On June 26, 2008, the Securities and Exchange Commission (“SEC”) published proposed Rules 151A and 12h-7 (“Proposed Rules”).  The Proposed Rules, if adopted, would clarify the status of indexed annuities (i.e. annuities for which payments to the purchaser are dependent on performance of a securities index) under the federal securities laws, and would provide insurance companies an exemption from reporting requirements under the Securities Exchange Act of 1934 (“Exchange Act”) with respect to such annuities and certain other securities issued by insurance companies that are registered under the Securities Act of 1933 (“Securities Act”) and regulated as insurance under state law.

     1.      Current Regulatory Regime

Under the current regulatory regime, certain annuities are outside the scope of federal securities regulation, including federal disclosure, antifraud and sales practice protections, pursuant to a definitional exclusion under Securities Act Section 3(a)(8).  Existing Rule 151, adopted in 1986, created a “safe harbor” for certain annuity contracts commonly known as “guaranteed investment contracts.”  Under Rule 151, an annuity contract issued by a state-regulated insurance company fell within the Section 3(a)(8) exclusion if the insurer assumed the investment risk under the contract and the contract was not marketed primarily as an investment.  However, this “safe harbor” did not extend to indexed annuities as such annuities do not fulfill the requirement that insurers not modify the rate of credited interest in excess of the guaranteed minimum rate more than once per year.

     2.      Proposed Rules

              a.       Rule 151A

Proposed Rule 151A, if adopted, would enhance investor protection by further clarifying the status of indexed annuities under the federal securities laws.  It would prospectively define indexed annuities as outside the exclusion for annuity contracts if the amounts payable under the contract are more likely than not to exceed the amounts guaranteed under the contract.  The “more likely than not” determination is based on a factual analysis as specified in the rule.  Annuities falling outside the exclusion would be subject to the registration provisions as securities.

               b.      Rule 12h-7

Proposed Rule 12h-7, if adopted, would provide insurance companies with an exemption from Exchange Act reporting with respect to indexed annuities and certain other insurance company issued securities that are registered under the Securities Act and regulated as insurance under state law.   The exemption would apply to issuers that are supervised by an insurance department, bank regulator, or similar agency.  However, the exemption would not apply to insurance company separate accounts which are not regulated as insurance, but rather are registered as investment companies under the Investment Company Act of 1940.

The SEC is accepting comments with respect to the Proposed Rules until September 10, 2008.