(Dow Jones) Some advisors are dismayed that a court order has scuttled a rule to regulate equity-indexed annuities as securities and that the financial overhaul bill leaves their regulation under state insurance commissioners.

As many eyes were glued to the financial overhaul bill as it threaded its way to a Senate vote, the U.S. Court of Appeals for the District of Columbia Monday ordered a Securities and Exchange Commission rule to regulate equity-indexed annuities as securities to be vacated. The ruling was seen as a victory for a coalition of annuity issuers and some state insurance commissioners, which had battled the rule.

In addition, the sweeping financial overhaul bill, approved by the Senate Thursday, includes an amendment that would ensure that indexed annuities remain under the regulation of state insurance departments.

Some advisors say that means inappropriate sales of the products will continue. But James Mumford, first deputy commissioner at the Iowa Insurance Division, says a new suitability model developed by the National Association of Insurance Commissioners will offer additional investor protections.

Indexed annuities are tied to the performance of stock indexes, but typically are sold by insurance agents. The products sometimes carry high commissions, and agents have been criticized for inappropriate sales of the annuities, particularly to the elderly.

They're currently subject to state regulation as insurance products. However, under the new SEC rule, which was passed in December 2008, indexed annuities issued on or after Jan. 12, 2011, would have been registered with the commission and sold by registered broker-dealers.

The Financial Planning Coalition, a group of financial planner organizations, said in a statement Thursday it was disappointed the SEC was stripped of its authority to regulate equity-indexed annuities. That reduces investor protection by preventing the SEC from preventing abusive sales practices, it said.

"Quite simply, it is dangerous to remove the SEC's authority over equity-indexed annuities," said William Baldwin, chairman for the National Association of Personal Financial Advisors. "Although we are pleased with many of the consumer protections included in the final finance reform bill, this is one provision that stands to hurt consumers, particularly the elderly."

Nigel Taylor, a certified financial planner at Taylor & Associates, a registered investment adviser, in Santa Monica, Calif., says many of the equity-indexed annuities carry very high sales commissions, have very long surrender periods and some insurance agents earn 14% commissions on the products. "It's a very lucrative business, and the client has to sit there for 15 to 20 years before they can touch their money without premature-use charges."

In addition, the products are sometimes misrepresented and unsuitable sales are made, particularly to seniors, by unethical agents, Taylor said.

The abuses won't be addressed at the state insurance commissioner level, he said. There isn't enough money for proper enforcement and state insurance departments take administrative actions; "they don't take things to court," said Taylor. "The SEC can open criminal and civil investigations."

Jerry Taylor, a division manager with Next Financial Group Inc., a broker-dealer, said he objects to the way the products are marketed.
"If someone is not a securities broker, which I think they should be to sell these, and if they're going to use the language of indexed securities, the minute they employ those terms, I say, "Whoops, where's your securities license? Why aren't you under the purview of Finra and the SEC?'"

Tony Compton, co-owner of Minneapolis-based Gradient Financial Group LLC, which distributes indexed annuities and also has two registered investment advisors, disagreed, saying "so much is already being done that adding another layer [of regulation] we felt could almost make it worse." Indexed annuities are currently one of the safest ways for a retiree to allocate their money to make sure they have retirement income, he said.

Over the last two years, the sales process and suitability guidelines for indexed annuities have been drastically improved by the insurance companies and some states have put educational requirements in place before the product can be sold, Compton said. In addition, he said, there are issues with sales of securities that have yet to be solved.

Jerry Taylor says he has never sold and would never sell an indexed annuity. "I have studied them with great interest since they came out." But the products' limitations are an issue, he said. "I cannot represent to a client that he's going to participate in the (Standard & Poor's 500 Index) because he's not. He's going to ostensibly participate--with minus signs and a cap."

In addition, there is little oversight for the insurance agents, he said. "I get audited once a year. How many times does the state insurance department audit an insurance agent? They can't; it's a different world."

But the Iowa Insurance Division's Mumford said state insurance jurisdictions conduct examinations, especially when they receive complaints. In addition, the new NAIC model puts a much heavier burden on the companies that create the annuities to make sure sales practices are correct, he said.

"We can put the companies out of business," said Mumford. "We can conduct examinations, financial and market-conduct wise. We have a lot more power than investment advisors give us credit for."

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