Section 151A Ruling

Wednesday, February 11, 2009

Section 151A has been at the forefront of our discussions for insurance agents and our industry in general for sometime now. Unfortunately for our clients, the bill recently passed on December 17, 2008. Rule 151A intends to classify equity indexed annuities (EIA's) as securities. This ruling will penalize consumers along with the responsible insurance agents that have helped their clients weather a massive financial crisis without the massive loss that most people have suffered.

First, what is an Equity Indexed Annuity?

An equity indexed annuity earns interest based on the performance of the equity index it is linked to. The value of the index might be tied to a stock or other equity index, typically the S&P 500 (which is an equity index). The value of any index varies from day to day and is not predictable but insurance companies offer guarantees (usually 1-3%) regardless of how the market performs. When you buy an indexed annuity you own an insurance contract, you are not buying shares of any stock or index. The benefit of an EIA is that you have the upside potential of the market with zero downside risk.

An Overview of Rule 151A

"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 sales supervised by a broker/dealer. An insurance producer license, by itself, would no longer be sufficient. 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.

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 The National Association of Insurance and Financial Advisors (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 Website

What Rule 151A means to YOU, the consumer...

Indexed annuities are great products and when they fall under the SEC's authority, the value they provide to you is likely to be diminished due to high fees and cost associated with security products. With the current state of our financial markets, it is absolutely insane for this product to fall under the "supervision" of the SEC and FINRA. It has been the investment advisors that have lost the majority of your money over the last few years. My guess is that very few people ever received a call from their  "supervised investment advisor" recommending it may be a good idea to reallocate funds to a more safe/guaranteed product, just until the financial waters clam down.

Now, if your money had been in an EIA, what would you have lost over the last few years? Absolutely nothing, you would not have lost one penny due to the solid guarantees that these products offer. By now most of you are wishing that this product was offered to you about three years ago, right? Well, EIA's are not considered assets under management so your broker or investment advisor can not build their commission structure the same way which is why you were sold stock, mutual funds, or variable products, ouch!

If you have a story of about how your personal advisor/agent has helped you through the last few years without taking on a loss, please, take the time to share your story with me.

A call to insurance agents...

Please adhere to all guidelines when selling and marketing our products. Take time and invest back into your business, if you are not a member of NAIFA, please join; this is our voice in Washington. CLICK HERE to begin the registration process and let your voice be heard, equity indexed universal life will be next.

Posted in Annuities , Industry News | Make a Comment (3)

1. Chris Miller on February 16, 2009 @ 8:50 AM

"Great post! You make some excellent points here. For one, Indexed Annuities are great products and should be left alone.

I think that a lot can happen in two years and that agents should definitely not panic but should stay aware of the guidelines and adhere to them as you pointed out. Joining NAIFA is an very good idea. Agents need to take responsibility to have their voices heard when it comes to their lifeblood, their business.

This post was really well done and I look forward to reading more from you!

Chris
@annuitymarketingmaven"

2. Andre on May 18, 2009 @ 3:15 PM

"Good afternoon. I am an editor for a CLE website and I am looking to contact any attorneys that may be knowledgeable on 151A. I’m looking to produce an audio webcast in June. Thank you!"

3. Scott Hoff on November 18, 2009 @ 9:19 AM

"As a marketer of fixed products, you might want to start considering what you might do in the event that the changes are upheld and go into effect.

To whom will your agents turn? Will you have the infrastructure set up to deal with them in the new regulatory climate? Is there a broker dealer out there to whom you are willing to entrust your agents? Which broker dealers will allow your agents to continue to work with you? Which broker dealers will require that your agents start placing their business with the broker dealer’s own insurance agency?

The reality is that there are a limited number of options. First, you can choose to walk away from the indexed annuity business and choose to focus on marketing other products. Second, you can choose to start your own broker dealer. The third option is to create a strategic alliance and affiliate with a "wholesale friendly" broker dealer.

If you do not plan to drastically change your businesses or start your own broker dealer, you should be actively searching for the right broker dealer. Considerations go beyond compensation. Does the broker dealer understand insurance? Do they understand your business model? Does it seem like a cultural fit? Choosing your broker dealer will be one of the most important business decisions that you ever make. Make sure you choose wisely."

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