Regulators have agreed to delay plans to treat equity-indexed annuities like securities, but many bank-affiliated brokerages are already doing so.

At First Bank in Creve Coeur, Mo., the annuities cannot be sold by licensed bankers, only by full-time financial consultants, said Bruce Stava, the director of advisory sales at First Bank Wealth Management Group. And sales at the $10.8 billion-asset bank are scrutinized much the same way securities transactions are, he said.

The Securities and Exchange Commission agreed this month to delay for two years a rule under which certain indexed annuities would be treated as securities rather than insurance products. The rule was supposed to take effect in January 2011 and had been the focus of a legal battle between the commission and certain insurance and marketing companies.

Equity-indexed annuities earn interest that is linked to a stock index such as the Standard & Poor's 500 Composite Index. These types of annuities are touted as a way to participate in stock market gains while avoiding the risk of losing money should the market fall. These products are often characterized as lying somewhere between a fixed and a variable annuity.

The SEC's plan to change how the products are regulated was challenged in a January lawsuit filed by, among others, American Equity Investment Life Insurance Co. of Des Moines. The suit argued that because the annuities offer a guaranteed return on principal, they should not be treated like securities, in which investors can lose principal.

The SEC, on the other hand, has argued that certain types of these annuities are security-like because their payouts tend to derive from the performance of a securities index.

In a Dec. 8 filing with the U.S. Court of Appeals for the District of Columbia Circuit, the SEC agreed not to put the rule into effect for another two years.

Banks' sales of equity index annuities have been surging over the past several months, from $200 million in the first quarter of 2008 to $900 million in the third quarter of this year, according to Kehrer-LIMRA.

The $900 million accounts for about 9% of total annuity sales through banks in the third quarter, according to Kehrer-Limra. Overall, banks accounted for 12% of equity-indexed annuity sales in the third quarter.

Kenneth Kehrer, the director of research at Kehrer-LIMRA, said he does not see the regulatory fight as portending much for banks, because so many of them treat equity-indexed annuities as securities anyway. By and large, banks that sell the products require a securities license to sell it, and they "run it through the same compliance review process as any security," he said.

"I don't know of a bank that lets its platform staff sell it, even if they are registered" to sell securities, Kehrer said.

Those who stand to lose the most from what the SEC wants are independent insurance agents who don't have securities licenses and have been selling equity-indexed annuities instead of the variable annuities that they are prohibited from selling, he said.

Insurance agents sell the bulk of these annuities, but the equity-indexed annuities sold at banks tend to be better to consumers than those that have caught the attention of regulators. "There are some terrible products out there," with extremely long surrender periods and enormous commissions, Kehrer said.

"Generally, the products banks are selling are priced very similarly to regular fixed annuities or to single-premium life policies," he said.

In general, underwriters of the products take some of the principal paid by customers and buy a hedge against an index. That leaves less money for current interest, but it provides protection against market dips. Properly priced, equity-indexed annuities are a fair deal, Kehrer said.

First Bank sells few equity-indexed annuities, Stava said, because they are a good fit for only a small sliver of its customers. Historically, they have been too complicated for customers to understand, and their fees and surrender penalties "weren't that beneficial to customers," he said. Within the past few years, however, carriers have responded to pressure from bank broker-dealers and produced products that address those problems, he said.

"They're a vastly improved product now compared to three or four years ago," Stava said.

This story was reprinted with permission from American Banker.

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