Legal Battle for Fixed Indexed Annuities Set to Begin in May
February 20, 2009
SOURCE: InsuranceNewsNet, Inc.
Oral arguments on a suit challenging the Securities and Exchange Commission's Rule 151A has been scheduled for May 8.
The American Equity Investment Life Insurance Co. suit's petitioners argue that the SEC exceeded its authority under the Section 3(a)(8) of the Securities Act of 1933 ("Securities Act") which states:
Section 3. (a) Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:
(8) Any insurance or endowment policy or annuity contract or optional
annuity contract, issued by a corporation subject to the supervision of the
insurance commissioner, bank commissioner, or any agency or officer performing
like functions, of any State or Territory of the United States or the District of
Columbia[.]
In addition the petitioners' claim that the SEC violated the Administrative Procedure Act (APA). The APA is the federal law that governs how administrative agencies of the federal government may propose and establish regulations.
Legal experts described the lawsuit as a bold and decisive move that raises the technical flaws in the rule and the rulemaking process, fight for consumers' accessibility to indexed annuity products, and to maintain the affordability of the contracts.
Arguments expected in the litigation include the following:
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The SEC's action directly contradicts a federal court ruling in Malone v. Addison Insurance Marketing Inc. that indexed annuities are not securities. In that case, the court focused upon the assumption of investment risk by the insurer, stating that "the insurer is acting in a role similar to that of a savings institution." The court also rejected the argument that the insured was at risk because the return could be determined by an index since the insurer provided a return of principal and a minimum rate of return guarantee.
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The decision contradicts two Supreme Court decisions, which said that the "allocation of investment risk" between the insurance company and purchaser is one of three key determinants of whether a product is an annuity or a security. The commission also ignored two other components of the Supreme Court's three-part test- whether the product is regulated by the states, and how it is marketed.
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The commission suggested that there were improper sales practices involving fixed indexed annuities when it first proposed the rule, but made no such finding in issuing the final rule. Instead it said that "the presence or absence of sales practice abuses is irrelevant" to its decision to act.
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The Commission gave insufficient attention to the costs its rule will impose on insurance companies, agents, and consumers during these challenging financial times. One estimate projects first-year income loss to distributors at $1.5 billion and a $300 million first-year income loss to insurance companies.
The suit, American Equity Investment Life Insurance Company, et al, vs. SEC, Number. 09-1021, was filed in the U.S. Court of Appeals for the District of Columbia Circuit on Jan. 16.
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In addition to American Equity, the suit named the other plaintiffs as BHC Marketing, Midland National Life Insurance Company, National Western Life Insurance Company, OM Financial Life Insurance Company and Tucker Advisory Group.
The court has also permitted the National Association of Insurance Commissioners (NAIC) to join the case as a petitioner, and the NAIC also has filed a brief. Meanwhile the National Conference of Insurance Legislators (NCOIL) will submit a friend-of-the-court brief.
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