[Read the Court Order here (pdf)]
Although the financial reform bill appears headed for passage it is not yet law. The Harkin amendment, which is attached to this legislation, remains important in order to clarify what constitutes an insurance product. With this in mind though important news came from the United States Court of Appeals in the District of Columbia on July 12th. Specifically the Court vacated SEC Rule 151A. Although the SEC has the opportunity to readdress the issue in the future, it cannot continue to pursue the previously announced rule.
As I have written numerous times, it didn’t make sense for any fixed annuity product to be regulated by the securities industry. Accordingly, insurance-only producers will retain the right to market fixed index annuities. This is very good news and was accomplished through the efforts of a number of dedicated people. NAFA deserves special mention and our thanks for taking the lead in this regard.
Now that Rule 151A has been vacated, let’s review the important “take-aways” from what was a very difficult although ultimately successful effort to keep FIA regulation at the state, insurance commission level.
1. Fixed Indexed Annuities are Terrific Products. One thing the entire process highlighted was the value of FIA products to consumers. That value is even more important in the current market environment of volatility and uncertainty in the equity markets and exceedingly low rates in the bond markets. Even though FIA rates, participation rates and caps have fallen a bit of late – primarily due to bond and option market conditions – FIAs remain an excellent option for risk-averse consumers who want to have some linkage to equity market success.
2. Suitability Remains a Major Focus. A key reason that Rule 151A was vacated by the Court and appears headed for an additional defeat in the financial reform bill was our industry’s ability to convince the Court and Congress that already existing suitability provisions, which have been increased substantially recently, are sufficient to protect consumers. As a practical matter, suitability and what it means is largely unchanged with the defeat of Rule 151A. We have merely avoided an additional layer of regulation. No producer should expect, nor should we want, any less care and any lesser level of review of a potential sale from a suitability standpoint.
3. Producers Should Still Consider Obtaining a Securities License. Whenever a consumer liquidates a securities position to purchase an FIA from an insurance-only producer, the producer runs the risk of being targeted for regulatory scrutiny because of the possibility that securities advice was rendered with respect to the securities sale. This is probably the greatest area of regulatory risk to the practices of insurance-only producers who sell FIAs. A securities license mitigates this risk. We, along with our broker-dealer subsidiary, Madison Avenue Securities, stand ready to talk with you at any time about the possibilities in this area.
4. Let’s Be Careful to be Worthy of the Trust Shown in Us. The Court and, it appears shortly, Congress have shown great trust in us and in our industry by not requiring an additional layer of regulatory scrutiny for FIA producers. That trust is due in large measure to the good ethics and good practices of the vast majority or producers in our industry. Let’s all of us rededicate ourselves to maintaining and justifying that trust every single day.