SEC's EIA rule may resurface

Appeals court finds commission's rulemaking "arbitrary and capricious'

Jul 26, 2009 @ 12:01 am

By Sara Hansard

The Securities and Exchange Commission will likely reissue a rule that classifies equity index annuities as securities and subjects them to federal oversight. The Court of Appeals for the District of Columbia Circuit last Tuesday ruled that the SEC does in fact have the legal authority to declare jurisdiction over such annuities. But it ordered the commission to reconsider the rule, saying it failed to consider properly its effect on efficiency, competition and capital formation. “The SEC purports to have analyzed the effect of the rule on competition but does not disclose a reasoned basis for its conclusion that [the rule] would increase competition,” the court said in its ruling, which was written by Chief Judge David Sentelle. The SEC's rule, issued late last year, was challenged by an industry group led by American Equity Investment Life Insurance Co. of West Des Moines, Iowa, and the National Association of Insurance Commissioners of Washington. The SEC is under no deadline to reissue the rule. Still, “I would expect that in relatively short order, they will reissue the rule,” said Thomas Gorman, a partner in the Washington office of Columbus, Ohio-based law firm Porter Wright Morris & Arthur LLP. “They're going to want to improve the disclosure,” he said. Mr. Gorman is a former senior counsel of the SEC's Division of Enforcement. The SEC also has the option of asking the appeals court to reconsider its ruling. That would have to be done by Sept. 4. Or it could appeal the ruling to the Supreme Court. The SEC declined to comment on what course of action it will take. “We will continue to consider the procedural issue identified in the opinion,” SEC spokes-man Kevin Callahan wrote in an e-mail. The SEC issued the rule late in 2008 shortly before then SEC Chairman Christopher Cox left office. The rule, which was to have taken effect Jan. 12, 2011, was designed to provide greater consumer protections on equity index annuities. Those on both sides of the contentious debate claimed victory in last week's ruling. “The SEC will be able to gather compelling evidence of investor confusion and harm relating to the sale of equity indexed annuities that will more than outweigh any concerns regarding duplication of regulation efforts,” said Ron Rhoades, chief compliance officer of Joseph Capital Management LLC in Hernando, Fla., which manages $80 million. Although state insurance regulators have cracked down on sales practice problems, abuses persist, said Mr. Rhoades, a member of the Industry Issues Committee of the National Association of Personal Financial Advisors of Arlington Heights, Ill. Indeed, even some insurance salesmen who sell the products concede that there are numerous problems with the way the products are designed and sold.
“I've never seen a product where it is more critical for an adviser to know the product and to do the right thing for the client,” said Paul Puckett, principal and chief compliance officer of Beacon Wealth Advisors LLC in Virginia Beach, Va., which manages $10 million. “The potential to sell a bad EIA is very high.” Mr. Puckett conceded that he has “mixed feelings” about the rule. Those opposed to the rule said that the SEC faces an uphill battle in getting a new version of the rule through the courts. “The court invalidated the rule on a ground that goes to the heart of the SEC's decision to act in this area,” said Eugene Scalia, a partner in the Washington office of Los Angeles-based law firm Gibson Dunn & Crutcher LLP.

He argued the case against the rule for a group of life insurance companies and equity index annuity issuers led by American Equity.

Kim O'Brien, director and executive vice president of the National Association for Fixed Annuities in Milwaukee, said the SEC's rule would make it more difficult for investors to buy equity index annuities. That's because only brokers would be allowed to sell them, she said.

“Not everybody has a financial adviser in their community” who sells equity index annuities, Ms. O'Brien said. “It's like saying you can't buy milk at your service station anymore; you can only buy it at your grocery store.”

An EIA is an immediate or deferred fixed annuity that earns interest or provides benefits that are linked to an equity index such as the Standard & Poor's 500 stock index.

In 2008, $26.5 billion in premiums were collected for such annuities, according to NAFA.

E-mail Sara Hansard at


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