3138 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

1 15 U.S.C. 77a et seq. 

2 15 U.S.C. 78a et seq. 

3 17 CFR 230.151A. Rule 151A was proposed by 

the Commission in June 2008. See Securities Act 

Release No. 8933 (June 25, 2008) [73 FR 37752 (July 

1, 2008)] (‘‘Proposing Release’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 230 and 240 

[Release Nos. 33–8996, 34–59221; File No. 

S7–14–08] 

RIN 3235–AK16 

Indexed Annuities And Certain Other 

Insurance Contracts 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: We are adopting a new rule 

that defines the terms ‘‘annuity 

contract’’ and ‘‘optional annuity 

contract’’ under the Securities Act of 

1933. The 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. The rule applies on a 

prospective basis to contracts issued on 

or after the effective date of the rule. We 

are also adopting a new rule that 

exempts insurance companies from 

filing reports under the Securities 

Exchange Act of 1934 with respect to 

indexed annuities and other securities 

that are registered under the Securities 

Act, provided that certain conditions are 

satisfied, including that the securities 

are regulated under state insurance law, 

the issuing insurance company and its 

financial condition are subject to 

supervision and examination by a state 

insurance regulator, and the securities 

are not publicly traded. 

DATES: Effective Date: The effective date 

of § 230.151A is January 12, 2011. The 

effective date of § 240.12h–7 is May 1, 

2009. Sections III.A.3. and III.B.3. of this 

release discuss the effective dates 

applicable to rule 151A and rule 12h– 

7, respectively. 

FOR FURTHER INFORMATION CONTACT: 

Michael L. Kosoff, Attorney, or Keith E. 

Carpenter, Senior Special Counsel, 

Office of Disclosure and Insurance 

Product Regulation, Division of 

Investment Management, at (202) 551– 

6795, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–5720. 

SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission 

(‘‘Commission’’) is adding rule 151A 

under the Securities Act of 1933 

(‘‘Securities Act’’) 1 and rule 12h–7 

under the Securities Exchange Act of 

1934 (‘‘Exchange Act’’).2

Table of Contents 

I. Executive Summary 

II. Background 

A. Description of Indexed Annuities 

B. Section 3(a)(8) Exemption 

III. Discussion of the Amendments 

A. Definition of Annuity Contract 

1. Analysis 

2. Commenters’ Concerns Regarding 

Commission’s Analysis 

3. Definition 

B. Exchange Act Exemption for Securities 

that are Regulated as Insurance 

1. The Exemption 

2. Conditions to Exemption 

3. Effective Date 

IV. Paperwork Reduction Act 

V. Cost-Benefit Analysis 

VI. Consideration of Promotion of Efficiency, 

Competition, and Capital Formation; 

Consideration of Burden on Competition 

VII. Final Regulatory Flexibility Analysis 

VIII. Statutory Authority 

Text of Rules 

I. Executive Summary 

We are adopting new rule 151A under 

the Securities Act of 1933 in order 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.3 Section 3(a)(8) of the 

Securities Act provides an exemption 

under the Securities Act for certain 

‘‘annuity contracts,’’ ‘‘optional annuity 

contracts,’’ and other insurance 

contracts. The new rule prospectively 

defines certain indexed annuities as not 

being ‘‘annuity contracts’’ or ‘‘optional 

annuity contracts’’ under this 

exemption if the amounts payable by 

the insurer under the contract are more 

likely than not to exceed the amounts 

guaranteed under the contract. 

The definition hinges upon a familiar 

concept: the allocation of risk. Insurance 

provides protection against risk, and the 

courts have held that the allocation of 

investment risk is a significant factor in 

distinguishing a security from a contract 

of insurance. The Commission has also 

recognized that the allocation of 

investment risk is significant in 

determining whether a particular 

contract that is regulated as insurance 

under state law is insurance for 

purposes of the federal securities laws. 

Individuals who purchase indexed 

annuities are exposed to a significant 

investment risk—i.e., the volatility of 

the underlying securities index. 

Insurance companies have successfully 

utilized this investment feature, which 

appeals to purchasers not on the usual 

insurance basis of stability and security, 

but on the prospect of investment 

growth. Indexed annuities are attractive 

to purchasers because they offer the 

promise of market-related gains. Thus, 

purchasers obtain indexed annuity 

contracts for many of the same reasons 

that individuals purchase mutual funds 

and variable annuities, and open 

brokerage accounts. 

When the amounts payable by an 

insurer under an indexed annuity are 

more likely than not to exceed the 

amounts guaranteed under the contract, 

this indicates that the majority of the 

investment risk for the fluctuating, 

securities-linked portion of the return is 

borne by the individual purchaser, not 

the insurer. The individual underwrites 

the effect of the underlying index’s 

performance on his or her contract 

investment and assumes the majority of 

the investment risk for the securitieslinked returns under the contract. 

The federal interest in providing 

investors with disclosure, antifraud, and 

sales practice protections arises when 

individuals are offered indexed 

annuities that expose them to 

investment risk. Individuals who 

purchase such indexed annuities 

assume many of the same risks and 

rewards that investors assume when 

investing their money in mutual funds, 

variable annuities, and other securities. 

However, a fundamental difference 

between these securities and indexed 

annuities is that—with few exceptions— 

indexed annuities historically have not 

been registered as securities. As a result, 

most purchasers of indexed annuities 

have not received the benefits of 

federally mandated disclosure, 

antifraud, and sales practice protections. 

In a traditional fixed annuity, the 

insurer bears the investment risk under 

the contract. As a result, such 

instruments have consistently been 

treated as insurance contracts under the 

federal securities laws. At the opposite 

end of the spectrum, the purchaser bears 

the investment risk for a traditional 

variable annuity that passes through to 

the purchaser the performance of 

underlying securities, and we have 

determined and the courts have held 

that variable annuities are securities 

under the federal securities laws. 

Indexed annuities, on the other hand, 

fall somewhere in between—they 

possess both securities and insurance 

features. Therefore, we have determined 

that providing greater clarity with 

regard to the status of indexed annuities 

under the federal securities laws will 

enhance investor protection, as well as 

provide greater certainty to the issuers 

and sellers of these products with 

respect to their obligations under the 

federal securities laws. Accordingly, we 


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Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 3139 

4NASAA is the association of all state, 

provincial, and territorial securities regulators in 

North America. 

5FINRA is the largest non-governmental regulator 

for registered broker-dealer firms doing business in 

the United States. FINRA was created in July 2007 

through the consolidation of NASD and the member 

regulation, enforcement, and arbitration functions 

of the New York Stock Exchange. 

6 ICI is a national association of investment 

companies, including mutual funds, closed-end 

funds, exchange-traded funds, and unit investment 

trusts. 

7See Securities Act Release No. 7438 (Aug. 20, 

1997) [62 FR 45359, 45360 (Aug. 27, 1997)] (‘‘1997 

Concept Release’’); NASD, Equity-Indexed 

Annuities, Notice to Members 05–50 (Aug. 2005), 

available at: http://www.finra.org/web/groups/rules

_regs/documents/notice_to_members/p014821.pdf 

(‘‘NTM 05–50’’); Letter of William A. Jacobson, Esq., 

Associate Clinical Professor, Director, Securities 

Law Clinic, and Matthew M. Sweeney, Cornell Law 

School ’10, Cornell University Law School (Sept. 

10, 2008) (‘‘Cornell Letter’’); Letter of FINRA (Aug. 

11, 2008) (‘‘FINRA Letter’’); Letter of Investment 

Company Institute (Sept. 10, 2008) (‘‘ICI Letter’’). 

8SEC v. Variable Annuity Life Ins. Co., 359 U.S. 

65 (1959) (‘‘VALIC’’); SEC v. United Benefit Life Ins. 

Co., 387 U.S. 202 (1967) (‘‘United Benefit’’). 

9NAVA, 2008 Annuity Fact Book, at 57 (2008). 

10 Id. 

11 Id. 

12See, e.g., Allianz Life Insurance Company of 

North America (Best’s Company Reports, Allianz 

Life Ins. Co. of N. Am., Dec. 3, 2007) (Indexed 

annuities represent approximately two-thirds of 

gross premiums written.); American Equity 

Investment Life Holding Company (Annual Report 

on Form 10–K, at F–16 (Mar. 14, 2008)) (Indexed 

annuities accounted for approximately 97% of total 

purchase payments in 2007.); Americo Financial 

Life and Annuity Insurance Company (Best’s 

Company Reports, Americo Fin. Life and Annuity 

Ins. Co., Sept. 5, 2008) (Indexed annuities represent 

over 90% of annuity premiums and almost 60% of 

annuity reserves.); Aviva USA Group (Best’s 

Company Reports, Aviva Life Insurance Company, 

July 14, 2008) (Indexed annuity sales represent 

more than 85% of total annuity production.); 

Investors Insurance Corporation (IIC) (Best’s 

Company Reports, Investors Ins. Corp., July 10, 

2008) (IIC’s primary product has been indexed 

annuities.); Life Insurance Company of the 

Southwest (‘‘LSW’’) (Best’s Company Reports, Life 

Ins. Co. of the Southwest, June 28, 2007) (LSW 

specializes in the sale of annuities, primarily 

indexed annuities.); Midland National Life 

Insurance Company (Best’s Company Reports, 

Midland Nat’l Life Ins. Co., Jan. 24, 2008) (Sales of 

indexed annuities in recent years have been the 

principal driver of growth in annuity deposits.). 

13See Letter of Susan E. Voss, Commissioner, 

Iowa Insurance Division (Nov. 18, 2008) (‘‘Voss 

Letter’’) (acknowledging sales practice issues and 

‘‘great deal’’ of concern about suitability and 

disclosures in indexed annuity market). See also 

Continued 

are adopting a new definition of 

‘‘annuity contract’’ that, on a 

prospective basis, will define a class of 

indexed annuities that are outside the 

scope of Section 3(a)(8). We carefully 

considered where to draw the line, and 

we believe that the line that we have 

drawn, which will be applied on a 

prospective basis only, is rational and 

reasonably related to fundamental 

concepts of risk and insurance. That is, 

if more often than not the purchaser of 

an indexed annuity will receive a 

guaranteed return like that of a 

traditional fixed annuity, then the 

instrument will be treated as insurance; 

on the other hand, if more often than 

not the purchaser will receive a return 

based on the value of a security, then 

the instrument will be treated as a 

security. With respect to the latter group 

of indexed annuities, investors will be 

entitled to all the protections of the 

federal securities laws, including full 

and fair disclosure and antifraud and 

sales practice protections. 

We are aware that many insurance 

companies and sellers of indexed 

annuities, in the absence of definitive 

interpretation or definition by the 

Commission, have of necessity acted in 

reliance on their own analysis of the 

legal status of indexed annuities based 

on the state of the law prior to the 

proposal and adoption of rule 151A. 

Under these circumstances, we do not 

believe that insurance companies and 

sellers of indexed annuities should be 

subject to any additional legal risk 

relating to their past offers and sales of 

indexed annuities as a result of the 

proposal and adoption of rule 151A. 

Therefore, the new definition will apply 

prospectively only—that is, only to 

indexed annuities that are issued on or 

after the effective date of our final rule. 

Finally, we are adopting rule 12h–7 

under the Exchange Act, a new 

exemption from Exchange Act reporting 

that will apply to insurance companies 

with respect to indexed annuities and 

certain other securities that are 

registered under the Securities Act and 

regulated as insurance under state law. 

We believe that this exemption is 

necessary or appropriate in the public 

interest and consistent with the 

protection of investors. Where an 

insurer’s financial condition and ability 

to meet its contractual obligations are 

subject to oversight under state law, and 

where there is no trading interest in an 

insurance contract, the concerns that 

periodic and current financial 

disclosures are intended to address are 

generally not implicated. 

The Commission received 

approximately 4,800 comments on the 

proposed rules. The commenters were 

divided with respect to proposed rule 

151A. Many issuers and sellers of 

indexed annuities opposed the 

proposed rule. However, other 

commenters supported the proposed 

rule, including the North American 

Securities Administrators Association, 

Inc. (‘‘NASAA’’),4 the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’),5 several insurance 

companies, and the Investment 

Company Institute (‘‘ICI’’).6 A number of 

commenters, both those who supported 

and those who opposed rule 151A, 

suggested modifications to the proposed 

rule. Sixteen commenters addressed 

proposed rule 12h–7, and all of these 

commenters supported the proposal, 

with some suggesting modifications. We 

are adopting proposed rules 151A and 

12h–7, with significant modifications to 

address the concerns of commenters. 

II. Background 

Beginning in the mid-1990s, the life 

insurance industry introduced a new 

type of annuity, referred to as an 

‘‘equity-indexed annuity,’’ or, more 

recently, ‘‘fixed indexed annuity’’ 

(herein ‘‘indexed annuity’’). Amounts 

paid by the insurer to the purchaser of 

an indexed annuity are based, in part, 

on the performance of an equity index 

or another securities index, such as a 

bond index. 

The status of indexed annuities under 

the federal securities laws has been 

uncertain since their introduction in the 

mid-1990s.7 Under existing precedents, 

the status of each indexed annuity is 

determined based on a facts and 

circumstances analysis of factors that 

have been articulated by the U.S. 

Supreme Court.8 Insurers have typically 

marketed and sold indexed annuities 

without registering the contracts under 

the federal securities laws. 

In the years after indexed annuities 

were first introduced, sales volumes and 

the number of purchasers were 

relatively small. Sales of indexed 

annuities for 1998 totaled $4 billion and 

grew each year through 2005, when 

sales totaled $27.2 billion.9 Indexed 

annuity sales for 2006 totaled $25.4 

billion and $24.8 billion in 2007.10 In 

2007, indexed annuity assets totaled 

$123 billion, 58 companies were issuing 

indexed annuities, and there were a 

total of 322 indexed annuity contracts 

offered.11 As sales have grown in more 

recent years, these products have 

affected larger and larger numbers of 

purchasers. They have also become an 

increasingly important business line for 

some insurers.12

The growth in sales of indexed 

annuities has, unfortunately, been 

accompanied by complaints of abusive 

sales practices. These include claims 

that the often-complex features of these 

annuities have not been adequately 

disclosed to purchasers, as well as 

claims that rapid sales growth has been 

fueled by the payment of outsize 

commissions that are funded by high 

surrender charges imposed over long 

periods, which can make these 

annuities unsuitable for seniors and 

others who may need ready access to 

their assets.13


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3140 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

FINRA, Equity Indexed Annuities—A Complex 

Choice (updated Apr. 22, 2008), available at: http:// 

www.finra.org/InvestorInformation/InvestorAlerts/ 

AnnuitiesandInsurance/Equity-IndexedAnnuitiesAComplexChoice/P010614 (‘‘FINRA Investor 

Alert’’) (investor alert on indexed annuities); Office 

of Compliance Inspections and Examinations, 

Securities and Exchange Commission, et al., 

Protecting Senior Investors: Report of Examinations 

of Securities Firms Providing ‘Free Lunch’ Sales 

Seminars, at 4 (Sept. 2007), available at: http:// 

www.sec.gov/spotlight/seniors/freelunchreport.pdf 

(joint examination conducted by Commission, 

North American Securities Administrators 

Association (‘‘NASAA’’), and FINRA identified 

potentially misleading sales materials and potential 

suitability issues relating to products discussed at 

sales seminars, which commonly included indexed 

annuities); Statement of Patricia Struck, President, 

NASAA, at the Senior Summit of the United States 

Securities and Exchange Commission, July 17, 

2006, available at: http://www.nasaa.org/ 

IssuesAnswers/Legislative_Activity/Testimony/ 

4999.cfm (identifying indexed annuities as among 

the most pervasive products involved in senior 

investment fraud); NTM 05–50, supra note 7 (citing 

concerns about marketing of indexed annuities and 

the absence of adequate supervision of sales 

practices). 

14FINRA Investor Alert, supra note 13; National 

Association of Insurance Commissioners, Buyer’s 

Guide to Fixed Deferred Annuities with Appendix 

for Equity-Indexed Annuities, at 9 (2007) (‘‘NAIC 

Guide’’); National Association for Fixed Annuities, 

White Paper on Fixed Indexed Insurance Products 

Including ’Fixed Indexed Annuities’ and Other 

Fixed Indexed Insurance Products, at 1 (2006), 

available at: http://www.nafa.us/ 

index.php?act=attach&type=post&id=68 (‘‘NAFA 

Whitepaper’’); Jack Marrion, Index Annuities: 

Power and Protection, at 13 (2004) (‘‘Marrion’’). 

15NAFA Whitepaper, supra note 14, at 13. 

16See FINRA Investor Alert, supra note 13; NAIC 

Guide, supra note 14, at 12–14; NAFA Whitepaper, 

supra note 14, at 9–10; Marrion, supra note 14, at 

38–59. 

17NAIC Guide, supra note 14, at 11; NAFA 

Whitepaper, supra note 14, at 5 and 9; Marrion, 

supra note 14, at 2. 

18See FINRA Investor Alert, supra note 13; NAIC 

Guide, supra note 14, at 10–11; NAFA Whitepaper, 

supra note 14, at 10; Marrion, supra note 14, at 38– 

59. 

19See FINRA Investor Alert, supra note 13; NAIC 

Guide, supra note 14, at 3–4 and 11; NAFA 

Whitepaper, supra note 14, at 7; Marrion, supra 

note 14, at 31. 

20The highest surrender charges are often 

associated with annuities in which the insurer 

credits a ‘‘bonus’’ equal to a percentage of purchase 

payments to the purchaser at the time of purchase. 

The surrender charge may serve, in part, to 

recapture the bonus. 

21See A Producer’s Guide to Indexed Annuities 

2007, LIFE INSURANCE SELLING (June 2007), 

available at: http://www.lifeinsuranceselling.com/ 

Media/MediaManager/0607_IASurvey_1.pdf; Equity 

Indexed Annuities, ANNUITYADVANTAGE, 

available at: 

We have observed the development of 

indexed annuities for some time and 

have become persuaded that guidance is 

needed with respect to their status 

under the federal securities laws. Given 

the current size of the market for 

indexed annuities, we believe that it is 

important for all parties, including 

issuers, sellers, and purchasers, to 

understand, in advance, the legal status 

of these products and the rules and 

protections that apply. Today, we are 

adopting rules that will provide greater 

clarity regarding the scope of the 

exemption provided by Section 3(a)(8). 

We believe our action is consistent with 

Congressional intent in that the 

definition will afford the disclosure, 

antifraud, and sales practice protections 

of the federal securities laws to 

purchasers of indexed annuities who are 

more likely than not to receive 

payments that vary in accordance with 

the performance of a security. In 

addition, the rules will provide relief 

from Exchange Act reporting obligations 

to the insurers that issue these indexed 

annuities and certain other securities 

that are regulated as insurance under 

state law. We base the Exchange Act 

exemption on two factors: First, the 

nature and extent of the activities of 

insurance company issuers, and their 

income and assets, and, in particular, 

the regulation of these activities and 

assets under state insurance law; and, 

second, the absence of trading interest 

in the securities. 

A. Description of Indexed Annuities 

An indexed annuity is a contract 

issued by a life insurance company that 

generally provides for accumulation of 

the purchaser’s payments, followed by 

payment of the accumulated value to 

the purchaser either as a lump sum, 

upon death or withdrawal, or as a series 

of payments (an ‘‘annuity’’). During the 

accumulation period, the insurer credits 

the purchaser with a return that is based 

on changes in a securities index, such 

as the Dow Jones Industrial Average, 

Lehman Brothers Aggregate U.S. Index, 

Nasdaq 100 Index, or Standard & Poor’s 

500 Composite Stock Price Index. The 

insurer also guarantees a minimum 

value to the purchaser.14 The specific 

features of indexed annuities vary from 

product to product. Some key features, 

found in many indexed annuities, are as 

follows. 

Computation of Index-Based Return 

The purchaser’s index-based return 

under an indexed annuity depends on 

the particular combination of features 

specified in the contract. Typically, an 

indexed annuity specifies all aspects of 

the formula for computing return in 

advance of the period for which return 

is to be credited, and the crediting 

period is generally at least one year 

long.15 The rate of the index-based 

return is computed at the end of the 

crediting period, based on the actual 

performance of a specified securities 

index during that period, but the 

computation is performed pursuant to a 

mathematical formula that is guaranteed 

in advance of the crediting period. 

Common indexing features are 

described below. 

• Index. Indexed annuities credit 

return based on the performance of a 

securities index, such as the Dow Jones 

Industrial Average, Lehman Brothers 

Aggregate U.S. Index, Nasdaq 100 Index, 

or Standard & Poor’s 500 Composite 

Stock Price Index. Some annuities 

permit the purchaser to select one or 

more indices from a specified group of 

indices. 

• Determining Change in Index. 

There are several methods for 

determining the change in the relevant 

index over the crediting period.16 For 

example, the ‘‘point-to-point’’ method 

compares the index level at two discrete 

points in time, such as the beginning 

and ending dates of the crediting period. 

Typically, in determining the amount of 

index change, dividends paid on 

securities underlying the index are not 

included. Indexed annuities typically 

do not apply negative changes in an 

index to contract value. Thus, if the 

change in index value is negative over 

the course of a crediting period, no 

deduction is taken from contract value 

nor is any index-based return credited.17

• Portion of Index Change to be 

Credited. The portion of the index 

change to be credited under an indexed 

annuity is typically determined through 

the application of caps, participation 

rates, spread deductions, or a 

combination of these features.18 Some 

contracts ‘‘cap’’ the index-based returns 

that may be credited. For example, if the 

change in the index is 6%, and the 

contract has a 5% cap, 5% would be 

credited. A contract may establish a 

‘‘participation rate,’’ which is 

multiplied by index growth to 

determine the rate to be credited. If the 

change in the index is 6%, and a 

contract’s participation rate is 75%, the 

rate credited would be 4.5% (75% of 

6%). In addition, some indexed 

annuities may deduct a percentage, or 

spread, from the amount of gain in the 

index in determining return. If the 

change in the index is 6%, and a 

contract has a spread of 1%, the rate 

credited would be 5% (6% minus 1%). 

Surrender Charges 

Surrender charges are commonly 

deducted from withdrawals taken by a 

purchaser.19 The maximum surrender 

charges, which may be as high as 15– 

20%,20 are imposed on surrenders made 

during the early years of the contract 

and decline gradually to 0% at the end 

of a specified surrender charge period, 

which may be in excess of 15 years.21


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Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 3141 

http://datafeeds.annuityratewatch.com/ 

annuityadvantage/fixed-indexed-accounts.htm. 

22FINRA Investor Alert, supra note 13; Marrion, 

supra note 14, at 31. 

23 1997 Concept Release, supra note 7 (concept 

release requesting comments on structure of equity 

indexed insurance products, the manner in which 

they are marketed, and other matters the 

Commission should consider in addressing federal 

securities law issues raised by these products). See 

also Letter from American Academy of Actuaries 

(Jan. 5, 1998); Letter from Aid Association for 

Lutherans (Nov. 19, 1997) (comment letters in 

response to 1997 Concept Release). The comment 

letters on the 1997 Concept Release are available for 

public inspection and copying in the Commission’s 

Public Reference Room, 100 F Street, NE., 

Washington, DC (File No. S7–22–97). Those 

comment letters that were transmitted 

electronically to the Commission are also available 

on the Commission’s Web site at http:// 

www.sec.gov/rules/concept/s72297.shtml. 

24See, e.g., CAL. INS. CODE § 10168.25 (West 

2007) & IOWA CODE § 508.38 (2008) (current 

requirements, providing for guarantee based on 

87.5% of purchase payments accumulated at 

minimum of 1% annual interest); CAL. INS. CODE 

§ 10168.2 (West 2003) & IOWA CODE § 508.38 

(2002) (former requirements, providing for 

guarantee for single premium annuities based on 

90% of premium accumulated at minimum of 3% 

annual interest). 

25NAFA Whitepaper, supra note 14, at 6. 

26 In a few instances, insurers have registered 

indexed annuities as securities as a result of 

particular features, such as the absence of any 

guaranteed interest rate or the absence of a 

guaranteed minimum value. See, e.g., Pre-Effective 

Amendment No. 4 to Registration Statement on 

Form S–1 of PHL Variable Insurance Company (File 

No. 333–132399) (filed Feb. 7, 2007); Pre-Effective 

Amendment No. 1 to Registration Statement on 

Form S–3 of Allstate Life Insurance Company (File 

No. 333–105331) (filed May 16, 2003); Initial 

Registration Statement on Form S–2 of Golden 

American Life Insurance Company (File No. 333– 

104547) (filed Apr. 15, 2003). 

27The Commission has previously stated its view 

that Congress intended any insurance contract 

falling within Section 3(a)(8) to be excluded from 

all provisions of the Securities Act notwithstanding 

the language of the Act indicating that Section 

3(a)(8) is an exemption from the registration but not 

the antifraud provisions. Securities Act Release No. 

6558 (Nov. 21, 1984) [49 FR 46750, 46753 (Nov. 28, 

1984)]. See also Tcherepnin v. Knight, 389 U.S. 332, 

342 n.30 (1967) (Congress specifically stated that 

‘‘insurance policies are not to be regarded as 

securities subject to the provisions of the 

[Securities] act,’’ (quoting H.R. Rep. 85, 73d Cong., 

1st Sess. 15 (1933)). 

28 VALIC, supra note 8, 359 U.S. 65; United 

Benefit, supra note 8, 387 U.S. 202. 

29 VALIC, supra note 8, 359 U.S. at 71–73. 

30United Benefit, supra note 8, 387 U.S. at 211. 

31 Id. at 211. 

32 VALIC, supra note 8, 359 U.S. at 77. 

Imposition of a surrender charge may 

have the effect of reducing or 

eliminating any index-based return 

credited to the purchaser up to the time 

of a withdrawal. In addition, a surrender 

charge may result in a loss of principal, 

so that a purchaser who surrenders prior 

to the end of the surrender charge 

period may receive less than the original 

purchase payments.22 Many indexed 

annuities permit purchasers to 

withdraw a portion of contract value 

each year, typically 10%, without 

payment of surrender charges. 

Guaranteed Minimum Value 

Indexed annuities generally provide a 

guaranteed minimum value, which 

serves as a floor on the amount paid 

upon withdrawal, as a death benefit, or 

in determining the amount of annuity 

payments. The guaranteed minimum 

value is typically a percentage of 

purchase payments, accumulated at a 

specified interest rate, and may not be 

lower than a floor established by 

applicable state insurance law. In the 

years immediately following their 

introduction, indexed annuities 

typically guaranteed 90% of purchase 

payments accumulated at 3% annual 

interest.23 More recently, however, 

following changes in state insurance 

laws,24 indexed annuities typically 

provide that the guaranteed minimum 

value is equal to at least 87.5% of 

purchase payments, accumulated at 

annual interest rate of between 1% and 

3%.25 Assuming a guarantee of 87.5% of 

purchase payments, accumulated at 1% 

interest compounded annually, it would 

take approximately 13 years for a 

purchaser’s guaranteed minimum value 

to be 100% of purchase payments. 

Registration 

Insurers typically have concluded that 

the indexed annuities they issue are not 

securities. As a result, virtually all 

indexed annuities have been issued 

without registration under the Securities 

Act.26

B. Section 3(a)(8) Exemption 

Section 3(a)(8) of the Securities Act 

provides an exemption for any ‘‘annuity 

contract’’ or ‘‘optional annuity contract’’ 

issued by a corporation that is subject to 

the supervision of the insurance 

commissioner, bank commissioner, or 

similar state regulatory authority.27 The 

exemption, however, is not available to 

all contracts that are considered 

annuities under state insurance law. For 

example, variable annuities, which pass 

through to the purchaser the investment 

performance of a pool of assets, are not 

exempt annuity contracts. 

The U.S. Supreme Court has 

addressed the insurance exemption on 

two occasions.28 Under these cases, 

factors that are important to a 

determination of an annuity’s status 

under Section 3(a)(8) include (1) the 

allocation of investment risk between 

insurer and purchaser, and (2) the 

manner in which the annuity is 

marketed. 

With regard to investment risk, 

beginning with SEC v. Variable Annuity 

Life Ins. Co. (‘‘VALIC’’),29 the Court has 

considered whether the risk is borne by 

the purchaser (tending to indicate that 

the product is not an exempt ‘‘annuity 

contract’’) or by the insurer (tending to 

indicate that the product falls within the 

Section 3(a)(8) exemption). In VALIC, 

the Court determined that variable 

annuities, under which payments varied 

with the performance of particular 

investments and which provided no 

guarantee of fixed income, were not 

entitled to the Section 3(a)(8) 

exemption. In SEC v. United Benefit Life 

Ins. Co. (‘‘United Benefit’’),30 the Court 

extended the VALIC reasoning, finding 

that a contract that provides for some 

assumption of investment risk by the 

insurer may nonetheless not be entitled 

to the Section 3(a)(8) exemption. The 

United Benefit insurer guaranteed that 

the cash value of its variable annuity 

contract would never be less than 50% 

of purchase payments made and that, 

after ten years, the value would be no 

less than 100% of payments. The Court 

determined that this contract, under 

which the insurer did assume some 

investment risk through minimum 

guarantees, was not an ‘‘annuity 

contract’’ under the federal securities 

laws. In making this determination, the 

Court concluded that ‘‘the assumption 

of an investment risk cannot by itself 

create an insurance provision under the 

federal definition’’ and distinguished a 

‘‘contract which to some degree is 

insured’’ from a ‘‘contract of 

insurance.’’ 31

In analyzing investment risk, Justice 

Brennan’s concurring opinion in VALIC 

applied a functional analysis to 

determine whether a new form of 

investment arrangement that emerges 

and is labeled ‘‘annuity’’ by its 

promoters is the sort of arrangement that 

Congress was willing to leave 

exclusively to the state insurance 

commissioners. In that inquiry, the 

purposes of the federal securities laws 

and state insurance laws are important. 

Justice Brennan noted, in particular, 

that the emphasis in the Securities Act 

is on disclosure and that the philosophy 

of the Act is that ‘‘full disclosure of the 

details of the enterprise in which the 

investor is to put his money should be 

made so that he can intelligently 

appraise the risks involved.’’ 32 We 

agree with the concurring opinion’s 

analysis. Where an investor’s 

investment in an annuity is sufficiently 

protected by the insurer, state insurance 

law regulation of insurer solvency and 

the adequacy of reserves are relevant. 

Where the investor’s investment is not 

sufficiently protected, the disclosure 


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33United Benefit, supra note 8, 387 U.S. at 211. 

34 Id. at 211 (quoting SEC v. Joiner Leasing Corp., 

320 U.S. 344, 352–53 (1943)). For other cases 

applying a marketing test, see Berent v. Kemper 

Corp., 780 F. Supp. 431 (E.D. Mich. 1991), aff’d, 973 

F. 2d 1291 (6th Cir. 1992); Associates in Adolescent 

Psychiatry v. Home Life Ins. Co., 729 F.Supp. 1162 

(N.D. Ill. 1989), aff’d, 941 F.2d 561 (7th Cir. 1991); 

and Grainger v. State Security Life Ins. Co., 547 F.2d 

303 (5th Cir. 1977). 

35 17 CFR 230.151; Securities Act Release No. 

6645 (May 29, 1986) [51 FR 20254 (June 4, 1986)]. 

A guaranteed investment contract is a deferred 

annuity contract under which the insurer pays 

interest on the purchaser’s payments at a 

guaranteed rate for the term of the contract. In some 

cases, the insurer also pays discretionary interest in 

excess of the guaranteed rate. 

36 17 CFR 230.151(a). 

37 17 CFR 230.151(b) and (c). In addition, the 

value of the contract may not vary according to the 

investment experience of a separate account. 

38Some indexed annuities also may fail other 

aspects of the safe harbor test. 

In adopting rule 151, the Commission declined to 

extend the safe harbor to excess interest rates that 

are computed pursuant to an indexing formula that 

is guaranteed for one year. Rather, the Commission 

determined that it would be appropriate to permit 

insurers to make limited use of index features, 

provided that the insurer specifies an index to 

which it would refer, no more often than annually, 

to determine the excess interest rate that it would 

guarantee for the next 12-month or longer period. 

For example, an insurer would meet this test if it 

established an ‘‘excess’’ interest rate of 5% by 

reference to the past performance of an external 

index and then guaranteed to pay 5% interest for 

the coming year. Securities Act Release No. 6645, 

supra note 35, 51 FR at 20260. The Commission 

specifically expressed concern that index feature 

contracts that adjust the rate of return actually 

credited on a more frequent basis operate less like 

a traditional annuity and more like a security and 

that they shift to the purchaser all of the investment 

risk regarding fluctuations in that rate. See infra 

note 71 and accompanying text. 

39An ‘‘optional annuity contract’’ is a deferred 

annuity. See United Benefit, supra note 8, 387 U.S. 

at 204. In a deferred annuity, annuitization begins 

at a date in the future, after assets in the contract 

have accumulated over a period of time (normally 

many years). In contrast, in an immediate annuity, 

the insurer begins making annuity payments shortly 

after the purchase payment is made, i.e., within one 

year. See Kenneth Black, Jr., and Harold D. Skipper, 

Jr., Life and Health Insurance, at 164 (2000). 

40See VALIC, supra note 8, 359 U.S. at 69. 

Although the McCarran-Ferguson Act, 15 U.S.C. 

1012(b), provides that ‘‘No Act of Congress shall be 

construed to invalidate, impair or supersede any 

law enacted by any State for the purpose of 

regulating the business of insurance,’’ the United 

States Supreme Court has stated that the question 

common to both the federal securities laws and the 

McCarran-Ferguson Act is whether the instruments 

are contracts of insurance. See VALIC, supra note 

8. Thus, where a contract is not an ‘‘annuity 

contract’’ or ‘‘optional annuity contract,’’ which we 

have concluded is the case with respect to certain 

indexed annuities, we do not believe that such 

contract is ‘‘insurance’’ for purposes of the 

McCarran-Ferguson Act. 

41The last time the Commission formally 

addressed indexed annuities was in 1997. At that 

time, the Commission issued a concept release 

requesting public comment regarding indexed 

insurance contracts. The concept release stated that 

‘‘depending on the mix of features * * * [an 

indexed insurance contract] may or may not be 

entitled to exemption from registration under the 

Securities Act’’ and that the Commission was 

protections of the Securities Act assume 

importance. 

Marketing is another significant factor 

in determining whether a state-regulated 

insurance contract is entitled to the 

Securities Act ‘‘annuity contract’’ 

exemption. In United Benefit, the U.S. 

Supreme Court, in holding an annuity to 

be outside the scope of Section 3(a)(8), 

found significant the fact that the 

contract was ‘‘considered to appeal to 

the purchaser not on the usual 

insurance basis of stability and security 

but on the prospect of ‘growth’ through 

sound investment management.’’ 33

Under these circumstances, the Court 

concluded ‘‘it is not inappropriate that 

promoters’ offerings be judged as being 

what they were represented to be.’’ 34

In 1986, given the proliferation of 

annuity contracts commonly known as 

‘‘guaranteed investment contracts,’’ the 

Commission adopted rule 151 under the 

Securities Act to establish a ‘‘safe 

harbor’’ for certain annuity contracts 

that are not deemed subject to the 

federal securities laws and are entitled 

to rely on Section 3(a)(8) of the 

Securities Act.35 Under rule 151, an 

annuity contract issued by a stateregulated insurance company is deemed 

to be within Section 3(a)(8) of the 

Securities Act if (1) the insurer assumes 

the investment risk under the contract 

in the manner prescribed in the rule; 

and (2) the contract is not marketed 

primarily as an investment.36 Rule 151 

essentially codifies the tests the courts 

have used to determine whether an 

annuity contract is entitled to the 

Section 3(a)(8) exemption, but adds 

greater specificity with respect to the 

investment risk test. Under rule 151, an 

insurer is deemed to assume the 

investment risk under an annuity 

contract if, among other things, 

(1) The insurer, for the life of the 

contract, 

(a) Guarantees the principal amount 

of purchase payments and credited 

interest, less any deduction for sales, 

administrative, or other expenses or 

charges; and 

(b) Credits a specified interest rate 

that is at least equal to the minimum 

rate required by applicable state law; 

and 

(2) The insurer guarantees that the 

rate of any interest to be credited in 

excess of the guaranteed minimum rate 

described in paragraph 1(b) will not be 

modified more frequently than once per 

year.37

Indexed annuities are not entitled to 

rely on the safe harbor of rule 151 

because they fail to satisfy the 

requirement that the insurer guarantee 

that the rate of any interest to be 

credited in excess of the guaranteed 

minimum rate will not be modified 

more frequently than once per year.38

III. Discussion of the Amendments 

The Commission has determined that 

providing greater clarity with regard to 

the status of indexed annuities under 

the federal securities laws will enhance 

investor protection, as well as provide 

greater certainty to the issuers and 

sellers of these products with respect to 

their obligations under the federal 

securities laws. We are adopting a new 

definition of ‘‘annuity contract’’ that, on 

a prospective basis, defines a class of 

indexed annuities that are outside the 

scope of Section 3(a)(8). With respect to 

these annuities, investors will be 

entitled to all the protections of the 

federal securities laws, including full 

and fair disclosure and antifraud and 

sales practice protections. We are also 

adopting a new exemption under the 

Exchange Act that applies to insurance 

companies that issue indexed annuities 

and certain other securities that are 

registered under the Securities Act and 

regulated as insurance under state law. 

We believe that this exemption is 

necessary or appropriate in the public 

interest and consistent with the 

protection of investors because of the 

presence of state oversight of insurance 

company financial condition and the 

absence of trading interest in these 

securities. 

A. Definition of Annuity Contract 

The Commission is adopting new rule 

151A, which defines a class of indexed 

annuities that are not ‘‘annuity 

contracts’’ or ‘‘optional annuity 

contracts’’ 39 for purposes of Section 

3(a)(8) of the Securities Act. Although 

we recognize that these instruments are 

issued by insurance companies and are 

treated as annuities under state law, 

these facts are not conclusive for 

purposes of the analysis under the 

federal securities laws. 

1. Analysis 

‘‘Insurance’’ and ‘‘Annuity’’: Federal 

Terms Under the Federal Securities 

Laws 

Our analysis begins with the wellsettled conclusion that the terms 

‘‘insurance’’ and ‘‘annuity contract’’ as 

used in the Securities Act are ‘‘federal 

terms,’’ the meanings of which are a 

‘‘federal question’’ under the federal 

securities laws.40 The Securities Act 

does not provide a definition of either 

term, and we have not previously 

provided a definition that applies to 

indexed annuities.41 Moreover, indexed 


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‘‘considering the status of [indexed annuities and 

other indexed insurance contracts] under the 

federal securities laws.’’ See 1997 Concept Release, 

supra note 7, at 4–5. 

The Commission has previously adopted a safe 

harbor for certain annuity contracts that are entitled 

to rely on Section 3(a)(8) of the Securities Act. 

However, as discussed in Part II.B., indexed 

annuities are not entitled to rely on the safe harbor. 

42See VALIC, supra note 8, 359 U.S. at 75 

(Brennan, J., concurring) (‘‘* * * if a brand-new 

form of investment arrangement emerges which is 

labeled ‘insurance’ or ‘annuity’ by its promoters, the 

functional distinction that Congress set up in 1933 

and 1940 must be examined to test whether the 

contract falls within the sort of investment form 

that Congress was then willing to leave exclusively 

to the State Insurance Commissioners. In that 

inquiry, an analysis of the regulatory and protective 

purposes of the Federal Acts and of state insurance 

regulation as it then existed becomes relevant.’’). 

43 Id. at 71–73. 

44See United Benefit, supra note 8, 387 U.S. at 

211 (‘‘[T]he assumption of investment risk cannot 

by itself create an insurance provision. * * * The 

basic difference between a contract which to some 

degree is insured and a contract of insurance must 

be recognized.’’). 

45See VALIC, supra note 8, 359 U.S. at 69. 

46 Id. (‘‘While all the States regulate ‘annuities’ 

under their ‘insurance’ laws, traditionally and 

customarily they have been fixed annuities, offering 

the annuitant specified and definite amounts 

beginning with a certain year of his or her life. The 

standards for investment of funds underlying these 

annuities have been conservative.’’). 

47 Id. (‘‘Congress was legislating concerning a 

concept which had taken on its coloration and 

meaning largely from state law, from state practice, 

from state usage.’’). 

48 Id. at 75 (Brennan, J., concurring). 

49See United Benefit, supra note 8, 387 U.S. at 

211 (finding that while a ‘‘guarantee of cash value’’ 

provided by an insurer to purchasers of a deferred 

annuity plan reduced ‘‘substantially the investment 

risk of the contract holder, the assumption of 

investment risk cannot by itself create an insurance 

provision under the federal definition.’’). 

50 Id. at 211 (‘‘The basic difference between a 

contract which to some degree is insured and a 

contract of insurance must be recognized.’’). 

51See VALIC, supra note 8, 359 U.S. at 71 

(finding that although the insurer’s assumption of 

a traditional insurance risk gives variable annuities 

an ‘‘aspect of insurance,’’ this is ‘‘apparent, not real; 

superficial, not substantial.’’). 

52The presence of protection against loss does 

not, in itself, transform a security into an insurance 

or annuity contract. Like indexed annuities, 

variable annuities typically provide some 

protection against the risk of loss, but are registered 

as securities. Historically, variable annuity 

contracts have typically provided a minimum death 

benefit at least equal to the greater of contract value 

or purchase payments less any withdrawals. More 

recently, many contracts have offered benefits that 

protect against downside market risk during the 

purchaser’s lifetime. 

53 VALIC, supra note 8, 359 U.S. at 91 (Brennan, 

J., concurring). 

annuities did not exist and were not 

contemplated by Congress when it 

enacted the insurance exemption. 

We therefore analyze indexed 

annuities under the facts and 

circumstances factors articulated by the 

U.S. Supreme Court in VALIC and 

United Benefit. In particular, we focus 

on whether these instruments are ‘‘the 

sort of investment form that Congress 

was * * * willing to leave exclusively 

to the State Insurance Commissioners’’ 

and whether they necessitate the 

‘‘regulatory and protective purposes’’ of 

the Securities Act.42

Type of Investment 

We believe that the indexed annuities 

that will be included in our definition 

are not the sort of investment that 

Congress contemplated leaving 

exclusively to state insurance 

regulation. According to the U.S. 

Supreme Court, Congress intended to 

include in the insurance exemption 

only those policies and contracts that 

include a ‘‘true underwriting of risks’’ 

and ‘‘investment risk-taking’’ by the 

insurer.43 Moreover, the level of risk 

assumption necessary for a contract to 

be ‘‘insurance’’ under the Securities Act 

must be meaningful—the assumption of 

an investment risk does not ‘‘by itself 

create an insurance provision under the 

federal definition.’’ 44

The annuities that ‘‘traditionally and 

customarily’’ were offered at the time 

Congress enacted the insurance 

exemption were fixed annuities that 

typically involved no investment risk to 

the purchaser.45 These contracts offered 

the purchaser ‘‘specified and definite 

amounts beginning with a certain year 

of his or her life,’’ and the ‘‘standards 

for investments of funds’’ by the insurer 

under these contracts were 

‘‘conservative.’’ 46 Moreover, these types 

of annuity contracts were part of a 

‘‘concept which had taken on its 

coloration and meaning largely from 

state law, from state practice, from state 

usage.’’ 47 Thus, Congress exempted 

these instruments from the requirements 

of the federal securities laws because 

they were a ‘‘form of ‘investment’ * * * 

which did not present very squarely the 

problems that [the federal securities 

laws] were devised to deal with,’’ and 

were ‘‘subject to a form of state 

regulation of a sort which made the 

federal regulation even less relevant.’’ 48

In contrast, when the amounts 

payable by an insurer under an indexed 

annuity contract are more likely than 

not to exceed the amounts guaranteed 

under the contract, the purchaser 

assumes substantially different risks and 

benefits. Notably, at the time that such 

a contract is purchased, the risk for the 

unknown, unspecified, and fluctuating 

securities-linked portion of the return is 

primarily assumed by the purchaser. 

By purchasing this type of indexed 

annuity, the purchaser assumes the risk 

of an uncertain and fluctuating financial 

instrument, in exchange for 

participation in future securities-linked 

returns. The value of such an indexed 

annuity reflects the benefits and risks 

inherent in the securities market, and 

the contract’s value depends upon the 

trajectory of that same market. Thus, the 

purchaser obtains an instrument that, by 

its very terms, depends on market 

volatility and risk. 

Such indexed annuity contracts 

provide some protection against the risk 

of loss, but these provisions do not, ‘‘by 

[themselves,] create an insurance 

provision under the federal 

definition.’’ 49 Rather, these provisions 

reduce—but do not eliminate—a 

purchaser’s exposure to investment risk 

under the contract. These contracts may 

to some degree be insured, but that 

degree may be too small to make the 

indexed annuity a contract of 

insurance.50

Thus, the protections provided by 

indexed annuities may not adequately 

transfer investment risk from the 

purchaser to the insurer when amounts 

payable by an insurer under the contract 

are more likely than not to exceed the 

amounts guaranteed under the contract. 

Purchasers of these annuities assume 

the investment risk for investments that 

are more likely than not to fluctuate and 

move with the securities markets. The 

value of the purchaser’s investment is 

more likely than not to depend on 

movements in the underlying securities 

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.51

Need for the Regulatory Protections of 

the Federal Securities Acts 

We also analyze indexed annuities to 

determine whether they implicate the 

regulatory and protective purposes of 

the federal securities laws. Based on 

that analysis, we believe that the 

indexed annuities that are included in 

the definition that we are adopting 

present many of the concerns that 

Congress intended the federal securities 

laws to address. 

Indexed annuities are similar in many 

ways to mutual funds, variable 

annuities, and other securities. 

Although these contracts contain certain 

features that are typical of insurance 

contracts, 52 they also may contain ‘‘to a 

very substantial degree elements of 

investment contracts.’’ 53 Indexed 

annuities are attractive to purchasers 

precisely because they offer 

participation in the securities markets. 

However, indexed annuities historically 

have not been registered with us as 

securities. Insurers have treated these 


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54See, e.g., Letter of Advantage Group Associates, 

Inc. (Nov. 16, 2008) (‘‘Advantage Group Letter’’); 

Letter of Allianz Life Insurance Company of North 

America (Sept. 10, 2008) (‘‘Allianz Letter’’); Letter 

of American Academy of Actuaries (Sept. 10, 2008) 

(‘‘Academy Letter’’); Letter of American Academy of 

Actuaries (Nov. 17, 2008) (‘‘Second Academy 

Letter’’); Letter of American Equity Investment Life 

Holding Company (Sept. 10, 2008) (‘‘American 

Equity Letter’’); Letter of American National 

Insurance Company (Sept. 10. 2008) (‘‘American 

National Letter’’); Letter of Aviva USA Corporation 

(Sept. 10, 2008) (‘‘Aviva Letter’’); Letter of Aviva 

USA Corporation (Nov. 17, 2008) (‘‘Second Aviva 

Letter’’); Letter of Coalition for Indexed Products 

(Sept. 10, 2008) (‘‘Coalition Letter’’); Letter of 

Committee of Annuity Insurers regarding proposed 

rule 151A (Sept. 10, 2008) (‘‘CAI 151A Letter’’); 

Letter of Lafayette Life Insurance Company (Sept. 

10, 2008) (‘‘Lafayette Letter’’); Letter of Maryland 

Insurance Administration (Sept. 9, 2008) 

(‘‘Maryland Letter’’); Letter of the Officers of the 

National Association of Insurance Commissioners 

(Sept. 10, 2008) (‘‘NAIC Officer Letter’’); Letter of 

National Association for Fixed Annuities (Sept. 10, 

2008) (‘‘NAFA Letter’’); Letter of National 

Association of Insurance and Financial Advisers 

(Sept. 10, 2008) (‘‘NAIFA Letter’’); Letter of 

National Conference of Insurance Legislators (Nov. 

25, 2008) (‘‘NCOIL Letter’’); Letter of National 

Western Life Insurance Company (Sept. 10, 2008) 

(‘‘National Western Letter’’); Letter of Old Mutual 

Financial Network (Sept. 10, 2008) (‘‘Old Mutual 

Letter’’); Letter of Sammons Annuity Group (Sept. 

10, 2008) (‘‘Sammons Letter’’); Letter of 

Transamerica Life Insurance Company (Sept. 10, 

2008) (‘‘Transamerica Letter’’); Letter of 

Transamerica Life Insurance Company (Nov. 17, 

2008) (‘‘Second Transamerica Letter’’). 

Other commenters, however, supported the 

Commission’s interpretation of Section 3(a)(8) and 

applicable legal precedents. See, e.g., ICI Letter, 

supra note 7; Letter of K&L Gates on behalf of AXA 

Equitable Life Insurance Company, Hartford 

Financial Services Group, Inc., Massachusetts 

Mutual Life Insurance Company, MetLife, Inc., and 

New York Life Insurance Company (Oct. 7, 2008) 

(‘‘K&L Gates Letter’’). 

55See, e.g., Coalition Letter, supra note 54; Letter 

of The Hartford Financial Services Group, Inc. 

(Sept. 10, 2008) (‘‘Hartford Letter’’); NAFA Letter, 

supra note 54. 56See, e.g., CAI 151A Letter, supra note 54; Old 

Mutual Letter, supra note 54; Sammons Letter, 

supra note 54. 57See United Benefit, supra note 8, 387 U.S. at 

211 (‘‘The basic difference between a contract 

which to some degree is insured and a contract of 

insurance must be recognized.’’). 

annuities as subject only to state 

insurance laws. 

There is a strong federal interest in 

providing investors with disclosure, 

antifraud, and sales practice protections 

when they are purchasing annuities that 

are likely to expose them to market 

volatility and risk. We believe that 

individuals who purchase indexed 

annuities that are more likely than not 

to provide payments that vary with the 

performance of securities are exposed to 

significant investment risks. They are 

confronted with many of the same risks 

and benefits that other securities 

investors are confronted with when 

making investment decisions. Moreover, 

they are more likely than not to 

experience market volatility because 

they are more likely than not to receive 

payments that vary with the 

performance of securities. 

We believe that the regulatory 

objectives that Congress was attempting 

to achieve when it enacted the 

Securities Act are present when the 

amounts payable by an insurer under an 

indexed annuity contract are more 

likely than not to exceed the guaranteed 

amounts. Therefore, we are adopting a 

rule that will define such contracts as 

falling outside the insurance exemption. 

2. Commenters’ Concerns Regarding 

Commission’s Analysis 

Many commenters raised significant 

concerns regarding the Commission’s 

analysis of indexed annuities under 

Section 3(a)(8). Commenters argued that 

the Commission’s analysis is 

inconsistent with applicable legal 

precedent, particularly the VALIC and 

United Benefit cases. Specifically, the 

commenters argued that the purchaser 

of an indexed annuity does not assume 

investment risk in the sense 

contemplated by applicable precedent, 

that the Commission failed to take into 

account the investment risk assumed by 

the insurer, and that the Commission’s 

analysis ignored the factors of marketing 

and mortality risk which have been 

articulated in applicable precedents. In 

addition, commenters questioned the 

need for federal securities regulation of 

indexed annuities, arguing that there is 

no evidence of widespread sales 

practice abuse in the indexed annuity 

marketplace, that state insurance 

regulators are effective in protecting 

purchasers of indexed annuities, and 

that the Commission’s disclosure 

requirements would not result in 

enhanced information flow to 

purchasers of indexed annuities. We 

disagree with each of these assertions 

for the reasons outlined below. 

Commission’s Analysis is Consistent 

With Applicable Precedents 

We disagree with commenters who 

argued that the Commission’s analysis is 

inconsistent with applicable legal 

precedents, particularly the VALIC and 

United Benefit cases.54 These 

commenters asserted, first, that because 

of guarantees of principal and minimum 

interest, the purchaser of an indexed 

annuity does not assume investment 

risk in the sense contemplated by 

applicable precedent which, in their 

view, is the risk of loss of principal. 

Second, the commenters argued that the 

Commission’s analysis failed to take 

into account the investment risk 

assumed by the insurer, including the 

risk associated with guaranteeing 

principal and a minimum interest rate 

and with guaranteeing in advance the 

formula for determining index-linked 

return. Third, commenters argued that 

the Commission’s analysis is 

inconsistent with precedent because it 

does not take into account the manner 

in which indexed annuities are 

marketed.55 Fourth, commenters faulted 

the Commission’s analysis for ignoring 

mortality risk.56

Our investment risk analysis is an 

application of the Court’s reasoning in 

the VALIC and United Benefit cases, and 

rule 151A applies that analysis with a 

specific test to determine the status 

under the federal securities laws of 

indexed annuities. Indexed annuities 

are a relatively new product and are 

different from the securities considered 

in those cases. These very differences 

have resulted in the uncertain legal 

status of indexed annuities from their 

introduction in the mid-1990s. Like the 

contract at issue in United Benefit, 

indexed annuities present a new case 

that requires us to determine whether ‘‘a 

contract which to some degree is 

insured’’ constitutes a ‘‘contract of 

insurance’’ for purposes of the federal 

securities laws.57 Indexed annuities 

offer to purchasers a financial 

instrument with uncertain and 

fluctuating returns that are, in part, 

securities-linked. We believe that 

whether such an instrument is a 

security hinges on the likelihood that 

the purchaser’s return will, in fact, be 

based on the returns of a securities 

index. In cases where the amounts 

payable by an insurer under an indexed 

annuity contract are more likely than 

not to exceed the amounts guaranteed 

under the contract, the amount the 

purchaser receives will be dependent on 

market returns and will vary because of 

investment risk. In such a case, we have 

concluded that, on a prospective basis, 

the indexed annuity is not entitled to 

rely on the Section 3(a)(8) exemption. 

Though the contract may to some degree 

be insured, it is not a contract of 

insurance because of the substantial 

investment risk assumed by the 

purchaser. 

A number of commenters equated 

investment risk with the risk of loss of 

principal for purposes of analysis under 

Section 3(a)(8) and argued that, because 

of guarantees of principal and minimum 

interest, the purchaser of an indexed 

annuity does not assume investment 

risk. We disagree. While the potential 

for loss of principal was important in 

the VALIC and United Benefit cases and 

helpful in analyzing the particular 

products at issue in those cases, it is by 


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58Zvi Bodie, Alex Kane and Alan J. Marcus, 

Investments, at 143 (2005) (‘‘The standard deviation 

of the rate of return is a measure of risk.’’). 

59Zvi Bodie, Alex Kane and Alan J. Marcus, 

Investments, at 144 (2005). 

60Our Office of Economic Analysis conducted a 

simulation, in which annual returns from the 

Center for Research in Security Prices (‘‘CRSP’’) 

capitalization-weighted NYSE index, annually 

rebalanced, from 1926 through 2007, are drawn 

randomly and aggregated (a bootstrap procedure). 

This procedure replicates the observed mean, 

standard deviation, skewness, kurtosis, and other 

observed moments of returns, but assumes that 

returns are intertemporally independent. Realized 

10-year returns in this period are negative 4% of the 

time, and there have been no 20-year negative 

returns. 

no means the only type of investment 

risk. Defining risk only as the possibility 

of principal loss or an approximate 

equivalent, as suggested by commenters, 

fails to account for important forms of 

risk and leads to conclusions 

inconsistent with the contemporary 

understanding of investment risk. Such 

a limited definition of risk would thus 

be incomplete. 

One widely accepted definition of 

‘‘risk’’ in financial instruments is the 

degree to which returns deviate from 

their statistical expectation.58

Accordingly, even investments 

guaranteeing a positive minimum return 

over long investment horizons, such as 

indexed annuities, may have returns 

that meaningfully and unpredictably 

deviate from the expected return and 

therefore have investment risk under 

this definition. 

For example, accepting the definition 

of risk suggested by commenters as a 

complete characterization of risk would 

lead to the conclusion that any two 

assets that both guarantee return of 

principal equally have no risk. 

However, we believe that the market 

would generally view an asset where the 

future payoff of the amount over the 

guaranteed principal return is uncertain 

to be more risky than a zero-coupon 

U.S. government bond maturing at the 

same date, which also guarantees 

principal return but has a nearly certain 

future payoff. Defining risk as the 

potential for loss of principal, or 

principal plus some minimal amount, 

misses important aspects of risk as 

commonly understood. While U.S. 

government bonds are commonly 

accepted as the standard benchmark of 

a nominally risk-free rate of return 

because their returns are considered to 

be nearly certain at specific horizons, 

the definition suggested by commenters 

fails to distinguish between these riskfree assets and assets that are protected 

against principal loss but that have 

uncertain payoffs above the guaranteed 

principal return.59

Additionally, under the definition of 

risk suggested by the commenters, most 

assets with positive expected returns 

would appear to have little to no risk 

over long horizons. As an example, 

using reasonable assumptions it can be 

estimated that a value-weighted 

portfolio of New York Stock Exchange 

(‘‘NYSE’’) stocks has approximately a 

6% chance of returning less than 

principal in 10 years, and 

approximately a 1% chance of returning 

less than principal in 20 years.60 Despite 

these relatively low probabilities of 

losing principal over long periods of 

time, we believe that it is generally 

understood that market participants, 

even those with long investment 

horizons, bear meaningful investment 

risk when investing in such a 

diversified portfolio of stocks. Indeed, 

investors generally consider modest 

long-term returns, even if greater than 

0% or some minimal rate, to be 

undesirable outcomes when the 

expected return was substantially 

greater. We therefore believe that the 

commenters’ suggestion that such a 

portfolio is without risk is at odds both 

with the commonly accepted meaning 

of the term as well as with the definition 

of risk generally accepted by financial 

economists. 

The purchaser of an indexed annuity 

assumes investment risk because his or 

her return is not known in advance and 

therefore varies from its expected value. 

When the amounts payable to the 

purchaser are more likely than not to 

exceed the guaranteed amounts, the 

investment risk assumed by the 

purchaser of an indexed annuity is 

substantial, and we believe that the 

contract should not be treated as an 

‘‘annuity contract’’ for purposes of the 

federal securities laws. We also note 

that indexed annuities are not, in fact, 

without the risk of principal loss. An 

indexed annuity purchaser who 

surrenders the contract during the 

surrender charge period, which for some 

indexed annuities may be in excess of 

15 years, may receive less than his or 

her original principal. Unlike a 

purchaser of a fixed annuity, a 

purchaser of an indexed annuity is 

dependent on favorable securities 

market returns to overcome the impact 

of the surrender charge and create a 

positive return rather than a loss. 

We also disagree with commenters 

who argued that the Commission’s 

analysis failed to take into account the 

investment risk assumed by the insurer, 

including the risk associated with 

guaranteeing principal and a minimum 

interest rate and with guaranteeing in 

advance the formula for determining 

securities-linked return. We agree with 

commenters that, in analyzing the status 

of indexed annuities under the federal 

securities laws, it is important to take 

into account the relative significance of 

the risks assumed by the insurer and the 

purchaser. In our analysis, the 

Commission does not ignore the risk 

assumed by the insurer as the 

commenters suggest. In fact, the rule, as 

proposed and adopted, specifically 

contemplates different outcomes based 

on the relative risks assumed by the 

insurer and purchaser. When the 

amounts payable by the insurer under 

the contract are more likely than not to 

exceed the amounts guaranteed, the 

contract loses the insurance exemption 

under rule 151A. 

Unlike a traditional fixed annuity 

where the investment risk for the 

contract is assumed by the insurer, or a 

traditional variable annuity where the 

investment risk for the contract is 

assumed by the purchaser, the very 

mixed nature of indexed annuities led 

the Commission to carefully consider 

the relative risks assumed by both 

parties to the contract. The fact that the 

rule does not define all indexed 

annuities as outside Section 3(a)(8), but 

rather sets forth a test for analyzing 

these contracts, reflects the 

Commission’s understanding that the 

status of these contracts under the 

federal securities laws hinges on the 

allocation of risk between both the 

insurer and the purchaser. Specifically, 

the rule recognizes that where the 

insurer is more likely than not to pay an 

amount that is fixed and guaranteed by 

the insurer, significant investment risks 

are assumed by the insurer and such a 

contract may therefore be entitled to the 

Section 3(a)(8) exemption. Conversely, 

where the purchaser is more likely than 

not to receive an amount that is variable 

and dependent on fluctuations and 

movements in the securities markets, 

rule 151A recognizes the significant 

investment risks assumed by the 

purchaser and specifies that such a 

contract would not be considered to fall 

within Section 3(a)(8). Moreover, both 

the guaranteed interest rate within an 

indexed annuity and the formula for 

crediting interest are typically reset on 

an annual basis. This provides insurers 

with a number of ways to reduce or 

eliminate their investment risks, 

including hedging market risk through 

the purchase of options or other 

derivatives and adjusting guarantees 

downwards in subsequent years to offset 

losses in earlier years of a contract. For 

purposes of analysis under Section 

3(a)(8), we do not consider these 

investment risks to be comparable to 


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3146 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

61Brief for the United States as Amicus Curiae on 

Petition for a Writ of Certiorari to the United States 

Court of Appeals for the Seventh Circuit, VALIC v. 

Otto, No. 87–600, October Term, 1987. See, e.g., 

Aviva Letter, supra note 54; CAI 151A Letter, supra 

note 54; Coalition Letter, supra note 54; NAFA 

Letter, supra note 54. 

62See, e.g., Coalition Letter, supra note 54; NAFA 

Letter, supra note 54; Old Mutual Letter, supra note 

54; Sammons Letter, supra note 54. 

63See, e.g., K&L Gates Letter, supra note 54. But 

see Letter of National Western Life Insurance 

Company (Nov. 17, 2008) (‘‘Second National 

Western Letter’’) (criticizing the K&L Gates 

position). 

64See, e.g., Allianz Letter, supra note 54; 

American Equity Letter, supra note 54; Coalition 

Letter, supra note 54. 

65See, e.g., Allianz Letter, supra note 54 (55.45% 

purchased indexed annuities because of guarantees 

and 54.88% because of tax deferral). 

66See Allianz Letter, supra note 54. But see 

Coalition Letter, supra note 54 (sampling by some 

indexed annuity issuers reveals that a large majority 

of purchasers acquire fixed annuities for stability of 

premiums). We are not able to ascertain from the 

statement in the Coalition Letter the degree to 

which purchasers identified growth as a goal as the 

letter addressed only stability of premiums. 

67See, e.g., CAI 151A Letter, supra note 54; Old 

Mutual Letter, supra note 54; Sammons Letter, 

supra note 54. 

68Securities Act Release No. 6645, supra note 35. 

69 225 F.Supp. 2d 743 (W.D. Ky. 2002). 

those of the indexed annuity purchaser, 

who bears the risk of a fluctuating and 

uncertain return based on the 

performance of a securities index. 

Some commenters argued that the 

Commission’s investment risk analysis 

is inconsistent with its own position in 

the Brief for the United States as 

Amicus Curiae in Variable Annuity Life 

Insurance Company, et al. v. Otto 

(‘‘VALIC v. Otto’’).61 That matter 

involved an annuity in which the 

insurer guaranteed principal and a 

minimum rate of interest and also 

could, in its discretion, credit excess 

interest above the guaranteed rate. The 

Commission argued that by 

guaranteeing principal and an adequate 

fixed rate of interest, and guaranteeing 

payment of all discretionary excess 

interest declared under the contract, the 

insurer assumed sufficient investment 

risk under the contract for it to fall 

within Section 3(a)(8), notwithstanding 

the assumption of the risk by the 

contract owner that the excess interest 

rate could be reduced or eliminated at 

the insurer’s discretion. 

We agree with commenters that our 

analysis is different from the position 

taken by the Commission in the VALIC 

v. Otto brief. However, this results from 

the fact that indexed annuity contracts 

are different from the contracts 

considered in VALIC v. Otto. Unlike the 

contracts in that case, which were 

annuity contracts that provided for 

wholly discretionary payment of excess 

interest, indexed annuities contractually 

specify that excess interest will be 

calculated by reference to a securities 

index. As a result, the purchaser of an 

indexed annuity is contractually bound 

to assume the investment risk for the 

fluctuations and movements in the 

underlying securities index. The 

contract in VALIC v. Otto did not 

impose this securities-linked investment 

risk on the purchaser. Moreover, we 

note that the Supreme Court did not 

grant certiorari in VALIC v. Otto. The 

final opinion in the case was rendered 

by the Seventh Circuit and was to the 

effect that, as a result of the insurer’s 

discretion to declare excess interest 

under the contract, the insurer’s 

guarantees were not sufficient to exempt 

the contract from the federal securities 

laws. Thus, the Commission’s position 

in the case was not adopted by either 

the Seventh Circuit or the Supreme 

Court. We believe that the position 

articulated in the VALIC v. Otto brief is 

not relevant in the context of indexed 

annuities and, to the extent that the 

brief may imply otherwise, the position 

taken in the brief does not reflect the 

Commission’s current position. Where 

the contractual return paid by an insurer 

under an annuity contract is 

retroactively determined based, in 

whole or in part, on the returns of a 

security in a prior period, we do not 

believe that fact—and the investment 

risk that it entails—can be ignored in 

determining whether the contract is an 

‘‘annuity contract’’ that is entitled to the 

Section 3(a)(8) exemption. 

Though rule 151A does not explicitly 

incorporate a marketing factor, we 

disagree with commenters who argued 

that the Commission’s analysis is 

inconsistent with precedent, because it 

does not take into account the manner 

in which indexed annuities are 

marketed.62 The very nature of an 

indexed annuity, where return is 

contractually linked to the return on a 

securities index, is, to a very substantial 

extent, designed to appeal to purchasers 

on the prospect of investment growth.63

This is particularly true in the case of 

indexed annuities that rule 151A 

defines as not ‘‘annuity contracts’’—i.e., 

indexed annuities where the purchaser 

is more likely than not to receive 

securities-linked returns. It would be 

inconsistent with the character of such 

an indexed annuity, and potentially 

misleading, to market the annuity 

without placing significant emphasis on 

the securities-linked return and the 

related risks. We disagree with 

commenters who argued that purchasers 

do not buy indexed annuities on the 

basis of the prospect for investment 

growth, but rather on the basis of 

guarantees and stability of principal.64

We agree with commenters that 

purchasers of indexed annuities, just 

like purchasers of variable annuities, 

have a blend of reasons for their 

purchase, including product guarantees 

and tax deferral.65 However, we also 

believe that purchasers who are 

uninterested in the growth offered by 

securities-linked returns would opt for 

higher fixed returns in lieu of the lower 

fixed returns, coupled with the prospect 

of securities-linked growth, offered by 

indexed annuities. Indeed, data 

submitted by one indexed annuity 

issuer confirm that almost half (46.60%) 

of its 2008 indexed annuity purchasers 

identify the prospect for growth as a 

reason for their purchase.66 Just as with 

variable annuities, the fact that indexed 

annuities appeal to purchasers for a 

variety of reasons does not detract from 

the significant appeal of securitieslinked growth. Accordingly, we have 

concluded that, in light of the nature of 

indexed annuities, it is unnecessary to 

include a separate marketing factor 

within rule 151A. The Supreme Court 

did not address marketing in VALIC. 

Similarly, we have concluded that a 

separate marketing analysis is 

unnecessary in the case of indexed 

annuities that are addressed by rule 

151A. 

Nor do we agree with commenters 

who argued that the Commission’s 

analysis departs from precedent in that 

it does not take into account mortality 

risk.67 In both VALIC and United 

Benefit, the Supreme Court found the 

investment risk test to be determinative 

(together with the marketing test in the 

case of United Benefit) that an insurance 

contract was not entitled to the Section 

3(a)(8) exemption. While the 

Commission has stated, and we 

continue to believe, that the presence or 

absence of assumption of mortality risk 

may be an appropriate factor to consider 

in a Section 3(a)(8) analysis,68 we do not 

believe that it should be given undue 

weight in determining the status of a 

contract under the federal securities 

laws, where it is clear from the nature 

of the investment risk that the contract 

is not an ‘‘annuity contract’’ for 

securities law purposes. We have 

concluded that this is the case for an 

indexed annuity where the amounts 

payable by the insurance company 

under the contract are more likely than 

not to exceed the amounts guaranteed 

under the contract. 

Some commenters criticized the 

Commission for failing to adequately 

address a federal district court decision, 

Malone v. Addison Ins. Marketing, Inc. 

(‘‘Malone’’),69 where the court 


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Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 3147 

70See, e.g., Coalition Letter, supra note 54; NAFA 

Letter, supra note 54; Sammons Letter, supra note 

54. 

71See supra note 38. 

72See, e.g., Letter of Joseph P. Borg, Director, 

Alabama Securities Commission (Aug. 5, 2008) 

(‘‘Alabama Letter’’); Cornell Letter, supra note 7; 

Letter of Financial Planning Association (Sept. 10, 

2008) (‘‘FPA Letter’’); FINRA Letter, supra note 7; 

Hartford Letter, supra note 55; ICI Letter, supra note 

7; Letter of Max Maxfield, Secretary of State, State 

of Wyoming (Sept. 9, 2008) (‘‘Wyoming Letter’’). 

73See, e.g., American Equity Letter, supra note 

54; Coalition Letter, supra note 54; Letter of FBL 

Financial Group (Sept. 8, 2008) (‘‘FBL Letter’’); 

Lafayette Letter, supra note 54; Maryland Letter, 

supra note 54; NAIFA Letter, supra note 54; 

Sammons Letter, supra note 54. 

74See, e.g., Allianz Letter, supra note 54; 

Academy Letter, supra note 54; Letter of American 

Bankers Insurance Association (Sept. 10, 2008) 

(‘‘American Bankers Letter’’); American Equity 

Letter, supra note 54; American National Letter, 

supra note 54; Aviva Letter, supra note 54; 

Coalition Letter, supra note 54; Letter of 

Connecticut Insurance Commissioner (Aug. 25, 

2008) (‘‘Connecticut Letter’’); Letter of Iowa 

Insurance Commissioner (Sept. 10, 2008) (‘‘Iowa 

Letter’’); Maryland Letter, supra note 54; NAFA 

Letter, supra note 54; NAIC Officer Letter, supra 

note 54; NAIFA Letter, supra note 54; National 

Western Letter, supra note 54; Old Mutual Letter, 

supra note 54; Sammons Letter, supra note 54; 

Transamerica Letter, supra note 54. 

75See, e.g., Allianz Letter, supra note 54; Aviva 

Letter, supra note 54. 

76See, e.g., Advantage Group Letter, supra note 

54; American Equity Letter, supra note 54; 

Maryland Letter, supra note 54; NAIFA Letter, 

supra note 54; Letter of Old Mutual Financial 

Network (Nov. 12, 2008) (‘‘Second Old Mutual 

Letter’’); Letter Type A (‘‘Letter A’’); Letter Type E 

(‘‘Letter E’’). ‘‘Letter Type’’ refers to a form letter 

submitted by multiple commenters, which is listed 

on the Commission’s Web site (http://www.sec.gov/ 

comments/s7-14-08/s71408.shtml) as a single 

comment, with a notation of the number of letters 

received by the Commission matching that form 

type. 

77See, e.g., American Equity Letter, supra note 

54; FBL Letter supra note 73; Maryland Letter, 

supra note 54; NAIFA Letter, supra note 54; Old 

Mutual Letter, supra note 54; Sammons Letter, 

supra note 54; Second National Western Letter, 

supra note 63. 

78United Benefit, supra note 8, 387 U.S. at 211. 

79 Id. 

80 VALIC, supra note 8, 359 U.S. at 72. 

determined that a particular indexed 

annuity was entitled to rely on Section 

3(a)(8).70 We disagree with the Malone 

court’s analysis of investment risk, 

which, we believe, understated the 

investment risk to the purchaser of an 

indexed annuity from the fluctuating 

and uncertain securities-linked return 

and therefore is inconsistent with 

applicable legal precedent. We also 

disagree with the court’s interpretation 

of the Commission’s rule 151 safe 

harbor, which does not apply to indexed 

annuities. As we discussed in the 

proposing release, in that case, the 

district court concluded that the 

contracts at issue fell within the 

Commission’s rule 151 safe harbor 

notwithstanding the fact that they 

apparently did not meet the test 

articulated by the Commission in 

adopting rule 151, i.e., specifying an 

index that would be used to determine 

a rate that would remain in effect for at 

least one year.71 Instead, the contracts 

appear to have guaranteed the indexbased formula, but not, as required by 

rule 151, the actual rate of interest. 

Need for Federal Securities Regulation 

Some commenters agreed that federal 

securities regulation is needed with 

respect to indexed annuities.72 Other 

commenters questioned the need for 

federal securities regulation of indexed 

annuities, and we disagree with those 

commenters. These commenters argued, 

first, that there is no evidence of 

widespread sales practice abuse in the 

indexed annuity marketplace, which 

would suggest a need for federal 

securities regulation.73 Second, 

commenters argued that state insurance 

regulators are effective in protecting 

purchasers of indexed annuities.74

Third, commenters argued that the 

Commission’s disclosure requirements 

would not result in enhanced 

information flow to purchasers of 

indexed annuities.75

We believe that the commenters who 

argued that regulation of indexed 

annuities under the federal securities 

laws is unnecessary because there is no 

evidence of widespread sales abuse 

misunderstand the exemption under 

Section 3(a)(8) of the Securities Act as 

well as our purpose in proposing, and 

now adopting, rule 151A. Some of these 

commenters cited data that they argued 

demonstrated that the incidence of 

abuse in the indexed annuity 

marketplace is low.76 Some of these 

commenters argued that the proposing 

release failed to present persuasive 

evidence of sales practice abuse.77

A vital aspect of the Commission’s 

mission is investor protection. As a 

result, reports of sales practice abuses 

surrounding a product, indexed 

annuities, whose status has long been 

unresolved under the federal securities 

laws, are a matter of grave concern to us. 

However, the presence or absence of 

sales practice abuses is irrelevant in 

determining whether an annuity 

contract is entitled to the exemption 

from federal securities regulation under 

Section 3(a)(8) of the Securities Act. 

Where an annuity contract is entitled to 

the Section 3(a)(8) exemption, the 

federal securities laws do not apply, and 

purchasers are not entitled to their 

protections, regardless of whether sales 

practice abuses may be pervasive. 

Where, however, an annuity contract is 

not entitled to the Section 3(a)(8) 

exemption, which we have concluded is 

the case with respect to certain indexed 

annuities, Congress intended that the 

federal securities laws apply, and 

purchasers are entitled to the disclosure 

and suitability protections under those 

laws without regard to whether there is 

a single documented incident of abuse. 

This view is consistent with 

applicable precedent which makes clear 

that the necessity for federal regulation 

arises from the characteristics of the 

financial instrument itself. This has 

been the approach of the United States 

Supreme Court in the two leading 

precedents. In those cases, the Court 

made a realistic judgment about the 

point at which a contract between a 

purchaser and an insurance company 

tips from being the sole concern of state 

regulators of insurance to also become 

the concern of the federal securities 

laws. 

The United Benefit Court observed 

that the products at issue in that case 

were ‘‘considered to appeal to the 

purchaser not on the usual insurance 

basis of stability and security but on the 

prospect of ‘growth’ through sound 

investment management.’’ 78 They were 

‘‘pitched to the same consumer interest 

in growth through professionally 

managed investment,’’ and, as a result, 

the Court concluded that it seemed 

‘‘eminently fair that a purchaser of such 

a plan be afforded the same advantages 

of disclosure which inure to a mutual 

fund purchaser under Section 5 of the 

Securities Act.’’ 79

The United Benefit decision picked 

up and extended a theme previously 

discussed in Justice Brennan’s 

concurring opinion in VALIC. Justice 

Brennan examined the differing nature 

of state regulation of insurance and 

federal regulation of the securities 

markets. He looked at the nature of the 

obligation the insurer assumed and its 

connection to the regulation of 

investment policy. He concluded that 

there came a point when the ‘‘contract 

between the investor and the 

organization no longer squares with the 

sort of contract in regard to which 

Congress in 1933 thought its ‘disclosure’ 

statute was unnecessary.’’ 80

It is precisely this realistic judgment 

about identifying the appropriate 

circumstances in which to apply the 

disclosure and other regulatory 

protections of the federal securities laws 

that rule 151A makes. That is why the 

rule adopts the principle that an 

indexed annuity providing for a 

combination of minimum guaranteed 

payments plus a potentially higher 

payment dependent on the performance 

of a securities index does not qualify for 

the insurance exclusion in Section 


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3148 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

81See, e.g., Allianz Letter, supra note 54; 

American Bankers Letter, supra note 74; American 

Equity Letter, supra note 54; FBL Letter supra note 

73; Maryland Letter, supra note 54; NAFA Letter, 

supra note 54; Letter of National Association of 

Health Underwriters (Sept. 10, 2008) (‘‘Health 

Underwriters Letter’’); National Western Letter, 

supra note 54; Letter of Vermont Department of 

Banking, Insurance, Securities and Health Care 

Administration (Nov. 17, 2008). 

82See, e.g., Allianz Letter, supra note 54; 

American Equity Letter, supra note 54; Aviva 

Letter, supra note 54; Coalition Letter, supra note 

54; Maryland Letter, supra note 54; NAFA Letter, 

supra note 54; NAIFA Letter, supra note 54; 

National Western Letter, supra note 54; Old Mutual 

Letter, supra note 54; Sammons Letter, supra note 

54. 

83NAIC Suitability in Annuity Transactions 

Model Regulation (Model 275–1) (2003). 

84National Association of Insurance 

Commissioners, Draft Model Summaries, available 

at: http://www.naic.org/committees_models.htm. 

85See, e.g., Letter A, supra note 76; American 

Bankers Letter, supra note 74; CAI 151A Letter, 

supra note 54; NAFA Letter, supra note 54; NAIC 

Officer Letter, supra note 54; NAIFA Letter, supra 

note 54. 

86NAIC Annuity Disclorues Model Regulation 

(Model 245–1) (1998). 

87See, e.g., Aviva Letter, supra note 54; CAI 151A 

Letter, supra note 54; NAFA Letter, supra note 54; 

NAIC Officer Letter, supra note 54; NAIFA Letter, 

supra note 54. 

88See, e.g., American Equity Letter, supra note 

54; Aviva Letter, supra note 54; Coalition Letter, 

supra note 54; Maryland Letter, supra note 54; 

NAIC Officer Letter, supra note 54; NAFA Letter, 

supra note 54. 

89See, e.g., Aviva Letter, supra note 54; Iowa 

Letter, supra note 74; NAIC Officer Letter, supra 

note 54. 

90See, e.g., Iowa Letter, supra note 74; NAIC 

Officer Letter, supra note 54. 

91See, e.g., NAIC Officer Letter, supra note 54. 

92See Voss Letter, supra note 13 (proposing to 

accelerate NAIC efforts to strengthen the NAIC 

model laws affecting indexed annuity products and 

urge adoption by more of the member states). 93See, e.g., Allianz Letter, supra note 54; 

American Equity Letter, supra note 54; Letter of R. 

Preston Pitts (Sept. 10, 2008) (‘‘Pitts Letter’’); 

Sammons Letter, supra note 54; Karlan Tucker, 

Tucker Advisory Group, Inc. (Sept. 10, 2008) 

(‘‘Tucker Letter’’). 94See, e.g., Letter of American Council of Life 

Insurers (Sep. 19, 2008) (‘‘ACLI Letter’’); Allianz 

Letter, supra note 54; Aviva Letter, supra note 54; 

CAI 151A Letter, supra note 54; National Western 

Letter, supra note 54; Sammons Letter, supra note 

54; Transamerica Letter, supra note 54. 

3(a)(8) when the amounts payable by the 

insurer under the contact are more 

likely than not to exceed the amounts 

guaranteed under the contract. 

Our intent in adopting rule 151A is to 

clarify the status of indexed annuities 

under the federal securities laws, so that 

purchasers of these products receive the 

protections to which they are entitled by 

federal law and so that issuers and 

sellers of these products are not subject 

to uncertainty and litigation risk with 

respect to the laws that are applicable. 

We expect that clarity will enhance 

investor protection in the future, and 

indeed will help prevent future sales 

practice abuses, but rule 151A is not 

based on the perception that there are 

widespread sales abuses in the indexed 

annuity marketplace. Rather, the rule is 

intended to address an uncertain area of 

the law, which, because of the growth 

of the indexed annuity market and 

allegations of sales practice abuses, has 

become of pressing importance. 

A number of commenters cited efforts 

by state insurance regulators to address 

disclosure and sales practice concerns 

with respect to indexed annuities as 

evidence that federal securities 

regulation is unnecessary and could 

result in duplicative or overlapping 

regulation.81 Commenters argued that 

state regulation extends beyond 

overseeing solvency and adequacy of 

the insurers’ reserves, and that it is also 

addressed to investor protection issues 

such as suitability and disclosure.82

Commenters cited, in particular, the 

NAIC Suitability in Annuity 

Transactions Model Regulation,83 which 

has been adopted in 35 states,84 and its 

adoption by the majority of states as 

evidence that states are addressing 

suitability concerns in connection with 

indexed annuity sales.85 Commenters 

also noted that a number of states have 

adopted the NAIC Annuity Disclosure 

Model Regulation,86 which has been 

adopted in 22 states and which requires 

delivery of certain disclosure 

documents regarding indexed annuity 

contracts.87 Commenters also cited the 

existence of state market conduct 

examinations, the use of state 

enforcement and investigative authority, 

and licensing and education 

requirements applicable to insurance 

agents who sell indexed annuities.88

Commenters described a number of 

recent and ongoing efforts by state 

insurance regulators. Some commenters 

cited efforts being undertaken by 

individual states. For example, 

commenters cited an Iowa regulation 

which recently became effective 

requiring that agents receive indexed 

product training approved by the Iowa 

Insurance Division before they can sell 

indexed annuity products.89 In 

addition, commenters stated that Iowa 

has partnered with the American 

Council of Life Insurers (‘‘ACLI’’) to 

operate a one-year pilot project with 

some ACLI members using templates 

developed for disclosure regarding 

indexed annuities, with the goal of 

assuring uniformity among insurers in 

the preparation of disclosure 

documents.90 Commenters also noted 

recent efforts by state regulators 

addressed to annuities generally, such 

as the creation of NAIC working groups 

to review and consider possible 

improvements to the NAIC Suitability in 

Annuity Transactions Model Regulation 

and the NAIC Annuity Disclosure 

Model Regulation.91

We applaud the efforts in recent years 

of state insurance regulators to address 

sales practice complaints that have 

arisen with respect to indexed 

annuities, and it is not our intention to 

question the effectiveness of state 

regulation. Nonetheless, we do not 

believe that the states’ regulatory efforts, 

no matter how strong, can substitute for 

our responsibility to identify securities 

covered by the federal securities laws 

and the protections Congress intended 

to apply. State insurance laws, enforced 

by multiple regulators whose primary 

charge is the solvency of the issuing 

insurance company, cannot serve as an 

adequate substitute for uniform, 

enforceable investor protections 

provided by the federal securities laws. 

Indeed, at least one state insurance 

regulator acknowledged the 

developmental nature of state efforts 

and the lack of uniformity in those 

efforts.92 Where the purchaser of an 

indexed annuity assumes the 

investment risk of an instrument that 

fluctuates with the securities markets, 

and the contract therefore does not fall 

within the Section 3(a)(8) exemption, 

the application of state insurance 

regulation, no matter how effective, is 

not determinative as to whether the 

contract is subject to the federal 

securities laws. 

Some commenters also cited 

voluntary measures taken by insurance 

companies, such as suitability reviews 

and the provision of plain English 

disclosures, as a reason why federal 

securities regulation of indexed 

annuities is unnecessary.93 While these 

voluntary measures are commendable, 

they are not a substitute for the 

provisions of the federal securities laws 

that Congress mandated. 

Finally, we note that some 

commenters argued that regulation of 

indexed annuities by the Commission 

would not enhance investor protection, 

in particular because the Commission’s 

disclosure scheme is not tailored to 

these contracts.94 Commenters cited a 

number of factors, including the lack of 

a registration form that is well-suited to 

indexed annuities, questions about the 

appropriate method of accounting to be 

used by insurance companies that issue 

indexed annuities, questions about 

advertising restrictions that may apply 

under the federal securities laws, and 

concerns about parity of the registration 

process vis-a`-vis mutual funds. We 

acknowledge that, as a result of indexed 

annuity issuers having historically 

offered and sold their contracts without 


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95See Form N–4 [17 CFR 239.17b and 274.11c] 

(registration form for variable annuities); Form N– 

6 [17 CFR 239.17c and 274.11d] (registration form 

for variable life insurance). 

96Rule 151A(a). 

97 Id. We note that the majority of states include 

in their insurance laws provisions that define 

annuities. See, e.g., ALA. CODE § 27–5–3 (2008); 

CAL. INS. CODE § 1003 (West 2007); N.J. ADMIN. 

CODE tit. 11, § 4–2.2 (2008); N.Y. INS. LAW § 1113 

(McKinney 2008). Those states that do not expressly 

define annuities typically have regulations in place 

that address annuities. See, e.g., Iowa Admin. Code 

§ 191–15.70 (5078) (2008); Kan. Admin. Regs. § 40– 

2–12 (2008); Minn. Stat. § 61B.20 (2007); Miss. Code 

Ann. § 83–1–151 (2008). 

98One commenter was concerned that rule 151A 

might apply to a certain type of health insurance 

contract, where some portion of any favorable 

financial experience of the insurer is refunded to 

the insured.’’ Letter of America’s Health Insurance 

Plans (Sep. 10, 2008) (‘‘AHIP Letter’’). Rule 151A 

will not apply to contracts that are regulated under 

state insurance law as health insurance. 

99See, e.g., Aviva Letter, supra note 54; Sammons 

Letter, supra note 54 (requesting clarification that 

rule 151A does not apply to indexed life insurance 

policies). 

100Rule 151A(d). 

101The assets of a variable annuity are held in a 

separate account of the insurance company that is 

insulated for the benefit of the variable annuity 

owners from the liabilities of the insurance 

company, and amounts paid to the owner under a 

variable annuity vary according to the investment 

experience of the separate account. See Black and 

Skipper, supra note 39, at 174–77 (2000). 

102See, e.g., VALIC, supra note 8, 359 U.S. 65; 

United Benefit, supra note 8, 387 U.S. 202. In 

addition, an insurance company separate account 

issuing variable annuities is an investment 

company under the Investment Company Act of 

1940. See Prudential Ins. Co. of Am. v. SEC, 326 

F.2d 383 (3d Cir. 1964). 

103Rule 151A(a)(1). 

104Rule 151A(a)(2). 

105Proposed rule 151A(a)(1). 

106See, e.g., ACLI Letter, supra note 94; Allianz 

Letter, supra note 54; Aviva Letter, supra note 54; 

Letter of AXA Equitable Life Insurance Company 

(Sept. 10, 2008) (‘‘AXA Equitable Letter’’); Letter of 

Financial Services Institute (Sept. 10, 2008) (‘‘FSI 

Letter’’); CAI 151A Letter, supra note 54; Hartford 

Letter, supra note 55; NAFA Letter, supra note 54; 

NAIFA Letter, supra note 54; Letter of NAVA (Sept. 

10, 2008) (‘‘NAVA Letter’’); Old Mutual Letter, 

supra note 54; Sammons Letter, supra note 54; 

Second Academy Letter, supra note 54; 

Transamerica Letter, supra note 54. 

107See, e.g., Letter of Association for Advanced 

Life Underwriting (Oct. 31, 2008); AXA Equitable 

Letter, supra note 106. 

complying with the federal securities 

laws, the Commission has not created 

specific disclosure requirements 

tailored to these products. This fact, 

though, is not relevant in determining 

whether indexed annuities are subject to 

the federal securities laws. The 

Commission has a long history of 

creating appropriate disclosure 

requirements for different types of 

securities, including securities issued by 

insurance companies, such as variable 

annuities and variable life insurance.95

We note that we are providing a twoyear transition period for rule 151A, 

and, during this period, we intend to 

consider how to tailor disclosure 

requirements for indexed annuities. We 

encourage indexed annuity issuers to 

work with the Commission during that 

period to address their concerns. 

3. Definition 

Scope of the Definition 

Rule 151A will apply, as proposed, to 

a contract that is issued by a corporation 

subject to the supervision of the 

insurance commissioner, bank 

commissioner, or any agency or officer 

performing like functions, of any State 

or Territory of the United States or the 

District of Columbia.96 This language is 

the same language used in Section 

3(a)(8) of the Securities Act. Thus, the 

insurance companies covered by the 

rule are the same as those covered by 

Section 3(a)(8). 

In addition, in order to be covered by 

the rule, a contract must be subject to 

regulation as an annuity under state 

insurance law.97 The rule will not apply 

to contracts that are regulated under 

state insurance law as life insurance, 

health insurance, or any form of 

insurance other than an annuity, and it 

does not apply to any contract issued by 

an insurance company if the contract 

itself is not subject to regulation under 

state insurance law.98 Thus, rule 151A 

itself will not apply to indexed life 

insurance policies,99 in which the cash 

value of the policy is credited with a 

guaranteed minimum return and a 

securities-linked return. The status of an 

indexed life insurance policy under the 

federal securities laws will continue to 

be a facts and circumstances 

determination, undertaken by reference 

to the factors and analysis that have 

been articulated by the Supreme Court 

and the Commission. We note, however, 

that the considerations that form the 

basis for rule 151A are also relevant in 

analyzing indexed life insurance 

because indexed life insurance and 

indexed annuities share certain features 

(e.g., securities-linked returns). 

The adopted rule, like the proposed 

rule, expressly states that it does not 

apply to any contract whose value 

varies according to the investment 

experience of a separate account.100 The 

effect of this provision is to eliminate 

variable annuities from the scope of the 

rule.101 It has long been established that 

variable annuities are not entitled to the 

exemption under Section 3(a)(8) of the 

Securities Act, and, accordingly, the 

new definition does not cover them or 

affect their regulation in any way.102

Definition of ‘‘Annuity Contract’’ and 

‘‘Optional Annuity Contract’’ 

We are adopting, with modifications 

to address commenters’ concerns, the 

proposal that an annuity issued by an 

insurance company would not be an 

‘‘annuity contract’’ or an ‘‘optional 

annuity contract’’ under Section 3(a)(8) 

of the Securities Act if the annuity has 

two characteristics. As adopted, those 

characteristics are as follows. First, the 

contract specifies that amounts payable 

by the insurance company under the 

contract are calculated at or after the 

end of one or more specified crediting 

periods, in whole or in part, by 

reference to the performance during the 

crediting period or periods of a security, 

including a group or index of 

securities.103 Second, amounts payable 

by the insurance company under the 

contract are more likely than not to 

exceed the amounts guaranteed under 

the contract.104

Annuities Subject to Rule 151A 

The first characteristic, as proposed 

and as adopted, is intended to describe 

indexed annuities, which are the subject 

of the rule. As proposed, this 

characteristic would simply have 

required that amounts payable by the 

insurance company under the contract 

are calculated, in whole or in part, by 

reference to the performance of a 

security, including a group or index of 

securities.105 We have modified this 

characteristic to address the concern 

expressed by many commenters that, as 

proposed, the first characteristic was 

overly broad and would reach annuities 

that were not indexed annuities.106

Commenters were concerned that the 

rule could, for example, be interpreted 

as extending to traditional fixed 

annuities, where amounts payable 

under the contract accumulate at a fixed 

interest rate, or to discretionary excess 

interest contracts, where amounts 

payable under the contract may include 

a discretionary excess interest 

component over and above the 

guaranteed minimum interest rate 

offered under the contract.107 With both 

traditional fixed annuities and 

discretionary excess interest contracts, 

the interest rates are often based, at least 

in part, on the performance of the 

securities held by the insurer’s general 

account. 

The modified language of the first 

characteristic addresses commenters’ 

concerns in three ways. First, the 

language requires that the contract itself 

specify that amounts payable by the 

insurance company are calculated by 

reference to the performance of a 

security. Thus, a contract will not be 

covered by the proposed rule unless the 

insurance company is contractually 

bound to pay amounts that are 


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108AXA Equitable Letter, supra note 106; 

Hartford Letter, supra note 55; ICI Letter, supra note 

7; K&L Gates Letter, supra note 54. 

109See supra note 38 and accompanying text. 

110A commenter inquired whether an annuity 

product whose returns were indexed to the 

consumer price index, a real estate index, or a 

commodities index would be considered a security. 

Letter of Meaghan L. McFadden (Aug. 13, 2008). 

Rule 151A, by its terms, does not apply to such an 

annuity. 

111 17 CFR 230.100(b). 

112See, e.g., CAI 151A Letter, supra note 54; 

National Western Letter, supra note 54; Sammons, 

supra note 54. 

113See, e.g., CAI 151A Letter, supra note 54; 

National Western Letter, supra note 54; Sammons, 

supra note 54. 

114For simplicity, we are referring to payments to 

the purchaser. The rule, however, references 

payments by the insurer without reference to a 

specified payee. In performing the analysis, 

payments to any payee, including the purchaser, 

annuitant, and beneficiaries, must be included. 

dependent upon the performance of a 

security. While an insurance company 

may, in fact, look to the performance of 

the securities in its general account in, 

for example, establishing the rate to be 

paid under a traditional fixed annuity, 

such a contract does not itself obligate 

the insurer to do so or undertake in any 

way that the purchaser will receive 

payments that are linked to the 

performance of any security. Second, 

the language requires that the amounts 

payable by the insurance company be 

calculated at or after the end of one or 

more specified crediting periods by 

reference to the performance during the 

crediting period of a security. That is, in 

order to be covered by the rule, an 

annuity contract must provide that the 

amount to be paid with respect to a 

crediting period is determined 

retrospectively, by reference to the 

performance during the period of a 

security. This retrospective 

determination of amounts to be paid is 

characteristic of indexed annuities and 

eliminates from the scope of the rule 

discretionary excess interest contracts, 

pursuant to which a specified interest 

rate may be established by reference to 

the past performance of a security or 

securities and applied on a prospective 

basis with respect to a future crediting 

period. Third, limiting the rule to 

contracts where the amount payable is 

determined retrospectively addresses 

the concerns of the commenters that the 

rule, as proposed, could reach annuity 

contracts covered by the rule 151 safe 

harbor.108 As explained above, contracts 

where the amount payable is 

determined retrospectively do not fall 

within rule 151.109

Rule 151A, like the proposed rule, 

will apply whenever any amounts 

payable under the contract under any 

circumstances, including full or partial 

surrender, annuitization, or death, 

satisfy the first characteristic of the rule. 

If, for example, a contract specifies that 

the amount payable under a contract 

upon a full surrender is not calculated 

at or after the end of one or more 

specified crediting periods by reference 

to the performance during the period or 

periods of a security, but the amount 

payable upon annuitization is so 

calculated, then the contract would 

need to be analyzed under the rule. As 

another example, if a contract specifies 

that amounts payable under the contract 

are partly fixed in amount and partly 

dependent on the performance of a 

security in the manner specified by the 

rule, the contract would need to be 

analyzed under the rule. 

We note that, like the proposal, rule 

151A applies to contracts under which 

amounts payable are calculated by 

reference to the performance of a 

security, including a group or index of 

securities. Thus, the rule, by its terms, 

applies to indexed annuities but also to 

other similar annuities where the 

contract specifies that amounts payable 

are retrospectively calculated by 

reference to a single security or any 

group of securities.110 The federal 

securities laws, and investors’ interests 

in full and fair disclosure and sales 

practice protections, are equally 

implicated, whether amounts payable 

under an annuity are retrospectively 

calculated by reference to a securities 

index, another group of securities, or a 

single security. 

The term ‘‘security’’ in rule 151A has 

the same broad meaning as in Section 

2(a)(1) of the Securities Act. Rule 151A 

does not define the term ‘‘security,’’ and 

our existing rules provide that, unless 

otherwise specifically provided, the 

terms used in the rules and regulations 

under the Securities Act have the same 

meanings defined in the Act.111

‘‘More Likely Than Not’’ Test 

The second characteristic sets forth 

the test that would define a class of 

indexed annuity contracts that are not 

‘‘annuity contracts’’ or ‘‘optional 

annuity contracts’’ under the Securities 

Act and that, therefore, are not entitled 

to the Section 3(a)(8) exemption. As 

adopted, the second characteristic 

defines that class to include those 

contracts where the amounts payable by 

the insurance company under the 

contract are more likely than not to 

exceed the amounts guaranteed under 

the contract. 

We are adopting the second 

characteristic as proposed. As explained 

above, by purchasing such an indexed 

annuity, the purchaser assumes the risk 

of an uncertain and fluctuating financial 

instrument, in exchange for exposure to 

future, securities-linked returns. As a 

result, the purchaser assumes many of 

the same risks that investors assume 

when investing in mutual funds, 

variable annuities, and other securities. 

The rule that we are adopting will 

provide the purchaser of such an 

annuity with the same protections that 

are provided under the federal securities 

laws to other investors who participate 

in the securities markets, including full 

and fair disclosure regarding the terms 

of the investment and the significant 

risks that he or she is assuming, as well 

as protections from abusive sales 

practices and the recommendation of 

unsuitable transactions. Some 

commenters raised concerns about the 

proposed rule’s treatment of de minimis 

amounts of securities-linked returns.112

These commenters suggested that the 

smaller the amount of securities-linked 

return, the less investment risk is 

assumed by the purchaser, and the more 

is assumed by the insurer. In particular, 

commenters suggested that where the 

securities-linked return is de minimis 

the purchaser does not assume the 

primary investment risk under the 

contract.113 However, based on our 

current understanding, we believe that 

almost all current indexed annuity 

contracts provide for securities-linked 

returns that are more likely than not to 

exceed a de minimis amount in excess 

of the guaranteed return. Nevertheless, 

in the case of an indexed annuity 

contract that is more likely than not to 

provide only a de minimis securitieslinked return in excess of the 

guaranteed return, the Commission and 

the staff would be prepared to consider 

a request for relief, if appropriate. 

Under rule 151A, amounts payable by 

the insurance company under a contract 

will be more likely than not to exceed 

the amounts guaranteed under the 

contract if this is the expected outcome 

more than half the time. In order to 

determine whether this is the case, it 

will be necessary to analyze expected 

outcomes under various scenarios 

involving different facts and 

circumstances. In performing this 

analysis, the amounts payable by the 

insurance company under any 

particular set of facts and circumstances 

will be the amounts that the 

purchaser 114 would be entitled to 

receive from the insurer under those 

facts and circumstances. The facts and 

circumstances include, among other 

things, the particular features of the 

annuity contract (e.g., the relevant 

index, participation rate, and other 

features), the particular options selected 


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115Rule 151A(b)(2). 

116Rule 151A(b)(1). 117See generally Black and Skipper, supra note 

39, at 26–47, 890–99. Several commenters who 

issue indexed annuities disputed that insurers 

undertake these analyses. See, e.g., American 

Equity Letter, supra note 54; National Western 

Letter, supra note 54; Sammons Letter, supra note 

54. Other commenters, however, confirmed that 

these analytical methods exist and are used by 

insurers for internal purposes. See, e.g., Aviva 

Letter, supra note 54; Academy Letter, supra note 

54. We give substantial weight to the views of the 

American Academy of Actuaries (‘‘Academy’’) on 

this point, given their expertise in this type of 

analysis, and are not persuaded that the contrary 

comments of several issuers are representative of 

industry practice. See Black’s Law Dictionary 39 

(8th ed. 2004) (An actuary is a statistician who 

determines the present effects of future contingent 

events and who calculates insurance and pension 

rates on the basis of empirically based tables.); 

American Academy of Actuaries, Mission, available 

at: http://www.actuary.org/mission.asp (The 

mission of the Academy is to, among other things, 

provide independent and objective actuarial 

information, analysis, and education for the 

formation of sound public policy.). 

118See, e.g., SEC v. Ralston Purina, 346 U.S. 119, 

126 (1953) (an issuer claiming an exemption under 

Section 4 of the Securities Act carries the burden 

of showing that the exemption applies). 

by the purchaser (e.g., surrender or 

annuitization), and the performance of 

the relevant securities benchmark (e.g., 

in the case of an indexed annuity, the 

performance of the relevant index, such 

as the Dow Jones Industrial Average, 

Lehman Brothers Aggregate U.S. Index, 

Nasdaq 100 Index, or Standard & Poor’s 

500 Composite Stock Price Index). The 

amounts guaranteed under a contract 

under any particular set of facts and 

circumstances will be the minimum 

amount that the insurer would be 

obligated to pay the purchaser under 

those facts and circumstances without 

reference to the performance of the 

security that is used in calculating 

amounts payable under the contract. 

Thus, if an indexed annuity, in all 

circumstances, guarantees that, on 

surrender, a purchaser will receive 

87.5% of an initial purchase payment, 

plus 1% interest compounded annually, 

and that any additional payout will be 

based exclusively on the performance of 

a securities index, the amount 

guaranteed after 3 years will be 90.15% 

of the purchase payment (87.5% × 1.01 

× 1.01 × 1.01). 

Determining Whether an Annuity Is Not 

an ‘‘Annuity Contract’’ or ‘‘Optional 

Annuity Contract’’ Under Rule 151A 

We are adopting, with modifications 

to address commenters’ concerns, the 

provisions of proposed rule 151A that 

address the manner in which a 

determination will be made regarding 

whether amounts payable by the 

insurance company under a contract are 

more likely than not to exceed the 

amounts guaranteed under the contract. 

Rule 151A is principles-based, 

providing that a determination made by 

the insurer at or prior to issuance of a 

contract will be conclusive, provided 

that: (i) Both the insurer’s methodology 

and the insurer’s economic, actuarial, 

and other assumptions are reasonable; 

(ii) the insurer’s computations are 

materially accurate; and (iii) the 

determination is made not earlier than 

six months prior to the date on which 

the form of contract is first offered.115

We have eliminated the proposed 

requirement that the insurer’s 

determination be made not more than 

three years prior to the date on which 

a particular contract is issued. The rule 

specifies the treatment of charges that 

are imposed at the time of payments 

under the contract by the insurer, and 

we have modified the proposal in order 

to provide for consistent treatment of 

these charges in computing both 

amounts payable by the insurance 

company and amounts guaranteed 

under the contract.116

We are adopting this principles-based 

approach because we believe that an 

insurance company should be able to 

evaluate anticipated outcomes under an 

annuity that it issues. We believe that 

many insurers routinely undertake 

similar analyses for purposes of pricing 

and valuing their contracts.117 In 

addition, we believe that it is important 

to provide reasonable certainty to 

insurers with respect to the application 

of the rule and to preclude an insurer’s 

determination from being second 

guessed, in litigation or otherwise, in 

light of actual events that may differ 

from assumptions that were reasonable 

when made. 

As with all exemptions from the 

registration and prospectus delivery 

requirements of the Securities Act, the 

party claiming the benefit of the 

exemption—in this case, the insurer— 

bears the burden of proving that the 

exemption applies.118 Thus, an insurer 

that believes an indexed annuity is 

entitled to the exemption under Section 

3(a)(8) based, in part, on a 

determination made under the rule 

will—if challenged in litigation—be 

required to prove that its methodology 

and its economic, actuarial, and other 

assumptions were reasonable, and that 

the computations were materially 

accurate. 

The rule provides that an insurer’s 

determination under the rule will be 

conclusive only if it is made at or prior 

to issuance of the contract. Rule 151A 

is intended to provide certainty to both 

insurers and investors, and we believe 

that this certainty will be undermined 

unless insurance companies undertake 

the analysis required by the rule no later 

than the time that an annuity is issued. 

The rule also provides that, for an 

insurer’s determination to be 

conclusive, the computations made by 

the insurance company in support of the 

determination must be materially 

accurate. An insurer should not be 

permitted to rely on a determination of 

an annuity’s status under the rule that 

is based on computations that are 

materially inaccurate. For this purpose, 

we intend that computations will be 

considered to be materially accurate if 

any computational errors do not affect 

the outcome of the insurer’s 

determination as to whether amounts 

payable by the insurer under the 

contract are more likely than not to 

exceed the amounts guaranteed under 

the contract. 

In order for an insurer’s determination 

to be conclusive, both the methodology 

and the economic, actuarial, and other 

assumptions used must be reasonable. 

We recognize that a range of 

methodologies and assumptions may be 

reasonable and that a reasonable 

methodology or assumption utilized by 

one insurer may differ from a reasonable 

assumption or methodology selected by 

another insurer. In determining whether 

an insurer’s methodology is reasonable, 

it is appropriate to look to methods 

commonly used for pricing, valuing, 

and hedging similar products in 

insurance and derivatives markets. 

An insurer will need to make 

assumptions in several areas, including 

assumptions about (i) insurer behavior, 

(ii) purchaser behavior, and (iii) market 

behavior, and will need to assign 

probabilities to various potential 

behaviors. With regard to insurer 

behavior, the insurer will need to make 

assumptions about discretionary actions 

that it may take under the terms of an 

annuity. In the case of an indexed 

annuity, for example, an insurer often 

has discretion to modify various 

features, such as guaranteed interest 

rates, caps, participation rates, and 

spreads. Similarly, the insurer will need 

to make assumptions concerning 

purchaser behavior, including matters 

such as how long purchasers will hold 

a contract, how they will allocate 

contract value among different 

investment options available under the 

contract, and the form in which they 

will take payments under the contract. 

Assumptions about market behavior 

will include assumptions about 

expected return, market volatility, and 

interest rates. In general, insurers will 

need to make assumptions about any 

feature of insurer, purchaser, or market 

behavior, or any other factor, that is 


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119See, e.g., Academy Letter, supra note 54; ACLI 

Letter, supra note 94; Aviva Letter, supra note 54; 

AXA Equitable Letter, supra note 106; CAI 151A 

Letter, supra note 54; FINRA Letter, supra note 7; 

Letter of Genesis Financial Products, Inc. (Aug. 29, 

2008) (‘‘Genesis Letter’’); Letter of Janice Hart (Aug. 

15, 2008) (‘‘Hart Letter’’); ICI Letter, supra note 7; 

National Western Letter, supra note 54; Sammons 

Letter, supra note 54. 

120See, e.g., FINRA Letter, supra note 7; Hart 

Letter, supra note 119; ICI Letter, supra note 7; 

NAIC Officer Letter, supra note 54. 

121See infra text accompanying notes 129 and 

130. 

122Rule 151A(b)(2)(iii). 

123Proposed rule 151A(b)(2)(C). 

124See, e.g., Aviva Letter, supra note 54; 

Sammons Letter, supra note 54. See also ICI Letter, 

supra note 7 (possibility that indexed annuity’s 

status under the federal securities laws could 

change is not consistent with the purposes of the 

federal securities laws). 

125Rule 151A(b)(1). In many cases, amounts 

guaranteed under annuities are not affected by 

charges imposed at the time payments are made by 

the insurer under the contract. This is a result of 

the fact that guaranteed minimum value, as 

commonly defined in indexed annuity contracts, 

equals a percentage of purchase payments, 

accumulated at a specified interest rate, as 

explained above, and this amount is not subject to 

surrender charges. However, under some indexed 

annuity contracts, the amounts guaranteed are 

affected by charges imposed at the time payments 

are made. For example, a purchaser buys a contract 

for $100,000. The contract defines surrender value 

as the greater of (i) purchase payments plus indexlinked interest minus surrender charges or (ii) the 

guaranteed minimum value. The maximum 

surrender charge is equal to 10%. The guaranteed 

minimum value is defined in the contract as 87.5% 

of premium accumulated at 1% annual interest. If 

the purchaser surrenders within the first year of 

purchase, and there is no index-linked interest 

credited, the surrender value would equal $90,000 

(determined under clause (i) as $100,000 purchase 

payment minus 10% surrender charge), and this 

amount would be the guaranteed amount under the 

contract, not the lower amount defined in the 

contract as guaranteed minimum value ($87,500). 

126Proposed rule 151A(b)(1). 

127See, e.g., Aviva Letter, supra note 54; CAI 

151A Letter, supra note 54; Coalition Letter, supra 

note 54. 

material in determining the likelihood 

that amounts payable under the contract 

exceed the amounts guaranteed. 

In determining whether assumptions 

are reasonable, insurers should 

generally be guided by both history and 

their own expectations about the future. 

An insurer may look to its own, and to 

industry, experience with similar or 

otherwise comparable contracts in 

constructing assumptions about both 

insurer behavior and investor behavior. 

In making assumptions about future 

market behavior, an insurer may be 

guided, for example, by historical 

market characteristics, such as historical 

returns and volatility, provided that the 

insurer bases its assumptions on an 

appropriate period of time and does not 

have reason to believe that the time 

period chosen is likely to be 

unrepresentative. As a general matter, 

assumptions about insurer, investor, or 

market behavior that are not consistent 

with historical experience would not be 

reasonable unless an insurer has a 

reasonable basis for any differences 

between historical experience and the 

assumptions used. 

In addition, an insurer may look to its 

own expectations about the future in 

constructing reasonable assumptions. 

As noted above, insurers routinely 

analyze anticipated outcomes for 

purposes of pricing and valuing their 

contracts. We expect that, in making a 

determination under rule 151A, an 

insurer will use assumptions that are 

consistent with the assumptions that it 

uses for other purposes, such as pricing 

and valuation. In addition, an insurer 

generally should use assumptions that 

are consistent with its marketing 

materials. In general, assumptions that 

are inconsistent with the assumptions 

that an insurer uses for other purposes 

will not be reasonable under rule 151A. 

As noted above, we are adopting a 

principles-based approach because we 

believe that it will provide reasonable 

certainty to insurers with respect to the 

application of the rule. We recognize, 

however, that a number of commenters 

expressed concern that the principlesbased approach provides insufficient 

guidance regarding implementation and 

the methodologies and assumptions that 

are appropriate and could result in 

inconsistent determinations by different 

insurance companies and present 

enforcement and litigation risk.119 Some 

commenters suggested that the 

Commission address these concerns by 

providing guidance as to how to make 

the determination under the rule, 

which, they asserted, could result in 

greater uniformity and consistency in 

the application of the rule.120 While we 

believe that further guidance may, 

indeed, be helpful in response to 

specific questions of affected insurance 

companies, we note that commenters 

generally did not articulate with 

specificity the areas where they believe 

that further guidance is required. As a 

result, in order to provide guidance in 

the manner that would be most helpful, 

we encourage insurance companies, 

sellers of indexed annuities, and other 

affected parties to submit specific 

requests for guidance, which we will 

consider during the two-year period 

between adoption of rule 151A and its 

effectiveness.121

Like the proposal, rule 151A requires 

that, in order for an insurer’s 

determination to be conclusive, the 

determination must be made not more 

than six months prior to the date on 

which the form of contract is first 

offered.122 For example, if a form of 

contract were first offered on January 1, 

2012, the insurer would be required to 

make the determination not earlier than 

July 1, 2011. We are not adopting the 

proposed requirement that the insurer’s 

determination be made not more than 

three years prior to the date on which 

the particular contract is issued.123 We 

were persuaded by the commenters that 

if the status of a form of contract under 

the federal securities laws were to 

change, over time, from exempt to nonexempt and vice versa, this would 

present practical difficulties resulting 

from the possibility that an annuity 

could be exempted from registration at 

one time but be required to be registered 

subsequently and vice versa, as well as 

heightened litigation and enforcement 

risk.124 We believe that the substantial 

uncertainties and resulting potential 

costs introduced by the proposed 

requirement that a contract’s status be 

redetermined every three years would 

be inconsistent with the intent of rule 

151A, which is to clarify the status of 

indexed annuities. 

Rule 151A, as adopted, requires that, 

in determining whether amounts 

payable by the insurance company are 

more likely than not to exceed the 

amounts guaranteed, both amounts 

payable and amounts guaranteed are to 

be determined by taking into account all 

charges under the contract, including, 

without limitation, charges that are 

imposed at the time that payments are 

made by the insurance company.125 For 

example, surrender charges would be 

deducted from both amounts payable 

and amounts guaranteed under the 

contract. This is a change from the 

proposal, which would have required 

that, in determining whether amounts 

payable by the insurance company 

under a contract are more likely than 

not to exceed the amounts guaranteed 

under the contract, amounts payable be 

determined without reference to any 

charges that are imposed at the time of 

payment, such as surrender charges, 

while those charges would be reflected 

in computing the amounts guaranteed 

under the contract.126

We are making the foregoing change 

because we are persuaded by 

commenters who argued that the 

proposed provision could result in 

contracts being determined not to be 

entitled to the Section 3(a)(8) exemption 

irrespective of the likelihood of 

securities-linked return being included 

in the amount payable.127 Specifically, 

commenters argued that as long as the 

surrender charge is in effect, the amount 

payable would always exceed the 

amount guaranteed if the surrender 


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128Letter of American International Group (Sept. 

10, 2008) (‘‘AIG Letter’’); Aviva Letter, supra note 

54; CAI 151A Letter, supra note 54; NAVA Letter, 

supra note 106; Letter of New York Life Insurance 

Company (Sept. 18, 2008) (‘‘NY Life Letter’’); 

Sammons Letter, supra note 54. 

129AIG Letter, supra note 128 (recommending 

transition period of 2 years); Aviva Letter, supra 

note 54 (at least 24 months); CAI 151A Letter, supra 

note 54 (24 months); Letter of NAVA (Nov. 17, 

2008) (‘‘Second NAVA Letter’’) (at least 24 months); 

NY Life Letter, supra note 128 (at least 24 months). 

130See supra text accompanying notes 95 and 

121. 

131See, e.g., Securities Act Release No. 4896 (Feb. 

1, 1968) [33 FR 3142, 3143 (Feb. 17, 1968)] (‘‘The 

Commission is aware that for many years issuers of 

the securities identified in this rule have not 

considered their obligations to be separate 

securities and that they have acted in reliance on 

the view, which they believed to be the view of the 

Commission, that registration under the Securities 

Act was not required. Under the circumstances, the 

Commission does not believe that such issuers are 

subject to any penalty or other damages resulting 

from entering into such arrangements in the past. 

Paragraph (b) provides that the rule shall apply to 

transactions of the character described in paragraph 

(a) only with respect to bonds or other evidence of 

indebtedness issued after adoption of the rule.’’). 

See also Securities Act Release No. 5316 (Oct. 6, 

1972) [37 FR 23631, 23632 (Nov. 7, 1972)] (‘‘The 

Commission recognizes that the ‘no-sale’ concept 

has been in existence in one form or another for a 

long period of time. * * * The Commission 

believes, after a thorough reexamination of the 

studies and proposals cited above, that the 

interpretation embodied in Rule 133 is no longer 

consistent with the statutory objectives of the 

[Securities] Act. * * * Rule 133 is rescinded 

prospectively on and after January 1, 1973. * * *’’). 

132See FSI Letter, supra note 106 (asking for 

clarification that, like insurance company issuers, 

independent broker-dealers and their affiliated 

financial advisers are not subject to any additional 

legal risk relating to past offers and sales of indexed 

annuities as a result of rule 151A). 

133See, e.g., AIG Letter, supra note 128; Hartford 

Letter, supra note 55; Letter of North American 

Securities Administrators Association (Sept. 10, 

2008) (‘‘NASAA Letter’’). 

134See, e.g., Aviva Letter, supra note 54; CAI 

151A Letter, supra note 54; Sammons Letter, supra 

note 54. 

charge were subtracted from the latter 

but not the former. The commenters 

further argued that bona fide surrender 

charges should not result in a contract 

being deemed a security, since a 

surrender charge is an expense and does 

not represent a transfer of risk from 

insurer to contract purchaser. Because 

the rule, as adopted, requires surrender 

charges to be subtracted from both 

amounts payable and amounts 

guaranteed, the surrender charges will 

not affect the determination of whether 

a contract is a security (i.e., the 

determination of whether amounts 

payable are more likely than not to 

exceed the amounts guaranteed). 

Effective Date 

The effective date of rule 151A is 

January 12, 2011. We originally 

proposed that rule 151A, if adopted, 

would be effective 12 months after 

publication in the Federal Register. We 

are persuaded by commenters, however, 

that additional time is required for, 

among other things, making the 

determinations required by the rule, 

preparing registration statements for 

indexed annuities that are required to be 

registered, and establishing the needed 

infrastructure for distributing registered 

indexed annuities.128 Based on the 

comments, we believe that a January 12, 

2011 effective date will provide the time 

needed to accomplish these tasks.129 We 

note that, during this period, the 

Commission intends to consider how to 

tailor disclosure requirements for 

indexed annuities and will also 

consider any requests for additional 

guidance that we receive concerning the 

determinations required under rule 

151A.130

The new definition in rule 151A will 

apply prospectively as we proposed— 

that is, only to indexed annuities issued 

on or after January 12, 2011. We are 

using our definitional rulemaking 

authority under Section 19(a) of the 

Securities Act, and the explicitly 

prospective nature of our rule is 

consistent with similar prospective 

rulemaking that we have undertaken in 

the past when doing so was appropriate 

and fair under the circumstances.131

We are aware that many insurance 

companies and sellers of indexed 

annuities, such as insurance agents, 

broker-dealers, and registered 

representatives of broker-dealers, in the 

absence of definitive interpretation or 

definition by the Commission, have of 

necessity acted in reliance on their own 

analysis of the legal status of indexed 

annuities based on the state of the law 

prior to this rulemaking. Under these 

circumstances, we do not believe that 

issuers and sellers of indexed annuities 

should be subject to any additional legal 

risk relating to their past offers and sales 

of indexed annuity contracts as a result 

of the proposal and adoption of rule 

151A.132

Several commenters requested 

clarification of the statement that rule 

151A will apply prospectively to 

indexed annuities issued on or after the 

rule’s effective date (i.e., January 12, 

2011).133 As a result, we are clarifying 

that if an indexed annuity has been 

issued to a particular individual 

purchaser prior to January 12, 2011, 

then that specific contract between that 

individual and the insurance company 

(including any additional purchase 

payments made under the contract on or 

after January 12, 2011) is not subject to 

rule 151A, and its status under the 

federal securities laws is to be 

determined under the law as it existed 

without reference to rule 151A. By 

contrast, if an indexed annuity is issued 

to a particular individual purchaser on 

or after January 12, 2011, then that 

specific contract between that 

individual and the insurance company 

is subject to rule 151A, even if the same 

form of indexed annuity was offered 

and sold prior to January 12, 2011, and 

even if the individual contract issued on 

or after January 12, 2011, is issued 

under a group contract that was in place 

prior to January 12, 2011. 

The Commission believes that 

permitting new sales of an existing form 

of contract (as opposed to additional 

purchase payments made under a 

specific existing contract between an 

individual and an insurance company) 

after the rule’s effective date without 

reference to the rule is contrary to the 

purpose of the rule. If the rule were not 

applicable to all contracts issued on or 

after the effective date without regard to 

when the forms of the contracts were 

originally sold, then two substantially 

similar contracts could be sold after the 

effective date, one not subject to the rule 

and one subject to the rule, even though 

they present the same level of risk to the 

purchaser and present the same need for 

investor protection. The fact that one 

was designed and released into the 

marketplace prior to January 12, 2011, 

and the other was designed and released 

into the marketplace after that date 

should not be a determining factor as to 

the availability of the protections of the 

federal securities laws. We note that, 

because we have extended the effective 

date to January 12, 2011, insurers 

should have adequate time to prepare 

for compliance with rule 151A. 

Some commenters raised concerns 

that the registration of an indexed 

annuity as required by rule 151A could 

cause offers and sales of the same 

annuity that occurred on an 

unregistered basis after adoption but 

prior to the effective date of the rule, 

January 12, 2011, to be unlawful under 

Section 5 of the Securities Act.134

We reiterate that nothing in this 

adopting release is intended to affect the 

current analysis of the legal status of 

indexed annuities until the effective 

date of rule 151A. Therefore, after the 

adoption of rule 151A but prior to the 

effective date of the rule: 

• An indexed annuity issuer making 

unregistered offers and sales of a 

contract that will not be an ‘‘annuity 

contract’’ or ‘‘optional annuity contract’’ 

under rule 151A may continue to do so 

until the effective date of rule 151A 

without such offers and sales being 


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3154 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

135As noted in Part II.B., above, indexed 

annuities are not entitled to rely on the rule 151 

safe harbor. 136See, e.g., Academy Letter, supra note 54; AIG 

Letter, supra note 128; Aviva Letter, supra note 54; 

Second Academy Letter, supra note 54; Second 

Aviva Letter, supra note 54; Second Transamerica 

Letter, supra note 54; Letter of Life Insurance 

Company of the Southwest (Sept. 10, 2008) 

(‘‘Southwest Letter’’); Voss Letter, supra note 13. 

137The Commission received a petition 

requesting that we propose a rule that would 

exempt issuers of certain types of insurance 

contracts from Exchange Act reporting 

requirements. Letter from Stephen E. Roth, 

Sutherland Asbill & Brennan LLP, on behalf of 

Jackson National Life Insurance Co., to Nancy M. 

Morris, Secretary, U.S. Securities and Exchange 

Commission (Dec. 19, 2007) (File No. 4–553) 

available at: http://www.sec.gov/rules/petitions/ 

2007/petn4-553.pdf. 

138See, e.g., ACLI Letter, supra note 94; Allianz 

Letter, supra note 54; AXA Equitable Letter, supra 

note 106; Letter of Committee of Annuity Insurers 

regarding proposed rule 12h–7 (Sept. 10, 2008) 

(‘‘CAI 12h–7 Letter’’); FSI Letter, supra note 106; 

Letter of Great-West Life & Annuity Insurance 

Company (Sept. 10, 2008) (‘‘Great-West Letter’’); ICI 

Letter, supra note 7; Letter of MetLife, Inc. (Sept. 

11, 2008) (‘‘MetLife Letter’’); NAVA Letter, supra 

note 106; Sammons Letter, supra note 54. 

139See Section 12(h) of the Exchange Act [15 

U.S.C. 78l(h)] (Commission may, by rules, exempt 

any class of issuers from the reporting provisions 

of the Exchange Act ‘‘if the Commission finds, by 

reason of the number of public investors, amount 

of trading interest in the securities, the nature and 

extent of the activities of the issuer, income or 

assets of the issuer, or otherwise, that such action 

is not inconsistent with the public interest or the 

protection of investors.’’) (emphasis added). 

140Black and Skipper, supra note 39, at 949. 

141 Id. at 949 and 956–59. 

142 Id. at 949. 

unlawful under Section 5 of the 

Securities Act as a result of the pending 

effectiveness of rule 151A; and 

• An indexed annuity issuer that 

wishes to register a contract that will 

not be an ‘‘annuity contract’’ or 

‘‘optional annuity contract’’ under rule 

151A may continue to make 

unregistered offers and sales of the same 

annuity until the earlier of the effective 

date of the registration statement or the 

effective date of the rule without such 

offers and sales being unlawful under 

Section 5 of the Securities Act as a 

result of the pending effectiveness of 

rule 151A. 

Annuities Not Covered by the Definition 

Rule 151A applies to annuities where 

the contract specifies that amounts 

payable by the insurance company 

under the contract are calculated at or 

after the end of one or more specified 

crediting periods, in whole or in part, by 

reference to the performance during the 

crediting period or periods of a security, 

including a group or index of securities. 

The rule defines certain of those 

annuities (annuities under which 

amounts payable by the issuer are more 

likely than not to exceed the amounts 

guaranteed under the contract) as not 

‘‘annuity contracts’’ or ‘‘optional 

annuity contracts’’ under Section 3(a)(8) 

of the Securities Act. The rule, however, 

does not provide a safe harbor under 

Section 3(a)(8) for any other annuities, 

including any other indexed annuities. 

The status under the Securities Act of 

any annuity, other than an annuity that 

is determined under rule 151A to be not 

an ‘‘annuity contract’’ or ‘‘optional 

annuity contract,’’ continues to be 

determined by reference to the 

investment risk and marketing tests 

articulated in existing case law under 

Section 3(a)(8) and, to the extent 

applicable, the Commission’s safe 

harbor rule 151.135

Some commenters suggested that the 

Commission, instead of adopting a rule 

that defines certain indexed annuities as 

not being ‘‘annuity contracts’’ under 

Section 3(a)(8), should instead define a 

safe harbor that would provide that 

indexed annuities that meet certain 

conditions are entitled to the Section 

3(a)(8) exemption.136 We are not 

adopting this approach for two reasons. 

First, such a rule would not address in 

any way the federal interest in 

providing investors with disclosure, 

antifraud, and sales practice protections 

that arise when individuals are offered 

indexed annuities that expose them to 

investment risk. A safe harbor would 

address circumstances where 

purchasers of indexed annuities are not 

entitled to the protections of the federal 

securities laws; one of our primary goals 

is to address circumstances where 

purchasers of indexed annuities are 

entitled to the protections of the federal 

securities laws. We are concerned that 

many purchasers of indexed annuities 

today should be receiving the 

protections of the federal securities 

laws, but are not. Rule 151A addresses 

this problem; a safe harbor rule would 

not. Second, we believe that, under 

many of the indexed annuities that are 

sold today, the purchaser bears 

significant investment risk and is more 

likely than not to receive a fluctuating, 

securities-linked return. In light of that 

fact, we believe that is far more 

important to address this class of 

contracts with our definitional rule than 

to address the remaining contracts, or 

some subset of those contracts, with a 

safe harbor rule. 

B. Exchange Act Exemption for 

Securities That Are Regulated as 

Insurance 

The Commission is also adopting new 

rule 12h–7 under the Exchange Act, 

which provides an insurance company 

with an exemption from Exchange Act 

reporting with respect to indexed 

annuities and certain other securities 

issued by the company that are 

registered under the Securities Act and 

regulated as insurance under state 

law.137 Sixteen commenters supported 

the exemption.138 No commenters 

opposed the exemption. We are 

adopting this exemption, with changes 

to the proposal that address 

commenters’ concerns, because we 

believe that the exemption is necessary 

or appropriate in the public interest and 

consistent with the protection of 

investors. We base that view on two 

factors: first, the nature and extent of the 

activities of insurance company issuers, 

and their income and assets, and, in 

particular, the regulation of those 

activities and assets under state 

insurance law; and, second, the absence 

of trading interest in the securities.139

The new rule imposes conditions to the 

exemption that relate to these factors 

and that we believe are necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors. 

State insurance regulation is focused 

on insurance company solvency and the 

adequacy of insurers’ reserves, with the 

ultimate purpose of ensuring that 

insurance companies are financially 

secure enough to meet their contractual 

obligations.140 State insurance 

regulators require insurance companies 

to maintain certain levels of capital, 

surplus, and risk-based capital; restrict 

the investments in insurers’ general 

accounts; limit the amount of risk that 

may be assumed by insurers; and 

impose requirements with regard to 

valuation of insurers’ investments.141

Insurance companies are required to file 

annual reports on their financial 

condition with state insurance 

regulators. In addition, insurance 

companies are subject to periodic 

examination of their financial condition 

by state insurance regulators. State 

insurance regulators also preside over 

the conservation or liquidation of 

companies with inadequate solvency.142

State insurance regulation, like 

Exchange Act reporting, relates to an 

entity’s financial condition. We are of 

the view that, in appropriate 

circumstances, it may be unnecessary 

for both to apply in the same situation, 

which may result in duplicative 

regulation that is burdensome. Through 

Exchange Act reporting, issuers 

periodically disclose their financial 

condition, which enables investors and 

the markets to independently evaluate 

an issuer’s income, assets, and balance 

sheet. State insurance regulation takes a 

different approach to the issue of 

financial condition, instead relying on 


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143CAI 12h–7 Letter, supra note 138; ICI Letter, 

supra note 7; MetLife Letter, supra note 138. 

144 Introductory paragraph to rule 12h–7. Cf. Rule 

12h–3(a) under the Exchange Act [17 CFR 240.12h– 

3(a)] (suspension of duty under Section 15(d) of the 

Exchange Act to file reports with respect to classes 

of securities held by 500 persons or less where total 

assets of the issuer have not exceeded $10,000,000); 

Rule 12h–4 under the Exchange Act [17 CFR 

240.12h–4] (exemption from duty under Section 

15(d) of the Exchange Act to file reports with 

respect to securities registered on specified 

Securities Act forms relating to certain Canadian 

issuers). 

Section 15(d) of the Exchange Act requires each 

issuer that has filed a registration statement that has 

become effective under the Securities Act to file 

reports and other information and documents 

required under Section 13 of the Exchange Act [15 

U.S.C. 78m] with respect to issuers registered under 

Section 12 of the Exchange Act [15 U.S.C. 78l]. 

Section 13(a) of the Exchange Act [15 U.S.C. 

78m(a)] requires issuers of securities registered 

under Section 12 of the Act to file annual reports 

and other documents and information required by 

Commission rule. 

145Rule 12h–7(a). The Exchange Act defines 

‘‘State’’ as any state of the United States, the District 

of Columbia, Puerto Rico, the Virgin Islands, or any 

other possession of the United States. Section 

3(a)(16) of the Exchange Act [15 U.S.C. 78c(a)(16)]. 

The term ‘‘State’’ in rule 12h–7 has the same 

meaning as in the Exchange Act. Rule 12h–7 does 

not define the term ‘‘State,’’ and our existing rules 

provide that, unless otherwise specifically 

provided, the terms used in the rules and 

regulations under the Exchange Act have the same 

meanings defined in the Exchange Act. See rule 

240.0–1(b) [17 CFR 240.0–1(b)]. 

146The separate account’s Exchange Act reporting 

requirements are deemed to be satisfied by filing 

annual reports on Form N–SAR. 17 CFR 274.101. 

See Section 30(d) of the Investment Company Act 

[15 U.S.C. 80a–30(d)] and rule 30a–1 under the 

Investment Company Act [17 CFR 270.30a–1]. 

147Rule 12h–7(a)(2). 

148A stock life insurance company is a 

corporation authorized to sell life insurance, which 

is owned by stockholders and is formed for the 

purpose of earning a profit for its stockholders. This 

is in contrast to another prevailing insurance 

company structure, the mutual life insurance 

company. In this structure, the corporation 

authorized to sell life insurance is owned by and 

operated for the benefit of its policy owners. Black 

and Skipper, supra note 39, at 577–78. 

149A domiciliary state is the jurisdiction in which 

an insurer is incorporated or organized. See 

National Association of Insurance Commissioners 

Model Laws, Regulations and Guidelines 555–1, 

§ 104 (2007). 

150 Great-West Letter, supra note 138. 

state insurance regulators to supervise 

insurers’ financial condition, with the 

goal that insurance companies be 

financially able to meet their contractual 

obligations. We believe that it is 

consistent with our federal system of 

regulation, which has allocated the 

responsibility for oversight of insurers’ 

solvency to state insurance regulators, to 

exempt insurers from Exchange Act 

reporting with respect to state-regulated 

insurance contracts. Commenters 

asserted that, in light of the protections 

available under state insurance 

regulation, periodic reporting under the 

Exchange Act by state-regulated insurers 

does not enhance investor protection 

with respect to the securities covered 

under the rule.143

Our conclusion is strengthened by the 

general absence of trading interest in 

insurance contracts. Insurance is 

typically purchased directly from an 

insurance company. While insurance 

contracts may be assigned in some 

circumstances, they typically are not 

listed or traded on securities exchanges 

or in other markets. As a result, outside 

the context of publicly owned insurance 

companies, there is little, if any, market 

interest in the information that is 

required to be disclosed in Exchange 

Act reports. 

1. The Exemption 

Rule 12h–7 provides an insurance 

company that is covered by the rule 

with an exemption from the duty under 

Section 15(d) of the Exchange Act to file 

reports required by Section 13(a) of the 

Exchange Act with respect to certain 

securities registered under the 

Securities Act.144

Covered Insurance Companies 

The Exchange Act exemption applies 

to an issuer that is a corporation subject 

to the supervision of the insurance 

commissioner, bank commissioner, or 

any agency or officer performing like 

functions, of any state, including the 

District of Columbia, Puerto Rico, the 

Virgin Islands, and any other possession 

of the United States.145 In the case of a 

variable annuity contract or variable life 

insurance policy, the exemption applies 

to the insurance company that issues 

the contract or policy. However, the 

exemption does not apply to the 

insurance company separate account in 

which the purchaser’s payments are 

invested and which is separately 

registered as an investment company 

under the Investment Company Act of 

1940 and is not regulated as an 

insurance company under state law.146

Covered Securities 

The exemption applies with respect to 

securities that do not constitute an 

equity interest in the insurance 

company issuer and that are either 

subject to regulation under the 

insurance laws of the domiciliary state 

of the insurance company or are 

guarantees of securities that are subject 

to regulation under the insurance laws 

of that jurisdiction.147 The exemption 

does not apply with respect to any other 

securities issued by an insurance 

company. As a result, if an insurance 

company issues securities with respect 

to which the exemption applies, and 

other securities that do not entitle the 

insurer to the exemption, the insurer 

will remain subject to Exchange Act 

reporting obligations. For example, if an 

insurer that is a publicly held stock 

company 148 also issues insurance 

contracts that are registered securities 

under the Securities Act, the insurer 

generally would be required to file 

Exchange Act reports as a result of being 

a publicly held stock company. 

Similarly, if an insurer raises capital 

through a debt offering, the exemption 

does not apply with respect to the debt 

securities. 

The exemption is available with 

respect to securities that are either 

subject to regulation under the 

insurance laws of the domiciliary state 

of the insurance company or are 

guarantees of securities that are subject 

to regulation under the insurance laws 

of that jurisdiction.149 Rule 12h–7 is a 

broad exemption that applies to any 

contract that is regulated under the 

insurance laws of the insurer’s home 

state because we intend that the 

exemption apply to all contracts, and 

only those contracts, where state 

insurance law, and the associated 

regulation of insurer financial 

condition, applies. A key basis for the 

exemption is that investors are already 

entitled to the financial condition 

protections of state law and that, under 

our federal system of regulation, 

Exchange Act reporting may be 

unnecessary. Therefore, we believe it is 

important that the reach of the 

exemption and the reach of state 

insurance law be the same. A single 

commenter addressed the scope of 

securities with respect to which the 

proposed exemption would apply, 

supporting the Commission’s approach 

and noting that limiting the exemption 

to enumerated types of securities would 

require the Commission to revisit the 

rule every few years, or would provide 

a significant barrier to the introduction 

of new investment products.150

The Exchange Act exemption applies 

both to certain existing types of 

insurance contracts and to types of 

contracts that are developed in the 

future and that are registered as 

securities under the Securities Act. The 

exemption applies to indexed annuities 

that are registered under the Securities 

Act. However, the Exchange Act 

exemption is independent of rule 151A 

and applies to types of contracts in 

addition to those that are covered by 

rule 151A. There are at least two types 

of existing insurance contracts with 

respect to which the Exchange Act 

exemption applies, contracts with socalled ‘‘market value adjustment’’ 

(‘‘MVA’’) features and insurance 

contracts that provide certain 


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3156 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

151Securities Act Release No. 6645, supra note 

35, 51 FR at 20256–58. 

152See, e.g., ING Life Insurance and Annuity 

Company (Annual Report on Form 10–K (Mar. 31, 

2008)); Protective Life Insurance Company (Annual 

Report on Form 10–K (Mar. 31, 2008)); Union 

Security Insurance Company (Annual Report on 

Form 10–K (Mar. 3, 2008)). 

153Some indexed annuities also include MVA 

features. See, e.g., Pre-Effective Amendment No. 4 

to Registration Statement on Form S–1 of PHL 

Variable Insurance Company (File No. 333–132399) 

(filed Feb. 7, 2007); Initial Registration Statement 

on Form S–1 of ING USA Annuity and Life 

Insurance Company (File No. 333–133153) (filed 

Apr. 7, 2006); Pre-Effective Amendment No. 2 to 

Registration Statement on Form S–3 of Allstate Life 

Insurance Company (File No. 333–117685) (filed 

Dec. 20, 2004). 

154See Proposing Release, supra note 3, 73 FR at 

37764 (describing MVA features). 

155See, e.g., PHL Variable Life Insurance 

Company, File No. 333–137802 (Form S–1 filed 

Feb. 25, 2008); Genworth Life and Annuity 

Insurance Company, File No. 333–143494 (Form S– 

1 filed Apr. 4, 2008). 

156See Proposing Release, supra note 3, 73 FR at 

37764 (describing guaranteed living benefits). 

157The Securities Act defines ‘‘security’’ in 

Section 2(a)(1) of the Act [15 U.S.C. 77b(a)(1)]. That 

definition provides that a guarantee of any of the 

instruments included in the definition is also a 

security. 

158For example, an insurance company may offer 

a registered variable annuity, and a parent or other 

affiliate of the issuing insurance company may act 

as guarantor for the issuing company’s insurance 

obligations under the contract. 

159Rule 12h–7(c). Cf. Section 26(f)(2)(B)(ii) and 

(iii) of the Investment Company Act [15 U.S.C. 80a– 

26(f)(2)(B)(ii) and (iii)] (using similar language in 

requirements that apply to insurance companies 

that sell variable insurance products). 

160For this purpose, ‘‘alternative trading system’’ 

would have the same meaning as in Regulation 

ATS. See 17 CFR 242.300(a) (definition of 

‘‘alternative trading system’’). 

161For this purpose, ‘‘inter-dealer quotation 

system’’ would have the same meaning as in 

Exchange Act rule 15c2–11. See 17 CFR 240.15c2– 

11(e)(2) (definition of ‘‘inter-dealer quotation 

system’’). 

162Rule 12h–7(d). 

guaranteed benefits in connection with 

assets held in an investor’s account, 

such as a mutual fund, brokerage, or 

investment advisory account. 

Contracts including MVA features 

have, for some time, been registered 

under the Securities Act.151 Insurance 

companies issuing contracts with these 

features have also complied with 

Exchange Act reporting requirements.152

MVA features have historically been 

associated with annuity and life 

insurance contracts that guarantee a 

specified rate of return to purchasers.153

In order to protect the insurer against 

the risk that a purchaser may make 

withdrawals from the contract at a time 

when the market value of the insurer’s 

assets that support the contract has 

declined due to rising interest rates, 

insurers sometimes impose an MVA 

upon surrender. Under an MVA feature, 

the insurer adjusts the proceeds a 

purchaser receives upon surrender prior 

to the end of the guarantee period to 

reflect changes in the market value of its 

portfolio securities supporting the 

contract.154

More recently, some insurance 

companies have registered under the 

Securities Act insurance contracts that 

provide certain guarantees in 

connection with assets held in an 

investor’s account, such as a mutual 

fund, brokerage, or investment advisory 

account.155 As a result, the insurers 

become subject to Exchange Act 

reporting requirements if they are not 

already subject to those requirements. 

These contracts, often called 

‘‘guaranteed living benefits,’’ are 

intended to provide insurance to the 

purchaser against the risk of outliving 

the assets held in the mutual fund, 

brokerage, or investment advisory 

account.156

As noted above, the Exchange Act 

exemption also applies with respect to 

a guarantee of a security if the 

guaranteed security is subject to 

regulation under state insurance law.157

We are adopting this provision because 

we believe that it is appropriate to 

exempt from Exchange Act reporting an 

insurer that provides a guarantee of an 

insurance contract (that is also a 

security) when the insurer would not be 

subject to Exchange Act reporting if it 

had issued the guaranteed contract. This 

situation may arise, for example, when 

an insurance company issues a contract 

that is a security and its affiliate, also an 

insurance company, provides a 

guarantee of benefits provided under the 

first company’s contract.158

Finally, the exemption is not available 

with respect to any security that 

constitutes an equity interest in the 

issuing insurance company. As a 

general matter, an equity interest in an 

insurer is not covered by the exemption 

because it is not subject to regulation 

under state insurance law and often is 

publicly traded. Nonetheless, we believe 

that the rule should expressly preclude 

any security that constitutes an equity 

interest in the issuing insurance 

company from being covered by the 

exemption. Where investors own an 

equity interest in an issuing insurance 

company, and are therefore dependent 

on the financial condition of the issuer 

for the value of that interest, we believe 

that they have a significant interest in 

directly evaluating the issuers’ financial 

condition for themselves on an ongoing 

basis and that Exchange Act reporting is 

appropriate. 

2. Conditions to Exemption 

As described above, we believe that 

the exemption is necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors because of the existence of 

state regulation of insurers’ financial 

condition and because of the general 

absence of trading interest in insurance 

contracts. The Exchange Act exemption 

that we are adopting, like the proposal, 

is subject to conditions that are 

designed to ensure that both of these 

factors are, in fact, present in cases 

where an insurance company is 

permitted to rely on the exemption. We 

have modified the conditions related to 

trading interest in one respect to address 

the concerns of commenters. We have 

also added a condition to the proposed 

rule in order to address a commenter’s 

concern. 

Regulation of Insurer’s Financial 

Condition 

In order to rely on the exemption, an 

insurer must file an annual statement of 

its financial condition with, and the 

insurer must be supervised and its 

financial condition examined 

periodically by, the insurance 

commissioner, bank commissioner, or 

any agency or any officer performing 

like functions, of the insurer’s 

domiciliary state.159 Commenters did 

not address this condition, and we are 

adopting this condition as proposed. 

This condition is intended to ensure 

that an insurer claiming the exemption 

is, in fact, subject to state insurance 

regulation of its financial condition. 

Absent satisfaction of this condition, 

Exchange Act reporting would not be 

duplicative of state insurance 

regulation, and the exemption would 

not be available. 

Absence of Trading Interest 

The Exchange Act exemption is 

subject to two conditions intended to 

insure that there is no trading interest in 

securities with respect to which the 

exemption applies, and we are 

modifying the proposed conditions in 

one respect to address the concerns of 

commenters. First, the securities may 

not be listed, traded, or quoted on an 

exchange, alternative trading system,160

inter-dealer quotation system,161

electronic communications network, or 

any other similar system, network, or 

publication for trading or quoting.162

This condition is designed to ensure 

that there is no established trading 

market for the securities. Second, the 

issuing insurance company must take 

steps reasonably designed to ensure that 

a trading market for the securities does 


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163Rule 12h–7(e). 

164See supra note 145 for a discussion of the term 

‘‘State’’ as used in rule 12h–7. 

165CAI 12h–7 Letter, supra note 138. 

166Proposed rule 12h–7(e). 

167Allianz Letter, supra note 54; CAI 12h–7 

Letter, supra note 138; ICI Letter, supra note 7; 

NAVA, supra note 106; Sammons Letter, supra note 

54. 

168CAI 12h–7 Letter, supra note 138; Sammons 

Letter, supra note 54; Transamerica Letter, supra 

note 54; Second Transamerica Letter, supra note 54. 

169CAI 12h–7 Letter, supra note 138. 

170Letter of Committee of Annuity Insurers 

regarding proposed rule 12h–7 (Nov. 17, 2008) 

(‘‘Second CAI 12h–7 Letter’’); Second Transamerica 

Letter, supra note 54. 

171Rule 12h–7(f). 

172CAI 12h–7 Letter, supra note 138. See Form 

S–1, General Instruction VII.A. (incorporation by 

reference permitted only if, among other things, 

registrant subject to Exchange Act reporting 

requirements); Form S–3, General Instruction I.A.2. 

(Form S–3, which permits incorporation by 

reference, available to registrant that, among other 

things, is required to file Exchange Act reports). 

173As described above, the exemption applies to 

an insurance company that issues a variable 

annuity contract or variable life insurance policy, 

Continued 

not develop.163 This includes, except to 

the extent prohibited by the law of any 

state, including the District of Columbia, 

Puerto Rico, the Virgin Islands, and any 

other possession of the United States,164

or by action of the insurance 

commissioner, bank commissioner, or 

any agency or officer performing like 

functions of any state, requiring written 

notice to, and acceptance by, the issuer 

prior to any assignment or other transfer 

of the securities and reserving the right 

to refuse assignments or other transfers 

at any time on a non-discriminatory 

basis. This condition is designed to 

ensure that the insurer takes reasonable 

steps to ensure the absence of trading 

interest in the securities. 

We are adopting the first condition, 

relating to the absence of listing, 

trading, and quoting on any exchange or 

similar system, network, or publication 

for trading or quoting, as proposed. We 

are not adopting the suggestion of a 

commenter that the Commission limit 

this condition to exchanges and other 

similar systems, networks, and 

publications for trading or quoting that 

are registered with, or regulated by, the 

Commission or a self-regulatory 

organization.165 The commenter argued 

that, absent this limitation, insurance 

companies would be placed in the 

position of enforcing the Commission’s 

requirements by identifying any 

exchanges and other similar systems, 

networks, and publications for trading 

or quoting that may arise from time to 

time and operate in violation of the 

Commission’s rules and regulations. We 

disagree that this limitation is 

appropriate. We have determined that 

the exemption provided by rule 12h–7 

is necessary or appropriate in the public 

interest and consistent with the 

protection of investors, in part, because 

of the absence of trading interest in the 

insurance contracts covered by the 

exemption. We do not believe that there 

would be an absence of trading interest 

where an insurance contract trades on 

an exchange or similar system, network, 

or publication for trading or quoting, 

whether regulated by the Commission or 

not. 

We are modifying the second 

condition, which requires the issuing 

insurance company to take steps 

reasonably designed to ensure that a 

trading market for the securities does 

not develop. As the condition was 

proposed, this would have included 

requiring written notice to, and 

acceptance by, the insurance company 

prior to any assignment or transfer of 

the securities and reserving the right to 

refuse assignments or other transfers of 

the securities at any time on a nondiscriminatory basis.166 Under the 

adopted rule, these particular steps will 

continue to be required, except to the 

extent that they are prohibited by the 

law of any state or by action of the 

insurance commissioner, bank 

commissioner, or any agency or officer 

performing like functions of any state. 

This modification addresses the 

concern expressed by several 

commenters that the proposed condition 

could, in some circumstances, be 

inconsistent with applicable state 

law.167 The commenters stated that 

some states may not permit restrictions 

on transfers or assignments and, indeed, 

that some states specifically grant 

contract owners the right to transfer or 

assign their contracts. In proposing the 

condition relating to restrictions on 

assignment, it was not our intent to 

require restrictions that are inconsistent 

with applicable state law. Our 

modification to rule 12h–7 clarifies this 

and, accordingly, addresses the 

commenters’ concern. 

Three commenters requested that the 

second condition be removed in its 

entirety.168 These commenters stated 

that the second condition is 

unnecessary, because the first should 

give sufficient comfort that a trading 

market will not arise. The commenters 

also stated that this condition would be 

difficult to apply. One of the 

commenters stated that the condition is 

ambiguous, and that there is no clear 

definition of ‘‘trading market’’ in the 

federal securities laws.169 We continue 

to believe that the second condition is 

important because it will ensure that the 

issuer takes steps reasonably designed 

to preclude the development of a 

trading market. We do not believe that, 

as modified to address concerns about 

inconsistency with state law, the second 

condition will be unduly difficult to 

apply. 

Two commenters requested that rule 

12h–7 include a transition period for 

filing required reports under the 

Exchange Act for any insurance 

company previously relying on the rule 

that no longer meets its conditions.170

We do not believe that it would be 

appropriate to include such a transition 

period because, if an insurer no longer 

meets the conditions, this generally 

would mean that either the securities 

are not regulated as insurance under 

state law or the securities are traded or 

may become traded. In such a case, the 

very basis on which we are granting the 

exemption would no longer exist. 

Therefore, we have determined not to 

include such a transition period in rule 

12h–7. If an issuer no longer meets the 

conditions of the rule, it will 

immediately become subject to the filing 

requirements of the Exchange Act. We 

would, in any event, expect situations 

where an insurance company ceases to 

meet the conditions of rule 12h–7 to be 

extremely rare. In such a case, at an 

insurer’s request, we would consider, 

based on the particular facts and 

circumstances, whether individual 

exemptive relief to provide for a 

transition period would be appropriate. 

Prospectus Disclosure 

We are adding a condition to 

proposed rule 12h–7 to require that, in 

order for an insurer to be entitled to the 

Exchange Act exemption provided by 

the rule with respect to securities, the 

prospectus for the securities must 

contain a statement indicating that the 

issuer is relying on the exemption 

provided by the rule.171 This addresses 

a commenter’s request that the 

Commission clarify that reliance on the 

exemption is optional because some 

insurers may conclude that the benefits 

that flow from the ability to incorporate 

by reference Exchange Act reports may 

outweigh any costs associated with 

filing those reports.172 The new 

condition will permit an insurance 

company that desires to remain subject 

to Exchange Act reporting requirements 

to do so by omitting the required 

statement from its prospectus. The new 

provision also has the advantage of 

providing notice to investors of an 

insurer’s reliance on the exemption. An 

insurer who does not include this 

statement will be subject to mandatory 

Exchange Act reporting.173


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but not to the associated separate account. See 

supra note 146 and accompanying text. On or after 

the effective date of rule 12h–7, the prospectus for 

a variable insurance contract with respect to which 

the insurer does not file Exchange Act reports (and 

therefore is relying on rule 12h–7) will be required 

to include the statement that the insurer is relying 

on rule 12h–7. 

174 44 U.S.C. 3501 et seq. 

175 17 CFR 239.11. 

176 44 U.S.C. 3507(d); 5 CFR 1320.11. 

177Some Securities Act offerings are registered on 

Form S–3 [17 CFR 239.13]. We do not believe that 

rule 151A will have any significant impact on the 

disclosure burden associated with Form S–3 

because we believe that very few, if any, insurance 

companies that issue indexed annuities will be 

eligible to register those contracts on Form S–3. In 

order to be eligible to file on Form S–3, an issuer 

must, among other things, have filed Exchange Act 

reports for a period of at least 12 calendar months. 

General Instruction I.A.3. of Form S–3. Very few 

insurance companies that issue indexed annuities 

are currently eligible to file Form S–3. Further, any 

insurance companies that issue indexed annuities 

and rely on the Exchange Act reporting exemption 

that we are adopting will not meet the eligibility 

requirements for Form S–3. We believe that very 

few, if any, issuers of indexed annuities will choose 

to be subject to the reporting requirements of the 

Exchange Act because of the costs that this would 

impose. In any event, the number of indexed 

annuity issuers that choose to be subject to the 

reporting requirements of the Exchange Act would 

be insignificant compared to the total number of 

Exchange Act reporting companies, which is 

approximately 12,100. The number of indexed 

annuity issuers in 2007 was 58. NAVA, supra note 

9, at 57. 

We also do not believe that the rules will have 

any significant impact on the disclosure burden 

associated with reporting under the Exchange Act 

on Forms 10 K, 10 Q, and 8 K. As a result of rule 

12h–7, insurance companies will not be required to 

file Exchange Act reports on these forms in 

connection with indexed annuities that are 

registered under the Securities Act, and, as noted 

in the prior paragraph, we believe that very few, if 

any, issuers of indexed annuities will choose to be 

subject to the reporting requirements of the 

Exchange Act because of the costs that this would 

impose. While rule 12h 7 will permit some 

insurance companies that are currently required to 

file Exchange Act reports as a result of issuing 

insurance contracts that are registered under the 

Securities Act, to cease filing those reports, the 

number of such companies is insignificant 

compared to the total number of Exchange Act 

reporting companies. Likewise, we do not believe 

that the prospectus statement required under rule 

12h–7 for insurers relying on that rule will have any 

significant impact on the disclosure burden 

associated with registration statements for 

insurance contracts that are securities (Forms S–1, 

S–3, N–3, N–4, and N–6). We do not believe that 

the currently approved collections of information 

for these forms will change based on the rule 

12h–7 prospectus statement. 

178As noted above, some commenters expressed 

concern about what they believed to be a lack of 

a registration form that is well-suited to indexed 

annuities. See supra text accompanying notes 94 

and 95. 

179Some Securities Act offerings are registered on 

Form S–3, but we believe that very few, if any, 

insurance companies that issue indexed annuities 

3. Effective Date 

The effective date of rule 12h–7 is 

May 1, 2009. 

IV. Paperwork Reduction Act 

A. Background 

Rule 151A contains no new 

‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).174 However, we believe that 

rule 151A will result in an increase in 

the disclosure burden associated with 

existing Form S–1 as a result of 

additional filings that will be made on 

Form S–1.175 Form S–1 contains 

‘‘collection of information’’ 

requirements within the meaning of the 

PRA. Although we are not amending 

Form S–1, we have submitted the Form 

S–1 ‘‘collection of information’’ (‘‘Form 

S–1 Registration Statement’’ (OMB 

Control No. 3235–0065)), which we 

estimate will increase as a result of rule 

151A, to the Office of Management and 

Budget (‘‘OMB’’) for review and 

approval in accordance with the 

PRA.176 We published notice soliciting 

comment on the increase in the 

collection of information requirements 

in the release proposing rule 151A and 

submitted the proposed collection of 

information to OMB for review and 

approval in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. 

We adopted Form S–1 pursuant to the 

Securities Act. This form sets forth the 

disclosure requirements for registration 

statements that are prepared by eligible 

issuers to provide investors with the 

information they need to make informed 

investment decisions in registered 

offerings. We anticipate that, absent 

amendments to our disclosure 

requirements to specifically address 

indexed annuities, indexed annuities 

that register under the Securities Act 

would generally register on Form 

S–1.177 As a result, we have assumed, 

for purposes of our PRA analysis, that 

this would be the case. We note, 

however, that we are providing a twoyear transition period for rule 151A and, 

during this period, we intend to 

consider how to tailor disclosure 

requirements for indexed annuities.178

The hours and costs associated with 

preparing disclosure, filing forms, and 

retaining records constitute reporting 

and cost burdens imposed by the 

collection of information. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. 

The information collection 

requirements related to registration 

statements on Form S–1 are mandatory. 

There is no mandatory retention period 

for the information disclosed, and the 

information disclosed will be made 

publicly available on the EDGAR filing 

system. 

B. Summary of Information Collection 

Because rule 151A will affect the 

number of filings on Form S–1 but not 

the disclosure required by this form, we 

do not believe that the rules will impose 

any new recordkeeping or information 

collection requirements. However, we 

expect that some insurance companies 

will register indexed annuities in the 

future that they would not previously 

have registered. We believe this will 

result in an increase in the number of 

annual responses expected with respect 

to Form S–1 and in the disclosure 

burden associated with Form S–1. At 

the same time, we expect that, on a per 

response basis, rule 151A will decrease 

the existing disclosure burden for Form 

S–1. This is because the disclosure 

burden for each indexed annuity on 

Form S–1 is likely to be lower than the 

existing burden per respondent on Form 

S–1. The decreased burden per response 

on Form S–1 will partially offset the 

increased burden resulting from the 

increase in the annual number of 

responses on Form S–1. We believe that, 

in the aggregate, the disclosure burden 

for Form S–1 will increase as a result of 

the adoption of rule 151A. 

C. Paperwork Reduction Act Burden 

Estimates 

For purposes of the PRA, we estimate 

that the rule will result in an annual 

increase in the paperwork burden for 

companies to comply with the Form 

S–1 collection of information 

requirements of approximately 60,000 

hours of in-house company personnel 

time and approximately $72,000,000 for 

the services of outside professionals. 

These estimates represent the combined 

effect of an expected increase in the 

number of annual responses on Form S– 

1 and a decrease in the expected burden 

per response. These estimates include 

the time and the cost of preparing and 

reviewing disclosure, filing documents, 

and retaining records. Our 

methodologies for deriving the above 

estimates are discussed below. 

We are adopting a new definition of 

‘‘annuity contract’’ that, on a 

prospective basis, defines a class of 

indexed annuities that are not ‘‘annuity 

contracts’’ or ‘‘optional annuity 

contracts’’ for purposes of Section 

3(a)(8) of the Securities Act, which 

provides an exemption under the 

Securities Act for certain insurance 

contracts. These indexed annuities will, 

on a prospective basis, be required to 

register under the Securities Act on 

Form S–1.179


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will be eligible to register those contracts on Form 

S–3. See supra note 177. 

180Rule 151A(a)(1). 

181Proposed Rule 151A(b)(2)(iii). 

182Rule 151A(b)(1). 

183See NAVA, supra note 9, at 57. 

184Annuity contracts are typically offered to 

purchasers on a continuous basis, and as a result, 

an insurer offering an annuity contract that is 

registered under the Securities Act generally will be 

required to update the registration statement once 

a year. See Section 10(a)(3) of the Securities Act [15 

U.S.C. 77j(a)(3)] (when prospectus used more than 

9 months after effective date of registration 

statement, information therein generally required to 

be not more than 16 months old). 

185These estimates have been revised by other 

rules that the Commission has adopted, and OMB 

approval is pending. See Supporting Statement to 

the Office of Management and Budget under the 

PRA for Securities Act Release No. 8876, available 

at: http://www.reginfo.gov/public/do/ 

DownloadDocument?

documentID=90204&version=0 (‘‘33–8876 

Supporting Statement’’). 

186The 322 indexed annuities offered in 2007 

were issued by 58 insurance companies. See NAVA, 

supra note 9, at 57. 

187See supra note 184. 

188See 33–8876 Supporting Statement, supra note 

185. 

189See Securities Act Release No. 8878 (Dec. 19, 

2007) [72 FR 73534, 73547 (Dec. 27, 2007)]. 

We received numerous comment 

letters on the proposal, and we have 

revised proposed rule 151A in response 

to the comments. However, we do not 

believe that any of the modifications 

affect the estimated reporting and cost 

burdens discussed in this PRA analysis. 

These modifications include: 

Æ Revising the proposed definition so 

that the rule will apply to a contract that 

specifies that amounts payable by the 

issuer under the contract are calculated 

at or after the end of one or more 

specified crediting periods, in whole or 

in part, by reference to the performance 

during the crediting period or periods of 

a security, including a group or index of 

securities; 180

Æ Eliminating the provision in 

proposed rule 151A that the issuer’s 

determination as to whether amounts 

payable under the contract are more 

likely than not to exceed the amounts 

guaranteed under the contract be made 

not more than three years prior to the 

date on which the particular contract is 

issued; 181 and 

Æ Adopting a requirement that 

amounts payable by the issuer and 

amounts guaranteed are to be 

determined by taking into account all 

charges under the contract, including, 

without limitation, charges that are 

imposed at the time that payments are 

made by the issuer.182

We do not believe that any of these 

changes will affect the annual increase 

in the number of responses on Form S– 

1 or the hours per response required. As 

we state below, we assume that all 

indexed annuities that are offered on or 

after January 12, 2011, will be 

registered, and that each of the 400 

registered indexed annuities will be the 

subject of one response per year on 

Form S–1. We do not expect the changes 

in the rule, as adopted, to affect our 

estimates of the increase in the number 

of annual responses required on Form 

S–1. The first change, revising the scope 

of the rule, addresses commenters’ 

concerns that the rule was overly broad 

and would reach annuities that were not 

indexed annuities, such as traditional 

fixed annuities and discretionary excess 

interest contracts. While the revision 

clarifies the intended scope of the rule 

to address these concerns, our PRA 

estimates with respect to the proposed 

rule were based on the intended scope 

of the proposed rule, which did not 

extend to these other types of annuities. 

As a result, this change has no effect on 

our estimates of the number of 

responses required on Form S–1. Our 

PRA estimates assume that all indexed 

annuities that are offered will be 

registered, and we do not believe that 

this assumption is affected by the 

elimination of the requirement that an 

insurer’s determination under rule 151A 

be made not more than three years prior 

to the date on which a particular 

contract is issued or the change to the 

manner of taking charges into account 

under the rule. In addition, the changes 

in the rule will not affect the 

information required to be disclosed by 

Form S–1, or the time required to 

prepare and file the form. 

Increase in Number of Annual 

Responses 

For purposes of the PRA, we estimate 

that there will be an annual increase of 

400 responses on Form S–1 as a result 

of the rule. In 2007, there were 322 

indexed annuity contracts offered.183

For purposes of the PRA analysis, we 

assume that 400 indexed annuities will 

be offered each year. This allows for 

some escalation in the number of 

contracts offered in the future over the 

number offered in 2007. Our Office of 

Economic Analysis has considered the 

effect of the rule on indexed annuity 

contracts with typical terms and has 

determined that these contracts would 

not meet the definition of ‘‘annuity 

contract’’ or ‘‘optional annuity contract’’ 

if they were to be issued after the 

effective date of the rule. Therefore, we 

assume that all indexed annuities that 

are offered will be registered, and that 

each of the 400 registered indexed 

annuities will be the subject of one 

response per year on Form S–1,184

resulting in the estimated annual 

increase of 400 responses on Form S–1. 

Decrease in Expected Hours per 

Response 

For purposes of the PRA, we estimate 

that there will be a decrease of 120 

hours per response on Form S–1 as a 

result of the rule. Current OMB 

approved estimates and recent 

Commission rulemaking estimate the 

hours per response on Form S–1 as 

950.185 The current hour estimate 

represents the burden for all issuers, 

both large and small. We believe that 

registration statements on Form S–1 for 

indexed annuities will result in a 

significantly lower number of hours per 

response, which, based on our 

experience with other similar contracts, 

we estimate as 600 hours per indexed 

annuity response on Form S–1. We 

attribute this lower estimate to two 

factors. First, the estimated 400 indexed 

annuity registration statements will 

likely be filed by far fewer than 400 

different insurance companies,186 and a 

significant part of the information in 

each of the multiple registration 

statements filed by a single insurance 

company will be the same, resulting in 

economies of scale with respect to the 

multiple filings. Second, many of the 

400 responses on Form S–1 each year 

will be annual updates to registration 

statements for existing contracts, rather 

than new registration statements, 

resulting in a significantly lower hour 

burden than a new registration 

statement.187 Combining our estimate of 

600 hours per indexed annuity response 

on Form S–1 (for an estimated 400 

responses) with the existing estimate of 

950 hours per response on Form S–1 

(for an estimated 768 responses),188 our 

new estimate is 830 hours per response 

(((400 × 600) + (768 × 950))/1168). 

Net Increase in Burden 

To calculate the total effect of the 

rules on the overall compliance burden 

for all issuers, large and small, we 

added the burden associated with the 

400 additional Forms S–1 that we 

estimate will be filed annually in the 

future and subtracted the burden 

associated with our reduced estimate of 

830 hours for each of the current 

estimated 768 responses. We used 

current OMB approved estimates in our 

calculation of the hours and cost burden 

associated with preparing, reviewing, 

and filing Form S–1. 

Consistent with current OMB 

approved estimates and recent 

Commission rulemaking,189 we estimate 

that 25% of the burden of preparation 

of Form S–1 is carried by the company 


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190 Id. at note 110 and accompanying text. 

191See, e.g., Allianz Letter, supra note 54; Second 

Aviva Letter, supra note 54; Letter of National 

Association for Fixed Annuities (Nov. 17, 2008) 

(‘‘Second NAFA Letter’’); Transamerica Letter, 

supra note 54. 

192Allianz Letter, supra note 54. 

193Second Aviva Letter, supra note 54. 

194Second NAFA Letter, supra note 191. 

195This estimate is for carriers ‘‘without variable 

authority.’’ The commenter does not explain the 

meaning of the phrase ‘‘without variable authority.’’ 

196NAVA, supra note 9, at 57 (58 companies 

issued indexed anuities in 2007). 

197Transamerica Letter, supra note 54. 

198See, e.g., Securities Act Release No. 8909 (Apr. 

10, 2008) [73 FR 20512, 20515 (Apr. 15, 2008)] 

(‘‘Revisions to Form S–11 Release’’). 

internally and that 75% of the burden 

is carried by outside professionals 

retained by the issuer at an average cost 

of $400 per hour.190 The portion of the 

burden carried by outside professionals 

is reflected as a cost, while the burden 

carried by the company internally is 

reflected in hours. 

The tables below illustrate our 

estimates concerning the incremental 

annual compliance burden in the 

collection of information in hours and 

cost for Form S–1. 

INCREMENTAL PRA BURDEN DUE TO

INCREASED FILINGS

Estimated 

increase in 

annual 

responses 

Hours/ 

response 

Incremental 

burden 

(hours) 

400 830 332,000 

INCREMENTAL DECREASE IN PRA BURDEN DUE TO DECREASE IN HOURS

PER RESPONSE

Estimated 

decrease in 

hours/response 

Current 

estimated 

number of 

annual filings 

Incremental 

decrease in 

burden 

(hours) 

(120) 768 (92,200) 

SUMMARY OF CHANGE IN INCREMENTAL COMPLIANCE BURDEN

Incremental burden 

(hours) 

25% Issuer 

(hours) 

75% Professional 

(hours) 

$400/hr. professional cost 

240,000 ...................................................................................................................... 60,000 180,000 $72,000,000 

D. Response to Comments on 

Commission’s Paperwork Reduction Act 

Analysis 

A few commenters commented on the 

Commission’s Paperwork Reduction Act 

analysis in the Proposing Release.191

One commenter stated that external 

costs of registering indexed annuities on 

Form S–1 will vary considerably 

depending on whether the insurer has 

previously prepared a Form S–1.192 The 

commenter stated that, for insurers that 

have not previously prepared a Form S– 

1 registration statement, external legal 

costs could be as high as $250,000– 

$500,000 for each registration statement. 

The same commenter estimated external 

legal costs for an issuer that has 

previously filed a Form S–1 at $50,000– 

$100,000. Another commenter estimated 

external legal costs for preparation and 

filing of a Form S–1 registration 

statement with the SEC at $350,000 for 

the first few years, which, the 

commenter stated, would decrease over 

time as the insurer gained more 

expertise.193 However, these 

commenters did not specify the sources 

of these cost estimates or how they were 

made. 

As stated above, we estimate the 

average burden per indexed annuity 

response on Form S–1 to be 600 hours. 

We further estimate that 75% of that 

burden will be carried by outside 

professionals retained by the issuer at 

an average cost of $400 per hour. 

Accordingly, we estimate the cost for 

outside professionals for each indexed 

annuity registration statement on Form 

S–1 to be on average $180,000 ((600 × 

.75) × $400). We do not believe that it 

is necessary to change our estimate of 

outside professional costs based on the 

commenters’ estimated costs. The 

$250,000–$500,000 range cited by the 

commenters is for an issuer that has not 

previously filed a Form S–1, with 

commenters acknowledging that the 

costs to an experienced filer would be 

lower (as low as $50,000–$100,000). Our 

$180,000 estimate reflects outside 

professional costs incurred not only by 

first-time Form S–1 filers, but also the 

costs of preparing Form S–1 for 

contracts offered by experienced Form 

S–1 filers, as well as annual updates to 

existing Form S–1 registration 

statements, which we expect to be 

significantly lower than costs incurred 

by first-time filers. 

One commenter cites a cost of 

$255,000 for the insurer to prepare a 

registration statement.194 It is not clear 

whether this cost represents only 

external costs or total costs. The 

commenter also estimates the cost of 

preparing a registration statement for 

certain types of carriers at $62,500 195

and further indicates that there are 27 

such carriers issuing indexed annuities, 

which is approximately half the number 

of insurers currently issuing indexed 

annuities.196 Because the commenter 

does not provide information as to the 

basis for the $255,000 figure, and 

because the $62,500 figure is 

substantially below the Commission’s 

estimate of $180,000, we are not 

revising our estimate of the burden of 

registering an indexed annuity on Form 

S–1 to reflect these estimates. 

Another commenter stated that the 

Commission’s estimate of outside 

professional costs of $400 per hour does 

not reflect market rates for securities 

counsel.197 However, the commenter 

did not cite a different rate and did not 

explain the basis for its disagreement 

with the $400 per hour rate cited by the 

Commission. Our estimate of $400 per 

hour for outside professionals retained 

by the issuer is consistent with recent 

rulemakings and is based on discussions 

between our staff and several law 

firms.198 Accordingly, we are not 

changing our estimate of the cost per 

hour of outside professional costs. The 

commenter further stated that the 

estimates of time involved are low for 

persons unfamiliar with the process of 

registration of securities under the 

federal securities laws and the 

anticipated need for interaction with 

Commission staff. However, as 

discussed, our estimate of time required 

to prepare a registration statement 

reflects time needed not only by firsttime Form S–1 filers, but also the time 

involved in preparing Form S–1 for 

contracts offered by experienced Form 

S–1 filers, as well as annual updates to 

the existing Form S–1 registration 

statement, which we expect to be 

significantly less than time needed by 

first-time filers. We are not revising our 

estimate of time involved in preparing 

registration statements on Form S–1. 

V. Cost-Benefit Analysis 

The Commission is sensitive to the 

costs and benefits imposed by its rules. 

Rule 151A is intended to clarify the 

status under the federal securities laws 


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199See, e.g., Advantage Group Letter, supra note 

54; Cornell Letter, supra note 7; FINRA Letter, 

supra note 7; ICI Letter, supra note 7; Letter of State 

of Washington Department of Financial Institutions 

Securities division (Nov. 17, 2008) (‘‘Washington 

State Letter’’). 

200FINRA Letter, supra note 7. 

201Washington State Letter, supra note 199. 202See supra note 119. 

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 

for certain insurance contracts. The rule 

prospectively defines certain indexed 

annuities as not being ‘‘annuity 

contracts’’ or ‘‘optional annuity 

contracts’’ 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. With 

respect to these annuities, investors are 

entitled to all the protections of the 

federal securities laws, including full 

and fair disclosure and sales practice 

protections. We are also adopting new 

rule 12h–7 under the Exchange Act, 

which exempts certain insurance 

companies from Exchange Act reporting 

with respect to indexed annuities and 

certain other securities that are 

registered under the Securities Act and 

regulated as insurance under state law. 

In the Proposing Release, we 

identified certain costs and benefits and 

requested comment on our cost-benefit 

analysis, including identification of any 

costs and benefits not discussed. We 

also requested that commenters provide 

empirical data and factual support for 

their views. 

Discussed below is our analysis of the 

costs and benefits of rules 151A and 

12h–7, as well as the issues raised by 

commenters. As noted above, we are 

sensitive to the costs imposed by our 

rules and we have estimated the costs 

associated with adoption of rule 151A. 

We emphasize, however, that the 

burdens of complying with the federal 

securities laws apply to all market 

participants who issue or sell securities 

under the federal securities laws. Rule 

151A, by defining those indexed 

annuities that are not entitled to the 

Section 3(a)(8) exemption, does not 

impose any greater or different burdens 

than those imposed on other similarly 

situated market participants. Rather, the 

effect of rule 151A is that issuers and 

sellers of indexed annuities that are not 

entitled to the Section 3(a)(8) exemption 

are treated in the same manner under 

the federal securities laws as issuers and 

sellers of other registered securities, and 

that investors purchasing these 

instruments receive the same disclosure, 

antifraud, and sales practice protections 

that apply when they are offered and 

sold other securities that pose similar 

investment risks. 

A. Benefits 

We anticipate that the rules will 

benefit investors and covered 

institutions by: (i) Creating greater 

regulatory certainty with regard to the 

status of indexed annuities under the 

federal securities laws; (ii) enhancing 

disclosure of information needed to 

make informed investment decisions 

about indexed annuities; (iii) applying 

sales practice protections to those 

indexed annuities that are outside the 

insurance exemption; (iv) enhancing 

competition; and (v) relieving from 

Exchange Act reporting obligations 

insurers that issue certain securities that 

are regulated as insurance under state 

law. 

Regulatory Certainty 

Rule 151A will provide the benefit of 

increased regulatory certainty to 

insurance companies that issue indexed 

annuities and the distributors who sell 

them, as well as to purchasers of 

indexed annuities. The status of 

indexed annuities under the federal 

securities laws has been uncertain since 

their introduction in the mid-1990s. 

Under existing precedents, the status of 

each indexed annuity is determined 

based on a facts and circumstances 

analysis of factors that have been 

articulated by the U.S. Supreme Court. 

Rule 151A will bring greater certainty 

into this area by defining a class of 

indexed annuities that are outside the 

scope of the insurance exemption and 

by providing that an insurer’s 

determination, in accordance with the 

rule, will be conclusive. 

Indexed annuities possess both 

insurance and securities features, and 

fall somewhere between traditional 

fixed annuities, which are clearly 

insurance falling within Section 3(a)(8), 

and variable annuities, which are 

clearly securities. We have carefully 

considered where to draw the line, and 

we believe that the line that we have 

drawn is rational and reasonably related 

to fundamental concepts of risk and 

insurance. 

Some commenters agreed that the 

proposal would provide greater 

regulatory certainty.199 One commenter 

stated that current uncertainty regarding 

the status of indexed annuities has 

impeded the ability of regulators to 

protect indexed annuity consumers,200

and another stated that it is apparent 

that clarification is needed and will set 

a clear national standard of regulatory 

oversight for indexed annuities.201

Some commenters, however, expressed 

concern that the principles-based 

approach provides insufficient guidance 

regarding implementation and the 

methodologies and assumptions that are 

appropriate and could result in 

inconsistent determinations by different 

insurance companies and present 

enforcement and litigation risk.202

While we believe that further guidance 

may be helpful in response to specific 

questions from affected insurance 

companies, commenters generally did 

not articulate with specificity the areas 

where they believe that further guidance 

is required. As a result, in order to 

provide guidance in the manner that 

would be most helpful, we encourage 

insurance companies, sellers of indexed 

annuities, and other affected parties to 

submit specific requests for guidance, 

which we will consider during the twoyear period between adoption of rule 

151A and its effectiveness. 

Disclosure 

Rule 151A extends the benefits of full 

and fair disclosure under the federal 

securities laws to investors in indexed 

annuities that, under the rule, fall 

outside the insurance exemption. 

Without such disclosure, investors face 

significant obstacles in making informed 

investment decisions with regard to 

purchasing indexed annuities that 

expose them to investment risk. Indexed 

annuities are similar in many ways to 

mutual funds, variable annuities, and 

other securities. Investors in indexed 

annuities are confronted with many of 

the same risks and benefits that other 

securities investors are confronted with 

when making investment decisions. 

Extending the federal securities 

disclosure regime to indexed annuities 

under which amounts payable by the 

insurer are more likely than not to 

exceed the amounts guaranteed should 

help to provide investors with the 

information they need. 

Disclosures required for registered 

indexed annuities include information 

about costs (such as surrender charges); 

the method of computing indexed 

return (e.g., applicable index, method 

for determining change in index, caps, 

participation rates, spreads); minimum 

guarantees, as well as guarantees, or 

lack thereof, with respect to the method 

for computing indexed return; and 

benefits (lump sum, as well as annuity 

and death benefits). We think there are 

significant benefits to the disclosures 

provided under the federal securities 

laws. This information will be public 

and accessible to all investors, 

intermediaries, third party information 

providers, and others through the 


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203See, e.g., Section 12(a)(2) of the Securities Act 

[15 U.S.C. 77l(a)(2)] (imposing liability for 

materially false or misleading statements in a 

prospectus or oral communication, subject to a 

reasonable care defense). See also Section 10(b) of 

the Exchange Act [15 U.S.C. 78j(b)]; rule 10–5 under 

the Exchange Act [17 CFR 240.10b–;5]; Section 17 

of the Securities Act [15 U.S.C. 77q] (general 

antifraud provisions). 

204See, e.g., Alabama Letter, supra note 72; 

Cornell Letter, supra note 7; FPA Letter, supra note 

72; Hartford Letter, supra note 55. 

205FPA Letter, supra note 72. 

206Hartford Letter, supra note 55. 

207See supra note 94 and accompanying text. 

208See Form N–4 [17 CFR 239.17b and 274.11c] 

(registration form for variable annuities); Form N– 

6 [17 CFR 239.17c and 274.11d] (registration form 

for variable life insurance). 

209See supra note 81 and accompanying text. 

210See, e.g., FINRA, Fund Analyzer, available at: 

http://www.finra.org/fundanalyzer (‘‘FINRA Fund 

Analyzer’’). 

211Cf. NASD Rule 2821 (rule designed to enhance 

broker-dealers’ compliance and supervisory systems 

and provide more comprehensive and targeted 

Commission’s Electronic Data 

Gathering, Analysis and Retrieval 

(‘‘EDGAR’’) system. Public availability 

of this information will be helpful to 

investors in making informed decisions 

about purchasing indexed annuities. 

The information will enhance investors’ 

ability to compare various indexed 

annuities and also to compare indexed 

annuities with mutual funds, variable 

annuities, and other securities and 

financial products. The potential 

liability for materially false and 

misleading statements and omissions 

under the federal securities laws will 

provide additional encouragement for 

accurate and complete disclosures by 

insurers that issue indexed annuities 

and by the broker-dealers who sell 

them.203

In addition, we believe that potential 

purchasers of indexed annuities that an 

insurer determines do not fall outside 

the insurance exemption under the rule 

may benefit from enhanced information 

that will help a purchaser to evaluate 

the value of the contract and, 

specifically, the index-based return. 

Specifically, an indexed annuity that is 

not registered under the Securities Act 

after the effective date of rule 151A 

would reflect the insurer’s 

determination that investors in the 

annuity will not receive more than the 

amounts guaranteed under the contract 

at least half the time. 

A number of commenters 

acknowledged the need for improved 

disclosures and agreed that indexed 

annuity purchasers will benefit from 

disclosures required under the federal 

securities laws.204 These commenters 

noted that indexed annuities are 

complicated products that can confuse 

experienced investment professionals 

and consumers, and strongly supported 

rule 151A as improving critical 

disclosures about these products. One 

commenter expressed strong support for 

enhanced disclosures regarding critical 

costs of indexed annuities, such as 

surrender charges, and the method of 

computing indexed returns, as well as 

guaranteed interest rates.205 Another 

commenter noted that the Commission 

could greatly improve consumer 

protection by subjecting indexed 

annuities that are not ‘‘annuity 

contracts’’ under rule 151A to the 

‘‘thorough, standardized, accessible, and 

transparent disclosure requirements and 

antifraud rules of the federal securities 

laws.’’ 206

However, some commenters argued 

that the proposed rule would not result 

in enhanced disclosure, in particular 

because the Commission’s disclosure 

scheme is not tailored to indexed 

annuities and Form S–1 is not wellsuited to indexed annuities.207 We 

acknowledge that, as a result of indexed 

annuity issuers having historically 

offered and sold their contracts without 

complying with the federal securities 

laws, the Commission has not created 

specific disclosure requirements 

tailored to these products. This fact, 

though, is not relevant in determining 

whether indexed annuities are subject to 

the federal securities laws. The 

Commission has a long history of 

creating appropriate disclosure 

requirements for different types of 

securities, including securities issued by 

insurance companies, such as variable 

annuities and variable life insurance.208

We note that we are providing a twoyear transition period for rule 151A, 

and, during this period, we intend to 

consider how to tailor disclosure 

requirements for indexed annuities. We 

encourage indexed annuity issuers to 

work with the Commission during that 

period to address their concerns. 

Some commenters also cited recent 

efforts by state insurance regulators to 

address disclosure concerns with 

respect to indexed annuities as evidence 

that federal securities regulation is 

unnecessary.209 However, as we state 

above, we disagree. We do not believe 

that the states’ regulatory efforts, no 

matter how strong, can substitute for our 

obligation to identify securities covered 

by the federal securities laws and the 

protections Congress intended to apply. 

State insurance laws, enforced by 

multiple regulators whose primary 

charge is the solvency of the issuing 

insurance company, cannot serve as an 

adequate substitute for uniform, 

enforceable investor protections 

provided by the federal securities laws. 

We have carefully considered the 

concerns raised by commenters, and we 

continue to believe that rule 151A will 

greatly enhance disclosures regarding 

indexed annuities. In addition to the 

specific benefits described above, we 

anticipate that these enhanced 

disclosures will also benefit the overall 

financial markets and their participants. 

We anticipate that the disclosure of 

terms of indexed annuities will be 

broadly beneficial to investors, 

enhancing the efficiency of the market 

for indexed annuities through increased 

competition. Disclosure will make 

information on indexed annuity 

contracts, including terms, publicly 

available. Public availability of terms 

will better enable investors to compare 

indexed annuities and may focus 

attention on the price competitiveness 

of these products. It will also improve 

the ability of third parties to price 

contracts, giving purchasers a better 

understanding of the fees implicit in the 

products. We anticipate that third-party 

information providers may provide 

services to price or compare terms of 

different indexed annuities. 

Analogously, we note that public 

disclosure of mutual fund information 

has enabled third-party information 

aggregators to facilitate comparison of 

fees.210 We believe that increasing the 

level of price transparency and the 

resulting competition through enhanced 

disclosure regarding indexed annuities 

would be beneficial to investors. It 

could also expand the size of the 

market, as investors may have increased 

confidence that indexed annuities are 

competitively priced. 

Sales Practice Protections 

Investors will also benefit because, 

under the federal securities laws, 

persons effecting transactions in 

indexed annuities that fall outside the 

insurance exemption under rule 151A 

will be required to be registered brokerdealers or become associated persons of 

a broker-dealer through a networking 

arrangement. Thus, the broker-dealer 

sales practice protections will apply to 

transactions in registered indexed 

annuities. As a result, investors who 

purchase these indexed annuities after 

the effective date of rule 151A will 

receive the benefits associated with a 

registered representative’s obligation to 

make only recommendations that are 

suitable. The registered representatives 

who sell registered indexed annuities 

will be subject to supervision by the 

broker-dealer with which they are 

associated. Both the selling brokerdealer and its registered representatives 

will be subject to the oversight of 

FINRA.211 The registered broker-dealers 


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protection to investors regarding deferred variable 

annuities). See Order Approving FINRA’s NASD 

Rule 2821 Regarding Members’ Responsibilities for 

Deferred Variable Annuities (Approval Order), 

Securities Exchange Act Release No. 56375 (Sept. 

7, 2007), 72 FR 52403 (Sept. 13, 2007) (SR–NASD– 

2004–183); Corrective Order, Securities Exchange 

Act Release No. 56375A (Sept. 14, 2007), 72 FR 

53612 (September 19, 2007) (SR–NASD–2004–183) 

(correcting the rule’s effective date). 

212See, e.g., Alabama Letter, supra note 72; 

Cornell Letter, supra note 7; FPA Letter, supra note 

72; FINRA Letter, supra note 7; Hartford Letter, 

supra note 55; Wyoming Letter, supra note 72. 

213Alabama Letter, supra note 72; Wyoming 

Letter, supra note 72. 

214See supra note 81 and accompanying text. 

215NAIC Suitability in Annuity Transactions 

Model Regulation (Model 275–1) (2003). National 

Association of Insurance Commissioners, Draft 

Model Summaries, available at: http:// 

www.naic.org/committees_models.htm. See, e.g., 

Letter A, supra note 76; American Bankers Letter, 

supra note 74; CAI 151A Letter, supra note 54; 

NAFA Letter, supra note 54; NAIC Officer Letter, 

supra note 54; NAIFA Letter, supra note 54. 

216See, e.g., American Equity Letter, supra note 

54; Aviva Letter, supra note 54; Coalition Letter, 

supra note 54; Iowa Letter, supra note 74; Maryland 

Letter, supra note 54; NAIC Officer Letter, supra 

note 54; NAFA Letter, supra note 54. 

217See, e.g., NAIC Officer Letter, supra note 54. 218 Indeed, at least one state regulator 

acknowledged the developmental nature of state 

efforts and the lack of uniformity in those efforts. 

See Voss Letter, supra note 13. 

219See, e.g., FINRA Fund Analyzer, supra note 

210. 

220See, e.g., Advantage Group Letter, supra note 

54; Allianz Letter, supra note 54; American Equity 

Letter, supra note 54; American National Letter, 

supra note 54; Aviva Letter, supra note 54; 

Coalition Letter, supra note 54; FBL Letter, supra 

note 73; National Western Letter, supra note 54; Old 

Mutual Letter, supra note 54; Southwest Letter, 

supra note 136. 

We note that a number of commenters supporting 

the proposal are industry participants, such as 

insurers, see, e.g., Hartford letter, supra note 55, 

and industry groups, see, e.g., ICI letter, supra note 

7. 

221See, e.g., Allianz Letter, supra note 54; Aviva 

Letter, supra note 54; Coalition Letter, supra note 

54. 

will also be required to comply with 

specific books and records, supervisory, 

and other compliance requirements 

under the federal securities laws, as 

well as be subject to the Commission’s 

general inspections and, where 

warranted, enforcement powers. 

A number of commenters agreed that 

indexed annuity purchasers will benefit 

from the sales practice protections 

accorded by the federal securities 

laws.212 These commenters indicated 

that sales practice protections accorded 

by the federal securities laws are the 

most effective means of preventing 

abusive sales practices. Some 

commenters specifically stated that the 

protections of the federal securities laws 

are needed for the protection of seniors 

in the indexed annuity marketplace.213

As stated above, however, a number 

of commenters argued that, because of 

efforts by state insurance regulators to 

address sales practice concerns with 

respect to indexed annuities, federal 

securities regulation is unnecessary and 

could result in duplicative or 

overlapping regulation.214 Commenters 

cited, in particular, the adoption by the 

majority of states of the NAIC Suitability 

in Annuity Transactions Model 

Regulation.215 Commenters also cited 

the existence of state market conduct 

examinations, the use of state 

enforcement and investigative authority, 

licensing and education requirements 

applicable to insurance agents who sell 

indexed annuities, and a number of 

recent and ongoing efforts by state 

insurance regulators.216 Commenters 

also noted recent efforts by state 

regulators addressed to annuities 

generally, such as the creation of NAIC 

working groups to review and consider 

possible improvements to the NAIC 

Suitability in Annuity Transactions 

Model Regulation.217

However, for the same reasons that we 

do not believe recent state disclosure 

efforts can substitute for federally 

required disclosures, we do not believe 

that the state’s efforts to address sales 

practice concerns, no matter how strong, 

can substitute for our responsibility to 

identify securities covered by the 

statutes and the protections Congress 

intended to apply. State insurance laws, 

enforced by multiple regulators whose 

primary charge is the solvency of the 

issuing insurance company, cannot 

serve as an adequate substitute for 

uniform, enforceable investor 

protections provided by the federal 

securities laws.218 Where the purchaser 

of an indexed annuity assumes the 

investment risk of an instrument that 

fluctuates with the securities markets, 

and the contract therefore does not fall 

within the Section 3(a)(8) exemption, 

the application of state insurance 

regulation, no matter how effective, is 

not determinative as to whether the 

contract is subject to the federal 

securities laws. 

Enhanced Competition 

Rule 151A may result in enhanced 

competition among indexed annuities, 

as well as between indexed annuities 

and other competing financial products, 

such as mutual funds and variable 

annuities. Rule 151A will result in 

enhanced disclosure, and, as a result, 

more informed investment decisions by 

potential investors, which may enhance 

competition among indexed annuities 

and competing products. The greater 

clarity that results from rule 151A may 

enhance competition as well because 

insurers who may have been reluctant to 

issue indexed annuities while their 

status was uncertain may now decide to 

enter the market. Similarly, registered 

broker-dealers who currently may be 

unwilling to sell unregistered indexed 

annuities because of their uncertain 

regulatory status may become willing to 

sell indexed annuities that are 

registered, thereby increasing 

competition among distributors of 

indexed annuities. Further, we believe 

that the Exchange Act exemption may 

enhance competition among insurance 

products and between insurance 

products and other financial products 

because the exemption may encourage 

insurers to innovate and introduce a 

range of new insurance contracts that 

are securities, since the exemption will 

reduce the regulatory costs associated 

with doing so. Increased competition 

may benefit investors through 

improvements in the terms of insurance 

products and other financial products, 

such as reductions of direct or indirect 

fees. 

We anticipate that the disclosure of 

terms of indexed annuities will be 

broadly beneficial to investors, 

enhancing the efficiency of the market 

for indexed annuities through increased 

competition. Disclosure will make 

information on indexed annuity 

contracts, including terms, publicly 

available. Public availability of terms 

will better enable investors to compare 

indexed annuities and may focus 

attention on the price competitiveness 

of these products. It will also improve 

the ability of third parties to price 

contracts, giving purchasers a better 

understanding of the fees implicit in the 

products. We anticipate that third-party 

information providers may provide 

services to price or compare terms of 

different indexed annuities. 

Analogously, we note that public 

disclosure of mutual fund information 

has enabled third-party information 

aggregators to facilitate comparison of 

fees.219 We believe that increasing the 

level of price transparency and the 

resulting competition through enhanced 

disclosure regarding indexed annuities 

would be beneficial to investors. It 

could also expand the size of the 

market, as investors may have increased 

confidence that indexed annuities are 

competitively priced. 

A number of commenters argued that 

proposed rule 151A would hinder 

competition, citing a number of factors 

that they argued would result in 

indexed annuities becoming less 

available.220 Commenters indicated that 

they did not believe that broker-dealers 

would become more willing to sell 

indexed annuities.221 They stated that 


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222See, e.g., Allianz Letter, supra note 54; Aviva 

Letter, supra note 54. 

223Allianz Letter, supra note 54. 

224See, e.g., Allianz Letter, supra note 54; 

American Equity Letter, supra note 54; Aviva 

Letter, supra note 54; Coalition Letter, supra note 

54. 

225Second Old Mutual Letter, supra note 76; 

Southwest Letter, supra note 136. 

226See, e.g., American Equity Letter, supra note 

54; Coalition Letter, supra note 54; Old Mutual 

Letter, supra note 54. 

227See, e.g., Aviva Letter, supra note 54; National 

Western Letter, supra note 54; Old Mutual Letter, 

supra note 54. 

228 In addition, because we are adopting both 

rules 151A and 12h–7, insurers that currently are 

not Exchange Act reporting companies and that will 

be required to register indexed annuities under the 

Securities Act will be entitled to rely on the 

Exchange Act exemption and obtain the benefits of 

the exemption. We have not included potential cost 

savings to these companies in our computation 

because they are not currently Exchange Act 

reporting companies. 

229These estimates are based on the requirement 

to file one Form 10–K each year and three Forms 

10–Q each year, and on our review of the actual 

number of Form 8–K filings by these insurers in 

calendar year 2007. 

230This consists of $8,748,950 attributable to 

internal personnel costs, representing 49,994 

burden hours at $175 per hour, and $6,665,600 

attributable to the costs of outside professionals, 

representing 16,664 burden hours at $400 per hour. 

Our estimates of $175 per hour for internal time and 

$400 per hour for outside professionals are 

consistent with the estimates that we have used in 

recent rulemaking releases. 

Our total burden hour estimate for Forms 10–K, 

10–Q, and 8–K is 66,658 hours, which, consistent 

with current OMB estimates and recent 

Commission rulemaking, we have allocated 75% 

(49,994 hours) to the insurers internally and 25% 

(16,664 hours) to outside professional time. See 

Supporting Statement to the Office of Management 

and Budget under the PRA for Securities Act 

Release No. 8819, available at: http://www.reginfo.

gov/public/do/DownloadDocument?document

ID=42924&version=1. The total burden hour 

estimate was derived as follows. The burden 

attributable to Form 10–K is 52,704 hours, 

representing 24 Forms 10–K at 2,196 hours per 

Form 10–K. The burden attributable to Form 10–Q 

is 13,824 hours, representing 72 Forms 10–Q at 192 

hours per Form 10–Q. The burden attributable to 

Form 8–K is 130 hours, representing 26 Forms 8– 

K at 5 hours per Form 8–K. The burden hours per 

response for Form 10–K (2,196 hours), Form 10–Q 

(192 hours), and Form 8–K (5 hours) are consistent 

with current OMB estimates. 

231 Great-West Letter, supra note 138. 

232The $642,275 cost was derived by dividing the 

total annual cost savings for all insurance 

companies that we believe will be entitled to the 

rule 12h–7 exemption ($15,414,600) by the number 

of such companies (24). See supra text 

accompanying notes 228 and 230. 

233While some distributors may register as 

broker-dealers or cease distributing indexed 

annuities that will be required to be registered as 

a result of rule 151A, based on our experience with 

insurance companies that issue insurance products 

that are also securities, we believe that the vast 

majority will continue to distribute those indexed 

annuities via networking arrangements with 

registered broker-dealers, as discussed below. 

234See, e.g., Cornell Letter, supra note 7; NASAA 

Letter, supra note 133. 

broker-dealers have limited ‘‘shelf 

space’’ for new products.222 One 

commenter stated that a broker-dealer 

would incur start-up costs in selling 

indexed annuities, such as becoming 

familiar with the products, performing 

due diligence, setting up supervisory 

systems, introducing appropriate 

technology, and becoming licensed to 

sell insurance, and these costs would 

deter a broker-dealer from selling 

indexed annuities.223 A number of 

commenters stated that many agents 

currently selling indexed annuities 

would stop selling them, rather than 

incur the costs of becoming licensed to 

sell securities and becoming associated 

with a broker-dealer.224 Two 

commenters stated that some agents 

would not be able to associate with a 

broker-dealer due to remote locations of 

the agents, so that rural areas would be 

underserved.225 Commenters further 

pointed to obstacles to distributors 

networking with registered brokerdealers.226 Commenters also stated that 

some insurance companies may stop 

issuing indexed annuities, because of 

the rule’s adverse impact on distribution 

and because of the costs that the rule 

would impose on insurers, such as the 

cost of registering indexed annuities.227

The Commission believes that there 

could be costs associated with 

diminished competition as a result of 

rule 151A. As the commenters note, 

some insurance companies may stop 

issuing indexed annuities, and some 

broker-dealers and agents may 

determine not to sell indexed annuities. 

We recognize that the impact of rule 

151A on competition may be mixed, 

but, on balance, we continue to believe 

that rule 151A will provide the benefits 

described above and has the potential to 

increase competition. In this regard, the 

demand for financial products is 

relatively fixed, in the aggregate. Any 

potential reduction in indexed annuities 

sold under the rule would likely 

correspond with an increase in the sale 

of other financial products, such as 

mutual funds or variable annuities. 

Thus, total reductions in competition 

may not be significant, when effects on 

the financial industry as a whole, 

including insurance companies together 

with other providers of financial 

instruments, are considered. Within the 

insurance industry, if some insurers 

cease selling indexed annuities, it is 

also likely that these insurers will sell 

other products through the same 

distribution channels, such as annuities 

with fixed interest rates. 

Relief From Reporting Obligations 

The exemption from Exchange Act 

reporting requirements with respect to 

certain securities that are regulated as 

insurance under state law will provide 

a cost savings to insurers. We have 

identified approximately 24 insurance 

companies that currently are subject to 

Exchange Act reporting obligations 

solely as a result of issuing insurance 

contracts that are securities and that we 

believe will be entitled to an exemption 

from Exchange Act reporting obligations 

under rule 12h–7.228 We estimate that, 

each year, these insurers file an 

estimated 24 annual reports on Form 

10–K, 72 quarterly reports on Form 10– 

Q, and 26 reports on Form 8–K.229

Based on current cost estimates, we 

believe that the total estimated annual 

cost savings to these companies will be 

approximately $15,414,600.230

One commenter estimated a higher 

cost savings.231 The commenter 

estimated costs of $1.5–$2 million 

annually for an issuer to comply with 

Exchange Act reporting obligations. 

Under our current cost estimates, we 

estimate that it costs $642,275 per 

issuer 232 to comply with these 

obligations. We are not revising our 

estimate, however, because the 

commenter did not explain how it 

arrived at its estimate and we have no 

basis for determining whether or not it 

is accurate. 

B. Costs 

While the rules we are adopting will 

result in significant cost savings for 

insurers as a result of the exemption 

from Exchange Act reporting 

requirements, we believe that there will 

be costs associated with the rules. These 

include costs associated with: (i) 

Determining under rule 151A whether 

amounts payable by the insurer under 

an indexed annuity are more likely than 

not to exceed the amounts guaranteed 

under the contract; (ii) preparing and 

filing required Securities Act 

registration statements with the 

Commission; (iii) printing prospectuses 

and providing them to investors; (iv) 

entering into a networking arrangement 

with a registered broker-dealer for those 

entities that are not currently parties to 

a networking arrangement or registered 

as broker-dealers and that intend to 

distribute indexed annuities that are 

registered as securities; 233 (v) loss of 

revenue to insurance companies that 

determine to cease issuing indexed 

annuities; and (vi) diminished 

competition that may result. 

Some commenters opined that the 

benefits of the proposal to indexed 

annuity purchasers would outweigh any 

costs to the indexed annuity 

industry.234 One commenter, for 

example, recognized that the proposal 

would impose some compliance costs 


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235Cornell Letter, supra note 7. 

236See, e.g., Allianz Letter, supra note 54; ACLI 

Letter, supra note 94; American Equity Letter, supra 

note 54; Coalition Letter, supra note 54; Old Mutual 

Letter, supra note 54; Second Aviva Letter, supra 

note 54. Southwest Letter, supra note 136; 

Transamerica Letter, supra note 54. 

237See, e.g., American National Letter, supra note 

54; National Western Letter, supra note 54; Old 

Mutual Letter, supra note 54; Southwest Letter, 

supra note 136. 

238See infra Section VII. 

239See generally Black and Skipper, supra note 

39, at 26–47, 890–99. 

240See, e.g., American Equity Letter, supra note 

54; National Western Letter, supra note 54; 

Sammons Letter, supra note 54. The commenters 

did not provide cost estimates for performing the 

analysis necessary under the rule. 

241See, e.g., Aviva Letter, supra note 54; 

Academy Letter, supra note 54. We give substantial 

weight to the views of the Academy on this point, 

given their expertise in this type of analysis, and 

are not persuaded that the contrary comments of 

several issuers are representative of industry 

practice. See BLACK’S LAW DICTIONARY 39 (8th 

ed. 2004) (An actuary is a statistician who 

determines the present effects of future contingent 

events and who calculates insurance and pension 

rates on the basis of empirically based tables.); 

American Academy of Actuaries, Mission, available 

at: http://www.actuary.org/mission.asp (The 

mission of the Academy is to, among other things, 

provide independent and objective actuarial 

information, analysis, and education for the 

formation of sound public policy.). 

242See supra Part IV.C. 

243This cost increase is estimated by multiplying 

the total annual hour burden (60,000 hours) by the 

estimated hourly wage rate of $175 per hour. 

Consistent with recent rulemaking releases, we 

estimate the value of work performed by the 

company internally at a cost of $175 per hour. 

244 $10,500,000 (in-house personnel) + 

$72,000,000 (outside professionals). 

245See, e.g., Allianz Letter, supra note 54; Second 

Aviva Letter, supra note 54; Second NAFA Letter, 

supra note 191. 

246Allianz Letter, supra note 54. 

on the indexed annuity industry, but 

stated that these costs are minimal 

relative to the gains to investors in 

regulatory oversight.235 The commenter 

stated that the rule would bring clarity 

regarding the status of indexed 

annuities under the federal securities 

laws and would subject indexed annuity 

sales to the application of suitability 

and antifraud protections under the 

federal securities laws. 

A number of other commenters, 

however, stated that the Commission 

significantly underestimated the costs of 

the proposal.236 As discussed below, 

these commenters stated that the 

proposal would impose substantial costs 

throughout the industry, affecting 

insurers, agents, marketing 

organizations. Commenters also stated 

that consumers would face additional 

costs as a result of the proposal, as the 

costs of product development and 

offering and selling registered securities 

are passed on to consumers.237 We also 

received a number of comments 

specifically stating that the proposal 

would have an adverse impact on small 

entities, such as small insurance 

distributors.238

The following is a more detailed 

discussion of specific costs that we 

believe will be associated with the rule. 

We specifically identified and discussed 

each of these costs in the Proposing 

Release. We received comments on each 

identified cost. 

Determination Under Rule 151A 

Insurers may incur costs in 

performing the analysis necessary to 

determine whether amounts payable 

under an indexed annuity would be 

more likely than not to exceed the 

amounts guaranteed under the contract. 

This analysis calls for the insurer to 

analyze expected outcomes under 

various scenarios involving different 

facts and circumstances. Insurers 

routinely undertake such analyses for 

purposes of pricing and valuing their 

contracts.239 As a result, we believe that 

the costs of undertaking the analysis for 

purposes of the rule may not be 

significant. However, the 

determinations necessary under the rule 

may result in some additional costs for 

insurers that issue indexed annuities, 

either because the timing of the 

determination does not coincide with 

other similar analyses undertaken by the 

insurer or because the level or type of 

actuarial and legal analysis that the 

insurer determines is appropriate under 

the rule is different or greater than that 

undertaken for other purposes, or for 

other reasons. These costs, if any, could 

include the costs of software, as well as 

the costs of internal personnel and 

external consultants (e.g., actuarial, 

accounting, legal). 

Several commenters who issue 

indexed annuities disputed that insurers 

undertake these analyses.240 Other 

commenters, however, confirmed that 

these analytical methods exist and are 

used by insurers for internal 

purposes.241 We continue to believe that 

because insurers routinely undertake 

these types of analyses, the costs of 

doing so for purposes of the rule may 

not be significant. 

Securities Act Registration Statements 

As noted above, we believe that 

significant benefits arise from the 

registration of indexed annuities, 

including enhanced disclosures of 

critical information regarding these 

products. Without such disclosure, 

investors face significant obstacles in 

making informed investment decisions 

with regard to purchasing indexed 

annuities that expose investors to 

securities investment risk. Investors in 

indexed annuities are confronted with 

many of the same risks and benefits that 

other securities investors are confronted 

with when making investment 

decisions. Extending the federal 

securities disclosure regime to indexed 

annuities that impose investment risk 

should help to provide investors with 

the information they need. The costs of 

preparing and filing registration 

statements are not unique to indexed 

annuities that are outside the scope of 

the Section 3(a)(8) exemption for 

annuities as a result of rule 151A, but 

apply to all issuers of registered 

securities. However, we are sensitive to 

these costs and discuss them below, 

along with comments that we received 

on this analysis. 

Insurers will incur costs associated 

with preparing and filing registration 

statements for indexed annuities that 

are outside the insurance exemption as 

a result of rule 151A. These include the 

costs of preparing and reviewing 

disclosure, filing documents, and 

retaining records. Our Office of 

Economic Analysis has considered the 

effect of the rule on indexed annuity 

contracts with typical terms and has 

determined that, more likely than not, 

these contracts would not meet the 

definition of ‘‘annuity contract’’ or 

‘‘optional annuity contract’’ if they were 

issued after the effective date of the rule. 

For purposes of the PRA, we have 

estimated an annual increase in the 

paperwork burden for companies to 

comply with the rules to be 60,000 

hours of in-house company personnel 

time and $72,000,000 for services of 

outside professionals.242 We estimate 

that the additional burden hours of inhouse company personnel time will 

equal total internal costs of 

$10,500,000 243 annually, resulting in 

aggregate annual costs of $82,500,000 244

for in-house personnel and outside 

professionals. These costs reflect the 

assumption that filings will be made on 

Form S–1 for 400 contracts each year, 

which we made for purposes of the 

PRA. 

As indicated in our analysis for 

purposes of the PRA, we received 

several comments questioning our 

estimate of the costs of registering an 

indexed annuity on Form 

S–1.245 One commenter stated that, for 

insurers that have not previously 

prepared a Form S–1 registration 

statement, external legal costs could be 

as high as $250,000–$500,000 for each 

registration statement.246 However, the 

commenter did not specify the source of 

this range of cost estimates or how it 

was made. The $250,000–$500,000 

range cited by the commenter is for an 


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247 Id. 248Second Aviva Letter, supra note 54. 249Second NAFA Letter, supra note 191. 250Transamerica Letter, supra note 54. 251See, e.g., Securities Act Release No. 8909 (Apr. 

10, 2008) [73 FR 20512, 20515 (Apr. 15, 2008)] 

(‘‘Revisions to Form S–11 Release’’). 

252See, e.g., Allianz Letter, supra note 54; 

American Equity Letter, supra note 54; Old Mutual 

Letter, supra note 54; Transamerica Letter, supra 

note 54. 

253Allianz Letter, supra note 54. 

254National Western Letter, supra note 54; Old 

Mutual Letter, supra note 54. 

255See, e.g., Allianz Letter, supra note 54. See 

Second Aviva Letter, supra note 54. 

256Second Aviva Letter, supra note 54. 

257See supra note 95 and accompanying text. 

258These estimates reflect estimates provided to 

us by Broadridge Financial Solutions, Inc. 

(‘‘Broadridge’’), in connection with our recent 

proposal to create a summary prospectus for mutual 

funds. The estimates depend on factors such as 

page length and number of copies printed and not 

on the content of the disclosures. Because we 

believe that these factors may be reasonably 

comparable for indexed annuity and mutual fund 

prospectuses, we believe that it is reasonable to use 

these estimates in the context of indexed annuities. 

See Memorandum to File number S7–28–07 

regarding October 27, 2007 meeting between 

Commission staff members and representatives of 

Broadridge Financial Solutions, Inc. (Nov. 28, 2007) 

(‘‘Broadridge Memo’’). The memorandum is 

available for inspection and copying in File No. S7– 

28–07 in the Commission’s Public Reference Room 

and on the Commission’s Web site at http:// 

www.sec.gov/comments/s7-28-07/s72807-5.pdf. 

259Allianz Letter, note 54. 

issuer that has not previously filed a 

Form S–1, with the commenter 

acknowledging that the costs to an 

experienced filer would be lower (as 

low as $50,000 to $100,000).247 Another 

commenter estimated external legal 

costs for preparation and filing of a 

Form S–1 registration statement with 

the SEC at $350,000 for the first few 

years, which, the commenter stated, 

would decrease over time as the insurer 

gained more expertise.248 Our average 

$180,000 estimate reflects outside 

professional costs incurred not only by 

first-time Form S–1 filers, but also the 

costs of preparing Form S–1 for 

contracts offered by experienced Form 

S–1 filers, as well as annual updates to 

existing Form S–1 registration 

statements, which we expect to be 

significantly lower than costs incurred 

by first-time filers. Therefore, we do not 

believe that it is necessary to change our 

estimate of outside professional costs 

based on the commenters’ estimated 

costs. 

One commenter cites a cost of $62,500 

per insurance company for ‘‘Registration 

Statement Preparation’’ but also appears 

to assume a cost of $255,000 per 

contract for registration statement 

preparation.249 It is unclear how these 

estimates should be reconciled, and we 

are not revising our estimate of the 

burden of preparation of registration 

statement on the basis of the 

commenter’s estimates. 

Another commenter stated that the 

Commission’s estimate of outside 

professional costs of $400 per hour does 

not reflect market rates for securities 

counsel.250 However, the commenter 

did not cite a different rate and did not 

explain the basis for its disagreement 

with the $400 per hour rate cited by the 

Commission. Our estimate of $400 per 

hour for outside professionals retained 

by the issuer is consistent with recent 

rulemakings and is based on discussions 

between our staff and several law 

firms.251 Accordingly, we are not 

changing our estimate of the cost per 

hour of outside professional costs. 

The commenter further stated that the 

estimates of time involved are low for 

persons unfamiliar with the process of 

registration of securities under the 

federal securities laws and the 

anticipated need for interaction with 

Commission staff. However, our 

estimate of time required to prepare a 

registration statement reflects time 

needed not only by first-time Form 

S–1 filers, but also the time involved in 

preparing Form S–1 for contracts offered 

by experienced S–1 filers, as well as 

annual updates to the existing Form 

S–1 registration statement, which we 

expect to be significantly less than time 

needed by first-time filers. Therefore, 

we are not revising our estimate of time 

involved in preparing registration 

statements on Form S–1. 

Commenters stated that insurers will 

be subject to significant additional costs 

as a result of having to register on Form 

S–1.252 These include required 

registration fees for securities sold. One 

commenter estimated Commission 

registration fees, assuming sales of 

$5 billion annually, as $196,500.253

Commenters also stated that the due 

diligence necessary to verify disclosures 

in the registration statement will require 

significant resources.254 We 

acknowledge that these are additional 

costs associated with registration. 

However, these costs are not unique to 

indexed annuities, but are incurred by 

all issuers of registered securities. 

Commenters also cited other costs of 

registration on Form S–1, such as 

preparation of financial statements in 

accordance with generally accepted 

accounting principles (‘‘GAAP’’), which, 

according to the commenters, many 

insurers currently do not do.255 One 

commenter estimated a cost of at least 

several million dollars for an insurer to 

develop GAAP financial statements.256

We acknowledge that if an indexed 

annuity issuer that did not currently 

prepare GAAP financial statements were 

required to do so in order to register its 

indexed annuities, the one-time start-up 

costs could be significant. We note that, 

during the two-year transition period for 

rule 151A, the Commission intends to 

consider how to tailor accounting 

requirements for indexed annuities.257

Based on the foregoing analysis, our 

estimates of the costs of registration for 

indexed annuities include the costs of 

preparing Form S–1 registration 

statements, totaling $82,500,000 

annually, or $206,250 per contract, and, 

based on a commenter’s estimate, 

registration fees of $196,000 assuming 

sales by an insurer of $5 billion 

annually. If the insurer does not already 

prepare financial statements in 

accordance with GAAP, the insurer will 

also incur costs of developing GAAP 

financials, which one commenter 

estimated to involve one-time start-up 

costs of at least several million dollars 

per insurer. Commenters also 

mentioned due diligence as a cost of 

registration, but did not separately break 

out its cost. 

