SECURITIES AND EXCHANGE COMMISSION

     17 CFR Part 230

     [Release No. 33-7438; File No. S7-22-97]

     RIN: 3235-AH23

     Equity Index Insurance Products

     AGENCY:  Securities and Exchange Commission

     ACTION:  Concept release; request for comments.

     SUMMARY:  The Securities and Exchange Commission is requesting comments on

     the structure of equity index insurance products, the manner in which they

     are marketed, and any other matters the Commission should consider in

     addressing federal securities law issues raised by equity index insurance

     products.

     DATES:  Comments must be received on or before November 20, 1997.

     ADDRESSES:  Comments should be submitted in triplicate to Jonathan G. Katz,

     Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,

     Washington, D.C. 20549-6009.  Comments also may be submitted electronically

     at the following E-mail address:  rule-comments@sec.gov.  All comment

     letters should refer to File No. S7-22-97; this file number should be

     included on the subject line if E-mail is used.  All comments received will

     be available for public inspection and copying in the Commission's Public

     Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549-6009. 

     Electronically submitted comments will also be posted on the Commission's

     Internet site (http://www.sec.gov).

     FOR FURTHER INFORMATION CONTACT:  Megan L. Dunphy, Attorney, Mark C. 



     Amorosi, Branch Chief, or Susan Nash, Assistant Director, (202) 942-0670,

     Office of Insurance Products, Division of Investment Management, Securities







     and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 10-6,

     Washington, D.C. 20549-6009.

     SUPPLEMENTARY INFORMATION:  The Securities Act of 1933 (the "Securities

     Act") includes an "insurance exemption" that exempts "insurance policies"

     and "annuity contracts" from the Act's registration requirements.  Equity

     index insurance products, recently introduced by the insurance industry,

     combine features of traditional insurance products and traditional

     securities.  The Commission requests information about the structure of

     equity index insurance products and the manner in which they are marketed. 

     The Commission also requests comment on any other matters the Commission

     should consider in addressing federal securities law issues raised by

     equity index insurance products.  

                                  TABLE OF CONTENTS
                                                                            Page

     I.   BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  


     II.  DESCRIPTION OF EQUITY INDEX INSURANCE PRODUCTS . . . . . . . . . . . .
          A.   Equity Index Annuities  . . . . . . . . . . . . . . . . . . . .  
               1.   Product Features . . . . . . . . . . . . . . . . . . . . .  
               2.   Funding of Insurer's Obligation  . . . . . . . . . . . . .  
               3.   Distribution Channels  . . . . . . . . . . . . . . . . . .  
          B.   Equity Index Life Insurance . . . . . . . . . . . . . . . . . .  

     III. APPLICABILITY OF THE FEDERAL SECURITIES LAWS TO EQUITY INDEX
          INSURANCE PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . .  
          A.   Applicability of State Insurance Regulation . . . . . . . . . .  
          B.   Investment Risk . . . . . . . . . . . . . . . . . . . . . . . .  
               1.   Case Law . . . . . . . . . . . . . . . . . . . . . . . . .  
               2.   Rule 151 . . . . . . . . . . . . . . . . . . . . . . . . .  
                    a.   Contract Value not Tied to Separate Account . . . . .  
                    b.   Guarantee of Purchase Payments and Credited
                         Interest  . . . . . . . . . . . . . . . . . . . . . .  
                    c.   Specified Rate of Interest  . . . . . . . . . . . . .  
                    d.   Excess Interest . . . . . . . . . . . . . . . . . . .  
          C.   Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . .  
          D.   Mortality Risk  . . . . . . . . . . . . . . . . . . . . . . . .  

     IV.  REQUEST FOR COMMENTS . . . . . . . . . . . . . . . . . . . . . . . .  

                              ======END OF PAGE 2======







     V.   CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  

     I.   BACKGROUND

          The Commission is considering the status of equity index annuities and

     other equity index insurance products under the federal securities laws. 

     Today the Commission is requesting public comment regarding these products.

          An equity index annuity is a contract issued by a life insurance

     company that generally provides for accumulation of the contract owner's

     payments, followed by payment of the accumulated value to the contract

     owner in a lump sum or series of payments.  During the accumulation period,

     the insurer credits the contract owner with a return that is based on

     changes in an equity index, such as the Standard & Poor's Composite Index

     of 500 Stocks ("S&P 500 Index").  The insurer also guarantees a minimum

     return to the contract owner if the contract is held to maturity.

