Insurers Sue to Stop SEC Rule Regulating Annuities (Update2)

By Jesse Westbrook
Bloomberg News
January 16, 2009

Jan. 16 (Bloomberg) -- Insurance companies and their marketers sued to block a Securities and Exchange Commission rule that defines indexed annuities as securities subject to U.S. regulation, saying $1.8 billion in profit may be erased.

American Equity Investment Life Insurance Co., Midland National Life Insurance Co. and four other companies filed the lawsuit today in a federal appeals court in Washington. Before the SEC adopted its rule last month, fixed-indexed annuities were overseen by state insurance regulators.

The SEC "has exceeded its authority," the companies said in a statement. The agency also "gave insufficient attention to the costs its rule will impose on insurance companies, agents and consumers during these challenging financial times."

Fixed-indexed annuities are products sold to retirees that link returns to equity markets and guarantee investors minimum payouts. The SEC rule, in its first year, may erase $1.5 billion of profit at firms that sell annuities and $300 million at insurance companies, the litigants said in their statement.

The rule that takes effect today requires agents to register with the SEC and either convert into a broker-dealer or affiliate with a larger securities firm, American Equity Chief Executive Officer Wendy Carlson said in an interview.

"It's very ironic to us that an insurance product that's already heavily regulated by the states should be a priority for the SEC right now," she said. "The SEC already has its hands full."

Added Disclosure

Supervision will ensure investors in fixed-indexed products are provided sufficient disclosure, SEC Chairman Christopher Cox, a Republican, said at a Dec. 17 public meeting in Washington. He said buyers need to know the fees they're being charged and penalties for early withdrawal. SEC spokesman John Nester declined to comment on the lawsuit.

American Equity Investment and Midland National Life are represented by Gibson Dunn & Crutcher LLP lawyer Eugene Scalia, who successfully sued the SEC to overturn a rule in 2006 that required mutual funds to appoint independent chairmen. He is the son of U.S. Supreme Court Associate Justice Antonin Scalia.

The other companies in the lawsuit are BCH Marketing, National Western Life Insurance Co., OM Financial Life Insurance Co. and Tucker Advisory Group Inc.

'Prohibited Realm'

SEC Commissioner Troy Paredes, a Republican, voted against the indexed-annuity rule, arguing the agency was "entering into a realm that Congress prohibited us from entering." He also said the SEC rule assumed states "are inadequate to regulate these products."

"Such a judgment is beyond our mandate or our expertise," Paredes said Dec. 17.

The U.S. Court of Appeals for the District of Columbia has rejected three SEC rules since 2006, including the mutual-fund independent-chairman regulation.

The court, ruling the SEC had exceeded its authority, also shot down a requirement forcing hedge funds to submit to routine inspections and a rule allowing brokerage firms to operate fee- based accounts without adhering to the same consumer-protection standards as money managers.

Mary Schapiro, who President-elect Barack Obama has picked to replace Cox, said in Senate testimony yesterday that she will seek legislation from Congress to regulate entities and financial products that she believes should fall under the agency's domain. Schapiro now leads the Financial Industry Regulatory Authority, a non-government organization that oversees U.S. brokerages.

The case is American Equity Investment Life Insurance Co. v. U.S. Securities and Exchange Commission, 09-1021, U.S. Court of Appeals for the District of Columbia Circuit (Washington).

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