Annuity FYI Blog

A year and a half long battle between the SEC and insurers is over, at least for now.  According to Arthur Postal’s “Appeals Court Vacates Rule 151A” in the National Underwriter, the SEC will have to go back to square one if they want to propose another Rule regarding the indexed annuity.  The SEC hoped to use Rule 151A to classify indexed annuities as securities rather than insurance products.  This would allow them to have jurisdiction over the products along with insurance regulators in each state.  But a panel of three judges in the appeals court has sided with insurers who want them to remain insurance products since they are backed by the insurance companies and there is no risk of losing investors’ principal.

If the SEC decides to propose a new Rule, they will have to show what effect such a rule would have on efficiency, capital formation, and competition in the industry.  Currently, the SEC says that they will do more research and wait to decide if they will begin another battle with insurers over indexed annuities.  Insurance companies believe that these are some of the best annuities for their clients and are relieved that Rule 151A has been dropped.  They think that agents and companies will be much better suited to handle indexed annuity products than the SEC and that they are far from being the equivalent of securities.  We’ll have to wait and see if the SEC decides to bring this issue up again.

A strong debate over who should oversee equity indexed annuity products has been going on since the SEC introduced Rule 151A in 2008.  According to Investment News’ “Indexed-annuities amendment: Insurers yea, advisers nay” by Mark Schoeff Jr. and Darla Mercado, the debate between sides will remain even if this amendment makes a final decision.  Regulation of equity indexed annuities will remain in the control of individual states if the bill passes, instead of transferring to the SEC as they had hoped.  The products will be classified as insurance products rather than securities.

Insurers are happy that the annuities will remain out of the hands of the SEC, while advisers would have preferred the latter.  Allianz Life, the National Association of Fixed Annuities, and the National Association of Insurance Commissioners support the bill keeping the regulation of equity indexed annuity products at the level of the state insurance commissioners.  While Democratic leaders hoped that the products would be regulated by the SEC, most rank and file Democrats voted with Republicans that the control should remain with state insurance commissioners.

The advisers who don’t agree with this bill believe that consumer protection against abusive sales representatives targeting vulnerable people will be compromised.  They believe that FINRA and members of the broker-dealer world have more knowledge to regulate a product tied to securities.  Because of past problems with equity indexed annuities, the National Association of Insurance Commissioners has put new suitability standards on the products believing that will help get rid of shady sellers.  There is also a concern in the government that taking away the state regulation of these products will force smaller insurance companies and individual agents out of business, leading to increased unemployment.  The debate rages on until the final bill is signed by the President.

California Insurance Commissioner Steve Poizner urges seniors to be careful to avoid annuity scams, according to press release “Commissioner Poizner Announces License Suspension; $15,000 Fine for Company’s Deceptive Practices Targeting Seniors.”  The Annuity Services Insurance Center was punished for using “deceptive advertising practices” that targeted the elderly in California.  Over 200,000 unsolicited letters were mailed out to residents of California starting in 2004.  The letters were misleading and used wording to make people think that they may have an annuity ready for distribution.  It wasn’t stated that the letters were not from the recipients actual insurance company or any affiliate.  Annuity Services Insurance Center is banned from operating in California for 5 years.  They have also received fines and cease and desist orders in numerous other states.

In order to protect senior citizens from annuity scams, Commissioner Poizner listed some important tips in the press release.  Sales pitches that are high pressure and tell you that the offers will not last are usually not valid.  Anything that makes you uncomfortable should also be avoided.  Many scam artists try to scare you into doing something before you run out of time.  Unfortunately, this leads to making decisions before any research is done and can be financially devastating.  Any licensed agent is happy to show you all of their credentials, so if someone is acting shady they probably are.  Just in most areas of life, if an offer seems too good to be true, most likely it is.  Steer clear of annuity scams directed at the elderly by taking your time and doing a lot of research.

The U.S. Securities and Exchange Commission’s Rule 151A might be thrown out by the U.S. Court of Appeals for the D.C. Circuit, according to “Court May Toss 151A Order” by Arthur D. Postal of National Underwriter.  The SEC’s proposed rule would classify indexed annuities as securities, allowing the SEC to apply the same rules that they do with variable annuities and other securities starting in January of 2011.  Last January, insurers filed a lawsuit against the SEC in an attempt to stop Rule 151A from being implemented.

In July an appeals court ruled that while the SEC does have the authority to apply the securities rule to indexed annuities, they “had failed to properly show the effect of Rule 151A on efficiency, competition, and capital formation.”  The appeals court said that the rule needed to be reconsidered.  Old Mutual Financial Life Insurance Company filed a motion of their own requesting that insurers have at least 2 years to comply with Rule 151A if it does take effect.  Instead, the court decided to require additional briefing from both Old Mutual and the SEC and said that they will address the issue of completely vacating the rule altogether.  It looks like the court battles will wage on for indexed immediate annuities and other EIA’s to determine whether they will be classified as securities in the future.

It looks like there are some questionable practices going on with the financial strength rating institutions, according to “CalPERS Gives Rating Agencies an FFF” by Kerry Pechter in the Retirement Income Journal. Investors and advisers alike have historically put a lot of faith in the ratings from Fitch, Standard & Poor’s, and Moody’s.  The companies rate the financial strength of annuities, bonds, and bond funds through a letter value system.  Unfortunately, a lawsuit filed by California’s state employee pension fund (CalPERS) alleges that the companies have been biased in their ratings process by using an “issuer pay” model.  This model basically blurs the lines between the rating and the compensation received by the rating institutions.  They stand to receive a higher financial payout with better ratings since they are paid by the debt issuers that they rate.

CalPERS lost close to $1 billion by investing in Structured Investment Vehicles (SIVs) that had the highest long-term debt ratings at the time.  They believe that these ratings institutions negligently misrepresented the SIVs because of the issuer pay model pressuring them to give high ratings so they would get large returns.  All three ratings companies have promised to look into the issues and make changes if necessary, but also believe that the losses can be attributed to a difficult economic environment and “natural actions.”  The possibility exists that although the system used by these institutions may have been unethical, it may very well still be legal which would negate any lawsuit.  This makes it more important than ever to do your research in order to find the best annuities, bonds, and stocks for your portfolio.