The regulation of indexed annuities and 'synthetic' annuities were among the topics addressed by SEC Director of Investment Management Andrew J. Donohue in a keynote speech at the American Law Institute-American Bar Association Conference on Life Insurance Products in Washington, D.C., November 13 and 14.

Donohue said, "We have received over 4,000 comments [about proposed Rule 151, which would classify indexed annuities as regulated securities]. Supporters of the proposal agreed with the Commission that indexed annuities impose investment risk on investors, and cited sales practice abuses and other issues that they believe would be addressed by federal securities regulation.

"However, many of the comments argue that these contracts should be considered insurance, particularly in light of the guarantees of principal and minimum interest typically provided. Many comments also argue that state regulation of indexed annuities is effective in protecting investors, recognizing in particular the states' role in overseeing suitability of sales and disclosure regarding annuities, as well as insurer solvency.

"The staff is reviewing and analyzing these and other comments. Several comments expressed concern that the rule as proposed is overbroad in its scope, so that it could be read to cover traditional fixed annuities. In the proposing release for the rule, the Commission contrasted the two types of annuities, noting that in the case of an indexed annuity the purchaser assumes substantially different risks and benefits.

"Notably, at the time that such a contract is purchased, the risk for the unknown, unspecified, and fluctuating securities-linked portion of the return is primarily assumed by the purchaser. If the staff makes a final rule recommendation, we would expect to make clear that traditional fixed annuities are excluded.

"Last month, the Commission reopened the proposal's comment period to give the public additional time to review the proposal. The new comment period ends this coming Monday, November 17.

"One kind of contract that would qualify for the exemption under the rule as proposed is what some call the 'synthetic guaranteed withdrawal contract' or 'synthetic annuity.' These products take the guaranteed lifetime withdrawal benefit rider of a variable annuity and offer it to owners of certain separately managed investment accounts.

Originally published by Retirement Income Reporter.