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SEC Proposes Two-Year Stay on Rule 151A

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The Securities and Exchange Commission on December 8 agreed to a two-year delay of the effective date of Rule 151A, which would require that equity indexed annuities be regulated as securities.

The SEC consented to a two-year stay of the rule in its brief, which the Commission filed at the U.S. Court of Appeals for the D.C. Circuit in response to a November court order directing the parties in the case to submit additional briefs addressing whether implementation of Rule 151A should be delayed beyond the January 2011 effective date because of "the SEC's failure to consider the rule's effect upon efficiency, competition, and capital formation."

Frederick Bellamy, a partner at the law firm Sutherland in Washington, says that the brief indicates that SEC staff intends to complete its study of state insurance regulation and present its recommendations to the Commission in the Spring of 2010.

Then, if the SEC agrees with the staff's recommendations, it will seek to issue a formal release asking for comments on the Section 2(b) analysis.

Section 2(b) of the 1933 Act requires the SEC when it engages in rulemaking to consider whether the action it is proposing will "promote efficiency, competition and capital formation." In its July 2009 opinion, the D.C. Circuit found that the SEC's Section 2(b) analysis in the adopting release for Rule 151A was "lacking" and remanded the rule to the SEC for it to perform another analysis, says Mary Jane Wilson-Bilick, a partner at Sutherland and a member of the firm's Financial Services Practices Group.

Sutherland says in its Legal Alert describing the supplemental briefs in the case, that now that all of the supplemental briefs have been received, the court is expected to issue an order "in the near future as to whether it will alter the relief previously ordered," that is, the court could agree to the SEC's two-year stay, or not. "Right now it's not 100% clear how this will play out," says Bilick. More clarity, in the form of a court order, may come in the next couple weeks, she says.

Sutherland notes in its Legal Alert that Rule 151A would "require registration of virtually all indexed annuities."

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