Equity Index Insurance Products

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7438; File No. S7-22-97]

RIN 3235-AH23

Equity Index Insurance Products

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comments.

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SUMMARY: The Securities and Exchange Commission is requesting comments

on the structure of equity index insurance products, the manner in

which they are marketed, and any other matters the Commission should

consider in addressing federal securities law issues raised by equity

index insurance products.

DATES: Comments must be received on or before November 20, 1997.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549-6009. Comments also may be submitted

electronically at the following E-mail address: [email protected].

All comment letters should refer to File No. S7-22-97; this file number

should be included on the subject line if E-mail is used. All comments

received will be available for public inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,

D.C. 20549-6009. Electronically submitted comments will also be posted

on the Commission's Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, Mark C.

Amorosi, Branch Chief, or Susan Nash, Assistant Director, (202) 942-

0670, Office of Insurance Products, Division of Investment Management,

Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop

10-6, Washington, D.C. 20549-6009.

SUPPLEMENTARY INFORMATION: The Securities Act of 1933 (the ``Securities

Act'') includes an ``insurance exemption'' that exempts ``insurance

policies'' and ``annuity contracts'' from the Act's registration

requirements. Equity index insurance products, recently introduced by

the insurance industry, combine features of traditional insurance

products and traditional securities. The Commission requests

information about the structure of equity index insurance products and

the manner in which they are marketed. The Commission also requests

comment on any other matters the Commission should consider in

addressing federal securities law issues raised by equity index

insurance products.

Table of Contents

I. Background

II. Description of Equity Index Insurance Products

A. Equity Index Annuities

1. Product Features

2. Funding of Insurer's Obligation

3. Distribution Channels

B. Equity Index Life Insurance

III. Applicability of the Federal Securities Laws to Equity Index

Insurance Products

A. Applicability of State Insurance Regulation

B. Investment Risk

1. Case Law

2. Rule 151

a. Contract Value not Tied to Separate Account

b. Guarantee of Purchase Payments and Credited Interest

c. Specified Rate of Interest

d. Excess Interest

C. Marketing

D. Mortality Risk

IV. Request for Comments

V. Conclusion

I. Background

The Commission is considering the status of equity index annuities

and other equity index insurance products under the federal securities

laws. Today the Commission is requesting public comment regarding these

products.

An equity index annuity is a contract issued by a life insurance

company that generally provides for accumulation of the contract

owner's payments, followed by payment of the accumulated value to the

contract owner in a lump sum or series of payments. During the

accumulation period, the insurer credits the contract owner with a

return that is based on changes in an equity index, such as the

Standard & Poor's Composite Index of 500 Stocks (``S&P 500 Index'').

The insurer also guarantees a minimum return to the contract owner if

the contract is held to maturity.

Equity index annuities are designed to appeal to risk averse

consumers who desire to participate in market increases, without

sacrificing the guarantees of principal and minimum return offered in

traditional fixed annuities. Other consumers may be seeking to lock in

prior gains from stock market investments while retaining some exposure

to the market.1

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\1\ See, e.g., Bill Harris, ``Tips For Selling Indexed

Annuities,'' National Underwriter, Aug. 5, 1996, at 12.

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The first equity index annuities were introduced in

1995.2 By the end of 1995, there were four insurers

marketing equity index annuities; and, by the end of 1996, over 30

equity index annuities were available.3 In 1997, this

expansion is expected to continue with as many as 40 insurers issuing

an estimated 50 equity index annuity contracts.4 Equity

index annuity sales reached $2 billion in 1996, with 1997 sales

projected to be as much as $10 billion.5 Recently, the types

of equity index insurance products have proliferated, with single

premium deferred annuities joined by flexible premium deferred

annuities, immediate annuities, and life insurance

policies.6

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\2\ See, e.g., Linda Koco, ``3 More Equity Index Annuities Make

Mkt. Debuts,'' National Underwriter, Dec. 23, 1996, at 11.

\3\ See, e.g., ``More Insurers Expected To Jump On Indexed

Bandwagon,'' Bank Investment Product News, Feb. 3, 1997, at 11

[hereinafter ``Bank Investment Product News'']; James B. Smith, Jr.,

``Survey Shows Strong Interest in Offering EIAs,'' National

Underwriter, Jan. 20, 1997, at 14 [hereinafter ``Survey''].

