Variable Annuity Contracts Under State Statutes Relating To Securities And To Insurance - FACT SHEET


Fact Sheet

Q: What is a variable annuity contract?

A: The variable annuity contract is a hybrid investment containing both securities and insurance features. The securities feature of variable annuities provides the investor with an opportunity to participate in potential capital appreciation and income through investments in the securities markets. However, the securities feature also subjects the investor to market risks. The insurance feature of variable annuities permits the investor to receive a series of periodic payments from the investment over time. It also provides a death benefit to the beneficiary if the investor dies during the accumulation phase and the account value is less than the "basis" (principal plus gains) at the time of death.

Q: Are variable annuity contracts susceptible to sales practice abuses?

A: Yes. Sales practice abuses associated with variable annuity contracts include churning, failures to make disclosures, inadequate training, lack of supervision, living trust mills, market timing schemes, unauthorized trades, unsuitable variable product recommendations, unsuitable switching or replacement, and violations of books and records requirements. Some abuses involve the principle of suitability, under which a broker-dealer who recommends a variable product to a customer must assess the customer's financial status, investment objectives, and other relevant information to determine if the product is suitable to the customer. The obligation to recommend only securities that are suitable for the investor arises from the antifraud provisions of the federal securities laws and from rules of the self-regulatory organizations. A broker-dealer must have a reasonable basis for believing that the securities recommendations are suitable for the customer in light of the customer's financial needs, objectives, and circumstances.

Q: Who regulates variable annuity contracts in Hawaii?

A: Both the securities commissioner and the insurance commissioner have concurrent jurisdiction over variable annuity contracts and the persons involved in their issuance and sale. Specifically, the insurance commissioner oversees insurers, the contract itself, and salespersons. The securities commissioner oversees broker-dealers, salespersons, and sales practice abuses. There is concurrent enforcement over salespersons. Between the two, the suitability issues are evidently the realm of securities, not insurance.

Q: What are the statutory bases for the two commissioners' authority over variable annuity contracts?

A: The securities commissioner's authority is based on the definition of "security" in the uniform securities act. The definition expressly includes a "variable annuity contract." Defining a "security" to include a "variable annuity contract" gives the securities commissioner jurisdiction over sales practice abuses relating to variable annuity contracts. The insurance commissioner's authority is based on the variable contract law in the insurance code. The law has an exclusive jurisdiction provision that expressly gives the insurance commissioner the sole and exclusive authority over the issuance and sale of variable contracts, including the licensing of persons selling variable contracts, notwithstanding any other provision of law. Variable annuity contracts are a type of variable contract.

Q: Are the statutes inconsistent with each other?

A: On the surface, they appear to be, due to that exclusive jurisdiction language. However, in practice, the insurance commissioner's jurisdiction is not exclusive. Jurisdiction is shared with the securities commissioner.

Q: Do other states have securities acts and variable contract laws?

A: Yes. All states have securities acts. All states have variable contract laws in their insurance codes or insurance statutes.

Q: Are the securities acts and variable contract laws in other states likewise jointly applicable to variable annuity contracts?

A: No. While the variable contract laws in all states are applicable to variable annuity contracts, the securities acts in most states are not applicable to variable annuity contracts. Specifically, the securities acts in thirty-six states do not appear to apply to variable annuity contracts. The securities acts in the remaining fourteen states do appear to apply to variable annuity contracts.

Q: Do other states have the exclusion jurisdiction language in their variable contracts laws?

A: Yes, most states do. Forty states have them. Ten states do not. Also, in some of those forty states, the exclusive jurisdiction provision specifies that the authority is granted to the insurance commissioner notwithstanding any other law. In some, the provision even specifies that the contracts and sellers are not subject to the securities act or to the securities commissioner.

Q: Are there any federal mandates that require a state's securities act to apply to a variable annuity contract, or prohibit a state's securities act from applying to a variable annuity contract?

A: No. However, the federal Securities Act of 1933 has been construed by the United States Supreme Court to include variable annuity contracts as securities.

Q: Should Hawaii's securities act be consistent and uniform with the federal Securities Act of 1933, by retaining the present definition of "security" in which a variable annuity contract is expressly a security, or should the act be consistent and uniform with the securities acts of the majority of states, by amending the definition of "security" so that a variable annuity contract is excluded from being a security?

A: That would appear to be a policy choice.

Q: Is there anything that can be done to clarify the present status quo in which the securities commissioner and the insurance commissioner have concurrent jurisdiction over variable annuity contracts?

A: Yes, the Legislature could repeal the exclusive jurisdiction language in the variable contracts law. Alternatively, the Legislature could amend the exclusive jurisdiction language so as to specify that the securities act is applicable to variable contracts.

Q: Do any other states have clarifying language like that in the exclusive jurisdiction provision of their variable contract law?

A: Yes, Montana does. The exclusive jurisdiction provision in the Montana variable contract law specifies that, except as provided in the securities act, the insurance commissioner has sole authority to regulate the issuance and sale of variable contracts.

Q: How about Indiana?

A: Indiana has a securities act that excludes variable annuity contracts as securities. It has a variable contract law that does not contain the exclusive jurisdiction provision. The current structure of Indiana's law is untested, as there have been no variable annuity cases in the past couple of years. The securities commissioner believes that it is suboptimal. The department of insurance states that there seems to be some overlapping responsibilities and authority between the department and the securities division, but that both agencies work cooperatively with each other, and there are no problems caused by this arrangement.