The Annuity Industry's rally point for news and advice regarding proposed rule 151a.

Jul 2, 2008

  1. xrac

    xrac Guru

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    If you are opposed to FIA being reclassified as securities and if you're not involved politically, now is the time to get involved and do something! Make your calls, write your letters, draft your emails! I suggest you read it this site and make your comment on the SEC's attempt to take this action. - News & Advice

    Here is meaningful comment on this by Jack Marrion:

    Index Compendium
    Last edited: Jul 2, 2008
    xrac, Jul 2, 2008
  2. Charpress

    Charpress Guru

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    Re: The Annuity Industry's rally point for news and advice regarding proposed rule 15

    Test #2 to decide whether a FIA is actually a security:

    "2. the amounts payable by the insurer are more likely than not to exceed the amounts guaranteed under the contract ("more-likely-than-not" test)."

    HAH! I know of annuities that seem to be designed to fail test #2 completely and therefore not be considered a security.
  3. padthaiforlunch

    padthaiforlunch Guru

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    Re: The Annuity Industry's rally point for news and advice regarding proposed rule 15

    (Please feel free to share this anywhere and everywhere.)

    The commenting period is too short. I think we need to push to have at least 12 months for commenting on such an important issue to the financial industry.

    Time to call your Congressman and Senator and ask them to lean on the SEC and to help stop this money grab.

    From Page 5 of 96:

    The Commission has also recognized that the allocation of investment risk is significant in determining whether a particular contract that is regulated as insurance under state law is insurance for purposes of the federal securities laws. Individuals who purchase indexed annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index.

    From page 6 of 96:

    "Individuals who purchase such indexed annuities assume many of the same risks and rewards that investors assume when investing their money in mutual funds, variable annuities, and other securities."

    O really? And which of those many risks would those be? Penalty for early withdrawal is not market risk.

    Why does the SEC have to lie to push this through? And why the rush? Because of falsehoods and half-truths, we need more time to examine and study the proposed rule especially the methodology behind Section 6: Cost/Benefit Analysis and Section 9: Consideration of Impact on the Economy.

    Senate Committe on Banking, Housing and Urban Affairs.
    Christopher J. Dodd Chairman (D-CT)
    Tim Johnson (D-SD)
    Jack Reed (D-RI)
    Charles E. Schumer (D-NY)
    Evan Bayh (D-IN)
    Tom Carper (D-DE)
    Robert Menendez (D-NJ)
    Daniel K. Akaka (D-HI)
    Sherrod Brown (D-OH)
    Robert P. Casey (D-PA)
    Jon Tester (D-MT)

    Richard C. Shelby Ranking Member (R-AL)
    Robert F. Bennett (R-UT)
    Wayne Allard (R-CO)
    Michael B. Enzi (R-WY)
    Chuck Hagel (R-NE)
    Jim Bunning (R-KY)
    Mike Crapo (R-ID)
    Elizabeth Dole (R-NC)
    Mel Martinez (R-FL)
    Bob Corker (R-TN)

    House Financial Services Committee Members
    Committee Members
    Chairman Barney Frank
    Rep. Paul E. Kanjorski, PA
    Rep. Maxine Waters, CA
    Rep. Carolyn B. Maloney, NY
    Rep. Luis V. Gutierrez, IL
    Rep. Nydia M. Velázquez, NY
    Rep. Melvin L. Watt, NC
    Rep. Gary L. Ackerman, NY
    Rep. Brad Sherman, CA
    Rep. Gregory W. Meeks, NY
    Rep. Dennis Moore, KS
    Rep. Michael E. Capuano, MA
    Rep. Rubén Hinojosa, TX
    Rep. William Lacy Clay, MO
    Rep. Carolyn McCarthy, NY
    Rep. Joe Baca, CA
    Rep. Stephen F. Lynch, MA
    Rep. Brad Miller, NC
    Rep. David Scott, GA
    Rep. Al Green, TX
    Rep. Emanuel Cleaver, MO
    Rep. Melissa L. Bean, IL
    Rep. Gwen Moore, WI
    Rep. Lincoln Davis, TN
    Rep. Paul W. Hodes, NH
    Rep. Keith Ellison, MN
    Rep. Ron Klein, FL
    Rep. Tim Mahoney, FL
    Rep. Charles Wilson, OH
    Rep. Ed Perlmutter, CO
    Rep. Christopher S. Murphy, CT
    Rep. Joe Donnelly, IN
    Rep. Bill Foster, IL
    Rep. Andre Carson, IN
    Rep. Jackie Speier, CA
    Rep. Don Cazayoux, LA
    Rep. Travis Childers, MS

    Republican Members

    Rep. Spencer Bachus, AL
    Rep. Deborah Pryce, OH
    Rep. Michael N. Castle, DE
    Rep. Peter King, NY
    Rep. Edward R. Royce, CA
    Rep. Frank D. Lucas, OK
    Rep. Ron Paul, TX
    Rep. Steven C. LaTourette, OH
    Rep. Donald A. Manzullo, IL
    Rep. Walter B. Jones , NC
    Rep. Judy Biggert, IL
    Rep. Christopher Shays, CT
    Rep. Gary G. Miller, CA
    Rep. Shelley Moore Capito, WV
    Rep. Tom Feeney, FL
    Rep. Jeb Hensarling, TX
    Rep. Scott Garrett, NJ
    Rep. Ginny Brown-Waite, FL
    Rep. J. Gresham Barrett, SC
    Rep. Jim Gerlach, PA
    Rep. Stevan Pearce, NM
    Rep. Randy Neugebauer, TX
    Rep. Tom Price, GA
    Rep. Geoff Davis, KY
    Rep. Patrick T. McHenry, NC
    Rep. John Campbell, CA
    Rep. Adam Putnam, FL
    Rep. Michele Bachmann, MN
    Rep. Peter J. Roskam, IL
    Rep. Kenny Marchant, TX
    Rep. Thaddeus McCotter, MI
    Rep. Kevin McCarthy, CA
    Rep. Dean Heller, NV
  4. sunshine

    sunshine New Member

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    Re: The Annuity Industry's rally point for news and advice regarding proposed rule 15

    Happy Independence Day to all you Independent Brokers !!!
  5. JMO Fan

    JMO Fan Guru

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    The Annuity Industry's weak point regarding proposed rule 15

    FIAs put more risk on buyers than the 1980s "fixed" annuities that were declared by federal court to be securities. Federal court then said a declared-rate annuity with a 3.5% guarantee shifted all the risk to the buyer. It is virtually impossible to sell FIAs without emphasizing their investment advantages, another violation of "safe harbor" rules.:policeman:

    SEC said indexed products were outside the "Safe Harbor" in 1986. They repeated it in 1997, open for public comments. Considering court decisions & laws, the proposed rule is as weak as the SEC dares. :radar:
    JMO Fan, Jul 3, 2008

    URDRWHO Guru

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    Re: The Annuity Industry's weak point regarding proposed rule 15

    So basically the SEC wants insurance non-registered annuities to only pay what the return on bills & bonds will pay? but wait....bills and bonds are a security.

    Hell the SEC wants everything to be a security.

    I'm not buying any of their horse poop (SEC). When I was a reg rep., working for independent B/D's, the NASD was always making rules that made it very hard for independent B/D's to operate. The final straw for me was this one: The NASD said that my B/D could no longer go to each State, holding meetings that each Reg Rep. could attend. The Reps had to fly to Texas (location of my B/D) each year for a face to face meeting. This was during a time that no independent B/D's sat on the NASD board.

    No I don't buy any of their crap. It is all about the money for FINRA and the big wirehouses. Period!

    URDRWHO, Jul 3, 2008
  7. padthaiforlunch

    padthaiforlunch Guru

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    Re: The Annuity Industry's weak point regarding proposed rule 15

    Yes, we know you want them under finra. Which 1986 SEC comment are you referring to? And wasn't the first EIA sold in 1995?

