Regulators and the financial press media have given EIAs a bad name. Why? Controversy has embroiled these products. Why?

Fact is EIAs can accomplish most of the goals of a Variable Annuity (VAs) and a Traditional Fixed Annuity (TFA) and be free of the problems inherent in both.

Variable annuity were created to provide retirement funds that cannot be outlived while protecting investors against the adverse effects of inflation to a portfolio; A portfolio of managed, diversified investments. Not long after their creation, federal regulators determined that VAs were little more than mutual funds with the slight trappings of insurance and were not exempt from federal registration and regulation. Even the Supreme Court agreed that VAs should be regulated by the SEC, state regulators and the NASD. Why so much heavy regulation on an Annuity product?

The Supreme Court decided to subject VAs to federal regulation was due to the fact that the entire investment risk in a VA is shifted from the insurer to the policy owner. Thus, determining that a VA was NOT the type of annuity Congress intended it to be thus exempting it from federal securities law. The result is the regulation that the product is subject to today.

By way of comparison, EIAs have the ability to provide consumers with the VAs two main advantages: a hedge against inflation and income for life. That being said, the EIA insurer guarantees the original deposit and a minimum investment return.

What does this mean? In an EIA the client transfers the risk of loss from their shoulders to an insurance company in return for a capped gain.

The mitigating factor in an EIA is the guarantee of credited interest results that intrinsically allows the EIA to avoid federal securities laws and is subjected only to the constraints of an atypical insurance product.

Recently, the NASD has caused undo concern regarding whether or not EIAs would continue to be insurance products rather than securities regulated investments.

The NASD position seems to be that registered representatives of broker-dealers that are members of the NASD should be supervised when selling EIAs, even though they are not securities and therefore not subject to NASD jurisdiction. A bit of a misnomer if you ask me.

The NASD will not formally say that EIAs are, per se, securities. This is probably because the NASD doesn’t have the power to challenge the SEC and the Supreme Court. The NASD really has no power to change regulation, they can however, stir the pot.

The NASD wants to see these product be sold through their distributions channels and thus subjecting the brokers to an “in house fee”, a cut of the sale’s commission to the house if you will.

If EIAs insurance products should be regulated and sold through Broker Dealers than why not all insurance products?

Although the SEC has had EIAs on their radar for quite some time, there has been no determination on whether to label the product ‘insurance’ or ‘security.’ This has been an ongoing controversy for years.

In fact, in the late 1980s the SEC published Rule 151 to clarify which annuities were securities and which were not. For the first time a safe harbor was created to protect EIAs that met the safe harbor definition. To qualify, an EIA must meet certain standards.

Despite this safe harbor, the courts and the SEC have long held that and product sold as an investment security, will be treated as one regardless of what in fact it is. EIAs are retirement products, not securities and should be bought and sold in this manner.

The emphasis of EIAs should be geared towards the guarantees in the product rather than the indexing feature used to credit returns.

Simply put, EIAs are not securities as determined by the SEC and the Supreme Court. They are not an investment, rather a retirement vehicle with a guarantee of a nominal rate of return and a lifetime of income GUARANTEED!