UPDATE 1-US SEC wants to oversee equity indexed annuities

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By Karey Wutkowski and Rachelle Younglai

WASHINGTON, June 25 (Reuters) - Annuities linked to equity indexes would be scrutinized and overseen by federal securities regulators under a new rule proposed by the U.S. Securities and Exchange Commission on Wednesday.

The SEC voted 3-0 to define equity indexed annuities as securities in an effort to better police the fast growing $120 billion market, protect investors and ensure that the products are sold appropriately.

The financial products, which are often quite complex, have fallen into a regulatory no-man's land as they possess features from insurance products, such as a guaranteed minimum return, and features from securities, such as a return linked to an equity market.

Although equity indexed annuities have the potential to generate higher returns, they are riskier than a traditional fixed annuity.

The SEC and other regulators are worried that the products are being marketed inappropriately to elderly investors, particularly since the products have longer accumulation periods and can mature after the investor has died.

"The cause for concern seems greater than ever," said SEC Chairman Christopher Cox at an open meeting.

Cox said the abusive sales practices for these products have gone on for so long because of the outstanding question of whether equity-indexed annuities are even securities.