Reassessing Rule 151A

Providers of fixed index annuities (FIAs) received some good news last week when the U.S. Court of Appeals for the D.C. Circuit struck down Securities and Exchange Commission (SEC) Rule 151A, which sought to reclassify FIAs as securities and subject them to SEC jurisdiction.

The case was brought by a group of life insurers including Des Moines, Iowa-based American Equity Investment Life Holding Co. The plaintiffs challenged the thoroughness of the rule-making process and said the agency had not fully considered the ramifications the rule would have on insurers and theirs distribution channels. The three-judge panel agreed with the plaintiffs but faulted the agency more on the process than on the merits of the law.

“I would have been pleased if the ruling said the rule was bad both on its merits and on the process, but one out of two isn’t bad,” Gary Bhojwani, president & CEO of Allianz Life tells Insurance Networking News.

Minneapolis-based Allianz is the nation’s largest supplier of FIAs, with approximately $41 billion in-force. Bhojwani says the adverse impact of Rule 151A would have been especially acute on the distribution channel. “There’s clearly a technology component if the SEC were somehow to compel the industry to move along the path of Rule 151A,” Bhojwani says. “That doesn’t happen overnight and doesn’t happen cost free.”

Bhojwani says the SEC effort may well emanate from negative misperceptions about FIA products. “Regulators need to come at the products with an open mind,” he says. “I would hope their performance in the current financial crisis has allayed some of those fears. None of our clients lost money as a result of the crisis.”

Indeed, Bhojwani states the true debate about FIAs should revolve less around product definition than about sales practices, noting that roughly 50% of the agents that sell Allianz FIAs already have a securities license. What’s more, individual states have been passing annuity suitability laws to protect consumers from unethical sales practices.

Instead of multiple state laws, Bhojwani says he would like to a national standard for suitability. He says Allianz consulted with both state and federal regulators when crafting their internal suitability standard.  “We have suitability requirements already in place at Allianz that exceed every state in the union,” he says. “We took the most extensive standard and applied in it all 50 states.”

Despite the court ruling, Bhojwani says he expects the discussion over how FIAs are regulated to persist. “Whether it comes back because of SEC tries to resurrect it, or whether it comes back in a slightly different form because of commercial pressure, I think it would be unwise to assume that issue is going away.”