Although the proposed SEC Rule 151A that would have classified fixed indexed annuities (FIAs) as securities was defeated quite some time ago, the contentious issue was revived recently in Illinois. A ruling in a case involving Pinnacle Investment Advisors led some annuity issuers to conclude that the state was characterizing FIAs as securities.
One insurer, Fidelity & Guaranty Life Insurance Co., asked the state's Securities Department to clarify that Illinois does, in fact, exempt FIAs from securities legislation. Their answer came last week, when the department issued a no-action letter, stating that fixed indexed annuities and the agents that sell such products are not subject to securities legislation under Illinois law.
To get a better understanding of the case and its background, LifeHealthPro.com spoke to Eric Marhoun, right, general counsel, senior vice president and secretary at Fidelity & Guaranty Life.
LHP: How did this no-action letter come about?
Eric Marhoun: It arose initially out of an enforcement action brought against Pinnacle Investment Advisors. We and other annuity issuers were concerned about the potentially ambiguous findings in an order entered by the Illinois Securities Department against Pinnacle that was issued in May 2011. The order potentially created the impression that FIAs or other fixed annuities might be securities under Illinois securities law. So we approached the department and made a formal request for clarification that fixed annuities and fixed indexed annuities aren't subject to securities legislation. We made the request in the form of a request for a no-action letter. The letter of January 10 is in response to that request.
LHP: Wasn't that issue settled when 151A was defeated?
Marhoun: They issued the order in 2011. 151A was struck down in the Harkin amendment in 2010. Because there was an appeal of this [Pinnacle] order, in the briefing, the Illinois Securities Department through the Attorney General's office took the position that Illinois didn't follow federal law in all instances. That, I think, was part of the reason for the confusion. Under Illinois law, there are two reasons why annuities that satisfy the requirements of the Harkin amendment are not securities. One is just by operation of Illinois law, properly understood, they are not subject to regulation. And Illinois does generally follow federal law and therefore it would follow the Harkin amendment. The confusion seemed to arise because the briefing in the [Pinnacle] action was unclear as to when Illinois would follow federal law. Obviously, the no-action letter simply clarifies under Illinois law these products are exempt.
LHP: Why should FIAs not be considered securities?
Marhoun: Because they provide guarantees that are regulated by state insurance laws and are consistent with the prior safe harbor of SEC Rule 151. Securities law has generally recognized that products that satisfy the requirements under state law relative to the standard non-forfeiture law should not be treated as securities because the insurance company bears the investment risk. The Harkin amendment clearly codifies that.
LHP: How did Fidelity & Guaranty Life get involved in case?