that are consistent with its marketing materials. In general,
assumptions that are inconsistent with the assumptions that an insurer
uses for other purposes will not be reasonable under rule 151A.
    As noted above, we are adopting a principles-based approach because
we believe that it will provide reasonable certainty to insurers with
respect to the application of the rule. We recognize, however, that a
number of commenters expressed concern that the principles-based
approach provides insufficient guidance regarding implementation and
the methodologies and assumptions that are appropriate and could result
in inconsistent determinations by different insurance companies and
present enforcement and litigation risk.\119\ Some commenters suggested
that the Commission address these concerns by providing guidance as to
how to make the determination under the rule, which, they asserted,
could result in greater uniformity and consistency in the application
of the rule.\120\ While we believe that further guidance may, indeed,
be helpful in response to specific questions of affected insurance
companies, we note that commenters generally did not articulate with
specificity the areas where they believe that further guidance is
required. As a result, in order to provide guidance in the manner that
would be most helpful, we encourage insurance companies, sellers of
indexed annuities, and other affected parties to submit specific
requests for guidance, which we will consider during the two-year
period between adoption of rule 151A and its effectiveness.\121\
---------------------------------------------------------------------------

    \119\ See, e.g., Academy Letter, supra note 54; ACLI Letter,
supra note 94; Aviva Letter, supra note 54; AXA Equitable Letter,
supra note 106; CAI 151A Letter, supra note 54; FINRA Letter, supra
note 7; Letter of Genesis Financial Products, Inc. (Aug. 29, 2008)
(``Genesis Letter''); Letter of Janice Hart (Aug. 15, 2008) (``Hart
Letter''); ICI Letter, supra note 7; National Western Letter, supra
note 54; Sammons Letter, supra note 54.
    \120\ See, e.g., FINRA Letter, supra note 7; Hart Letter, supra
note 119; ICI Letter, supra note 7; NAIC Officer Letter, supra note
54.
    \121\ See infra text accompanying notes 129 and 130.
---------------------------------------------------------------------------

    Like the proposal, rule 151A requires that, in order for an
insurer's determination to be conclusive, the determination must be
made not more than six months prior to the date on which the form of
contract is first offered.\122\ For example, if a form of contract were
first offered on January 1, 2012, the insurer would be required to make
the determination not earlier than July 1, 2011. We are not adopting
the proposed requirement that the insurer's determination be made not
more than three years prior to the date on which the particular
contract is issued.\123\ We were persuaded by the commenters that if
the status of a form of contract under the federal securities laws were
to change, over time, from exempt to non-exempt and vice versa, this
would present practical difficulties resulting from the possibility
that an annuity could be exempted from registration at one time but be
required to be registered subsequently and vice versa, as well as
heightened litigation and enforcement risk.\124\ We believe that the
substantial uncertainties and resulting potential costs introduced by
the proposed requirement that a contract's status be redetermined every
three years would be inconsistent with the intent of rule 151A, which
is to clarify the status of indexed annuities.
---------------------------------------------------------------------------

    \122\ Rule 151A(b)(2)(iii).
    \123\ Proposed rule 151A(b)(2)(C).
    \124\ See, e.g., Aviva Letter, supra note 54; Sammons Letter,
supra note 54. See also ICI Letter, supra note 7 (possibility that
indexed annuity's status under the federal securities laws could
change is not consistent with the purposes of the federal securities
laws).
---------------------------------------------------------------------------

    Rule 151A, as adopted, requires that, in determining whether
amounts payable by the insurance company are more likely than not to
exceed the amounts guaranteed, both amounts payable and amounts
guaranteed are to be determined by taking into account all charges
under the contract, including, without limitation, charges that are
imposed at the time that payments are made by the insurance
company.\125\ For example, surrender charges would be deducted from
both amounts payable and amounts guaranteed under the contract. This is
a change from the proposal, which would have required that, in
determining whether amounts payable by the insurance company under a
contract are more likely than not to exceed the amounts guaranteed
under the contract, amounts payable be determined without reference to
any charges that are imposed at the time of payment, such as surrender
charges, while those charges would be reflected in computing the
amounts guaranteed under the contract.\126\
---------------------------------------------------------------------------

    \125\ Rule 151A(b)(1). In many cases, amounts guaranteed under
annuities are not affected by charges imposed at the time payments
are made by the insurer under the contract. This is a result of the
fact that guaranteed minimum value, as commonly defined in indexed
annuity contracts, equals a percentage of purchase payments,
accumulated at a specified interest rate, as explained above, and
this amount is not subject to surrender charges. However, under some
indexed annuity contracts, the amounts guaranteed are affected by
charges imposed at the time payments are made. For example, a
purchaser buys a contract for $100,000. The contract defines
surrender value as the greater of (i) purchase payments plus index-
linked interest minus surrender charges or (ii) the guaranteed
minimum value. The maximum surrender charge is equal to 10%. The
guaranteed minimum value is defined in the contract as 87.5% of
premium accumulated at 1% annual interest. If the purchaser
surrenders within the first year of purchase, and there is no index-
linked interest credited, the surrender value would equal $90,000
(determined under clause (i) as $100,000 purchase payment minus 10%
surrender charge), and this amount would be the guaranteed amount
under the contract, not the lower amount defined in the contract as
guaranteed minimum value ($87,500).
    \126\ Proposed rule 151A(b)(1).
---------------------------------------------------------------------------

    We are making the foregoing change because we are persuaded by
commenters who argued that the proposed provision could result in
contracts being determined not to be entitled to the Section 3(a)(8)
exemption irrespective of the likelihood of securities-linked return
being included in the amount payable.\127\ Specifically, commenters
argued that as long as the surrender charge is in effect, the amount
payable would always exceed the amount guaranteed if the surrender

charge were subtracted from the latter but not the former. The
commenters further argued that bona fide surrender charges should not
result in a contract being deemed a security, since a surrender charge
is an expense and does not represent a transfer of risk from insurer to
contract purchaser. Because the rule, as adopted, requires surrender
charges to be subtracted from both amounts payable and amounts
guaranteed, the surrender charges will not affect the determination of
whether a contract is a security (i.e., the determination of whether
amounts payable are more likely than not to exceed the amounts
guaranteed).
---------------------------------------------------------------------------

    \127\ See, e.g., Aviva Letter, supra note 54; CAI 151A Letter,
supra note 54; Coalition Letter, supra note 54.
---------------------------------------------------------------------------

Effective Date
    The effective date of rule 151A is January 12, 2011. We originally
proposed that rule 151A, if adopted, would be effective 12 months after
publication in the Federal Register. We are persuaded by commenters,
however, that additional time is required for, among other things,
making the determinations required by the rule, preparing registration
statements for indexed annuities that are required to be registered,
and establishing the needed infrastructure for distributing registered
indexed annuities.\128\ Based on the comments, we believe that a
January 12, 2011 effective date will provide the time needed to
accomplish these tasks.\129\ We note that, during this period, the
Commission intends to consider how to tailor disclosure requirements
for indexed annuities and will also consider any requests for
additional guidance that we receive concerning the determinations
required under rule 151A.\130\
---------------------------------------------------------------------------

    \128\ Letter of American International Group (Sept. 10, 2008)
(``AIG Letter''); Aviva Letter, supra note 54; CAI 151A Letter,
supra note 54; NAVA Letter, supra note 106; Letter of New York Life
Insurance Company (Sept. 18, 2008) (``NY Life Letter''); Sammons
Letter, supra note 54.
    \129\ AIG Letter, supra note 128 (recommending transition period
of 2 years); Aviva Letter, supra note 54 (at least 24 months); CAI
151A Letter, supra note 54 (24 months); Letter of NAVA (Nov. 17,
2008) (``Second NAVA Letter'') (at least 24 months); NY Life Letter,
supra note 128 (at least 24 months).
    \130\ See supra text accompanying notes 95 and 121.
---------------------------------------------------------------------------

    The new definition in rule 151A will apply prospectively as we
proposed--that is, only to indexed annuities issued on or after January
12, 2011. We are using our definitional rulemaking authority under
Section 19(a) of the Securities Act, and the explicitly prospective
nature of our rule is consistent with similar prospective rulemaking
that we have undertaken in the past when doing so was appropriate and
fair under the circumstances.\131\
---------------------------------------------------------------------------

    \131\ See, e.g., Securities Act Release No. 4896 (Feb. 1, 1968)
[33 FR 3142, 3143 (Feb. 17, 1968)] (``The Commission is aware that
for many years issuers of the securities identified in this rule
have not considered their obligations to be separate securities and
that they have acted in reliance on the view, which they believed to
be the view of the Commission, that registration under the
Securities Act was not required. Under the circumstances, the
Commission does not believe that such issuers are subject to any
penalty or other damages resulting from entering into such
arrangements in the past. Paragraph (b) provides that the rule shall
apply to transactions of the character described in paragraph (a)
only with respect to bonds or other evidence of indebtedness issued
after adoption of the rule.''). See also Securities Act Release No.
5316 (Oct. 6, 1972) [37 FR 23631, 23632 (Nov. 7, 1972)] (``The
Commission recognizes that the `no-sale' concept has been in
existence in one form or another for a long period of time. * * *
The Commission believes, after a thorough reexamination of the
studies and proposals cited above, that the interpretation embodied
in Rule 133 is no longer consistent with the statutory objectives of
the [Securities] Act. * * * Rule 133 is rescinded prospectively on
and after January 1, 1973. * * *'').
---------------------------------------------------------------------------

    We are aware that many insurance companies and sellers of indexed
annuities, such as insurance agents, broker-dealers, and registered
representatives of broker-dealers, in the absence of definitive
interpretation or definition by the Commission, have of necessity acted
in reliance on their own analysis of the legal status of indexed
annuities based on the state of the law prior to this rulemaking. Under
these circumstances, we do not believe that issuers and sellers of
indexed annuities should be subject to any additional legal risk
relating to their past offers and sales of indexed annuity contracts as
a result of the proposal and adoption of rule 151A.\132\
---------------------------------------------------------------------------

    \132\ See FSI Letter, supra note 106 (asking for clarification
that, like insurance company issuers, independent broker-dealers and
their affiliated financial advisers are not subject to any
additional legal risk relating to past offers and sales of indexed
annuities as a result of rule 151A).
---------------------------------------------------------------------------

    Several commenters requested clarification of the statement that
rule 151A will apply prospectively to indexed annuities issued on or
after the rule's effective date (i.e., January 12, 2011).\133\ As a
result, we are clarifying that if an indexed annuity has been issued to
a particular individual purchaser prior to January 12, 2011, then that
specific contract between that individual and the insurance company
(including any additional purchase payments made under the contract on
or after January 12, 2011) is not subject to rule 151A, and its status
under the federal securities laws is to be determined under the law as
it existed without reference to rule 151A. By contrast, if an indexed
annuity is issued to a particular individual purchaser on or after
January 12, 2011, then that specific contract between that individual
and the insurance company is subject to rule 151A, even if the same
form of indexed annuity was offered and sold prior to January 12, 2011,
and even if the individual contract issued on or after January 12,
2011, is issued under a group contract that was in place prior to
January 12, 2011.
---------------------------------------------------------------------------

    \133\ See, e.g., AIG Letter, supra note 128; Hartford Letter,
supra note 55; Letter of North American Securities Administrators
Association (Sept. 10, 2008) (``NASAA Letter'').
---------------------------------------------------------------------------

    The Commission believes that permitting new sales of an existing
form of contract (as opposed to additional purchase payments made under
a specific existing contract between an individual and an insurance
company) after the rule's effective date without reference to the rule
is contrary to the purpose of the rule. If the rule were not applicable
to all contracts issued on or after the effective date without regard
to when the forms of the contracts were originally sold, then two
substantially similar contracts could be sold after the effective date,
one not subject to the rule and one subject to the rule, even though
they present the same level of risk to the purchaser and present the
same need for investor protection. The fact that one was designed and
released into the marketplace prior to January 12, 2011, and the other
was designed and released into the marketplace after that date should
not be a determining factor as to the availability of the protections
of the federal securities laws. We note that, because we have extended
the effective date to January 12, 2011, insurers should have adequate
time to prepare for compliance with rule 151A.
    Some commenters raised concerns that the registration of an indexed
annuity as required by rule 151A could cause offers and sales of the
same annuity that occurred on an unregistered basis after adoption but
prior to the effective date of the rule, January 12, 2011, to be
unlawful under Section 5 of the Securities Act.\134\
---------------------------------------------------------------------------

