Industry experts have different takes on what the Securities and Exchange Commission is going to do in the wake of a recent federal appeals court ruling that returned to the SEC for reconsideration of Rule 151A, a regulation that would have imposed federal oversight on fixed indexed annuities.
The marketing director of a firm which distributes the products says he doesn’t think the decision means that the SEC “is going to back off at all.”
“I still think there is a fight there,” said Gary Raggio, a national director of annuity marketing at Dunhill Marketing and Insurance Services, San Diego, Calif. “I don’t think we should be raising the flag in victory just quite yet.”
A panel of the U.S. Court of Appeals for the D.C. Circuit ruled July 21 in American Equity Investment Life Insurance Company, et al, v. the Securities and Exchange Commission, No. 09-1021, that the SEC had the authority to determine that the language of Sec. 3(a)(8) of the Securities Act of 1933 was ambiguous, allowing the agency to rule that FIAs were subject to federal regulation.
In that portion of its decision, the appeals court panel determined that the SEC did not need to show that investors could lose money on indexed annuities, but that the fact the product offered only variable returns was sufficient to constitute investment risk, said Frederick R. Bellamy, a partner in the Washington, D.C., office of Sutherland Asbill & Brennan LLP.
But, the court also returned the case to the SEC for reconsideration because the panel felt that the analysis of the efficiency, competition and capital formation component of the rulemaking was insufficient.
In a note to clients, Joan Boros, of counsel with Jorden Burt LLP, Washington, D.C., argued that complying with the court’s order is a “formidable and time-consuming task, and there is no assurance that the Court will find that the SEC’s follow-up meets the statutory standard.”
In her note, Boros said the job, among other things, may require the SEC to subject its review to still another round of public comment.
“In view of the current pressures on the SEC regarding proposed financial regulatory reform, is quite uncertain whether (and when) the SEC will choose to assume these tasks,” she said.
But, Bellamy disagreed. “I agree that there is no certainty as to what the SEC will do,” he said, but added that the SEC has a number of options.
He said that doing an analysis of the potential impact on efficiency, competition and capital formation through imposition of the rule “is a formidable task, but I don’t think it is as formidable as others think it is.”
For one thing, he said, the agency has the option to explain to the court why the analysis under Sec. 2b of the Securities Act of 1933 does not apply in this case.
“Through its decision, the court provided SEC that opportunity,” he said.
He said the court found that the SEC’s analysis of its justification for determining that FIAs were subject to federal regulation was reasonable.
Moreover, he added, it could be interpreted in several ways.
He said that if the decision was an interpretation of Sec. 3(a)(8), “it could have a very broad impact.”
The decision could also be read, Bellamy said, under the Chevron decision interpretation as “merely deferring to the agency and merely evaluating the reasonableness of the SEC’s action.”
Under this interpretation, the decision “could have a narrower impact, depending on what the SEC does.”
He explained that one of the principal arguments made by the industry and state insurance regulators was that since the insurer guaranteed against investment loss, that constituted a fixed rather than a variable annuity.
But the court disagreed, Bellamy said, “finding it reasonable for the SEC to determine that the unpredictability and the variability of the excess interest of the FIA was sufficient to exclude that product as a fixed annuity.”
As a result, he said, “it is still possible this rule could go into effect, and a lot of people should be preparing for that eventuality.”
Raggio of Dunhill Marketing agrees.