SEC Wants to Regulate Index Annuities

Here’s the bait: when the stock market goes up, the value of your annuity goes up. If the market goes down, the value won’t go below what you paid in.

Like its cousin, the variable annuity, the index annuity comes with a “no-risk” feature that attracts many investors who tend ignore its many downsides. These include steep surrender fees for periods as long as 15 years, which make the annuity an inappropriate investment for seniors. Now the Securities and Exchange Commission wants to bring index annuities and those who peddle them under its regulatory umbrella.

Citing problems like high-pressure sales tactics, hidden or unexplained fees, and difficulties in figuring out how returns are calculated, the SEC proposes to have index annuities classified as “securities,” like stocks and bonds are classified. The move would impose mandatory disclosure and reporting requirements on those marketing these annuities, including a full list of any fees and a standardized method of computing past performance.

Currently, only insurance companies and their agents can sell annuities, and there have been many complaints that annuities are being pushed to investors by insurance agents who are paid a hefty commission on each policy they sell. The proposed SEC rules would also change the way annuities are sold by allowing only licensed brokers, or insurance agencies affiliated with brokerages, to sell the plans.

The SEC action would encroach on turf that until now has been the domain of state insurance regulators. The SEC points out that, although the National Association of Insurance Commissioners has published regulatory guidelines on annuities, only 24 states have adopted them.