The proposal clarifies that the funds are insurance products that should be overseen by states rather than securities that should be regulated by the Securities and Exchange Commission.
Legislation that would dramatically overhaul financial regulation will include a provision that maintains state regulation of equity-indexed annuities.
House members of a House-Senate conference committee negotiating a final bill approved Thursday an amendment offered by Sen. Tom Harkin, D-Iowa, that was not part of either the House or Senate versions of the financial-reform bill. Senate conferees passed Mr. Harkin’s measure Tuesday.
The proposal clarifies that the funds are insurance products that should be overseen by states rather than securities that should be regulated by the Securities and Exchange Commission.
The SEC promulgated Rule 151A, which brings EIAs 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.
Supporters of the Harkin amendment argue that the SEC should not extend its reach to what they call an insurance product. EIAs are complex instruments that guarantee an income linked to a securities index.
“States do an excellent job of regulating the insurance industry,” said Rep. Spencer Bachus, R-Ala.
Rep. Barney Frank, D-Mass., chairman of both the House Financial Services Committee and the House-Senate conference, opposed the Harkin proposal. In an unusual vote breakdown, most rank-and-file Democrats sided with most Republicans to approve the amendment over the objections of Democratic leaders.
“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.”
Supporters of SEC oversight said that EIAs are vulnerable to abuse by unscrupulous salespeople who prey on vulnerable customers, such as elderly investors, who don’t have 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.”
Past problems with the annuities have been addressed by a suitability standard developed by the National Association of Insurance Commissioners, according to Mr. Harkin. The model regulation 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, which said that the SEC could regulate annuities but failed to account for how its rule would affect market efficiency, competitiveness and capital formation.
“The Harkin amendment would effectively trump the court’s decision,” Mr. Reed said Tuesday. “There have been repeated abuses of this product.”
In the meeting of the conference Wednesday, Rep. Scott Garrett, R-N.J., defended the performance of the annuities.
“No one has lost a penny of account value,” Mr. Garrett 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 salesmen and small insurance companies out of business, adding to unemployment rolls.
“A lot of it’s about jobs,” Mr. Meeks said.
Beyond the debate over 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.”
