SEC Rule 151A—designed to subject fixed indexed annuities to regulation under the federal securities laws—has been judicially vacated and legislatively overridden. On July 12, 2010, the U.S. Court of Appeals for the D.C. Circuit vacated the Rule as a result of the SEC’s “arbitrary and capricious” failure to perform the required analysis of the effect of the Rule on efficiency, competition, and capital formation. On July 21, 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act (DFA), which includes an amendment that effectively precludes the SEC from reissuing the Rule.
The SEC, however, may claim limited victories in that: (1) the DC Court of Appeals upheld as reasonable under Chevron the SEC’s interpretation that indexed annuities are “annuity contracts” exempted from securities regulation under the Securities Act of 1933; (2) the DFA provides that it shall not be construed to affect whether any other insurance product is or is not an exempt security; and (3) the DFA addresses certain suitability concerns that prompted the SEC’s regulation of indexed annuities.
Central here is that qualification for the securities exemption for indexed annuities is linked to compliance with March 2010 NAIC Suitability in Annuity Transactions Model Regulation (or state law equivalent), which seeks to bring state insurance suitability standards in line with the suitability standards currently imposed on the securities industry. Further, the new financial reform legislation contains provisions designed to provide funding to the states to combat the sale of annuities and life insurance to seniors through the use of fraudulent or misleading Senior-Specific Certifications and Professional Designations.
Will the SEC be content with this limited success? Will it instead seize on the raft of regulatory initiatives required by the DFA or resort to back-door cooperation with FINRA or even the states in order to further regulate the sale of indexed products? One possible indicator: SEC Chairman Mary Schapiro testified before the House Committee on Financial Services on July 14, 2010, reiterating her longstanding “concerns” about how indexed annuities are sold, and stating that although the SEC would not “re-engage” in efforts to directly regulate indexed annuities as securities, it would volunteer its assistance to state insurance commissioners in their efforts to regulate the sale of indexed products.