          Equity index annuities are designed to appeal to risk averse consumers

     who desire to participate in market increases, without sacrificing the

     guarantees of principal and minimum return offered in traditional fixed

     annuities.  Other consumers may be seeking to lock in prior gains from

     stock market investments while retaining some exposure to the

     market.<(1)>

          The first equity index annuities were introduced in 1995.<(2)> 

     By the end of 1995, there were four insurers marketing equity index

     annuities; and, by the end of 1996, over 30 equity index annuities were

                              

          <(1)>     See, e.g., Bill Harris, "Tips For Selling Indexed
                    Annuities," National Underwriter, Aug. 5, 1996, at 12.

          <(2)>     See, e.g., Linda Koco, "3 More Equity Index Annuities
                    Make Mkt. Debuts," National Underwriter, Dec. 23, 1996,
                    at 11.

                              ======END OF PAGE 3======







     available.<(3)>  In 1997, this expansion is expected to continue with

     as many as 40 insurers issuing an estimated 50 equity index annuity

     contracts.<(4)>  Equity index annuity sales reached $2 billion in

     1996, with 1997 sales projected to be as much as $10 billion.<(5)> 

     Recently, the types of equity index insurance products have proliferated,

     with single premium deferred annuities joined by flexible premium deferred

     annuities, immediate annuities, and life insurance policies.<(6)>

          Equity index insurance products combine features of traditional

     insurance products (guaranteed minimum return) and traditional securities

     (return linked to equity markets).  Depending upon the mix of features in

     any insurance product, including an equity index insurance product, the

     product may or may not be entitled to exemption from registration under the

     Securities Act as an "insurance policy" or "annuity contract."  To date,

     most equity index annuities have not been registered under the Securities

     Act, although commentators have acknowledged that substantial uncertainty

     exists whether all of these products are entitled to exemption from


                              

          <(3)>     See, e.g., "More Insurers Expected To Jump On Indexed
                    Bandwagon," Bank Investment Product News, Feb. 3, 1997,
                    at 11 [hereinafter "Bank Investment Product News"];
                    James B. Smith, Jr., "Survey Shows Strong Interest in
                    Offering EIAs," National Underwriter, Jan. 20, 1997, at
                    14 [hereinafter "Survey"].

          <(4)>     See, e.g., Bank Investment Product News, supra note 3.

          <(5)>     See, e.g., Bridget O'Brian and Leslie Scism, "Equity-
                    Indexed Annuities Score Big Hit, But They Put a High
                    Price on Protection," Wall Street Journal, May 30,
                    1997, at C1.

          <(6)>     See, e.g., Linda Koco, "Some Index Annuity Products Are
                    Going Optional," National Underwriter, Oct. 21, 1996,
                    at 21 [hereinafter "Going Optional"].

                              ======END OF PAGE 4======







     registration.<(7)>

          The Commission believes that both purchasers and insurers may benefit

     from greater clarity in this area.  With respect to products that are not

     covered by the insurance exemption, investors are entitled to the

     protections afforded by the federal securities laws -- full disclosure

     concerning the issuer and the product and marketing through registered

     broker-dealers that are subject to the Commission's oversight.  With

     respect to products that are covered by the insurance exemption, greater

     certainty would reduce the risk to all parties of expensive and time-

     consuming litigation.

          The Commission is considering the issues raised by equity index

     insurance products.  As part of its consideration, the Commission today

     seeks public comment on the structure of these products, the manner in

     which they are marketed, and any other matters the Commission should

     consider in addressing federal securities law issues raised by equity index





                              

          <(7)>     See, e.g., Jeffrey S. Puretz and Christopher M.
                    Gregory, "Should Equity Index Annuities Be
                    Registered?," National Underwriter, Jan. 20, 1997, at
                    22; Stephen E. Roth and Kimberly J. Smith, "Emerging
                    Developments Relating to Fixed Insurance Products Under
                    the Federal Securities Laws," ALI-ABA Conference on
                    Life Insurance Company Products 45, 65-95 (1996).  The
                    equity index annuities that have been registered
                    contain features that could reduce amounts received by
                    contract owners below the floor typically guaranteed by
                    equity index annuities.  See, e.g., Pre-Effective
                    Amendment No. 1 to Registration Statement on Form S-1
                    of Keyport Life Insurance Company (File No. 333-13609)
                    (filed Feb. 7, 1997); Pre-Effective Amendment No. 1 to
                    Registration Statement of Valley Forge Life Insurance
                    Company (File No. 333-02093) (filed Oct. 17, 1996).

