H.R. 4173: Goodbye Hedge Fund, Hello Family Office

Another provision of the act, Section 989J, which is best known for classifying indexed annuities as state-regulated insurance products, also could hold some appeal for advisors who want to work with wealthy clients without registering with the SEC.

The final language of the provision, which was added by Sen. Tom Harkin, D-Iowa, does not specifically use the term "indexed annuity." Instead, the provision applies to "any insurance or endowment policy or annuity contract or optional annuity contract" that meets the requirements listed in Section 989J.

Here is the final text of Section 989J, which states that products eligible for 989J treatment must satisfy the nonforfeiture standards developed by the National Association of Insurance Commissioners, Kansas City, Mo.:

SEC. 989J. FURTHER PROMOTING THE ADOPTION OF THE NAIC MODEL REGULATIONS THAT ENHANCE PROTECTION OF SENIORS AND OTHER CONSUMERS.

(a) In General- The Commission shall treat as exempt securities described under section 3(a)(8) of the Securities Act of 1933 (15 U.S.C. 77c(a)(8)) any insurance or endowment policy or annuity contract or optional annuity contract–

(1) the value of which does not vary according to the performance of a separate account;

(2) that–

(A) satisfies standard nonforfeiture laws or similar requirements of the applicable State at the time of issue; or

(B) in the absence of applicable standard nonforfeiture laws or requirements, satisfies the Model Standard Nonforfeiture Law for Life Insurance or Model Standard Nonforfeiture Law for Individual Deferred Annuities, or any successor model law, as published by the National Association of Insurance Commissioners; and

(3) that is issued–

(A) on and after June 16, 2013, in a State, or issued by an insurance company that is domiciled in a State, that–

(i) adopts rules that govern suitability requirements in the sale of an insurance or endowment policy or annuity contract or optional annuity contract, which shall substantially meet or exceed the minimum requirements established by the Suitability in Annuity Transactions Model Regulation adopted by the National Association of Insurance Commissioners in March 2010; and

(ii) adopts rules that substantially meet or exceed the minimum requirements of any successor modifications to the model regulations described in subparagraph (A) within 5 years of the adoption by the Association of any further successors thereto; or

(B) by an insurance company that adopts and implements practices on a nationwide basis for the sale of any insurance or endowment policy or annuity contract or optional annuity contract that meet or exceed the minimum requirements established by the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation (Model 275), and any successor thereto, and is therefore subject to examination by the State of domicile of the insurance company, or by any other State where the insurance company conducts sales of such products, for the purpose of monitoring compliance under this section….

During the recent H.R. 4173 conference committee proceedings, Sen. Jack Reed, D-R.I., suggested that companies might use the provision to develop new types of insurance-securities hybrid investment products that cannot be regulated by the SEC because they legally are defined as state-regulated insurance products, not as securities.