Deference to the Rulemaker, Not the Rule: The D.C. Circuit's Enabling Rejection of the SEC's Fixed Indexed Annuities Rule in American Equity Investment Life Insurance Co. v. SEC

IntroductionSince the federal securities laws went into effect in 1933, courts have often struggled with the proper application of investor protections to a rapidly changing financial services industry.1 Annuity contracts have been an especially frequent source of uncertainty for courts.2 As consumers have grown increasingly wary of the devastating effects of inflation on retirement savings, insurers have responded by developing innovative products that combine a traditional annuity structure with potentially riskier, and thus more rewarding, investment features.3 These hybrid products aim to combine the safety of an annuity with the long-term capital growth typically associated with equity exposure.4Hybrid annuities are particularly vexing for courts because they straddle the boundary between state and federal regulatory authority.5 Annuities are regulated by the various state insurance commissioners, who restrict the fees and commissions that insurers may charge, the investment activities they may undertake, and the representations they may make to prospective customers.6 The SEC, however, is charged with protecting investors in securities from fraud and other deceptive sales practices and may seek to regulate hybrid products that pose unusual levels of risk.7 For this reason, a court called upon to determine whether a state-regulated annuity is risky enough to warrant federal oversight must confront difficult and sensitive questions regarding the "respective spheres of operation of federal and state law."8In 2010, in American Equity Investment Life Insurance Co. v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit rejected the SEC's attempt to regulate one such hybrid product, known as a fixed indexed annuity ("FIA").9 The D.C. Circuit's decision was widely viewed as a victory for state insurance commissioners, who had taken the lead in regulating FIAs and had brought suit to protect their jurisdictions from federal encroachment.10 One commentator even praised the court for attempting to put an end to the SEC's "overreaching," and portrayed the decision as an example of the robust judicial review needed to keep federal agencies in check.11Those who worry about the ever-growing power of federal administrative agencies are unlikely to be entirely satisfied with the American Equity decision.12 Although the D.C. Circuit ultimately vacated the SEC's rule applying the securities laws to FIAs, it endorsed an expansive view of a federal agency's authority to regulate in an area historically reserved to the states.13 Writing for a unanimous panel, Chief Judge David B. Sentelle concluded that the existing regulation of FIAs by state insurance commissioners did not bar the SEC from further regulating those products.14 The court's opinion suggests that the SEC may apply the securities laws to any annuity that it deems sufficiently risky and thus may establish the limits of its own regulatory authority in the process.15 For this reason, the court accepted the SEC's conclusion that FIAs expose annuity holders to "investment risk" and therefore require federal oversight.16In short, the court deferred to the SEC's rule, even though the rule threatened to upset the existing balance of federal and state power in the regulation of hybrid products.17 Yet the court showed little or no deference in requiring the agency to justify its encroachment on state regulation by providing a convincing cost-benefit analysis.18 This Comment examines the court's decision and suggests that an even less deferential approach is needed to prevent federal agencies from encroaching on areas of traditional state regulation.19This Comment begins in Part I with a brief overview of FIAs and their regulation by state and federal authorities.20 Part II discusses the practice of judicial deference to administrative interpretations of law, including rules issued by federal agencies such as the SEC.21 It then discusses the D. …