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U.S. Securities and Exchange Commission

Statement at Open Meeting on Equity-Indexed Annuities


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
June 25, 2008

Our next item of business is a subject of great interest to senior investors. For three years, we have been closely partnering with the North American Securities Administrators Association (NASAA) on senior issues, and the recommendation before us this morning from the Division of Investment Management is very much a product of that collaboration.

NASAA has led the way in exposing the abusive sales practices often used to promote equity indexed annuities to older investors for whom they are unsuitable. So too has the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) before it. Two years ago at the national Seniors Summit here at the SEC, NASAA made public its survey results showing the scope of senior investment fraud. As then-NASAA President Patty Struck put it, the survey revealed a landscape "littered with slick schemes and broken dreams" that has been "devastating" to the victims and their families. The survey of state securities regulators showed that 45% of all investor complaints received by state securities regulators are made by seniors. The survey also found that equity-indexed annuities are among a handful of products most often involved in senior investment fraud. For example, cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi.

Working with our state regulatory counterparts, the SEC has made cracking down on fraud in this area a top priority, and today's proposed rulemaking is a big part of that effort. But let me be clear: the Commission would not be here today working on this topic were it not for the pioneering efforts of Karen Tyler, NASAA's current president, and her predecessors Patty Struck and Joe Borg, who together with our colleagues at FINRA have been highlighting the problems associated with equity indexed annuities for years. This is truly a joint federal-state partnership, and the SEC is proud to be working shoulder-to-shoulder with state securities regulators on this vital investor protection issue.

Equity indexed annuities are investments that insurance companies sell to the public. They were first introduced about 13 years ago, around 1995. They gained ground and grew significantly over the years — in 2004 alone, for example, sales of equity indexed annuities increased over 50 percent, from $14 billion in 2003 to about $22 billion in 2004. In 2007, indexed annuity sales were nearly $25 billion. Today, over $123 billion is invested in indexed annuities.

These products are both simple and complicated. They are simple in that, like other investments, they involve a pay-in and a pay-out. After money is paid in, the value of the investment can grow based on changes in a securities index. At some point, the investor takes the money out, and, depending on when that happens, the terms of the contract and the performance of the index determine whether the pay-out might be more or less than the money the investor contributed in the first place.

That's the simple part. The complicated part is that a variety of fees and charges, limitations on accumulation, calculations of index values, and other detailed features are baked into equity indexed annuities. And although the contract guarantees a minimum value, that's typically less than what the investor gives the insurance company in the first place. As FINRA noted in an Investor Alert, indexed annuities are "anything but easy to understand." FINRA added that, because there are so many features among various products, investors have a difficult time comparing one equity indexed annuity to another.

Surrender charges are another way that investors can find that they get back less money than they put in. The charges can be as high as 15 to 20 percent of the amounts invested. Although the surrender charges decline to zero over time, that process can take more than 15 years. In the meantime, if an investor who buys an equity indexed annuity needs his or her money sooner — for medical expenses or rent, for example — he or she can be forced to forfeit a substantial amount of the investment.

Unfortunately, many equity indexed annuities appear to have been marketed to investors who are least able to scrutinize the details. It's common for these products to be sold as investments to older Americans who are simply in many cases not suitable purchasers. Three years ago, the NASD, now FINRA, raised concerns about the manner in which broker-dealer personnel were marketing and selling unregistered equity indexed annuities. They also sounded the alarm about the absence of adequate supervision of these sales practices.

Today, in 2008, the cause for concern seems greater than ever. Recently, Dateline NBC produced a segment on the abusive sales tactics that are often used to sell equity indexed annuities to seniors. A hidden camera captured the evidence at free lunch and dinner seminars that were followed by sales pitches that downplayed the surrender charges. They also highlighted a number of other abusive and misleading sales methods, such as salespeople with fake credentials and over-the-top presentations designed to instill fear in would-be investors. The SEC was not involved in producing this segment, but I'd like for all of us to watch just a few minutes of it right now…

[short video presentation]…

One big reason that these abusive sales practices have gone unchecked is that the question of whether they are securities at all has been left unanswered. In 1997, shortly after equity indexed annuities were first introduced, the Commission issued a concept release that asked a range of questions about equity indexed annuities. We received a number of letters, which were followed by further debate among industry participants, government regulators, and consumer advocates.

Today we are considering a new rule that would establish — on a prospective basis — the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws. These investor protections include the requirement of registration under the Securities Act, and our requirements related to truthful and complete disclosure of the investment to potential purchasers. In addition, investors would enjoy the benefits of protections against fraud and misrepresentation, and additional safeguards against abusive sales practices by unscrupulous marketers. In the future, these protections may significantly reduce the problem of investors being harmed by inappropriate sales of equity indexed annuities.

I would like to thank the staff of the Division of Investment Management for their hard work in bringing this release before the Commission today. I include, of course, Buddy Donohue, the Director of the Division, and especially Susan Nash, Keith Carpenter, and Michael Kosoff, as well as the Office of the General Counsel, including Lori Price and Cathy Ahn, and the Office of Economic Analysis, including Jim Overdahl and Joshua White.

I would also like to thank the leadership of both the North American Securities Administrators Association, especially current president Karen Tyler, and past presidents Joe Borg and Patty Struck and FINRA. Their efforts have been instrumental in bringing to light the investor protection concerns related to equity indexed annuities that we are addressing today.


Modified: 06/25/2008