Securities or Not: Uncertainties Remain For Fixed Insurance Products After Dodd-Frank


When the Securities Act of 1933 was enacted 77 years ago, it was clear that annuity and life insurance products were not securities and were not subject to that Act. However, insurance products have evolved substantially since then, and one of the most significant changes has been the addition of investment components of varying type, scope and magnitude, with new types of products such as excess interest products, variable products, equity indexed products, and products with market value adjustments. This product evolution led to the creation of an analytic framework to determine whether certain types of products are or should be treated as securities under the federal securities laws. In some cases, however, that analysis involves some elements of uncertainty. Now, in the Dodd-Frank financial reform legislation enacted in July, Congress, for the first time since 1933, has provided a new statutory provision which expands the exemption for insurance products so that a new category of products meeting certain conditions will not be treated as securities. This article discusses that new statutory provision and identifies areas of uncertainty in its interpretation and application that will need to be addressed by product issuers, distributors and regulators alike.

I. Background

Section 3(a)(8) of the Securities Act of 1933 (the ‘‘1933 Act’’) provides simply and in broad terms that ‘‘any insurance or . . . annuity contract’’ (issued by a regulated insurance company) is not subject to the provisions of that Act (except as otherwise specifically provided). 1 The legislative history of the 1933 Act states that ‘‘insurance policies are not to be regarded as securities’’ subject to that Act.2 This was in the context of what we now think of as the ‘traditional’ fixed products that existed at that time.

Thereafter, the variable annuity product was developed and brought to market. In the traditional fixed annuity, the insurance company promised a fixed (or guaranteed rate of) return and bore the investment risk. In contrast, with a variable annuity the insurance company promises to ‘pass through’ the investment return (gains or losses) on a specified pool or group of assets, and thereby shifts the investment risk to the contract owner. Principally due to this shifting of investment risk to the contract owner, but also because such products are usually marketed with an emphasis on their investment management component, two seminal Supreme Court cases have led to the treatment of variable annuities as securities subject to all provisions of the 1933 Act3 (absent an applicable exemption, e.g., for contracts sold to qualified retirement plans or in private placements).

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