A federal appeals court in Washington will hear oral arguments May 8 on a suit challenging the U.S. Securities and Exchange Commission’s move to adopt Rule 151A, a regulation that classifies some indexed annuities as securities.

The SEC is calling the annuities “equity indexed annuities.”

The lawyers for the petitioners that filed the suit, American Equity Investment Life Insurance Company, et al, vs. SEC, Number. 09-1021, are calling the products “fixed indexed annuities,” or FIAs.

The petitioners filed their first brief in the case Tuesday, telling the court that, under the plain meaning of a provision of the Securities Exchange Act of 1933, fixed indexed annuities are exempt from SEC regulation.

The court has permitted the National Association of Insurance Commissioners, Kansas City, Mo., to join the case as a petitioner, and the NAIC also has filed a brief.

The National Conference of Insurance Legislators, Troy, N.Y., which initially had joined with the NAIC as a petitioner, says it will not try to be a petitioner and instead will submit a friend-of-the-court brief.

“It is really a legal matter involving where NCOIL fits in,” says Susan Nolan, executive director of NCOIL.

“Our objective is to support the NAIC and oppose the SEC regulation, but our attorneys advised us to do an amicus brief, which is consistent with what NCOIL has done in previous cases,” Nolan says.

NCOIL will file a supporting brief, rather than serving as a petitioner, because of a “technical legal issue involving standing,” Nolan says.

The main brief for the petitioners was submitted by Eugene Scalia, of Gibson, Dunn & Crutcher L.L.P., Washington.

“It was only through an analysis that defies Supreme Court precedent, common parlance, and prior pronouncements of the SEC itself that the agency was able to arrogate to itself the power to regulate” fixed indexed annuities as securities, the petitioners write in their brief.

The SEC wrongly classified the annuities as securities, the petitioners write.

“The Commission admitted [in its rule] that a contract with de minimis securities-linked gains would be covered by the regulation,” the petitioners write in a footnote.

The SEC indicated that it “would be prepared to consider a request for relief, if appropriate” in such circumstances, the petitioners write. But “this is little comfort to insurers and agents, who must ensure securities compliance in advance, and the Commission’s acknowledgement merely confirms the arbitrariness of the rule.”

The SEC contends in the regulation that some indexed annuities are securities because “[i]ndexed annuities are similar in many ways to mutual funds, variable annuities, and other securities,” and that the purchaser of an indexed annuity “assumes many of the same risks that investors assume when investing in mutual funds, variable annuities, and other securities,” the petitioners write.

The SEC contention is “incorrect, obviously” because FIA premiums are invested in an insurer’s general account–which are subject to special state investment requirements–and contract values are not based on the insurer’s investment management, the petitioners write.

“Investment risk is fundamentally risk of loss to one’s investment–the risk borne by purchasers of mutual funds and variable annuities that their capital will be lost or plummet in value with a decline in the underlying securities,” the petitioners write.

Fixed income annuities, however, “are subject to the full panoply of state insurance laws whose function is to protect against risk of loss, guaranteeing that a contract owner receives no less than 87.535% of premiums even if the contract is surrendered in the first year, and assuring that the minimum contract value will increase at a rate of at least 1% to 3% annually for the life of the contract,” the petitioners write.

The FIA guarantees are identical to the guarantees that traditional fixed annuities offer, the petitioners write.

“For such reasons, the American Academy of Actuaries–in a comment the Commission ignored–said the ‘the risk profiles for FIAs and traditional annuities are similar,’” petitioners argue.

“The decisions of other courts confirm that FIAs are annuities,” and “squarely held that the issuer of an FIA assumed as much or more investment risk than the purchaser,” the petitioners write.