Equity-Indexed Annuity Overview

• Equity-indexed annuities -- now called either "indexed annuities" or "fixed index annuities," are contracts in which an individual gives money to an insurance company in exchange for a stream of income later in life. The cash contributed is called "premium" and is invested in the general account of the insurance company. In return, the insurance company credits the account a minimum interest rate competitive with CDs, or a portion of stock market returns -- whichever is greater. The customer does not lose money, no matter what the stock market does (provided the insurer remains solvent). In return, the customer gives up a portion of the stock market gains to the insurance company, to compensate it for the risk it takes on.
  
  

Introductory Period

• The early years of indexed annuities were marked by confusion, as state insurance regulators were confused about the purpose and structure of the new products. Regulators were also concerned about adequate disclosure. Because the fee structure of may indexed annuities is complex, and because investors could easily confuse these products with a direct exposure to stock market returns, some regulators were slow to approve the products. Some insurance companies, such as New York Life, have not rolled out indexed annuities in their product mixes either, in part because of the potential for confusion.
  
  

Objections of the Securities Industry

• Security industry organizations, including the Securities Industry Association and FINRA, the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers, or NASD) objected to the insurance company's new product, arguing that because of the term "equity," and because they were frequently marketed as a way to get exposure to the stock market, equity indexed annuities should be regulated as securities. That would have meant that agents would have had to get a securities license and submit to the authority of a broker-dealer in order to sell these products. The insurance industry countered that the guaranteed minimum return, plus the fact that these were guaranteed products, backed by the general account of the insurance company, made them more similar to fixed annuities than to securities, and that therefore the state insurance regulators should maintain their jurisdiction.
  
  

Regulation 151a

• Securities and Exchange Commission Rule 151a was a proposed rule that would have brought indexed annuities under the purview of the Securities and Exchange Commission, and regulated them as securities. The issue was hotly contested between insurance and securities industry organizations, which both realized that billions of dollars in annual revenue were at stake. The issue went to court in 2009, where a federal judge ruled with the insurance industry, vacating the rule. The securities industry was unsuccessful in shutting down or co-opting the competition from the insurance industry, while the insurance industry successfully kept indexed annuities under the authority of state insurance regulators, rather than the SEC.