Costs of Printing Prospectuses and 

Providing Them to Investors 

Insurers will incur costs to print and 

provide prospectuses to investors for 

indexed annuities that are outside the 

insurance exemption as a result of rule 

151A. For purposes of the PRA, we have 

estimated that registration statements 

will be filed for 400 indexed annuities 

per year. In the Proposing Release, we 

estimated that it would cost $0.35 to 

print each prospectus and $1.21 to mail 

each prospectus,258 for a total of $1.56 

per prospectus. These estimates would 

be reduced to the extent that 

prospectuses are delivered in person or 

electronically, or to the extent that 

Securities Act prospectuses are 

substituted for written materials used 

today, rather than being delivered in 

addition to those materials. 

One commenter questioned whether 

the cost of printing an indexed annuity 

prospectus on Form S–1 would be 

roughly equivalent to that of printing a 

mutual fund prospectus on Form N–1A, 

as we were assuming for purposes of our 

estimate in the proposing release.259

The commenter, based on its internal 

projections of prospectus printing and 

mailing costs, stated that the indexed 

annuity prospectus would cost twice as 

much as the mutual fund prospectus. 

The commenter estimated printing costs 

for an indexed annuity prospectus on 

Form S–1 as $1.50 and the cost of 

mailing as $1.38 for a total cost of $2.88. 

In making its cost projections, the 

commenter assumed that the mutual 

fund prospectus would be 25 pages 


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260Broadridge Memo, supra note 258. 

261See Pre-effective Amendment No. 4 to 

Registration Statement on Form S–1 of PHL 

Variable Insurance Company (File No. 333–132399) 

(filed Feb. 7, 2007) (67-page prospectus); 257 Preeffective Amendment No. 1 to Registration 

Statement on Form S–1 of Golden America Life 

Insurance Company (File No. 333–67660) (filed Feb. 

8, 2002) (170-page prospectus). 

262Allianz Letter, supra note 54. This revision 

does not affect our estimate of the cost burden for 

Form S–1 under the Paperwork Reduction Act. 

Printing and mailing costs are not ‘‘collections of 

information’’ for purposes of the Paperwork 

Reduction Act. 

263See Pre-effective Amendment No. 4 to 

Registration Statement on Form S–1 of PHL 

Variable Insurance Company (File No. 333–132399) 

(filed Feb. 7, 2007) (20 pages of the prospectus are 

attributable to financial statements); Pre-effective 

Amendment No. 1 to Registration Statement on 

Form S–1 of Golden America Life Insurance 

Company (File No. 333–67660) (filed Feb. 8, 2002) 

(63 pages of the prospectus are attributable to 

financial statements). 

264Second NAFA Letter, supra note 191. It is not 

fully clear what the commenter intends by ‘‘supply 

chain,’’ but we are citing the estimate, because it 

references printing of prospectuses. 

265Allianz Letter, supra note 54. Initial setup 

includes registering the broker-dealer with the 

Commission, developing extensive written policies 

and procedures tailored to its business, obtaining a 

fidelity bond, registering its offices as branch 

offices, and setting up a procedure for a principal 

review of all applications, as well as review of 

advertisements, business cards, letterhead, office 

signage, correspondence, and e-mails. 

266Allianz Letter, supra note 54. 

267Memorandum from the Division of Investment 

Management Regarding a November 10, 2008 

Meeting with Representatives of the National 

Association for Fixed Annuities (Nov. 26, 2008). 

One commenter stated that the costs of registering 

and operating as a broker-dealer include FINRA 

registration and examination fees of up to $4,000. 

The commenter further stated that the legal cost 

associated with registering and applying for 

membership with FINRA, the cost of completing the 

necessary forms, and the costs of ongoing 

compliance could result in start-up costs of $25,000 

and between $50,000 to $100,000 annually to 

maintain the registration. Coalition Letter, supra 

note 54. 

268Second NAFA Letter, supra note 191. 

269See, e.g., American Equity Letter, supra note 

54; Coalition Letter, supra note 54. 

270Coalition Letter, supra note 54. 

271Coalition Letter, supra note 54. One 

commenter indicated its belief that insurance 

agencies are only permitted to enter into 

networking arrangements with affiliated brokerdealers. Therefore, the commenter stated that 

insurance agencies without an affiliated brokerdealer would not appear to be able to take 

advantage of networking arrangements. We disagree 

with the commenter’s interpretation and note that, 

in our view, insurance agencies may enter into 

networking arrangements with unaffiliated brokerdealers. 

long, while the indexed annuity 

prospectus (including financial 

statements) would be 100 pages long. 

Our estimate of the cost of printing and 

mailing a mutual fund prospectus was 

based on an assumed page length of 45 

pages.260 We believe that the 

commenter’s estimate of page length 

may be more realistic for a prospectus 

prepared on Form S–1.261 Accordingly, 

we are revising our estimate of the costs 

of printing and mailing the prospectus 

to the costs cited by the commenter; i.e., 

$1.50 for printing the prospectus and 

$1.38 for mailing for a total cost of 

$2.88.262 Though we have revised our 

estimate as described above, we believe 

that the revised estimate is conservative 

because some indexed annuity issuers 

who file Exchange Act reports and 

incorporate their financial statements 

from their Exchange Act reports by 

reference may have significantly shorter 

prospectuses as a result.263

Another commenter estimated the 

cost per insurance company of ‘‘printing 

prospectuses/supply chain’’ 264 at 

$20,000 per insurance company for a 

combined total of $880,000. The 

commenter does not explain how it 

arrived at this estimate. Moreover, 

because the commenter’s estimate is for 

total cost per insurance company and 

does not specify the number of 

prospectuses printed by each insurance 

company, and our estimate is a per 

prospectus cost, we are not able to 

compare the two estimates. Thus, we are 

not revising our estimate of the cost of 

printing prospectuses and providing 

them to investors. 

Networking Arrangements With 

Registered Broker-Dealers and Other 

Related Costs 

Rule 151A may impose costs on 

indexed annuity distributors that are not 

currently parties to a networking 

arrangement or registered as brokerdealers. These costs are not unique to 

indexed annuity distributors but apply 

to all distributors of federally registered 

securities that are not registered brokerdealers. While these entities may choose 

to register as broker-dealers, in order to 

continue to distribute indexed annuities 

that are registered as securities, these 

distributors will likely enter into a 

networking arrangement with a 

registered broker-dealer. Under these 

arrangements, an affiliated or thirdparty broker-dealer provides brokerage 

services for an insurance agency’s 

customers, in connection with 

transactions in insurance products that 

are also securities. Entering into a 

networking arrangement will impose 

costs associated with contracting with 

the registered broker-dealer regarding 

the terms, conditions, and obligations of 

each party to the arrangement. We 

anticipate that a distributor will incur 

legal costs in connection with entering 

into a networking arrangement with a 

registered broker-dealer, as well as 

ongoing costs associated with 

monitoring compliance with the terms 

of the networking arrangement. 

However, while there are costs of 

entering into a networking arrangement 

and monitoring compliance with the 

terms of the arrangement, distributors in 

networking arrangements will not be 

subject to the full range of costs 

associated with obtaining and 

maintaining broker-dealer registration. 

One commenter estimated that the 

cost of registering as a broker-dealer, 

taking into account only the legal and 

regulatory work of initial setup,265

licensing, and staffing could be between 

$250,000–$500,000.266 Another 

commenter estimated the cost of 

forming a registered broker-dealer at 

$800,000.267 The same commenter cites 

a cost of $3 million for ‘‘BD startup’’ in 

a separate comment.268 As we discuss 

above, however, we believe it is more 

likely that distributors will enter into 

networking arrangements with 

registered broker-dealers, rather than 

register as broker-dealers. 

Some commenters disagreed that 

distributors would enter into 

networking arrangements with 

registered broker-dealers, stating that 

the cost of networking would be too 

high.269 One of these commenters stated 

that networking would be inordinately 

expensive.270 The commenter stated 

that under current industry practice, a 

distributor would bear expenses when 

using a networking arrangement that 

include examination fees, state 

registration fees, and possibly a pro rata 

share of the associated broker-dealer’s 

increased compliance costs, and would 

have to share a portion of his 

commissions with the registered brokerdealer.271 Commenters did not provide 

estimates of the cost of networking. We 

recognize that a distributor will incur 

costs in entering into networking 

arrangement. We estimate the upper 

bound of entering into a networking 

agreement to be the equivalent of the 

cost of establishing a registered brokerdealer. Commenters provided a range of 

cost estimates for establishing a 

registered broker-dealer from $250,000 

to $3 million. However, these costs are 

not unique to indexed annuities. For 

example, issuers of insurance products 

registered as securities, such as variable 

annuities, may incur networking costs, 

as do banks involved in networking 

arrangements. Moreover, while we 

would expect networking to be 

generally more cost-effective than 

registration as a broker-dealer, to the 

extent that it is not, broker-dealer 


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272See, e.g., Allianz Letter, supra note 54; 

Coalition Letter, supra note 54; Southwest Letter, 

supra note 136. 

273Allianz Letter, supra note 54. 

274Letter of Advisors Excel (Aug. 20, 2008); 

Coalition Letter, supra note 54; Letter of Courtney 

A. Juhl (Aug. 15, 2008), citing Jack Marrion, The 

Proposed Rule Will Sock it to Index Annuity 

Distributors, National Underwriter Life & Health/ 

Financial Services Edition, Aug. 4, 2008, at 13, 

available at: http:// 

www.lifeandhealthinsurancenews.com/cms/nulh/ 

Weekly%20Issues/issues/2008/29/Focus/L29cover2. 

275See, e.g., Allianz Letter, supra note 54; 

National Western, supra note 54. 

276Second NAFA Letter, supra note 191. 

277 Id., citing ‘‘The Advantage Compendium, Jack 

Marrion, President.’’ The commenter does not 

provide a specific citation, and we have been 

unable to find the source of the estimate provided 

by the commenter. 

278See, e.g., Second Old Mutual Letter, supra 

note 76; Southwest Letter, supra note 136. 

279Second NAFA Letter, supra note 191. This 

commenter also estimated a first-year income loss 

of $300 million for independent marketing 

organizations. 

280Allianz Letter, supra note 54; Aviva Letter, 

supra note 54; National Western Letter, supra note 

54. 

281See, e.g., Allianz Letter, supra note 54. 

282See, e.g., Allianz Letter, supra note 54. 

283E.g., Letter of Todd F. Gregory (Aug. 5, 2008); 

Letter of Terry R. Lucas (Sept. 9, 2008); National 

Western Letter, supra note 54; Letter of Randall L. 

Whittle (Aug. 8, 2008). 

registration remains an option for 

indexed annuity distributors. 

Commenters also cited additional 

costs that agents will incur as a result 

of the rule.272 For example, commenters 

cited annual securities registration and 

licensing fees, including FINRA fees 

and state securities fees, that agents 

would be required to pay. With regard 

to state registration fees, one commenter 

estimated that an agent selling in all 50 

states would pay approximately $3,100 

in initial state securities registration fees 

and nearly $3,000 annually in ongoing 

state securities fees.273 We recognize 

that agents may incur additional 

registration and licensing costs and are 

sensitive to the impact of such costs. 

However, these fees are paid by all 

sellers of securities and are not unique 

to those selling indexed annuities. The 

fees are a product of the regulatory 

structure mandated by Congress under 

the federal securities laws, which is 

intended to provide sales practice and 

other protections to investors. 

Several commenters cited an industry 

source that estimated loss to distributors 

as a result of the rule as approximately 

$800 million.274 This source estimates 

that agents would lose about $200 

million in income by having to share 

commissions with the broker-dealers 

with which the agent is associated. The 

source estimates that fees charged by the 

broker-dealer and by FINRA would 

amount to another $22.5 million. The 

sharing of commissions, as well as the 

fees charged by the broker-dealer and by 

FINRA are necessary expenses of selling 

registered securities. For marketing 

organizations, the source estimates that 

indexed annuity sales would drop by 

60% and marketing organization 

compensation would be reduced from 

around $500 million-$700 million a year 

today to $60 million-$200 million as a 

result of the rule. However, the source 

does not explain the basis for the 

estimate of the decline in sales. 

Moreover, if the marketing organization 

registers as, or enters into a networking 

arrangement with, a broker-dealer, it 

would have opportunities to sell other 

types of securities, and may be able to 

compensate for any declines in sales of 

indexed annuities that may occur. We 

believe that even at the high end of costs 

suggested by commenters, given the 

imperative of the federal securities laws 

and the size of the industry, these costs 

are nonetheless justified. 

Possible Loss of Revenue 

Insurance companies that determine 

that indexed annuities are outside the 

insurance exemption under rule 151A 

could either choose to register those 

annuities under the Securities Act or to 

cease selling those annuities. If an 

insurer ceases selling such annuities, 

the insurer may experience a loss of 

revenue. Commenters agreed that some 

insurers may stop selling indexed 

annuities as a result of the rule and that 

they would experience a loss of 

revenue.275 One commenter estimated a 

total first year loss to insurance 

companies of approximately 

$300,000,000 as a result of the rule.276

The commenter argued that industry 

experts state indexed annuity sales will 

drop from approximately $30 billion of 

premium per year (projected for 2008) to 

$10 billion per year as a result of the 

rule.277 However, the commenter does 

not explain how this estimate was 

determined. We believe that even at the 

high end of costs suggested by 

commenters, given the imperative of the 

federal securities laws and the size of 

the industry, these costs are nonetheless 

justified. 

The amount of lost revenue for 

insurance companies would depend on 

actual revenues prior to effectiveness of 

the rules and to the particular 

determinations made by insurers 

regarding whether to continue to issue 

registered indexed annuities. However, 

the loss of revenue may be offset, in 

whole or in part, by gains in revenue 

from the sale of other financial 

products, as purchasers’ need for 

financial products will not diminish. 

These gains could be experienced by the 

same insurers who exit the indexed 

annuity business or they could be 

experienced by other insurance 

companies or other issuers of securities 

or other financial products. 

Commenters also stated that sellers of 

indexed annuities may lose revenue 

because rule 151A may cause them to 

cease selling these products.278 One 

commenter estimated a first-year 

income loss to distributors of $1.5 

billion, based on an estimated decline in 

indexed annuity sales from 

approximately $30 billion (projected for 

2008) to $10 billion per year, as a result 

of the rule.279

The amount of lost revenue for sellers 

of indexed annuities would depend on 

actual revenues prior to effectiveness of 

the rules and to the particular 

determinations made by distributors 

regarding whether to continue to sell 

registered indexed annuities. The loss of 

revenue may be offset, in whole or in 

part, by gains in revenue from the sale 

of other financial products, as 

purchasers’ need for financial products 

will not diminish. 

Commenters also cited indirect or 

collateral costs associated with the 

rule.280 For example, if insurers exit the 

indexed annuities business; this will 

result in a reduction in personnel of 

those who are no longer needed to 

administer the products.281 Commenters 

also stated that if insurers chose to stop 

offering indexed annuities because of 

the rule, third-party service providers 

who helped support the administration 

and/or sale of the insurer’s indexed 

annuities may also incur costs.282

A number of commenters cited job 

loss as a consequence of the rule. Loss 

of employment, these commenters 

argued, would affect current employees 

of insurance companies, agents, and 

others.283 Demand for financial 

products is relatively fixed in the 

aggregate. Within the insurance 

industry, some employees of insurance 

companies and agents will likely find 

employment in other areas of the 

insurance industry. 

Possible Diminished Competition 

There could be costs associated with 

diminished competition as a result of 

our rules. In order to issue indexed 

annuities that are outside the insurance 

exemption under rule 151A, insurers 

would be required to register those 

annuities as securities. If some insurers 

determine to cease issuing indexed 

annuities rather than undertake the 

analysis required by rule 151A and 

register those annuities that are outside 

the insurance exemption under the rule, 


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284See, e.g., American Equity, supra note 54; 

American National, supra note 54; National 

Western, supra note 54. 

285Second NAFA Letter, supra note 191. 

286See, e.g., American Equity Letter, supra note 

54. 

287 15 U.S.C. 77b(b). 

288 15 U.S.C. 78c(f). 

289 15 U.S.C. 78w(a)(2). 

there will be fewer issuers of indexed 

annuities, which may result in reduced 

competition. Any reduction in 

competition may affect investors 

through potentially less favorable terms 

of insurance products and other 

financial products, such as increases in 

direct or indirect fees. A number of 

commenters agreed that diminished 

competition would result in indexed 

annuity purchasers receiving less 

favorable terms. However, the 

commenters did not provide data in this 

regard.284

It is currently unknown whether new 

providers will enter the market for 

indexed annuities. We note, however, 

that the possibility for new entrants 

created by this rule is beneficial to 

competition, even if they do not enter 

the market. If the indexed annuity 

market becomes sufficiently 

uncompetitive and economic profits 

increase, new entrants will likely arrive, 

putting downward pressure on prices. 

Thus, any reduction in regulatory 

barriers to entry created by increased 

regulatory certainty can have the effect 

of increasing competition and reducing 

prices, a direct benefit to investors. It is 

currently unknown whether new 

providers will enter the market for 

indexed annuities. We note, however, 

that the possibility for new entrants 

created by this rule is beneficial to 

competition, even if they do not enter 

the market. If the indexed annuity 

market becomes sufficiently 

uncompetitive and economic profits 

increase, new entrants will likely arrive, 

putting downward pressure on prices. 

Thus, any reduction in regulatory 

barriers to entry created by increased 

regulatory certainty can have the effect 

of increasing competition and reducing 

prices, a direct benefit to investors. 

Additional Costs 

Commenters provided further 

information on costs for insurance 

companies. One commenter estimated a 

total first-year cost to insurance 

companies of $237,000,000.285

Components of this cost are identified 

as broker-dealer startup, broker-dealer 

annual maintenance, new compliance 

costs, legal start-up costs, FINRA 

implementation, FINRA maintenance, 

state fees, Form S–1 fees, including 

registration statement preparation, state 

filing, annual audit, operations/ 

administration/systems, printing 

prospectus supply chain, and additional 

fees paid to FINRA impacting product 

pricing. Much of these costs appear to 

be attributable to setting up a brokerdealer. As noted above, however, we do 

not believe that insurers would need to 

establish a broker-dealer to continue to 

sell indexed annuities. An insurer could 

make use of existing broker-dealers and 

avoid the costs of starting a brokerdealer. If those costs are avoided, the 

commenter’s estimate could be reduced 

by at least $135,727,000 (the total cost 

attributable to the costs of starting a 

broker-dealer as estimated by the 

commenter). This still leaves a total 

first-year cost to insurance companies of 

over $100,000,000. We recognize this is 

a substantial cost. However, these costs 

are not unique to indexed annuities but 

are the costs of offering and selling any 

registered securities. All issuers of 

securities must incur such costs, and 

issuers of indexed annuities will not 

incur higher costs as a result of the rule 

than any other issuer of securities. 

One commenter cited the cost that 

may be incurred if the insurer needs to 

find additional distributors as a result of 

existing distributors dropping out of the 

indexed annuity market because of the 

costs they would incur under the 

rule.286 However, this is no different 

from any securities issuer, all of whom 

must use distribution channels subject 

to the federal securities laws. 

The Commission has carefully 

considered the costs cited by the 

commenters. These include the costs 

that the commenters state will be 

incurred by insurers, distributors, and 

agents. We have also considered the 

collateral costs cited by the commenters, 

and the possibility of loss of 

employment cited by the commenters. 

While we have taken the costs of the 

rule into account, we also continue to 

believe that the rule will result in 

substantial benefits to indexed annuity 

purchasers, in the form of enhanced 

disclosure and sales practice 

protections, greater regulatory certainty 

for issuers and sellers of indexed 

annuities, enhanced competition, and 

relief from reporting obligations. While 

the costs of the rule may be significant, 

where an annuity contract is not 

entitled to the Section 3(a)(8) 

exemption, which we have concluded is 

the case with respect to certain indexed 

annuities, the federal securities laws 

apply, and participants in the indexed 

annuity market will need to bear the 

costs of compliance with the federal 

securities laws, as do any other 

participants in the securities markets. 

Furthermore, notwithstanding these 

costs, our rule imposes no greater costs 

than those imposed on other market 

participants who issue or sell securities. 

VI. Consideration of Promotion of 

Efficiency, Competition, and Capital 

Formation; Consideration of Burden on 

Competition 

Section 2(b) of the Securities Act 287

and Section 3(f) of the Securities 

Exchange Act 288 require the 

Commission, when engaging in 

rulemaking that requires it to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. 

Section 23(a)(2) of the Exchange Act 289

requires us, when adopting rules under 

the Exchange Act, to consider the 

impact that any new rule would have on 

competition. In addition, Section 

23(a)(2) prohibits us from adopting any 

rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

A. Efficiency 

For the following reasons, we believe 

that rule 151A will promote efficiency 

by extending the benefits of the 

disclosure and sales practice protections 

of the federal securities laws to indexed 

annuities that are more likely than not 

to provide payments that vary with the 

performance of securities. 

The required disclosures will enable 

investors to make more informed 

investment decisions. As discussed 

above, disclosures that will be required 

for registered indexed annuities include 

information about costs (such as 

surrender charges); the method of 

computing indexed return (e.g., 

applicable index, method for 

determining change in index, caps 

participation rates, spreads); minimum 

guarantees, as well as guarantees, or 

lack thereof, with respect to the method 

for computing indexed return; and 

benefits (lump sum, as well as annuity 

and death benefits). This information 

will be public and accessible to all 

investors, intermediaries, third party 

information providers, and others 

through the SEC’s EDGAR system. 

Public availability of this information 

will be helpful to investors in making 

informed decisions about purchasing 

indexed annuities. The enhancement of 

investor decision-making that will result 

from the public availability of 

information about indexed annuities 


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3170 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

290See e.g., Coalition Letter, supra note 54; NAFA 

Letter, supra note 54. But see Washington State 

Letter, supra note 199 (noting its experience with 

variable annuities and synergy of complementary 

regulation by the insurance regulator focused on 

solvency and the securities regulator focused on 

investor protection). 

291See Voss Letter, supra note 13 (proposing to 

accelerate NAIC efforts to strengthen the NAIC 

model laws affecting indexed annuity products and 

urge adoption by more of the member states). 

292Coalition Letter, supra note 54. 

293 Id. 

294See, e.g., FINRA, Fund Analyzer, available at: 

http://www.finra.org/fundanalyzer (‘‘FINRA Fund 

Analyzer’’). 

will ultimately lead to more efficient 

capital allocation in the securities 

markets. 

Investors will also receive the benefits 

of the sales practice protections, 

including a registered representative’s 

obligation to make only 

recommendations that are suitable. 

Under the federal securities laws, 

persons effecting transactions in 

indexed annuities that fall outside the 

insurance exemption under rule 151A 

will be required to be registered brokerdealers or become associated persons of 

a broker-dealer. As a result, investors 

who purchase these indexed annuities 

after the effective date of rule 151A will 

receive the benefits associated with a 

registered representative’s obligation to 

make only recommendations that are 

suitable. The registered representatives 

who sell registered indexed annuities 

will be subject to supervision by the 

broker-dealer with which they are 

associated. Both the selling brokerdealer and its registered representatives 

will be subject to the oversight of 

FINRA. The registered broker-dealers 

will also be required to comply with 

specific books and records, supervisory, 

and other compliance requirements 

under the federal securities laws, as 

well as be subject to the Commission’s 

general inspections and, where 

warranted, enforcement powers. These 

sales practice protections will promote 

suitable recommendations to investors, 

which will lead to enhanced decisionmaking by investors and, ultimately, to 

greater efficiency in the securities 

markets. 

Some commenters argued that rule 

151A, as proposed, would not promote 

efficiency, because it would be 

duplicative of state insurance regulation 

of indexed annuities.290 These 

commenters argued that disclosure and 

suitability concerns in connection with 

indexed annuity sales are already 

addressed by state insurance regulation, 

and further indicated that state 

insurance regulation is more closely 

tailored to indexed annuities than 

federal securities regulation. 

We do not believe that these efforts, 

no matter how strong, can substitute for 

the federal securities law protections 

that apply to instruments that are 

regulated as securities. The federal 

securities laws were designed to provide 

uniform protections, with respect to 

both disclosure and sales practices, to 

investors in securities. State insurance 

laws, enforced by multiple regulators 

whose primary charge is the solvency of 

the issuing insurance company, cannot 

serve as an adequate substitute for 

uniform, enforceable investor 

protections provided by the federal 

securities laws. Indeed, at least one state 

insurance regulator acknowledged the 

developmental nature of state efforts 

and the lack of uniformity in those 

efforts.291 Where the purchaser of an 

indexed annuity assumes the 

investment risk of an instrument that 

fluctuates with the securities markets, 

and the contract therefore does not fall 

within the Section 3(a)(8) exemption, 

the application of state insurance 

regulation, no matter how effective, is 

not determinative as to whether the 

contract is subject to the federal 

securities laws, which provide uniform 

and enforceable protections for 

investors. In addition, during the 

transition period between adoption and 

the effective date of rule 151A, we 

intend to consider how to tailor 

disclosure requirements for indexed 

annuities. 

One commenter stated that the 

Commission cannot claim further 

efficiencies without a comprehensive 

consideration of the existing state law 

regulatory regime, the efficiencies that 

regime already realizes, and the respects 

in which that state regime falls short 

and further gains may be achieved by 

the Commission.292 The commenter 

further stated that the proposal would 

only impose further costs and burdens 

on efficiency with no compensating 

benefit, adding an unnecessary, largely 

duplicative layer of federal 

requirements that were developed for 

securities and have not been tailored to 

annuity products and purchasers 

generally.293 We disagree that the 

Commission must undertake a 

comprehensive consideration of the 

existing state law regulatory regime and 

that there are no benefits from the 

federal securities laws. Congress has 

determined that securities investors are 

entitled to the disclosure, antifraud, and 

sales practice protections of the federal 

securities laws. The burdens that are 

uniformly imposed on issuers and 

sellers of all types of securities are part 

of those laws, and it is not the 

Commission’s role to reevaluate the 

efficiencies of that regulatory structure 

for each particular instrument that is a 

security. 

B. Competition 

We also anticipate that, because rule 

151A will improve investors’ ability to 

make informed investment decisions, it 

will lead to increased competition 

between issuers and sellers of indexed 

annuities, mutual funds, variable 

annuities, and other financial products, 

and increased competitiveness in the 

U.S. capital markets. The greater clarity 

that results from rule 151A also may 

enhance competition because insurers 

who may have been reluctant to issue 

indexed annuities, while their status 

was uncertain, may decide to enter the 

market. Similarly, registered brokerdealers who currently may be unwilling 

to sell unregistered indexed annuities 

because of their uncertain regulatory 

status may become willing to sell 

indexed annuities that are registered, 

thereby increasing competition among 

distributors of indexed annuities. 

We have carefully considered the 

concerns raised by commenters, and we 

continue to believe that rule 151A will 

greatly enhance disclosures regarding 

indexed annuities. In addition to the 

specific benefits described above, we 

anticipate that these enhanced 

disclosures will also benefit the overall 

financial markets and their participants. 

We anticipate that the disclosure of 

terms of indexed annuities will be 

broadly beneficial to investors, 

enhancing the efficiency of the market 

for indexed annuities through increased 

competition. Disclosure will make 

information on indexed annuity 

contracts, including terms, publicly 

available. Public availability of terms 

will better enable investors to compare 

indexed annuities and may focus 

attention on the price competitiveness 

of these products. It will also improve 

the ability of third parties to price 

contracts, giving purchasers a better 

understanding of the fees implicit in the 

products. We anticipate that third-party 

information providers may provide 

services to price or compare terms of 

different indexed annuities. 

Analogously, we note that public 

disclosure of mutual fund information 

has enabled third-party information 

aggregators to facilitate comparison of 

fees.294 We believe that increasing the 

level of price transparency and the 

resulting competition through enhanced 

disclosure regarding indexed annuities 

would be beneficial to investors. It 

could also expand the size of the 


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295Allianz Letter, supra note 54; Sammons Letter, 

supra note 54; Second Aviva Letter, supra note 54. 

296See Form N–4 [17 CFR 239.17b and 274.11c] 

(registration form for variable annuities); Form N– 

6 [17 CFR 239.17c and 274.11d] (registration form 

for variable life insurance). 297NAFA Letter, supra note 54. 

298See, e.g., Section 12(a)(2) of the Securities Act 

[15 U.S.C. 77l(a)(2)] (imposing liability for 

materially false or misleading statements in a 

prospectus or oral communication, subject to a 

reasonable care defense). See also Section 10(b) of 

the Exchange Act [15 U.S.C. 78j(b)]; rule 10b–5 

under the Exchange Act [17 CFR 240.10b–5]; 

Section 17 of the Securities Act [15 U.S.C. 77q] 

(general antifraud provisions). 

299See, e.g., Coalition Letter, supra note 54; 

NAFA Letter, supra note 54. 

300Coalition Letter, supra note 54. 

301See Voss Letter, supra note 13. 

market, as investors may have increased 

confidence that indexed annuities are 

competitively priced. 

The Commission believes that there 

could be costs associated with 

diminished competition as a result of 

rule 151A. As the commenters note, 

some insurance companies may stop 

issuing indexed annuities, and some 

broker-dealers and agents may 

determine not to sell indexed annuities. 

We recognize that the impact of rule 

151A on competition may be mixed, 

but, on balance, we continue to believe 

that rule 151A will provide the benefits 

described above and has the potential to 

increase competition. In this regard, the 

demand for financial products is 

relatively fixed, in the aggregate. Any 

potential reduction in indexed annuities 

sold under the rule would likely 

correspond with an increase in the sale 

of other financial products, such as 

mutual funds or variable annuities. 

Thus, total reductions in competition 

may not be significant, when effects on 

the financial industry as a whole, 

including insurance companies together 

with other providers of financial 

instruments, are considered. Within the 

insurance industry, if some insurers 

cease selling indexed annuities, it is 

also likely that these insurers will sell 

other products through the same 

distribution channels, such as annuities 

with fixed interest rates. 

We conclude, in any event, that the 

importance of providing the protections 

of the federal securities laws to indexed 

annuity purchasers is significant 

notwithstanding any burden on 

competition that may result from the 

operation of the rule. In addition, the 

rule will provide other benefits. It will 

bring about clarity in what has been an 

uncertain area of law. In addition, 

issuers and sellers of these products will 

no longer be subject to uncertainty and 

litigation risk with respect to the laws 

that are applicable. 

Some commenters argued that 

regulation under the federal securities 

laws of indexed annuities will place 

them at a competitive disadvantage to 

variable annuities and mutual funds 

because the Commission’s disclosure 

scheme is not tailored to these 

contracts.295 Commenters cited a 

number of supposed defects, including 

the lack of a registration form that is 

well-suited to indexed annuities, 

questions about the appropriate method 

of accounting to be used by insurance 

companies that issue indexed annuities, 

and concerns about parity of the 

registration process vis-a-vis mutual 

funds. 

We acknowledge that, as a result of 

indexed annuity issuers having 

historically offered and sold their 

contracts without complying with the 

federal securities laws, the Commission 

has not created specific disclosure 

requirements tailored to these products. 

This fact, though, is not relevant in 

determining whether indexed annuities 

are subject to the federal securities laws. 

The Commission has a long history of 

creating appropriate disclosure 

requirements for different types of 

securities, including securities issued by 

insurance companies, such as variable 

annuities and variable life insurance.296

We note that we are providing a twoyear transition period for rule 151A, 

and, during this period, we intend to 

consider how to tailor disclosure 

requirements for indexed annuities. We 

encourage indexed annuity issuers to 

work with the Commission during that 

period to address their concerns. 

One commenter indicated that the 

rule creates a competitive disadvantage 

for indexed annuities to the advantage 

of fixed annuities and suggests that that 

the Commission improperly failed to 

consider competition between indexed 

and fixed annuities.297 Fixed annuities 

do not involve assumption of significant 

investment risks by purchasers. By 

contrast, indexed annuities that fall 

outside the insurance exemption under 

rule 151A do impose significant 

investment risk on purchasers, and, like 

other securities, they require the 

protections of the federal securities 

laws. Securities and non-securities are 

subject to different regulatory regimes as 

a result of Congressional action; it is not 

the Commission’s role to revisit that 

determination by Congress. 

C. Capital Formation 

We also anticipate that the increased 

market efficiency resulting from 

enhanced investor protections under 

rule 151A could promote capital 

formation by improving the flow of 

information among insurers that issue 

indexed annuities, the distributors of 

those annuities, and investors. Public 

availability of this information will be 

helpful to investors in making informed 

decisions about purchasing indexed 

annuities. The information will enhance 

investors’ ability to compare various 

indexed annuities and also to compare 

indexed annuities with mutual funds, 

variable annuities, and other securities 

and financial products. The potential 

liability for materially false and 

misleading statements and omissions 

under the federal securities laws will 

provide additional encouragement for 

accurate, relevant, and complete 

disclosures by insurers that issue 

indexed annuities and by the brokerdealers who sell them.298

Some commenters criticized the 

Commission’s consideration of whether 

the rule will promote capital 

formation.299 One commenter 

specifically questioned whether the 

proposed rule would improve the flow 

of information with regard to indexed 

annuities, suggesting that the 

Commission should delineate where the 

states’ current disclosure regime falls 

short, and how the rule would improve 

upon it, as well as how the benefits of 

the rule would exceed its costs.300 We 

disagree. It is not our intention to 

question the effectiveness of state 

regulation. We continue to believe that 

applying the federal securities 

disclosure scheme to indexed annuities 

will enhance disclosure of information 

needed to make informed investment 

decisions. The information will enhance 

investors’ abilities to compare various 

indexed annuities and also compare 

indexed annuities with mutual funds, 

variable annuities, and other securities 

and finanancial products. We believe 

that state insurance laws, enforced by 

multiple regulators whose primary 

charge is the solvency of the issuing 

insurance company, cannot serve as an 

adequate substitute for uniform, 

enforceable investor protections 

provided by the federal securities laws. 

At least one state regulator has 

acknowledged the developmental nature 

of state efforts and the lack of 

uniformity in those efforts.301 Congress 

has prescribed a uniform federal 

regulatory scheme for securities having 

already weighed whether the federal 

securities laws are well-suited to 

securities. In addition, the courts have 

recognized that labeling a product as 

insurance does not remove it from the 

federal regulatory scheme. 

The federal securities laws will 

further improve upon the state structure 

because of the Commission’s long 


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3172 Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 

302See e.g., Form N–4 [17 CFR 239.17b and 

274.11c] (registration form for variable annuities); 

Form N–6 [17 CFR 239.17c and 274.11d] 

(registration form for variable life insurance). 

303NAFA Letter, supra note 54. 304 5 U.S.C. 604 et seq. 

305See, e.g., Letter A, supra note 76; Letter of 

Dennis Absher (Jul. 25, 2008) (‘‘Absher Letter’’); 

Letter of James Brenner (Jul. 7, 2008) (‘‘Brenner 

Letter’’); Letter E, supra note 76; Letter of Dustin R. 