\4\ See, e.g., Bank Investment Product News, supra note 3.

\5\ See, e.g., Bridget O'Brian and Leslie Scism, ``Equity-

Indexed Annuities Score Big Hit, But They Put a High Price on

Protection,'' Wall Street Journal, May 30, 1997, at C1.

\6\ See, e.g., Linda Koco, ``Some Index Annuity Products Are

Going Optional,'' National Underwriter, Oct. 21, 1996, at 21

[hereinafter ``Going Optional''].

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Equity index insurance products combine features of traditional

insurance products (guaranteed minimum return) and traditional

securities (return linked to equity markets). Depending upon the mix of

features in any insurance product, including an equity index insurance

product, the product may or may not be entitled to exemption from

registration

[[Page 45360]]

under the Securities Act as an ``insurance policy'' or ``annuity

contract.'' To date, most equity index annuities have not been

registered under the Securities Act, although commentators have

acknowledged that substantial uncertainty exists whether all of these

products are entitled to exemption from registration.7

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\7\ See, e.g., Jeffrey S. Puretz and Christopher M. Gregory,

``Should Equity Index Annuities Be Registered?,'' National

Underwriter, Jan. 20, 1997, at 22; Stephen E. Roth and Kimberly J.

Smith, ``Emerging Developments Relating to Fixed Insurance Products

Under the Federal Securities Laws,'' ALI-ABA Conference on Life

Insurance Company Products 45, 65-95 (1996). The equity index

annuities that have been registered contain features that could

reduce amounts received by contract owners below the floor typically

guaranteed by equity index annuities. See, e.g., Pre-Effective

Amendment No. 1 to Registration Statement on Form S-1 of Keyport

Life Insurance Company (File No. 333-13609) (filed Feb. 7, 1997);

Pre-Effective Amendment No. 1 to Registration Statement of Valley

Forge Life Insurance Company (File No. 333-02093) (filed Oct. 17,

1996).

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The Commission believes that both purchasers and insurers may

benefit from greater clarity in this area. With respect to products

that are not covered by the insurance exemption, investors are entitled

to the protections afforded by the federal securities laws--full

disclosure concerning the issuer and the product and marketing through

registered broker-dealers that are subject to the Commission's

oversight. With respect to products that are covered by the insurance

exemption, greater certainty would reduce the risk to all parties of

expensive and time-consuming litigation.

The Commission is considering the issues raised by equity index

insurance products. As part of its consideration, the Commission today

seeks public comment on the structure of these products, the manner in

which they are marketed, and any other matters the Commission should

consider in addressing federal securities law issues raised by equity

index insurance products.8

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\8\ The Commission's consideration of whether equity index

insurance products are exempt from registration as ``insurance

products'' or ``annuity contracts'' does not relate to the status

under the federal securities laws of index products issued by non-

insurers to which the insurance exemption is inapplicable.

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II. Description of Equity Index Insurance Products

A. Equity Index Annuities

1. Product Features

Equity index annuity contracts generally share two characteristics:

(i) A return based on changes in an equity index, and (ii) a guaranteed

minimum return if the contract is held to maturity. Other features of

equity index annuity contracts vary from product to product.

Premium Payments. To date, the majority of products on the market

are single premium deferred annuities, with the purchaser making one

premium payment that is accumulated for some period prior to pay-out.

9 Some insurers offer flexible premium deferred annuities,

permitting multiple premium payments in amounts determined by the

purchaser, and immediate annuities, providing for immediate

commencement of the pay-out period. 10

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\9\ See, e.g., Survey, supra note 3.

\10\ See, e.g., Going Optional, supra note 6.

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Floor Guarantee. The guaranteed minimum return for a single premium

product typically is 90% of premium accumulated at a 3% annual rate of

interest, an amount that is generally required by applicable state

insurance laws. 11

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\11\ See, e.g., Michelle Clayton, ``How Product Marketers

Stylize Equity Indexed Annuities,'' Bank Mutual Fund Report, Mar.

10, 1997, at 1.

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Computation of Index-Based Return. The index-based return depends

on the particular combination of indexing features specified in the

contract. The most common indexing features are described below.

