Washington State Department of Financial Institutions

FROM THE NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION (NASAA)

New Washington state law
defines variable annuities as securities

WASHINGTON (April 2, 2002) – Securities regulators in Washington state will for the first time be able to handle complaints from investors about variable annuities, under a law signed recently by Governor Gary Locke. The legislation (Senate Bill 6483), signed March 22, was unopposed by Washington lawmakers.

“This new law is good for investor protection and makes sense for consumers, particularly since most variable annuities are marketed as investments,” said Deborah Bortner, Director of Washington’s Securities Division.

Added Washington Insurance Commissioner Mike Kreidler: “This is not about regulatory turf; it won't change the regulation of insurance companies or their products. It will, however, emphasize that variable annuities are securities and that the regulation of licensing and sales practices should be consistent under both state and federal law.”

While variable annuities offer a death benefit, they are marketed primarily as tax-deferred retirement investments with sub-accounts typically invested in mutual funds. Variable annuities were introduced in the early 1950s as the insurance industry’s response to the rising popularity of mutual funds and other stock market investments.

In general, state securities regulators are prevented from investigating complaints involving variable annuities because most state laws classify them as insurance products.  By contrast, since 1959, the U.S. Supreme Court has held that variable annuities constitute securities under federal law.

Lobbying efforts by the insurance industry have slowed or prevented action to define variable annuities as securities in some states. For example, the Kansas legislature last year defeated such a proposal after heavy lobbying by the insurance industry.

Sales of variable products have increased dramatically over the past decade and the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers Regulation, Inc. (NASDR) have both stepped-up regulatory scrutiny of variable products.  In particular, regulators worry that investors aren’t being told about steep surrender charges and the high sales commissions agents often earn when they move investors from annuity to annuity.

“I’ve seen a lot of agents wipe out retirees by moving their funds from variable annuity to variable annuity,” said JJ MacNab, an independent financial planner and insurance analyst based in Bethesda, Maryland. “People lose out because they don’t understand the incentive for unscrupulous agents is to keep swapping variable annuities because it generates huge commissions.”

The North American Securities Administrators Association (NASAA) is supporting an amendment to the Uniform Securities Act, which would duplicate Washington’s new law and serve as a template to other states. At a recent roundtable sponsored by the NASAA committee working on variable annuity issues, the NASDR, the Financial Planning Association and the Consumer Federation of America each expressed support for securities oversight of variable annuity sales practices.

“Investors who buy variable annuities should not be denied the protections extended to every other class of investors,” said NASAA President Joseph Borg, who is also Director of the Alabama Securities Commission. “Washington’s new law is good news for investors and a step toward a more level regulatory playing field in today's complex financial services marketplace.”

For more on variable annuities, go to the National Association of Securities Dealers site.