Whether equity-indexed annuities will be subject to federal or state regulation will likely hinge on a federal appeals court panel’s view on how much risk in a product currently sold as insurance “is too much risk” to be exempt from federal oversight.
That was the impression left by Judge David Sentelle, chief judge of the U.S. Court of Appeals for the D.C. Circuit, at the close of spirited oral arguments May 8 in a case brought by the EIA industry that seeks to vacate a rule approved by the Securities and Exchange Commission in December.
The case, American Equity Investment Life Insurance Company, et al, v. SEC, is being heard on an expedited basis, but a final decision is not expected for several months.
The oral arguments were held just as the National Association for Fixed Annuities, whose members sell EIAs, concluded its 2009 annual meeting & annuity summit in Washington.
At the meeting, the trade group unveiled a two-pronged strategy for ensuring that EIAs remain state-regulated.
Specifically, Rep. Greg Meeks, D-N.Y., and Rep. Tom Price, R-Ga., disclosed that they have agreed to be co-sponsors of legislation expected to be introduced soon in the House clarifying that EIAs are exempt from federal regulation.
Danette Kennedy, government relations chair for NAFA and senior product counsel at Aviva Insurance Company in Des Moines, Iowa, said the industry seeks to ensure that even if it wins the legal case, “it wants to shut down the possibility” that the SEC will seek to assert jurisdiction over EIAs on other grounds in the future.
The legislation will seek to nullify Rule 151A and clarify that Sec. 3(a)(8), the exception which reserves to the states regulation of fixed annuities, governs EIAs.
Rule 151A would impose SEC regulation on certain EIAs as of Jan. 11, 2011.
In response to the contention of Rodney Page, a lawyer for the National Association of Insurance Commissioners, that SEC action constituted an inappropriate attempt to “trump state regulation,” Judge Sentelle cautioned, “We have not said how much risk is too much risk.”
Page, a lawyer at Bryan Cave, Washington, D.C., also represents the National Conference of Insurance Legislators in the litigation.
Page told the court that state regulation adequately protects consumers from the risk of loss from EIAs, and that the insurer, not the insured, bears most of the risk on EIAs.
Eugene Scalia, a lawyer with Gibson, Dunn & Crutcher in Washington, D.C., also argued that the SEC was basing its rule on theories rather than facts.
To that argument, Judge Sentelle asked Scalia whether he was asking for rule to be vacated because the SEC “can’t act on an economic theory.