Finding on July 21 in the case of American Equity Investment Life Insurance Company, et al. v. Securities and Exchange Commission that the Securities and Exchange Commission (SEC) had "failed to properly consider the effect of the rule upon efficiency, competition and capital formation," the United States Court of Appeals for the District of Columbia told the SEC to reconsider Rule 151A, which classifies fixed indexed annuities (FIAs) as securities and subjects the offering and sale of such products to federal securities laws.
The new rule was issued by the SEC on December 17, 2008 and was scheduled to go into effect on January 12, 2011. Rule 151 was originally issued in 1986 in response to the mass marketing of new financial products and created a safe harbor for certain annuity contracts. Rule 151A would have eliminated that safe harbor for indexed annuities. In response, American Equity Life Insurance, the National Association of Insurance Commissioners (NAIC), and others filed suit seeking to block implementation the rule.
The Court did not buy all of the plaintiffs' arguments and found that it was reasonable for the SEC to conclude that indexed annuities are different from traditional fixed annuities in that the index-based return of an FIA is not known until the end of a crediting cycle, as the rate is based on the actual performance of a specified securities index during that period. Where the Court did side with the plaintiffs was in noting that Section 2(b) of the Securities Act of 1933 requires the SEC "to consider or determine whether an action is necessary or appropriate in the public interest," and to "consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation." The Court found that "the Commission's consideration of the effect of Rule 151A on efficiency, competition and capital formation was arbitrary and capricious."
Not surprisingly, the ruling was greeted with enthusiasm by the insurance industry. "We are pleased the Appeals Court recognizes that the ramifications of Rule 151A have not been fully vetted. A thorough analysis will reveal it will have a chilling effect on the industry and its distribution channel," said Gary Bhojwani, president and CEO of Allianz Life, the largest carrier of fixed index annuities (FIAs) in-force in a statement applauding the ruling. Allianz Life maintains that FIAs are insurance products that do not meet the standards to be securities, although that issue was not part of the Court's ruling.
"Standard insurance requirements, such as minimum guaranteed floors on account values, are more likely to have real-world benefits than adding federal securities laws," Bhojwani continued. "Overlapping, inconsistent regulation doesn't make any sense. It would be counterproductive to our shared goal of providing the best, most transparent forms of consumer protection."
The SEC is now charged by the Court with either completing an analysis of the rule to satisfy its obligations under the Act or to explain why "that section does not govern rulemaking." That leaves the door open for a new attempt to apply Rule 151A or some similar regulation in the future.