Although Rule 151A has been vacated by the U.S. Court of Appeals for the D.C. Circuit, legislatively overridden by the Harkin Amendment to the Dodd-Frank Act (DFA), and officially withdrawn by the SEC (see SEC Release No. 33-9152), questions regarding the potential securities regulation of indexed products remain.
The Harkin Amendment conditions indexed products’ exemption from Section 3(a)(8) of the Securities Act of 1933 on meeting state standard nonforfeiture and suitability laws. Hence, questions arise such as whether synthetic products without cash values can meet state nonforfeiture laws and whether indexed life insurance — or indeed any other life insurance product covered by the Harkin Amendment — can meet state suitability standards designed for annuities.
Despite vacating Rule 151A, the Court of Appeals found the SEC to be “reasonable” in regulating indexed products under the Rule, and did not object to the “more likely than not” test articulated under that Rule. Consequently, questions arise as to whether the investment risk, marketing, and mortality risk tests traditionally used to determine the securities status of insurance products have been modified.
The Harkin Amendment is articulated in terms of “exemption” from the securities laws rather than “exclusion.” Unlike “exclude[d]” products, exempt products remain subject to certain provisions of the federal securities laws, including the anti-fraud provisions. Although SEC Chairman Mary Schapiro has testified that the SEC has no plans to re-engage on this matter, query whether the SEC could bring actions against issuers of indexed and other products covered by the Harkin Amendment. In addition, DFA authorizes the SEC to adopt rules regulating broker- dealer point-of-sale disclosure of “investment products.” Still unknown: whether the SEC might seize on this provision to regulate disclosure of indexed products notwithstanding the Harkin Amendment.
Finally, FIN RA has sought to “regulate” indexed annuities through requirements regarding “outside business activities” of associated persons of broker-dealers and jawboning regarding “source of funds” to buy indexed annuities. Questions arise as to whether FIN RA will continue to assert jurisdiction on these grounds.