WHEREAS, a variable annuity contract is a tax-deferred investment that typically invests in stock and bond mutual funds that provide the investor with an opportunity for potential capital appreciation and income but also subjects the investor to market risks and is primarily sold by insurance companies; and

WHEREAS, the insurance features of variable annuity contracts permit the investor to receive a series of periodic payments from the investment over the life of the contract and provide a death benefit to the beneficiary should the investor die during the accumulation phase; and

WHEREAS, while these products are legitimate investments, regulators are concerned about overzealous marketing of variable annuity contracts, especially to senior consumers who require particular protection from the risks involved in these instruments; and

WHEREAS, variable annuity contracts are generally thought to be inappropriate for seniors unless they are fully informed of the risks involved, such as short-term market movements given that seniors generally cannot afford a long investing horizon, and the restrictions involved, such as steep penalties for early withdrawals, which may hamper seniors' access to their funds; and

WHEREAS, there has been widespread publicity concerning inappropriate sales of variable annuity contracts to the general public, especially seniors and those approaching retirement, to hold these annuities inside a 401(k) retirement account or Individual Retirement Account, when the buyer would already be getting tax-deferred growth in an Individual Retirement Account or a 401(k) account, and the variable annuity simply adds an additional layer of cost with no additional tax benefit; and

WHEREAS, some of the complaints regarding the sales of variable annuities include:

WHEREAS, there is uncertainty over the most effective means of regulating sales of variable annuity contracts; and

WHEREAS, according to the National Association of Securities Dealers, which was established under authority granted by the Securities Exchange Act of 1934, and which regulates almost 5,200 securities firms employing more than 663,000 registered securities professionals, the sales-related problems of variable annuity contracts parallel those of mutual funds and other securities and the National Association of Securities Dealers believe that "it is incongruous for agents and sales practices involved in variable [annuity] contracts not to be covered by state securities laws"; and

WHEREAS, it was reported by the North American Securities Administrators Association, which was organized in 1919 and is a voluntary association whose goal is investor protection, that the Securities Enforcement Branch of the Department of Commerce and Consumer Affairs is currently investigating fourteen enforcement cases regarding variable annuities contracts involving thirty-one consumers; and

WHEREAS, the North American Securities Administrators Association continually lists variable annuity contracts in its "Top Ten Investment Scams" annually; and

WHEREAS, the American Council of Life Insurers, a national trade association that is composed of three hundred seventy-seven member companies, pointed out that the continued inclusion of variable annuity contracts as a security in Hawaii would:

WHEREAS, the American Council of Life Insurers states that, in response to widely publicized complaints from consumers dealing with unsuitable annuity sales, particularly to seniors due to their age and penalty charges assessed upon early withdrawal or surrender, in 2003, the National Association of Insurance Commissioners adopted two models of insurance regulation, namely, the Annuity Disclosure Model Regulation and the Senior Protection in Annuity Transactions Model Regulation; and

WHEREAS, S.B. No. 3070, 2006, was introduced during the Regular Session of 2006 to delete "variable annuity contracts" from the definition of "security" thus removing variable annuity contracts from securities regulation; and

WHEREAS, S.B. No. 2225, 2006, was introduced during the Regular Session of 2006 to require insurers and insurance providers to make reasonable efforts to obtain relevant information from senior consumers prior to conducting annuities transactions; and

WHEREAS, the Legislature understands that some jurisdictions, the State of Indiana among them, regulate sales of variable annuities as insurance rather than as securities; now, therefore,

BE IT RESOLVED by the Senate of the Twenty-third Legislature of the State of Hawaii, Regular Session of 2006 that the Legislative Reference Bureau is requested to examine how other states, such as Indiana, are addressing the issue of reclassifying a variable annuity contract as insurance rather than as a security; and

BE IT FURTHER RESOLVED that the Director of Commerce and Consumer Affairs, the Insurance Commissioner, and the Commissioner of the Business Registration Division are requested to assist and fully cooperate with the Legislative Reference Bureau in the conduct of the study; and

BE IT FURTHER RESOLVED that the Legislative Reference Bureau is requested to submit its report to the Legislature no later than twenty days prior to the convening of the Regular Session of 2007; and

BE IT FURTHER RESOLVED that certified copies of this Resolution be transmitted to the Director of Commerce and Consumer Affairs, the Insurance Commissioner, the Commissioner of the Business Registration Division, and the Director of the Legislative Reference Bureau.

Report Title:

Variable Annuities; Reclassify from Security to Insurance; Study