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Senate Conferees Approve Harkin Amendment on Fixed Income Annuities

By Jim Hamilton

By an 8-4 vote, Senate conferees approved an amendment to the financial reform legislation that would treat fixed index annuities as insurance products to be regulated by state insurance officials, thereby essentially nullifying SEC Rule 151A. The amendment was offered by Senator Tom Harkin. Senator Jack Reed opposed the Harkin Amendment, stating that the SEC would be a more effective regulator of these hybrid instruments.

A fixed index annuity is a hybrid financial product that combines some of the benefits of fixed annuities with the added earning potential of a security. Like traditional fixed annuities, fixed index annuities are subject to state insurance laws, under which insurance companies must guarantee the same 87.5 percent of purchase payments. Unlike traditional fixed annuities, however, the purchaser?s rate of return is not based upon a guaranteed interest rate.

Rule 151A defines indexed annuities as not being exempt annuity contracts under Section 3(a)(8) of the Securities Act. Relying on a series of US Supreme Court rulings, the SEC reasoned that, given the unpredictability of the securities markets, index annuities contain substantial risk that must be addressed by the disclosure regime established by the Securities Act. Last year, a panel of the US Court of Appeals for the District of Columbia ruled that the rulemaking process was flawed by the fact that the SEC?s consideration of the effect of Rule 151A on efficiency, competition, and capital formation, as required by Securities Act Section 2(b), was arbitrary and capricious. American Equity Investment Life Insurance Co. v. SEC, No. 09-1021, CA DofC Circuit.

The Harkin Amendment mirrors bi-partisan legislation introduced earlier in the Senate that would nullify the Commission?s adoption of Rule 151A before it has a chance to take effect. The Fixed Indexed Annuities and Insurance Products Classification Act, S. 1389, provides that Rule 151A will have no force or effect. There is a companion bill in the House, HR 2733. The draft legislation expresses a congressional sense that the SEC?s adoption of Rule 151A interferes with state insurance regulation, harms the insurance industry, reduces competition, and creates unnecessary and excessive regulatory burdens.

The measure also embodies a congressional finding that indexed insurance and annuity products offered by insurance companies are subject to a wide array of state laws and regulations, including non-forfeiture requirements that provide for minimum guaranteed values, thereby protecting consumers against market swings.

Full post as published by Jim Hamilton's World of Securities Regulation on June 23, 2010 (boomark / email).