D.C. Court Vacates SEC Rule on Annuities Ahead of Senate Reform Vote
July 13, 2010 by Sean P. Carr
The U.S. Court of Appeals for the District of Columbia Circuit ordered a U.S. Securities and Exchange Commission rule to regulate equity-indexed annuities as securities to be vacated, dealing a victory to a coalition of annuity issuers and state insurance commissioners.
The order in American Equity Investment Life Insurance Co., et al v. Securities and Exchange Commission came as the U.S. Senate is preparing to vote on a financial regulatory reform bill that would also reverse SEC Rule 151A, which was to take effect Jan. 12, 2011 (BestWire, June 24, 2010). Lawmakers added the amendment during conference committee deliberations; the House of Representatives voted 237-192 to back the Wall Street reform bill, HR 4173 (BestWire, July 1, 2010).
The SEC “failed properly to consider the effect of the rule upon efficiency, competition and capital formation,” the appeals court found in its order, which was in response to a petition from plaintiffs. In vacating the rule, the judges went further than their July 2009 decision, which asked the SEC to reconsider its rule. That decision faulted the SEC, but did not find it to be in violation of the Securities Act of 1933 (BestWire, July 21, 2009).
The court lost patience with the SEC, said Wendy C. Waugaman, president and chief executive officer, American Equity Investment Life Holding Co. “We believe the court’s decision sets an important precedent on the appropriate remedy when an agency like the SEC adopts a rule in a flawed rulemaking process,” she said in an e-mail.
“The commission will study the court order as well as the financial reform legislation under consideration by Congress to determine how best to proceed,” SEC spokesman John Nester said.
The judges agreed with plaintiffs that the SEC did not conduct due diligence when creating the flawed rule, said Jim Poolman, spokesman for the Coalition for Indexed Products, a group that includes the plaintiffs that sell indexed annuities. “The SEC failed to consider the strong state regulations in place to protect consumers, and how the rule would diminish the choices for consumers,” said Poolman, a former North Dakota insurance commissioner.
In December 2008, the commission voted to reclassify the annuities as securities, not insurance products. Indexed annuities would be treated as securities if amounts payable by the insurer are more likely than not to surpass amounts guaranteed under the contract. Insurance carriers would be required to file their products with the SEC and offer them via a prospectus (BestWire, Dec. 17, 2009).
The court order “alleviates the limbo that state insurance regulators, members of the insurance industry and consumers have been in,” National Association of Insurance Commissioners President and West Virginia Insurance Commissioner Jane L .Cline said in a statement. The NAIC also sued to block the SEC rule.
In the past year, state insurance commissioners have strengthened suitability marketing standards for annuities through a new model law, NAIC President-elect and Iowa Insurance Commissioner Susan Voss said in a statement. “State insurance regulators will continue to protect consumers and build upon our history of effective regulation of these products,” she said.
(By Sean P. Carr, Washington Correspondent: sean.carr@ambest.com)
