The Securities and Exchange Commission on June 25, 2008, released new proposed regulations under Rule 151A, which will require the registration of certain newly issued "indexed annuities" under which payments to the purchaser are dependent upon the performance of a securities index. The proposed rule would define certain types of indexed annuities as being neither an annuity contract nor options annuity contract, and therefore, ineligible for the "insurance exemption" found in section 3(a)(8) of the Securities Act.

Insurance companies issuing annuity contracts will need to look closely at the definitions used by the SEC in the proposed rule. As proposed, it appears that the rule would cover certain types of non-registered group annuity contracts sold to § 403(b) plans, particularly certain group fixed annuities sold as part of § 403(b) open architecture programs. Of particular concern could be contracts designed to mirror stable value collective trusts, where the annuity's crediting rate is tied to an outside index. To the extent that annuity issuers have viewed those types of contracts as merely another version of a "fixed" contract that does not need registration, the proposed rule may provoke a re-examination of that position.

As proposed, the rule would impose a two-part test to determine if such stable value funds need to be registered under federal securities laws. The first is whether any amount payable under the contract under any circumstance is calculated in whole or in part by reference to the performance of a securities-including index. The second part of the test is to determine if the amount payable under the contract is more likely than not to exceed the guaranteed amount under the contract. This means, for example, if the contract guarantees the principal (or most of it) and crediting rate of 1.5 percent, the insurance company would need to determine if more than half of the time the contract would pay out more than this guaranteed amount. If there is a better than 50 percent chance that the payment from the indexed annuity will be greater than the guarantee, compliance with federal securities laws will be required.

Every company's products are a bit different; some companies may not have an issue with these rules and may even be registering such products. But companies should take a look at their product lineup and compare it to the new registration rules. While we believe that this proposal should not concern 401(a) plans because of the broad securities law exemptions available to such plans, 403(b) plans do not enjoy this favorable treatment and may now be at risk to the strictures of Rule 151A. The only way to tell for sure is to walk through the proposed regulation step-by-step and apply each of their provisions to each particular product.