Subject: File No. S7-14-08
From: Rick E Myers
Affiliation: Certified Financial Planner (tm)

August 20, 2008

Secretary Security and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: Comments relating to SEC Proposed Rule 151A
File Number: S7-14-08
To Whom It May Concern:
The following comments are submitted regarding SEC proposed rule 151A to regulate Fixed Indexed Annuities (FIAs) as Securities.
Proposed Rule 151A is unconstitutional in its present form. The 10th Amendment to the U.S. Constitution states that the powers not specifically granted to the federal government are retained by the states. Nowhere in the U.S. Constitution is the federal government or its agencies granted authority to regulate insurance products. The regulation of insurance has historically been reserved as the domain of the individual states. Over the last 150 years of the United States, the federal government has eroded the state powers reserved by the 10th amendment through an ever expanding interpretation of Section 8 of the U.S. Constitution – the interstate commerce clause. However, Rule 151A attempts to regulate a Fixed Indexed Annuity even when no interstate commerce is involved. A Fixed Indexed Annuity sold within a single state issued by an insurance company domiciled in that same state would involve no interstate commerce. Such a product would properly be under the state as its sole regulatory authority. The proposed rule is therefore vulnerable to a constitutional challenge under the 10th Amendment.

Proposed Rule 151A is conceptually flawed. Rule 151A states that because the Fixed Indexed Annuity is linked to a security to determine excess interest (over the guarantee minimum interest rate) that makes the annuity a security. That makes as much sense as the U.S. Department of Agriculture declaring that it will now regulate all egg salad sandwiches as live poultry because they contain the product of a chicken. By this same logic, the SEC should also regulate all adjustable rate mortgages as securities - because their interest rate is determined by the LIBOR (a security). Unlike FIAs, many adjustable rate mortgages have no guaranteed interest rates but are pegged to the LIBOR index. The executive summary announcing proposed Rule 151A, dated June 25, 2008 submitted by the SEC staff states on page 5: Individuals who purchase indexed annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index. The fact that the interest credited in a FIA is linked to a security does not expose the purchaser to investment risk as the consumer bears no market risk or potential loss of his principal in these products. The only risk the purchaser is exposed to is whether the contract will credit interest above the minimum guaranteed interest rate on the annuity, which hardly rises to the level stated of significant investment risk.

A broader question arises over the proposed regulation. If the SEC is successful at redefining the definition of a security, what is to stop the SEC from regulating all insurance products? The vast majority of all deferred annuities and many cash-value life insurance policies sold in the United States are more likely than not to pay an interest rate higher than their guaranteed interest rate. Most non-indexed declared rate annuity contracts and cash-value life insurance policies offer a current interest rate that is higher than the guaranteed minimum interest rate. What is to stop the SEC from next declaring a new definition that these too are securities? Will fixed annuities with Market Value Adjustment clauses also be classified as securities, as the underlying value of the bonds supporting the annuity would affect the interest rate? Undoubtedly there are staff members of the SEC who would prefer to regulate all insurance products nationwide. Most intellectually honest people will acknowledge that it is the nature of government to expand - seeking greater power, influence and accompanying budgets. It is therefore not surprising that the staff of the SEC has proposed to regulate Fixed Indexed Annuities as Securities. The question that arises, would such regulation benefit the public interest? The answer is clearly – No. The SEC proposal adds an unnecessary layer of securities regulation to this insurance product that is already sufficiently regulated at a state level.

The States are the appropriate regulating authority of Fixed Indexed Annuities. I agree with the stated motivation of the proposed rule to ensure consumer protection and enforce suitability standards with regard to the sales of FIAs. This goal is already being addressed at a state level. No one denies that there have been some unsuitable sales and improper actions in the sale of FIAs. As a licensed insurance agent for over 30 years I have read of such practices. However, problems exist in every business and industry in the country. It is human nature and a fact of life that whenever large numbers of individuals or transactions are involved – there will be some abuses. The criticisms have largely been exaggerated and market abuses have been largely corrected by the state regulatory authorities. In recent years the individual states have developed improved suitability and compliance standards. To date, 33 states have adopted the NAIC Model or related legislation on Suitability in Annuity Transactions. In addition, 22 states have adopted the NAIC Annuity Disclosure Model Regulation or related legislation. This type of state lead action is the answer to these abuses is not for the SEC to broadly expand its powers to regulate an entire industry that is being appropriately regulated on a state level. The SEC argument for the proposed rule 151A is that due to widespread abuse, the American Public urgently needs to be protected by regulating these products as securities. This argument is disingenuous. If regulation as a security reduced or eliminated abuses one would expect that Variable Annuities would have far few complaints of unsuitable sales than Fixed Indexed Annuities. However this is not born out by the facts. The records show complaints and abuses involving Variable Annuities have been are far more frequent and numerous than similar incidents involving Fixed Indexed Annuities.

