August 25, 2008
Dear Commissioner Cox,
I am writing in opposition to the proposed rule 151A, The Regulation of Indexed Annuities as Securities. There are a host of reasons that this is a very BAD idea, a few of which I will list here.
1. The SEC's definition of RISK in it's reasoning for the proposed rule stretches the bounds of credulity. The ability to gain more or less interest in a fixed period of time has NEVER before been considered RISK. It has always been fundamentally understood that RISK entials the ability to lose PRINCIPAL. If someone purchases an indexed annuity, and never touches it until the end of the contract term, will they have lost any PRINCIPAL? The answer is a definitive NO. If you are going to argue, as some have, that loss of PRINCIPAL RISK occurs when people take withdrawls after gaining little or no interest, then the SEC must consider the regulation of ANY and ALL money accounts, including CDs, Money Markets, Savings, Checking, etc. These all credit interest, and when people take out more than they've been credited in interest, they have effectively lost PRINCIPAL. But this is absurd. No one would even suggest such a thing. The reason the courts considered Variable Annuities a security boiled down to the fact that the purchaser of a VA bore the risk of the loss of his/her PRINCIPAL. This is not the case with an indexed annuity, and I do believe the SEC will have a very difficult time convincing the federal courts otherwise.
2. Everyone wants to see the "bad apples" of any industry put out of business. They make it much harder for those of us who genuinely care about people to conduct business. But moving indexed annuities from state regulation to federal regulation will not improve the disclosure and suitability issues. Most states, indeed, most insurers, have already put in place substantial safeguards to ensure proper disclosures are made, and the suitability of clients for particular products is determined. Every detail of an indexed annuity, including contract periods and surrender charges, must be fully disclosed, and the client must sign the disclosure forms attesting that they have been told these things. Trying to regulate indexed annuities as securities will only serve to disrupt and confuse clients by adding another layer of bureaucracy to the process. Judging by the recent scandals that have hit Wll Street and the big brokerage firms, if the SEC REALLY wants to improve client protections, maybe it should classify all mutual funds and stocks as insurance products and turn them over to insurance agents. Just a thought since complaints, per capita, against broker/dealers FAR outnumber complaints against insurance agents.
3. The reclassification of indexed annuities as securities will further harm clients by taking away an important alternative choice to CDs, Mutual Funds, etc. The overwhelming majority of clients I've spoken with want to get completely out of the market risk (watching their principal dissappear). They are ecstatic to learn that there is an alternative out there that gives them the opportunity to earn more interest than CDs, money markets, etc, and yet protects their principal completely from market losses. THEY WANT COMPLETE SAFETY. If brokers want to address peoples' concerns about safety and not losing their principal, then maybe they should consider offering stock and mutual fund investments that GUARANTEE the client's principal against ANY LOSS if the market turns down. Oh, wait. That would be AN INSURANCE PRODUCT.
4. The number of agents adversely affected by, and the costs associated with this change will substantially burden an already faltering economy. Agents all across this country will be harmed by the resulting loss of income. This would cost the economy BILLIONS.
5. Section 2(b) of the Securities Act121 and Section 3(f) of the Securities Exchange Act122 require the Commission, when engaging in rulemaking, to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.
I would respectfully submit that not one of these criteria is met. Necessary? No. Disclosures of every aspect of an indexed annuity are already given. Serves to protect investors? No. Investors are already protected by substantial disclosure and suitability requirements. Promote efficiency? No. An added layer of federal bureaucracy will only create confusion and inefficiency. Promote competition? No. The exact opposite would occur. The main reason this is happening now is that broker/dealers are losing out to the competition offered by indexed annuities, and they want it STOPPED AT ALL COST They want control of the indexed annuity so they can put it where they believe it belongs, OUT OF BUSINESS. If you don't believe that, just read some of the comments submitted by broker/dealers. One broker comments that no one in his office is allowed to sell indexed annuities, and no one will ever be allowed If you turn these over to brokers, and they don't allow them to be sold, how is that promoiting competition? Competiton is saftey vs risk. Do I want to put my principal at RISK in SECURITIES? Or do I want to protect my principal by putting it into SAFETY, such as a money market, CDs, savings account, INDEXED ANNUITY?
I hope you all will look at reason when it comes to this deeply flawed proposal. The facts do NOT support your contention that indexed annuities should be considered and regulated as securities.
Sincerely,
Frederick S. Bond
Independent Insurance Agent