August 15, 2008
Gentlemen,
I read with some interest several of the comment letters submitted to the Commission. I was surprised to read so much opposition from registered representatives. I don't think the indexed annuity product can be properly classified as a security. The insurance company bears the investment risk, not the insured as several of the previous letters have pointed out with great thoughtful detail. The broker-dealers will certainly benefit by becoming the default marketing arm of the indexed annuity product, so I question their objectivity. The burden of proof ultimately lies upon the SEC to prove that the indexed annuity design is so flawed and deceptive that regulation as a security is the only reliable remedy. It is also the responsibility of the SEC to prove that regulating the distribution of indexeded annuities through the broker-dealer system is absolutely necessary to solve the alleged marketing abuses.
First of all, according to the NAIC there are more consumer complaints about Variable Annuity products (which are regulated securities), than the Indexed Annuities (which are not regulated securites). Second, the State Insurance Commissioners are not sitting on their hands. Florida has a new law targeting improper annuity sales to seniors. The penalties can reach $250,000 per occurance. The law requires the use of a suitability analysis and requires licensed agents to complete three hours of continuing education. The State of Iowa has required specific "indexed annuity" continuing education since the beginning of 2008. The State of Wisconsin fined an insurance company who improperly sold annuities in the State $925,000, made the insurance carrier offer a restitution program to the annuity purchasers and ordered the carrier not to sell annuities in Wisconsin for four years. The NAIC has a committee called the "Suitability of Annuity Sales Working Group", whose charge is to review and consider changes to the model regulation to improve annuity sales and provide uniform guidance in developing agent training, supervision and monitoring standards.
But, I also find it facinating that a security regulator such as NASAA President and North Dakota Securities Commissioner Karen Tyler would infer that the 50 State Insurance regulators are not doing their job. Call it the child on the playground syndrome - "We can regulate better than you can... neener, neener, neener." But adding layer upon layer of regulation with the resultant fees and costs falls into what politicians refer to as "waste, fraud and abuse" and I'm getting a little sick of it. If the Insurance regulators are not doing their job, let's begin with holding them accountable.
And speaking of accountability, I find it somewhat interesting that the SEC was not adequately supervising the SROs which are entrusted with direct regulation of the securities industry. Senator Grassley wrote a letter dated December 13, 2007 to SEC Chairman Christopher Cox reviewing the findings of a GAO report, which stated the SEC does not obtain copies of internal audits and investigations conducted by SROs. Senator Grassley states, "Given that SROs are entrusted with direct regulation of the securities industry, there is no excuse for them being anything less than completely transparent to the SEC." It took the SEC four years to comply with the GAO recommendations.
Call me cynical, but when the United States Treasury has to extend a line of credit to Wall Street firms so they can remain solvent, I'm not sure the SEC has their regulatory priorities properly structured. Someone certainly wasn't paying attention while this problem developed.
And finally, when the SEC tried to require hedge funds to register, the D.C. Circuit Court of Appeals overturned that regulation. The federal courts said the SEC was going beyond its statutory authority. If the SEC lacks the statutory authority to register hedge funds, which are clearly in the security business how will the SEC justify their attempt to regulate indexed annuities, which offer a base guaranteed return plus participation?
I don't market indexed annuities, so my comments are not self-serving. I simply think the financial services industry is over-regulated and needs to adopt a more common sense approach before we allow regulators to add new layers of regulation. This entire regulatory expansion was initiated by NASAA more than 3 years ago. While it would be perfectly acceptable for NASAA, FINRA or the SEC to encourage the State Insurance regulators to take a more proactive stance in regulating annuities for alleged abuses, it is completely inappropriate for one regulatory body to conduct a power grab simply for the purpose of promoting the interests of their regulatory constituents. I think the SEC should abandon the attempt to regulate indexed annuties.