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Regulation and Compliance > Federal Regulation > SEC

Coalition Sues To Overturn SEC Annuity Rule

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Washington Bureau

The U.S. Securities and Exchange Commission is facing a court challenge to its effort to regulate equity indexed annuities as securities.

The Coalition for Indexed Products, a group representing indexed annuity issuers and distributors, today filed a suit concerning the SEC’s new Rule 151 in the U.S. Court of Appeals for the District of Columbia Circuit.

In related news, the SEC today published the final rule in the Federal Register.

Unless court action reverses the SEC decision, Rule 151 will take effect Jan. 12, 2011.

The Coalition for Indexed Products alleges in the suit that the SEC exceeded its authority under the Securities Act of 1933 by attempting to regulate EIAs as securities.

The coalition also alleges that the agency has violated the federal Administrative Procedures Act by ignoring insurance industry claims that regulating EIAs as securities might cost insurance companies $100 million in the first year alone, and by declining to give “comprehensive consideration” to whether existing state regulation was sufficient to protect consumers.

The SEC indexed annuity action “directly contradicts” a federal court ruling that fixed indexed annuities are annuities, not securities, the coalition contends.

The U.S. Court of Appeals for the District of Columbia Circuit typically hears cases about new agency regulations.

“The securities laws say explicitly that annuities are to be regulated by the states, not the SEC,” says Eugene Scalia, a Washington lawyer who is representing the coalition.

The SEC has engaged in a flawed rulemaking process that has produced a rule that conflicts with the intent of Congress and with two Supreme Court decisions, Scalia says.

Jim Poolman, a coalition spokesman and former North Dakota insurance commissioner, says the SEC has chosen to regulate indexed annuities at a time when the SEC has other pressing priorities.

“It is unfortunate that the SEC seeks to duplicate state efforts to regulate indexed products when at the same time it has come under heavy criticism for failing to adequately meet its core mandate of overseeing the securities industry,” Poolman says.

Indexed annuities are annuities that offer minimum guaranteed values and credit interest based on the performance of a market index such as the S&P 500.

Because the purchaser is guaranteed the return of principal with interest, subject to any surrender charges, indexed annuities are considered safer than securities products, which expose principal directly to investment market fluctuations, the coalition argues.

Lawyers for the Association for Advanced Life Underwriting, Falls Church, Va., say the final rule was narrowed significantly from the rule first proposed last June, to ensure that it does not apply to discretionary excess interest contracts written in such a way that insurers declare the current rate of interest in advance.

The AALU lawyers also interpreted the final rule as ensuring that 151A does not apply to traditional participating policies that are written in such a way that insurers declare and pay dividends at their discretion based in part on the investment return of the insurer’s general account portfolio.

The Federal Register version of the final rule is available here.


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