SEC Ordered to Reconsider Annuity Rule

Finding on July 21 in the case of American Equity Investment Life Insurance Company, et al. v. Securities and Exchange Commission that the Securities and Exchange Commission (SEC) had “failed to properly consider the effect of the rule upon efficiency, competition and capital formation,” the United States Court of Appeals for the District of Columbia told the SEC to reconsider Rule 151A, which classifies fixed indexed annuities (FIAs) as securities and subjects the offering and sale of such products to federal securities laws.

The new rule was issued by the SEC on December 17, 2008 and was scheduled to go into effect on January 12, 2011. Rule 151 was originally issued in 1986 in response to the mass marketing of new financial products and created a safe harbor for certain annuity contracts. Rule 151A would have eliminated that safe harbor for indexed annuities. In response, American Equity Life Insurance, the National Association of Insurance Commissioners (NAIC), and others filed suit seeking to block implementation the rule.

The Court did not buy all of the plaintiffs’ arguments and found that it was reasonable for the SEC to conclude that indexed annuities are different from traditional fixed annuities in that the index-based return of an FIA is not known until the end of a crediting cycle, as the rate is based on the actual performance of a specified securities index during that period. Where the Court did side with the plaintiffs was in noting that Section 2(b) of the Securities Act of 1933 requires the SEC “to consider or determine whether an action is necessary or appropriate in the public interest,” and to “consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation.” The Court found that “the Commission’s consideration of the effect of Rule 151A on efficiency, competition and capital formation was arbitrary and capricious.”