SEC Issues Proposed Rule to Classify Most Indexed Annuities as Securities, Plans to Move on 12b-1 Fees This Summer

Acting in response to concerns about allegedly abusive sales practices used in selling indexed annuities to seniors, the SEC on June 25 issued a new proposed rule (SEC Release No. 33-8933) that would classify indexed annuities as securities under certain circumstances. The proposal would accomplish this by revising several of the definitions in Section 3 of the Securities Act of 1933. Specifically, certain indexed annuities would no longer be defined as “annuity contracts” that fit within the insurance products exemption from coverage under the Act if the amounts payable under the contract are likely to exceed the amounts guaranteed under the contract. Comments are due to the SEC by September 10, 2008.

The release of this proposal came as no surprise; the SEC has been examining this issue for several years, and earlier this summer SEC Chairman Christopher Cox stated that in the near future “we’ll consider a proposed rule to deal with the longstanding investor protection issue of equity indexed annuities, and when they should be treated as securities”. Also, in 2005 FINRA (then the NASD) issued its Notice to Members 05-50, which strongly advised its member broker-dealers to supervise and run all indexed annuities transactions through the broker-dealer, despite the fact that neither the SEC nor the Congress had declared these products to be securities.

In response to the SEC announcement, NAIFA issued the following statement: “The relationship between insurance products and the securities laws is an issue of ongoing interest to NAIFA and its membership. The SEC initiative announced at the June 25 SEC Open Meeting will be carefully reviewed by NAIFA’s Policy Formation Subcommittee and Board of Trustees. At the appropriate time NAIFA will decide whether to take a position on and submit comments to the SEC with respect to the initiative.” NAIFA is in the process of reviewing the lengthy (almost 100 pages) proposed rule and will begin the process of considering a position and possible response when the Policy Formation Subcommittee meets to discuss this issue in July.

On another matter of concern to NAIFA and its members, Chairman Cox also reiterated in a recent speech in Washington, D.C. that “The Commission will also formally consider amendments to overhaul or abolish 12b-1 fees, which have befuddled mutual fund investors for so long.” NAIFA has been on top of the 12b-1 issue since it first surfaced at the SEC almost a year ago, and we have filed extensive comments with the SEC defending the use and payment of these fees as being the most efficient way to provide expert investment advice to mid-level investors. We will continue to monitor developments on this issue and respond in an appropriate manner if and when the SEC issues a formal proposal.

NAIFA Staff Contact: Gary Sanders, Senior Counsel for Law and Government Relations, 703-770-8192.