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Equity Indexed Annuities - Securities Or Not?

Confused about whether equity indexed annuities are securities? You are not alone. Comments made during the 4th Annual Forum On Responding To Broker-Dealer Litigation & Regulatory Enforcement suggest that state regulators are equally unable to categorize these hybrid products. Indeed, depending on the state, EIA's might be viewed as insurance, securities, both or neither. The problem is apparent. Inconsistent classification leads to inconsistent regulation which, in turn, leads to mixed signals to firms and employees regarding the sales of these products. For example, if State X treats an EIA as an insurance product but State Y treats an EIA as a security, a firm selling EIA's in both states may need to develop one or more different sets of guidelines for the sales of the same products under applicable state laws, and could be dealing with an insurance division in one state but the securities division in another.

For those states on the fence (and there are several) about whether to treat EIA's as securities, and then how to determine suitability of these products, a pragmatic idea was offered up that investment "planning" should be targeted rather than the product itself. That is, customer suitability for purchasing an EIA could be determined by looking at a multitude of factors such as what types of products held by the customer were being liquidated (if any) to purchase the EIA, what other types of investments were in the customer's portfolio at the time, and what the customer was told about the EIA. Regulator comments suggest that EIA's are not considered unsuitable products per se. Rather, it is the marketing of these and similar products that has captured regulator attention.

Only time will tell whether NASAA will propose model guidelines for state securities regulators to adopt regarding treatment of EIA's. In the meantime, EIA's and similar hybrid products in "limbo" will remain a question mark in everyone's minds.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on May 30, 2007 (boomark / email).