During 2010, Insurance Industry Reached the End of the Battle with the SEC Over Indexed Annuities

Annuities, Blogs

There were many important legal developments in the insurance industry in 2010, and one that looms particularly large is the end of the industry’s battles with the Securities and Exchange Commission over the securities status of indexed annuities.

In July 2010, two very important events took place that brought this face-off to a conclusion in favor of the insurance industry.

One event was the July 12, 2010 decision of the United States Court of Appeals for the District of Columbia in American Equity Investment Life Ins. Co. v. S.E.C., 613 F.3d 166 (D.C. Cir. 2010). In that opinion, the D.C. Circuit held that the SEC’s action was arbitrary and capricious when it considered the impact on efficiency, competition and capital formation of a new SEC Rule 151A. Rule 151A would have stated that fixed indexed annuities were not annuity contracts within the meaning of the Securities Act.

As the court stated in its opening synopsis:

The Securities Act of 1933, 15 U.S.C. §§ 77a et seq.(the Act), exempts from federal regulation annuity contracts issued by a corporation subject to regulation by state insurance laws. Petitioners seek review of a rule promulgated by the Securities and Exchange Commission (SEC or Commission) stating that fixed indexed annuities (FIAs) are not annuity contracts within the meaning of the Act. As a result of this new rule, FIAs are subject to the full panoply of requirements set forth by the Act, instead of being subject solely to state insurance laws. Petitioners argue that the Commission unreasonably interpreted the term “annuity contract” not to include FIAs. Petitioners also assert that the SEC failed to fulfill its statutory responsibility under the Act to consider the effect of the new rule on efficiency, competition, and capital formation. Because we hold that the SEC’s interpretation of “annuity contract” is reasonable . . . we deny the petitions with respect to this issue. We grant the petitions, however, with respect to petitioners’ alternate ground that the SEC failed to properly consider the effect of the rule upon efficiency, competition, and capital formation. Accordingly, we vacate the rule.

American Equity Investment Life Ins. Co. v. S.E.C., 613 F.3d 167-68. (The opinion is available here.)

Much effort went into the litigation battles over Rule 151A, and while much more could be said about Rule 151A, the bottom line is that the issue was properly addressed in the other major development in July 2010: the signing into law of the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” As described in this useful synopsis, after a decade-long battle, “an Act of Congress settled the matter, ensuring that indexed annuities would continue to be regulated as fixed insurance products.”

It took more than a decade of litigation, and an Act of Congress, but the insurance industry can now look back on 2010 as the culmination of a successful struggle over an important aspect of its business.