Document ID: SEC-2008-0871-0001
Agency: sec
Document Type: Proposed Rule
Title: Indexed Annuities and Certain Other Insurance Contracts
Posted Date: 2008-07-01T04:00Z

[Federal Register: July 1, 2008 (Volume 73, Number 127)]
[Proposed Rules]               
[Page 37751-37774]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy08-16]                         

[[Page 37751]]

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Part VI

Securities and Exchange Commission

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17 CFR Parts 230 and 240

Indexed Annuities and Certain Other Insurance Contracts; Proposed Rule

[[Page 37752]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-8933, 34-58022; File No. S7-14-08]
RIN 3235-AK16

 
Indexed Annuities and Certain Other Insurance Contracts

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing a new rule that would define the terms 
``annuity contract'' and ``optional annuity contract'' under the 
Securities Act of 1933. The proposed rule is intended to clarify the 
status under the federal securities laws of indexed annuities, under 
which payments to the purchaser are dependent on the performance of a 
securities index. The proposed rule would apply on a prospective basis 
to contracts issued on or after the effective date of the rule. We are 
also proposing to exempt 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 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: Comments should be received on or before September 10, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-14-08 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number S7-14-08. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/
proposed.shtml). Comments are also available for public inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. All comments received will be posted without change; we 
do not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Michael L. Kosoff, Attorney, or Keith 
E. Carpenter, Senior Special Counsel, Office of Disclosure and 
Insurance Products 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 proposing to add 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\
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
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Table of Contents

I. EXECUTIVE SUMMARY
II. BACKGROUND
    A. Description of Indexed Annuities
    B. Marketing of Indexed Annuities
    C. Section 3(a)(8) Exemption
III. DISCUSSION OF THE PROPOSED AMENDMENTS
    A. Definition of Annuity Contract
    B. Exchange Act Exemption for Securities that Are Regulated as 
Insurance
IV. GENERAL REQUEST FOR COMMENTS
V. PAPERWORK REDUCTION ACT
VI. COST/BENEFIT ANALYSIS
VII. CONSIDERATION OF PROMOTION OF EFFICIENCY, COMPETITION, AND 
CAPITAL FORMATION; CONSIDERATION OF BURDEN ON COMPETITION
VIII. INITIAL REGULATORY FLEXIBILITY ANALYSIS
IX. CONSIDERATION OF IMPACT ON THE ECONOMY
X. STATUTORY AUTHORITY
TEXT OF PROPOSED RULES

I. Executive Summary

    We are proposing a new rule that is intended to clarify the status 
under the federal securities laws of indexed annuities, under which 
payments to the purchaser are dependent on the performance of a 
securities index. Section 3(a)(8) of the Securities Act provides an 
exemption under the Securities Act for certain insurance contracts. The 
proposed rule would prospectively define 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.
    The proposed definition would hinge 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 promise to offer market-related gains. Thus, these 
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, the majority of the investment risk for the fluctuating, 
equity-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 equity-linked 
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 securities 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

[[Page 37753]]

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 and sales 
practice protections.
    We have determined that providing greater clarity with regard to 
the status of indexed annuities under the federal securities laws would 
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 are 
proposing a new definition of ``annuity contract'' that, on a 
prospective basis, would define a class of indexed annuities that are 
outside the scope of section 3(a)(8). With respect to these annuities, 
investors would be entitled to all the protections of the federal 
securities laws, including full and fair disclosure and sales practice 
protections.
    We are aware that many insurance companies, 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 
release. Under these circumstances, we do not believe that insurance 
companies should be subject to any additional legal risk relating to 
their past offers and sales of indexed annuities as a result of our 
proposal today or its eventual adoption. Therefore, we are also 
proposing that the new definition 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 proposing a new exemption from Exchange Act 
reporting that would 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. Rather, investors who purchase these 
securities are primarily affected by issues relating to the insurer's 
financial ability to satisfy its contractual obligations--issues that 
are addressed by state law and regulation.

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. 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.\3\ Insurers have typically 
marketed and sold indexed annuities without complying with the federal 
securities laws, and sales of the products have grown dramatically in 
recent years. This growth has, unfortunately, been accompanied by 
growth in 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 particularly unsuitable for seniors and others who 
may need ready access to their assets.
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    \3\ SEC 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'').
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    We have observed the development of indexed annuities for some 
time, and we have become persuaded that guidance is needed with respect 
to their status under the federal securities laws. Today, we are 
proposing rules that are intended to provide greater clarity regarding 
the scope of the exemption provided by section 3(a)(8). We believe our 
proposed action is consistent with Congressional intent in that the 
proposed definition would afford the disclosure 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 
proposed rules are intended to provide regulatory certainty and 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 our proposed 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.\4\
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    \4\ Financial Industry Regulatory Authority, Inc. (``FINRA''), 
Equity-Indexed Annuities--A Complex Choice (updated Apr. 22, 2008), 
available at: http://www.finra.org/InvestorInformation/
InvestorAlerts/AnnuitiesandInsurance/Equity-IndexedAnnuities-
AComplexChoice/P010614; National Association of Insurance 
Commissioners, Buyer's Guide to Fixed Deferred Annuities with 
Appendix for Equity-Indexed Annuities, at 9 (2007); 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/pdfs/White%20Paper%20Final_11-10-06_
All%20Inquiries.pdf; Jack Marrion, Index Annuities: Power and 
Protection, at 13 (2004).
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    Life insurance companies began offering indexed annuities in the 
mid-1990s.\5\ Sales of indexed annuities for 1998 totaled $4 billion 
and grew each year through 2005, when sales totaled $27.2 billion.\6\ 
Indexed annuity sales for 2006 totaled $25.4 billion and $24.8 billion 
in 2007.\7\ In 2007, indexed annuity assets totaled $123 billion, 58 
companies were issuing indexed annuities, and there were a total of 322 
indexed annuities offered.\8\ The specific features of indexed 
annuities vary from product to product. Some of the key features are as 
follows.
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    \5\ See National Association for Fixed Annuities, supra note 4, 
at 4.
    \6\ NAVA, 2008 Annuity Fact Book, 57 (2008).
    \7\ Id.
    \8\ Id.
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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

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advance of the period for which return is to be credited, and the 
crediting period is generally at least one year long.\9\ 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.
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    \9\ National Association for Fixed Annuities, supra note 4, at 
13.
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     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.\10\ 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. Another method, sometimes 
referred to as ``monthly point-to-point,'' combines both positive and 
negative changes in the index values from one month to the next during 
the crediting period and recognizes the aggregate change as the amount 
of index credit for the period, if it is positive. Another method 
compares an average of index values at periodic intervals during the 
crediting period to the index value at the beginning of the 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.\11\
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    \10\ See FINRA, supra note 4; National Association of Insurance 
Commissioners, supra note 4, at 12-14; National Association for 
Fixed Annuities, supra note 4, at 9-10; Marrion, supra note 4, at 
38-59.
    \11\ National Association of Insurance Commissioners, supra note 
4, at 11; National Association for Fixed Annuities, supra note 4, at 
5 and 9; Marrion, supra note 4, at 2.
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     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.\12\ 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%).
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    \12\ See FINRA, supra note 4; National Association of Insurance 
Commissioners, supra note 4, at 10-11; National Association for 
Fixed Annuities, supra note 4, at 10; Marrion, supra note 4, at 38-
59.
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Surrender Charges
    Surrender charges are commonly deducted from withdrawals taken by a 
purchaser.\13\ The maximum surrender charges, which may be as high as 
15-20%,\14\ 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. 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.\15\ Many indexed annuities permit purchasers to withdraw a 
portion of contract value each year, typically 10%, without payment of 
surrender charges.
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    \13\ See FINRA, supra note 4; National Association of Insurance 
Commissioners, supra note 4, at 3-4 and 11; National Association for 
Fixed Annuities, supra note 4, at 7; Marrion, supra note 4, at 31.
    \14\ The 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.
    \15\ FINRA, supra note 4; Marrion, supra note 4, at 31.
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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. 
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%.\16\ 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.
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    \16\ National Association for Fixed Annuities, supra note 4, at 
6.
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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.\17\
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    \17\ 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).
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B. Marketing of Indexed Annuities

    In the years after indexed annuities were first introduced, sales 
volumes were relatively small. In 1998, when sales totaled $4 billion, 
the impact of these products on both purchasers and issuing insurance 
companies was limited. As sales have grown in more recent years, with 
sales of $24.8 billion and total indexed annuity assets of $123 billion 
in 2007, these products have affected larger and larger numbers of 
purchasers. They have also become an increasingly important business 
line for some insurers.\18\ In addition, in recent