12

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\12\ See, e.g., Thomas F. Streiff, ``Three Basic Ways of

Achieving Equity Indexing,'' National Underwriter, Nov. 4, 1996, at

18; William Harris, ``A Selling Perspective on Equity Indexed

Annuities,'' National Underwriter, Nov. 4, 1996, at 16; Going

Optional, supra note 6; Albert B. Crenshaw, ``A Rising Investment

Star: Equity-Indexed Annuities,'' Washington Post, Oct. 20, 1996, at

H1.

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Index. The return of equity index annuities is typically

based on the S&P 500 Index, but other domestic and international

indices are also used. Some products permit the contract owner to

select one or more indices from a specified group of indices.

Determining Change in Index. Index growth generally is

computed without regard to dividends. There are several methods for

determining the change in the relevant index over the period of the

contract. The ``point-to-point'' method compares the level of the index

at two discrete points in time, such as the beginning and ending dates

of the contract term. The ``high water mark'' or ``look-back'' method

compares the highest index level reached on specified dates throughout

the term of the contract (e.g., contract anniversaries) to the index

level at the beginning of the contract term. The ``annual reset,''

``cliquet,'' or ``lock-in'' method compares the index level at the end

of each contract year to the index level at the beginning of that year,

with the gain for each year ``locked in'' even if the index declines in

the following year. Averaging techniques may be used with these

formulas to dampen the volatility of index changes. For example, in the

point-to-point method, the ending index value could be computed by

averaging index values on each of the final 90 days of the contract

term.

Participation Rate or Spread. Two methods typically are

used to compute the extent to which a contract owner is credited with

index growth. In some contracts, the participation rate, frequently

between 75% and 90%, is multiplied by index growth to determine the

applicable share of index appreciation to be credited. The

participation rate is typically set at the time the annuity is

purchased and may be reset either annually or at the start of the next

contract term. Other contracts specify a percentage, called the

``margin'' or ``spread,'' that is subtracted from index growth to

determine the applicable share of index appreciation to be credited.

Caps and Floors. Some contracts limit the maximum

(``cap'') and minimum (``floor'') index-based returns that may be

credited to a contract. Caps and floors are generally guaranteed for

the entire contract term, although a few equity index annuities provide

for annual reset of the cap and floor.

Computation of Contractual Benefits. Equity index annuities provide

a variety of benefits, including surrender values, annuitization

benefits, and death benefits, each of which may be computed in a

different manner.

Term of Product. Equity index annuities are issued for varying

terms, including terms of three, five, seven, or nine years.

Surrender Charges. Surrender charges are commonly deducted from

withdrawals, but these charges often are eliminated for a 30 to 45 day

window at the end of each index term. There may also be a limited free

withdrawal privilege.

Vesting. Vesting schedules are often implemented to deter early

surrenders of contracts that credit the index-based return periodically

throughout the term of the contract. Typically, a small percentage of

the index-based return is available for withdrawal in the first year,

with the percentage increasing over time until the entire return is

available at the end of the term.

2. Funding of Insurer's Obligation

Equity index annuities typically are backed by assets held in the

insurance company's general account. A portion of the general account

assets is invested in fixed income instruments to support the minimum

return guarantee. Insurance companies typically purchase

[[Page 45361]]

derivatives to hedge their indexed-based return obligations, although

insurers vary in the degree to which they hedge these obligations.

3. Distribution Channels

The most frequently used channels of distribution for equity index

annuities have been banks and insurance agents who are not licensed as

registered representatives of a broker-dealer. To date, broker-dealers

have played a less significant role.13

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\13\ See, e.g., Survey, supra note 3; Cerulli Associates, Inc.

and Lipper Analytical Services, Inc., The Cerulli-Lipper Analytical

Report: The State of the Variable Annuity and Variable Insurance

Markets 37-40 (1996).

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B. Equity Index Life Insurance

Equity index life insurance policies have been introduced

recently.14 The available policies are universal life

insurance policies that permit the holder to vary the amount and timing

of premium payments and change the death benefit. The cash value of an

equity index life insurance policy is credited with a return that is

based on changes in an equity index. As with equity index annuities,

the insurer also guarantees a minimum return on the policy's cash

value. Equity index life insurance policies typically offer annual

crediting of index-based interest and index participation rates that

are reset annually and are generally lower than those for equity index

annuities.15 At least two companies currently offer equity

index life insurance policies, and it is estimated that as many as 25

companies are developing these products.16

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\14\ See, e.g., Linda Koco, ``Transamerica Occidental Unveils

Equity-Indexed UL,'' National Underwriter, Jan. 6, 1997, at 25

[hereinafter ``Transamerica Occidental'']; Linda Koco, ``Two More

Index UL Policies Make Their Debuts,'' National Underwriter, Mar.

