SEC Proposes Rule That Would Require Equity Index Annuities to Be Registered Securities

The Securities and Exchange Commission (SEC) has proposed a rule which, if adopted, is expected to require all insurance companies issuing equity index annuities (EIAs) to register them as securities under the Securities Act of 1933 and sell them pursuant to a prospectus. An EIA is an annuity that provides annual interest equal to some or all of the return of a specified securities index, such as the S&P 500, or a minimum percentage rate specified in the annuity contract, whichever is greater. Insurance agents who currently can sell EIAs with a state insurance license would have to pass FINRA tests and become registered representatives associated with a broker-dealer. EIA sales practices would become subject to the antifraud provisions of the securities laws, including Rule 10b-5. Given the current uncertainty as to how the law applies to EIAs, the proposed rule would not apply retroactively, but only to EIA sales after a rule is adopted. The proposed rule does not address the status of general account life insurance products whose return is index-based.

Prompted by apparently abusive sales practices, including free lunch seminars used to sell EIAs to senior citizens for whom the purchase is unsuitable, on June 25 the SEC unanimously approved Proposed Rule 151A, which would define which EIAs are securities. The key element of the test is whether the return that the annuity owner receives, based on the index return, is more likely than not to exceed the minimum percentage rate specified in the contract. Based on initial discussions with insurance companies, it appears that, in almost all EIAs currently offered, the index return is the one the annuity owner is expected to receive. Accordingly, EIAs would need to be registered under the Securities Act.

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