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years, guarantees provided by indexed annuities have been reduced. In 
the years immediately following their introduction, indexed annuities 
typically guaranteed 90% of purchase payments accumulated at 3% annual 
interest.\19\ More recently, however, following changes in state 
insurance laws,\20\ guarantees in indexed annuities have been as low as 
87.5% of purchase payments accumulated at 1% annual interest.\21\
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    \18\ See, 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., 
Jul. 10, 2007) (Indexed annuities represent over eighty percent of 
annuity premiums and almost half of annuity reserves.); Aviva USA 
Group (Best's Company Reports, AmerUs Life Insurance Company, Nov. 
6, 2007) (Indexed annuity sales represent more than 90% of total 
annuity production.); Conseco Insurance Group (CIG) (Best's Company 
Reports, Conseco Ins. Group, Nov. 7, 2008) (CIG's business was 
heavily weighted toward indexed annuities, which contributed 
approximately 77% of new first year premiums.); Investors Insurance 
Corporation (IIC) (Best's Company Reports, Investors Ins. Corp., 
Aug. 20, 2007) (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, Jun. 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 has been the principal driver of growth in 
annuity deposits.).
    \19\ Securities Act Release No. 7438 (Aug. 20, 1997) [62 FR 
45359, 45360 (Aug. 27, 1997)] (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) (``1997 Concept Release''). 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). Some of the comment letters are also available on the 
Commission's Web site at http://www.sec.gov/rules/concept/
s72297.shtml.
    \20\ See, e.g., Cal. Ins. Code Sec.  10168.25 (West 2007) 
(current requirements, providing for guarantee based on 87.5% of 
purchase payments accumulated at minimum of 1% annual interest); 
Cal. Ins. Code Sec.  10168.2 (West 2003) (former requirements, 
providing for guarantee for single premium annuities based on 90% of 
premium accumulated at minimum of 3% annual interest).
    \21\ See A Producer's Guide to Indexed Annuities 2006, Life 
Insurance Selling (Jun. 2006), available at: http://
www.lifeinsuranceselling.com/Media/MediaManager/
6IAsurveyforweb3.pdf.
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    At the same time that sales of indexed annuities have increased and 
guarantees within the products have been reduced, concerns about 
potentially abusive sales practices and inadequate disclosure have 
grown. In August 2005, NASD \22\ issued a Notice to Members in which it 
cited its concerns about the manner in which persons associated with 
broker-dealers were marketing unregistered indexed annuities and the 
absence of adequate supervision of those sales practices.\23\ The 
Notice to Members also expressed NASD's concern with indexed annuity 
sales materials that do not fully describe the features and risks of 
the products. Citing uncertainty as to whether indexed annuities are 
subject to the federal securities laws, NASD encouraged member firms to 
supervise transactions in these products as though they are securities.
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    \22\ In July 2007, NASD and the member regulation, enforcement, 
and arbitration functions of the New York Stock Exchange were 
consolidated to create FINRA. The NASD materials cited in this 
release were issued prior to the creation of FINRA.
    \23\ 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.
    See also FINRA, supra note 4 (investor alert on indexed 
annuities, stating that indexed annuities are ``anything but easy to 
understand'').
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    At the Senior Summit held at the Commission in July 2006, at which 
securities regulators and others met to explore how to coordinate 
efforts to protect older Americans from abusive sales practices and 
securities fraud, concerns were cited about sales of indexed annuities 
to seniors.\24\ Patricia Struck, then President of the North American 
Securities Administrators Association (``NASAA''), identified indexed 
annuities as among the most pervasive products involved in senior 
investment fraud.\25\ In a joint examination conducted by the 
Commission, NASAA, and the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') of ``free lunch'' seminars that are aimed at selling 
financial products, often to seniors, with a free meal as enticement, 
examiners identified potentially misleading sales materials and 
potential suitability issues relating to the products discussed at the 
seminars, which commonly included indexed annuities.\26\
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    \24\ The average age of issuance for indexed annuities has been 
reported to be 64. Advantage Compendium, 4th Quarter Index Annuity 
Sales Slip (Mar. 2008), available at: http://www.indexannuity.org/
ic2008.htm#4q07.
    \25\ 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.
    \26\ 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.
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C. 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.
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    \27\ The 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)).
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    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.
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    \28\ VALIC, supra note 3, 359 U.S. 65; United Benefit, supra 
note 3, 387 U.S. 202.
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    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\
---------------------------------------------------------------------------

    \29\ VALIC, supra note 3, 359 U.S. at 71-73.
    \30\ United Benefit, supra note 3, 387 U.S. at 211.
    \31\ Id. at 211.
---------------------------------------------------------------------------

    In analyzing investment risk, Justice Brennan's concurring opinion 
in VALIC applied a functional analysis to determine whether a new form 
of

[[Page 37756]]

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\ 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 protections of the Securities 
Act assume importance.
---------------------------------------------------------------------------

    \32\ VALIC, supra note 3, 359 U.S. at 77.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \33\ United Benefit, supra note 3, 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).
---------------------------------------------------------------------------

    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 
state-regulated 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,
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \38\ Some 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.
    The only judicial decision that we are aware of regarding the 
status of indexed annuities under the federal securities laws is a 
district court case that concluded that the contracts at issue in 
the case fell within the Commission's Rule 151 safe harbor 
notwithstanding the fact that they apparently did not meet the 
limited test described above, i.e., specifying an index that would 
be used to determine a rate that would remain in effect for at least 
one year. Instead, the contracts appear to have guaranteed the 
index-based formula, but not the actual rate of interest. See Malone 
v. Addison Ins. Marketing, Inc., 225 F.Supp.2d 743, 751-754 (W.D. 
Ky. 2002).
---------------------------------------------------------------------------

III. Discussion of the Proposed Amendments

    The Commission has determined that providing greater clarity with 
regard to the status of indexed annuities under the federal securities 
laws would 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 proposing a 
new definition of ``annuity contract'' that, on a prospective basis, 
would define a class of indexed annuities that are outside the scope of 
section 3(a)(8). With respect to these annuities, investors would be 
entitled to all the protections of the federal securities laws, 
including full and fair disclosure and sales practice protections. We 
are also proposing a new exemption under the Exchange Act that would 
apply 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 proposing new rule 151A, which would define 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.
---------------------------------------------------------------------------

    \39\ An ``optional annuity contract'' is a deferred annuity. See 
United Benefit, supra note 3, 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).

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[[Page 37757]]

1. Analysis
``Insurance'' and ``Annuity'': Federal Terms under the Federal 
Securities Laws
    Our analysis begins with the well-settled 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 annuities did not exist and were not contemplated by Congress 
when it enacted the insurance exemption.
---------------------------------------------------------------------------

    \40\ See VALIC, supra note 3, 359 U.S. at 69.
    \41\ The 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 ``considering the status of [indexed 
annuities and other indexed insurance contracts] under the federal 
securities laws.'' See Concept Release, supra note 19, 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.C., indexed 
annuities are not entitled to rely on the safe harbor.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \42\ See VALIC, supra note 3, 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.'').
---------------------------------------------------------------------------

Type of Investment
    We believe that the indexed annuities that would be included in our 
proposed 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\
---------------------------------------------------------------------------

    \43\ Id. at 71-73.
    \44\ See United Benefit, supra note 3, 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.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \45\ See VALIC, supra note 3, 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).
---------------------------------------------------------------------------

    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 exposure to 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\
---------------------------------------------------------------------------

    \49\ See United Benefit, supra note 3, 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.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \51\ See VALIC, supra note 3, 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.'').
---------------------------------------------------------------------------

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 would be included in our proposed definition 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.

[[Page 37758]]

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. Thus, individuals who purchase such indexed 
annuities are ``vitally interested in the investment experience.'' \54\ 
However, indexed annuities historically have not been registered with 
us as securities. Insurers have treated these annuities as subject only 
to state insurance laws.
---------------------------------------------------------------------------

    \52\ The 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\ Id. at 91 (Brennan, J., concurring).
    \54\ Id. at 89 (Brennan, J., concurring).
---------------------------------------------------------------------------

    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.
    Accordingly, 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 proposing a rule that would define such 
contracts as falling outside the insurance exemption.
2. Proposed Definition
Scope of the Proposed Definition
    Proposed rule 151A would apply 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.\55\ This language is the same language used in Section 
3(a)(8) of the Securities Act. Thus, the insurance companies that will 
be covered by the proposed rule are the same as those covered by 
Section 3(a)(8). In addition, in order to be covered by the proposed 
rule, a contract must be subject to regulation as an annuity under 
state insurance law.\56\ As a result, the proposed rule does 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.
---------------------------------------------------------------------------

    \55\ Proposed rule 151A(a).
    \56\ Id. We note that the majority of states include in their 
insurance laws provisions that define annuities. See, e.g., ALA. 
CODE section 27-5-3 (2008); CAL. INS. CODE section 1003 (West 2007); 
N.J. ADMIN. CODE tit. 11, section 4-2.2 (2008); N.Y. INS. LAW 
section 1113 (McKinney 2007). Those states that do not expressly 
define annuities typically have regulations in place that address 
annuities. See, e.g., KAN. ADMIN. REGS. section 40-2-12 (2008); 
MISS. CODE ANN. Sec.  83-1-151 (2008).
---------------------------------------------------------------------------

    The proposed rule would expressly state that it does not apply to 
any contract whose value varies according to the investment experience 
of a separate account.\57\ The effect of this provision is to eliminate 
variable annuities from the scope of the rule.\58\ 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, we do 
not propose to cover them under the new definition or affect their 
regulation in any way.\59\
---------------------------------------------------------------------------