  8. padthaiforlunch

    padthaiforlunch Guru

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    Re: The Annuity Industry's rally point for news and advice regarding proposed rule 15

    From Raymond James Index Annuities: Insurance Product or Security

    ...Malone v. Addison Insurance Marketing: AEL Index Annuities Exempt Under Securities Act

    Referring back to Malone, the judge found that the American Equity index annuity was exempt from
    registration under the Securities Act.

    First, the judge noted that, per Sec 3(a) 8, American Equity (a defendant in the case) was subject to the
    supervision of an insurance regulator and that its index annuity was subject to the approval of an
    insurance commissioner per 3(a) 10.

    Second, the district court also found that the plaintiff's effort to have her American Equity contracts declared
    as variable annuities failed for two reasons:

    (1) By guaranteeing the plaintiff a minimum 3% return
    irrespective of the performance of the S&P 500 index, the district court found that American Equity took the
    investment risk and not plaintiff who stood to be credited 3% annually no matter how the market performed;

    (2) Annuitization payments were fixed in advance. Thus, both questions in VALIC were answered

    Third, the district court found that American Equity did promise the plaintiff a fixed amount of her savings plus
    interest (the return of premium plus 3% annually credited interest less any surrender charges) and that her
    assets were not kept in a separate account - "the keystone characteristic of all variable annuity contracts"
    according to the judge. Thus, both key questions asked in United Benefit Life were answered in the

    Fourth, the plaintiff's argument that her return over and above the minimum guarantee was variable, and thus
    did involve an element of risk and uncertainty, was found to be inconclusive. American Equity was found to
    bear substantially more risk as it can actually take a loss on the product if it was unable to surpass the
    minimum guaranteed crediting rate in its own investments. On the other hand, plaintiff's risk was not that she
    would lose the value of her initial investment, but rather the risk that had she chosen a different contract her
    money might have been worth more."

    Again, according to the judge, "That type of risk - that she could have gotten a better deal but for the pressure she encountered to enter into this particular contract - is not the type of risk central to determining whether a security exists.”

    Interestingly, the district court said it could end its deliberation there and find that the "plaintiff's American
    Equity contracts are more like 'fixed annuities' and therefore are excluded from the definition of 'security'
    under the Supreme Court's opinions in VALIC and United Benefit" without considering how the product was

    SEC Safe Harbor Rule 151: AEL Index Annuities Also Exempt

    However, the district court did decide to continue and examine SEC Safe Harbor Rule 151. SEC Safe
    Harbor Rule 151 was adopted in 1986 to quickly deal with the issue of what is and isn't a security under the
    Securities Act. The rule reads as follows:

    Any annuity contract or optional annuity contract (a contract) shall be deemed to be within the
    provisions of section 3(a)(8) of the Securities Act of 1933 (15 U.S.C. 77c(a)(8)), Provided,

    (1) The annuity or optional annuity contract is issued by a corporation (the insurer) subject to
    the supervision of the insurance commissioner, bank commissioner, or any agency or officer
    performing like functions, of any State or Territory of the United States or the District of

    (2) The insurer assumes the investment risk under the contract as prescribed in paragraph (b)
    of this section; and

    (3) The Contract is not marketed primarily as an investment
    Criterion 1 was, of course, easily satisfied.
    Criterion 2 is met if:

    (1) The value of the contract does not vary according to the investment experience of a
    separate account;

    (2) The insurer for the life of the contract

    (i) Guarantees the principal amount of the purchase payments and interest

    credited thereto, less any deduction (without regard to its timing) for sales

    administrative or other expenses or charges; and

    (ii) Credits a specified rate of interest (as defined in paragraph (c) of this
    section) to net purchase payments and interest credited thereto; and

    (3) The insurer guarantees that the rate of any interest to be credited in excess of that
    described in paragraph (b)(2)(ii) of this section will not be modified more frequently than once per year.

