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.”