    \57\ Proposed rule 151A(c).
    \58\ The 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).
    \59\ See, e.g., VALIC, supra note 3, 359 U.S. 65; United 
Benefit, supra note 3, 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).
---------------------------------------------------------------------------

    We request comment on the scope of the proposed definition and in 
particular on the following issues:
     Should the rule apply only to contracts that are issued by 
the same insurance companies that are covered by section 3(a)(8) of the 
Securities Act, or should the proposed definition apply with respect to 
contracts of different issuers than those covered by section 3(a)(8)?
     What contracts should be covered by the proposed 
definition? Should the scope of contracts covered be articulated by 
reference to state law? Should the proposed definition extend to all 
annuity contracts, or should any annuity contracts be excluded? Should 
variable annuity contracts be covered by the proposed definition? 
Should the proposed definition apply to forms of insurance other than 
annuities, such as life insurance or health insurance? Should the 
proposed definition apply to a contract issued by an insurance company 
if the contract is not itself regulated as insurance under state law?
     Should we permit insurance companies to register indexed 
annuities, as well as any other annuities that are securities, on Form 
N-4,\60\ the form that is currently used by insurance companies to 
register variable annuities under the Securities Act? If so, should we 
modify Form N-4, which is also used by insurance company separate 
accounts to register under the Investment Company Act, in any way?
---------------------------------------------------------------------------

    \60\ 17 CFR 239.17b and 274.11c.
---------------------------------------------------------------------------

Definition of ``Annuity Contract'' and ``Optional Annuity Contract''
    We are proposing 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 the following two characteristics. First, 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. Second, amounts payable by the insurance 
company under the contract are more likely than not to exceed the 
amounts guaranteed under the contract.
    The first characteristic, that amounts payable by the insurance 
company under the contract are calculated by reference to the 
performance of a security or securities, defines a class of contracts 
that we believe, in all cases, require further scrutiny because they 
implicate the factors articulated by the U.S. Supreme Court as 
important in determining whether the section 3(a)(8) exemption is 
applicable. When payments under a contract are calculated by reference 
to the performance of a security or securities, rather than being paid 
in a fixed amount, at least some investment risk relating to the 
performance of the securities is assumed by the purchaser. In addition, 
the contract may be marketed on the basis of the potential for growth 
offered by investments in the securities.
    The proposed rule would define the class of contracts that is 
subject to scrutiny broadly. The rule would apply whenever any amounts 
payable under

[[Page 37759]]

the contract under any circumstances, including full or partial 
surrender, annuitization, or death, are calculated, in whole or in 
part, by reference to the performance of a security or securities. If, 
for example, the amount payable under a contract upon a full surrender 
is not calculated by reference to the performance of a security or 
securities, but the amount payable upon annuitization is so calculated, 
then the contract would need to be analyzed under the rule. As another 
example, if amounts payable under a contract are partly fixed in amount 
and partly dependent on the performance of a security or securities, 
the contract would need to be analyzed under the rule.
    We note that the proposed rule would apply to contracts under which 
amounts payable are calculated by reference to a security, including a 
group or index of securities. Thus, the proposed rule would, by its 
terms, apply to indexed annuities but also to other annuities where 
amounts payable are calculated by reference to a single security or any 
group of securities. The federal securities laws, and investors' 
interests in full and fair disclosure and protection from abusive sales 
practices, are equally implicated, whether amounts payable under an 
annuity are calculated by reference to a securities index, another 
group of securities, or a single security.
    The term ``security'' in proposed rule 151A would have the same 
broad meaning as in section 2(a)(1) of the Securities Act. Proposed 
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.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 230.100(b).
---------------------------------------------------------------------------

    The second characteristic, that amounts payable by the insurance 
company under the contract are more likely than not to exceed the 
amounts guaranteed under the contract, sets forth the test that would 
define a class of 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 
explained above, by purchasing this type of indexed annuity, the 
purchaser assumes the risk of an uncertain and fluctuating financial 
instrument, in exchange for exposure to future, securities-linked 
returns.\62\ As a result, the purchaser assumes many of the same risks 
that investors assume when investing in mutual funds, variable 
annuities, and other securities. Our proposal is intended to 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 protection from abusive 
sales practices and the recommendation of unsuitable transactions.
---------------------------------------------------------------------------

    \62\ See supra Part III.A.1.
---------------------------------------------------------------------------

    Under proposed rule 151A, amounts payable by the insurance company 
under a contract would be more likely than not to exceed the amounts 
guaranteed under the contract if this were the expected outcome more 
than half the time. In order to determine whether this is the case, it 
would 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 would be the amounts that the 
purchaser \63\ would be entitled to receive from the insurer under 
those facts and circumstances. The facts and circumstances would 
include, among other things, the particular features of the annuity 
contract (e.g., in the case of an indexed annuity, the relevant index, 
participation rate, and other features), the particular options 
selected 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 would 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, were to guarantee that, on 
surrender, a purchaser would receive 87.5% of purchase payments, plus 
1% interest compounded annually, and that any additional payout would 
be based exclusively on the performance of a securities index, the 
amount guaranteed after 3 years would be 90.15% of purchase payments 
(87.5% x 1.01 x 1.01 x 1.01).
---------------------------------------------------------------------------

    \63\ For simplicity, we are referring to payments to the 
purchaser. The proposed 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 would be included.
---------------------------------------------------------------------------

    We request comment on the proposed definition and in particular on 
the following issues:
     Should we define a class of annuities that are not 
``annuity contracts'' or ``optional annuity contracts'' under the 
Securities Act? If so, should we adopt the proposed definition or 
should the proposed definition be modified?
     Should we provide greater clarity with respect to the 
status under the Securities Act of annuities under which amounts 
payable by the insurance company are calculated, in whole or in part, 
by reference to the performance of a security, including a group or 
index of securities? Should we, as proposed, adopt a definitional rule 
that would apply to all such annuities? Or should we adopt a 
definitional rule that applies to a more limited subset of annuities, 
such as annuities under which amounts payable are calculated by 
reference to the performance of a securities index?
     Is the proposed test that defines a class of contracts 
that are not ``annuity contracts'' or ``optional annuity contracts,'' 
i.e., that amounts payable by the insurance company under the contract 
are more likely than not to exceed the amounts guaranteed under the 
contract, an appropriate test? Should the test be modified in any way, 
e.g., should the threshold be higher or lower than ``more likely than 
not?'' Should we provide further clarification with respect to the 
meaning of any of the elements of that test, including ``amounts 
payable by the insurance company under the contract'' and ``amounts 
guaranteed under the contract?''
     Should we specify a particular point in time as of which 
``amounts payable by the insurance company under the contract'' and 
``amounts guaranteed under the contract'' should be determined under 
the rule? If so, what would be an appropriate time, e.g., contract 
maturity, the point where the surrender charge period ends, a specified 
number of years (5 years, 10 years, 15 years, 20 years, or some other 
period), or a specified age of the annuitant or a joint annuitant under 
the contract (60 years, 65 years, 75 years, or some other age)?
Determining Whether an Annuity Is Not an ``Annuity Contract'' or 
``Optional Annuity Contract'' Under Proposed Rule 151A
    Proposed rule 151A addresses the manner in which a determination 
would

[[Page 37760]]

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. The proposed rule is principles-based, 
providing that a determination made by the insurer at or prior to 
issuance of a contract would 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 and not more than three years prior to the date on which 
the particular contract is issued.\64\ The proposed rule would, 
however, specify the treatment of charges that are imposed at the time 
of payments under the contract by the insurer.\65\
---------------------------------------------------------------------------

    \64\ Proposed rule 151A(b)(2).
    \65\ Proposed rule 151A(b)(1).
---------------------------------------------------------------------------

    We are proposing this principles-based approach because we believe 
that an insurance company should be able to evaluate anticipated 
outcomes under an annuity that it issues. Insurers routinely undertake 
such analyses for purposes of pricing and hedging their contracts.\66\ 
In addition, we believe that it is important to provide reasonable 
certainty to insurers with respect to the application of the proposed 
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.
---------------------------------------------------------------------------

    \66\ See generally, Black and Skipper, supra note 39, at 26-47, 
890-99.
---------------------------------------------------------------------------

    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.\67\ 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 proposed rule 
would--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.
---------------------------------------------------------------------------

    \67\ See, 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).
---------------------------------------------------------------------------