    Subcriterion (1) was satisfied as funds are commingled. Plaintiff's funds are not invested in a
    separate account.

    Subcriterion (2) was satisfied as the district court found that the American Equity contracts did guarantee the principal amount of the purchase payment and interest credited and that a specified rate of interest was stated.

    Subcriterion (3) was met as participation rates -which determine excess credited interest above the minimum 3%- are changed only once per year.

    Having found the first two criteria satisfied, the judge went on to Criterion 3 and contrasted the Supreme
    Court's findings in United Benefit Life to that of another case

    - Otto v. Variable Annuity Life Ins. Co. (1987)
    decided by the Seventh Circuit Court...

    …The Supreme Court cited United Benefit's reliance on the possibility of investment return as evidence of an "appeal to the purchaser not on the usual basis of stability and
    security but on the prospect of 'growth' through sound investment management."

    In contrast, in Otto, the Seventh Circuit concluded, "Although the award of discretionary excess interest and VALIC's investment experience were given some emphasis, the fixed
    annuity ... was marketed primarily on the basis of its stability and security." 814 F.2d at 1134.

    Thus, the judge wrote that his court must determine if American Equity's marketing emphasis was more
    clearly related to the prospects of growth or to that of stability.

    While the judge noted that plaintiff was correct that, "...the American Equity brochure and contract made reference to the success of the American Equity portfolio and that it advertised the S&P 500 indexing premium."

    The district court, in deciding that American Equity had satisfied criterion 3, noted that while the company
    promised "sound financial management," it did so only in the context of "...explaining that the company promises flexibility and stability."

    In addition, the district court found that the contract itself states plainly just before plaintiff's signature, "
    understand that past S&P 500 Index activity is not intended to predict future activity and that the S&P 500
    Index does not include dividends."

    Further, the judge noted that the one-page summary plaintiff signed, which focused on how her contract value was calculated at any one point to assure her the initial principal
    plus interest,"...did not emphasize the potential increase in her assets, but focused on explaining to her that she was guaranteed her principal plus three percent interest.”

    Thus, having decided that criterion 3 was met, the district court found that the American Equity product had
    satisfied all three criteria necessary under Rule 151 and was also exempt from registration under this basis.
  9. JMO Fan

    JMO Fan Guru

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    The Annuity Industry's rally point is weak

    I'm aware of the AEL decision. It proves that we can't predict which direction courts will go, which seems to have made the SEC slow to state its opinion. The AEL court completely ignored a prior decision on FPDAs that said a 3.5% fixed floor guarantee left all risk to the buyer, and the court-imposed requirement that the declared fixed rate be set for 12 months in advance, not just the factors.

    When the SEC said (in 1986) that all indexed annuities were outside the safe harbor, I think they believed they would have the prerogative to decide which ones were securities on a case-by-case basis. When the first big federal court decision was made after the SEC adopted the rule, the court clearly classified every contract outside the safe harbor as a security. Shortly after that decision, the SEC announced that they would no longer provide opinions on whether a contract was a security.

    SEC silence set up the scenario for EIAs to prosper. Stock index futures began to be offered in the 1990s, which enabled many more carriers to try indexed products. Denied any SEC input, it was natural for company attorneys (and actuaries) to get kudos (as well as pay) for arguing that securities registration was not required.

    Considering Dateline, consumer complaints, and FINRA as well as the bulk of past court decisions, the SEC seems pushed to classify EIAs as securities. They considered the subject publicly in 1997, but went silent when the NAIC (backed by the American Academy of Actuaries) told the SEC to back off. It seems silly to say that they are rushing into this rule.

    The SEC seems to be taking a big risk by proposing that pre-rule EIAs will be grandfathered as non-securities. A strong class action lawsuit could easily prove that post-rule EIAs are the same as pre-rule, implying that SEC overstepped its authority in ignoring past EIAs. Financial folks will be left scratching their heads as to how to account for them differently.
    JMO Fan, Jul 8, 2008