The Securities & Exchange Commission (“SEC”) had announced that starting in early 2011, many Equity Index Annuities (aka EIAs) will be treated as securities, subject to federal regulation. A July 21, 2009 ruling by the Court of Appeals for the District of Columbia Circuit now threatens that important investor protection. The Court ordered the SEC to reconsider the rule, a decision that could allow EIAs to continue to be abusively sold without federal securities regulation obligations or oversight.
EIAs are very expensive, very illiquid products that insurance agents often sell as investment products to senior citizens. Although marketing efforts promise safety of principal and partial participation in any appreciation in the stock market, the fine print of EIA contracts virtually assures that these "investments" do not work out as advertised. As noted by the SEC, high EIA surrender charges and other hurdles can lock up seniors’ retirement money for decades. If retired investors need their money for medical care or living expenses, they risk losing a substantial amount of their original investment. For example, in many cases, an investor may only receive $800,000 back on a $1 million investment if he needs his money within the first decade. This is far from what most consumers would consider a “guarantee” on their principal.
The SEC rule was not the result of an SEC investigation into reported EIA abuses. Rather, public exposure of this problem came from a source outside the federal government, in this case, the NBC television program Dateline. View video clips from the Dateline program "Tricks of the Trade," which uncovered serious misconduct by some annuities salesmen.
Shockingly, some politicians were opposed to this measure and wanted to delay implementation even longer. Public outrage prevailed over the powerful insurance lobby --- which strongly opposed this action --- forcing the SEC to act to protect retirees and other innocent investors. Now that protection is threatened by the District Court decision, which requires the SEC to reconsider the rule.