    \134\ See, e.g., Aviva Letter, supra note 54; CAI 151A Letter,
supra note 54; Sammons Letter, supra note 54.
---------------------------------------------------------------------------

    We reiterate that nothing in this adopting release is intended to
affect the current analysis of the legal status of indexed annuities
until the effective date of rule 151A. Therefore, after the adoption of
rule 151A but prior to the effective date of the rule:
     An indexed annuity issuer making unregistered offers and
sales of a contract that will not be an ``annuity contract'' or
``optional annuity contract'' under rule 151A may continue to do so
until the effective date of rule 151A without such offers and sales
being

unlawful under Section 5 of the Securities Act as a result of the
pending effectiveness of rule 151A; and
     An indexed annuity issuer that wishes to register a
contract that will not be an ``annuity contract'' or ``optional annuity
contract'' under rule 151A may continue to make unregistered offers and
sales of the same annuity until the earlier of the effective date of
the registration statement or the effective date of the rule without
such offers and sales being unlawful under Section 5 of the Securities
Act as a result of the pending effectiveness of rule 151A.
Annuities Not Covered by the Definition
    Rule 151A applies to annuities where the contract specifies that
amounts payable by the insurance company under the contract are
calculated at or after the end of one or more specified crediting
periods, in whole or in part, by reference to the performance during
the crediting period or periods of a security, including a group or
index of securities. The rule defines certain of those annuities
(annuities under which amounts payable by the issuer are more likely
than not to exceed the amounts guaranteed under the contract) as not
``annuity contracts'' or ``optional annuity contracts'' under Section
3(a)(8) of the Securities Act. The rule, however, does not provide a
safe harbor under Section 3(a)(8) for any other annuities, including
any other indexed annuities. The status under the Securities Act of any
annuity, other than an annuity that is determined under rule 151A to be
not an ``annuity contract'' or ``optional annuity contract,'' continues
to be determined by reference to the investment risk and marketing
tests articulated in existing case law under Section 3(a)(8) and, to
the extent applicable, the Commission's safe harbor rule 151.\135\
---------------------------------------------------------------------------

    \135\ As noted in Part II.B., above, indexed annuities are not
entitled to rely on the rule 151 safe harbor.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission, instead of adopting
a rule that defines certain indexed annuities as not being ``annuity
contracts'' under Section 3(a)(8), should instead define a safe harbor
that would provide that indexed annuities that meet certain conditions
are entitled to the Section 3(a)(8) exemption.\136\ We are not adopting
this approach for two reasons. First, such a rule would not address in
any way the federal interest in providing investors with disclosure,
antifraud, and sales practice protections that arise when individuals
are offered indexed annuities that expose them to investment risk. A
safe harbor would address circumstances where purchasers of indexed
annuities are not entitled to the protections of the federal securities
laws; one of our primary goals is to address circumstances where
purchasers of indexed annuities are entitled to the protections of the
federal securities laws. We are concerned that many purchasers of
indexed annuities today should be receiving the protections of the
federal securities laws, but are not. Rule 151A addresses this problem;
a safe harbor rule would not. Second, we believe that, under many of
the indexed annuities that are sold today, the purchaser bears
significant investment risk and is more likely than not to receive a
fluctuating, securities-linked return. In light of that fact, we
believe that is far more important to address this class of contracts
with our definitional rule than to address the remaining contracts, or
some subset of those contracts, with a safe harbor rule.
---------------------------------------------------------------------------

    \136\ See, e.g., Academy Letter, supra note 54; AIG Letter,
supra note 128; Aviva Letter, supra note 54; Second Academy Letter,
supra note 54; Second Aviva Letter, supra note 54; Second
Transamerica Letter, supra note 54; Letter of Life Insurance Company
of the Southwest (Sept. 10, 2008) (``Southwest Letter''); Voss
Letter, supra note 13.
---------------------------------------------------------------------------

B. Exchange Act Exemption for Securities That Are Regulated as
Insurance

    The Commission is also adopting new rule 12h-7 under the Exchange
Act, which provides an insurance company with an exemption from
Exchange Act reporting with respect to indexed annuities and certain
other securities issued by the company that are registered under the
Securities Act and regulated as insurance under state law.\137\ Sixteen
commenters supported the exemption.\138\ No commenters opposed the
exemption. We are adopting this exemption, with changes to the proposal
that address commenters' concerns, because we believe that the
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors. We base that view on two
factors: first, the nature and extent of the activities of insurance
company issuers, and their income and assets, and, in particular, the
regulation of those activities and assets under state insurance law;
and, second, the absence of trading interest in the securities.\139\
The new rule imposes conditions to the exemption that relate to these
factors and that we believe are necessary or appropriate in the public
interest and consistent with the protection of investors.
---------------------------------------------------------------------------

    \137\ The Commission received a petition requesting that we
propose a rule that would exempt issuers of certain types of
insurance contracts from Exchange Act reporting requirements. Letter
from Stephen E. Roth, Sutherland Asbill & Brennan LLP, on behalf of
Jackson National Life Insurance Co., to Nancy M. Morris, Secretary,
U.S. Securities and Exchange Commission (Dec. 19, 2007) (File No. 4-
553) available at: http://www.sec.gov/rules/petitions/2007/petn4-
553.pdf.
    \138\ See, e.g., ACLI Letter, supra note 94; Allianz Letter,
supra note 54; AXA Equitable Letter, supra note 106; Letter of
Committee of Annuity Insurers regarding proposed rule 12h-7 (Sept.
10, 2008) (``CAI 12h-7 Letter''); FSI Letter, supra note 106; Letter
of Great-West Life & Annuity Insurance Company (Sept. 10, 2008)
(``Great-West Letter''); ICI Letter, supra note 7; Letter of
MetLife, Inc. (Sept. 11, 2008) (``MetLife Letter''); NAVA Letter,
supra note 106; Sammons Letter, supra note 54.
    \139\ See Section 12(h) of the Exchange Act [15 U.S.C. 78l(h)]
(Commission may, by rules, exempt any class of issuers from the
reporting provisions of the Exchange Act ``if the Commission finds,
by reason of the number of public investors, amount of trading
interest in the securities, the nature and extent of the activities
of the issuer, income or assets of the issuer, or otherwise, that
such action is not inconsistent with the public interest or the
protection of investors.'') (emphasis added).
---------------------------------------------------------------------------

    State insurance regulation is focused on insurance company solvency
and the adequacy of insurers' reserves, with the ultimate purpose of
ensuring that insurance companies are financially secure enough to meet
their contractual obligations.\140\ State insurance regulators require
insurance companies to maintain certain levels of capital, surplus, and
risk-based capital; restrict the investments in insurers' general
accounts; limit the amount of risk that may be assumed by insurers; and
impose requirements with regard to valuation of insurers'
investments.\141\ Insurance companies are required to file annual
reports on their financial condition with state insurance regulators.
In addition, insurance companies are subject to periodic examination of
their financial condition by state insurance regulators. State
insurance regulators also preside over the conservation or liquidation
of companies with inadequate solvency.\142\
---------------------------------------------------------------------------

    \140\ Black and Skipper, supra note 39, at 949.
    \141\ Id. at 949 and 956-59.
    \142\ Id. at 949.
---------------------------------------------------------------------------

    State insurance regulation, like Exchange Act reporting, relates to
an entity's financial condition. We are of the view that, in
appropriate circumstances, it may be unnecessary for both to apply in
the same situation, which may result in duplicative regulation that is
burdensome. Through Exchange Act reporting, issuers periodically
disclose their financial condition, which enables investors and the
markets to independently evaluate an issuer's income, assets, and
balance sheet. State insurance regulation takes a different approach to
the issue of financial condition, instead relying on

state insurance regulators to supervise insurers' financial condition,
with the goal that insurance companies be financially able to meet
their contractual obligations. We believe that it is consistent with
our federal system of regulation, which has allocated the
responsibility for oversight of insurers' solvency to state insurance
regulators, to exempt insurers from Exchange Act reporting with respect
to state-regulated insurance contracts. Commenters asserted that, in
light of the protections available under state insurance regulation,
periodic reporting under the Exchange Act by state-regulated insurers
does not enhance investor protection with respect to the securities
covered under the rule.\143\
---------------------------------------------------------------------------

    \143\ CAI 12h-7 Letter, supra note 138; ICI Letter, supra note
7; MetLife Letter, supra note 138.
---------------------------------------------------------------------------

    Our conclusion is strengthened by the general absence of trading
interest in insurance contracts. Insurance is typically purchased
directly from an insurance company. While insurance contracts may be
assigned in some circumstances, they typically are not listed or traded
on securities exchanges or in other markets. As a result, outside the
context of publicly owned insurance companies, there is little, if any,
market interest in the information that is required to be disclosed in
Exchange Act reports.
1. The Exemption
    Rule 12h-7 provides an insurance company that is covered by the
rule with an exemption from the duty under Section 15(d) of the
Exchange Act to file reports required by Section 13(a) of the Exchange
Act with respect to certain securities registered under the Securities
Act.\144\
---------------------------------------------------------------------------

    \144\ Introductory paragraph to rule 12h-7. Cf. Rule 12h-3(a)
under the Exchange Act [17 CFR 240.12h-3(a)] (suspension of duty
under Section 15(d) of the Exchange Act to file reports with respect
to classes of securities held by 500 persons or less where total
assets of the issuer have not exceeded $10,000,000); Rule 12h-4
under the Exchange Act [17 CFR 240.12h-4] (exemption from duty under
Section 15(d) of the Exchange Act to file reports with respect to
securities registered on specified Securities Act forms relating to
certain Canadian issuers).
    Section 15(d) of the Exchange Act requires each issuer that has
filed a registration statement that has become effective under the
Securities Act to file reports and other information and documents
required under Section 13 of the Exchange Act [15 U.S.C. 78m] with
respect to issuers registered under Section 12 of the Exchange Act
[15 U.S.C. 78l]. Section 13(a) of the Exchange Act [15 U.S.C.
78m(a)] requires issuers of securities registered under Section 12
of the Act to file annual reports and other documents and
information required by Commission rule.
---------------------------------------------------------------------------

Covered Insurance Companies
    The Exchange Act exemption applies to an issuer that is a
corporation subject to the supervision of the insurance commissioner,
bank commissioner, or any agency or officer performing like functions,
of any state, including the District of Columbia, Puerto Rico, the
Virgin Islands, and any other possession of the United States.\145\ In
the case of a variable annuity contract or variable life insurance
policy, the exemption applies to the insurance company that issues the
contract or policy. However, the exemption does not apply to the
insurance company separate account in which the purchaser's payments
are invested and which is separately registered as an investment
company under the Investment Company Act of 1940 and is not regulated
as an insurance company under state law.\146\
---------------------------------------------------------------------------

    \145\ Rule 12h-7(a). The Exchange Act defines ``State'' as any
state of the United States, the District of Columbia, Puerto Rico,
the Virgin Islands, or any other possession of the United States.
Section 3(a)(16) of the Exchange Act [15 U.S.C. 78c(a)(16)]. The
term ``State'' in rule 12h-7 has the same meaning as in the Exchange
Act. Rule 12h-7 does not define the term ``State,'' and our existing
rules provide that, unless otherwise specifically provided, the
terms used in the rules and regulations under the Exchange Act have
the same meanings defined in the Exchange Act. See rule 240.0-1(b)
[17 CFR 240.0-1(b)].
    \146\ The separate account's Exchange Act reporting requirements
are deemed to be satisfied by filing annual reports on Form N-SAR.
17 CFR 274.101. See Section 30(d) of the Investment Company Act [15
U.S.C. 80a-30(d)] and rule 30a-1 under the Investment Company Act
[17 CFR 270.30a-1].
---------------------------------------------------------------------------

