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Appeals Court Vacates SEC's Rule 151A on Indexed Annuities

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By Arthur D. Postal, National Underwriter Health & Life

WASHINGTON — A federal appeals court on Monday July 12, has sided with agents and others who want the Securities and Exchange Commission (SEC) to classify indexed annuities as insurance products rather than as securities.

A 3-judge panel at the D.C. Circuit Court of Appeals has granted the plaintiffs’ request for a rehearing in American Equity vs. SEC because the panel agrees with the plaintiffs’ view that the SEC “failed properly to consider the effect of the rule upon efficiency, competition, and capital formation.”

“The SEC argues it is likely to reissue Rule 151A but it also acknowledges it is in the midst of analyzing the effect of the rule upon the law of each state,” the panel says. “As the petitioners point out, the commission cannot know whether that analysis will support reissuing Rule 151A until it has been completed.”

The panel included justices David Sentelle, Douglas Ginsburg and Judith Rogers.

The decision to grant the request for a rehearing revises a decision the same panel issued in July 2009. They said then that the SEC’s efforts to analyze the effects of Rule 151A on securities market efficiency, competition and capital formation were “lacking.”

The SEC has been trying to split jurisdiction over indexed annuities with state insurance regulators. SEC officials have argued that indexed annuities act like securities and ought to be regulated the same way securities are; SEC critics have asserted that the products are backed by insurers’ general account investments and expose holders to no risk of principal loss due to investment market fluctuations.

The SEC issued Rule 151A in January 2009, but it was not planning to enforce the rule until Jan. 12, 2011. Insurers sued to block implementation of the rule.

In July 2009, the D.C. Court of Appeals panel held that the SEC had authority to classify indexed annuities as securities, but it sent the rule back to the SEC for further work because of its conclusion that the analysis of the rule’s effects had been faulty.

Old Mutual filed a petition for a rehearing in December, asking the court to stay the rule two years after any new rule was reissued. But, after receiving comments from the SEC on the agency’s plans to conduct an analysis by this spring, the court on Wednesday acted to throw out the rule entirely.

The panel says in its latest decision that the SEC “cannot justify the adoption of a particular rule based solely on the assertion that the existence of a rule provides greater clarity to an area that remained unclear in the absence of any rule.”

“Whatever rule the SEC chose to adopt could equally be said to make the previously unregulated market clearer than it would be without that adoption,” the panel says. “The fact that federal regulation of EIAs would bring ‘clarity’ to this area of the law is not helpful in assessing the effect Rule 151A has on competition.”

Read the full version of this story, which originally appeared in National Underwriter Health & Life.

Read about the battle of Rule 151A from the archives of National Underwriter Health & Life.


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