* See Securities Act Release No. 7438 (August 20, 1997),62 Fed. Reg. 45359 (August 27, 1997), (copy attached).
[9202]
August 29, 1997
TO: SEC RULES COMMITTEE No. 83-97
RE: SEC ISSUES CONCEPT RELEASE REGARDING EQUITY INDEX INSURANCE
PRODUCTS
______________________________________________________________________________
The Commission is considering the status of equity index annuities and other equity
index insurance products under the federal securities laws.* As part of this consideration, the
Commission is seeking comment on a variety of issues, including the structure of these
products, the manner in which they are marketed, and the federal securities laws issues raised
by equity index insurance products. The significant aspects of the Commissions release are
summarized below.
I. Description of Equity Index Insurance Products
An equity index annuity is a contract issued by a life insurance company that generally
provides for accumulation of the contract owners payments, followed by payment of the
accumulated value to the contract owner in a lump sum or series of payments. During the
accumulation period, the insurer credits the contract owner with a return that is based on
changes in an equity index, such as the S & P 500 Index. The insurer also guarantees a
minimum return to the contract owner if the contract is held to maturity.
Equity index products combine features of traditional insurance products (guaranteed
minimum return) and traditional securities (return linked to equity markets). Depending on
the mix of features in any insurance product, including an equity index insurance product, the
product may or may not be entitled to exemption from registration under the Securities Act of
1933 as an "insurance policy" or "annuity contract." To date, most equity index annuities have
not been registered under the Securities Act, although commentators have acknowledged that
substantial uncertainty exists whether all of these products are entitled to exemption from
registration. Both purchasers and insurers may benefit from greater clarity in this area.
II. Applicability of the Federal Securities Laws to Equity Index Insurance Products
Section 3(a)(8) of the Securities Act exempts from registration any "insurance policy" or
"annuity contract" issued by a corporation subject to the supervision of the insurance
commissioner, bank commissioner, or similar state regulatory agency. The Commission and
the courts have addressed this exemption on a number of occasions and applied certain factors
to determine whether a product is entitled to the exemption. Comment is requested on the
application to equity index insurance products of the factors used by the Commission and the
courts to determine whether the exemption is available for a particular product. These factors
include the allocation of investment risk between insurer and contract owner, the manner in
which the contract is marketed, and the applicability of state insurance regulation.
A. Allocation of Investment Risk
Comment is requested on how investment risk is allocated between the insurer and
contract owner in equity index insurance products. Comment also is requested on how this
allocation of risk affects the application of the federal securities laws to these products.
B. Marketing
The Commission noted its concern that the nature of equity index insurance products
may make it particularly difficult to market these products without primary emphasis on their
investment aspects. Comment is requested on how these products are marketed. Commenters
are asked to address both written sales materials and oral sales presentations, including the
ability of an insurer to train and monitor its sales force to ensure that these products are not
marketed with primary focus on their investment aspects. Commenters also are asked to
identify the products that are viewed as competitive alternatives to equity index annuities and
address how the nature of these competitive products affects the manner in which equity index
insurance products are marketed.
C. State Regulation
Comment is specifically requested on whether equity index insurance products are
regulated as annuities or insurance under state law. In addition, comment is requested on how
the applicability of state insurance law affects the need for federal securities regulation of these
products.
Comments are due to the Commission by November 20, 1997. Please contact me with
your comments on the Commissions release by October 9, 1997. You can reach me by phone at
202/326-5821, facsimile at 202/326-5827, or e-mail at donohue@ici.org.
Dorothy M. Donohue
Associate Counsel
Attachment (in .pdf format)