Covered Securities
    The exemption applies with respect to securities that do not
constitute an equity interest in the insurance company issuer and that
are either subject to regulation under the insurance laws of the
domiciliary state of the insurance company or are guarantees of
securities that are subject to regulation under the insurance laws of
that jurisdiction.\147\ The exemption does not apply with respect to
any other securities issued by an insurance company. As a result, if an
insurance company issues securities with respect to which the exemption
applies, and other securities that do not entitle the insurer to the
exemption, the insurer will remain subject to Exchange Act reporting
obligations. For example, if an insurer that is a publicly held stock
company \148\ also issues insurance contracts that are registered
securities under the Securities Act, the insurer generally would be
required to file Exchange Act reports as a result of being a publicly
held stock company. Similarly, if an insurer raises capital through a
debt offering, the exemption does not apply with respect to the debt
securities.
---------------------------------------------------------------------------

    \147\ Rule 12h-7(a)(2).
    \148\ A stock life insurance company is a corporation authorized
to sell life insurance, which is owned by stockholders and is formed
for the purpose of earning a profit for its stockholders. This is in
contrast to another prevailing insurance company structure, the
mutual life insurance company. In this structure, the corporation
authorized to sell life insurance is owned by and operated for the
benefit of its policy owners. Black and Skipper, supra note 39, at
577-78.
---------------------------------------------------------------------------

    The exemption is available with respect to securities that are
either subject to regulation under the insurance laws of the
domiciliary state of the insurance company or are guarantees of
securities that are subject to regulation under the insurance laws of
that jurisdiction.\149\ Rule 12h-7 is a broad exemption that applies to
any contract that is regulated under the insurance laws of the
insurer's home state because we intend that the exemption apply to all
contracts, and only those contracts, where state insurance law, and the
associated regulation of insurer financial condition, applies. A key
basis for the exemption is that investors are already entitled to the
financial condition protections of state law and that, under our
federal system of regulation, Exchange Act reporting may be
unnecessary. Therefore, we believe it is important that the reach of
the exemption and the reach of state insurance law be the same. A
single commenter addressed the scope of securities with respect to
which the proposed exemption would apply, supporting the Commission's
approach and noting that limiting the exemption to enumerated types of
securities would require the Commission to revisit the rule every few
years, or would provide a significant barrier to the introduction of
new investment products.\150\
---------------------------------------------------------------------------

    \149\ A domiciliary state is the jurisdiction in which an
insurer is incorporated or organized. See National Association of
Insurance Commissioners Model Laws, Regulations and Guidelines 555-
1, Sec.  104 (2007).
    \150\ Great-West Letter, supra note 138.
---------------------------------------------------------------------------

    The Exchange Act exemption applies both to certain existing types
of insurance contracts and to types of contracts that are developed in
the future and that are registered as securities under the Securities
Act. The exemption applies to indexed annuities that are registered
under the Securities Act. However, the Exchange Act exemption is
independent of rule 151A and applies to types of contracts in addition
to those that are covered by rule 151A. There are at least two types of
existing insurance contracts with respect to which the Exchange Act
exemption applies, contracts with so-called ``market value adjustment''
(``MVA'') features and insurance contracts that provide certain

guaranteed benefits in connection with assets held in an investor's
account, such as a mutual fund, brokerage, or investment advisory
account.
    Contracts including MVA features have, for some time, been
registered under the Securities Act.\151\ Insurance companies issuing
contracts with these features have also complied with Exchange Act
reporting requirements.\152\ MVA features have historically been
associated with annuity and life insurance contracts that guarantee a
specified rate of return to purchasers.\153\ In order to protect the
insurer against the risk that a purchaser may make withdrawals from the
contract at a time when the market value of the insurer's assets that
support the contract has declined due to rising interest rates,
insurers sometimes impose an MVA upon surrender. Under an MVA feature,
the insurer adjusts the proceeds a purchaser receives upon surrender
prior to the end of the guarantee period to reflect changes in the
market value of its portfolio securities supporting the contract.\154\
---------------------------------------------------------------------------

    \151\ Securities Act Release No. 6645, supra note 35, 51 FR at
20256-58.
    \152\ See, e.g., ING Life Insurance and Annuity Company (Annual
Report on Form 10-K (Mar. 31, 2008)); Protective Life Insurance
Company (Annual Report on Form 10-K (Mar. 31, 2008)); Union Security
Insurance Company (Annual Report on Form 10-K (Mar. 3, 2008)).
    \153\ Some indexed annuities also include MVA features. See,
e.g., Pre-Effective Amendment No. 4 to Registration Statement on
Form S-1 of PHL Variable Insurance Company (File No. 333-132399)
(filed Feb. 7, 2007); Initial Registration Statement on Form S-1 of
ING USA Annuity and Life Insurance Company (File No. 333-133153)
(filed Apr. 7, 2006); Pre-Effective Amendment No. 2 to Registration
Statement on Form S-3 of Allstate Life Insurance Company (File No.
333-117685) (filed Dec. 20, 2004).
    \154\ See Proposing Release, supra note 3, 73 FR at 37764
(describing MVA features).
---------------------------------------------------------------------------

    More recently, some insurance companies have registered under the
Securities Act insurance contracts that provide certain guarantees in
connection with assets held in an investor's account, such as a mutual
fund, brokerage, or investment advisory account.\155\ As a result, the
insurers become subject to Exchange Act reporting requirements if they
are not already subject to those requirements. These contracts, often
called ``guaranteed living benefits,'' are intended to provide
insurance to the purchaser against the risk of outliving the assets
held in the mutual fund, brokerage, or investment advisory
account.\156\
---------------------------------------------------------------------------

    \155\ See, e.g., PHL Variable Life Insurance Company, File No.
333-137802 (Form S-1 filed Feb. 25, 2008); Genworth Life and Annuity
Insurance Company, File No. 333-143494 (Form S-1 filed Apr. 4,
2008).
    \156\ See Proposing Release, supra note 3, 73 FR at 37764
(describing guaranteed living benefits).
---------------------------------------------------------------------------

    As noted above, the Exchange Act exemption also applies with
respect to a guarantee of a security if the guaranteed security is
subject to regulation under state insurance law.\157\ We are adopting
this provision because we believe that it is appropriate to exempt from
Exchange Act reporting an insurer that provides a guarantee of an
insurance contract (that is also a security) when the insurer would not
be subject to Exchange Act reporting if it had issued the guaranteed
contract. This situation may arise, for example, when an insurance
company issues a contract that is a security and its affiliate, also an
insurance company, provides a guarantee of benefits provided under the
first company's contract.\158\
---------------------------------------------------------------------------

    \157\ The Securities Act defines ``security'' in Section 2(a)(1)
of the Act [15 U.S.C. 77b(a)(1)]. That definition provides that a
guarantee of any of the instruments included in the definition is
also a security.
    \158\ For example, an insurance company may offer a registered
variable annuity, and a parent or other affiliate of the issuing
insurance company may act as guarantor for the issuing company's
insurance obligations under the contract.
---------------------------------------------------------------------------

    Finally, the exemption is not available with respect to any
security that constitutes an equity interest in the issuing insurance
company. As a general matter, an equity interest in an insurer is not
covered by the exemption because it is not subject to regulation under
state insurance law and often is publicly traded. Nonetheless, we
believe that the rule should expressly preclude any security that
constitutes an equity interest in the issuing insurance company from
being covered by the exemption. Where investors own an equity interest
in an issuing insurance company, and are therefore dependent on the
financial condition of the issuer for the value of that interest, we
believe that they have a significant interest in directly evaluating
the issuers' financial condition for themselves on an ongoing basis and
that Exchange Act reporting is appropriate.
2. Conditions to Exemption
    As described above, we believe that the exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors because of the existence of state regulation of insurers'
financial condition and because of the general absence of trading
interest in insurance contracts. The Exchange Act exemption that we are
adopting, like the proposal, is subject to conditions that are designed
to ensure that both of these factors are, in fact, present in cases
where an insurance company is permitted to rely on the exemption. We
have modified the conditions related to trading interest in one respect
to address the concerns of commenters. We have also added a condition
to the proposed rule in order to address a commenter's concern.

Regulation of Insurer's Financial Condition

    In order to rely on the exemption, an insurer must file an annual
statement of its financial condition with, and the insurer must be
supervised and its financial condition examined periodically by, the
insurance commissioner, bank commissioner, or any agency or any officer
performing like functions, of the insurer's domiciliary state.\159\
Commenters did not address this condition, and we are adopting this
condition as proposed. This condition is intended to ensure that an
insurer claiming the exemption is, in fact, subject to state insurance
regulation of its financial condition. Absent satisfaction of this
condition, Exchange Act reporting would not be duplicative of state
insurance regulation, and the exemption would not be available.
---------------------------------------------------------------------------

    \159\ Rule 12h-7(c). Cf. Section 26(f)(2)(B)(ii) and (iii) of
the Investment Company Act [15 U.S.C. 80a-26(f)(2)(B)(ii) and (iii)]
(using similar language in requirements that apply to insurance
companies that sell variable insurance products).
---------------------------------------------------------------------------

Absence of Trading Interest

    The Exchange Act exemption is subject to two conditions intended to
insure that there is no trading interest in securities with respect to
which the exemption applies, and we are modifying the proposed
conditions in one respect to address the concerns of commenters. First,
the securities may not be listed, traded, or quoted on an exchange,
alternative trading system,\160\ inter-dealer quotation system,\161\
electronic communications network, or any other similar system,
network, or publication for trading or quoting.\162\ This condition is
designed to ensure that there is no established trading market for the
securities. Second, the issuing insurance company must take steps
reasonably designed to ensure that a trading market for the securities
does

not develop.\163\ This includes, except to the extent prohibited by the
law of any state, including the District of Columbia, Puerto Rico, the
Virgin Islands, and any other possession of the United States,\164\ or
by action of the insurance commissioner, bank commissioner, or any
agency or officer performing like functions of any state, requiring
written notice to, and acceptance by, the issuer prior to any
assignment or other transfer of the securities and reserving the right
to refuse assignments or other transfers at any time on a non-
discriminatory basis. This condition is designed to ensure that the
insurer takes reasonable steps to ensure the absence of trading
interest in the securities.
---------------------------------------------------------------------------

    \160\ For this purpose, ``alternative trading system'' would
have the same meaning as in Regulation ATS. See 17 CFR 242.300(a)
(definition of ``alternative trading system'').
    \161\ For this purpose, ``inter-dealer quotation system'' would
have the same meaning as in Exchange Act rule 15c2-11. See 17 CFR
240.15c2-11(e)(2) (definition of ``inter-dealer quotation system'').
    \162\ Rule 12h-7(d).
    \163\ Rule 12h-7(e).
    \164\ See supra note 145 for a discussion of the term ``State''
as used in rule 12h-7.
---------------------------------------------------------------------------

    We are adopting the first condition, relating to the absence of
listing, trading, and quoting on any exchange or similar system,
network, or publication for trading or quoting, as proposed. We are not
adopting the suggestion of a commenter that the Commission limit this
condition to exchanges and other similar systems, networks, and
publications for trading or quoting that are registered with, or
regulated by, the Commission or a self-regulatory organization.\165\
The commenter argued that, absent this limitation, insurance companies
would be placed in the position of enforcing the Commission's
requirements by identifying any exchanges and other similar systems,
networks, and publications for trading or quoting that may arise from
time to time and operate in violation of the Commission's rules and
regulations. We disagree that this limitation is appropriate. We have
determined that the exemption provided by rule 12h-7 is necessary or
appropriate in the public interest and consistent with the protection
of investors, in part, because of the absence of trading interest in
the insurance contracts covered by the exemption. We do not believe
that there would be an absence of trading interest where an insurance
contract trades on an exchange or similar system, network, or
publication for trading or quoting, whether regulated by the Commission
or not.
---------------------------------------------------------------------------

    \165\ CAI 12h-7 Letter, supra note 138.
---------------------------------------------------------------------------

    We are modifying the second condition, which requires the issuing
insurance company to take steps reasonably designed to ensure that a
trading market for the securities does not develop. As the condition
was proposed, this would have included requiring written notice to, and
acceptance by, the insurance company prior to any assignment or
transfer of the securities and reserving the right to refuse
assignments or other transfers of the securities at any time on a non-
discriminatory basis.\166\ Under the adopted rule, these particular
steps will continue to be required, except to the extent that they are
prohibited by the law of any state or by action of the insurance
commissioner, bank commissioner, or any agency or officer performing
like functions of any state.
---------------------------------------------------------------------------

    \166\ Proposed rule 12h-7(e).
---------------------------------------------------------------------------

    This modification addresses the concern expressed by several
commenters that the proposed condition could, in some circumstances, be
inconsistent with applicable state law.\167\ The commenters stated that
some states may not permit restrictions on transfers or assignments
and, indeed, that some states specifically grant contract owners the
right to transfer or assign their contracts. In proposing the condition
relating to restrictions on assignment, it was not our intent to
require restrictions that are inconsistent with applicable state law.
Our modification to rule 12h-7 clarifies this and, accordingly,
addresses the commenters' concern.
---------------------------------------------------------------------------

    \167\ Allianz Letter, supra note 54; CAI 12h-7 Letter, supra
note 138; ICI Letter, supra note 7; NAVA, supra note 106; Sammons
Letter, supra note 54.
---------------------------------------------------------------------------

    Three commenters requested that the second condition be removed in
its entirety.\168\ These commenters stated that the second condition is
unnecessary, because the first should give sufficient comfort that a
trading market will not arise. The commenters also stated that this
condition would be difficult to apply. One of the commenters stated
that the condition is ambiguous, and that there is no clear definition
of ``trading market'' in the federal securities laws.\169\ We continue
to believe that the second condition is important because it will
ensure that the issuer takes steps reasonably designed to preclude the
development of a trading market. We do not believe that, as modified to
address concerns about inconsistency with state law, the second
condition will be unduly difficult to apply.
---------------------------------------------------------------------------

    \168\ CAI 12h-7 Letter, supra note 138; Sammons Letter, supra
note 54; Transamerica Letter, supra note 54; Second Transamerica
Letter, supra note 54.
    \169\ CAI 12h-7 Letter, supra note 138.
---------------------------------------------------------------------------

    Two commenters requested that rule 12h-7 include a transition
period for filing required reports under the Exchange Act for any
insurance company previously relying on the rule that no longer meets
its conditions.\170\ We do not believe that it would be appropriate to
include such a transition period because, if an insurer no longer meets
the conditions, this generally would mean that either the securities
are not regulated as insurance under state law or the securities are
traded or may become traded. In such a case, the very basis on which we
are granting the exemption would no longer exist. Therefore, we have
determined not to include such a transition period in rule 12h-7. If an
issuer no longer meets the conditions of the rule, it will immediately
become subject to the filing requirements of the Exchange Act. We
would, in any event, expect situations where an insurance company
ceases to meet the conditions of rule 12h-7 to be extremely rare. In
such a case, at an insurer's request, we would consider, based on the
particular facts and circumstances, whether individual exemptive relief
to provide for a transition period would be appropriate.
---------------------------------------------------------------------------

    \170\ Letter of Committee of Annuity Insurers regarding proposed
rule 12h-7 (Nov. 17, 2008) (``Second CAI 12h-7 Letter''); Second
Transamerica Letter, supra note 54.
---------------------------------------------------------------------------

Prospectus Disclosure
    We are adding a condition to proposed rule 12h-7 to require that,
in order for an insurer to be entitled to the Exchange Act exemption
provided by the rule with respect to securities, the prospectus for the
securities must contain a statement indicating that the issuer is
relying on the exemption provided by the rule.\171\ This addresses a
commenter's request that the Commission clarify that reliance on the
exemption is optional because some insurers may conclude that the
benefits that flow from the ability to incorporate by reference
Exchange Act reports may outweigh any costs associated with filing
those reports.\172\ The new condition will permit an insurance company
that desires to remain subject to Exchange Act reporting requirements
to do so by omitting the required statement from its prospectus. The
new provision also has the advantage of providing notice to investors
of an insurer's reliance on the exemption. An insurer who does not
include this statement will be subject to mandatory Exchange Act
reporting.\173\
---------------------------------------------------------------------------

    \171\ Rule 12h-7(f).
    \172\ CAI 12h-7 Letter, supra note 138. See Form S-1, General
Instruction VII.A. (incorporation by reference permitted only if,
among other things, registrant subject to Exchange Act reporting
requirements); Form S-3, General Instruction I.A.2. (Form S-3, which
permits incorporation by reference, available to registrant that,
among other things, is required to file Exchange Act reports).
    \173\ As described above, the exemption applies to an insurance
company that issues a variable annuity contract or variable life
insurance policy, but not to the associated separate account. See
supra note 146 and accompanying text. On or after the effective date
of rule 12h-7, the prospectus for a variable insurance contract with
respect to which the insurer does not file Exchange Act reports (and
therefore is relying on rule 12h-7) will be required to include the
statement that the insurer is relying on rule 12h-7.

---------------------------------------------------------------------------

3. Effective Date
    The effective date of rule 12h-7 is May 1, 2009.

IV. Paperwork Reduction Act

A. Background

    Rule 151A contains no new ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\174\ However, we believe that rule 151A will result in an
increase in the disclosure burden associated with existing Form S-1 as
a result of additional filings that will be made on Form S-1.\175\ Form
S-1 contains ``collection of information'' requirements within the
meaning of the PRA. Although we are not amending Form S-1, we have
submitted the Form S-1 ``collection of information'' (``Form S-1
Registration Statement'' (OMB Control No. 3235-0065)), which we
estimate will increase as a result of rule 151A, to the Office of
Management and Budget (``OMB'') for review and approval in accordance
with the PRA.\176\ We published notice soliciting comment on the
increase in the collection of information requirements in the release
proposing rule 151A and submitted the proposed collection of
information to OMB for review and approval in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    \174\ 44 U.S.C. 3501 et seq.
    \175\ 17 CFR 239.11.
    \176\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    We adopted Form S-1 pursuant to the Securities Act. This form sets
forth the disclosure requirements for registration statements that are
prepared by eligible issuers to provide investors with the information
they need to make informed investment decisions in registered
offerings. We anticipate that, absent amendments to our disclosure
requirements to specifically address indexed annuities, indexed
annuities that register under the Securities Act would generally
register on Form S-1.\177\ As a result, we have assumed, for purposes
of our PRA analysis, that this would be the case. We note, however,
that we are providing a two-year transition period for rule 151A and,
during this period, we intend to consider how to tailor disclosure
requirements for indexed annuities.\178\
---------------------------------------------------------------------------

    \177\ Some Securities Act offerings are registered on Form S-3
[17 CFR 239.13]. We do not believe that rule 151A will have any
significant impact on the disclosure burden associated with Form S-3
because we believe that very few, if any, insurance companies that
issue indexed annuities will be eligible to register those contracts
on Form S-3. In order to be eligible to file on Form S-3, an issuer
must, among other things, have filed Exchange Act reports for a
period of at least 12 calendar months. General Instruction I.A.3. of
Form S-3. Very few insurance companies that issue indexed annuities
are currently eligible to file Form S-3. Further, any insurance
companies that issue indexed annuities and rely on the Exchange Act
reporting exemption that we are adopting will not meet the
eligibility requirements for Form S-3. We believe that very few, if
any, issuers of indexed annuities will choose to be subject to the
reporting requirements of the Exchange Act because of the costs that
this would impose. In any event, the number of indexed annuity
issuers that choose to be subject to the reporting requirements of
the Exchange Act would be insignificant compared to the total number
of Exchange Act reporting companies, which is approximately 12,100.
The number of indexed annuity issuers in 2007 was 58. NAVA, supra
note 9, at 57.
    We also do not believe that the rules will have any significant
impact on the disclosure burden associated with reporting under the
Exchange Act on Forms 10 K, 10 Q, and 8 K. As a result of rule 12h-
7, insurance companies will not be required to file Exchange Act
reports on these forms in connection with indexed annuities that are
registered under the Securities Act, and, as noted in the prior
paragraph, we believe that very few, if any, issuers of indexed
annuities will choose to be subject to the reporting requirements of
the Exchange Act because of the costs that this would impose. While
rule 12h 7 will permit some insurance companies that are currently
required to file Exchange Act reports as a result of issuing
insurance contracts that are registered under the Securities Act, to
cease filing those reports, the number of such companies is
insignificant compared to the total number of Exchange Act reporting
companies. Likewise, we do not believe that the prospectus statement
required under rule 12h-7 for insurers relying on that rule will
have any significant impact on the disclosure burden associated with
registration statements for insurance contracts that are securities
(Forms S-1, S-3, N-3, N-4, and N-6). We do not believe that the
currently approved collections of information for these forms will
change based on the rule 12h-7 prospectus statement.
    \178\ As noted above, some commenters expressed concern about
what they believed to be a lack of a registration form that is well-
suited to indexed annuities. See supra text accompanying notes 94
and 95.
---------------------------------------------------------------------------

    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
    The information collection requirements related to registration
statements on Form S-1 are mandatory. There is no mandatory retention
period for the information disclosed, and the information disclosed
will be made publicly available on the EDGAR filing system.

B. Summary of Information Collection

    Because rule 151A will affect the number of filings on Form S-1 but
not the disclosure required by this form, we do not believe that the
rules will impose any new recordkeeping or information collection
requirements. However, we expect that some insurance companies will
register indexed annuities in the future that they would not previously
have registered. We believe this will result in an increase in the
number of annual responses expected with respect to Form S-1 and in the
disclosure burden associated with Form S-1. At the same time, we expect
that, on a per response basis, rule 151A will decrease the existing
disclosure burden for Form S-1. This is because the disclosure burden
for each indexed annuity on Form S-1 is likely to be lower than the
existing burden per respondent on Form S-1. The decreased burden per
response on Form S-1 will partially offset the increased burden
resulting from the increase in the annual number of responses on Form
S-1. We believe that, in the aggregate, the disclosure burden for Form
S-1 will increase as a result of the adoption of rule 151A.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the PRA, we estimate that the rule will result in
an annual increase in the paperwork burden for companies to comply with
the Form S-1 collection of information requirements of approximately
60,000 hours of in-house company personnel time and approximately
$72,000,000 for the services of outside professionals. These estimates
represent the combined effect of an expected increase in the number of
annual responses on Form S-1 and a decrease in the expected burden per
response. These estimates include the time and the cost of preparing
and reviewing disclosure, filing documents, and retaining records. Our
methodologies for deriving the above estimates are discussed below.
    We are adopting a new definition of ``annuity contract'' that, on a
prospective basis, defines a class of indexed annuities that are not
``annuity contracts'' or ``optional annuity contracts'' for purposes of
Section 3(a)(8) of the Securities Act, which provides an exemption
under the Securities Act for certain insurance contracts. These indexed
annuities will, on a prospective basis, be required to register under
the Securities Act on Form S-1.\179\
---------------------------------------------------------------------------

    \179\ Some Securities Act offerings are registered on Form S-3,
but we believe that very few, if any, insurance companies that issue
indexed annuities will be eligible to register those contracts on
Form S-3. See supra note 177.

---------------------------------------------------------------------------

    We received numerous comment letters on the proposal, and we have
revised proposed rule 151A in response to the comments. However, we do
not believe that any of the modifications affect the estimated
reporting and cost burdens discussed in this PRA analysis. These
modifications include:
    [cir] Revising the proposed definition so that the rule will apply
to a contract that specifies that amounts payable by the issuer under
the contract are calculated at or after the end of one or more
specified crediting periods, in whole or in part, by reference to the
performance during the crediting period or periods of a security,
including a group or index of securities; \180\
---------------------------------------------------------------------------

    \180\ Rule 151A(a)(1).
---------------------------------------------------------------------------

    [cir] Eliminating the provision in proposed rule 151A that the
issuer's determination as to whether amounts payable under the contract
are more likely than not to exceed the amounts guaranteed under the
contract be made not more than three years prior to the date on which
the particular contract is issued; \181\ and
---------------------------------------------------------------------------

    \181\ Proposed Rule 151A(b)(2)(iii).
---------------------------------------------------------------------------

    [cir] Adopting a requirement that amounts payable by the issuer and
amounts guaranteed are to be determined by taking into account all
charges under the contract, including, without limitation, charges that
are imposed at the time that payments are made by the issuer.\182\
---------------------------------------------------------------------------

    \182\ Rule 151A(b)(1).
---------------------------------------------------------------------------

    We do not believe that any of these changes will affect the annual
increase in the number of responses on Form S-1 or the hours per
response required. As we state below, we assume that all indexed
annuities that are offered on or after January 12, 2011, will be
registered, and that each of the 400 registered indexed annuities will
be the subject of one response per year on Form S-1. We do not expect
the changes in the rule, as adopted, to affect our estimates of the
increase in the number of annual responses required on Form S-1. The
first change, revising the scope of the rule, addresses commenters'
concerns that the rule was overly broad and would reach annuities that
were not indexed annuities, such as traditional fixed annuities and
discretionary excess interest contracts. While the revision clarifies
the intended scope of the rule to address these concerns, our PRA
estimates with respect to the proposed rule were based on the intended
scope of the proposed rule, which did not extend to these other types
of annuities. As a result, this change has no effect on our estimates
of the number of responses required on Form S-1. Our PRA estimates
assume that all indexed annuities that are offered will be registered,
and we do not believe that this assumption is affected by the
elimination of the requirement that an insurer's determination under
rule 151A be made not more than three years prior to the date on which
a particular contract is issued or the change to the manner of taking
charges into account under the rule. In addition, the changes in the
rule will not affect the information required to be disclosed by Form
S-1, or the time required to prepare and file the form.
Increase in Number of Annual Responses
    For purposes of the PRA, we estimate that there will be an annual
increase of 400 responses on Form S-1 as a result of the rule. In 2007,
there were 322 indexed annuity contracts offered.\183\ For purposes of
the PRA analysis, we assume that 400 indexed annuities will be offered
each year. This allows for some escalation in the number of contracts
offered in the future over the number offered in 2007. Our Office of
Economic Analysis has considered the effect of the rule on indexed
annuity contracts with typical terms and has determined that these
contracts would not meet the definition of ``annuity contract'' or
``optional annuity contract'' if they were to be issued after the
effective date of the rule. Therefore, we assume that all indexed
annuities that are offered will be registered, and that each of the 400
registered indexed annuities will be the subject of one response per
year on Form S-1,\184\ resulting in the estimated annual increase of
400 responses on Form S-1.
---------------------------------------------------------------------------

    \183\ See NAVA, supra note 9, at 57.
    \184\ Annuity contracts are typically offered to purchasers on a
continuous basis, and as a result, an insurer offering an annuity
contract that is registered under the Securities Act generally will
be required to update the registration statement once a year. See
Section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)] (when
prospectus used more than 9 months after effective date of
registration statement, information therein generally required to be
not more than 16 months old).
---------------------------------------------------------------------------

Decrease in Expected Hours per Response
    For purposes of the PRA, we estimate that there will be a decrease
of 120 hours per response on Form S-1 as a result of the rule. Current
OMB approved estimates and recent Commission rulemaking estimate the
hours per response on Form S-1 as 950.\185\ The current hour estimate
represents the burden for all issuers, both large and small. We believe
that registration statements on Form S-1 for indexed annuities will
result in a significantly lower number of hours per response, which,
based on our experience with other similar contracts, we estimate as
600 hours per indexed annuity response on Form S-1. We attribute this
lower estimate to two factors. First, the estimated 400 indexed annuity
registration statements will likely be filed by far fewer than 400
different insurance companies,\186\ and a significant part of the
information in each of the multiple registration statements filed by a
single insurance company will be the same, resulting in economies of
scale with respect to the multiple filings. Second, many of the 400
responses on Form S-1 each year will be annual updates to registration
statements for existing contracts, rather than new registration
statements, resulting in a significantly lower hour burden than a new
registration statement.\187\ Combining our estimate of 600 hours per
indexed annuity response on Form S-1 (for an estimated 400 responses)
with the existing estimate of 950 hours per response on Form S-1 (for
an estimated 768 responses),\188\ our new estimate is 830 hours per
response (((400 x 600) + (768 x 950))/1168).
---------------------------------------------------------------------------

    \185\ These estimates have been revised by other rules that the
Commission has adopted, and OMB approval is pending. See Supporting
Statement to the Office of Management and Budget under the PRA for
Securities Act Release No. 8876, available at: http://
www.reginfo.gov/public/do/
DownloadDocument?documentID=90204&version=0 (``33-8876 Supporting
Statement'').
    \186\ The 322 indexed annuities offered in 2007 were issued by
58 insurance companies. See NAVA, supra note 9, at 57.
    \187\ See supra note 184.
    \188\ See 33-8876 Supporting Statement, supra note 185.
---------------------------------------------------------------------------

Net Increase in Burden
    To calculate the total effect of the rules on the overall
compliance burden for all issuers, large and small, we added the burden
associated with the 400 additional Forms S-1 that we estimate will be
filed annually in the future and subtracted the burden associated with
our reduced estimate of 830 hours for each of the current estimated 768
responses. We used current OMB approved estimates in our calculation of
the hours and cost burden associated with preparing, reviewing, and
filing Form S-1.
    Consistent with current OMB approved estimates and recent
Commission rulemaking,\189\ we estimate that 25% of the burden of
preparation of Form S-1 is carried by the company

internally and that 75% of the burden is carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.\190\ The portion of the burden carried by outside professionals
is reflected as a cost, while the burden carried by the company
internally is reflected in hours.
---------------------------------------------------------------------------

    \189\ See Securities Act Release No. 8878 (Dec. 19, 2007) [72 FR
73534, 73547 (Dec. 27, 2007)].
    \190\ Id. at note 110 and accompanying text.
---------------------------------------------------------------------------

    The tables below illustrate our estimates concerning the
incremental annual compliance burden in the collection of information
in hours and cost for Form S-1.

             Incremental PRA Burden Due to Increased Filings
------------------------------------------------------------------------
 Estimated increase in                              Incremental burden
    annual responses         Hours/ response              (hours)
------------------------------------------------------------------------
              400                      830                 332,000
------------------------------------------------------------------------

Incremental Decrease in PRA Burden Due to Decrease in Hours Per Response
------------------------------------------------------------------------
                            Current estimated
 Estimated decrease in       number of annual      Incremental decrease
     hours/response              filings             in burden (hours)
------------------------------------------------------------------------
            (120)                      768                (92,200)
------------------------------------------------------------------------

                               Summary of Change in Incremental Compliance Burden
----------------------------------------------------------------------------------------------------------------
                                                                           75% Professional        $400/hr.
             Incremental burden (hours)               25% Issuer (hours)        (hours)        professional cost
----------------------------------------------------------------------------------------------------------------
240,000.............................................             60,000             180,000         $72,000,000
----------------------------------------------------------------------------------------------------------------

D. Response to Comments on Commission's Paperwork Reduction Act
Analysis

    A few commenters commented on the Commission's Paperwork Reduction
Act analysis in the Proposing Release.\191\ One commenter stated that
external costs of registering indexed annuities on Form S-1 will vary
considerably depending on whether the insurer has previously prepared a
Form S-1.\192\ The commenter stated that, for insurers that have not
previously prepared a Form S-1 registration statement, external legal
costs could be as high as $250,000-$500,000 for each registration
statement. The same commenter estimated external legal costs for an
issuer that has previously filed a Form S-1 at $50,000-$100,000.
Another commenter estimated external legal costs for preparation and
filing of a Form S-1 registration statement with the SEC at $350,000
for the first few years, which, the commenter stated, would decrease
over time as the insurer gained more expertise.\193\ However, these
commenters did not specify the sources of these cost estimates or how
they were made.
---------------------------------------------------------------------------

    \191\ See, e.g., Allianz Letter, supra note 54; Second Aviva
Letter, supra note 54; Letter of National Association for Fixed
Annuities (Nov. 17, 2008) (``Second NAFA Letter''); Transamerica
Letter, supra note 54.
    \192\ Allianz Letter, supra note 54.
    \193\ Second Aviva Letter, supra note 54.
---------------------------------------------------------------------------

    As stated above, we estimate the average burden per indexed annuity
response on Form S-1 to be 600 hours. We further estimate that 75% of
that burden will be carried by outside professionals retained by the
issuer at an average cost of $400 per hour. Accordingly, we estimate
the cost for outside professionals for each indexed annuity
registration statement on Form S-1 to be on average $180,000 ((600 x
.75) x $400). We do not believe that it is necessary to change our
estimate of outside professional costs based on the commenters'
estimated costs. The $250,000-$500,000 range cited by the commenters is
for an issuer that has not previously filed a Form S-1, with commenters
acknowledging that the costs to an experienced filer would be lower (as
low as $50,000-$100,000). Our $180,000 estimate reflects outside
professional costs incurred not only by first-time Form S-1 filers, but
also the costs of preparing Form S-1 for contracts offered by
experienced Form S-1 filers, as well as annual updates to existing Form
S-1 registration statements, which we expect to be significantly lower
than costs incurred by first-time filers.
    One commenter cites a cost of $255,000 for the insurer to prepare a
registration statement.\194\ It is not clear whether this cost
represents only external costs or total costs. The commenter also
estimates the cost of preparing a registration statement for certain
types of carriers at $62,500 \195\ and further indicates that there are
27 such carriers issuing indexed annuities, which is approximately half
the number of insurers currently issuing indexed annuities.\196\
Because the commenter does not provide information as to the basis for
the $255,000 figure, and because the $62,500 figure is substantially
below the Commission's estimate of $180,000, we are not revising our
estimate of the burden of registering an indexed annuity on Form S-1 to
reflect these estimates.
---------------------------------------------------------------------------

    \194\ Second NAFA Letter, supra note 191.
    \195\ This estimate is for carriers ``without variable
authority.'' The commenter does not explain the meaning of the
phrase ``without variable authority.''
    \196\ NAVA, supra note 9, at 57 (58 companies issued indexed
anuities in 2007).
---------------------------------------------------------------------------

    Another commenter stated that the Commission's estimate of outside
professional costs of $400 per hour does not reflect market rates for
securities counsel.\197\ However, the commenter did not cite a
different rate and did not explain the basis for its disagreement with
the $400 per hour rate cited by the Commission. Our estimate of $400
per hour for outside professionals retained by the issuer is consistent
with recent rulemakings and is based on discussions between our staff
and several law firms.\198\ Accordingly, we are not changing our
estimate of the cost per hour of outside professional costs. The
commenter further stated that the estimates of time involved are low
for persons unfamiliar with the process of registration of securities
under the federal securities laws and the anticipated need for
interaction with Commission staff. However, as discussed, our estimate
of time required to prepare a registration statement reflects time
needed not only by first-time Form S-1 filers, but also the time
involved in preparing Form S-1 for contracts offered by experienced
Form S-1 filers, as well as annual updates to the existing Form S-1
registration statement, which we expect to be significantly less than
time needed by first-time filers. We are not revising our estimate of
time involved in preparing registration statements on Form S-1.
---------------------------------------------------------------------------

    \197\ Transamerica Letter, supra note 54.
    \198\ See, e.g., Securities Act Release No. 8909 (Apr. 10, 2008)
[73 FR 20512, 20515 (Apr. 15, 2008)] (``Revisions to Form S-11
Release'').
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by
its rules. Rule 151A is intended to clarify the status under the
federal securities laws

of indexed annuities, under which payments to the purchaser are
dependent on the performance of a securities index. Section 3(a)(8) of
the Securities Act provides an exemption for certain insurance
contracts. The rule prospectively defines certain indexed annuities as
not being ``annuity contracts'' or ``optional annuity contracts'' under
this insurance exemption if the amounts payable by the insurer under
the contract are more likely than not to exceed the amounts guaranteed
under the contract. With respect to these annuities, investors are
entitled to all the protections of the federal securities laws,
including full and fair disclosure and sales practice protections. We
are also adopting new rule 12h-7 under the Exchange Act, which exempts
certain insurance companies from Exchange Act reporting with respect to
indexed annuities and certain other securities that are registered
under the Securities Act and regulated as insurance under state law.
    In the Proposing Release, we identified certain costs and benefits
and requested comment on our cost-benefit analysis, including
identification of any costs and benefits not discussed. We also
requested that commenters provide empirical data and factual support
for their views.
    Discussed below is our analysis of the costs and benefits of rules
151A and 12h-7, as well as the issues raised by commenters. As noted
above, we are sensitive to the costs imposed by our rules and we have
estimated the costs associated with adoption of rule 151A. We
emphasize, however, that the burdens of complying with the federal
securities laws apply to all market participants who issue or sell
securities under the federal securities laws. Rule 151A, by defining
those indexed annuities that are not entitled to the Section 3(a)(8)
exemption, does not impose any greater or different burdens than those
imposed on other similarly situated market participants. Rather, the
effect of rule 151A is that issuers and sellers of indexed annuities
that are not entitled to the Section 3(a)(8) exemption are treated in
the same manner under the federal securities laws as issuers and
sellers of other registered securities, and that investors purchasing
these instruments receive the same disclosure, antifraud, and sales
practice protections that apply when they are offered and sold other
securities that pose similar investment risks.

A. Benefits

    We anticipate that the rules will benefit investors and covered
institutions by: (i) Creating greater regulatory certainty with regard
to the status of indexed annuities under the federal securities laws;
(ii) enhancing disclosure of information needed to make informed
investment decisions about indexed annuities; (iii) applying sales
practice protections to those indexed annuities that are outside the
insurance exemption; (iv) enhancing competition; and (v) relieving from
Exchange Act reporting obligations insurers that issue certain
securities that are regulated as insurance under state law.
Regulatory Certainty
    Rule 151A will provide the benefit of increased regulatory
certainty to insurance companies that issue indexed annuities and the
distributors who sell them, as well as to purchasers of indexed
annuities. The status of indexed annuities under the federal securities
laws has been uncertain since their introduction in the mid-1990s.
Under existing precedents, the status of each indexed annuity is
determined based on a facts and circumstances analysis of factors that
have been articulated by the U.S. Supreme Court. Rule 151A will bring
greater certainty into this area by defining a class of indexed
annuities that are outside the scope of the insurance exemption and by
providing that an insurer's determination, in accordance with the rule,
will be conclusive.
    Indexed annuities possess both insurance and securities features,
and fall somewhere between traditional fixed annuities, which are
clearly insurance falling within Section 3(a)(8), and variable
annuities, which are clearly securities. We have carefully considered
where to draw the line, and we believe that the line that we have drawn
is rational and reasonably related to fundamental concepts of risk and
insurance.
    Some commenters agreed that the proposal would provide greater
regulatory certainty.\199\ One commenter stated that current
uncertainty regarding the status of indexed annuities has impeded the
ability of regulators to protect indexed annuity consumers,\200\ and
another stated that it is apparent that clarification is needed and
will set a clear national standard of regulatory oversight for indexed
annuities.\201\ Some commenters, however, expressed concern that the
principles-based approach provides insufficient guidance regarding
implementation and the methodologies and assumptions that are
appropriate and could result in inconsistent determinations by
different insurance companies and present enforcement and litigation
risk.\202\ While we believe that further guidance may be helpful in
response to specific questions from affected insurance companies,
commenters generally did not articulate with specificity the areas
where they believe that further guidance is required. As a result, in
order to provide guidance in the manner that would be most helpful, we
encourage insurance companies, sellers of indexed annuities, and other
affected parties to submit specific requests for guidance, which we
will consider during the two-year period between adoption of rule 151A
and its effectiveness.
---------------------------------------------------------------------------

    \199\ See, e.g., Advantage Group Letter, supra note 54; Cornell
Letter, supra note 7; FINRA Letter, supra note 7; ICI Letter, supra
note 7; Letter of State of Washington Department of Financial
Institutions Securities division (Nov. 17, 2008) (``Washington State
Letter'').
    \200\ FINRA Letter, supra note 7.
    \201\ Washington State Letter, supra note 199.
    \202\ See supra note 119.
---------------------------------------------------------------------------

Disclosure
    Rule 151A extends the benefits of full and fair disclosure under
the federal securities laws to investors in indexed annuities that,
under the rule, fall outside the insurance exemption. Without such
disclosure, investors face significant obstacles in making informed
investment decisions with regard to purchasing indexed annuities that
expose them to investment risk. Indexed annuities are similar in many
ways to mutual funds, variable annuities, and other securities.
Investors in indexed annuities are confronted with many of the same
risks and benefits that other securities investors are confronted with
when making investment decisions. Extending the federal securities
disclosure regime to indexed annuities under which amounts payable by
the insurer are more likely than not to exceed the amounts guaranteed
should help to provide investors with the information they need.
    Disclosures required for registered indexed annuities include
information about costs (such as surrender charges); the method of
computing indexed return (e.g., applicable index, method for
determining change in index, caps, participation rates, spreads);
minimum guarantees, as well as guarantees, or lack thereof, with
respect to the method for computing indexed return; and benefits (lump
sum, as well as annuity and death benefits). We think there are
significant benefits to the disclosures provided under the federal
securities laws. This information will be public and accessible to all
investors, intermediaries, third party information providers, and
others through the

Commission's Electronic Data Gathering, Analysis and Retrieval
(``EDGAR'') system. Public availability of this information will be
helpful to investors in making informed decisions about purchasing
indexed annuities. The information will enhance investors' ability to
compare various indexed annuities and also to compare indexed annuities
with mutual funds, variable annuities, and other securities and
financial products. The potential liability for materially false and
misleading statements and omissions under the federal securities laws
will provide additional encouragement for accurate and complete
disclosures by insurers that issue indexed annuities and by the broker-
dealers who sell them.\203\
---------------------------------------------------------------------------

    \203\ See, e.g., Section 12(a)(2) of the Securities Act [15
U.S.C. 77l(a)(2)] (imposing liability for materially false or
misleading statements in a prospectus or oral communication, subject
to a reasonable care defense). See also Section 10(b) of the
Exchange Act [15 U.S.C. 78j(b)]; rule 10-5 under the Exchange Act
[17 CFR 240.10b-;5]; Section 17 of the Securities Act [15 U.S.C.
77q] (general antifraud provisions).
---------------------------------------------------------------------------

    In addition, we believe that potential purchasers of indexed
annuities that an insurer determines do not fall outside the insurance
exemption under the rule may benefit from enhanced information that
will help a purchaser to evaluate the value of the contract and,
specifically, the index-based return. Specifically, an indexed annuity
that is not registered under the Securities Act after the effective
date of rule 151A would reflect the insurer's determination that
investors in the annuity will not receive more than the amounts
guaranteed under the contract at least half the time.
    A number of commenters acknowledged the need for improved
disclosures and agreed that indexed annuity purchasers will benefit
from disclosures required under the federal securities laws.\204\ These
commenters noted that indexed annuities are complicated products that
can confuse experienced investment professionals and consumers, and
strongly supported rule 151A as improving critical disclosures about
these products. One commenter expressed strong support for enhanced
disclosures regarding critical costs of indexed annuities, such as
surrender charges, and the method of computing indexed returns, as well
as guaranteed interest rates.\205\ Another commenter noted that the
Commission could greatly improve consumer protection by subjecting
indexed annuities that are not ``annuity contracts'' under rule 151A to
the ``thorough, standardized, accessible, and transparent disclosure
requirements and antifraud rules of the federal securities laws.''
\206\
---------------------------------------------------------------------------

    \204\ See, e.g., Alabama Letter, supra note 72; Cornell Letter,
supra note 7; FPA Letter, supra note 72; Hartford Letter, supra note
55.
    \205\ FPA Letter, supra note 72.
    \206\ Hartford Letter, supra note 55.
---------------------------------------------------------------------------

    However, some commenters argued that the proposed rule would not
result in enhanced disclosure, in particular because the Commission's
disclosure scheme is not tailored to indexed annuities and Form S-1 is
not well-suited to indexed annuities.\207\ We acknowledge that, as a
result of indexed annuity issuers having historically offered and sold
their contracts without complying with the federal securities laws, the
Commission has not created specific disclosure requirements tailored to
these products. This fact, though, is not relevant in determining
whether indexed annuities are subject to the federal securities laws.
The Commission has a long history of creating appropriate disclosure
requirements for different types of securities, including securities
issued by insurance companies, such as variable annuities and variable
life insurance.\208\ We note that we are providing a two-year
transition period for rule 151A, and, during this period, we intend to
consider how to tailor disclosure requirements for indexed annuities.
We encourage indexed annuity issuers to work with the Commission during
that period to address their concerns.
---------------------------------------------------------------------------

    \207\ See supra note 94 and accompanying text.
    \208\ See Form N-4 [17 CFR 239.17b and 274.11c] (registration
form for variable annuities); Form N-6 [17 CFR 239.17c and 274.11d]
(registration form for variable life insurance).
---------------------------------------------------------------------------

    Some commenters also cited recent efforts by state insurance
regulators to address disclosure concerns with respect to indexed
annuities as evidence that federal securities regulation is
unnecessary.\209\ However, as we state above, we disagree. We do not
believe that the states' regulatory efforts, no matter how strong, can
substitute for our obligation to identify securities covered by the
federal securities laws and the protections Congress intended to apply.
State insurance laws, enforced by multiple regulators whose primary
charge is the solvency of the issuing insurance company, cannot serve
as an adequate substitute for uniform, enforceable investor protections
provided by the federal securities laws.
---------------------------------------------------------------------------

    \209\ See supra note 81 and accompanying text.
---------------------------------------------------------------------------

    We have carefully considered the concerns raised by commenters, and
we continue to believe that rule 151A will greatly enhance disclosures
regarding indexed annuities. In addition to the specific benefits
described above, we anticipate that these enhanced disclosures will
also benefit the overall financial markets and their participants.
    We anticipate that the disclosure of terms of indexed annuities
will be broadly beneficial to investors, enhancing the efficiency of
the market for indexed annuities through increased competition.
Disclosure will make information on indexed annuity contracts,
including terms, publicly available. Public availability of terms will
better enable investors to compare indexed annuities and may focus
attention on the price competitiveness of these products. It will also
improve the ability of third parties to price contracts, giving
purchasers a better understanding of the fees implicit in the products.
We anticipate that third-party information providers may provide
services to price or compare terms of different indexed annuities.
Analogously, we note that public disclosure of mutual fund information
has enabled third-party information aggregators to facilitate
comparison of fees.\210\ We believe that increasing the level of price
transparency and the resulting competition through enhanced disclosure
regarding indexed annuities would be beneficial to investors. It could
also expand the size of the market, as investors may have increased
confidence that indexed annuities are competitively priced.
---------------------------------------------------------------------------

    \210\ See, e.g., FINRA, Fund Analyzer, available at: http://
www.finra.org/fundanalyzer (``FINRA Fund Analyzer'').
---------------------------------------------------------------------------

Sales Practice Protections
    Investors will also benefit because, under the federal securities
laws, persons effecting transactions in indexed annuities that fall
outside the insurance exemption under rule 151A will be required to be
registered broker-dealers or become associated persons of a broker-
dealer through a networking arrangement. Thus, the broker-dealer sales
practice protections will apply to transactions in registered indexed
annuities. As a result, investors who purchase these indexed annuities
after the effective date of rule 151A will receive the benefits
associated with a registered representative's obligation to make only
recommendations that are suitable. The registered representatives who
sell registered indexed annuities will be subject to supervision by the
broker-dealer with which they are associated. Both the selling broker-
dealer and its registered representatives will be subject to the
oversight of FINRA.\211\ The registered broker-dealers

will also be required to comply with specific books and records,
supervisory, and other compliance requirements under the federal
securities laws, as well as be subject to the Commission's general
inspections and, where warranted, enforcement powers.
---------------------------------------------------------------------------

    \211\ Cf. NASD Rule 2821 (rule designed to enhance broker-
dealers' compliance and supervisory systems and provide more
comprehensive and targeted protection to investors regarding
deferred variable annuities). See Order Approving FINRA's NASD Rule
2821 Regarding Members' Responsibilities for Deferred Variable
Annuities (Approval Order), Securities Exchange Act Release No.
56375 (Sept. 7, 2007), 72 FR 52403 (Sept. 13, 2007) (SR-NASD-2004-
183); Corrective Order, Securities Exchange Act Release No. 56375A
(Sept. 14, 2007), 72 FR 53612 (September 19, 2007) (SR-NASD-2004-
183) (correcting the rule's effective date).
---------------------------------------------------------------------------

    A number of commenters agreed that indexed annuity purchasers will
benefit from the sales practice protections accorded by the federal
securities laws.\212\ These commenters indicated that sales practice
protections accorded by the federal securities laws are the most
effective means of preventing abusive sales practices. Some commenters
specifically stated that the protections of the federal securities laws
are needed for the protection of seniors in the indexed annuity
marketplace.\213\
---------------------------------------------------------------------------

    \212\ See, e.g., Alabama Letter, supra note 72; Cornell Letter,
supra note 7; FPA Letter, supra note 72; FINRA Letter, supra note 7;
Hartford Letter, supra note 55; Wyoming Letter, supra note 72.
    \213\ Alabama Letter, supra note 72; Wyoming Letter, supra note
72.
---------------------------------------------------------------------------

    As stated above, however, a number of commenters argued that,
because of efforts by state insurance regulators to address sales
practice concerns with respect to indexed annuities, federal securities
regulation is unnecessary and could result in duplicative or
overlapping regulation.\214\ Commenters cited, in particular, the
adoption by the majority of states of the NAIC Suitability in Annuity
Transactions Model Regulation.\215\ Commenters also cited the existence
of state market conduct examinations, the use of state enforcement and
investigative authority, licensing and education requirements
applicable to insurance agents who sell indexed annuities, and a number
of recent and ongoing efforts by state insurance regulators.\216\
Commenters also noted recent efforts by state regulators addressed to
annuities generally, such as the creation of NAIC working groups to
review and consider possible improvements to the NAIC Suitability in
Annuity Transactions Model Regulation.\217\
---------------------------------------------------------------------------

    \214\ See supra note 81 and accompanying text.
    \215\ NAIC Suitability in Annuity Transactions Model Regulation
(Model 275-1) (2003). National Association of Insurance
Commissioners, Draft Model Summaries, available at: http://
www.naic.org/committees_models.htm. See, e.g., Letter A, supra note
76; American Bankers Letter, supra note 74; CAI 151A Letter, supra
note 54; NAFA Letter, supra note 54; NAIC Officer Letter, supra note
54; NAIFA Letter, supra note 54.
    \216\ See, e.g., American Equity Letter, supra note 54; Aviva
Letter, supra note 54; Coalition Letter, supra note 54; Iowa Letter,
supra note 74; Maryland Letter, supra note 54; NAIC Officer Letter,
supra note 54; NAFA Letter, supra note 54.
    \217\ See, e.g., NAIC Officer Letter, supra note 54.
---------------------------------------------------------------------------

    However, for the same reasons that we do not believe recent state
disclosure efforts can substitute for federally required disclosures,
we do not believe that the state's efforts to address sales practice
concerns, no matter how strong, can substitute for our responsibility
to identify securities covered by the statutes and the protections
Congress intended to apply. State insurance laws, enforced by multiple
regulators whose primary charge is the solvency of the issuing
insurance company, cannot serve as an adequate substitute for uniform,
enforceable investor protections provided by the federal securities
laws.\218\ Where the purchaser of an indexed annuity assumes the
investment risk of an instrument that fluctuates with the securities
markets, and the contract therefore does not fall within the Section
3(a)(8) exemption, the application of state insurance regulation, no
matter how effective, is not determinative as to whether the contract
is subject to the federal securities laws.
---------------------------------------------------------------------------

    \218\ Indeed, at least one state regulator acknowledged the
developmental nature of state efforts and the lack of uniformity in
those efforts. See Voss Letter, supra note 13.
---------------------------------------------------------------------------

Enhanced Competition
    Rule 151A may result in enhanced competition among indexed
annuities, as well as between indexed annuities and other competing
financial products, such as mutual funds and variable annuities. Rule
151A will result in enhanced disclosure, and, as a result, more
informed investment decisions by potential investors, which may enhance
competition among indexed annuities and competing products. The greater
clarity that results from rule 151A may enhance competition as well
because insurers who may have been reluctant to issue indexed annuities
while their status was uncertain may now decide to enter the market.
Similarly, registered broker-dealers who currently may be unwilling to
sell unregistered indexed annuities because of their uncertain
regulatory status may become willing to sell indexed annuities that are
registered, thereby increasing competition among distributors of
indexed annuities. Further, we believe that the Exchange Act exemption
may enhance competition among insurance products and between insurance
products and other financial products because the exemption may
encourage insurers to innovate and introduce a range of new insurance
contracts that are securities, since the exemption will reduce the
regulatory costs associated with doing so. Increased competition may
benefit investors through improvements in the terms of insurance
products and other financial products, such as reductions of direct or
indirect fees.
    We anticipate that the disclosure of terms of indexed annuities
will be broadly beneficial to investors, enhancing the efficiency of
the market for indexed annuities through increased competition.
Disclosure will make information on indexed annuity contracts,
including terms, publicly available. Public availability of terms will
better enable investors to compare indexed annuities and may focus
attention on the price competitiveness of these products. It will also
improve the ability of third parties to price contracts, giving
purchasers a better understanding of the fees implicit in the products.
We anticipate that third-party information providers may provide
services to price or compare terms of different indexed annuities.
Analogously, we note that public disclosure of mutual fund information
has enabled third-party information aggregators to facilitate
comparison of fees.\219\ We believe that increasing the level of price
transparency and the resulting competition through enhanced disclosure
regarding indexed annuities would be beneficial to investors. It could
also expand the size of the market, as investors may have increased
confidence that indexed annuities are competitively priced.
---------------------------------------------------------------------------

    \219\ See, e.g., FINRA Fund Analyzer, supra note 210.
---------------------------------------------------------------------------

    A number of commenters argued that proposed rule 151A would hinder
competition, citing a number of factors that they argued would result
in indexed annuities becoming less available.\220\ Commenters indicated
that they did not believe that broker-dealers would become more willing
to sell indexed annuities.\221\ They stated that

broker-dealers have limited ``shelf space'' for new products.\222\ One
commenter stated that a broker-dealer would incur start-up costs in
selling indexed annuities, such as becoming familiar with the products,
performing due diligence, setting up supervisory systems, introducing
appropriate technology, and becoming licensed to sell insurance, and
these costs would deter a broker-dealer from selling indexed
annuities.\223\ A number of commenters stated that many agents
currently selling indexed annuities would stop selling them, rather
than incur the costs of becoming licensed to sell securities and
becoming associated with a broker-dealer.\224\ Two commenters stated
that some agents would not be able to associate with a broker-dealer
due to remote locations of the agents, so that rural areas would be
underserved.\225\ Commenters further pointed to obstacles to
distributors networking with registered broker-dealers.\226\ Commenters
also stated that some insurance companies may stop issuing indexed
annuities, because of the rule's adverse impact on distribution and
because of the costs that the rule would impose on insurers, such as
the cost of registering indexed annuities.\227\
---------------------------------------------------------------------------

    \220\ See, e.g., Advantage Group Letter, supra note 54; Allianz
Letter, supra note 54; American Equity Letter, supra note 54;
American National Letter, supra note 54; Aviva Letter, supra note
54; Coalition Letter, supra note 54; FBL Letter, supra note 73;
National Western Letter, supra note 54; Old Mutual Letter, supra
note 54; Southwest Letter, supra note 136.
    We note that a number of commenters supporting the proposal are
industry participants, such as insurers, see, e.g., Hartford letter,
supra note 55, and industry groups, see, e.g., ICI letter, supra
note 7.
    \221\ See, e.g., Allianz Letter, supra note 54; Aviva Letter,
supra note 54; Coalition Letter, supra note 54.
    \222\ See, e.g., Allianz Letter, supra note 54; Aviva Letter,
supra note 54.
    \223\ Allianz Letter, supra note 54.
    \224\ See, e.g., Allianz Letter, supra note 54; American Equity
Letter, supra note 54; Aviva Letter, supra note 54; Coalition
Letter, supra note 54.
    \225\ Second Old Mutual Letter, supra note 76; Southwest Letter,
supra note 136.
    \226\ See, e.g., American Equity Letter, supra note 54;
Coalition Letter, supra note 54; Old Mutual Letter, supra note 54.
    \227\ See, e.g., Aviva Letter, supra note 54; National Western
Letter, supra note 54; Old Mutual Letter, supra note 54.
---------------------------------------------------------------------------

    The Commission believes that there could be costs associated with
diminished competition as a result of rule 151A. As the commenters
note, some insurance companies may stop issuing indexed annuities, and
some broker-dealers and agents may determine not to sell indexed
annuities. We recognize that the impact of rule 151A on competition may
be mixed, but, on balance, we continue to believe that rule 151A will
provide the benefits described above and has the potential to increase
competition. In this regard, the demand for financial products is
relatively fixed, in the aggregate. Any potential reduction in indexed
annuities sold under the rule would likely correspond with an increase
in the sale of other financial products, such as mutual funds or
variable annuities. Thus, total reductions in competition may not be
significant, when effects on the financial industry as a whole,
including insurance companies together with other providers of
financial instruments, are considered. Within the insurance industry,
if some insurers cease selling indexed annuities, it is also likely
that these insurers will sell other products through the same
distribution channels, such as annuities with fixed interest rates.
Relief From Reporting Obligations
    The exemption from Exchange Act reporting requirements with respect
to certain securities that are regulated as insurance under state law
will provide a cost savings to insurers. We have identified
approximately 24 insurance companies that currently are subject to
Exchange Act reporting obligations solely as a result of issuing
insurance contracts that are securities and that we believe will be
entitled to an exemption from Exchange Act reporting obligations under
rule 12h-7.\228\ We estimate that, each year, these insurers file an
estimated 24 annual reports on Form 10-K, 72 quarterly reports on Form
10-Q, and 26 reports on Form 8-K.\229\ Based on current cost estimates,
we believe that the total estimated annual cost savings to these
companies will be approximately $15,414,600.\230\
---------------------------------------------------------------------------

    \228\ In addition, because we are adopting both rules 151A and
12h-7, insurers that currently are not Exchange Act reporting
companies and that will be required to register indexed annuities
under the Securities Act will be entitled to rely on the Exchange
Act exemption and obtain the benefits of the exemption. We have not
included potential cost savings to these companies in our
computation because they are not currently Exchange Act reporting
companies.
    \229\ These estimates are based on the requirement to file one
Form 10-K each year and three Forms 10-Q each year, and on our
review of the actual number of Form 8-K filings by these insurers in
calendar year 2007.
    \230\ This consists of $8,748,950 attributable to internal
personnel costs, representing 49,994 burden hours at $175 per hour,
and $6,665,600 attributable to the costs of outside professionals,
representing 16,664 burden hours at $400 per hour. Our estimates of
$175 per hour for internal time and $400 per hour for outside
professionals are consistent with the estimates that we have used in
recent rulemaking releases.
    Our total burden hour estimate for Forms 10-K, 10-Q, and 8-K is
66,658 hours, which, consistent with current OMB estimates and
recent Commission rulemaking, we have allocated 75% (49,994 hours)
to the insurers internally and 25% (16,664 hours) to outside
professional time. See Supporting Statement to the Office of
Management and Budget under the PRA for Securities Act Release No.
8819, available at: http://www.reginfo.gov/public/do/
DownloadDocument?documentID=42924&version=1. The total burden hour
estimate was derived as follows. The burden attributable to Form 10-
K is 52,704 hours, representing 24 Forms 10-K at 2,196 hours per
Form 10-K. The burden attributable to Form 10-Q is 13,824 hours,
representing 72 Forms 10-Q at 192 hours per Form 10-Q. The burden
attributable to Form 8-K is 130 hours, representing 26 Forms 8-K at
5 hours per Form 8-K. The burden hours per response for Form 10-K
(2,196 hours), Form 10-Q (192 hours), and Form 8-K (5 hours) are
consistent with current OMB estimates.
---------------------------------------------------------------------------

    One commenter estimated a higher cost savings.\231\ The commenter
estimated costs of $1.5-$2 million annually for an issuer to comply
with Exchange Act reporting obligations. Under our current cost
estimates, we estimate that it costs $642,275 per issuer \232\ to
comply with these obligations. We are not revising our estimate,
however, because the commenter did not explain how it arrived at its
estimate and we have no basis for determining whether or not it is
accurate.
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    \231\ Great-West Letter, supra note 138.
    \232\ The $642,275 cost was derived by dividing the total annual
cost savings for all insurance companies that we believe will be
entitled to the rule 12h-7 exemption ($15,414,600) by the number of
such companies (24). See supra text accompanying notes 228 and 230.
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B. Costs

    While the rules we are adopting will result in significant cost
savings for insurers as a result of the exemption from Exchange Act
reporting requirements, we believe that there will be costs associated
with the rules. These include costs associated with: (i) Determining
under rule 151A whether amounts payable by the insurer under an indexed
annuity are more likely than not to exceed the amounts guaranteed under
the contract; (ii) preparing and filing required Securities Act
registration statements with the Commission; (iii) printing
prospectuses and providing them to investors; (iv) entering into a
networking arrangement with a registered broker-dealer for those
entities that are not currently parties to a networking arrangement or
registered as broker-dealers and that intend to distribute indexed
annuities that are registered as securities; \233\ (v) loss of revenue
to insurance companies that determine to cease issuing indexed
annuities; and (vi) diminished competition that may result.
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    \233\ While some distributors may register as broker-dealers or
cease distributing indexed annuities that will be required to be
registered as a result of rule 151A, based on our experience with
insurance companies that issue insurance products that are also
securities, we believe that the vast majority will continue to
distribute those indexed annuities via networking arrangements with
registered broker-dealers, as discussed below.
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    Some commenters opined that the benefits of the proposal to indexed
annuity purchasers would outweigh any costs to the indexed annuity
industry.\234\ One commenter, for example, recognized that the proposal
would impose some compliance costs

on the indexed annuity industry, but stated that these costs are
minimal relative to the gains to investors in regulatory
oversight.\235\ The commenter stated that the rule would bring clarity
regarding the status of indexed annuities under the federal securities
laws and would subject indexed annuity sales to the application of
suitability and antifraud protections under the federal securities
laws.
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    \234\ See, e.g., Cornell Letter, supra note 7; NASAA Letter,
supra note 133.
    \235\ Cornell Letter, supra note 7.
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    A number of other commenters, however, stated that the Commission
significantly underestimated the costs of the proposal.\236\ As
discussed below, these commenters stated that the proposal would impose
substantial costs throughout the industry, affecting insurers, agents,
marketing organizations. Commenters also stated that consumers would
face additional costs as a result of the proposal, as the costs of
product development and offering and selling registered securities are
passed on to consumers.\237\ We also received a number of comments
specifically stating that the proposal would have an adverse impact on
small entities, such as small insurance distributors.\238\
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    \236\ See, e.g., Allianz Letter, supra note 54; ACLI Letter,
supra note 94; American Equity Letter, supra note 54; Coalition
Letter, supra note 54; Old Mutual Letter, supra note 54; Second
Aviva Letter, supra note 54. Southwest Letter, supra note 136;
Transamerica Letter, supra note 54.
    \237\ See, e.g., American National Letter, supra note 54;
National Western Letter, supra note 54; Old Mutual Letter, supra
note 54; Southwest Letter, supra note 136.
    \238\ See infra Section VII.
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    The following is a more detailed discussion of specific costs that
we believe will be associated with the rule. We specifically identified
and discussed each of these costs in the Proposing Release. We received
comments on each identified cost.
Determination Under Rule 151A
    Insurers may incur costs in performing the analysis necessary to
determine whether amounts payable under an indexed annuity would be
more likely than not to exceed the amounts guaranteed under the
contract. This analysis calls for the insurer to analyze expected
outcomes under various scenarios involving different facts and
circumstances. Insurers routinely undertake such analyses for purposes
of pricing and valuing their contracts.\239\ As a result, we believe
that the costs of undertaking the analysis for purposes of the rule may
not be significant. However, the determinations necessary under the
rule may result in some additional costs for insurers that issue
indexed annuities, either because the timing of the determination does
not coincide with other similar analyses undertaken by the insurer or
because the level or type of actuarial and legal analysis that the
insurer determines is appropriate under the rule is different or
greater than that undertaken for other purposes, or for other reasons.
These costs, if any, could include the costs of software, as well as
the costs of internal personnel and external consultants (e.g.,
actuarial, accounting, legal).
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    \239\ See generally Black and Skipper, supra note 39, at 26-47,
890-99.
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    Several commenters who issue indexed annuities disputed that
insurers undertake these analyses.\240\ Other commenters, however,
confirmed that these analytical methods exist and are used by insurers
for internal purposes.\241\ We continue to believe that because
insurers routinely undertake these types of analyses, the costs of
doing so for purposes of the rule may not be significant.
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    \240\ See, e.g., American Equity Letter, supra note 54; National
Western Letter, supra note 54; Sammons Letter, supra note 54. The
commenters did not provide cost estimates for performing the
analysis necessary under the rule.
    \241\ See, e.g., Aviva Letter, supra note 54; Academy Letter,
supra note 54. We give substantial weight to the views of the
Academy on this point, given their expertise in this type of
analysis, and are not persuaded that the contrary comments of
several issuers are representative of industry practice. See BLACK'S
LAW DICTIONARY 39 (8th ed. 2004) (An actuary is a statistician who
determines the present effects of future contingent events and who
calculates insurance and pension rates on the basis of empirically
based tables.); American Academy of Actuaries, Mission, available
at: http://www.actuary.org/mission.asp (The mission of the Academy
is to, among other things, provide independent and objective
actuarial information, analysis, and education for the formation of
sound public policy.).
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Securities Act Registration Statements
    As noted above, we believe that significant benefits arise from the
registration of indexed annuities, including enhanced disclosures of
critical information regarding these products. Without such disclosure,
investors face significant obstacles in making informed investment
decisions with regard to purchasing indexed annuities that expose
investors to securities investment risk. Investors in indexed annuities
are confronted with many of the same risks and benefits that other
securities investors are confronted with when making investment
decisions. Extending the federal securities disclosure regime to
indexed annuities that impose investment risk should help to provide
investors with the information they need. The costs of preparing and
filing registration statements are not unique to indexed annuities that
are outside the scope of the Section 3(a)(8) exemption for annuities as
a result of rule 151A, but apply to all issuers of registered
securities. However, we are sensitive to these costs and discuss them
below, along with comments that we received on this analysis.
    Insurers will incur costs associated with preparing and filing
registration statements for indexed annuities that are outside the
insurance exemption as a result of rule 151A. These include the costs
of preparing and reviewing disclosure, filing documents, and retaining
records. Our Office of Economic Analysis has considered the effect of
the rule on indexed annuity contracts with typical terms and has
determined that, more likely than not, these contracts would not meet
the definition of ``annuity contract'' or ``optional annuity contract''
if they were issued after the effective date of the rule. For purposes
of the PRA, we have estimated an annual increase in the paperwork
burden for companies to comply with the rules to be 60,000 hours of in-
house company personnel time and $72,000,000 for services of outside
professionals.\242\ We estimate that the additional burden hours of in-
house company personnel time will equal total internal costs of
$10,500,000 \243\ annually, resulting in aggregate annual costs of
$82,500,000 \244\ for in-house personnel and outside professionals.
These costs reflect the assumption that filings will be made on Form S-
1 for 400 contracts each year, which we made for purposes of the PRA.
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    \242\ See supra Part IV.C.
    \243\ This cost increase is estimated by multiplying the total
annual hour burden (60,000 hours) by the estimated hourly wage rate
of $175 per hour. Consistent with recent rulemaking releases, we
estimate the value of work performed by the company internally at a
cost of $175 per hour.
    \244\ $10,500,000 (in-house personnel) + $72,000,000 (outside
professionals).
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    As indicated in our analysis for purposes of the PRA, we received
several comments questioning our estimate of the costs of registering
an indexed annuity on Form S-1.\245\ One commenter stated that, for
insurers that have not previously prepared a Form S-1 registration
statement, external legal costs could be as high as $250,000-$500,000
for each registration statement.\246\ However, the commenter did not
specify the source of this range of cost estimates or how it was made.
The $250,000-$500,000 range cited by the commenter is for an

issuer that has not previously filed a Form S-1, with the commenter
acknowledging that the costs to an experienced filer would be lower (as
low as $50,000 to $100,000).\247\ Another commenter estimated external
legal costs for preparation and filing of a Form S-1 registration
statement with the SEC at $350,000 for the first few years, which, the
commenter stated, would decrease over time as the insurer gained more
expertise.\248\ Our average $180,000 estimate reflects outside
professional costs incurred not only by first-time Form S-1 filers, but
also the costs of preparing Form S-1 for contracts offered by
experienced Form S-1 filers, as well as annual updates to existing Form
S-1 registration statements, which we expect to be significantly lower
than costs incurred by first-time filers. Therefore, we do not believe
that it is necessary to change our estimate of outside professional
costs based on the commenters' estimated costs.
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    \245\ See, e.g., Allianz Letter, supra note 54; Second Aviva
Letter, supra note 54; Second NAFA Letter, supra note 191.
    \246\ Allianz Letter, supra note 54.
    \247\ Id.
    \248\ Second Aviva Letter, supra note 54.
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    One commenter cites a cost of $62,500 per insurance company for
``Registration Statement Preparation'' but also appears to assume a
cost of $255,000 per contract for registration statement
preparation.\249\ It is unclear how these estimates should be
reconciled, and we are not revising our estimate of the burden of
preparation of registration statement on the basis of the commenter's
estimates.
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    \249\ Second NAFA Letter, supra note 191.
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    Another commenter stated that the Commission's estimate of outside
professional costs of $400 per hour does not reflect market rates for
securities counsel.\250\ However, the commenter did not cite a
different rate and did not explain the basis for its disagreement with
the $400 per hour rate cited by the Commission. Our estimate of $400
per hour for outside professionals retained by the issuer is consistent
with recent rulemakings and is based on discussions between our staff
and several law firms.\251\ Accordingly, we are not changing our
estimate of the cost per hour of outside professional costs.
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    \250\ Transamerica Letter, supra note 54.
    \251\ See, e.g., Securities Act Release No. 8909 (Apr. 10, 2008)
[73 FR 20512, 20515 (Apr. 15, 2008)] (``Revisions to Form S-11
Release'').
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    The commenter further stated that the estimates of time involved
are low for persons unfamiliar with the process of registration of
securities under the federal securities laws and the anticipated need
for interaction with Commission staff. However, our estimate of time
required to prepare a registration statement reflects time needed not
only by first-time Form S-1 filers, but also the time involved in
preparing Form S-1 for contracts offered by experienced S-1 filers, as
well as annual updates to the existing Form S-1 registration statement,
which we expect to be significantly less than time needed by first-time
filers. Therefore, we are not revising our estimate of time involved in
preparing registration statements on Form S-1.
    Commenters stated that insurers will be subject to significant
additional costs as a result of having to register on Form S-1.\252\
These include required registration fees for securities sold. One
commenter estimated Commission registration fees, assuming sales of $5
billion annually, as $196,500.\253\ Commenters also stated that the due
diligence necessary to verify disclosures in the registration statement
will require significant resources.\254\ We acknowledge that these are
additional costs associated with registration. However, these costs are
not unique to indexed annuities, but are incurred by all issuers of
registered securities.
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    \252\ See, e.g., Allianz Letter, supra note 54; American Equity
Letter, supra note 54; Old Mutual Letter, supra note 54;
Transamerica Letter, supra note 54.
    \253\ Allianz Letter, supra note 54.
    \254\ National Western Letter, supra note 54; Old Mutual Letter,
supra note 54.
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    Commenters also cited other costs of registration on Form S-1, such
as preparation of financial statements in accordance with generally
accepted accounting principles (``GAAP''), which, according to the
commenters, many insurers currently do not do.\255\ One commenter
estimated a cost of at least several million dollars for an insurer to
develop GAAP financial statements.\256\ We acknowledge that if an
indexed annuity issuer that did not currently prepare GAAP financial
statements were required to do so in order to register its indexed
annuities, the one-time start-up costs could be significant. We note
that, during the two-year transition period for rule 151A, the
Commission intends to consider how to tailor accounting requirements
for indexed annuities.\257\
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