Yesterday, I had the privilege to serve on a webcast panel for West's LegalEdCenter presenting an update on SEC Rule 151A. The Rule, if it becomes effective as passed by the SEC, will classify indexed annuities as securities, effective January 12, 2011, subjecting them to the securities regulatory disclosure system. Currently, these products are considered insurance products and are regulated by the insurance commissioners of the several states. If the Rule becomes effective, they will lose their exemption as non-securities products, and their sale would be regulated by the SEC, and self-regulatory organizations such as FINRA.
Currently, there is a court challenge to the SEC's adoption of this rule. A group of insurance companies have filed suit, as have groups of insurance commissioners and legislators. They have argued that the SEC exceeded its authority in promulgating this rule, and that the products are clearly exempt from the definition of a security under the Securities Act of 1933. The U.S. Court of Appeals for the D.C. Circuit heard oral argument on the case in May and has apparently agreed to decide this matter on an expedited basis. In addition to this court challenge, Rep. Gary Meeks (NY) has introduced HR 2733 in the House. This bill would effectively eliminate Rule 151A and clarify the exemption fo indexed annuities in the Securities Act of 1933. That bill has been referred to the House Committee on Financial Services.
During yesterday's webcast, the panelists discussed the pros and cons of the Rule from the insurance, securities and consumer perspectives, and discussed ramifications of the regulation of these products as securities. Among other things, salespersons would have to be registered as securities salespersons and be registered with a broker-dealer. The sale of these products would then be subject to FINRA's suitability rule, something that is not applicable now. Also discussed was the fact that under state law, these products may still be classified as insurance products, so in those states, the products would be regulated by regulators from both the securities and insurance industry.
