Comments to SEC for proposed rule 151A

The basis explained by the SEC for the recommended redefinition of indexed annuities as securities, under the Securities Act of 1933, is due to the suggested “risk” that a buyer faces while owning one of these products. The very unique character of the indexed annuity is that in addition to having all of the safe features of a fixed annuity, it also has the “potential” to earn additional interest, and because the measure for these “extra” earnings are mathematically tied to the performance of a named index, the SEC has suggested that the annuity owner is assuming investment risk, and therefore these products should be regulated by the SEC, rather than state insurance departments. This position by the SEC is erroneous and misguided and needs to be retracted.

Insurance industry experts and major insurance carriers have argued against the SEC acceptance of this rule, clearly illustrating that it is the insurance company which bears the investment risk involved in determining this “extra” interest and NOT the annuity owner. The insurance company is contractually bound to credit the policy holder the additional interest when the formula is positive, according to their contract, and regardless of how underlying insurance company investments performed.

The annuity owner is protected from losses in an indexed annuity with contractually defined guarantees of return of premium, and in most cases, a minimum interest return over the life of the annuity. Because the insurance company has developed a method whereby they will credit this “extra” interest, based upon the movement of some outside index, the owner may or may not always get this “extra” interest, depending upon how the mathematical formula works out when the index numbers are plugged in for that crediting period.

What the SEC is basically saying in their assertions, is that because this potential for “extra” interest is uncertain and not guaranteed, it is therefore risk to the owner, because, in order to pass rule 151A in good conscious, the SEC has to find that the annuity owner actually has some risk of loss within an indexed annuity contract. According to tax laws, if an investment loses value which you never realize, you cannot claim a taxable loss, because in the eyes of the IRS, a loss never occurred. Similarly, in an indexed annuity, where the owner has the “potential” to earn extra interest, but did not because the measuring stick value went down rather than up for that crediting period, the owner never earned that interest, so they never had that interest to lose.

Without a loss, there was NO RISK, only the potential for gain. The annuity owner’s original deposit is never at risk, and all previous period interest earnings, once credited to the account, are similarly guaranteed from that point forward. With no risk to the purchaser, there is NO SECURITY product definition that falls under the Securities Act of 1933, and therefore, NO NEED for the SEC to attempt to take control of this product away from state insurance regulators. In fact, the SEC is outside of their jurisdiction in their attempts to define indexed annuities as securities.

During the enormous slide of the stock market over the past two weeks, this financially alarming time interestingly illustrates the very significant differences between indexed annuities and every security product available, and punctuates exactly why these annuity products are NOT securities. While in this short time, stock portfolios plummeted as much as 40%, Wall Street giants went bankrupt, corporate bonds lost value or became worthless, major banks became insolvent, and every investor who had ANY holdings in any part of the market feared for their financial future; EVERY owner of an indexed annuity experienced exactly the same thing:

No matter what happened to stock values, interest rates, bond prices, or the price of oil, EVERY single owner of an indexed annuity in the USA was guaranteed not to lose one single penny of their savings held securely within those insurance products.

If EVERY retiree, who is presently suffering severely from the enormous decline in the value of their market invested retirement accounts, had instead purchased a guaranteed indexed annuity insurance product, their financial plight would be removed from this national dilemma. If their money was safely in an indexed annuity, they would be able to sleep peacefully, knowing that their money was safe from the corruption that rocked Wall Street, our nation, and the entire world economy.