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EIA Sellers Reject SEC Premise

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The fact that “insurance” involves risk taking does not mean that an annuity is automatically subject to U.S. Securities and Exchange Commission regulation, annuity industry lawyers argue in a new brief.

In addition, the SEC has made mistakes in connection with efforts to develop and implement Rule 151A, which would classify many equity indexed annuities as securities, according to the lawyers, who are representing the EIA issuers and EIA marketers that are challenging efforts by the SEC to implement Rule 151A.

Rule 151A was published in January and is supposed to take effect in January 2012.

The lawyers submitted the brief to a panel of the U.S. Court of Appeals for the D.C. Circuit.

The industry brief in the case, American Equity Investment Life Insurance Company, et al, vs. the Securities and Exchange Commission, No. 09-1021, was filed in reply to a brief submitted earlier in the month by the U:S: Securities and Exchange Commission:

A 3-judge panel is scheduled to begin hearing oral arguments May 8.

When the SEC published Rule 151A, the National Association of Insurance Commisioners, Kansas City, Mo., joined with underwriters and marketers in the effort to file a petition concerning the SEC’s oversight authority.

The petitioners are seeking to have Rule 151A set aside as arbitrary and capricious. They argue that the Securities Act of 1933 exempts “any” annuity contract from federal regulation provided it is issued by a corporation supervised by a state insurance commissioner.

The SEC “mistakenly assumes an authority to receive” an exemption from a provision in the Securities Act of 1933 that reserves regulation of annuities to state insurance regulators except under some circumstances, lawyers write in the new industry brief.

The lawyers further argue that the SEC has proposed Rule 151A in the “mistaken belief that there were frequent abuses in marketing these annuities that state laws did not address.”

When public comment proved both these premises wrong, the “commission adopted the rule nonetheless, asserting that duplicative regulation and the absence of even a ‘single’ improper sales practice were ‘irrelevant’” to its decision to adopt a rule “that will impose as much as $2 billion in costs, threatening–in these fragile economic times–the distribution network and even the viability of the firms that offer, market and sell these products,” the lawyers representing the industry write.

In a 1959 case and a 1967 case, the U.S. Supreme Court ruled that products classified as “securities” remained under a provision exempting them from federal regulation because “even though the products were found to be labeled annuities, they were not annuities in fact,” the lawyers for the industry write.

The SEC is now claiming authority to determine “which ‘sort of annuities’ fall within” the exemption for state regulation under the 1933 act, and “now invokes these Supreme Court decisions to ordain that a product regulated by every state as an annuity cannot be an annuity unless all investment risk is borne by the seller, and all risk to the purchaser is eliminated,” the lawyers for the industry write.

The SEC reached this conclusion “without any consideration of the amount of risk characteristically borne by insurers under the insurance laws; with any weight given to the ‘significant’ investment risk concededly borne by the insurers; without examination of a factor–marketing–that the SEC said was part two of its two-part legal test; and on the basis of a concept of ‘risk’ that conflicts with common sense and Supreme Court precedent,” the lawyers for the industry write.


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