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U.S. Securities and Exchange Commission

SEC Improves Protections for Seniors and Other Investors in Equity-Indexed Annuities


Washington, D.C., Dec. 17, 2008 — The Securities and Exchange Commission today approved a new rule to help protect seniors and other investors from fraudulent and abusive practices that can occur in the sale of equity-indexed annuities.

Equity-indexed annuities, first introduced in the mid-1990s, have grown significantly over the years. In 2004 alone, sales of equity-indexed annuities increased more than 50 percent to approximately $23 billion. Today, more than $123 billion is invested in equity-indexed annuities.

Equity-indexed annuities are often sold to seniors and can lock up older investors' money for more than a decade. Until now, the question of whether equity-indexed annuities are insurance products or securities subject to investor protections under the federal securities laws has not been clearly answered. The rule that the SEC approved today establishes, on a prospective basis, the standards for determining when equity-indexed annuities are considered not to be annuity contracts under the securities laws and thus subject to the investor protections against fraud and misrepresentation, limiting the potential for sales practice abuses in the promotion of equity-indexed annuities to older investors.

"Investors who buy equity-indexed annuities are typically looking for a safer way to invest in securities. But if those investors need their money for medical expenses or rent, for example, they risk losing a substantial amount of the investment. At the same time, their upside is typically limited to less than what they would have gained by directly buying the indexed securities. Unfortunately, many equity-indexed annuities appear to have been marketed to investors who may be least able to scrutinize these details, including America's seniors," said SEC Chairman Christopher Cox.

"Senior investors will particularly benefit from these additional safeguards against abusive sales practices by unscrupulous marketers," Chairman Cox continued. "Investors in all types of securities are uniformly entitled to regulatory protections, and the SEC's action today will result in the extension of these same protections to investors in equity-indexed annuities who are exposed to investment risk."

The SEC's new rule defines the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933. The rule clarifies the status under the federal securities laws of equity-indexed annuities, under which payments to the purchaser are dependent on the performance of a securities index.

Section 3(a)(8) of the Securities Act provides an exemption under the Securities Act for certain insurance and annuity contracts. The SEC's new rule provides that an indexed annuity is not an "annuity contract" under this insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.

The SEC's rule 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. The rule is principles-based, providing that a determination made by the insurer at or prior to issuance of a contract is conclusive if, among other things, both the insurer's methodology and the insurer's economic, actuarial, and other assumptions are reasonable.

The new definition applies only to equity-indexed annuities issued on or after Jan. 12, 2011.

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Modified: 12/17/2008