                              ======END OF PAGE 5======







     insurance products.<(8)>



     II.  DESCRIPTION OF EQUITY INDEX INSURANCE PRODUCTS

          A.   Equity Index Annuities

               1.   Product Features

          Equity index annuity contracts generally share two characteristics: 

     (i) a return based on changes in an equity index, and (ii) a guaranteed

     minimum return if the contract is held to maturity.  Other features of

     equity index annuity contracts vary from product to product.

          Premium Payments.  To date, the majority of products on the market are

     single premium deferred annuities, with the purchaser making one premium

     payment that is accumulated for some period prior to pay-out.<(9)> 

     Some insurers offer flexible premium deferred annuities, permitting

     multiple premium payments in amounts determined by the purchaser, and

     immediate annuities, providing for immediate commencement of the pay-out

     period.<(10)>

          Floor Guarantee.  The guaranteed minimum return for a single premium

     product typically is 90% of premium accumulated at a 3% annual rate of

     interest, an amount that is generally required by applicable state



                              

          <(8)>     The  Commission's consideration of whether equity index
                    insurance  products  are  exempt from  registration  as
                    "insurance  products" or  "annuity contracts"  does not
                    relate to the status  under the federal securities laws
                    of index  products issued by non-insurers  to which the
                    insurance exemption is inapplicable.

          <(9)>     See, e.g., Survey, supra note 3.

          <(10)>    See, e.g., Going Optional, supra note 6.

                              ======END OF PAGE 6======







     insurance laws.<(11)>

          Computation of Index-Based Return.  The index-based return depends on

     the particular combination of indexing features specified in the contract. 

     The most common indexing features are described below.<(12)>

          *    Index.  The return of equity index annuities is typically based

               on the S&P 500 Index, but other domestic and international

               indices are also used.  Some products permit the contract owner

               to select one or more indices from a specified group of indices.

          *    Determining Change in Index.  Index growth generally is computed

               without regard to dividends.  There are several methods for

               determining the change in the relevant index over the period of

               the contract.  The "point-to-point" method compares the level of

               the index at two discrete points in time, such as the beginning

               and ending dates of the contract term.  The "high water mark" or

               "look-back" method compares the highest index level reached on

               specified dates throughout the term of the contract (e.g.,

               contract anniversaries) to the index level at the beginning of

               the contract term.  The "annual reset," "cliquet," or "lock-in"

               method compares the index level at the end of each contract year

                              

          <(11)>    See, e.g., Michelle Clayton, "How Product Marketers
                    Stylize Equity Indexed Annuities," Bank Mutual Fund
                    Report, Mar. 10, 1997, at 1.

          <(12)>    See, e.g., Thomas F. Streiff, "Three Basic Ways of
                    Achieving Equity Indexing," National Underwriter, Nov.
                    4, 1996, at 18; William Harris, "A Selling Perspective
                    on Equity Indexed Annuities," National Underwriter,
                    Nov. 4, 1996, at 16; Going Optional, supra note 6;
                    Albert B. Crenshaw, "A Rising Investment Star: Equity-
                    Indexed Annuities," Washington Post, Oct. 20, 1996, at
                    H1.

                              ======END OF PAGE 7======







               to the index level at the beginning of that year, with the gain

               for each year "locked in" even if the index declines in the

               following year.  Averaging techniques may be used with these

               formulas to dampen the volatility of index changes.  For example,

               in the point-to-point method, the ending index value could be

               computed by averaging index values on each of the final 90 days

               of the contract term.

          *    Participation Rate or Spread.  Two methods typically are used to

               compute the extent to which a contract owner is credited with

               index growth.  In some contracts, the participation rate,

               frequently between 75% and 90%, is multiplied by index growth to

               determine the applicable share of index appreciation to be

               credited.  The participation rate is typically set at the time

               the annuity is purchased and may be reset either annually or at

               the start of the next contract term.  Other contracts specify a

               percentage, called the "margin" or "spread," that is subtracted

               from index growth to determine the applicable share of index

               appreciation to be credited.

