Last year, the Securities and Exchange Commission issued a rule that brought Equity Index Annuities within its regulatory jurisdiction and provided greater investor protection. Previously, those insurance products were not considered to be securities subject to SEC regulation. The SEC rule was challenged in court by a group of insurance companies. A federal court of appeals ruled that the SEC does have the authority to regulate Equity Index Annuities, but it ordered the SEC to reconsider the rule’s effect on the economy, reported Sara Hansard in her July 26 article in InvestmentNews entitled “SEC’s EIA rule may resurface.” While it is not under a deadline to do so, some observers expect that the SEC will complete is assessment and reissue the rule pretty quickly, rather than asking the court of appeals to reconsider its ruling.
Equity Indexed Annuities are immediate or deferred annuities that earn interest or provide benefits that are linked to an equity index such as the Standard & Poors 500 stock index, explains Ms. Hansard. Brokers and insurance salesman have aggressively marketed Equity Indexed Annuities as “safety net” investments that participate in the upside of the stock market without any exposure to the downside. $26.5 billion of Equity Indexed Annuities were sold in 2008.
Equity Index Annuities are complicated, but essentially they work like this: You invest a lump sum for a set period of time, typically 10 years or longer. You are guaranteed a minimum annual rate of return. If the market rises more than that, your annuity can grow up to a point. Meanwhile, the issuing insurance company promises that the annuity will never decline in value. Sometimes a bonus of at least 7% of the account value is also promised when an agreement is signed.
The downside of so-called safety net investments is that while agent commissions and expenses are high, returns are often low. Also, a surrender charge or exit fee of at least 6% is incurred if money is withdrawn within the first six to eight years. Finally, in many cases, the promised bonus is illusory.
Regulators have long been concerned about misleading sales practices involving Equity Index Annuities and Variable Annuities. In a joint report published in 2004, the SEC and FINRA (formerly National Association of Securities Dealers) said, “High commissions, typically above 5 percent for variable annuities, help drive sales of these products.” According to the most recent survey of state securities enforcement actions by NASAA (the North American Securities Administrators Association), for the period 2005-2006, some 48 percent of all cases of “senior investment exploitation” involved variable or equity-indexed annuities. That represents an increase from 34 percent for the 2004-2005 time period.
Although state and federal regulators have cracked down on the sales practice problems, abuses persist. Some insurance salespersons concede there are numerous problems in the way these products are designed and sold. “I’ve never seen a product where it is more critical for an adviser to know the product and to do the right thing for the client,” one adviser was quoted as saying in the article. “The potential to sell a bad EIA is very high.”
An especially serious problem occurs when elderly investors are induced to put a substantial portion of their assets in annuities, having been told they can access their money if needed, and they find their money is actually “locked up” and subject to a substantial “surrender charge” when a need arises.
Anyone who believes that they or a loved one has been misled into purchasing one of these products should consult with experienced legal counsel to determine their options.
Page Perry has represented numerous Equity Indexed Annuity investors in making claims to recover losses resulting from fraudulent sales practices or unsuitable recommendations.