    The proposed rule provides that an insurer's determination under 
the rule would be conclusive only if it is made at or prior to issuance 
of the contract. Proposed rule 151A is intended to provide certainty to 
both insurers and investors, and we believe that this certainty would 
be undermined unless insurance companies undertake the analysis 
required by the rule no later than the time that an annuity is issued. 
The proposed 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 proposed rule that is based on computations that are 
materially inaccurate. For this purpose, we intend that computations 
would 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 
would be required to 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 would be 
appropriate to look to methods commonly used for 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 would 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 
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 
hedging their contracts, and for similar purposes. We would expect 
that, in making a determination under proposed rule 151A, an insurer 
would use assumptions that are consistent with the assumptions that it 
uses for other purposes. Generally, assumptions that are inconsistent 
with the assumptions that an insurer uses for other purposes would not 
be reasonable under proposed rule 151A.
    We note that an insurer may offer a particular form of contract 
over a significant period of time. Assumptions that are reasonable when 
a contract is originally offered may or may not continue to be 
reasonable at a subsequent time when the insurer continues to offer the 
contract. For this reason, the rule would provide that an insurer's 
determination would be conclusive if it is sufficiently current. 
Specifically, the determination must be made not more than six months 
prior to the date on which the form of contract is first offered and 
not more than three years prior to the date on which a particular 
contract is issued. For example, if a form of contract were first 
offered on January 1, 2011, the insurer

[[Page 37761]]

would be required to make the determination not earlier than July 1, 
2010. If the same form of contract were issued to a particular 
individual on January 1, 2014, the insurer's determination would be 
required to be made not earlier than January 1, 2011, in order to be 
conclusive for this transaction. This approach is intended to address 
the changing nature of reasonable assumptions, while permitting an 
insurer to rely on its determination for a significant period of time 
(three years) once made.
    Proposed rule 151A would require that, in determining whether 
amounts payable by the insurance company under the contract are more 
likely than not to exceed the amounts guaranteed under the contract, 
amounts payable under the contract be determined without reference to 
any charges that are imposed at the time of payment. For example, the 
calculation of amounts payable upon surrender would be computed without 
deduction of any surrender charges, which typically decline over time. 
We are proposing this calculation methodology in order to eliminate the 
differential impact that such charges would have on the determination 
depending on the assumptions made about contract holding periods. 
However, the proposed rule would require that charges imposed at the 
time of payment be reflected in computing the amounts guaranteed under 
the contract. 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.\68\ However, in the case of an annuity 
where the amounts guaranteed are affected by charges imposed at the 
time payments are made,\69\ the determination under proposed rule 151A 
would be made using the actual amounts guaranteed under the contract 
(which reflect the impact of these charges).
---------------------------------------------------------------------------

    \68\ 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.
    \69\ For example, a purchaser buys a contract for $100,000. The 
contract defines surrender value as the greater of (i) purchase 
payments plus index-linked 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).
---------------------------------------------------------------------------

    We request comment on the manner in which a determination would be 
made under proposed rule 151A regarding whether amounts payable by the 
insurance company under a contract are more likely than not to exceed 
the amounts guaranteed under the contract and, in particular, on the 
following issues:
     Should we, as proposed, adopt a principles-based approach 
to this determination? Would the principles-based approach facilitate 
our goal of providing certainty?
     Should the insurer's determination be conclusive? If so, 
are the conditions in the proposed rule (i.e., determination at or 
prior to contract issuance, reasonable methodology and assumptions, 
materially accurate computation) appropriate, or should we modify these 
conditions in any way?
     Should we expressly specify the circumstances under which 
a computation is materially accurate? If so, should the rule, as 
proposed, provide that an insurer's computation is 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? Or should we provide a different guideline for 
determining whether the computation is ``materially accurate?'' For 
example, should the rule provide that an insurer's computation is 
materially accurate if any computational errors do not materially 
affect the insurer's determination of the likelihood that amounts 
payable by the insurer under the contract exceed the amounts guaranteed 
under the contract?
     Should the rule prescribe the assumptions to be used by an 
insurer in making its determination? What factors should affect a 
determination of whether an insurer's assumptions are reasonable? 
Should the rule specify how the determination should be made with 
respect to securities, including indices, that have little or no 
history?
     Should we, as proposed, provide that, in order for an 
insurer's determination to be conclusive, it must be made not more than 
six months prior to the date on which the form of contract is first 
offered? Should this period be shorter or longer, e.g., 30 days, 3 
months, 9 months, 1 year?
     Should we, as proposed, provide that, in order for an 
insurer's determination to be conclusive, it must not be made more than 
three years prior to the date on which a particular contract is issued? 
Should this period be shorter or longer, e.g., 1 year, 2 years, or 5 
years?
     Should an insurer's determination, once made for a 
particular form of contract, be conclusive with respect to every 
particular contract of that form that is sold provided that the 
determination meets the standards required for conclusiveness at the 
time of the insurer's original determination, i.e., reasonable 
methodology and assumptions and materially accurate computation? Or 
should an insurer's determination only be conclusive with respect to 
any particular sale of a contract if the methodology and assumptions 
are reasonable at the time of the particular sale?
     How should surrender charges and other charges imposed at 
the time of payout under an annuity be treated in making the 
determination required under the proposed rule? Should amounts payable 
under the contract be determined with or without reference to such 
charges? Should amounts guaranteed under the contract be computed with 
or without reference to such charges? Should we define with greater 
specificity the concept of charges imposed at the time of payment under 
a contract?
     Should we provide any guidance with respect to the 
principles-based approach of the rule?
     Should we provide guidance on the circumstances under 
which it is reasonable to rely on historical experience? Would it be 
reasonable to use other asset prices (such as derivative prices) to 
form expectations about the future, as long as the use of these prices 
is supported by historical experience?
     Should we provide guidance about the circumstances under 
which it is reasonable to rely on insurer expectations about the 
future? Would it be reasonable to rely on these expectations for 
factors over which insurers have control (e.g., changes in contract 
features) or about which they have particular expertise (e.g., rates of 
annuitization, mortality rates)? Would it be reasonable to rely on 
these expectations for factors over which insurers do not have control, 
such as market behavior?
     Should we provide guidance that would specify how insurers 
should consider interactions between various factors that may affect 
the determination (such as interactions between market returns and 
surrender behavior)?
     Should the rule specify how the determination should be 
made in the case of contracts that offer more than one investment 
option, e.g., multiple indices or multiple crediting formulas or the 
availability of a guaranteed interest rate option in addition to 
indexed investment options? In such a

[[Page 37762]]

case, should we require a separate determination under each available 
option? If so, should we provide that the entire annuity is not an 
``annuity contract'' or ``optional annuity contract'' if it is 
determined that the annuity would not be an ``annuity contract'' or 
``optional annuity contract'' under any one or more of the available 
options?
     Should the rule require separate determinations with 
respect to the various benefits available under an annuity, such as 
lump sum payments, annuity payments, and death benefits? If so, should 
the rule prescribe that if the amounts payable under any one of these 
options are more likely than not to exceed the amounts guaranteed under 
that option, then the entire contract is not an ``annuity contract'' or 
``optional contract''?
3. Effective Date
    We propose to have the new definition apply prospectively--that is, 
only to indexed annuities issued on or after the effective date of a 
final rule. We are using our definitional rulemaking authority under 
Section 19(a) of the Securities Act, and the explicitly prospective 
nature of our proposed rule is consistent with similar prospective 
rulemaking that we have undertaken in the past when doing so was 
appropriate and fair under the circumstances.\70\
---------------------------------------------------------------------------

    \70\ See, 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. * * *'').
---------------------------------------------------------------------------

    We are aware that many insurance companies, 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 
release. Under these circumstances, we do not believe that insurance 
companies should be subject to any additional legal risk relating to 
their past offers and sales of indexed annuity contracts as a result of 
our proposal or its eventual adoption.
    We also recognize that, if our proposal is adopted, the industry 
will need sufficient time to conduct the analysis required by the new 
definitional rule and comply with any applicable requirements under the 
federal securities laws. Therefore, we propose that if we adopt a final 
rule, the effective date of that rule would be a date that is 12 months 
after publication in the Federal Register.
    We request comment on the proposed effective date of the rule and 
in particular on the following issue:
     Should the effective date of the new definitional rule, if 
adopted, be 12 months after publication in the Federal Register, or 
should it be effective sooner (e.g., 60 days after publication, six 
months after publication) or later (e.g., 18 months after publication, 
2 years after publication)?
4. Annuities Not Covered by the Proposed Definition
    Proposed rule 151A would apply to annuities under which amounts 
payable by the insurance company are calculated by reference to the 
performance of a security. The proposed rule would define 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 proposed 
rule, however, would not provide a safe harbor under section 3(a)(8) 
for any other annuities, including any other annuities under which 
amounts payable by the insurance company are calculated by reference to 
the performance of a security. The status under the Securities Act of 
any annuity, other than an annuity that is determined under proposed 
rule 151A to be not an ``annuity contract'' or ``optional annuity 
contract,'' would continue 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.\71\
---------------------------------------------------------------------------

    \71\ As noted in Part II.C., above, indexed annuities are not 
entitled to rely on the rule 151 safe harbor.
---------------------------------------------------------------------------

    We request comment on the proposal not to include a safe harbor in 
the proposal and in particular on the following issues:
     Should we provide a safe harbor under section 3(a)(8) of 
the Securities Act for any annuities under which amounts payable by the 
insurance company are calculated by reference to the performance of a 
security? If so, what should the safe harbor be?
     Should we modify the Commission's existing safe harbor for 
certain annuities, rule 151, to address indexed annuities or other 
annuities under which amounts payable by the insurance company are 
calculated by reference to the performance of a security? If so, how?

B. Exchange Act Exemption for Securities That Are Regulated as 
Insurance

    The Commission is also proposing new rule 12h-7, which would 
provide 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.\72\ We are 
proposing this exemption 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.\73\ We are also 
proposing to impose 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.
---------------------------------------------------------------------------

    \72\ The Commission has 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.
    \73\ See 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).
---------------------------------------------------------------------------

    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.\74\ State insurance regulators require 
insurance companies to

[[Page 37763]]

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.\75\ 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.\76\
---------------------------------------------------------------------------

    \74\ Black and Skipper, supra note 39, at 949.
    \75\ Id. at 949 and 956-59.
    \76\ Id. at 949.
---------------------------------------------------------------------------

    State insurance regulation, like Exchange Act reporting, relates to 
an entity's financial condition. We are of the view that, as a general 
matter, 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 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 would be 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.
    Our conclusion in this regard 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 limited circumstances,\77\ 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.
---------------------------------------------------------------------------

    \77\ Insurance contracts may be assigned either as a complete 
assignment or as collateral. Insurance contracts that are assignable 
typically provide that the insurer need not recognize the assignment 
until it receives written notice. See Black and Skipper, supra note 
39, at 234.
---------------------------------------------------------------------------

    We request comment on whether we should provide insurance companies 
with exemptions from Exchange Act reporting with respect to securities 
that are regulated as insurance under state law and in particular on 
the following issues:
     Does the existence of state insurance regulation, and, in 
particular, state regulation of insurance company financial condition 
and solvency, support providing an exemption from Exchange Act 
reporting? Does Exchange Act reporting serve any purpose, in the 
context of insurance contracts that are also securities, that is not 
served by state insurance regulation?
     Does the lack of trading interest in insurance contracts 
support providing an exemption from Exchange Act reporting for 
securities that are regulated as insurance under state law? Should 
Exchange Act reporting be required notwithstanding the absence of 
trading interest and, if so, why? Are there any circumstances where 
trading interest in insurance contracts that are securities is 
significant enough that Exchange Act reporting should be required?
1. The Exemption
    Proposed rule 12h-7 would provide 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.\78\
---------------------------------------------------------------------------

    \78\ Introductory paragraph to proposed 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.
---------------------------------------------------------------------------

Covered Insurance Companies
    The proposed Exchange Act exemption would apply 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.\79\ In the case of a variable annuity contract or variable life 
insurance policy, the exemption would apply to the insurance company 
that issues the contract or policy. However, the exemption would 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.\80\
---------------------------------------------------------------------------

    \79\ Proposed rule 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 proposed rule 12h-7 has the same meaning as 
in the Exchange Act. Proposed 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)].
    \80\ This approach is consistent with the historical practice of 
insurance companies that issue variable annuities and do not file 
Exchange Act reports. The associated separate accounts, however, are 
required to file Exchange Act reports. These 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].
---------------------------------------------------------------------------

Covered Securities
    The proposed exemption would apply 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.\81\ 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 stock company \82\ 
also issues insurance contracts that are registered securities under 
the Securities Act, the insurer generally

[[Page 37764]]

would be required to file Exchange Act reports as a result of being a 
stock company. Similarly, if an insurer raises capital through a debt 
offering, the proposed exemption would not apply with respect to the 
debt securities.
---------------------------------------------------------------------------

    \81\ Proposed rule 12h-7(b).
    \82\ A 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 policyowners. Black and Skipper, supra note 39, at 
577-78.
---------------------------------------------------------------------------

    We are proposing that the exemption be 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.\83\ We are proposing a broad 
exemption that would apply 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 proposed 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.
---------------------------------------------------------------------------

    \83\ A 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, Sec.  
104 (2007).
---------------------------------------------------------------------------

    The proposed Exchange Act exemption would apply 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 proposed exemption would apply to indexed 
annuities that are registered under the Securities Act. However, the 
proposed Exchange Act exemption is independent of proposed rule 151A 
and would apply to types of contracts in addition to those that are 
covered by proposed rule 151A. There are at least two types of existing 
insurance contracts with respect to which we intend that the proposed 
Exchange Act exemption would apply, contracts with so-called ``market 
value adjustment'' (``MVA'') features and insurance contracts that 
provide certain 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.\84\ Insurance companies issuing 
contracts with these features have also complied with Exchange Act 
reporting requirements.\85\ MVA features have historically been 
associated with annuity and life insurance contracts that guarantee a 
specified rate of return to purchasers.\86\ 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 sometime 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. As a 
result, if a purchaser makes a withdrawal at a time when interest rates 
are higher than at the time of contract issuance (and the market value 
of the insurer's assets has decreased), the proceeds payable upon 
surrender are adjusted downwards. By contrast, if interest rates are 
lower than at the time of contract issuance (and the market value of 
the insurer's assets has increased), the proceeds payable upon 
surrender are adjusted upwards.
---------------------------------------------------------------------------

    \84\ Securities Act Release. No. 6645, supra note 35, 51 FR at 
20256-58.
    \85\ See, 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)).
    \86\ Some 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).
---------------------------------------------------------------------------

    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.\87\ 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. An 
example of a guaranteed living benefit is a contract that guarantees 
regular income payments for the life of the purchaser to the extent 
that the value of the purchaser's investment in the relevant account is 
not sufficient to provide such payments. Such a contract could, for 
example, guarantee that if the purchaser withdraws no more than five 
percent per year of the amount invested, and if withdrawals and market 
performance reduce the account value to a zero balance, the insurer 
will thereafter make annual payments to the purchaser in an amount 
equal to five percent of the amount invested.
---------------------------------------------------------------------------

    \87\ See, 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).
---------------------------------------------------------------------------

    As noted above, the proposed Exchange Act exemption would also 
apply with respect to a guarantee of a security if the guaranteed 
security is subject to regulation under state insurance law.\88\ We are 
proposing this provision because we believe that it would be 
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.\89\
---------------------------------------------------------------------------

    \88\ The 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.
    \89\ For 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.
---------------------------------------------------------------------------

    Finally, the proposed exemption would be unavailable 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 would not be covered by the proposed exemption because it would 
not be subject to regulation under state insurance law and often would 
be 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 proposed 
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.

[[Page 37765]]

    We request comment on the proposed exemption and in particular on 
the following issues:
     Should we provide insurance companies 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 that are also regulated as insurance? Should we modify the 
exemption in any way?
     What securities should be covered by the proposed 
exemption? Should the exemption, as proposed, only be available with 
respect to securities that are either subject to regulation under state 
insurance law or are guarantees of securities that are subject to 
regulation under state insurance law? Should the exemption apply to 
indexed annuities, contracts with MVA features, and insurance contracts 
that provide certain guaranteed benefits in connection with assets held 
in an investor's account, such as a mutual fund, brokerage, or 
investment advisory account? Should we limit the exemption to all or 
any of those three types of securities, or should we also make the 
exemption available to types of securities that may be issued by 
insurance companies in the future?
     If we adopt the proposed Exchange Act exemption, should 
the adopted rule expressly provide that the exemption is unavailable 
with respect to any security that constitutes an equity interest in the 
issuing insurance company? Should the rule expressly provide that the 
exemption is unavailable with respect to debt securities? If so, how 
should we define the term ``debt securities'' so that it does not cover 
insurance obligations?
2. Conditions to Exemption
    As described above, we believe that the proposed 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. We are proposing that the 
Exchange Act exemption be 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.
Regulation of Insurer's Financial Condition
    In order to rely on the proposed 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.\90\ 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 proposed exemption would not be available.
---------------------------------------------------------------------------

    \90\ Proposed rule 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).
---------------------------------------------------------------------------

Absence of Trading Interest
    The proposed Exchange Act exemption would be subject to two 
conditions intended to insure that there is no trading interest in 
securities with respect to which the exemption applies. First, the 
securities may not be listed, traded, or quoted on an exchange, 
alternative trading system,\91\ inter-dealer quotation system,\92\ 
electronic communications network, or any other similar system, 
network, or publication for trading or quoting.\93\ 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 not develop, including requiring written notice to, and acceptance 
by, the insurance company prior to any assignment or other transfer of 
the securities and reserving the right to refuse assignments or other 
transfers of the securities at any time on a non-discriminatory 
basis.\94\ This condition is designed to ensure that the insurer takes 
reasonable steps to ensure the absence of trading interest in the 
securities. We recognize that insurance contracts typically permit 
assignment in some circumstances. The proposed condition is intended to 
permit these assignments to continue while requiring the insurer to 
monitor assignments and, if it observes development of trading interest 
in the securities, to step in and refuse assignments related to this 
trading interest. We understand that it is commonplace for insurers 
today to include restrictions on assignments in their contracts similar 
to those that would be required by the proposed rule.\95\
---------------------------------------------------------------------------

    \91\ For 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'').
    \92\ For 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'').
    \93\ Proposed rule 12h-7(d).
    \94\ Proposed rule 12h-7(e).
    \95\ See Roth, supra note 72, at 4 n. 4.
---------------------------------------------------------------------------

