Monday, December 29, 2008

Indexed Annuities under the SEC's Eye

Earlier this month, the SEC adopted new final rules,based on a June 25, 2008 proposal, governing indexed annuities. This new Securities Act Rule 151A is intended to clarify the SEC's position on the regulatory status of indexed annuities, a type of annuity that ties contract values to the performance of an index.  Rule 151A defines "indexed annuities," and requires indexed annuities that satisfy the rule’s definition and are issued on or after January 12, 2011 to register under the Securities Act.

Section 38(a)(8) of the Securities Act exempts annuity contracts and optional annuity contracts from regulation under the Securities Act.  But, the Section 38(a)(8) exemption is not available to all contracts that are “annuity contracts” under state law (e.g., variable annuities). Whether or not indexed annuities fell within the scope of the exemption, however, had not been clarified until now.  Under the new rule 151A, indexed annuities are not "annuity contracts" and are not exempt from the Securities Act if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.  The rule also provides a principles-based manner in which this determination is made.  It is this principles-based method that generated the bulk of the nearly 4,800 comments to the proposal.

According to Commission Staff comments at the December 17th open meeting, Rule 151A as adopted differs from the proposed version in that: 

  • It does not contain the requirement that the insurance company re-assess the status of each indexed annuity every three years. 

  • In response to comments received, the scope of the rule was made narrower and clarifications were made because the rule as originally proposed might unintentionally have been interpreted to apply to traditional fixed annuities, which now remain outside the scope of Rule 151A. 

Rule 151A was proposed, and subsequently adopted, because the dramatic increase in the popularity of indexed annuities since the product was introduced in the mid 1990s, coupled with increased incidence of abusive sales practices and deceptive sales to seniors, prompted the SEC to provide clarification of their status under Section 3(a)(8).  This rule adoption has not come without controversy, however. Commissioner Paredes voted against adoption, and took the unusual step of insisting his dissenting remarks be published in the Federal Register. His dissent rests on legal grounds, in particular that Rule 151A exceeds the SEC's regulatory authority and that courts interpreting the scope of the SEC's power under Section 38(a)(8) does not support SEC authority extending to the regulation of indexed annuities.  His dissent also opposes the principles-based method of determining if an indexed annuity falls under the Rule 151A requirements.  Commissioner Paredes' analysis follows that of some of the commenters opposing the rule proposal, and is sure to provide a road map for challenge to the new rule. 

The final rule release is not yet available on the SEC's website, but the proposing release may be found at:

The full text of Commissioner Paredes' dissenting remarks is available at:

An archived webcast of the December 17, 2008 open meeting is available at: