Ambler, Teleki and Johnson on Indexed Annuities Controversy

The Securities and Exchange Commission, in a 4-to-1 decision on December 17, 2008, adopted Rule 151A under the Securities Act of 1933, governing index annuities. Under Rule 151A, indexed annuities that satisfy the rules definition and are issued on or after January 12, 2011 will need to be registered under the Securities Act. In this Commentary, Diane E. Ambler, Mr. Andras P. Teleki, and Mr. Brian M. Johnson discuss Rule 151A, the scope of the final rule, and the potential legal challenges. They write:
     Section 3(a)(8) of the Securities Act provides that "annuity contract[s]" or "optional annuity contract[s]" are not subject to regulation under the Securities Act. This exemption, however, is not available to all contracts that are "annuities" under state law (e.g., variable annuities), and it has long been unclear if indexed annuities are within its scope. The dramatic increase in the popularity of indexed annuities since their introduction in the mid-1990s, together with reports of abusive sales practices and improper sales to seniors, prompted the SEC to provide additional guidance on their status under Section 3(a)(8).
     . . . Rule 151A defines certain contracts as outside the Section 3(a)(8) definition, and thus subject to Securities Act regulation, if (i) amounts payable by the insurer under the contract are calculated at or after the end of one or more specified crediting periods in whole or in part by reference to the performance during the crediting period(s) of a security, including a group or index of securities; and (ii) the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.
     Furthermore, an insurance company’s determination, at or before the issuance of a contract, that the amounts payable under the contract are (or are not) "more likely than not" to exceed contractual guarantees will be conclusive, provided that (i) the insurance company’s methodology and economic, actuarial and other assumptions are reasonable, (ii) the insurance company’s computations are materially accurate; and (iii) the determination is made not earlier than six months prior to the date on which the form of contract is first offered. In making this determination, surrender and other charges should be reflected in both the amounts payable and the amounts guaranteed under the contract. The SEC staff noted at the [December 17] open meeting that this provision is intended to be "principles-based," suggesting an intention that it be open to interpretation.

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