    We request comment generally on the proposed conditions to the 
Exchange Act exemption and specifically on the following issues:
     Are the proposed conditions appropriate? Will they help to 
ensure that the proposed exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors?
     Should we, as proposed, condition the exemption on the 
insurer filing an annual statement of its financial condition with its 
home state insurance regulator? Should we require more or less frequent 
filings relating to financial condition, e.g., quarterly, semi-
annually, every two years, etc.?
     Should we require, as a condition to the exemption, any 
public disclosure of the insurer's financial condition, either through 
filing with us or by posting on the insurer's Web site? Should we 
require that an insurer post on its Web site, or make available to 
investors on request, any reports of financial condition that it files 
with state insurance regulators or any third-party ratings of its 
claims-paying ability? Should we require, as a condition to the 
exemption, an insurer to report to the Commission, disclose to its 
contract owners, and/or publicly disclose any material disciplinary 
action undertaken, or material deficiency identified by, a state 
insurance regulator that relates to the insurer's financial condition 
or any other matter?
     Should we require, as a condition to the exemption, that 
the insurer be subject to supervision and periodic examination of its 
financial condition by its home state regulator, as proposed? Is the 
proposed condition consistent with state insurance regulation? Are 
there other conditions that should be imposed relating to supervision 
by the state insurance regulator?
     Should the Exchange Act exemption include conditions 
designed to limit trading interest in the securities? If so, are the 
proposed conditions appropriate? Does the proposed rule place 
appropriate restrictions on transfers of securities with respect to 
which the exemption is claimed without unduly restricting transfers in 
a manner that would be harmful to investors' interests?

IV. General Request for Comments

    The Commission requests comment on the rules proposed in this 
release,

[[Page 37766]]

whether any further changes to our rules are necessary or appropriate 
to implement the objectives of our proposed rules, and on other matters 
that might affect the proposals contained in this release.

V. Paperwork Reduction Act

A. Background

    Proposed rule 151A contains no new ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\96\ However, we believe that proposed rule 151A would, if 
adopted, result in an increase in the disclosure burden associated with 
existing Form S-1 as a result of additional filings that would be made 
on Form S-1.\97\ Form S-1 contains ``collection of information'' 
requirements within the meaning of the PRA. Although we are not 
proposing to amend Form S-1, we are submitting the Form S-1 
``collection of information'' (``Form S-1 (OMB Control No. 3235-0065)), 
which we estimate would increase as a result of proposed rule 151A, to 
the Office of Management and Budget (``OMB'') for review and approval 
in accordance with the PRA.\98\
---------------------------------------------------------------------------

    \96\ 44 U.S.C. 3501 et seq.
    \97\ 17 CFR 239.11.
    \98\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    We adopted existing 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 indexed annuities that 
register under the Securities Act would generally register on Form S-
1.\99\
---------------------------------------------------------------------------

    \99\ Some Securities Act offerings are registered on Form S-3 
[17 CFR 239.13]. We do not believe that proposed rule 151A would 
have any significant impact on the disclosure burden associated with 
Form S-3 because we believe that very few insurance companies that 
issue indexed annuities would 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 today are currently eligible to file Form S-3. Further, if 
we adopt the proposed Exchange Act reporting exemption, insurance 
companies that issue indexed annuities and rely on the exemption 
would not meet the eligibility requirements for Form S-3.
    We also do not believe that the proposed rules would 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 proposed rule 12h-7, insurance companies would not be 
required to file Exchange Act reports on these forms in connection 
with indexed annuities that are registered under the Securities Act. 
While proposed rule 12h-7 would 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.
---------------------------------------------------------------------------

    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 
would be made publicly available on the EDGAR filing system.

B. Summary of Information Collection

    Because proposed rule 151A would affect the number of filings on 
Form S-1 but not the disclosure required by this form, we do not 
believe that the amendments 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, proposed rule 
151A would 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 would 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 would increase if proposed rule 151A 
were adopted.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the PRA, we estimate that our proposal 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 proposing a new definition of ``annuity contract'' that, on 
a prospective basis, would define 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 would, on a prospective basis, be required to 
register under the Securities Act on Form S-1.\100\
---------------------------------------------------------------------------

    \100\ Some Securities Act offerings are registered on Form S-3, 
but we believe that very few, if any, insurance companies that issue 
indexed annuities would be eligible to register those contracts on 
Form S-3. See supra note 99.
---------------------------------------------------------------------------

Increase in Number of Annual Responses
    For purposes of the PRA, we estimate that there would be an annual 
increase of 400 responses on Form S-1 as a result of the proposal. In 
2007, there were 322 indexed annuity contracts offered.\101\ 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 proposed 
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 proposed rule, if adopted as proposed. 
Therefore, we assume that all indexed annuities that are offered will 
be registered, and that each of the 400 registered indexed annuities 
would be the subject of one response per year on Form S-1,\102\ 
resulting in the estimated annual increase of 400 responses of Form S-
1.
---------------------------------------------------------------------------

    \101\ NAVA, supra note 6, at 57.
    \102\ Annuity 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 would 
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).

---------------------------------------------------------------------------

[[Page 37767]]

Decrease in Expected Hours per Response
    For purposes of the PRA, we estimate that there would be a decrease 
of 265 hours per response on Form S-1 as a result of our proposal. 
Current OMB estimates and recent Commission rulemaking estimate the 
hours per response on Form S-1 as 1,176.\103\ 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 would 
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,\104\ 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.\105\ Combining our estimate of 600 hours per 
indexed annuity response on Form S-1 (for an estimated 400 responses) 
with the existing estimate of 1,176 hours per response on Form S-1 (for 
an estimated 471 responses),\106\ our new estimate is 911 hours per 
response (((400 x 600) + (471 x 1,176))/871).
---------------------------------------------------------------------------

    \103\ See Securities Act Release No. 8878 (Dec. 19, 2007) [72 FR 
73534, 73547 (Dec. 27, 2007)].
    \104\ The 322 indexed annuities offered in 2007 were issued by 
58 insurance companies. See NAVA, supra note 6, at 57.
    \105\ See supra note 102.
    \106\ See Supporting Statement to the Office of Management and 
Budget under the PRA for Securities Act Release No. 8878, available 
at: http://www.reginfo.gov/public/do/
DownloadDocument?documentID=61283&version=1.
---------------------------------------------------------------------------

Net Increase in Burden
    To calculate the total effect of the proposed 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 911 hours for each of the current estimated 471 
responses. We used current OMB estimates in our calculation of the 
hours and cost burden associated with preparing, reviewing, and filing 
Form S-1.
    Consistent with current OMB estimates and recent Commission 
rulemaking,\107\ we estimate that 25% of the burden of preparation of 
Form S-1 is carried by the company internally and that 75% of the 
burden is carried by outside professionals retained by the issuer at an 
average cost of $400 per hour.\108\ 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.
---------------------------------------------------------------------------

    \107\ See Securities Act Release No. 8878, supra note 103, 72 FR 
at 73547.
    \108\ Id. at n. 110 and accompanying text.
---------------------------------------------------------------------------

    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...............................................                           911                        364,400
----------------------------------------------------------------------------------------------------------------

                    Incremental Decrease in PRA Burden due to Decrease in Hours per Response
----------------------------------------------------------------------------------------------------------------
                                                     Current estimated number of      Incremental decrease in
       Estimated decrease in hours/response                 annual filings                 burden (hours)
----------------------------------------------------------------------------------------------------------------
(265).............................................                           471                      (124,800)
----------------------------------------------------------------------------------------------------------------

                                                   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. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comments to: (1) 
Evaluate whether the proposed collections of information are necessary 
for the proper performance of the functions of the agency, including 
whether the information would have practical utility; (2) evaluate the 
accuracy of our estimate of the burden of the proposed collections of 
information; (3) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) evaluate whether there are ways to minimize the burden of the 
collections of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology. We note that the PRA burden will depend on the 
number of indexed annuity contracts that, under any rule we adopt, are 
not ``annuity contracts,'' and therefore will be required to register 
under the Securities Act. We have assumed, for purposes of the PRA, 
that all indexed annuities would not be ``annuity contracts'' under the 
rule and that, if the proposed rule were adopted, they would be 
required to be registered under the Securities Act. We request comment 
regarding this assumption and, more generally, on the percentage, or 
number, of indexed annuities that would be required to register under 
the Securities Act if the proposed rule were adopted.
    Persons submitting comments on the collection of information 
requirements should direct the comments to OMB,

[[Page 37768]]

Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should send a copy of the comments to Office of the Secretary, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303, with reference to File No. S7-14-08. Requests for materials 
submitted to OMB by the Commission with regard to this collection of 
information should be in writing, refer to File No. S7-14-08, and be 
submitted to the Securities and Exchange Commission, Records Management 
Office, 100 F Street, NE., Washington, DC 20549-1110. OMB is required 
to make a decision concerning the collections of information between 30 
and 60 days after publication of this release. Consequently, a comment 
to OMB is best assured of having its full effect if OMB receives it 
within 30 days of publication.

VI. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Proposed rule 151A is intended to clarify the status under 
the federal securities laws of indexed annuities, under which payments 
to the purchaser are dependent on the performance of a securities 
index. Section 3(a)(8) of the Securities Act provides an exemption for 
certain insurance contracts. The proposed rule would prospectively 
define 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 would be entitled to all the protections 
of the federal securities laws, including full and fair disclosure and 
sales practice protections. We are also proposing new rule 12h-7 under 
the Exchange Act, which would exempt 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.

A. Benefits

    Possible benefits of the proposed amendments include the following: 
(i) Enhanced disclosure of information needed to make informed 
investment decisions about indexed annuities; (ii) sales practice 
protections would apply with respect to those indexed annuities that 
are outside the insurance exemption; (iii) greater regulatory certainty 
with regard to the status of indexed annuities under the federal 
securities laws; (iv) enhanced competition; and (v) relief from 
Exchange Act reporting obligations to insurers that issue certain 
securities that are regulated as insurance under state law.
Disclosure
    Proposed rule 151A would extend the benefits of full and fair 
disclosure under the federal securities laws to investors in indexed 
annuities that, under the proposed 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 investors to securities 
investment risk. Extending the federal securities disclosure regime to 
such indexed annuities that impose securities investment risk should 
help to provide investors with the information they need.
    Disclosures that would 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). 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 SEC's EDGAR system. Public availability of this 
information would be helpful to investors in making informed decisions 
about purchasing indexed annuities. The information would 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 would provide additional encouragement for 
accurate, relevant, and complete disclosures by insurers that issue 
indexed annuities and by the broker-dealers who sell them.\109\
---------------------------------------------------------------------------

    \109\ See, 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).
---------------------------------------------------------------------------

    In addition, we believe that potential purchasers of indexed 
annuities that an insurer determines do not fall outside the insurance 
exemption under the proposed rule may benefit from enhanced information 
available as a result of the proposed rule. An indexed annuity that is 
not registered under the Securities Act after the adoption of proposed 
rule 151A would reflect the insurer's determination that investors in 
the annuity would not receive more than the amounts guaranteed under 
the contract at least half the time. This information would help a 
purchaser to evaluate the value of the index-based return.
Sales Practice Protections
    Investors would also benefit because, under the federal securities 
laws, persons effecting transactions in indexed annuities that fall 
outside the insurance exemption under proposed rule 151A would be 
required to be registered broker-dealers or become associated persons 
of a broker-dealer through a networking arrangement. Thus, the broker-
dealer sales practice protections would apply to transactions in 
registered indexed annuities. As a result, investors who purchase these 
indexed annuities after the effective date of proposed 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 broker-dealer with which they are 
associated. Both the selling broker-dealer and its registered 
representatives would be subject to the oversight of FINRA.\110\ 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 be subject 
to the Commission's general inspections and, where warranted, 
enforcement powers.
---------------------------------------------------------------------------

    \110\ Cf. NASD Rule 2821 (recently adopted rule designed to 
enhance broker-dealers' compliance and supervisory systems and 
provide more comprehensive and targeted 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).

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[[Page 37769]]

Regulatory Certainty
    Proposed rule 151A would 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. Proposed rule 151A 
would 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 proposed rule, would be conclusive.
Enhanced Competition
    Proposed 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. 
Proposed rule 151A would 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 proposed 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 proposed 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 would 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.
Relief from Reporting Obligations
    In addition, the proposed exemption from Exchange Act reporting 
requirements with respect to certain securities that are regulated as 
insurance under state law would 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 
would, if we adopt proposed rule 12h-7, be exempted from Exchange Act 
reporting obligations.\111\ 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.\112\ Based on current cost 
estimates, we believe that the total estimated annual cost savings to 
these companies would be approximately $15,414,600.\113\
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    \111\ In addition, if we adopt both proposed rules 151A and 12h-
7, insurers that currently are not Exchange Act reporting companies 
and that would be required to register indexed annuities under the 
Securities Act could avail themselves of 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.
    \112\ These 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.
    \113\ This 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 hours 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?documentID=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.
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B. Costs

    While our proposal would result in significant cost savings for 
insurers as a result of the proposed exemption from Exchange Act 
reporting requirements, we believe that there would be costs associated 
with the proposal. These would include costs associated with: (i) 
Determining under proposed 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;\114\ 
(v) loss of revenue to insurance companies that determine to cease 
issuing indexed annuities; and (vi) diminished competition that may 
result if some insurance companies cease issuing indexed annuities.
---------------------------------------------------------------------------

    \114\ While some distributors may register as broker-dealers or 
cease distributing indexed annuities that would be required to be 
registered as a result of proposed rule 151A, based on our 
experience with insurance companies that issue insurance products 
that are also securities, we believe that the vast majority would 
continue to distribute those indexed annuities via networking 
arrangements with registered broker-dealers, as discussed below.
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Determination Under Proposed 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 hedging their contracts.\115\ As a result, we believe 
that the costs of undertaking the analysis for purposes of the proposed 
rule may not be significant. However, the determinations necessary 
under the proposed 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 would determine is appropriate under the 
proposed 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

[[Page 37770]]

and external consultants (e.g. , actuarial, accounting, legal).
---------------------------------------------------------------------------

    \115\ See generally Black and Skipper, supra note 39, at 26-47, 
890-899.
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Securities Act Registration Statements
    Insurers will incur costs associated with preparing and filing 
registration statements for indexed annuities that are outside the 
insurance exemption as a result of proposed rule 151A. These include 
the costs of preparing and reviewing disclosure, filing documents, and 
retaining records. As noted above, our Office of Economic Analysis has 
considered the effect of the proposed 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 issued after the effective date of the proposed 
rule, if adopted as proposed. For purposes of the PRA, we have 
estimated an annual increase in the paperwork burden for companies to 
comply with the proposed rules to be 60,000 hours of in-house company 
personnel time and $72,000,000 for services of outside professionals. 
We estimate that the additional burden hours of in-house company 
personnel time would equal total internal costs of $10,500,000 \116\ 
annually, resulting in aggregate annual costs of $82,500,000 \117\ 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.
---------------------------------------------------------------------------

    \116\ This 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.
    \117\ $10,500,000 (in-house personnel) + $72,000,000 (outside 
professionals).
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Costs of Printing Prospectuses and Providing Them to Investors
    Insurers will also incur costs to print and provide prospectuses to 
investors for indexed annuities that are outside the insurance 
exemption as a result of proposed rule 151A. For purposes of the PRA, 
we have estimated that registration statements would be filed for 400 
indexed annuities per year. We estimate that it would cost $0.35 to 
print each prospectus and $1.21 to mail each prospectus,\118\ for a 
total of $1.56 per prospectus.\119\ 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.
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    \118\ These estimates reflect estimates provided to us by 
Broadridge Financial Solutions, Inc., 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). 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.
    \119\ We note that we solicit specific comment on the average 
number of prospectuses that would be provided each year to offerees 
and/or purchasers of a registered indexed annuity. This information 
may assist us in estimating an aggregate cost for printing and 
providing prospectuses.

---------------------------------------------------------------------------
Networking Arrangements With Registered Broker-Dealers

    Proposed rule 151A may impose costs on indexed annuity distributors 
that are not currently parties to a networking arrangement or 
registered as broker-dealers. 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 would 
likely enter into a networking arrangement with a registered broker-
dealer. Under these arrangements, an affiliated or third-party 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 would 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.\120\
---------------------------------------------------------------------------

    \120\ We note that we solicit specific comment on the number of 
entities that are distributors of indexed annuities, and on how many 
are parties to a networking arrangement.

---------------------------------------------------------------------------
Possible Loss of Revenue

    Insurance companies that determine that indexed annuities are 
outside the insurance exemption under proposed 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. The amount of lost 
revenue would depend on actual revenues prior to effectiveness of the 
proposed rules and to the particular determinations made by insurers 
regarding whether to continue to issue 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. 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.
Possible Diminished Competition
    There could be costs associated with diminished competition as a 
result of our proposed rules. In order to issue indexed annuities that 
are outside the insurance exemption under proposed 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 proposed rule 151A and register 
those annuities that are outside the insurance exemption under the 
proposed rule, 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. Any reduction in competition must be considered in 
conjunction with the potential enhancements to competition that are 
described in the Benefits section, above.