10, 1997, at 9.

\15\ See, e.g., ``Transamerica Occidental,'' supra note 14.

\16\ See, e.g., Linda Koco, ``Equity Index Market Shows Signs of

Fierce Competition,'' National Underwriter, Jan. 27, 1997, at 9.

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III. Applicability of the Federal Securities Laws to Equity Index

Insurance Products

Section 3(a)(8) of the Securities Act exempts from the registration

requirements of the Act any ``insurance policy'' or ``annuity

contract'' issued by a corporation subject to the supervision of the

insurance commissioner, bank commissioner, or similar state regulatory

authority.17 The exemption, however, is not available to all

products labelled ``insurance policies'' or ``annuity contracts.'' For

example, ``variable annuities,'' which pass through to the contract

owner the investment performance of a pool of assets, are securities

rather than exempt annuity contracts.18

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\17\ The Commission has previously stated its view that Congress

intended any insurance contract falling within Section 3(a)(8) to be

excluded from all provisions of the Securities Act notwithstanding

the language of the Act indicating that Section 3(a)(8) is an

exemption from the registration but not the antifraud provisions.

Definition of ``Annuity Contract or Optional Annuity Contract,''

Securities Act Rel. No. 6558 (Nov. 21, 1984) [49 FR 46750, 46753

(Nov. 28, 1984)] [hereinafter ``Proposing Release''].

\18\ SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959);

SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967).

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The Commission and the courts have addressed the insurance

exemption on a number of occasions. Under existing case law, factors

that are important to a determination of a contract's status under

Section 3(a)(8) include (1) the allocation of investment risk between

insurer and contract owner and (2) the manner in which the contract is

marketed.

In 1986, faced with the proliferation of annuity contracts commonly

known as ``guaranteed investment contracts,'' the Commission adopted

Rule 151 under the Securities Act to establish a safe harbor for

certain annuity contracts that will not be deemed subject to the

federal securities laws.19 The factors that determine an

annuity contract's eligibility for the safe harbor include the

applicability of state insurance regulation, the assumption of

investment risk by the insurer, and the manner of marketing the

contract. In situations when the Rule 151 safe harbor is not

applicable, the status of a contract may be analyzed by reference to

the principles discussed in Rule 151 and the accompanying releases and

to judicial precedents construing Section 3(a)(8).20 This

would include, for example, an annuity that does not fall within the

safe harbor or a life insurance policy.

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\19\ 17 CFR 230.151; Definition of Annuity Contract or Optional

Annuity Contract, Securities Act Rel. No. 6645 (May 29, 1986) [51 FR

20254 (June 4, 1986)] [hereinafter ``Adopting Release'']. A

guaranteed investment contract is a deferred annuity contract under

which the insurer pays interest on the purchaser's payments at a

guaranteed rate for the term of the contract. In some cases, the

insurer also pays discretionary interest in excess of the guaranteed

rate.

\20\ Adopting Release, supra note 19, 51 FR at 20255 n.4, 20261.

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This section discusses the factors that have been used by the

Commission and courts to determine whether a product is entitled to the

insurance exemption, and the manner in which those factors may apply to

equity index insurance products. Commenters are asked to provide

detailed information on the structure, operation, and marketing of

equity index insurance products. Commenters should specifically discuss

the application to equity index insurance products of the factors that

have been used by the Commission and the courts to determine whether a

product is entitled to the insurance exemption.

A. Applicability of State Insurance Regulation

To gain the benefit of the Rule 151 safe harbor, an annuity

contract is required to be issued by a corporation subject to the

supervision of a state insurance commissioner, bank commissioner, or

similar state regulator.21 In addition, the contract itself

is required to be subject to state regulation as an annuity or

insurance.22 Equity index insurance products on the market

today generally are issued by companies subject to state insurance

regulation, thereby appearing to meet this threshold requirement for

insurance status.

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\21\ 17 CFR 230.151(a)(1). This requirement is parallel to the

language of Section 3(a)(8).

