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Latest News on SEC Proposed Rule 151A

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Gary Sanders
Vice President of Securities and State Government Relations
(703) 770-8192

Background: In June, 2008 the SEC issued a new proposed rule (SEC Release No. 33-8933, File No. S7-14-08) that would classify certain indexed annuities as securities. The proposal would accomplish this by creating a new Rule 151A that would change the treatment of indexed annuities under the insurance products exemption found in Section 3(a)(8) of the Securities Act of 1933. If the proposed rule is adopted, the SEC and FINRA would have authority over indexed annuity sales, and someone who wishes to market/sell indexed annuities will need a series 6 or 7 securities license and be required to have IA sales supervised by a broker/dealer. An insurance producer license, by itself, would no longer be sufficient. (Currently, agents with a life license can sell indexed annuities whether or not they also have a securities license--but if the agent does have a securities license, he likely has to have the sale supervised by his broker/dealer, whereas an agent without a securities license can sell indexed annuities without running the sale through a b/d.) There is also concern that the application of proposed Rule 151A would not be limited to indexed annuities, and that other annuity and insurance products that fit the criteria set forth in the rule could be brought within the scope of the rule.

NAIFA Position: NAIFA opposes the adoption of proposed Rule 151A. NAIFA acknowledges the concerns that have been raised regarding the suitability of certain indexed annuity sales and the methods used to market indexed annuity products, and NAIFA strongly believes that people who engage in unscrupulous or misleading sales practices should be aggressively prosecuted and subject to appropriate and meaningful sanctions. However, concerns regarding suitability, disclosure and marketing methods are not the relevant criteria to consider in determining whether a financial product is or is not a security. NAIFA agrees with state insurance regulators that indexed annuities should be classified as insurance products, and that the state insurance regulatory structure is the appropriate means for addressing the concerns raised by the SEC. Looking beyond our concerns regarding this specific SEC proposal, NAIFA also strongly believes that it is necessary to preserve the principle that insurance products should be regulated by state insurance regulators.

 NAIFA is committed to working with the NAIC and state insurance departments towards the goal of having every state adopt and vigorously enforce the NAIC’s model regulations on annuity suitability and disclosure. NAIFA also recommends that a state regulatory body be designated to develop standards for indexed annuity product design that would be implemented by state insurance regulators and used to prevent inappropriate indexed annuity products from reaching the marketplace.

NAIFA Action in Connection with Proposed Rule 151A: NAIFA has been actively engaged on this issue since first receiving notice of the proposed rule. NAIFA filed a detailed comment letter with the SEC which presented our reasons for opposing proposed Rule 151A. In late August, 2008 NAIFA issued a GovAlert to the membership asking members to submit individual comment letters to the SEC on this issue. Over 1,250 NAIFA members submitted comments, which represented over 25% of the total number of comments received by the SEC. In November, 2008 NAIFA played a key role in the successful effort to have the National Conference of Insurance Legislators (NCOIL, which is an influential association of state legislators who focus their efforts on state insurance issues) adopt a resolution opposing the SEC’s proposed rule. Most recently, NAIFA issued a GovAlert on December 12, 2008 asking the membership to contact their members of Congress (both Representatives and Senators) and urge their elected officials to contact the SEC and express opposition to proposed Rule 151A. NAIFA has also reported on this issue numerous times in GovTalk, GovWatch and Advisor Today. NAIFA’s GovAlerts, SEC comment letter and informational reports can be reviewed by using the links below.

Recent Developments: On December 17, the SEC held a public Open Meeting to discuss proposed Rule 151A, and by a 4-1 vote, adopted the Rule.  In response to comments submitted by NAIFA and others, the SEC did indicate it was revising the text of the Rule to clarify that the Rule only applies to indexed annuities and not to other types of fixed annuities or insurance products. Rule 151A will only apply to indexed annuities that are issued after the Rule’s effective date, which will be January 12, 2011.

NAIFA will closely evaluate the text of the final rule and has not yet determined what action, if any, it will take in response to the adoption of Rule 151A by the SEC.

NAIFA Comment Letter and GovAlerts:

NAIFA Communications:

NCOIL Resolution Opposing Rule 151A: