After a series of behind-the-scenes efforts resulted in what looks like a substantial victory for foes of the SEC 151A proposal, the non-financial industry media media has painted a more sinister view of what actually occurred this week in Washington.
Advisors interested in keeping up on both sides of the issue may be interested to read a post by Huffington Post blogger Shahien Nasiripour, who notes that the last-minute wrangling to overturn the efforts to securitize fixed index annuities might not present the best bargain for seniors
House Democrats provided the key votes to help adopt a measure that critics argue will hurt senior citizens by inadequately regulating financial products long associated with deception and predation, overturning court rulings and federal regulators in the process.
The measure, unrelated to the pending financial reform bill, was introduced by Rep. Gregory W. Meeks, a New York Democrat long known for his friendly relations with banking and corporate interests. It's the House version of a provision introduced earlier this week by Sen. Tom Harkin, a Democrat from Iowa.
The provision prevents the Securities and Exchange Commission from regulating equity-indexed annuities, financial products that promise guaranteed returns and other similar products by designating them as exempt from securities regulation — even though they act like securities. It overturns court rulings and an SEC rule that determined these products were indeed securities, and thus should be regulated as such.
Consumer and investor advocates argue that the measure, which was adopted by House conferees by a 12-4 vote during Thursday's conference to reconcile the House and Senate versions of financial reform legislation, undercuts basic protections for investors and seniors, who often are tricked into purchasing these products under false pretenses.
In a 2008 speech on equity-indexed annuities, former SEC Chairman Christopher Cox referred to the "abusive sales practices often used to promote" them to seniors, and quoted a former head of the North American Securities Administrations Association who said her association's survey of the products revealed a "landscape littered with slick schemes and broken dreams" that had been "devastating" to victims and their families.
Last year the SEC ruled that these products were securities, rather than insurance, and hence subject to SEC regulation.
The amendment introduced by Harkin, and then by Meeks, undercuts federal regulators to ensure these products remain the province of state insurance regulators.
Supporters of the provision argued during the public negotiation over the measure that state regulators are equipped to adequately regulate these products, adding that sellers would be held to a "suitability" standard. Such a standard requires that sellers determine that the products are "suitable" for the buyers. There's no requirement that sellers of these securities-like products act in the best interests of the buyers, though. Investment advisers, for example, are held to such a standard. The suitability standard is widely considered to be weaker than the best interests standard, also known as a fiduciary duty.
A request to Meeks's office for comment was not immediately returned in time for publication.
There was nothing in either the Senate's or the House's financial reform bill that addressed equity-indexed annuities, yet somehow they were adopted by both chambers during the "conference committee" to reconcile the two competing versions of the legislation.
