Source: http://annuityadvisors.com/articles/detail/151a?artid=184
Timestamp: 2019-04-20 00:11:02+00:00

Document:
On July 21, 2009 The United States Court of Appeals for the District Of Columbia Circuit ordered the Securities and Exchange Commission to reconsider Rule 151A which it adopted in the final weeks of the Bush administration and deems annuities linked to equity indexes to be securities subject to registration with the SEC. The Court held that the SEC "failed to properly consider the effect of the rule upon efficiency, competition and capital formation” and remanded the Rule requiring the SEC to do just that.
After a preliminary review of the decision, NAFA is very pleased that the Rule was found flawed and remanded to the SEC. By the same token, NAFA is disappointed that the Court did not find that indexed annuities are exempt under section 3(a)(8) of the Securities Act. This is why the NAFA sought a legislative repeal of Rule 151A and supports the House sponsored bill (H.R. 2733) and Senate sponsored bill (S. 1389) which are critical to ensure that fixed indexed annuities are not subject to duplicative, bureaucratic, and potentially inefficient oversight by the SEC.
After a brief conversation with Benjamin Branch - who has taken over for Tre – yesterday, we are happy to report that they added four new cosponsors for the House version of the bill since he's been on board: Smith (R-TX); Klein (D-FL); Coble (R-NC) and Wamp (R-TN), He also said that his office is planning to circulate another Dear Colleague letter in the near future to round up more co-sponsors. Finally, he noted that the Senate version has two new co-sponsors: Vitter (R-LA) and Isakson (R-GA).
KEEP THE SUPPORT GROWING – GET ACTIVE and Fly In to DC to get your representatives on board.
This reasoning is flawed. The lack of clarity resulting from the “uncertain legal status” of the financial product is only another way of saying that there was not a regulation in place prior to the adoption of Rule 151A determining the status of those products under the annuity exemption of §3(a)(8). The SEC cannot justify the adoption of a particular rule based solely on the assertion that the existence of a rule provides greater clarity to an area that remained unclear in the absence of any rule. Whatever rule the SEC chose to adopt could equally be said to make the previously unregulated market clearer than it would be without that adoption. Moreover, the fact that federal regulation of FIAs would bring “clarity” to this area of the law is not helpful in assessing the effect Rule 151A has on competition. Again, creating a rule that resolves the “uncertain legal status” of FIAs might be said to improve competition. But that conclusion could be asserted regardless of whether the rule deems FIAs to fall within the SEC’s regulatory reach or outside of it. Indeed, the SEC would achieve a similar clarity if it declined outright to regulate FIAs. Section 2(b) does not ask for an analysis of whether any rule would have an effect on competition. Rather, it asks for an analysis of whether the specific rule will promote efficiency, competition, and capital formation.
The SEC’s reasoning with respect to competition supports at most the conclusion that any SEC action in this area could promote competition, but does not establish Rule 151A’s effect on competition. The SEC’s competition analysis also fails because the SEC did not make any finding on the existing level of competition in the marketplace under the state law regime. The SEC asserted competition would increase based upon its expectation that Rule 151A would require fuller public disclosure of the terms of FIAs and thereby increase price transparency. The SEC could not accurately assess any potential increase or decrease in competition, however, because it did not assess the baseline level of price transparency and information disclosure under state law.
The SEC nevertheless argues that it is not required to conduct such a detailed § 2(b) analysis because doing so would contravene the Supreme Court’s reasoning in United Benefit and VALIC. [The] SEC’s § 2(b) analysis is arbitrary and capricious because it failed to consider the extent of the existing competition in its analysis. The Commission’s efficiency analysis is similarly arbitrary and capricious. The SEC concluded that Rule 151A would promote efficiency because the required disclosures under the rule would enable investors to make more informed investment decisions about purchasing indexed annuities. The SEC advanced further that the rule’s sales practice protections would enable sellers to promote more suitable recommendations to investors; this, in turn, would lead to investors making even better informed decisions, which would offer greater efficiency. As with its analysis of competition, however, the SEC’s analysis is incomplete because it fails to determine whether, under the existing regime, sufficient protections existed to enable investors to make informed investment decisions and sellers to make suitable recommendations to investors. The SEC’s failure to analyze the efficiency of the existing state law regime renders arbitrary and capricious the SEC’s judgment that applying federal securities law would increase efficiency. Finally, the SEC’s flawed efficiency analysis also renders its capital formation analysis arbitrary and capricious.
The SEC’s conclusion that Rule 151A would promote capital formation was based significantly on the flawed presumption that the enhanced investor protections under Rule 151A would increase market efficiency. This analysis fails with the failure of its underlying premise. Having determined that the SEC’s § 2(b) analysis is lacking, we conclude that this matter should be remanded to the SEC to address the deficiencies with its § 2(b) analysis.
It is obvious that the SEC believes imposing a federal framework on FIAs would be superior to the existing patchwork of state insurance laws. Indeed, after a more thorough review of the existing state law regime, the Commission may decide ultimately that Rule 151A will promote competition, efficiency, and capital formation. Nevertheless, the Commission must either complete an analysis sufficient to satisfy its obligations under § 2(b), or explain why that section does not govern this rulemaking. Accordingly, we grant the petitions and remand for further reconsideration consistent with this opinion. So ordered.

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