          *    Caps and Floors.  Some contracts limit the maximum ("cap") and

               minimum ("floor") index-based returns that may be credited to a

               contract.  Caps and floors are generally guaranteed for the

               entire contract term, although a few equity index annuities

               provide for annual reset of the cap and floor.

          Computation of Contractual Benefits.  Equity index annuities provide a

     variety of benefits, including surrender values, annuitization benefits,

     and death benefits, each of which may be computed in a different manner.


                              ======END OF PAGE 8======







          Term of Product.  Equity index annuities are issued for varying terms,

     including terms of three, five, seven, or nine years.

          Surrender Charges.  Surrender charges are commonly deducted from

     withdrawals, but these charges often are eliminated for a 30 to 45 day

     window at the end of each index term.  There may also be a limited free

     withdrawal privilege.

          Vesting.  Vesting schedules are often implemented to deter early

     surrenders of contracts that credit the index-based return periodically

     throughout the term of the contract.  Typically, a small percentage of the

     index-based return is available for withdrawal in the first year, with the

     percentage increasing over time until the entire return is available at the

     end of the term.

               2.   Funding of Insurer's Obligation

          Equity index annuities typically are backed by assets held in the

     insurance company s general account.  A portion of the general account

     assets is invested in fixed income instruments to support the minimum

     return guarantee.  Insurance companies typically purchase derivatives to

     hedge their indexed-based return obligations, although insurers vary in the

     degree to which they hedge these obligations.

               3.   Distribution Channels

          The most frequently used channels of distribution for equity index

     annuities have been banks and insurance agents who are not licensed as

     registered representatives of a broker-dealer.  To date, broker-dealers

     have played a less significant role.<(13)>
                              

          <(13)>    See, e.g., Survey, supra note 3; Cerulli Associates,
                    Inc. and Lipper Analytical Services, Inc., The Cerulli-
                                                             (continued...)

                              ======END OF PAGE 9======







          B.   Equity Index Life Insurance

          Equity index life insurance policies have been introduced

     recently.<(14)>  The available policies are universal life insurance

     policies that permit the holder to vary the amount and timing of premium

     payments and change the death benefit.  The cash value of an equity index

     life insurance policy is credited with a return that is based on changes in

     an equity index.  As with equity index annuities, the insurer also

     guarantees a minimum return on the policy's cash value.  Equity index life

     insurance policies typically offer annual crediting of index-based interest

     and index participation rates that are reset annually and are generally

     lower than those for equity index annuities.<(15)>  At least two

     companies currently offer equity index life insurance policies, and it is

     estimated that as many as 25 companies are developing these

     products.<(16)>

     III. APPLICABILITY OF THE FEDERAL SECURITIES LAWS TO EQUITY INDEX INSURANCE
          PRODUCTS

          Section 3(a)(8) of the Securities Act exempts from the registration

     requirements of the Act any "insurance policy" or "annuity contract" issued

                              

          <(13)>(...continued)
                    Lipper Analytical Report:  The State of the Variable
                    Annuity and Variable Insurance Markets 37-40 (1996).

          <(14)>    See, e.g., Linda Koco, "Transamerica Occidental Unveils
                    Equity-Indexed UL," National Underwriter, Jan. 6, 1997,
                    at 25 [hereinafter "Transamerica Occidental"]; Linda
                    Koco, "Two More Index UL Policies Make Their Debuts,"
                    National Underwriter, Mar. 10, 1997, at 9.

          <(15)>    See, e.g., "Transamerica Occidental," supra note 14.

          <(16)>    See, e.g., Linda Koco, "Equity Index Market Shows Signs
                    of Fierce Competition," National Underwriter,  Jan. 27,
                    1997, at 9.

                              ======END OF PAGE 10======







     by a corporation subject to the supervision of the insurance commissioner,

     bank commissioner, or similar state regulatory authority.<(17)>  The

     exemption, however, is not available to all products labelled "insurance

     policies" or "annuity contracts."  For example, "variable annuities," which

     pass through to the contract owner the investment performance of a pool of

     assets, are securities rather than exempt annuity contracts.<(18)>

          The Commission and the courts have addressed the insurance exemption

     on a number of occasions.  Under existing case law, factors that are

     important to a determination of a contract's status under Section 3(a)(8)

     include (1) the allocation of investment risk between insurer and contract

     owner and (2) the manner in which the contract is marketed.