Montgomery (Sep. 11, 2008) (‘‘Montgomery 

Letter’’); Letter of Raymond J. Ohlson, The Ohlson 

Group, Inc. (Jul. 22, 2008) (‘‘Ohlson Letter’’); Letter 

of Steven A Sewell (Aug. 25, 2008) (‘‘Sewell 

Letter’’); Letter of Donna Tupper (Sept. 11, 2009) 

(‘‘Tupper Letter’’). 

306See, e.g., Letter of Matthew Coleman (Jul. 11, 

2008) (‘‘Coleman Letter’’); Letter of Bruce E. Dickes 

(Jul. 16, 2008) (‘‘Dickes Letter’’); Letter Type K 

(‘‘Letter K’’); Letter of Larry A. Kaufman (Aug. 27, 

2008) (‘‘Kaufman Letter’’); Letter of Dejah F. 

LaMonte (Sep. 3, 2008) (‘‘LaMonte Letter’’); Letter 

of Kyle Mann (Sep. 9, 2008) (‘‘Mann Letter’’). 

307See, e.g., Coalition Letter, supra note 54. 

308Coalition Letter, supra note 54. 

history of creating appropriate 

disclosure requirements for different 

types of securities, including securities 

issued by insurance companies, such as 

variable annuities and variable life 

insurance,302 the federal regulatory 

scheme’s uniformity in application, the 

suitability requirements enforced by 

FINRA, as well as the Commission and 

FINRA’s robust enforcement powers and 

the private remedies allowed under the 

federal securities laws. 

Another commenter stated that the 

proposed rule would only promote 

capital formation if it resulted in 

increased sales of indexed annuities, 

and that the Commission has not 

analyzed the rule to the point where it 

can determine whether or not it will 

increase indexed annuity sales.303 We 

strongly disagree that the correct 

measure of whether the rule will 

promote capital formation is if it results 

in increased sales of indexed annuities. 

We believe that capital formation would 

be enhanced through increased 

competition among indexed annuities 

and among indexed annuities and other 

financial products, such as variable 

annuities and mutual funds, and the 

innovation and better terms in indexed 

annuities for investors that may result 

from this competition. Better 

information leads to increased 

competition and greater investor 

confidence in markets which will in 

turn lead to willingness to invest and 

facilitate capital formation. Moreover, it 

is not possible to predict with certainty 

whether indexed annuity sales will 

themselves increase or decrease as a 

result of the rule. The Commission has 

taken both possibilities into account. In 

any event, we believe, first, that the 

importance of protecting purchasers of 

these products under the federal 

securities laws is significant 

notwithstanding any reduction in 

capital formation that may result from 

fewer sales of indexed annuities and 

second, that any such reduction is likely 

to be offset by an increase in capital 

formation through sales of other 

financial products. 

Rule 12h–7 provides insurance 

companies with an exemption from 

Exchange Act reporting with respect to 

indexed annuities and certain other 

securities that are regulated as insurance 

under state law. We are adopting this 

exemption because the concerns that 

Exchange Act financial disclosures are 

intended to address are generally not 

implicated where an insurer’s financial 

condition and ability to meet its 

contractual obligations are subject to 

oversight under state law and where 

there is no trading interest in an 

insurance contract. Accordingly, we 

believe that the exemption will improve 

efficiency by eliminating potentially 

duplicative and burdensome regulation 

relating to insurers’ financial condition. 

Furthermore, we believe that rule 12h– 

7 will not impose any burden on 

competition. Rather, we believe that the 

rule will enhance competition among 

insurance products and between 

insurance products and other financial 

products because the exemption may 

encourage insurers to innovate and 

introduce a range of new insurance 

contracts that are securities, since the 

exemption will reduce the regulatory 

costs associated with doing so. We also 

anticipate that the innovations in 

product development could promote 

capital formation by providing new 

investment opportunities for investors. 

VII. Final Regulatory Flexibility 

Analysis 

This Final Regulatory Flexibility 

Analysis has been prepared in 

accordance with the Regulatory 

Flexibility Act.304 It relates to the 

Commission’s rule 151A that defines the 

terms ‘‘annuity contract’’ and ‘‘optional 

annuity contract’’ under the Securities 

Act of 1933 and rule 12h–7 that exempts 

insurance companies from filing reports 

under the Securities Exchange Act of 

1934 with respect to indexed annuities 

and other securities that are registered 

under the Securities Act, subject to 

certain conditions, both of which we are 

adopting in this Release. The Initial 

Regulatory Flexibility Analysis 

(‘‘IRFA’’) which was prepared in 

accordance with 5 U.S.C. 603 was 

published in the Proposing Release. 

A. Need For and Objectives of Rules 

We are adopting the definition of the 

terms ‘‘annuity contract’’ and ‘‘optional 

annuity contract’’ to provide greater 

clarity with regard to the status of 

indexed annuities under the federal 

securities laws. We believe this will 

enhance investor protection and provide 

greater certainty to the issuers and 

sellers of these products with respect to 

their obligations under the federal 

securities laws. We are adopting the 

exemption from Exchange Act reporting 

because we believe that the concerns 

that periodic financial disclosures are 

intended to address are generally not 

implicated where an insurer’s financial 

condition and ability to meet its 

contractual obligations are subject to 

oversight under state law and where 

there is no trading interest in an 

insurance contract. 

B. Significant Issues Raised By Public 

Comment 

In the Proposing Release, we 

requested comment on the number of 

small entity insurance companies, small 

entity distributors of indexed annuities, 

and any other small entities that may be 

affected by the rules, the existence or 

nature of the potential impact and how 

to quantify the impact of the rules. A 

number of commenters stated that costs 

and burdens arising from rule 151A 

would have a significant and adverse 

impact on small entities, such as small 

insurance distributors.305 Commenters 

have estimated the number of small 

entities to be adversely affected by this 

rule to range from thousands to tens of 

thousands of small entities.306 Insurance 

distributors that would be affected by 

the rule are not registered with the 

Commission. For that reason, we do not 

have information pertaining to the 

number of such distributors, or the 

number of small distributors. While 

commenters provided a range of 

numbers of small entities, they did not 

explain the basis for their estimates. 

Some commenters stated that the 

estimate of the burden on small entities 

in the proposing release is 

understated.307 In particular, one 

commenter stated that small entities 

among distributors who network with 

registered broker-dealers will incur not 

only legal and monitoring costs, as the 

Proposing Release recognized, but will 

also have to share commissions that 

they earn from the sales of indexed 

annuities.308 While we did not 

specifically address sharing of 

commissions in the Proposing Release, 

we recognize that networking may cause 

small distributors to share commissions 

with registered broker-dealers. However, 

we continue to believe that networking 

may be more cost-effective than 


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309See rule 157 under the Securities Act [17 CFR 

230.157]; rule 0–10 under the Exchange Act [17 

CFR 240.0–10]. 

310 17 CFR 240.0–10(a). 

311Securities Act rule 157(a) [17 CFR 157(a)] 

generally defines an issuer, other than an 

investment company, to be a ‘‘small business’’ or 

‘‘small organization’’ for purposes of the Regulatory 

Flexibility Act if it had total assets of $5 million or 

less on the last day of its most recent fiscal year and 

it is conducting or proposing to conduct a securities 

offering of $5 million or less. For purposes of our 

analysis, however, we use the Exchange Act 

definition of ‘‘small business’’ or ‘‘small entity’’ 

because that definition includes more issuers than 

does the Securities Act definition and, as a result, 

assures that the definition we use would not itself 

lead to an understatement of the impact of the 

amendments on small entities. 

312The staff has determined that each insurance 

company that currently offers indexed annuities has 

total assets significantly in excess of $5 million. The 

staff compiled a list of indexed annuity issuers from 

four sources: AnnuitySpecs, Carrier List, http:// 

www.annuityspecs.com/Page.aspx?s=carrierlist; 

Annuity Advantage, Equity Indexed Annuity Data, 

http://www.annuityadvantage.com/ 

annuitydataequity.htm; Advantage Compendium, 

Current Rates, http://www.indexannuity.org/ 

rates_by_carrier.htm; and a search of Best’s 

Company Reports (available on Lexis) for indexed 

annuity issuers. The total assets of each insurance 

company issuer of indexed annuities were 

determined by reviewing the most recent Best’s 

Company Reports for each indexed annuity issuer. 

313The staff has determined that each insurance 

company that currently offers contracts that are 

registered under the Securities Act and that include 

so-called market value adjustment features or 

guaranteed benefits in connection with assets held 

in an investor’s account has total assets 

significantly in excess of $5 million. The total assets 

of each such insurance company were determined 

by reviewing the Form 10–K of that company and, 

in some cases, Best’s Company Reports (available 

on Lexis). 

314See supra note 306 and accompanying text. 

315 17 CFR 240.0–10(c). 

316 17 CFR 240.17a–5(d). 

317 17 CFR 240.0–10(a). 

318See discussion supra Part V.B. The costs borne 

by distributors entering into networking 

arrangements will be borne by both large and small 

distributors of registered indexed annuities. 

319See, e.g., Submission for OMB Review; 

Comment Request, OMB Control No. 3235–0012 [72 

FR 39646 (Jul. 19, 2007)] (discussing the total 

annual burden imposed by Form BD). 

registering as a broker-dealer. We 

recognize that a distributor will incur 

costs in entering into networking 

arrangement. However, these costs are 

not unique to indexed annuities. For 

example, issuers of insurance products 

registered as securities, such as variable 

annuities, may incur networking costs, 

as do banks involved in networking 

arrangements. Moreover, while we 

would expect networking to be 

generally more cost-effective than 

registration as a broker-dealer, to the 

extent that it is not more efficient, 

broker-dealer registration remains an 

option for indexed annuity distributors. 

We believe that the upper bound of the 

cost of entering into a networking 

agreement is the equivalent of the costs 

of establishing a registered brokerdealer. Commenters provided a range of 

cost estimates for establishing a 

registered broker-dealer, ranging from 

$250,000 to $3 million. 

As discussed below, it is the view of 

the Commission that, despite any 

adverse impact to small entities that 

may result, rule 151A is a necessary 

measure for the protection of purchasers 

of indexed annuities. Rule 151A will 

result in significant benefits to indexed 

annuity purchasers, including federally 

mandated disclosure and sales practice 

protections. Moreover, rule 151A offers 

benefits to all entities, large and small, 

such as greater regulatory certainty with 

regard to the status of indexed annuities 

under the federal securities laws and 

enhance competition. We do not 

anticipate that rule 151A will impose 

different or additional burdens on small 

entities than those imposed on other 

small entities who issue or distribute 

securities. Commenters generally 

supported rule 12h–7 and did not raise 

any issues regarding the effect of rule 

12h–7 on small entities. 

C. Small Entities Subject to the Rules 

The Commission’s rules define ‘‘small 

business’’ and ‘‘small organization’’ for 

purposes of the Regulatory Flexibility 

Act for each of the types of entities 

regulated by the Commission.309 Rule 

0–10(a) 310 defines an issuer, other than 

an investment company, to be a ‘‘small 

business’’ or ‘‘small organization’’ for 

purposes of the Regulatory Flexibility 

Act if it had total assets of $5 million 

or less on the last day of its most recent 

fiscal year.311 No insurers currently 

issuing indexed annuities are small 

entities.312 In addition, no other 

insurers that would be covered by the 

Exchange Act exemption are small 

entities.313

While there are no small entities 

among the insurers who are subject to 

the new rules 151A and 12h–7, we note 

that there may be a substantial number 

of small entities among distributors of 

indexed annuities.314 Rule 0–10(c) 315

states that the term ‘‘small business’’ or 

‘‘small organization,’’ when referring to 

a broker-dealer that is not required to 

file audited financial statements 

prepared pursuant to rule 17a–5(d) 

under the Exchange Act,316 means a 

broker or dealer that had total capital 

(net worth plus subordinated liabilities) 

of less than $500,000 on the last 

business day of the preceding fiscal year 

(or in the time that it has been in 

business, if shorter); and is not affiliated 

with any person (other than a natural 

person) that is not a small business or 

small organization. Rule 0–10(a) 317

states that the term ‘‘small business’’ or 

‘‘small organization,’’ when used with 

reference to a ‘‘person,’’ other than an 

investment company, means a ‘‘person’’ 

that, on the last day of its most recent 

fiscal year, had total assets of $5 million 

or less. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

Rule 151A will result in Securities 

Act filing obligations for those 

insurance companies that, in the future, 

issue indexed annuities that fall outside 

the insurance exemption under rule 

151A, and rule 12h–7 will result in the 

elimination of Exchange Act reporting 

obligations for those insurance 

companies that meet the conditions to 

the exemption. As noted above, no 

insurance companies that currently 

issue indexed annuities or that would 

be covered by the exemption are small 

entities. 

However, rule 151A may affect 

indexed annuity distributors that are 

small entities and that are not currently 

parties to a networking arrangement or 

registered as broker-dealers. While these 

entities may choose to register as brokerdealers, in order to continue to 

distribute indexed annuities that are 

registered as securities, these 

distributors would likely enter into a 

networking arrangement with a 

registered broker-dealer. Under these 

arrangements, an affiliated or thirdparty broker-dealer provides brokerage 

services for an insurance agency’s 

customers, in connection with 

transactions in insurance products that 

are also securities. Entering into a 

networking arrangement would impose 

costs associated with contracting with 

the registered broker-dealer regarding 

the terms, conditions, and obligations of 

each party to the arrangement. We 

anticipate that a distributor will incur 

legal costs in connection with entering 

into a networking arrangement with a 

registered broker-dealer, as well as 

ongoing costs associated with 

monitoring compliance with the terms 

of the networking arrangement.318

Entities that enter into such networking 

arrangements would not be subject to 

ongoing reporting, recordkeeping, or 

other compliance requirements imposed 

by the federal securities laws. If any of 

these entities were to choose to register 

as broker-dealers as a result of rule 

151A,319 they would be subject to 

ongoing reporting, recordkeeping, and 

other compliance requirements 

applicable to registered broker-dealers. 

Compliance with these requirements, if 


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320See supra notes 265–268 and accompanying 

text. 

321See, e.g., Academy Letter, supra note 54; AIG 

Letter, supra note 128; Aviva Letter, supra note 54; 

Second Academy Letter, supra note 54; Second 

Aviva Letter, supra note 54; Second Transamerica 

Letter, supra note 54; Letter of Life Insurance 

Company of the Southwest (Sept. 10, 2008) 

(‘‘Southwest Letter’’); Voss Letter, supra note 13. 

applicable, would impose costs 

associated with accounting, legal, and 

other professional personnel, and the 

design and operation of automated and 

other compliance systems.320

E. Commission Action To Minimize 

Effect on Small Entities 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish the stated 

objective, while minimizing any 

significant adverse impact on small 

entities. In connection with the 

adoption of rule 151A and rule 12h–7, 

we considered the following 

alternatives: 

• Establishing different compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; 

• Further clarifying, consolidating, or 

simplifying the requirements for small 

entities; 

• Using performance standards rather 

than design standards; and 

• Providing an exemption from the 

requirements, or any part of them, for 

small entities. 

Because no insurers that currently 

issue indexed annuities or that will be 

covered by the Exchange Act exemption 

are small entities, consideration of these 

alternatives for those insurance 

companies is not applicable. Small 

distributors of indexed annuities that 

choose to enter into networking 

arrangements with registered brokerdealers, which we believe will be likely 

once rule 151A is adopted, would not be 

subject to ongoing reporting, 

recordkeeping, or other compliance 

requirements. However, because some 

small distributors may choose to register 

as broker-dealers, we did consider the 

alternatives above for small distributors. 

Commenters did not suggest any 

alternatives specifically addressed to 

small entities. Some commenters 

suggested that the Commission, instead 

of adopting a rule that defines certain 

indexed annuities as not being ‘‘annuity 

contracts’’ under Section 3(a)(8), should 

instead define a safe harbor that would 

provide that indexed annuities that 

meet certain conditions are entitled to 

the Section 3(a)(8) exemption.321 We are 

not adopting this approach for two 

reasons. First, such a rule would not 

address in any way the federal interest 

in providing investors with disclosure, 

antifraud, and sales practice protections 

that arise when individuals are offered 

indexed annuities that expose them to 

investment risk. A safe harbor would 

address circumstances where 

purchasers of indexed annuities are not 

entitled to the protections of the federal 

securities laws; one of our primary goals 

is to address circumstances where 

purchasers of indexed annuities are 

entitled to the protections of the federal 

securities laws. We are concerned that 

many purchasers of indexed annuities 

today should be receiving the 

protections of the federal securities 

laws, but are not. Rule 151A addresses 

this problem; a safe harbor rule would 

not. Second, we believe that, under 

many of the indexed annuities that are 

sold today, the purchaser bears 

significant investment risk and is more 

likely than not to receive a fluctuating, 

securities-linked return. In light of that 

fact, we believe that is far more 

important to address this class of 

contracts with our definitional rule than 

to address the remaining contracts, or 

some subset of those contracts, with a 

safe harbor rule. 

The Commission believes that 

different registration, compliance, or 

reporting requirements or timetables for 

small entities that distribute registered 

indexed annuities would not be 

appropriate or consistent with investor 

protection. The rules will provide 

investors with the sales practice 

protections of the federal securities laws 

when they purchase indexed annuities 

that are outside the insurance 

exemption. These indexed annuities 

would be required to be distributed by 

a registered broker-dealer. As a result, 

investors who purchase these indexed 

annuities after the effective date of rule 

151A would receive the benefits 

associated with a registered 

representative’s obligation to make only 

recommendations that are suitable. The 

registered representatives who sell 

registered indexed annuities would be 

subject to supervision by the brokerdealer with which they are associated, 

and the selling broker-dealers would be 

subject to the oversight of FINRA. The 

registered broker-dealers would also be 

required to comply with specific books 

and records, supervisory, and other 

compliance requirements under the 

federal securities laws, as well as to be 

subject to the Commission’s general 

inspections and, where warranted, 

enforcement powers. 

Different registration, compliance, or 

reporting requirements or timetables for 

small entities that distribute indexed 

annuities may create the risk that 

investors will receive lesser sales 

practice and other protections when 

they purchase a registered indexed 

annuity through a distributor that is a 

small entity. We believe that it is 

important for all investors that purchase 

indexed annuities that are outside the 

insurance exemption to receive 

equivalent protections under the federal 

securities laws, without regard to the 

size of the distributor through which 

they purchase. For those same reasons, 

the Commission also does not believe 

that it would be appropriate or 

consistent with investor protection to 

exempt small entities from the brokerdealer registration requirements when 

those entities distribute indexed 

annuities that fall outside of the 

insurance exemption under our rules. 

Through our existing requirements for 

broker-dealers, we have endeavored to 

minimize the regulatory burden on all 

broker-dealers, including small entities, 

while meeting our regulatory objectives. 

Small entities that distribute indexed 

annuities that are outside the insurance 

exemption under our rule should 

benefit from the Commission’s reasoned 

approach to broker-dealer regulation to 

the same degree as other entities that 

distribute securities. In our existing 

broker-dealer regulatory framework, we 

have endeavored to clarify, consolidate, 

and simplify the requirements 

applicable to all registered brokerdealers, and the rules do not change 

those requirements in any way. Finally, 

we do not consider using performance 

rather than design standards to be 

consistent with investor protection in 

the context of broker-dealer registration, 

compliance, and reporting 

requirements. 

VIII. Statutory Authority 

The Commission is adopting the 

amendments outlined above under 

Sections 3(a)(8) and 19(a) of the 

Securities Act [15 U.S.C. 77c(a)(8) and 

77s(a)] and Sections 12(h), 13, 15, 23(a), 

and 36 of the Exchange Act [15 U.S.C. 

78l(h), 78m, 78o, 78w(a), and 78mm]. 

List of Subjects in 17 CFR Parts 230 and 

240 

Reporting and recordkeeping 

requirements, Securities. 

Text of Rules 

■ For the reasons set forth in the 

preamble, the Commission amends Title 

17, Chapter II, of the Code of Federal 

Regulations as follows: 


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Federal Register / Vol. 74, No. 11 / Friday, January 16, 2009 / Rules and Regulations 3175 

PART 230—GENERAL RULES AND 

REGULATONS, SECURITIES ACT OF 

1933 

■ 1. The authority citation for Part 230 

continues to read in part as follows: 

Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 

77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, 

78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 

78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a– 

30, and 80a–37, unless otherwise noted. 

* * * * * 

■ 2. Add § 230.151A to read as follows: 

§ 230.151A Certain contracts not 

‘‘annuity contracts’’ or ‘‘optional annuity 

contracts’’ under section 3(a)(8). 

(a) General. Except as provided in 

paragraph (c) of this section, a contract 

that is issued by a corporation subject to 

the supervision of the insurance 

commissioner, bank commissioner, or 

any agency or officer performing like 

functions, of any State or Territory of 

the United States or the District of 

Columbia, and that is subject to 

regulation under the insurance laws of 

that jurisdiction as an annuity is not an 

‘‘annuity contract’’ or ‘‘optional annuity 

contract’’ under Section 3(a)(8) of the 

Securities Act (15 U.S.C. 77c(a)(8)) if: 

(1) The contract specifies that 

amounts payable by the issuer under the 

contract are calculated at or after the 

end of one or more specified crediting 

periods, in whole or in part, by 

reference to the performance during the 

crediting period or periods of a security, 

including a group or index of securities; 

and 

(2) Amounts payable by the issuer 

under the contract are more likely than 

not to exceed the amounts guaranteed 

under the contract. 

(b) Determination of amounts payable 

and guaranteed. In making the 

determination under paragraph (a)(2) of 

this section: 

(1) Amounts payable by the issuer 

under the contract and amounts 

guaranteed under the contract shall be 

determined by taking into account all 

charges under the contract, including, 

without limitation, charges that are 

imposed at the time that payments are 

made by the issuer; and 

(2) A determination by the issuer at or 

prior to issuance of the contract shall be 

conclusive, provided that: 

(i) Both the methodology and the 

economic, actuarial, and other 

assumptions used in the determination 

are reasonable; 

(ii) The computations made by the 

issuer in support of the determination 

are materially accurate; and 

(iii) The determination is made not 

more than six months prior to the date 

on which the form of contract is first 

offered. 

(c) Separate accounts. This section 

does not apply to any contract whose 

value varies according to the investment 

experience of a separate account. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 3. The authority citation for Part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201 et seq. ; and 18 U.S.C. 

1350, unless otherwise noted. 

* * * * * 

■ 4. Add § 240.12h–7 to read as follows: 

§ 240.12h–7 Exemption for issuers of 

securities that are subject to insurance 

regulation. 

An issuer shall be exempt from the 

duty under section 15(d) of the Act (15 

U.S.C. 78o(d)) to file reports required by 

section 13(a) of the Act (15 U.S.C. 

78m(a)) with respect to securities 

registered under the Securities Act of 

1933 (15 U.S.C. 77a et seq.), provided 

that: 

(a) The issuer is a corporation subject 

to the supervision of the insurance 

commissioner, bank commissioner, or 

any agency or officer performing like 

functions, of any State; 

(b) The securities do not constitute an 

equity interest in the issuer and are 

either subject to regulation under the 

insurance laws of the domiciliary State 

of the issuer or are guarantees of 

securities that are subject to regulation 

under the insurance laws of that 

jurisdiction; 

(c) The issuer files an annual 

statement of its financial condition 

with, and is supervised and its financial 

condition examined periodically by, the 

insurance commissioner, bank 

commissioner, or any agency or officer 

performing like functions, of the issuer’s 

domiciliary State; 

(d) The securities are not listed, 

traded, or quoted on an exchange, 

alternative trading system (as defined in 

§ 242.300(a) of this chapter), inter-dealer 

quotation system (as defined in 

§ 240.15c2–11(e)(2)), electronic 

communications network, or any other 

similar system, network, or publication 

for trading or quoting; 

(e) The issuer takes steps reasonably 

designed to ensure that a trading market 

for the securities does not develop, 

including, except to the extent 

prohibited by the law of any State or by 

action of the insurance commissioner, 

bank commissioner, or any agency or 

officer performing like functions of any 

State, requiring written notice to, and 

acceptance by, the issuer prior to any 

assignment or other transfer of the 

securities and reserving the right to 

refuse assignments or other transfers at 

any time on a non-discriminatory basis; 

and 

(f) The prospectus for the securities 

contains a statement indicating that the 

issuer is relying on the exemption 

provided by this rule. 

January 8, 2009. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

Opening Remarks and Dissent by 

Commissioner Troy A. Paredes 

Regarding Final Rule 151A: Indexed 

Annuities and Certain Other Insurance 

Contracts 

Open Meeting of the Securities & Exchange 

Commission 

December 17, 2008 

Thank you, Chairman Cox. 

I believe that proposed Rule 151A 

addressing indexed annuities is rooted in 

good intentions. For instance, at the time the 

rule was proposed, the Commission watched 

a television clip from Dateline NBC that 

described individuals who may have been 

misled by seemingly unscrupulous sales 

practices into buying these products. Part of 

our tripartite mission at the SEC is to protect 

investors, so there is a natural tendency to 

want to act when we hear stories like this. 

However, our jurisdiction is limited; and 

thus our authority to act is circumscribed. 

Rule 151A is about this very question: The 

proper scope of our statutory authority. 

In our effort to protect investors, we cannot 

extend our reach past the statutory stopping 

point. Section 3(a)(8) of the Securities Act of 

1933 (’33 Act) provides a list of securities 

that are exempt from the ’33 Act and thus, 

by design of the statute, fall beyond the 

Commission’s reach. The Section 3(a)(8) 

exemption includes, in relevant part, ‘‘[a]ny 

insurance or endowment policy or annuity 

contract or optional annuity contract, issued 

by a corporation subject to the supervision of 

the insurance commissioner * * * of any 

State or Territory of the United States or the 

District of Columbia.’’ I am not persuaded 

that Rule 151A represents merely an attempt 

to provide clarification to the scope of 

exempted securities falling within Section 

3(a)(8). Instead, by defining indexed 

annuities in the manner done in Rule 151A, 

I believe the SEC will be entering into a 

realm that Congress prohibited us from 

entering. Therefore, I cannot vote in favor of 

the rule and respectfully dissent. 

Rule 151A takes some annuity products 

(indexed annuities), which otherwise may be 

covered by the statutory exemption in 

Section 3(a)(8), and removes them from the 

exemption, thus placing them within the 

Commission’s jurisdiction to regulate. If the 

Commission’s Rule 151A analysis is wrong— 

which is to say that indexed annuities do fall 


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1See generally SEC v. Variable Annuity Life Ins. 

Co. of Am., 359 U.S. 65 (1959); SEC v. United 

Benefit Life Ins. Co., 387 U.S. 202 (1967). 

2See Malone v. Addison Ins. Mktg., Inc., 225 F. 

Supp. 2d 743 (W.D. Ky. 2002). 

3Otto v. Variable Annuity Life Ins. Co., 814 F.2d 

1127 (7th Cir. 1987). The Supreme Court denied the 

petition for a writ of certiorari. 

within Section 3(a)(8)—then the SEC has 

exceeded its authority by seeking to regulate 

them. In other words, the effect of Rule 151A 

would be to confer additional authority upon 

the SEC when these products, in fact, are 

entitled to the Section 3(a)(8) exemption. 

The Supreme Court has twice construed 

the scope of Section 3(a)(8) for annuity 

contracts in the VALIC and United Benefit 

cases.1 I believe the approach embraced by 

Rule 151A conflicts with these Supreme 

Court cases. Although neither VALIC nor 

United Benefit deals with indexed annuities 

directly, the cases nevertheless are 

instructive in evaluating whether such a 

product falls within the Section 3(a)(8) 

exemption. And despite the adopting 

release’s efforts to discount its holding, at 

least one federal court applying VALIC and 

United Benefit has held that an indexed 

annuity falls within the statutory exemption 

of Section 3(a)(8).2

When fixing the contours of Section 

3(a)(8), the relevant features of the product at 

hand should be considered to determine 

whether the product falls outside the Section 

3(a)(8) exemption. Rule 151A places singular 

focus on investment risk without adequately 

considering another key factor—namely, the 

manner in which an indexed annuity is 

marketed. 

Moreover, I believe that Rule 151A 

misconceptualizes investment risk for 

purposes of Section 3(a)(8). The extent to 

which the purchaser of an indexed annuity 

bears investment risk is a key determinant of 

whether such a product is subject to the 

Commission’s jurisdiction. Rule 151A denies 

an indexed annuity the Section 3(a)(8) 

exemption when it is ‘‘more likely than not’’ 

that, because of the performance of the linked 

securities index, amounts payable to the 

purchaser of the annuity contract will exceed 

the amounts the insurer guarantees the 

purchaser. This approach to investment risk 

gives short shrift to the guarantees that are a 

hallmark of indexed annuities. In other 

words, the central insurance component of 

the product eludes the Rule 151A test. More 

to the point, Rule 151A in effect treats the 

possibility of upside, beyond the guarantee of 

principal and the guaranteed minimum rate 

of return the purchaser enjoys, as investment 

risk under Section 3(a)(8). I believe that it is 

more appropriate to emphasize the extent of 

downside risk—that is, the extent to which 

an investor is subject to a risk of loss—in 

determining the scope of Section 3(a)(8). 

When investment risk is properly conceived 

of in terms of the risk of loss, it becomes 

apparent why indexed annuities may fall 

within Section 3(a)(8) and thus beyond this 

agency’s reach, contrary to Rule 151A. 

Not only does Rule 151A seem to deviate 

from the approach taken by courts, including 

the Supreme Court, but it also appears to 

depart from prior positions taken by the 

Commission. For example, in an amicus brief 

filed with the Supreme Court in the Otto 

case,3 the Commission asserted that the 

Section 3(a)(8) exemption applies when an 

insurance company, regulated by the state, 

assumes a ‘‘sufficient’’ share of investment 

risk and there is a corresponding decrease in 

the risk to the purchaser, such as where the 

purchaser benefits from certain guarantees. 

Yet Rule 151A denies the Section 3(a)(8) 

exemption to an indexed annuity issued by 

a state-regulated insurance company that 

bears substantial risk under the annuity 

contract by guaranteeing principal and a 

minimum return. 

In addition, Rule 151A seems to diverge 

from the analysis embedded in Rule 151. 

Rule 151 establishes a true safe harbor under 

Section 3(a)(8) and provides that a variety of 

factors should be considered, such as 

marketing techniques and the availability of 

guarantees. The Rule 151 adopting release 

even indicates that the rule allows for certain 

‘‘indexed excess interest features’’ without 

the product falling outside the safe harbor. 

An even more critical difference between 

Rule 151 and Rule 151A is the effect of 

failing to meet the requirements under the 

rule. If a product does not meet the 

requirements of Rule 151, there is no safe 

harbor, but the product nevertheless may fall 

within Section 3(a)(8) and thus be an 

exempted security. But if a product does not 

pass muster under the Rule 151A ‘‘more 

likely than not’’ test, then the product is 

deemed to fall outside Section 3(a)(8) and 

thus is under the SEC’s jurisdiction. In 

essence, while Rule 151 provides a safe 

harbor, Rule 151A takes away the Section 

3(a)(8) statutory exemption. 

I am not aware of another instance in the 

federal securities laws where a ‘‘more likely 

than not’’ test is employed, and for good 

reason. A ‘‘more likely than not’’ test does 

not provide insurers with proper notice of 

whether their products fall within the federal 

securities laws or not. If an insurer applies 

the test in good faith and gets it wrong, the 

insurer nonetheless risks being subject to 

liability under Section 5 of the Securities 

Act, even if the insurer had no intent to run 

afoul of the federal securities laws. In 

addition, under the ‘‘more likely than not’’ 

test, the availability of the Section 3(a)(8) 

exemption turns on the insurer’s own 

analysis. Accordingly, it is at least 

conceivable that the same product could 

receive different Section 3(a)(8) treatment 

depending on how each respective insurer 

modeled the likely returns. 

Further, I am concerned that Rule 151A, as 

applied, reveals that the ‘‘more likely than 

not’’ test, despite its purported balance, leads 

to only one result: The denial of the Section 

3(a)(8) exemption. In practice, Rule 151A 

appears to result in blanket SEC regulation of 

the entire indexed annuity market. The 

adopting release indicates that over 300 

indexed annuity contracts were offered in 

2007 and explains that the Office of 

Economic Analysis has determined that 

indexed annuity contracts with typical 

features would not meet the Rule 151A test. 

Indeed, the adopting release elsewhere 

expresses the expectation that almost all 

indexed annuity contracts will fail the test. 

If everyone is destined to fail, what is the 

purpose of a test? Further, there is at least 

some risk that in sweeping up the index 

annuity market, the rule may sweep up other 

insurance products that otherwise should fall 

within Section 3(a)(8). 

The rule has other shortcomings, aside 

from the legal analysis that underpins it. 

These include, but are not limited to, the 

following. 

First, a range of state insurance laws 

govern indexed annuities. I am disappointed 

that the rule and adopting release make an 

implicit judgment that state insurance 

regulators are inadequate to regulate these 

products. Such a judgment is beyond our 

mandate or our expertise. In any event, 

Section 3(a)(8) does not call upon the 

Commission to determine whether state 

insurance regulators are up to the task; 

rather, the section exempts annuity contracts 

subject to state insurance regulation. 

Second, as a result of Rule 151A, insurers 

will have to bear various costs and burdens, 

which, importantly, could disproportionately 

impact small businesses. Some even have 

predicted that companies may be forced out 

of business if Rule 151A is adopted. Such an 

outcome causes me concern, especially 

during these difficult economic times. Even 

when the economy is not strained, such an 

outcome is disconcerting because it can lead 

to less competition, ultimately to the 

detriment of consumers. 

Third, the Commission received several 

thousand comment letters since Rule 151A 

was proposed in June 2008. Consistent with 

comments we have received, I believe that 

there are more effective and appropriate ways 

to address the concerns underlying this 

rulemaking. One possible alternative to Rule 

151A would be amending Rule 151 to 

establish a more precise safe harbor in light 

of all the relevant facts and circumstances 

attendant to indexed annuities and how they 

are marketed. A more precise safe harbor 

would provide better clarity and certainty in 

this area—regulatory goals the Commission 

has identified—and would preserve the 

ability of insurers to find an exemption 

outside the safe harbor by relying directly on 

Section 3(a)(8) and the cases interpreting it. 

I believe further exploration of alternative 

approaches is warranted, as is continued 

engagement with interested parties, 

including state regulators. 

In closing, I request that my remarks be 

included in the Federal Register with the 

final version of the release. My remarks today 

do not give a full exposition of the rule’s 

shortcomings, but rather highlight some of 

the key points that lead me to dissent. I wish 

to note that these dissenting remarks just 

given represent my view after giving careful 

consideration to the range of arguments 

presented by the Commission’s staff, 

particularly the Office of General Counsel, 

the commenters, and my own counsel, as 

well as those of my fellow Commissioners. 

Although I cannot support the rule, I 

nonetheless thank the staff for the hard work 

they have devoted to its preparation. 

[FR Doc. E9–597 Filed 1–15–09; 8:45 am] 

BILLING CODE 8011–01–P 


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