C. Request for Comments

    We request comments on all aspects of this cost/benefit analysis, 
including identification of any additional costs or benefits that may 
result from the proposed amendments. We also solicit comment on any 
alternatives to the proposal in light of the cost-benefit analysis. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible. In particular, we 
request comment on the following issues:
     Are our quantitative estimates of benefits and costs 
correct? If not, how should they be adjusted?
     What are the costs associated with determining whether 
amounts payable under an indexed annuity would be more likely than not 
to exceed the amounts guaranteed under the contract? Are valuation and 
hedging models currently in use readily adaptable for the purposes of 
this calculation? How much, if any, additional cost would this 
represent for insurers over and above the costs they routinely incur 
for the

[[Page 37771]]

analysis necessary for pricing and hedging contracts, or for other 
purposes?
     We have estimated that 400 indexed annuity contracts would 
be registered on Form S-1 each year. Is this an accurate estimate, or 
is it too high or too low? What percentage of indexed annuities 
currently offered would not be considered ``annuity contracts'' or 
``optional annuity contracts'' under proposed rule 151A?
     What would the costs of printing and providing 
prospectuses be for indexed annuities that are outside the insurance 
exemption under proposed rule 151A? What would the per prospectus 
printing and mailing costs be? On average, how many prospectuses would 
be provided each year for a registered indexed annuity to offerees and/
or purchasers? To what degree would prospectuses be delivered by mail, 
in person, or electronically? To what degree would Securities Act 
prospectuses be provided in lieu of written materials used today?
     What are the costs of entering into a networking 
arrangement with a registered broker-dealer? How many entities 
currently distribute indexed annuities? Of those, how many have entered 
into a networking arrangement to sell other insurance products that are 
also securities (i.e., variable annuities)? How many have registered as 
broker-dealers to sell other insurance products that are also 
securities?
     How much revenue would be lost by insurers that determine 
to cease issuing indexed annuities? Would this lost revenue be offset 
by revenue gains of these insurance companies or by revenue gains of 
others? If so, by how much?

VII. Consideration of Promotion of Efficiency, Competition, and Capital 
Formation; Consideration of Burden on Competition

    Section 2(b) of the Securities Act \121\ and section 3(f) of the 
Securities Exchange Act \122\ 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 \123\ 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.
---------------------------------------------------------------------------

    \121\ 15 U.S.C. 77b(b).
    \122\ 15 U.S.C. 78c(f).
    \123\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We believe that proposed rule 151A would 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 would enable investors to make 
more informed investment decisions, and investors would receive the 
benefits of the sales practice protections, including a registered 
representative's obligation to make only recommendations that are 
suitable. We believe that these investor protections would provide 
better dissemination of investment-related information, enhance 
investment decisions by investors, and, ultimately, lead to greater 
efficiency in the securities markets.
    We also anticipate that, because proposed rule 151A would improve 
investors' ability to make informed investment decisions, it would 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 proposed 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 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.
    Proposed rule 151A might have some negative effects on competition. 
In order to issue indexed annuities that are outside the insurance 
exemption under proposed 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 proposed rule 151A and register those annuities that are 
outside the insurance exemption under the proposed rule, there will be 
fewer issuers of indexed annuities, which may result in reduced 
competition. Any reduction in competition must be considered in 
conjunction with the potential enhancements to competition that are 
described in the preceding paragraph.
    We also anticipate that the increased market efficiency resulting 
from enhanced investor protections under proposed rule 151A could 
promote capital formation by improving the flow of information between 
insurers that issue indexed annuities, the distributors of those 
annuities, and investors.
    Proposed rule 12h-7 would provide 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 have proposed 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 proposed exemption would 
improve efficiency by eliminating potentially duplicative and 
burdensome regulation relating to insurers' financial condition. 
Furthermore, we believe that proposed rule 12h-7 would not impose any 
burden on competition. Rather, we believe that the proposed rule would 
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 would 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.
    We request comment on whether the proposed amendments, if adopted, 
would promote efficiency, competition, and capital formation. We also 
request comment on any anti-competitive effects of the proposed rules. 
Commenters are requested to provide empirical data and other factual 
support for their views.

VIII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with the Regulatory Flexibility Act.\124\ It relates to the 
Commission's proposed rule 151A that would define the terms ``annuity 
contract'' and ``optional annuity contract'' under the Securities Act 
of

[[Page 37772]]

1933 and proposed rule 12h-7 that would exempt 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.
---------------------------------------------------------------------------

    \124\ 5 U.S.C. 603 et seq.
---------------------------------------------------------------------------

A. Reasons for, and Objective of, Proposed Amendments

    We are proposing 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 would enhance investor protection and would 
provide greater certainty to the issuers and sellers of these products 
with respect to their obligations under the federal securities laws. We 
are proposing 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. Legal Basis

    The Commission is proposing rules 151A and 12h-7 pursuant to the 
authority set forth in 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].

C. Small Entities Subject to the Proposed 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.\125\ Rule 0-10(a) 
\126\ 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.\127\ No insurers 
currently issuing indexed annuities are small entities.\128\ In 
addition, no other insurers that would be covered by the proposed 
Exchange Act exemption are small entities.\129\
---------------------------------------------------------------------------

    \125\ See rule 157 under the Securities Act [17 CFR 230.157]; 
rule 0-10 under the Exchange Act [17 CFR 240.0-10].
    \126\ 17 CFR 240.0-10(a).
    \127\ Securities 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.
    \128\ The 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.
    \129\ The 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).
---------------------------------------------------------------------------

    While there are no small entities among the insurers who are 
subject to the proposed rules, we note that there may be small entities 
among distributors of indexed annuities. Proposed rule 151A, if adopted 
as proposed, may affect indexed annuity distributors who are not 
currently parties to a networking arrangement or registered as broker-
dealers. 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 would likely enter into a 
networking arrangement with a registered broker-dealer.\130\ Under 
these arrangements, an affiliated or third-party 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 would 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.
---------------------------------------------------------------------------

    \130\ We note that we solicit specific comment on the number of 
entities that are distributors of indexed annuities, and on how many 
are parties to a networking arrangement. See Part VI., above.
---------------------------------------------------------------------------

    Rule 0-10(c) \131\ 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,\132\ 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 0-1(a)\133\ 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.
---------------------------------------------------------------------------

    \131\ 17 CFR 240.0-10(c).
    \132\ 17 CFR 240.17a-5(d).
    \133\ 17 CFR 240.10(a).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    Proposed rule 151A would result in Securities Act filing 
obligations for those insurance companies that, in the future, issue 
indexed annuities that fall outside the insurance exemption under 
proposed rule 151A, and proposed rule 12h-7 would result in the 
elimination of Exchange Act reporting obligations for those insurance 
companies that meet the conditions to the proposed exemption. As noted 
above, no insurance companies that currently issue indexed annuities or 
that would be covered by the proposed exemption are small entities.
    However, proposed 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 broker-dealers, 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. Entities that enter into such 
networking arrangements would not be subject to ongoing reporting, 
recordkeeping, or other compliance requirements. If any of these 
entities were to choose to register as broker-dealers as a result of 
proposed rule 151A,\134\ they would be subject to

[[Page 37773]]

ongoing reporting, recordkeeping, and other compliance requirements 
applicable to registered broker-dealers. Compliance with these 
requirements, if applicable, would impose costs associated with 
accounting, legal, and other professional personnel, and the design and 
operation of automated and other compliance systems.
---------------------------------------------------------------------------

    \134\ See, 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).
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that the proposed rules would not duplicate, overlap, or 
conflict with other federal rules.

F. Significant Alternatives

    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 proposed amendments, 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 
proposed requirements for small entities;
     Using performance standards rather than design standards; 
and
     Providing an exemption from the proposed requirements, or 
any part of them, for small entities.
    Because no insurers that currently issue indexed annuities or that 
would be covered by the proposed 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 
broker-dealers, which we believe would be likely if proposed rule 151A 
were 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.
    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 proposed rules would 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 proposed 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 broker-dealer 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 would 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 
broker-dealer registration requirements when those entities distribute 
indexed annuities that fall outside of the insurance exemption under 
our proposed 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 proposed 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 
broker-dealers, and the proposed 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.

G. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
     Whether there are any small entity insurance companies 
that would be affected by the proposed rules and, if so, how many and 
the nature of the potential impact of the proposed rules on these 
insurance companies;
     The number of small entity distributors of indexed 
annuities that may be affected by proposed rule 151A and the potential 
effect of the rule on these small entities; and
     Any other small entities that may be affected by the 
proposed rules.
    Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. These 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rules are adopted, and will be 
placed in the same public file as comments on the proposed rules 
themselves.

IX. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 ``SBREFA'',\135\ a rule is ``major'' if it results or is 
likely to result in:
---------------------------------------------------------------------------

    \135\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment, or 
innovation.

X. Statutory Authority

    The Commission is proposing 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].

[[Page 37774]]

List of Subjects in 17 CFR Parts 230 and 240

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rules

    For the reasons set forth in the preamble, the Commission proposes 
to amend title 17, Chapter II, of the Code of Federal Regulations as 
follows:

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 Sec.  230.151A to read as follows:

Sec.  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) Amounts payable by the issuer 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; 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 shall be 
determined without reference to any charges that are imposed at the 
time of payment, but those charges shall be taken into account in 
computing the amounts guaranteed under the contract; 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 and not more 
than three years prior to the date on which the particular contract is 
issued.
    (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 Sec.  240.12h-7 to read as follows:

Sec.  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 Sec.  242.300(a) of 
this chapter), inter-dealer quotation system (as defined in Sec.  
240.15c2-11(e)(2)), electronic communications network, or any other 
similar system, network, or publication for trading or quoting; and
    (e) The issuer takes steps reasonably designed to ensure that a 
trading market for the securities does not develop, including 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.

    June 25, 2008.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14845 Filed 6-30-08; 8:45 am]

BILLING CODE 8010-01-P