          In 1986, faced with the proliferation of annuity contracts commonly

     known as "guaranteed investment contracts," the Commission adopted Rule 151

     under the Securities Act to establish a safe harbor for certain annuity

     contracts that will not be deemed subject to the federal securities

     laws.<(19)>  The factors that determine an annuity contract's
                              

          <(17)>    The Commission has previously stated its view that
                    Congress intended any insurance contract falling within
                    Section 3(a)(8) to be excluded from all provisions of
                    the Securities Act notwithstanding the language of the
                    Act indicating that Section 3(a)(8) is an exemption
                    from the registration but not the antifraud provisions. 
                    Definition of "Annuity Contract or Optional Annuity
                    Contract," Securities Act Rel. No. 6558 (Nov. 21, 1984)
                    [49 FR 46750, 46753 (Nov. 28, 1984)] [hereinafter
                    "Proposing Release"].

          <(18)>    SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65
                    (1959); SEC v. United Benefit Life Ins. Co., 387 U.S.
                    202 (1967).

          <(19)>    17 CFR 230.151; Definition of Annuity Contract or
                    Optional Annuity Contract, Securities Act Rel. No. 6645
                    (May 29, 1986) [51 FR 20254 (June 4, 1986)]
                                                             (continued...)

                              ======END OF PAGE 11======







     eligibility for the safe harbor include the applicability of state

     insurance regulation, the assumption of investment risk by the insurer, and

     the manner of marketing the contract.  In situations when the Rule 151 safe

     harbor is not applicable, the status of a contract may be analyzed by

     reference to the principles discussed in Rule 151 and the accompanying

     releases and to judicial precedents construing Section 3(a)(8).<(20)> 

     This would include, for example, an annuity that does not fall within the

     safe harbor or a life insurance policy.

          This section discusses the factors that have been used by the

     Commission and courts to determine whether a product is entitled to the

     insurance exemption, and the manner in which those factors may apply to

     equity index insurance products.  Commenters are asked to provide detailed

     information on the structure, operation, and marketing of equity index

     insurance products.  Commenters should specifically discuss the application

     to equity index insurance products of the factors that have been used by

     the Commission and the courts to determine whether a product is entitled to

     the insurance exemption.

          A.   Applicability of State Insurance Regulation

          To gain the benefit of the Rule 151 safe harbor, an annuity contract

     is required to be issued by a corporation subject to the supervision of a
                              

          <(19)>(...continued)
                    [hereinafter "Adopting Release"].  A guaranteed
                    investment contract is a deferred annuity contract
                    under which the insurer pays interest on the
                    purchaser's payments at a guaranteed rate for the term
                    of the contract.  In some cases, the insurer also pays
                    discretionary interest in excess of the guaranteed
                    rate.

          <(20)>    Adopting Release, supra note 19, 51 FR at 20255 n.4,
                    20261.

                              ======END OF PAGE 12======







     state insurance commissioner, bank commissioner, or similar state

     regulator.<(21)>  In addition, the contract itself is required to be

     subject to state regulation as an annuity or insurance.<(22)>  Equity

     index insurance products on the market today generally are issued by

     companies subject to state insurance regulation, thereby appearing to meet

     this threshold requirement for insurance status.

          Commenters are requested to address the status under state law of

     equity index insurance products.  Are all of these contracts regulated as

     annuities or insurance?  For contracts that are regulated as annuities or

     insurance, commenters are asked to describe the provisions of state law

     that apply, e.g., regulation of reserves, investment restrictions, approval

     of contract forms, illustration requirements, market conduct standards,

     applicability of state insurance guaranty laws.  How does the applicability

     of state insurance regulation to equity index insurance products affect the

     need for federal securities regulation of these products?

          B.   Investment Risk

               1.   Case Law

          Under existing case law, the allocation of investment risk between

     insurer and contract owner is significant in determining whether a

     particular contract is insurance for purposes of the federal securities

     laws.  In SEC v. Variable Annuity Life Insurance Co. (hereinafter "VALIC"),

     the Supreme Court determined that absent some element of fixed return,

     i.e.,"some investment risk-taking on the part of the company," an annuity

                              

          <(21)>    17 CFR 230.151(a)(1).  This requirement is parallel to
                    the language of Section 3(a)(8).

          <(22)>    Adopting Release, supra note 19, 51 FR at 20255.

