Senate Bill Would Nullify SEC Rule 151A

As the US Court of Appeals for the District of Columbia considers the future of SEC Rule 151A, bi-partisan legislation introduced by Senator Ben Nelson would nullify the Commission’s adoption of Rule 151A before it has a chance to take effect. The Fixed Indexed Annuities and Insurance Products Classification Act, S. 1389, provides that Rule 151A will have no force or effect. There is a companion bill in the House, HR 2733, introduced by Rep. Gregory Meeks.

The draft legislation expresses a congressional sense that the SEC’s adoption of Rule 151A interferes with state insurance regulation, harms the insurance industry, reduces competition, and creates unnecessary and excessive regulatory burdens. The measure also embodies a congressional finding that indexed insurance and annuity products offered by insurance companies are subject to a wide array of state laws and regulations, including non-forfeiture requirements that provide for minimum guaranteed values, thereby protecting consumers against market related losses.

Adopted earlier this year, Rule 151A defines indexed annuities as not being exempt annuity contracts under Section 3(a)(8) of the Securities Act. Relying on a series of US Supreme Court rulings, the SEC reasoned that, given the unpredictability of the securities markets, index annuities contain substantial risk that must be addressed by the disclosure regime established by the Securities Act so that investors can accurately evaluate their investment risk.

The effective date of Rule 151A is January 12, 2011, two years after its adoption. Rule 151A was challenged in the US Court of Appeals for the District of Columbia Circuit in American Equity Investment Life Insurance Company v. SEC, No. 09-1021. Oral argument was held on May 8, 2009.

Rule 151A is being challenged by issuers of fixed indexed annuities that would be subject to SEC regulation as a consequence of the rule. Fixed indexed annuities are annuities, argued the issuers, not regulated securities. They are uniformly recognized as such by the states and are subject without exception to the state laws that exist to assure that insurance products provide protections against risk commensurate with the name. Unlike variable annuities and mutual funds, noted the issuers, fixed indexed annuities are not marketed or valued according to the investment management of the issuer. The petitioners asked the federal appeals court to vacate Rule 151A.

In its brief filed with the federal court of appeals, the SEC contended that its adoption of Rule 151A was based on a permissible construction of the term “annuity contract” in Section 3(a)(8). The Commission explained that purchasers of indexed annuities are exposed to a significant investment risk, namely the volatility of the underlying securities index, that the securities laws were enacted to address through disclosure to investors. Moreover, the Commission said that it reasonably concluded that indexed annuities described by Rule 151A expose purchasers to investment risk that the Securities Act was intended to address through disclosure to investors and, therefore, are not the sort of annuity that Congress intended to leave exclusively to state insurance regulation through the Section 3(a)(8) exemption.