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9.24 Exemption for State-Regulated Equity-Indexed Annuities

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9.24 Exemption for State-Regulated Equity-Indexed Annuities

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9.24.     Exemption for State-Regulated Equity-Indexed Annuities.  Section 989J of the Act (also known as the Harkin Amendment) is targeted at removing equity indexed annuities from SEC jurisdiction.  This provision will require the SEC to treat certain state-regulated annuities as exempt securities under the Securities Act of 1933, and therefore not subject to SEC registration requirements. 

Specifically, the provision requires the SEC to treat as, "exempt securities as described under Section 3 (a) (8) of the Securities Act of 1933" any insurance or endowment policy or annuity or optional annuity contract (a contract) that meets the following requirements: (i) the value of the contract does not vary according to the performance of a separate account (thus variable annuities cannot claim the exemption); (ii) the contract satisfies applicable standard nonforfeiture laws at the time of issue (if applicable State law does not have such a provision, the nonforfeiture requirements of the Model Standard Nonforfeiture Law published by the National Association of Insurance Commissioners ("NAIC") would govern); and (iii) sales of the contract must be subject to suitability standards established by the NAIC and to state monitoring of compliance with those standards. [§989J(a)]

The suitability standards requirement can be met: (i) for contracts issued on or after June 16, 2013, if  the contract is issued in a State or by an insurance company domiciled in a State that has adopted either the NAIC's model regulation for Suitability in Annuity Transactions or suitability requirements that substantially meet or exceed the minimum requirements established by the NAIC model regulations; or (ii) for contracts issued at any time, if the issuing insurance company has adopted and implemented practices on a nationwide basis that meet or exceed the NAIC standards and sales are subject to state monitoring for compliance. 

This provision is a direct response to the SEC's adoption of Rule 151A, which would have required SEC registration of equity indexed annuity contracts as securities and the sale of these products by registered broker dealers in accordance with SEC and FINRA sales practice standards.  Rule 151A, which had a delayed effective date and never became effective, was challenged in court and vacated on procedural grounds.  The new exemption addresses SEC treatment of equity indexed contracts and other contracts that meet the requirements established by the provision, but it does not affect the exempt status of any other insurance, endowment, or annuity policy under the 1933 Act and leaves open a number of interpretive issues. [§989J(b)]

9.24.1.  What Entities are Impacted and How?  This provision directly affects issuers of equity indexed annuities by removing these contracts from SEC registration requirements.  It may also indirectly affect issuers of fixed and variable life insurance in general, as it changes the competitive landscape by reducing regulatory burdens relating to a particular product.  The exemption may also have an impact on issuers of other insurance products that are currently registered as securities, such as certain market value adjusted fixed annuities, to the extent those contracts meet the requirements of the exemption.  Finally, the new exemption may also put pressure on states and insurance companies to adopt suitability standards applicable to the sale of annuities and life insurance products.