\22\ Adopting Release, supra note 19, 51 FR at 20255.

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Commenters are requested to address the status under state law of

equity index insurance products. Are all of these contracts regulated

as annuities or insurance? For contracts that are regulated as

annuities or insurance, commenters are asked to describe the provisions

of state law that apply, e.g., regulation of reserves, investment

restrictions, approval of contract forms, illustration requirements,

market conduct standards, applicability of state insurance guaranty

laws. How does the applicability of state insurance regulation to

equity index insurance products affect the need for federal securities

regulation of these products?

B. Investment Risk

1. Case Law

Under existing case law, the allocation of investment risk between

insurer and contract owner is significant in determining whether a

particular contract is insurance for purposes of the federal securities

laws. In SEC v. Variable Annuity Life Insurance Co. (hereinafter

``VALIC''), the Supreme Court determined that absent some element of

fixed return, i.e.,''some investment risk-taking on the part of the

company,'' an annuity contract is outside the scope of Section

3(a)(8).23 The VALIC court found a variable annuity contract

to be a security, not insurance, when the insurer invested premiums in

a pool of common stocks

[[Page 45362]]

and other equities and the value of the contract owner's benefit

payments varied directly with the success of the underlying

investments.

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\23\ 359 U.S. 65, 71 (1959).

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The Supreme Court subsequently clarified that a contract could

provide for some assumption of investment risk by the insurer, but

nonetheless be a security. In SEC v. United Benefit Life Ins. Co.

(hereinafter ``United Benefit''), the insurer guaranteed that the cash

value of its variable annuity contract would never be less than 50% of

purchase payments made and that, after ten years, the value would be no

less than 100% of payments.24 The Court determined that this

contract, under which the insurer did assume some investment risk

through minimum guarantees, was a security. In making this

determination, the Court distinguished a contract ``which to some

degree is insured'' from a contract of ``insurance.'' 25

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\24\ 387 U.S. 202, 205 (1962).

\25\ Id. at 211.

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Commenters are requested to discuss generally how investment risk

is allocated between insurer and contract owner in equity index

insurance products. Commenters should also compare this allocation of

risk to other insurance products and discuss how this allocation of

investment risk affects the application of the federal securities laws

to equity index insurance products.

2. Rule 151

To gain the benefit of the Rule 151 safe harbor, an insurer is

required to assume the investment risk under the contract.26

For purposes of the safe harbor, an insurer is deemed to assume the

investment risk if the following conditions are satisfied.

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\26\ 17 CFR 230.151(a)(2).

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a. Contract Value not Tied to Separate Account. The safe harbor

requires that the value of the contract not vary according to the

investment experience of a separate account, a separately managed pool

of assets operating independently of the investment experience of the

insurer's general account.27 Equity index annuities

typically are general account products, whose value does not vary

according to the investment experience of a separate account. These

products therefore appear to satisfy the first condition of the Rule

151 investment risk test.

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\27\ 17 CFR 230.151(b)(1).

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Commenters are requested to describe the investments used by an

insurer to support its obligations under an equity index insurance

product. Commenters should also address how the nature of these

investments affects the analysis of equity index insurance products

under the federal securities laws. For example, should the relative

levels of a contract owner's purchase payment allocated to the floor

guarantee and the index-based benefit affect the status of a contract

as insurance under the federal securities laws? Is the status of an

equity index insurance product affected by whether, or the degree to

which, an insurer hedges its obligations to pay the index-based

benefit? To the extent an insurer's obligations are hedged, does it

bear investment risk with respect to those obligations? In the

alternative, is there, in essence, a pass-through of performance from

insurer to contract owner, with the contract owner experiencing the

performance of the hedging instruments that the insurer purchased to

hedge the contract?

b. Guarantee of Purchase Payments and Credited Interest. The safe

harbor requires that the insurer, for the life of the contract,

guarantee the principal amount of purchase payments and credited

interest, less any deduction for sales, administrative, or other

expenses or charges.28 For equity index annuities, insurers

generally guarantee 90% of purchase payments and annual interest of 3%.

Commenters should address whether the typical floor guarantee for

equity index annuities, by itself, satisfies the investment risk

requirement, or whether there must be some additional guarantee.

