On September 4, 2009, OM Financial Life Insurance Company ("Old Mutual") filed a Petition for Panel Rehearing ("Petition") with the U.S. Court of Appeals for the District of Columbia Circuit ("Court") seeking to stay the effective date of Rule 151A ("Rule") until two years following the reissuance of the current or any revised Rule.

A. July 21 Court Opinion and Remand to SEC

Previously, Old Mutual and other companies (and, separately, certain state regulatory entities) had petitioned the Court to review the Rule on grounds that the SEC not only unreasonably interpreted the "annuity contract" exemption in Section 3(a)(8) of the Securities Act of 1933 ("Act") to exclude fixed indexed annuities ("FIAs"), but also failed to fulfill its responsibility under Section 2(b) of the Act to properly consider the effect of the Rule upon efficiency, competition, and capital formation. Although the Court ruled on July 21, 2009 that the SEC's interpretation of Section 3(a)(8) was reasonable, it remanded the Rule to the SEC for reconsideration to address deficiencies in the SEC's Section 2(b) analysis, which the Court held to be "arbitrary and capricious." The Court, however, did not stay the effective date of the Rule and in its Petition, described below, Old Mutual requested the Court to reconsider its "remedywithout- stay."

B. August Pre-Petition Requests to SEC

In August, prior to filing the Petition, Old Mutual asked the SEC to stay the Rule until two years after the SEC completed a new Section 2(b) analysis and possibly reissued, revised, or withdrew the Rule in light of that analysis. Old Mutual also asked the SEC to consent to an unopposed motion for a 60-day extension of the deadline for filing a rehearing petition, and to a corresponding 60-day stay of issuance of the Court's mandate, to afford the SEC sufficient time to consider whether to stay the Rule's effective date without the pressure of "imminent judicial deadlines." According to the Petition, the SEC orally declined Old Mutual's proposal to file such an unopposed motion and was not able to agree, prior to the deadline for filing a rehearing petition, to stay the Rule's effective date.

C. Grounds for Petition

Old Mutual argued that the Court should grant a rehearing to consider staying the Rule's effective date on grounds that:

  • the Court's remand-without-stay will have an immediate adverse impact on the FIA industry;
  • the Court's remand-without-stay failed to consider an analysis of the factors in Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm'n, 988 F.2d 146 (D.C. Cir. 1993) ("Allied-Signal"), in which the Court outlined the considerations that should be applied in determining whether an agency rule found to be defective should be vacated rather than remanded; and
  • the SEC already has determined that an effective date of no less than two years following issuance of a final FIA rule is necessary for the FIA industry to comply.

1. Adverse impact to the FIA industry. Old Mutual argued that, without a stay, it and other members of the FIA industry would be "compelled to take immediate and costly steps to comply with the current Rule while the SEC undertakes the lengthy and complex process of conducting a proper Section 2(b) analysis, and then deciding whether to reissue a revised rule-or any rule at all." Old Mutual also argued that the FIA industry would be placed "at a substantial competitive disadvantage when and if the Rule goes into effect in January 2011."

Specifically, Old Mutual argued that, without a stay, it would be required to "fundamentally alter" its FIA distribution network to be in a position to continue to sell FIAs by the Rule's current effective date. These changes, according to Old Mutual, would include transitioning its distribution model from one that relied on independent marketing organizations ("IMOs") to one relying on broker-dealers, as well as engaging in the "long and expensive process" of developing and registering new FIA products for the broker-dealer market.

In addition, noting that the SEC's own estimate of first year industrywide compliance costs exceeded $100 million, Old Mutual argued that, without a stay, the FIA industry would be required to immediately bear such costs lest it be unable "to compete effectively in the marketplace against competitors such as securities firms selling established securities products." At the same time, Old Mutual asserted that such "costly actions would be completely wasted in the event the SEC withdraws or substantially revises Rule 151A in light of the Court's opinion and remand (and may not even be possible to complete by January 2011)."

2. Allied-Signal Factors. Old Mutual also argued that the Allied- Signal factors, which apply to the distinction between vacatur and remand, support the more limited "remand-with-stay" remedy that it was seeking. The Allied-Signal factors include:

  • consideration of the seriousness of the order's deficiencies (and thus the extent of doubt whether the agency chose correctly); and
  • an analysis of the disruptive consequences of an interim change that may itself be changed.

Old Mutual argued that the first Allied-Signal factor favored staying the Rule, because there was no reason to believe that there is a substantial likelihood that the SEC can justify the Rule under Section 2(b) on remand.

Regarding the second Allied-Signal factor, Old Mutual argued that its proposed stay would avoid the "enormous disruption to the FIA industry" that the Court's remand-without-stay remedy would cause, which disruption "would fall completely on the FIA industry's shoulders without any offsetting benefit." According to Old Mutual, this would be "particularly true if the SEC were later to withdraw or amend Rule 151A after conducting a proper §2(b) analysis." Old Mutual also argued that the failure to stay the Rule would lead to a "perverse result" where competition would be harmed in the short term while the SEC was engaged in the process of analyzing whether the Rule would adversely impact competition in the long term.

3. SEC Determination of Need for Two-Year Period. Finally, Old Mutual noted that when it adopted the Rule, the SEC extended the effective date of the Rule to two years rather than one year following its publication after determining that "additional time is required for, among other things, making the determinations required by the rule, preparing registration statements for indexed annuities that are required to be registered, and establishing the needed infrastructure for distributing registered indexed annuities." Old Mutual also observed that the "substantial lead time" needed by the FIA industry to comply with the Rule apparently was the reason the Court granted petitioners' motion for expedited briefing in the case, and that the SEC's consent to the request for expedited briefing reflected its recognition of the "major impact" the Rule would have on the FIA industry. Accordingly, Old Mutual concluded by arguing that the relief it was requesting, which would reset the two-year compliance period, "simply makes good sense."

D. Commentary

Old Mutual limited its Petition to requesting the Court to reconsider its "remedy-without-stay." It did not seek a rehearing on the Court's holding that the SEC's interpretation of "annuity contract" under Section 3(a)(8) was "reasonable."

Old Mutual dropped out of the group of six original Petitioners and hired separate counsel from the others in that group.

The Court may ask the SEC for its view of Old Mutual's Petition.

SEC Chairman Mary Schapiro recently responded to a letter from Senator Ben Nelson (and other primary sponsors of the Senate and House bills to overturn Rule 151A), stating that the SEC was carefully considering the Senator's request for an extension of the effective date of Rule 151A.