NAIFA GovWatch

Financial Services Overhaul Bill Includes Provision to Settle Regulatory Battle over Indexed Annuities

Issue: Financial Services Regulatory Reform

Date: June 25, 2010

Action Taken: The final version of the financial services regulatory reform legislation approved by the House-Senate Conference Committee overnight includes a provision that essentially bars the Securities and Exchange Commission (SEC) from regulating indexed annuities; thus leaving indexed annuity regulation to the States.

Indexed Annuity Provision: The provision included in the final bill was spearheaded by Senator Tom Harkin (D-IA) and endorsed by House conferee Gregory Meeks (D-NY). The provision generally provides that the SEC will have no jurisdiction over indexed annuity products sold in a state that has adopted the NAIC’s Suitability in Annuity Transactions Model Regulation or over indexed annuity products sold by a company that has adopted equivalent of the NAIC Model as their corporate policy with regard to the sale of indexed annuities.

Specifically, the provision provides that an indexed annuity issued on and after June 16, 2013, is exempt from SEC regulation if it is issued:

in a state that adopts rules that govern suitability requirements in the sale of an indexed annuity that “substantially meet or exceed the minimum requirements established by” the NAIC’s Suitability in Annuity Transactions Model Regulation, which was adopted by the NAIC in March of this year (and any successor to that model);
in any state by an insurance company domiciled in a state that has rules that govern suitability requirements in the sale of an indexed annuity that “substantially meet or exceed the minimum requirements established by” the NAIC’s Suitability in Annuity Transactions Model Regulation (and any successor to that model); or
in any state by an insurance company that “adopts and implements practices on a nationwide basis” for the sale of indexed annuities that meet or exceed the minimum requirements established by” the NAIC’s Suitability in Annuity Transactions Model Regulation (and any successor to that model). Enforcement of compliance with the Model Regulation in states that do not have the NAIC’s rule in force is left to the insurer’s state of domicile or “any other state...”

NAIC Suitability in Annuity Transactions Model: In March of 2010 the NAIC adopted a revised Suitability in Annuity Transactions Model regulation. During the several years it took to develop the revised Model, NAIFA staff worked closely with regulators and industry representatives to develop the Model which attempts to align its requirements with the FINRA suitability requirements for the sale of variable annuities. Key changes in the Model which impacts the sale of all fixed annuities includes enhanced monitoring and supervision of sales by insurers, producer training, and insurer review of producer recommendations. Click here to review a guideline of the Model as produced by NAIC officials who were involved with its development.

Impact on Sales of Indexed Annuities: The effect of the Harkin amendment is likely to be two-fold: First, it will prevent the SEC from making another attempt at claiming jurisdiction over indexed annuities. Second, it will encourage the States to adopt the strong suitability protections incorporated in the NAIC’s Suitability in Annuity Transactions Model Regulation.

Next Steps: The financial services regulatory reform bill is expected to be sent to the House and Senate for final approval next week. Upon passage, the bill will be sent to the President’s desk to be signed into law.

NAIFA Staff Contact: Gary Sanders, Vice President -- Securities and State Government Regulation, at gsanders@naifa.org; and Jill Edwards, Assistant Vice President – Federal Government Relations, at jilledwards@naifa.org.

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