On December 17, 2008, the U.S. Securities and Exchange Commission (the “SEC”) voted 4 – 1 in favor of classifying equity-indexed annuities as securities, subjecting them to federal regulation. As discussed in our earlier posts here and here, the new rule, which takes effect January 12, 2011, seeks to clarify the status of indexed annuities under the federal securities laws. The new rule exempts insurance companies from filing reports under the Securities Exchange Act of 1934 (the “Securities Act”) with respect to indexed annuities and other securities that are registered under the Securities Act, provided that: (i) such securities are regulated under state insurance law, (ii) the issuing insurance company and its financial condition are subject to state insurance regulator supervision and examination, and (iii) the securities are not publicly traded. Further, the exemption would not apply to insurance company separate accounts that are not regulated as insurance, but rather are registered as investment companies under the Investment Company Act of 1940.
Some insurers and state insurance departments opposed the rule change arguing that indexed annuities are already adequately regulated by state regulators and that new federal regulation would only result in additional costs in registering and selling the products; costs that would ultimately be passed to the consumer. Consumer advocates argued, however, that federal regulation was needed because of the complexity of the products and the fact that they were sold to people who oftentimes did not understand what they were buying and were unaware of the potential fees associated with withdrawals.