August 25, 2008
On Wednesday, June 25, 2008, the SEC proposed a new rule (Rule 151A) to regulate most fixed indexed annuities as securities. The SEC takes the position that state insurance regulation of the sale of these annuities is inadequate to protect purchasers. According to the SEC, purchasers of fixed index annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index. Thus, the SEC is proposing that these contracts be registered so purchasers can receive a prospectus and product sales can be supervised by broker dealers.
As with other registered security offerings, sales would need to be preceded or accompanied by a prospectus, and only registered representatives of broker dealer firms could sell the product.
The purpose of this change, in the eyes of the SEC, is to regulate sales practices. First, no one benefits from an unsuitable sale. Our insurance commissioners and the insurance companies have worked diligently in the supervision of these sales and their agents. Changing the definition of what is a security will not benefit the consumer. It will definitely not solve the perceived problem.
Finally, this will have a significant impact on small entities in the insurance arena. Sales will reduce and costs will increase. Fifty percent of those selling index annuities do not have a securities license. Most will choose not to apply. There will be greatly reduced revenue for many small firms. There may be layoffs at a time when unemployment has been rising. I direct you to the Regulatory Flexibility Act and the Small Business Regulatory Fairness Act. I believe the data will show that the proposed rule would have a significant impact on small entities ($5 million assets or less) and would cause an annual effect on the economy of $100 million or more: A major increase in costs and prices for consumers and adverse effects on competitive investment or innovation.
In closing, I have been in the insurance business since 1982. Many of my clients are retirement-aged. They have been very appreciative of the index annuities they purchased through me as a safe money option for their retirement funds. They particularly appreciate the fixed nature of the product, as it does not carry risk of loss due to a market decline.
To me, this just doesnt make sense. It is a fixed product that just has a different way of crediting interest. There are more important issues for the SEC to focus on. I hope you will look at this matter and oppose its passage.