The Illinois Supreme Court has unanimously affirmed that fixed-indexed annuities are not securities and are not subject to regulation by securities regulators.
The long-awaited decision shields the annuities industry in Illinois from attempts by regulators and legislators to subject agents and advisors to securities rules, including best-interest and fiduciary regulations, when they sell fixed annuities.
“If the Illinois Secretary of State had been successful in classifying fixed annuities as securities, it would have had national ramifications and required individuals to obtain securities licensure in order to sell these products,” said Pam Heinrich, general legal counsel for the National Association of Fixed Annuities (NAFA).
An appeal of the ruling would have to be considered by the U.S. Supreme Court. The state attorney general did not return calls and it was not know if it is considering such an appeal.
The industry came roaring back in 2018, in part because of the demise of the U.S. Department of Labor fiduciary rule last year, which made it difficult for agents and advisors to sell fixed annuities in retirement accounts.
Annual sales of fixed annuities hit a record high of $132 billion in 2018, a 25 percent jump from the previous year, as investors retreated from a volatile stock market and were attracted by larger payouts created by rising interest rates, according to the Limra Secure Retirement Institute.
The decision to exempt the products from securities rules is especially critical “as discussions about fixed annuity regulation and legislation continue to evolve at both the state and federal levels,” Heinrich said.
The case began in April 2014 when the Illinois secretary of state brought an administrative action against Richard Van Dyke, an investment advisor who sold fixed indexed-annuities to his clients.
The secretary eventually ruled that the annuities sold by Van Dyke were not only insurance products regulated by the Illinois Department of Insurance, as they had been for decades, but were also subject to regulation by the secretary as securities.
The secretary’s ruling was subsequently affirmed by a state circuit court, but in July 2016, a three-judge panel of Illinois’s Fourth District Appellate Court unanimously reversed the decision and held that fixed-indexed annuities “are not securities under Illinois law.”