Opponents of the US Securities and Exchange Commission’s (SEC)
controversial Rule 151A have hailed a ruling by the US District Of
Columbia Circuit Court of Appeals as a partial victory. Under Rule
151A adopted earlier this year, the SEC will assume regulation of
fixed indexed annuities (FIA) in January 2011.

In its judgment, the court ordered the SEC to reconsider the rule
which deems annuities linked to equity indexes to be securities
subject to registration with the SEC. The court held that the SEC
“failed to properly consider the effect of the rule upon
efficiency, competition and capital formation” and remanded the
rule requiring the SEC for further consideration.

The ruling by the court was a sequel to a suit filed on 16 January
this year by the Coalition for Indexed Products, a group
representing indexed annuity issuers and distributors including
American Equity Investment Life Insurance Company, BHC Marketing,
Midland National Life Insurance Company, National Western Life
Insurance Company, OM [Old Mutual] Financial Life Insurance
Company, and Tucker Advisory Group.

However, in its ruling the court also concluded that the SEC’s
assessment of “investment risk” associated with FIAs was not
unreasonable, and thus the SEC may choose to regulate them.

Prior to adoption of Rule 151A, the SEC argued that individuals
purchasing indexed annuities are exposed to “a significant
investment” risk in the form of volatility of an underlying
securities index and asserted that the probability of contract
gains above guaranteed minimums was “investment risk” justifying
federal oversight.

The SEC also argued that insurance companies have successfully
utilised FIA’s investment feature, which appeals to purchasers not
on the usual insurance basis of stability and security, but on the
prospect of investment growth.

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Following the court’s ruling, American Equity Life noted that Rule
151A’s future remains uncertain. The remand to the SEC for further
consideration will, said the insurer, add to a growing list of
issues facing the SEC, and whether addressing the flaws in Rule
151A will be given high priority is unknown.

American Equity stressed that it believes Rule 151A will have “a
chilling effect on competition” and that the efficiency of the rule
which duplicates consumer protections already provided by state
insurance laws is questionable.

Political opposition to the rule is also growing with bills
introduced in the Senate and House of Representatives aimed at
reversing the SEC’s decision.