The U.S. Securities and Exchange Commission voted on Wednesday to begin scrutinizing annuities linked to equity indexes, a complex financial product the agency says falls into a regulatory no-man’s land.
The 4-1 vote by the SEC immediately drew a sharp rebuke from Rep. Barney Frank, chairman of the House Financial Services Committee, who said the SEC should not have acted on such a controversial rule in the final days of the George W. Bush administration.
The SEC agreed to define annuity contracts and optional annuity contracts as securities so it can better police the fast-growing $120 billion market. The agency action came at a time when SEC Chairman Christopher Cox has drawn criticism for not doing enough to protect investors.
The SEC’s new definition applies to indexed annuities issued on or after Jan. 12, 2011.
Annuities are insurance products in which the insurer promises to make periodic payments to the customer.
Equity indexed annuities possess insurance-product features such as a guaranteed minimum return, as well as securities elements like a return linked to an equity market. They have the potential to generate higher returns but are riskier than a traditional fixed annuity.
Opponents of the SEC action include insurance agents and some lawmakers, who say it will create unnecessary regulations, reduce choices and bump up costs for consumers.
However, the SEC and state securities regulators worry that the products are being sold to elderly investors, despite long accumulation periods which mean an annuity may not mature until after an elderly investor has died. Equity linked annuities also have higher surrender charges, making it difficult for investors to pull out if they need the money.
Cox said the agency action will help protect investors in annuities linked to indexes. Three of the other SEC commissioners agreed as did the North American Securities Administrators Association.
The sole dissenting vote was cast by Republican Commissioner Troy Paredes, who said the agency was extending its powers beyond its jurisdiction.
“The SEC is entering into a realm that Congress prohibited us from entering,” Paredes said, adding that insurers will have to bear the costs of the new regulations, a cause for concern during tough economic times.
By defining the products as subject to the federal Securities Act, equity indexed annuities will have to be registered with the SEC and cannot be sold to inappropriate investors.
Conseco Inc. , a U.S. life and accident insurer, the U.S. unit of European insurer Allianz , and units of British insurer Aviva Plc are among the firms that sell this type of annuity.
(Reporting by Rachelle Younglai, additional reporting by Lilla Zuill in New York: editing by Gerald E. McCormick, Bernard Orr)