Financial Counsel by Eccleston Law

SEC Proposes Changing The Rules To Better Protect Purchasers Of Equity Indexed Annuities

Recently, The Securities and Exchange Commission (SEC) published for public comment its proposed new rule aimed at protecting investors, especially senior investors, against the abuses associated with the marketing and sale of equity indexed annuities.  Sales of equity indexed annuities have grown dramatically in recent years, with $25 billion sold in 2007, for a total outstanding value of $123 billion of equity indexed annuities held by investors.

Let's examine why the SEC is concerned, what it proposes to do, and how the proposed rule will protect investors.

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Regulator's Complaint Against UBS Securities Exposes Significant Conflicts Of Interest And Omissions In The Sale Of Auction-Rate Securities

On June 26th, Massachusetts securities regulators sued UBS Securities and UBS Financial Services for their role in the auction-rate securities ("ARS") debacle that has plagued not only UBS but several other financial services firms.  In addition to other relief, the 101-page complaint seeks an order requiring UBS to offer to rescind sales of ARS at par (purchase price), or to offer restitution to investors who already sold their ARS below par.

Much like the emails that Eliot Spitzer uncovered to expose Wall Street's widespread, undisclosed conflicts of interest in the research analyst cases, Massachusetts securities regulators have uncovered scores of emails from UBS executives that make UBS' denial of liability border on laughable if not absurd.

Let's examine the more important charges that Massachusetts securities regulators have lodged against UBS.

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Securities Regulator Highlights Examination Priorities To Protect Investors

FINRA (the Financial Industry Regulatory Authority) has issued its publication, “Improving Examination Results” to highlight “examination priorities”.  Many of the examination priorities relate to investor protection issues, including guidance regarding the recommendation of, and required risk disclosures for, purchases of auction rate securities.  Let’s examine three of the more important investor protection issues.

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SEC Proposes To Broaden Investor Protection For Those Being Sold Equity Indexed Annuities

The Securities and Exchange Commission has published for public comment a proposed new rule that would protect seniors and other investors from fraudulent and abusive practices in the sale of equity indexed annuities.  Equity indexed annuities are often sold to seniors, for whom they may be unsuitable investments due to substantial early surrender charges that lock up older investors' money for many years.

The SEC voted unanimously on June 25, 2008 to issue the proposed rule for public comment.  The proposed rule would establish the standards for determining when equity indexed annuities may be considered securities subject to the investor protections afforded by the securities laws.

"Working with the North American Securities Administrators Association, the SEC has made cracking down on fraud in this area a top priority," said SEC Chairman Christopher Cox.  "This is truly a joint federal-state partnership, and the SEC is proud to be working shoulder-to-shoulder with state securities regulators on this vital investor protection issue."

The SEC's proposed rule would define the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933.  The proposed rule is intended to clarify the status under the federal securities laws of indexed annuities, under which payments to the purchaser are dependent on the performance of a securities index.

Section 3(a)(8) of the Securities Act provides an exemption under the Securities Act for certain insurance and annuity contracts.  The proposed rule would provide that an indexed annuity is not an "annuity contract" under this insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.

If adopted, the proposed new definition would apply prospectively - that is, only to indexed annuities issued on or after the effective date of a final rule.  The recommended effective date for a final rule, if adopted, would be 12 months after its publication in the Federal Register.

Source:  Knowledge Mosaic