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VOL. 123 | NO. 176 | Tuesday, September 9, 2008

Furor Builds on SEC Indexed Annuity Oversight Plan

By EILEEN AJ CONNELLY | AP Business Writer

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NEW YORK (AP) - It sounds like an arcane topic that would concern only a few, but a proposal by the Securities and Exchange Commission has generated a mini furor.

The subject of this highly charged debate? Whether or not equity-indexed annuities, a specialized financial product that combines the promise of regular payments with the potential for gains linked to the stock market, should be considered securities or insurance.

Citing a high number of complaints from consumers, the SEC has proposed a rule that would classify indexed annuities as securities and place them under its watch, whereas now they are regulated by the insurance departments of each state. The comment period for the SEC proposal ends on Sept. 10.

Opposition to the proposal is vehement among independent insurance agents, who stand to lose significant income. The reclassification means that indexed annuities could only be sold by licensed securities brokers.

"It is huge," said Sheryl Moore, chief executive of AnnuitySpecs.com, which tracks data about indexed annuities sold by various insurance companies. "There are hundreds and probably thousands of people who are writing to their senators and congressmen about it."

FAST GROWTH FOR YOUNG PRODUCT. Indexed annuities were introduced about a dozen years ago, and quickly became an important product for insurance companies.

They are appealing because they include some guarantees. Money put into an indexed annuity will earn a minimum rate of return, plus a potential upside based on the performance of an index, such as the S&P 500 or Dow Jones industrial average.

Moore estimates there were $25.1 billion in indexed annuities sold in 2007, down about $2 billion from their peak in 2005. While sales decreased, last year total indexed annuity assets reached $123 billion according to the SEC.

The tremendous sales figures are among the factors that drew the attention of regulators "Indexed annuities are attractive to purchasers precisely because they offer participation in the securities markets," the rule proposal says. "Thus, individuals who purchase such indexed annuities are 'vitally interested in the investment experience.'"

FEES, CHARGES AND RISKS. One concern expressed by critics is that there are often fees attached to indexed annuities that buyers may not fully understand.

Among the concerns are surrender fees, which are charged to withdraw money from an annuity. The SEC says such fees can be as high as 15 to 20 percent. These fees decline over the life of the annuity, but the SEC notes that such charges could erase any gains from interest if a buyer pulls out of the contract early.

Chris Cordaro, a financial planner with Regent Atlantic Capital supports classifying the products as securities. "The consumer doesn't really have the ability to analyze the information," he said. "If I bought 100 shares of IBM and I decided it was a mistake, it would cost $10 to get out at a discount broker. If I bought one of these contracts, it could cost me 8 percent to get out, or if you have one of these horrible contracts, it could cost 18 percent to get out."

Robb Edwards, managing principal at AnnuityWorks LLP in Kansas City, Kansas, who opposes the SEC proposal, said most indexed annuities have liquidity features designed to allow the buyer to withdraw some money - typically up to 10 percent a year - without a penalty. "That's a basic feature offered by many, many products," he said. In return, the products offer buyers a guarantee on most of their principal, he said, which is not available when buying investments like stocks.

The SEC bases its overall argument on who is taking the risk when someone buys an indexed annuity. It maintains that people who buy indexed annuities are exposed to "a significant investment risk" because their returns are linked to the volatility of an index. "The protections offered in these indexed annuities may give the instruments an aspect of insurance, but we do not believe that these protections are substantial enough," the proposal says.

MARKETING PRACTICES QUESTIONED. Insurance is governed state by state, so controls over the marketing of indexed annuities vary. Jim Mumford, Iowa's first deputy insurance commissioner, disagrees with the SEC proposal pointing out that his state has an annuity disclosure law, and has worked with insurance companies to come up with a standard for presenting material that makes it easier to compare plans with each other.

"For years, there's been a tremendous effort by the states, including Iowa, and the major industry players to make sure that the consumers get what they need," he said. Noting that some of the SEC proposal is based on information from a few years ago, he added, "The SEC has not recognized what the insurance regulators have done in the last two years."

Edwards, of AnnuityWorks, acknowledged that some companies might have sales pitches that don't clearly spell out how an indexed annuity works and may gloss over things like the surrender fees. "There are some carriers out there who have historically promoted and marketed the product in a way that was not helpful," he said, but that in itself doesn't justify reclassifying the product.


On the Net: AnnuitySpecs: http://www.annuityspecs.com/

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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