EIA's are securities is the UL policy next

URDRWHO · 07-01-2008, 02:16 PM

The SEC is recommending that EIA's be registered products, could the UL policy be far behind?

One point from the SEC is the EIA owner is paid out of the insurance company general account, buyer incurs market risk and is dependent on movement of the stock market. The UL policy is dependent on bills/bond, buyer incurs market risk and returns are dependent on movement of the stock market. Both policies deposit money from their general accounts, not segregated accounts.

It isn't a far step for the SEC to determine the owner of a UL has market risk and therefore it should be a registered security.

"The proposed definition would hinge upon a familiar concept: the allocation of risk. Insurance provides protection against risk, and the courts have held that the allocation of investment risk is a significant factor in distinguishing a security from a contract of insurance."

If the SEC wins out to change the allocation of risk standard, UL and traditional annuities could be considered to be registered securities by the SEC.

If you think you have no dog in the EIA fight.....better re-think your position. A massive power grab has begun at the hands of FINRA and the SEC to control all markets.

Mr. Bill · 07-01-2008, 05:32 PM

Maybe once the socialists/Marxists are elected, we won't need to worry a whit about all of this because the rich will be taken from to give to the poor, and we'll all be taken care of by our benevolent dictatorship government.

JMO Fan · 07-01-2008, 05:39 PM

EI UL will almost certainly be included in the final rule. The logic which SEC applied to classify EIAs as securities would clearly extend to all UL and excess interest WL, as well as virtually all currently marketed deferred annuities. Most of those are sold as investments, and few are careful to emphasize insurance guarantees more than investment gains, which is essential to avoiding securities regulation.

Delta76 · 07-01-2008, 06:12 PM

Just follow the money and it all makes sense. I personally don't market fixed or indexed annuities, but I disagree with the ruling. It was up for review in the past and equity indexed products were determined not to be a security. After they became popular, B/D's wanted part of the action and were all too willing to agree with the SEC who for obvious reasons wanted to expand their regulatory control.

It will be interesting to see what happens to the volume of FIA sales using the same logic, following the money. If the B/D's are taking a large hair cut off this business, they won't be nearly as lucrative to sell without even considering increased compliance headaches.

JMO Fan · 07-02-2008, 10:14 AM

Originally Posted by Delta76

... I disagree with the ruling. It was up for review in the past and equity indexed products were determined not to be a security. ...

That's a widely held misconception.

In 1986, when SEC issued the "Safe Harbor" Rule, they said virtually all indexed products were outside the safe harbor. A federal court later said that products outside the safe harbor were securities. The SEC issued a "concept letter" in 1997, which reiterated much of what they said in 1986.

After the public comment period closed, the SEC closed the file. They retreated, not stating any opinions. They left themselves in a position to pounce when politics shifted to permit them to register EIAs.

SEC was silent, so attorneys were left to figure out the securities question on their own. Those attorneys who said EIAs didn't need registration got paid by EIA carriers. Their opponents had to find other work.

URDRWHO · 07-02-2008, 10:49 AM

You have quoted this 1986 issue multiple times. Since the SEC (I posted this for you) said EIA's have existed for 15 years, what are you talking about when you say 1986.

Please post your reference to the 1986 EIA that you reference.

Originally Posted by JMO Fan

That's a widely held misconception.

In 1986, when SEC issued the "Safe Harbor" Rule, they said virtually all indexed products were outside the safe harbor. A federal court later said that products outside the safe harbor were securities. The SEC issued a "concept letter" in 1997, which reiterated much of what they said in 1986.

After the public comment period closed, the SEC closed the file. They retreated, not stating any opinions. They left themselves in a position to pounce when politics shifted to permit them to register EIAs.

SEC was silent, so attorneys were left to figure out the securities question on their own. Those attorneys who said EIAs didn't need registration got paid by EIA carriers. Their opponents had to find other work.