                              ======END OF PAGE 13======







     contract is outside the scope of Section 3(a)(8).<(23)>  The VALIC

     court found a variable annuity contract to be a security, not insurance,

     when the insurer invested premiums in a pool of common stocks and other

     equities and the value of the contract owner's benefit payments varied

     directly with the success of the underlying investments.

          The Supreme Court subsequently clarified that a contract could provide

     for some assumption of investment risk by the insurer, but nonetheless be a

     security.  In SEC v. United Benefit Life Ins. Co. (hereinafter "United

     Benefit"), the insurer guaranteed that the cash value of its variable

     annuity contract would never be less than 50% of purchase payments made and

     that, after ten years, the value would be no less than 100% of

     payments.<(24)>  The Court determined that this contract, under which

     the insurer did assume some investment risk through minimum guarantees, was

     a security.  In making this determination, the Court distinguished a

     contract  which to some degree is insured  from a contract of

      insurance. <(25)>

          Commenters are requested to discuss generally how investment risk is

     allocated between insurer and contract owner in equity index insurance

     products.  Commenters should also compare this allocation of risk to other

     insurance products and discuss how this allocation of investment risk

     affects the application of the federal securities laws to equity index

     insurance products.  

               2.   Rule 151
                              

          <(23)>    359 U.S. 65, 71 (1959).

          <(24)>    387 U.S. 202, 205 (1962).

          <(25)>    Id. at 211.

                              ======END OF PAGE 14======







          To gain the benefit of the Rule 151 safe harbor, an insurer is

     required to assume the investment risk under the contract.<(26)>  For

     purposes of the safe harbor, an insurer is deemed to assume the investment

     risk if the following conditions are satisfied.

                    a.   Contract Value not Tied to Separate Account

          The safe harbor requires that the value of the contract not vary

     according to the investment experience of a separate account, a separately

     managed pool of assets operating independently of the investment experience

     of the insurer's general account.<(27)>  Equity index annuities

     typically are general account products, whose value does not vary according

     to the investment experience of a separate account.  These products

     therefore appear to satisfy the first condition of the Rule 151 investment

     risk test.

          Commenters are requested to describe the investments used by an

     insurer to support its obligations under an equity index insurance product. 

     Commenters should also address how the nature of these investments affects

     the analysis of equity index insurance products under the federal

     securities laws.  For example, should the relative levels of a contract

     owner's purchase payment allocated to the floor guarantee and the index-

     based benefit affect the status of a contract as insurance under the

     federal securities laws?  Is the status of an equity index insurance

     product affected by whether, or the degree to which, an insurer hedges its

     obligations to pay the index-based benefit?  To the extent an insurer's

     obligations are hedged, does it bear investment risk with respect to those
                              

          <(26)>    17 CFR 230.151(a)(2).

          <(27)>    17 CFR 230.151(b)(1).

                              ======END OF PAGE 15======







     obligations?  In the alternative, is there, in essence, a pass-through of

     performance from insurer to contract owner, with the contract owner

     experiencing the performance of the hedging instruments that the insurer

     purchased to hedge the contract?

                    b.   Guarantee of Purchase Payments and Credited Interest

          The safe harbor requires that the insurer, for the life of the

     contract, guarantee the principal amount of purchase payments and credited

     interest, less any deduction for sales, administrative, or other expenses

     or charges.<(28)>  For equity index annuities, insurers generally

     guarantee 90% of purchase payments and annual interest of 3%.  Commenters

     should address whether the typical floor guarantee for equity index

     annuities, by itself, satisfies the investment risk requirement, or whether

     there must be some additional guarantee.  Commenters are requested to

     address whether, and under what circumstances, the typical 10% deduction

     from purchase payments is attributable to sales, administrative, or other

     expenses or charges and therefore falls within the rule's parameters. 

     Commenters should also address whether there are equity index annuities

     that reduce the floor guarantee by charges of any type, and how any such

     charges affect the investment risk analysis.<(29)>  Commenters should

     also discuss any floor guarantees in equity index annuities that are

     different from 90% of purchase payments with annual interest of 3%. 

     Commenters should address how the different floor guarantees affect the
                              

          <(28)>    17 CFR 230.151(b)(2)(i).

          <(29)>    See Registration Statement of Valley Forge Life
                    Insurance Company (File No. 333-02093) (filed Mar. 29,
                    1996) (minimum guaranteed value of registered equity
                    index annuity reduced by rider charge for equity index
                    feature).

                              ======END OF PAGE 16======







     investment risk analysis. 

