Insurance Law

TOP CASE: Federal Appeals Court Vacates Proposed Rule Calling for SEC Regulation of Fixed Index Annuities

   By Sherilyn Pastor, Partner and Practice Group Leader, McCarter & English, LLP

On July 12, 2010, the United States Court of Appeals for the District of Columbia in Am. Equity Inv. Life Ins. Co. v. SEC, 2010 U.S. App. LEXIS 14249 (D.C. Cir. July 12, 2010) struck a blow to the Securities and Exchange Commission’s (“SEC”) attempts to classify fixed index annuity products (“FIAs”) as securities falling under its regulatory authority.  The Securities Act of 1933, 15 U.S.C. §§ 77a et seq. (“1933 Act”), exempts from federal regulation annuity contracts issued by insurers.  Because FIAs’ rates of return are linked to the performance of a securities index, the SEC’s proposed Rule 151A sought to subject them to the full panoply of the 1933 Act’s requirements.


The Court explained, by way of background, that a traditional fixed annuity is a contract issued by a life insurer under which the purchaser makes a series of premium payments to the insurer in exchange for a series of periodic payments from the insurer at agreed upon later dates.  The insurer guarantees that the purchaser will earn a minimum rate of interest over time.  Fixed annuities are subject to state insurance law regulations, which generally require insurers to guarantee a minimum of the contract value after any costs and charges are applied – typically 87.5% percent of the premiums paid, accumulated at an annual interest rate of 1 to 3 percent. State insurance laws also impose certain disclosure and suitability requirements on insurers. As noted by the Court, FIAs offer added earning potential.  Like traditional fixed annuities, FIAs are subject to state insurance laws requiring insurers to guarantee the same 87.5% of purchase payments.  But, unlike traditional fixed annuities, the purchaser’s rate of return is not based upon a guaranteed interest rate.  It instead is based on the performance (good or bad) of a securities index, such as the Dow Jones Industrial Average, Standard & Poor’s 500 Index or NASDAQ 100 Index.


Given the characteristics of a FIA, including its tie to the performance of a securities index, the SEC had sought to share regulatory authority over these products with state insurance regulators. The SEC urged that FIAs are different from the typical “annuity contracts” and therefore not exempt from the 1933 Act.  The Court did not take issue with the SEC’s analysis in this regard, but rather concluded that the SEC had failed to fulfill its statutory responsibility of considering the new rule’s effect on efficiency, competition, an capital formation.  The Court therefore vacated Rule 151A, which would have gone into effect in January 2011.


What is the upshot of this Court’s decision?  For now, state insurance regulators will have sole express oversight responsibility for FIAs.  They therefore will continue to be covered by states' guarantee funds, which protect claimants and policyholders in the event of insurer insolvency.  If and when the SEC again takes up the issue of FIA regulation again, it will then need to consider the status of now pending legislation impacting financial services regulation and its classification and treatment of FIAs.


Sherilyn Pastor is a Partner and Practice Group Leader of McCarter & English, LLP’s Insurance Coverage Team.  She has secured hundreds of millions of dollars in insurance assets for policyholder clients throughout the country and counsels policyholders assessing their potential risks, new insurance products and their insurance programs. Ms. Pastor is the author of Chapter 1, Introduction to Insurance, of the New Appleman Insurance Law Practice Guide, and Chapter 19, Duty to Indemnify Personal and Advertising Injury, of the New Appleman on Insurance Law Library Edition.


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