Commenters are requested to address whether, and under what

circumstances, the typical 10% deduction from purchase payments is

attributable to sales, administrative, or other expenses or charges and

therefore falls within the rule's parameters. Commenters should also

address whether there are equity index annuities that reduce the floor

guarantee by charges of any type, and how any such charges affect the

investment risk analysis.29 Commenters should also discuss

any floor guarantees in equity index annuities that are different from

90% of purchase payments with annual interest of 3%. Commenters should

address how the different floor guarantees affect the investment risk

analysis.

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\28\ 17 CFR 230.151(b)(2)(i).

\29\ See Registration Statement of Valley Forge Life Insurance

Company (File No. 333-02093) (filed Mar. 29, 1996) (minimum

guaranteed value of registered equity index annuity reduced by rider

charge for equity index feature).

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Commenters should describe any floor guarantees provided by equity

index life insurance products and how the guarantees affect their

status under the federal securities laws. Commenters should address

whether an equity index life insurance policyholder is dependent on

cash value growth in excess of guaranteed minimums to gain the

anticipated benefits under the policy.

c. Specified Rate of Interest. The safe harbor requires that the

insurer credit a specified rate of interest, in an amount at least

equal to the minimum rate required by applicable state

law.30 Equity index annuities typically appear to satisfy

this condition by guaranteeing a minimum interest rate of 3%, which is

generally equal to the minimum rate required by state law. Commenters

should describe the minimum guaranteed rate on various equity index

insurance products. Do the guaranteed rates satisfy this condition of

the safe harbor?

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\30\ 17 CFR 230.151(b)(2)(ii) and (c).

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d. Excess Interest. The safe harbor requires that the insurer

guarantee that the rate of any interest to be credited in excess of the

guaranteed minimum rate not be modified more frequently than once per

year.31 Rule 151, as originally proposed, would have

excluded from the safe harbor any annuity that linked excess interest

to an index. The Commission reasoned that an insurer that uses an index

feature externalizes its discretionary excess interest rate, shifting

to the contract owner all of the investment risk regarding fluctuations

in that rate.32 In adopting Rule 151, the Commission

extended the rule's coverage to permit insurers to make limited use of

index features in determining the excess interest rate, so long as the

excess rate is not modified more frequently than annually.33

Specifically, the insurer could specify an index to which it would

refer, no more often than annually, to determine the excess rate that

it would guarantee under the contract for the next 12-month or longer

period. In addition, an insurer could not change the terms of the index

feature used for calculating the excess rate more frequently than once

per year.

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\31\ 17 CFR 230.151(b)(3).

\32\ Proposing Release, supra note 17, 49 FR at 46753 n.19.

\33\ Adopting Release, supra note 19, 51 FR at 20260.

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Commenters are requested to discuss how the use of an index-based

formula for calculating contract values under equity index annuities

affects the allocation of investment risk between insurer and contract

owner. How does the use of an indexed-based return determined

retrospectively by reference to a formula that is established

prospectively affect the status of these contracts as securities or

insurance? Commenters are specifically requested

[[Page 45363]]

to address the Commission's expressed concern with shifting the risk of

fluctuations in an index rate to a contract owner and the Commission's

decision to limit the benefit of Rule 151 to situations where an index

is used to fix a specific excess interest rate in advance.

Additionally, comment is requested on how the nature of particular

indexing formulas and the duration of any guarantees of caps, floors,

participation rates, margins, or other terms affect the allocation of

investment risk between the contract owner and the insurer.

C. Marketing

Marketing is another significant factor in distinguishing insurance

from a security. In United Benefit, the Supreme Court, in holding an

annuity contract to be outside the scope of Section 3(a)(8), found

significant the fact that the contract was ``considered to appeal to

the purchaser not on the usual insurance basis of stability and

security but on the prospect of `growth' through sound investment

management.'' 34 Under these circumstances, the Court

concluded ``it is not inappropriate that promoters' offerings be judged

as being what they were represented to be.'' 35 Rule 151

incorporates a ``marketing'' test.36 As a condition to the

safe harbor, the contract must not be ``marketed primarily as an

investment.'' The Commission is concerned that the nature of equity

index insurance products may make it particularly difficult to market

these products without primary emphasis on their investment aspects.

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\34\ United Benefit, 387 U.S. 202, 211 (1962).