          Commenters should describe any floor guarantees provided by equity

     index life insurance products and how the guarantees affect their status

     under the federal securities laws.  Commenters should address whether an

     equity index life insurance policyholder is dependent on cash value growth

     in excess of guaranteed minimums to gain the anticipated benefits under the

     policy.

                    c.   Specified Rate of Interest

          The safe harbor requires that the insurer credit a specified rate of

     interest, in an amount at least equal to the minimum rate required by

     applicable state law.<(30)>  Equity index annuities typically appear

     to satisfy this condition by guaranteeing a minimum interest rate of 3%,

     which is generally equal to the minimum rate required by state law. 

     Commenters should describe the minimum guaranteed rate on various equity

     index insurance products.  Do the guaranteed rates satisfy this condition

     of the safe harbor?

                    d.   Excess Interest

          The safe harbor requires that the insurer guarantee that the rate of

     any interest to be credited in excess of the guaranteed minimum rate not be

     modified more frequently than once per year.<(31)>  Rule 151, as

     originally proposed, would have excluded from the safe harbor any annuity

     that linked excess interest to an index.  The Commission reasoned that an

     insurer that uses an index feature externalizes its discretionary excess

     interest rate, shifting to the contract owner all of the investment risk
                              

          <(30)>    17 CFR 230.151(b)(2)(ii) and (c).

          <(31)>    17 CFR 230.151(b)(3).

                              ======END OF PAGE 17======







     regarding fluctuations in that rate.<(32)>  In adopting Rule 151, the

     Commission extended the rule's coverage to permit insurers to make limited

     use of index features in determining the excess interest rate, so long as

     the excess rate is not modified more frequently than annually.<(33)> 

     Specifically, the insurer could specify an index to which it would refer,

     no more often than annually, to determine the excess rate that it would

     guarantee under the contract for the next 12-month or longer period.  In

     addition, an insurer could not change the terms of the index feature used

     for calculating the excess rate more frequently than once per year.

          Commenters are requested to discuss how the use of an index-based

     formula for calculating contract values under equity index annuities

     affects the allocation of investment risk between insurer and contract

     owner.  How does the use of an indexed-based return determined

     retrospectively by reference to a formula that is established prospectively

     affect the status of these contracts as securities or insurance? 

     Commenters are specifically requested to address the Commission's expressed

     concern with shifting the risk of fluctuations in an index rate to a

     contract owner and the Commission's decision to limit the benefit of Rule

     151 to situations where an index is used to fix a specific excess interest

     rate in advance.  Additionally, comment is requested on how the nature of

     particular indexing formulas and the duration of any guarantees of caps,

     floors, participation rates, margins, or other terms affect the allocation

     of investment risk between the contract owner and the insurer.

          C.   Marketing
                              

          <(32)>    Proposing Release, supra note 17, 49 FR at 46753 n.19.

          <(33)>    Adopting Release, supra note 19, 51 FR at 20260.

                              ======END OF PAGE 18======







          Marketing is another significant factor in distinguishing insurance

     from a security.  In United Benefit, the Supreme Court, in holding an

     annuity contract to be outside the scope of Section 3(a)(8), found

     significant the fact that the contract was "considered to appeal to the

     purchaser not on the usual insurance basis of stability and security but on

     the prospect of  growth' through sound investment management."<(34)> 

     Under these circumstances, the Court concluded "it is not inappropriate

     that promoters' offerings be judged as being what they were represented to

     be."<(35)>  Rule 151 incorporates a "marketing" test.<(36)>  As

     a condition to the safe harbor, the contract must not be "marketed

     primarily as an investment."  The Commission is concerned that the nature

     of equity index insurance products may make it particularly difficult to

     market these products without primary emphasis on their investment aspects.

          Commenters should describe how equity index insurance products are

     marketed and how the marketing factor applies to equity index insurance

     products.  Given the structure and purposes of equity index insurance

     products, can they be marketed without focusing primarily on their

     investment aspects?  Comments should address both written sales materials

     and oral sales presentations, including the ability of an insurer to train

     and monitor its sales force to ensure that equity index insurance products
                              

          <(34)>    United Benefit, 387 U.S. 202, 211 (1962).

