SEC Requests Industry Info on EIAs: The Regulatory Agency is Again Collecting Data on Equity-Indexed Annuities From Insurance Companies.

By Tamiko Toland
Money Management Executive
August 1, 2005

Within weeks of the impending release of a Notice to Members (NTM) by the NASD on the treatment of equity-indexed annuities (EIAs), the Securities and Exchange Commission has sent a request to numerous insurance companies for information about their EIA products. The inquiry follows up on an early look into the products in the late 1990s.

"Since that time, equity-indexed annuity sales have grown dramatically," the letter reads. "Further it appears that the characteristics of these products have evolved in the years since the concept release was issued. As a result, we are seeking information regarding equity-indexed annuities currently being sold."

The letter, signed by SEC Associate Director Susan Nash, was received by a number of prominent manufacturers of EIAs on July 21 or 22, according to Steve Roth, partner at Sutherland Asbill & Brennan in Washington. The SEC is re-examing the question of EIAs and whether individual products or the class constitute securities, like variable annuities do.

The SEC first addressed the matter of EIAs in a concept release in 1997. The agency then requested comment from the industry but never delivered a clear determination of the status of EIAs. Despite the uncertainty raised by this turn of events, EIAs have since been regulated as fixed annuities, although some individual products are registered with the SEC.

Now, the SEC is asking carriers to provide information on each firm's top five EIA products and any unregistered products that may return less than 90% of total premiums. By the end of August, insurers must produce, for each product: a copy of the contract; written sales materials; other written materials destined for consumers, including disclosure documents; a list of the top 10 distributors of the product through the first half of 2005; and a legal analysis about why the EIA should not be registered.

Roth said that the inquiry, in and of itself, should not alarm the industry.

"The SEC is looking for information and they're going to analyze what they've got," Roth says. "It doesn't on its face portend anything one way or the other."

The timing of the SEC's letter has certainly raised eyebrows among many EIA watchers, as the industry is anxiously awaiting the NASD's release of an NTM regarding the treatment of EIAs. The NTM, which became widely circulated throughout the industry during its development phase, generated considerable alarm because an early draft suggested that broker-dealers treat EIAs as if they were securities, regardless of the SEC's position on the matter. This is consistent with NASD views expressed to the SEC following the agency's 1997 concept release and more recent comments by Mary L. Schapiro, vice chairman of the NASD.

However, many feel that this puts the cart before the horse and that the NASD is trying to supercede the regulatory authority of the SEC. NASD plans on publishing the NTM within weeks, said Herb Perone, a spokesman for the NASD.

"I wouldn't want to characterize this as responding to pressure from the NASD," Roth says. The SEC does not comment on such matters, according to John Heine, a spokesman with the Commission.