Court overturns rule to treat equity index annuities as securities

The Court of Appeals for the District of Columbia Circuit today ordered the Securities and Exchange Commission to reconsider a rule that treats most equity index annuities as securities. The ruling is a victory for the equity index annuity industry and state insurance commissioners. The SEC's rule, issued late last year, was challenged by an industry group led by American Equity Investment Life Insurance Company of West Des Moines, Iowa, and the National Association of Insurance Commissioners of Washington. They argued that the SEC did not have legal authority to declare jurisdiction over annuities, which are regulated by the states as insurance products. The court found that the SEC's consideration of the effect of its rule on efficiency, competition and capital formation was “arbitrary and capricious.” “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 reasoning that the new rule would bring legal clarity to the status of equity index annuities “is flawed,” the court said. “Whatever rule the SEC chose to adopt could equally be said to make the previously unregulated market clearer than it would be without that adoption,” the court said in the ruling. The SEC's rule, which was to have taken effect Jan. 12, 2011, was designed to provide greater consumer protections to equity index annuities "We are pleased that the court validated the Commission's interpretation regarding equity indexed annuities, which would subject them to the important investor protections of the federal securities laws. We will continue to consider the procedural issue identified in the opinion," said Kevin Callahan, SEC spokesman.