A close parallel to this situation with annuities is how drugs are regulated in this country. We have two classes of medications - prescription drugs and over-the-counter medications. Have there ever been abuses of lesser regulated over-the-counter medications? Of course there have - most recently certain cold medications were being improperly used to create meth-amphetamines. What was the solution? Place those over-the-counter medications behind the counter. Imagine if the FDA instead banned all over-the-counter medications? Then all medicines, (including aspirin) would only be available by prescription from a licensed physician. Who would be hurt by such an action? The answer: Every consumer who has a headache, cold or fever. This is a close parallel in that we currently have two different types of annuities (Fixed Indexed and Variable). The Variable Annuity is one that is rightly regulated by the SEC, and Fixed Indexed Annuity has been a product regulated by the states because it carries no market risk for the consumer. Now because of a few exaggerated abuses with FIAs, the SEC is attempting to classify all FIAs as securities. Who will be hurt by such an action? The answer: Every consumer without a brokerage account who wants a guarantee of principal, a guaranteed minimum interest rate and the potential for a higher interest rate without market risk. The SEC is proposing a sweeping change to address problems that are very limited and have already been largely addressed by the individual states.

The examples stated by the SEC are not representative of the Industry. It is a common legislative saying: Hard Cases Make Bad Law. The SEC is proposing new laws and regulation based on unrepresentative cases of abuse. The SEC has featured a few FIAs with long and high surrender charge schedules that are not client-friendly. The SEC staff in their comments, focused on the worst-of-the-worst and most egregious examples of unsuitable sales by a few poorly trained or unscrupulous agents. The SEC staff has totally ignored the majority of products that are client-friendly and sold by well-trained and honest agents - because that would not support their argument that the SEC expand its reach and oversight. The SEC staff does not give equal time to client friendly products such as the ING Secure Index Seven or the OM Safety Index Seven, both products that have a 7-year surrender charge schedules, and provide a guaranteed minimum interest rate of 3% on 100% of premium (the approximate the interest rate earned on Certificates of Deposit currently).

Fixed Indexed annuities give consumers guarantees they cannot find elsewhere. Consumers have been drawn to these products because of the guarantees and the benefits they offer. The FIA allows the consumer to earn an attractive interest rate linked to the increase of an index (typically the SP 500 index). When the index goes up the consumer earns an attractive interest rate. When the index goes down, the consumer does not lose any value. In this way, consumers are able to enjoy attractive interest rates linked to the good years of the stock market without having any principal at risk. Because they are fixed annuities, each contract offers a full guarantee of premium and a contractually guaranteed minimum interest rate - regardless of market performance. The recent downturn in the stock market highlights the value of FIAs. Millions of Americans have lost a significant portion of their wealth in the recent market losses, while FIA owners have enjoyed peace of mind that market fluctuations do not adversely affect their retirement savings. Now that is threatened - as the SEC wants to take this valuable product away from consumers.

The SEC staffs answer is that the public can still buy FIAs as registered products, sold by prospectus through Registered Representatives. This demonstrates either a startling ignorance of the industry they seek to regulate, or a lack of candor in evaluating the marketplace. The vast majority of consumers who purchase FIAs do not have or want a relationship with a Registered Representative or own a brokerage account. If only Registered Representatives can sell FIAs the majority of the buying public will be denied the right to purchase these valuable products. The purchasers of FIAs are largely individuals who have an established relationship with their insurance agent. The position of the SEC staff that people can buy a registered version of an FIA is akin to Marie Antoinette saying: let them eat cake when told that her people have no bread. In my experience, 85% of FIA owners do not have a brokerage account. In addition, (as a rule) Registered Representatives sell Variable Annuities - not Fixed Indexed Annuities (even though they are already licensed to do so). If Registered Representatives wanted to sell FIAs to their clients - they would already do so today. Having a FIA as a registered product will not make it more attractive but less attractive to consumers as the issuing insurance companies will have to reduce the benefits to cope with the new additional costs of federal registration and compliance requirements. This proposed rule would virtually eliminate this valuable product that consumers currently enjoy. The staff of the SEC is either unaware of these facts or chooses to ignore them as it does not support their argument for extending their own power and expansion of their agency. The SEC staff seems oblivious to the negative impact their proposed rule would have on the very consumers they are trying to protect.

More time is needed for an appropriate comment period. The SEC has only allowed 78 days for the public and the industry to voice its comments. At a time when our economy is struggling, the SEC seeks to cripple an entire industry affecting hundreds of thousands of Americans with a hastily conceived proposal. Seventy-eight days is simply not a long enough time for a comment period. I encourage SEC Chairman Christopher Cox and the SEC Commissioners to extend the comment period. This proposal that will have a profound effect on the insurance industry could become law within just a couple of months even though agents, insurance companies, and consumers have had minimum opportunity to evaluate, comment and offer possible alternatives.

In summary, proposed Rule 151A would deny a valuable insurance product to the public. If adopted, it will turn most Fixed Indexed Annuities (FIAs) – as well as many more non-indexed traditional fixed annuities – into securities. The SEC has proposed changing the definition of a Security in order to expand an agency of the federal government while at the same time usurping the rightful regulatory authority of the individual states. Many Americans have used these products with great success since 1995 to safely build their retirements while enjoying the valuable guarantees these products offer. I encourage Chairman Christopher Cox and the SEC Commissioners to see that the comment period is extended or that this hastily conceived rule is dropped or amended and prevented from becoming law.

Respectfully Submitted,

R.E. Myers, CLU, RHU, CASL, ChFC
Certified Financial Planner

August 20, 2008