          <(35)>    Id.  For other cases applying a marketing test, see
                    Berent v. Kemper Corp., 780 F.Supp. 431 (E.D. Mich.
                    1991), aff'd, 973 F.2d 1291 (6th Cir. 1992); Associates
                    in Adolescent Psychiatry v. Home Life Ins. Co., 729
                    F.Supp. 1162 (N.D. Ill. 1989), aff'd, 941 F.2d 561 (7th
                    Cir. 1991); Grainger v. State Security Life Ins. Co.,
                    547 F.2d 303 (5th Cir. 1977).

          <(36)>    17 CFR 230.151(a)(3).

                              ======END OF PAGE 19======







     are not marketed with primary focus on their investment aspects. 

     Commenters are requested to identify the distribution channels that are

     used in marketing equity index insurance products and discuss whether the

     use of particular distribution channels affects an insurer's ability to

     market these products without focusing primarily on their investment

     aspects.  Commenters are also asked to identify the products that are

     viewed as competitive alternatives to equity index annuities and address

     how the nature of these other products (e.g., whether securities or

     insurance) affects the manner in which equity index insurance products are

     marketed.

          D.   Mortality Risk

          When the Commission adopted the Rule 151 safe harbor, it determined

     not to include a requirement that the insurer assume some mortality risk

     through, for example, guaranteeing annuity purchase rates for the life of

     the contract.  The Commission noted, however, that in a Section 3(a)(8)

     facts and circumstances analysis of contracts outside the Rule 151 safe

     harbor, the presence or absence of mortality risk may be an appropriate

     factor to consider.<(37)>

          Commenters are requested to describe with specificity the nature of

                              

          <(37)>    Adopting Release, supra note 19, at 20255-56.  See also
                    Proposing Release, supra note 17, at 46752 (requesting
                    comment on whether mortality risk assumption should be
                    a required element of the Rule 151 safe harbor);
                    General Statement of Policy Regarding Exemptive
                    Provisions Relating to Annuity and Insurance Contracts,
                    Securities Act. Rel. No. 6051 (Apr. 5, 1979) [44 FR
                    21626, 21627-28 (Apr. 11, 1979)] (predecessor
                    interpretive release to Rule 151 stating that
                    meaningful mortality risk by insurer was prerequisite
                    to determination that contract was "insurance," not
                    "security").

                              ======END OF PAGE 20======







     the mortality risks assumed by insurers in connection with equity index

     insurance products.  For equity index annuities, commenters should describe

     the terms of any guaranteed annuity purchase rates, whether those rates are

     comparable to rates available in more traditional annuity contracts, and

     the likelihood that contract owners will annuitize.  Comment is also

     requested on the significance of mortality risk in determining whether an

     equity index insurance product is exempted by Section 3(a)(8).  Is

     mortality risk a relevant factor and, if so, what weight should it be

     given?

     IV.  REQUEST FOR COMMENTS

          All interested persons are invited to submit written comments on

     equity index insurance products.  Whenever possible, submissions should

     describe particular equity index insurance products with specificity and

     include sample sales literature and contracts.  Commenters should address

     the ways in which equity index insurance products are similar to or

     different from traditional fixed annuities and life insurance, on the one

     hand, and variable annuities and variable life insurance, on the other. 

     Particular emphasis should be placed on the factors described above,

     including state insurance law, investment risk, marketing, and mortality

     risk.

          The Commission also requests that commenters address the following:

          *    Are there features that all equity index insurance products share

               that result in all of them being covered by the insurance

               exemption or, in the alternative, not covered by the insurance

               exemption?  If so, commenters should identify the features that

               cause all equity index insurance products to be classified


                              ======END OF PAGE 21======







               together.  If not, commenters should identify the features that

               distinguish equity index insurance products that are covered by

               the insurance exemption from those that are not.

          *    Are there differences between broad types of equity index

               insurance products that are relevant to the analysis of their

               status under the federal securities laws?  If so, commenters

               should separately address different types of products, e.g.,

               single premium products versus flexible premium products or

               annuities versus life insurance.  For example, commenters should

               address any differences in mortality risk between equity index

               annuities and life insurance.

     The Commission also requests comment on the implications for small business

     of federal securities law issues raised by equity index insurance products.

     V.   CONCLUSION

          The Commission is requesting comments on a number of specific issues

     raised by equity index insurance products.  In addition, commenters are

     encouraged to address any other matters that they believe merit
     examination.


     By the Commission.



                                        Jonathan G. Katz
                                        Secretary


     Dated:  August 20, 1997








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