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SEC's Indexed Annuity Rule Under Legal Cloud

A new SEC rule we posted about late last year requiring certain indexed annuities to register with the Commission was challenged recently by an insurance company, American Equity Investment Life Ins. Co., whose annuity products would fall under the new rule. The challenged rule, Securities Act Rule 151A, adopted late in December of 2008, defines "indexed annuities," and requires indexed annuities that satisfy the rule’s definition and are issued on or after January 12, 2011 to register under the Securities Act. As we reported in our December 29, 2008 post about the new rule:
Section 38(a)(8) of the Securities Act exempts annuity contracts and optional annuity contracts from regulation under the Securities Act. But, the Section 38(a)(8) exemption is not available to all contracts that are “annuity contracts” under state law (e.g., variable annuities). Whether or not indexed annuities fell within the scope of the exemption, however, had not been clarified until now. Under the new rule 151A, indexed annuities are not "annuity contracts" and are not exempt from the Securities Act if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract. The rule also provides a principles-based manner in which this determination is made.

The rule was challenged on the grounds that the SEC's interpretation of the term "annuity contract" was unreasonable, and also on the grounds that the Commission failed to assess sufficiently the effect of the rule on efficiency, competition, and capital formation under as required for SEC rulemaking by the Securities Act. The DC Circuit found that the SEC's interpretation of the term "annuity contract" was reasonable, but remanded the case to the SEC to address the deficiencies in its analysis of the effect of the rule on efficiency, competition, and capital formation. Should the Commission remedy the analysis sufficient to meet what the Court sees as the SEC's obligations under the Securities Act, it is likely that Rule 151A will survive this round of challenges.

The full text of the DC Circuit Court's opinion in American Equity Investment Life Ins. Co. v. SEC (D.C. Cir. 7/21/09) is available at: http://lawprofessors.typepad.com/files/d.c.opiniononindexannuities.pdf

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