JMO Fan · 07-02-2008, 10:54 AM

Some 1980s products were indexed, more often to CPI than stocks. Federal Register, Wednesday, June 4, 1986, Vol. 51, No. 107, pp 20254+ discusses the proposed Safe Harbor Rule, says the only OK indexed products would use the index to calculate a guaranteed fixed rate for at least the next year. SEC reemphasized this in their recent announcement, pointing out that none of the currently marketed EIAs would satisfy that requirement (since they compute the rate for the previous year).

URDRWHO · 07-02-2008, 12:04 PM

I tried to google it but I got a thousand hits but none of them were what I wanted.

Well then....it has been a while since I was in the traditional UL market. Probably mid 1980's was the time. I remember products that pegged the return on what the insurance company made on bills or was it bonds...or was it bills & bonds? Anyhow, the traditional UL's that do so could be construed by the SEC as a security. It all depends if they credit the rate of return for the previous year or the coming year?

SO if I sell an FIA that does not allow index participation in the first year and only pays the owner a guaranteed fixed rate for the first year; then whatever the company made on their puts and calls that first year would get credited to the second year, going forward. If so, I would not be selling a security because the guaranteed rate is the the next year.

From what you are telling me the crux of the problem is not where the return was made but how/when it is paid. It can't be paid for the previous year but must be paid for the coming year.

Or is the SEC going to tell insurance companies they can not invest in the stock market and pay returns out of the general fund.

Originally Posted by JMO Fan

Some 1980s products were indexed, more often to CPI than stocks. Federal Register, Wednesday, June 4, 1986, Vol. 51, No. 107, pp 20254+ discusses the proposed Safe Harbor Rule, says the only OK indexed products would use the index to calculate a guaranteed fixed rate for at least the next year. SEC reemphasized this in their recent announcement, pointing out that none of the currently marketed EIAs would satisfy that requirement (since they compute the rate for the previous year).

JMO Fan · 07-02-2008, 03:13 PM

Originally Posted by JMO Fan

Federal Register, Wednesday, June 4, 1986, Vol. 51, No. 107, pp 20254+ *

*It predates the Internet; I got the SEC to send me a copy years ago.

Insurance laws limit companies on investing in stocks. None could actually buy enough to represent S&P500 fairly. If not for index future options, EIAs would all be in separate accounts. NTTAWWT

rocky top buzz · 07-02-2008, 04:22 PM

The SEC's desire to go after EIA's is, in my opinion, not based on the product, but perception. There are a couple of issues to consider:

1 - The recently exposed "Annuity University" got everyones attention about agents mis-representing EIA's. With that said, don't we have to do AML now just to sell term insurance? If the SEC wants oversight on all financial products, will term life soon become a security?

2 - The BD's who are sanctioned by the SEC desperately want to get their hands on the commissions they are losing by EIA's not being registered, and securities reps want to see the product registered so they don't have to compete with "great unclean" who don't have a securities license and don't have to pay $$$$$ for their E&O to sell securities.

Charpress · 07-02-2008, 05:37 PM

I would guess (or hope) we will see some intense lobbying and the dropping of big bucks by the insurance industry in opposition to this.

Which side is going to spend more to further enrich our politicians? Stay tuned.

URDRWHO · 07-04-2008, 12:27 PM

Predates the internet?

What? I can find obscure things that were written one hundred years ago but their one thing "predates" the internet. Hm?

Originally Posted by JMO Fan

*It predates the Internet; I got the SEC to send me a copy years ago.

Insurance laws limit companies on investing in stocks. None could actually buy enough to represent S&P500 fairly. If not for index future options, EIAs would all be in separate accounts. NTTAWWT

JMO Fan · 07-07-2008, 01:56 PM

Originally Posted by URDRWHO

Predates the internet?

What? I can find obscure things that were written one hundred years ago but their one thing "predates" the internet. Hm?

I'm disappointed as well. Sorry, the SEC doesn't post old stuff. I knew they discussed it when they issued the safe harbor rule (151), couldn't find it on the web, so I called the SEC to get my copy.

Maybe if you offered to push for more funding for the SEC.