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Where is state regulation?

An Editorial (subscription required) in the May 12, 2014 edition of InvestmentNews was titled “FINRA right to watch indexed annuities.” Know what was missing from the piece? A single reference to state regulation of fixed annuities. “The indexed annuity business has been booming, with sales last year climbing to $38.6 billion, up 13.2% from 2012, according to Wink, Inc. This growth alone warrants close attention from Finra.” That growth alone should not warrant close attention from Finra if state regulators are doing a good job at enforcing suitability mandates and replacement rules. There is no analysis in the editorial suggesting they are not. There is no indication that state insurance regulators even exist. If someone were to read this with no experience in insurance, they would reasonably think that without Finra there is, and will be, no regulation of indexed annuities at all.

The editorial goes on to describe indexed annuities as “hybrid investment vehicles.” As fixed insurance products, they are not investment vehicles. When we review advertising, we advise that describing a fixed insurance product as an investment product is misleading. When we review advertising we advise that calling an indexed annuity a “hybrid” is misleading because it is not a cross between a fixed annuity and a variable annuity. It is a fixed annuity, in which the interest rate is determined, in part, based on the performance of an external index, but it is a fixed annuity.

The editors at InvestmentNews seem to believe that without Finra’s oversight “investors” will not understand surrender charges or the pros and cons of replacements. “It is altogether appropriate and commendable that Finra is being proactive about the indexed annuity business. Its attentiveness is likely to prevent a scandal involving the inappropriate sale of these products to unsophisticated or unwary investors, especially those who are retired or nearing retirement.” Are state regulators not attentive to the possibility of scandal? If they are, why is it not more visible? Why is the conclusion so apparently clear to InvestmentNews that Finra is the only viable regulator?

Enforcement of suitability for indexed annuities lies with the states. Anyone who talks to state regulators comes away believing they take that responsibility very seriously. Why is it not evident to InvestmentNews and others? The editorial concludes “Indeed, it is better to head off a problem than try to repair any damage after it occurs.” True. That is a true statement for indexed annuities, and also for state regulation of indexed annuities. Trying to hold onto state regulation after Finra more aggressively steps in will be a difficult “repair.” Heading off that problem is better. Take note state regulators: your regulation did not merit a single reference in this editorial. Not one. That is a problem that needs to be addressed.