UPDATE 1-US SEC wants to oversee equity indexed annuities

(Adds details from proposal, quotes, bylines)

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.

The equity linked annuities also have higher surrender charges making it difficult for investors to pull out if they need the money.

By defining the products under the Securities Act, they would be subjected to rules that require that the investments to be registered. It would also allow regulators to enforce proper sales practices and to ensure that advisers are recommending products that are suitable to the investor.

SEC commissioner Paul Atkins said some sellers have encouraged unsuitable investors, especially the elderly, to invest in equity-indexed annuities.

"A few rotten apples have given a bad name to the industry as a whole," Atkins said.

The rule would be effective about a year after it is adopted, and would only apply to indexed annuities issued on or after the effective date.

The SEC said insurance companies would not be subjected to new legal risk for past sales of equity-indexed annuities.

Annuities are insurance products in which the insurer promises to make periodic payments to the customer, starting immediately or at some future date. (Reporting by Karey Wutkowski and Rachelle Younglai; Editing by Brian Moss and John Wallace)