Rule 151A: Status of Indexed Annuities Under the Federal Securities Laws

A Small Entity Compliance Guide¹

Introduction

On January 8, 2009, the Securities and Exchange Commission ("SEC") issued a new rule that defines the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933 ("Securities Act"). The rule is intended to clarify the status under the federal securities laws of indexed annuities, under which payments to the purchaser are dependent on the performance of a securities index. The rule applies on a prospective basis to contracts issued on or after January 12, 2011.

Background

Description of Indexed Annuities

An indexed annuity is a contract issued by a life insurance company that generally provides for accumulation of the purchaser's payments, followed by payment of the accumulated value to the purchaser either as a lump sum, upon death or withdrawal, or as a series of payments (an "annuity"). During the accumulation period, the insurer credits the purchaser with a return that is based on changes in a securities index, such as the Dow Jones Industrial Average, Lehman Brothers Aggregate U.S. Index, Nasdaq 100 Index, or Standard & Poor's 500 Composite Stock Price Index. The insurer also guarantees a minimum value to the purchaser. The specific features of indexed annuities vary from product to product.

Section 3(a)(8) Exemption

Section 3(a)(8) of the Securities Act provides an exemption for any "annuity contract" or "optional annuity contract" issued by a corporation that is subject to the supervision of the insurance commissioner, bank commissioner, or similar state regulatory authority. The exemption, however, is not available to all contracts that are considered annuities under state insurance law. For example, variable annuities, which pass through to the purchaser the investment performance of a pool of assets, are not exempt annuity contracts.

Definition of Annuity Contract

Rule 151A, on a prospective basis, defines a class of indexed annuities that are not "annuity contracts" or "optional annuity contracts" for purposes of Section 3(a)(8) of the Securities Act; i.e., that are outside the scope of Section 3(a)(8). With respect to these annuities, investors will be entitled to all the protections of the federal securities laws, including full and fair disclosure and antifraud and sales practice protections.

Under rule 151A, an annuity issued by an insurance company is not an "annuity contract" or an "optional annuity contract" under Section 3(a)(8) of the Securities Act if the annuity has two characteristics.

• First, the contract specifies that amounts payable by the insurance company under the contract are calculated at or after the end of one or more specified crediting periods, in whole or in part, by reference to the performance during the crediting period or periods of a security, including a group or index of securities.

• Second, amounts payable by the insurance company under the contract are more likely than not to exceed the amounts guaranteed under the contract.

Rule 151A addresses the manner in which a determination will be made regarding whether amounts payable by the insurance company under a contract are more likely than not to exceed the amounts guaranteed under the contract. Rule 151A is principles-based, providing that a determination made by the insurer at or prior to issuance of a contract will be conclusive, provided that:

• both the insurer's methodology and the insurer's economic, actuarial, and other assumptions are reasonable;

• the insurer's computations are materially accurate; and

• the determination is made not earlier than six months prior to the date on which the form of contract is first offered.

Effective Date

The effective date of rule 151A is January 12, 2011. The new definition in rule 151A will apply prospectively — that is, only to indexed annuities issued on or after January 12, 2011.

Other resources

The release adopting rule 151A can be found on the SEC's website at http://www.sec.gov/rules/final/2009/33-8996.pdf.

Contacting the SEC

The SEC's Division of Investment Management is happy to assist small companies with questions regarding rule 151A. You can contact the Division's Office of Insurance Products at (202) 551-6795.

¹ This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.

http://www.sec.gov/rules/final/2009/33-8996-secg-151a.htm