Adviser groups opposed to exempting indexed annuities from SEC oversight

Groups argue the Harkin amendment would undermine the goal of strengthening the standard of care for investors.

Investment adviser industry groups are fighting a proposal to exempt equity indexed annuities from oversight by the Securities and Exchange Commission — an idea that has emerged during Capitol Hill negotiations on the financial-regulatory-reform bill even though it was not originally part of either chamber’s measure.
Sen. Tom Harkin, D.-Iowa, and a member of the House-Senate conference committee, offered an amendment last week to prevent the SEC from regulating sales practices related to these annuities. The provision could be acted upon as soon as Tuesday, when the panel resumes its work on the 1,974-page base text that is the foundation for the talks.
The Harkin amendment is part of the investor protection title of the bill. Another sticking point in that section is fiduciary duty.
The House has proposed to strip from the bill Senate language that calls for an SEC study of the issue and replace it with a provision of the House bill that would direct the SEC to write a regulation imposing the same fiduciary standard on broker dealers and insurance agents as investment advisers must meet.
On Tuesday, members of the committee are expected to respond to the Harkin amendment and to the House offer on fiduciary duty.
The conference should reject the Harkin amendment because it would undermine the goal of strengthening the standard of care for investors, said Kevin Keller, president of the Certified Financial Planner Board of Standards Inc. Mr. Keller said the Financial Planning Association, the North American Security Administrators Association and the Consumer Federation of America also are pushing back against the Harkin amendment.
“These are products that are ripe for abuse among the elderly,” Mr. Keller said. “It’s important for consumers, especially the elderly, to have the protection of the SEC.”
He pointed to a 2009-10 CFP Board survey of financial planning professionals. Among the 1,600 stories of malfeasance told by clients to their advisers were many involving equity index annuities. One centered on an 80-year-old married man being sold an annuity with a 17-year surrender period, which prevented him from withdrawing his money.
Equity indexed annuities are contracts that guarantee a certain return that is linked to a securities index.
“We believe the SEC should not have its authority pre-empted by Congress,” Mr. Keller said. “It’s a bad precedent. It particularly limits their authority to regulate more-exotic products down the road.”
The SEC has adopted Rule 151A, which would treat equity indexed funds like securities. But the agency became embroiled in a legal battle with a consortium of insurance companies that want states to have oversight of the products. The U.S. Court of Appeals for the District of Columbia remanded the case to the SEC, which decided in December to delay the effective date of the rule until 2013.
Lobbyists for the insurance industry acknowledged that annuities have garnered a bad reputation, but they said they are now among the most heavily regulated financial products.
Mr. Harkin’s office did not respond to a request for comment Monday.
The 43-member committee is reconciling the separate House and Senate versions of the financial-reform measure into a final bill, which both chambers must approve before sending it to President Barack Obama to be signed into law. Democratic leaders want to get the bill to the president by July 4.
Beyond the substantive reasons for opposing the equity indexed annuities provision, Mr. Keller said there is a procedural one. Mr. Harkin’s proposal was not voted on by the House or Senate and is not part of either bill under negotiation.
“It’s completely out of left field,” Mr. Keller said. “It’s not germane to the conference.”