The jury is out, and the verdict is expected before the end of summer. By way of review, the SEC delivered Rule 151(A) to the brokerage industry in mid-December 2008 as an early Christmas gift. The Rule attempts to classify index-linked fixed annuities as securities and bring their regulation under SEC and FINRA control. The Rule is slated to become effective on January 12, 2011. In early 2009, litigation challenging Rule 151(A) was filed in Federal Court by the Coalition of Indexed Annuities – consisting of several insurance companies, BHC Marketing and one other marketing organization.

The Coalition was able to convince the U.S. Court of Appeals for the D.C. Circuit to expedite the case. The expedited hearing was granted because Rule 151(A), if implemented, stands to do substantial damage to insurance companies issuing annuities, marketing companies distributing annuities and insurance professionals offering annuities to the general public. Also, if the normal litigation time frame is allowed to run, there could be insufficient time for operational adjustments between adoption and implementation.

The preliminary steps in the litigation involved filing various briefs with the Appeals Court by the SEC, the Coalition and the various Amicus Curiae supporting either the SEC or the Coalition. The most notable supporters of the SEC’s position were MetLife and AARP, whereas the Coalition’s supporters included the National Association of Insurance Commissioners and National Conference of Insurance Legislators. The SEC’s central argument is that “if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract”, then owners bear the risk which makes the annuity contract a security. The Coalition’s counter argument is that this unorthodox definition of risk is illogical, because the probability of loss of principal is the legally acceptable definition of investment risk. Since the issuing company guarantees a minimum rate of return if an annuity is held for the term, it is impossible to lose money; therefore, index-linked annuities do not significantly differ from traditional annuities and accordingly are not securities.

The oral arguments were made on May 08, 2009 before a three-judge panel of the U.S. Appeals Court. The judges are currently deliberating, and their decision is expected before September 2009. At this point, there are five possible outcomes:

1. The Court could vacate Rule 151(A) which would require the SEC to start the process over to move forward;
2. It could be upheld and would become effective on January 12, 2011;
3. Remand it back to the SEC because the economic impact was not properly considered, whereupon the SEC will be given an opportunity to correct the flaw;
4. Either side can appeal the Court’s decision to the U.S. Supreme Court, but this Court could refuse to hear the case and the lower Court’s opinion would be final;
5. Legislation could be passed by Congress which would exempt index-linked annuities from Federal regulation. Such legislation [Meeks-Price Bill, H.R. 2733] has been introduced; however, the probability of getting a companion Bill in the Senate and its ultimate passage is currently unknown.

« PREVIOUS ISSUES »

« SUBSCRIPTION PAGE »