Appellate Court Sends Annuity Rule Back to SEC

A federal appellate court has sent a 2008 rule governing fixed indexed annuities (FIAs) back to the U.S. Securities and Exchange Commission (SEC) that the court said was improperly passed.

A federal appellate court has sent a 2008 rule governing fixed indexed annuities (FIAs) back to the U.S. Securities and Exchange Commission (SEC) that the court said was improperly passed.

The U.S. Court of Appeals for the D.C. Circuit issued the order in a challenge to Rule 151A that states that FIAs are not annuity contracts and, therefore, are subject to federal securities laws instead of being solely subject to state regulations.  A fixed index annuity (FIA) is a hybrid financial product that combines some of the benefits of fixed annuities with the added earning potential of a security. In FIAs, the insurance company credits the purchaser with a return that is based on the performance of a securities index. Depending on the performance of the securities index to which a particular FIA is tied, the return on an FIA might be much higher or lower than the guaranteed rate of return offered by a traditional fixed annuity.

The SEC had agreed to define annuity contracts and optional annuity contracts as securities so it could better police the fast-growing market, applying to indexed annuities issued on or after January 12, 2011. Challenging the rule was the American Equity Investment Life Holding Company of West Des Moines, Iowa.

“It is obvious that the SEC believes imposing a federal framework on FIAs would be superior to the existing patchwork of state insurance laws,” declared Chief U.S. Circuit Judge David B. Sentelle, writing for the court. “Indeed, after a more thorough review of the existing state law regime, the Commission may decide ultimately that Rule 151A will promote competition, efficiency, and capital formation. Nevertheless, the Commission must either complete an analysis sufficient to satisfy its obligations under § 2(b) (affecting SEC regulatory actions), or explain why that section does not govern this rulemaking.”

Sentelle pointed out that state insurance laws governing fixed annuity contracts require insurance companies to guarantee a minimum of the contract value after any costs and charges are applied and that these state laws generally require the minimum guarantee be at least 87.5% of the premiums paid, accumulated at an annual interest rate of 1% to 3% percent. The laws also generally impose disclosure and suitability requirements, which vary from state to state.

SEC Worries

With a total of 322 FIAs being offered by 58 insurance companies when the rule was promulgated, according to Sentelle, the SEC was increasingly concerned that these FIAs were not being sold through registered broker/dealers and were not registered with the SEC despite their tie-in to a securities market, and those concerns led to the rule.

Rule 151A provides that a contract that is regulated as an annuity under state insurance law is not an "annuity contract" under § 3(a)(8) of the Securities Act of 1933 if:

  • The contract specifies that amounts payable by the issuer under the contract are calculated at or after the end of one or more specified crediting periods, in whole or in part, by reference to the performance during the crediting period or periods of a security, including a group or index of securities; and stating that fixed indexed annuities (FIAs) are not annuity contracts within the meaning of the Act; and
  • Amounts payable by the issuer under the contract are more likely than not to exceed the amounts guaranteed under the contract.

SEC Will Keep Working on Rule

"We will continue to consider the procedural issue identified in the opinion," SEC spokesman Kevin Callahan, told Reuters.

The appellate ruling is available here.

The rule being challenged is available here.