At this time, few, if any, people with an interest in indexed annuities are unaware of the prevailing uncertainties swirling around the indexed annuity’s status, notwithstanding the decision of the U.S. Court of Appeals for the D.C. Circuit regarding the Securities and Exchange Commission’s Rule 151A.
Will the SEC respond to the remand? Will the response be sufficient for the Appeals Court? If the SEC doesn’t respond, will the Appeals Court vacate the Rule, as has occurred in other cases when the SEC doesn’t complete and submit a revised presentation as may be required by Section 2(b) of the Securities Act? Will any party ask for further Appeals Court consideration or for review by the Supreme Court?
In addition to these and other questions, the decision does not resolve uncertainty regarding indexed life insurance. Rather, the decision inadvertently contributes to the compendium of unanswered questions.
Earlier this year, following the SEC’s adoption of Rule 151A, I had observed that the SEC may have clarified the status of index annuities, but made the status of index life insurance more uncertain than ever. The same may now be said with regard to the Appeals Court decision.
The Appeals Court opined that the SEC met the precedential “Chevron Test” (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)) in its adoption of Rule 151A. It found that the statutory term “annuity” was not unambiguous and therefore the SEC had the power to regulate as to its meaning.
The Appeals Court further found that the SEC acted reasonably in its interpretation of Section 3(a)(8) of the Securities Act and adoption of Rule 151A. It also found, however, that the adoption of the Rule was arbitrary and capricious in not properly considering the effect of the Rule on efficiency, competition, and capital formation, as required by Section 2(b) of the Securities Act.
The Appeals Court remanded the matter back to the SEC to address the deficiencies with its ? 2(b) analysis.
With regard to uncertainty regarding the status of indexed life insurance, it is important to stress that the litigation and the Appeals Court’s opinion solely addresses Rule 151A, and Rule 151A solely addresses indexed annuities.
The Appeals Court appropriately had nothing to say about indexed life insurance, nor did it discuss the contradictory frameworks for the analysis of life insurance under Section 3(a)(8) set out in the SEC’s release adopting Rule 151A.
The status of indexed life insurance, under the Securities Act, and the SEC’s related ruminations in the Adopting Release were not before the Appeals Court.
In the Adopting Release, the SEC articulated contradictory frameworks for the analysis of life insurance under Section 3(a)(8) by stating that it depends on both the factors articulated by the Supreme Court and the SEC and the unique basis for Rule 151A. (See box.)
Following is just a sampling of the myriad uncertainties that the recent Appeals Court decision generated.
o If the SEC does not respond or does not respond satisfactorily, what is the continuing force and weight of the Chevron portion of the ruling as applied to either indexed annuities or indexed life insurance?
o Given the deferential nature of the Chevron Test, how much weight would be given to the SEC’s statement “that the considerations that form the basis for Rule 151A are also relevant in analyzing indexed life insurance?”
o What comfort will the SEC take from the restrained pronouncement of the Appeals Court under the Chevron Test when addressing indexed life insurance questions?
o How will the SEC or a court regard the relevancy of the Appeals Court’s analysis of existing case law that is limited to annuities when evaluating the reasonableness of any regulation of indexed life insurance?
o What significance will be accorded the fact that, notwithstanding the absence of any Supreme Court pronouncements about variable life insurance under Section 3(a)(8), those products are registered under the Securities Act?
o What significance will be given to any distinguishing quality of a guaranteed death benefit several times the amount of premium paid in the presence of the possibility of an additional interest rate credit derived from an index?
o Will the SEC or a court decide that the mortality risk and investment risk of that death benefit guarantee are of no import in assessing the reasonableness of labeling indexed live insurance a security?
How, when, and if these questions will be answered is the ultimate question.
Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is JEB@jordenusa.com.