MarleysGh0st wrote:
That says the SEC will start regulating EICs (Equity Index Annuities), not eliminate them.
Considering how close we came to having the new mortgage product and hedge funds destroy our entire financial system, is a little regulation a bad thing?
An equity indexed annuity is similar to a fixed annuity (one that pays a guaranteed rate of interest) with a twist. It is also tied to the performance of some major market index like the S&P 500. If the market goes up sufficiently, the annuity is guaranteed to pay a higher rate of interest. This is not the same as a variable annuity, in which the customer's funds are used to buy shares in a stock or bond fund, which, if it goes down, can result in the customer's losing money (many variable annuities are sold with a guarantee, which, for a price, ensures that this won't happen). Needless to say a bunch of varibale annuities haven't done real well lately. An equity indexed annuity will always return some stated (often very low) interest rate, but one which could go higher if the market does well.
Currently, equity indexed annuities are considered standard annuities and regulated by the State Insurance Departments. The person selling them must be a licensed insurance agent. The SEC is considering regulating these because of widespread complaints about these annuities being pushed on senior citizens who aren't aware that they are tying up their money in an essentially illiquid investment with steep withdrawal penalties. If the SEC rule becomes final, the people who sell these annuities would need to be federally registered like stockbrokers (many of them already are) and the funds themselves would have to file SEC prospectuses and so forth. It's very likely that there would be a lot fewer of these around in that case.
The annuities themselves won't be regulated in the sense of making sure they are financially sound before they can be offered to the public. Plenty of risky stocks and bonds are already being sold out there. It's the state insurance departments who make sure that insurance companies maintain sufficient assets to pay their obligations. Instead, the SEC's concern is with full disclosure of the potential risks of the annuity and regulation of the people who sell them.
The main benefit of federal regulation would be making the firm itself responsible for what the selling representative does. With variable annuities, new regulations require that a higher-up in the firm personally review every proposed sale and approve it as suitable for the particular customer. That would undoubtedly be extended to equity indexed annuities.