\35\ Id. For other cases applying a marketing test, see Berent

v. Kemper Corp., 780 F.Supp. 431 (E.D. Mich. 1991), aff'd, 973 F.2d

1291 (6th Cir. 1992); Associates in Adolescent Psychiatry v. Home

Life Ins. Co., 729 F.Supp. 1162 (N.D. Ill. 1989), aff'd, 941 F.2d

561 (7th Cir. 1991); Grainger v. State Security Life Ins. Co., 547

F.2d 303 (5th Cir. 1977).

\36\ 17 CFR 230.151(a)(3).

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Commenters should describe how equity index insurance products are

marketed and how the marketing factor applies to equity index insurance

products. Given the structure and purposes of equity index insurance

products, can they be marketed without focusing primarily on their

investment aspects? Comments should address both written sales

materials and oral sales presentations, including the ability of an

insurer to train and monitor its sales force to ensure that equity

index insurance products are not marketed with primary focus on their

investment aspects. Commenters are requested to identify the

distribution channels that are used in marketing equity index insurance

products and discuss whether the use of particular distribution

channels affects an insurer's ability to market these products without

focusing primarily on their investment aspects. Commenters are also

asked to identify the products that are viewed as competitive

alternatives to equity index annuities and address how the nature of

these other products (e.g., whether securities or insurance) affects

the manner in which equity index insurance products are marketed.

D. Mortality Risk

When the Commission adopted the Rule 151 safe harbor, it determined

not to include a requirement that the insurer assume some mortality

risk through, for example, guaranteeing annuity purchase rates for the

life of the contract. The Commission noted, however, that in a Section

3(a)(8) facts and circumstances analysis of contracts outside the Rule

151 safe harbor, the presence or absence of mortality risk may be an

appropriate factor to consider.37

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\37\ Adopting Release, supra note 19, at 20255-56. See also

Proposing Release, supra note 17, at 46752 (requesting comment on

whether mortality risk assumption should be a required element of

the Rule 151 safe harbor); General Statement of Policy Regarding

Exemptive Provisions Relating to Annuity and Insurance Contracts,

Securities Act. Rel. No. 6051 (Apr. 5, 1979) [44 FR 21626, 21627-28

(Apr. 11, 1979)] (predecessor interpretive release to Rule 151

stating that meaningful mortality risk by insurer was prerequisite

to determination that contract was ``insurance,'' not ``security'').

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Commenters are requested to describe with specificity the nature of

the mortality risks assumed by insurers in connection with equity index

insurance products. For equity index annuities, commenters should

describe the terms of any guaranteed annuity purchase rates, whether

those rates are comparable to rates available in more traditional

annuity contracts, and the likelihood that contract owners will

annuitize. Comment is also requested on the significance of mortality

risk in determining whether an equity index insurance product is

exempted by Section 3(a)(8). Is mortality risk a relevant factor and,

if so, what weight should it be given?

IV. Request for Comments

All interested persons are invited to submit written comments on

equity index insurance products. Whenever possible, submissions should

describe particular equity index insurance products with specificity

and include sample sales literature and contracts. Commenters should

address the ways in which equity index insurance products are similar

to or different from traditional fixed annuities and life insurance, on

the one hand, and variable annuities and variable life insurance, on

the other. Particular emphasis should be placed on the factors

described above, including state insurance law, investment risk,

marketing, and mortality risk.

The Commission also requests that commenters address the following:

Are there features that all equity index insurance

products share that result in all of them being covered by the

insurance exemption or, in the alternative, not covered by the

insurance exemption? If so, commenters should identify the features

that cause all equity index insurance products to be classified

together. If not, commenters should identify the features that

distinguish equity index insurance products that are covered by the

insurance exemption from those that are not.

Are there differences between broad types of equity index

insurance products that are relevant to the analysis of their status

under the federal securities laws? If so, commenters should separately

address different types of products, e.g., single premium products

versus flexible premium products or annuities versus life insurance.

For example, commenters should address any differences in mortality

risk between equity index annuities and life insurance.

The Commission also requests comment on the implications for small

business of federal securities law issues raised by equity index

insurance products.

V. Conclusion

The Commission is requesting comments on a number of specific

issues raised by equity index insurance products. In addition,

commenters are encouraged to address any other matters that they

believe merit examination.

Dated: August 20, 1997.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-22597 Filed 8-26-97; 8:45 am]

BILLING CODE 8010-01-P