NASAA Commends SEC for Advancing Equity Indexed Annuities Proposal

Tyler: “Shielding investors from the predatory sale of EIAs is one of the most important steps the SEC can take to advance the cause of Main Street investor protection.”

WASHINGTON, D.C. June 25, 2008—The North American Securities Administrators (NASAA) today commended the U.S. Securities and Exchange Commission (SEC) for issuing a rule proposal related to the classification of equity indexed annuities.

“This important proposal, as outlined at today’s SEC open meeting, would, if adopted, represent a significant step forward in the ongoing fight to protect investors, especially seniors, and we thank SEC Chairman Christopher Cox for his leadership on this issue,” said NASAA President and North Dakota Securities Commissioner Karen Tyler. “NASAA has long maintained that EIAs are securities and has urged the SEC to assert its jurisdiction over these products so that all investors who purchase EIAs can benefit from the strong protections afforded under the nation’s securities laws.”

Since first raising awareness in 2003 of the dangers facing senior investors, which include the inappropriate sale of equity indexed annuities, state securities regulators have led a determined effort to protect this heavily targeted segment of the population through enforcement actions, investor education, and rule-making.

The SEC’s rule proposal represents a major advance in this campaign to protect seniors. “We commend the SEC for moving forward with this proposal,” Tyler said, adding that NASAA looks forward to reviewing and commenting on the proposed rule. Tyler said the proposal, as described at the SEC’s open meeting today, “appears to remove the uncertainty that has surrounded the legal classification of equity indexed annuities for over a decade.” If adopted, Tyler said, “the proposal will subject these investment products to rigorous disclosure and suitability standards, and will deter abuse by exposing unscrupulous salespersons to strong sanctions under our securities laws.”

Although EIAs may be legitimate investment vehicles for some people, NASAA is concerned that these products are unsuitable for many investors and that they are often sold through deceptive marketing tactics. Particularly troubling is the sale of EIAs to senior citizens, who are being aggressively targeted through “free lunch” investment seminars nationwide.

“Shielding investors from the predatory sale of EIAs is one of the most important steps that the SEC can take to advance the cause of Main Street investor protection,’ Tyler said. “Millions of investors across the country, many of them senior citizens, need protection from the fraud and abuse that is taking place in the sale of EIAs. We applaud Chairman Cox for his commitment to strengthening protections for EIA investors.”

The sale of equity indexed annuities has risen dramatically since 1995, when they first appeared on the market. As sales of EIAs have risen, state securities regulators, as well as the SEC and the SROs, have received an increasing number of complaints about EIAs. According to a recent NASAA enforcement survey, 34 percent of all cases of senior exploitation reported to state securities regulators involved variable or equity indexed annuities.

“Agents portray equity indexed annuities in very alluring terms, and because these products are so complex, most investors cannot look behind the sales pitch and assess the high costs and significant risks they actually entail,” Tyler said. “At the same time, these investments offer such generous commissions that agents are highly motivated to sell them, regardless of how unsuitable they may be for investors.”

Tyler said the proposed rule would serve to close a regulatory gap, which has proven to be particularly harmful to senior investors. EIAs have generally been regarded as exempt from regulation under a provision of the Securities Act of 1933. As a result, many investors have been subject to fraud and other misconduct in the offer and sale of EIAs without the protections that the securities laws normally afford.

“The SEC has the power close this gap, a move that would dramatically enhance investor protection, given the level of sales abuse associated with these products and the unique ability of securities regulators to address wrongdoings that occur at the point of sale.”

Tyler said the insurance industry has long since evolved into the investment business, and the strong disclosure and suitability standards found in the securities regulatory structure must be applied to the sale of EIA investments in order to mitigate sales practice abuses and ensure that the product is sold only to investors for whom they are appropriate.

NASAA is the oldest international organization devoted to investor protection. NASAA’s membership consists of the securities administrators in the 50 states, the District of Columbia, the U.S. Virgin Islands, Canada, Mexico and Puerto Rico.

For more information:
Bob Webster, Director of Communications
202-737-0900

2008 Headlines, Newsroom