Court Vacates Rule on Fixed Indexed Annuities
July 16, 2010 by Matthew Reynolds
By MATTHEW REYNOLDS
(CN) – Fixed indexed annuities should be subject to state rather than federal financial regulations, the D.C. Circuit ruled. The three-judge panel vacated an SEC rule regulating the financial products, saying the agency “failed to properly consider the effect of the rule upon efficiency, competition and capital formation.”
Fixed indexed annuities differ from a traditional fixed annuities, which are exempt from federal securities laws, because the “purchaser rate of return is not based on a guaranteed interest rate,” the ruling states.
American Equity Investment Life Insurance Co. argued that the fixed indexed annuities should be exempt under federal securities laws, and that the SEC had unreasonably interpreted the term “annuity contract” to exclude fixed indexed annuities.
Chief Judge David Sentelle, writing for the panel, upheld as “reasonable” the SEC’s interpretation of the regulation, known as Rule 151A.
“In fixed indexed annuities, as in securities, there is a variability in the potential return that results in a risk to the purchaser,” he wrote. “By contrast, an annuity contract falling under Rule 151A’s exemption avoids this variability by guaranteeing the interest rate ahead of time.”
But the court vacated the rule on the alternate ground that the SEC “failed to properly consider the effect of the rule upon efficiency, competition, and capital formation.”
Sentelle said the agency “does not disclose a reasoned basis for its conclusion that Rule 151A would increase competition.”
“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,” Sentelle wrote. “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.”
Citing the agency’s “flawed” analysis, the court vacated Rule 151A.
