Congressional committee ap-proval late last week of an amendment to the financial-reform bill maintaining state regulation of equity-indexed annuities drew mixed reaction, with insurers cheering the action and advisers largely opposing it.
On Thursday, House members of the House-Senate conference committee negotiating a final financial-reform bill approved the provision, offered by Sen. Tom Harkin, D-Iowa, that had not been part of either the House or Senate versions of the bill. Senate conferees passed Mr. Harkin's measure Tuesday.
The proposal clarifies the status of equity-indexed annuities as insurance products to be overseen by states rather than as securities regulated by the Securities and Ex-change Commission.
“This is great news. From the start we viewed [the equity-indexed annuity] as an insurance product, not a security — and that it should be regulated at state level rather than the SEC,” said Tom Burns, chief distribution officer of Allianz Life Insurance Company of North America.
Kim O'Brien, executive director of the National Association of Fixed Annuities, also applauded the committee. “We're very thrilled that Congress has recognized the work that the industry and the [National Association of Insurance Commissioners] have done. They recognize the insurance value of the product and have kept it the hands of state insurance commissioners. We hope it continues its way to the president's desk for signing.”
The SEC in late 2008 promulgated Rule 151A, which brings equity-indexed annuities under its jurisdiction. But the agency delayed implementation because the regulation is the subject of a lawsuit filed by a consortium of insurance companies. The U.S. District Court of Appeals for the District of Columbia sent the rule back to the SEC for further work.
Rep. Barney Frank, D-Mass., chairman of both the House Financial Services Committee and the House-Senate conference, opposed the Harkin proposal to maintain the insurance status of indexed annuities. In an unusual vote breakdown, most rank-and-file Democrats sided with most Republicans to approve the amendment over the objections of Democratic leaders, who favored SEC oversight of the product.
“This is not state versus federal,” Mr. Frank said. “This is investment products versus insurance products. The dual regulation is a better way to go.”
Many advisers and financial planners also support SEC oversight, saying that equity-indexed annuities are vulnerable to abuse by unscrupulous sales representatives who prey on vulnerable customers, such as elderly investors, who lose access to their money unless they pay huge penalties.
“Stripping the SEC of the power to regulate equity-indexed annuities really undermines the intent of the financial-reform legislation,” said Kevin Keller, chief executive of the Certified Financial Planner Board of Standards Inc. “We feel it's a real loss for consumer protection.”
Adviser Mary Sterk, founder of Sterk Financial Services Inc., added that “the broker-dealer world and Finra should regulate the indexed-annuity products. To truly understand the mechanism of an index tied to securities, you need to have the education and the background of a securities license to know what's suitable for clients.”
Jerry W. Taylor, a division manager with Next Financial Group Inc. a broker-dealer, said that if sales of the product were put under the jurisdiction of the SEC and the Financial Industry Regulatory Authority Inc., the structure of a broker-dealer would lend itself to numerous layers of supervision and tight oversight — and as such, transactions would be scrutinized closely.
“If you sell a straight insurance product, you have the vendor, the client and the state insurance commissioner,” he said. “Broker-dealers have more eyes on the transaction on the securities side.”
But past problems with indexed annuities have been addressed by development of a suitability standard by the National Association of Insurance Commissioners, according to Mr. Harkin. The standard requires that an agent selling the product obtain information about a customer's age, income, financial experience, investment horizon and liquidity needs, among other factors.
Sen. Jack Reed, D-R.I., countered that Mr. Harkin's amendment short circuits the appeals court. The ruling said that the SEC could regulate annuities but failed to account for how its rule would affect market efficiency, competitiveness and capital formation, he said.
“The Harkin amendment would effectively trump the court's decision,” Mr. Reed said Tuesday. “There have been repeated abuses of this product.”
During the conference meeting Wednesday, Rep. Scott Garrett, R-N.J., defended the performance of the annuities.
“No one has lost a penny of account value,” he said.
The economic slowdown also played a part in the conference debate on regulation of the annuities. Rep. Gregory Meeks, D-N.Y., said that undermining state regulation could drive individual insurance agents and small insurance companies out of business, adding to unemployment.
“A lot of it's about jobs,” he said.
Beyond the debate about who should regulate the products was a disagreement over whether the Harkin amendment was germane to the regulatory bill and should have been considered in the conference.
“This is a major amendment of securities law without any hearings or debate,” Mr. Reed said. “I don't think this is the proper place to make such a change.”
E-mail Mark Schoeff Jr. at firstname.lastname@example.org.