In this special section, part of a Senior Market Advisor series on the developments and legal response to SEC Rule 151A, we break down the flurry of headlines from this summer. Does a federal ruling calling for a major retooling of 151A spell the end of the line for the controversial legislation, or are advisors, broker-dealers and companies still liable to see a huge transformation in annuities business in less than two years?

As had been the case on several other occasions in the ongoing SEC 151A soap opera, after a long period of quiet, the financial world suddenly came alive on a July 21. Amid a flurry of e-mails, Twittering and blog posts, word spread like wildfire that the U.S. Court of Appeals had dealt a serious blow to the controversial legislation, which now needed some serious re-examination and rewriting to be considered valid. Did it mean that 151A was instantly dead in the water?

Those close to the 151A issue spent the next few weeks letting the dust settle and getting to the heart of the matter: the Court of Appeals decision does not necessarily sentence the SEC’s ruling to the scrapheap of history. Instead, like a freshman term paper rushed to completion and turned into a kindly English teacher, a major rewrite has been requested.

The July decision was a reaction to a suit filed by American Equity Investment, a major underwriter of fixed indexed annuities, as well as a coalition of other industry participants. In its judgment, the three-judge Court of Appeals sided with the plaintiffs’ suggestion that the SEC was flawed in its assertion that the probability of contract gains above guaranteed minimums constituted “investment risk,” thereby stepping into the realm of federal oversight.

As well, the Court said the SEC’s analysis of various efficiencies in the 151A ruling was “flawed,” “arbitrary and capricious,” with the upshot being a call for the SEC to significantly retool the ruling. “The SEC failed to properly consider the effect of the rule upon efficiency, competition and capital formation.”
The Court’s ruling did, however, give some credence to the SEC’s larger assertion that federal oversight is necessary to police the wider world of the financial industry, rather than a sometimes uneven blanket of state regulators.

Many see this “remand,” not to mention the Court’s language, as victory enough, but celebration was muted: those most intently involved in the issue saw it as a partial win, but say much more work is required to convince the SEC to seriously reconsider or entirely abandon the regulation.

“We were pleased, overall, with the decision, especially the recognition that the process was flawed and rushed,” says Wendy Carlson, CEO and president of American Equity. “We’re happy that this leaves the door open to continue the dialogue about 151A, and to that extent, we will continue our efforts to lobby Congress and the Senate. We were also very excited to get the engagement of a number of congressmen and senators, opening up a dialog and getting the SEC to recognize the already important role of state regulators.”

Carlson says she still thinks it’s too early to guess on the final outcome of 151A, but certainly knows how she’d like it all to play out.

“My preference would be to see the NAIC reach out to the SEC and have them come together where the two systems coincide and overlap. There must be a way to find the most efficient allocation of regulation between those two groups.”

Sheryl Moore, president and CEO of AnnuitySpecs.com, says that while the Court of Appeal’s decision has many positives for those opposed to 151A’s reach, she feels the fight is far from over.

“We did not ‘win,’ but this is a setback for the SEC,” she says. “The ruling merely gives us more time. At this point, the SEC has a number of options–they could decide that this rule is not a priority, in light of their current problems, or they could complete the necessary analysis to provide the court with proof of the rule’s impact on competition, efficiency and capital formation. I do not believe that there is any way that the SEC is going to drop this issue.”

Moore says she senses that there’s still something personal involved in the 151A battle, as was the case when former SEC Chairman Christopher Cox helped fast-track the legislation in the first place, citing the “Dateline” expose and a bad experience one of his own relatives had with an advisor.

“While serving as head of FINRA, formerly the NASD, current SEC Chairman Mary Schapiro was frequently quoted as saying that indexed annuities should be regulated as securities,” Moore says. “She is definitely not a fan of these products. Furthermore, she has not made it any secret that she wishes to regulate numerous non-securities products under the SEC’s purview.”

Whatever the case, Moore says the fixed indexed annuity industry has its own options: You can sit around and wait for January 12, 2011, the magic date when 151A comes into effect and securitizes FIAs, or … join efforts such as last month’s Washington D.C. fly-in, and continue to push legislators to support the Meeks-Price bill and its matching Senate bill, both calling for the nullification of 151A.

Others, however, contend that the Court of Appeals decision helps demonstrate the rushed and not-so-invisible, late-Bush Administration politicking that led to 151A being fast-tracked into existence in the first place. They see 151A as a lone last legislative stand for the SEC–which was about to receive incendiary criticism for its legendary mismanagement of both the flailing economy and the Madoff case.
Longtime industry insider and former Allianz chair Bob MacDonald, blogging on the subject, says he believes that the Court’s decision will help spell the end to the 151A mess.

“Having consistently argued that 151A is both illogical and legal, I believe this Court of Appeals ruling effectively kills the 151A regulation,” he wrote. “The SEC–with lots of bigger issues to deal with now, including its own survival–will not want to expend the time or energy to reopen the battle over the ruling. Every agent who has ever sold an equity fixed indexed annuity owes a debt of gratitude and thanks to the management of American Equity Insurance, for showing the courage to support the agents by standing up to the media and the SEC by filing the lawsuit.”

Or are there bigger issues?

The Court of Appeals decision comes, as we have all seen, in the midst of a larger Obama Administration thrust to bring more and more of the financial world under federal scrutiny. Other legislation has since been introduced by Reps. Melissa Bean (D-Ill.) Ed Royce (R-Cal.) and to create a centralized federal insurance regulator. And as an example of the sentiment involved, Royce, clearly irritated by the spectacular economic troubles in his home state, said “… leaving the business of insurance regulation solely to the various state insurance commissioners, while the federal government provides taxpayer-funded assistance, is simply irresponsible.”

Brian Atchinson, president and CEO of the Insurance Marketplace Standards Association, says that while 151A may appear to be on marginally shaky ground, read between the lines and you’ll see that the SEC still retains a position of political prestige when it comes to a push towards increased federal oversight.
“With respect to responsibility and jurisdiction for supervising and regulating annuities, it’s obvious that there’s an initiative out there to get the federal legislation passed,” he says. “So long as that district court decision holds–and it will probably be appealed–you’re starting to see some of the market migrate to conformity with those expectations.”

Atchinson says he actually sees the Court’s decision as validation for those in the securities end of the dispute.

“The fact that the federal district court in this case affirmed that the SEC has jurisdiction over these annuities is indeed a game-changer,” he adds. “We’ve already seen many in the industry readying themselves; many broker-dealers have already been subjecting all annuity sales to the protocols and practices which apply to those registered products. It certainly seems like the migration to a more centralized federal system may slowly evolve, unless there’s some contrary federal legislation.”