Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 6

Section 3(a)(8) of the Securities Act of 1933, which governs the sale of any security through interstate commerce, exempts "annuity contracts" subject to state insurance laws from the federal registration, disclosure, and antifraud requirements of the Act. Rule 151A, which the SEC adopted in 2007, provides that fixed indexed annuities (FIAs) are not annuity contracts within the meaning of the Act and are therefore not exempt from SEC regulation. FIAs are hybrid financial products that combine aspects of fixed annuities with aspects of securities. Like a traditional fixed annuity, which yields a guaranteed interest rate, an FIA has a guaranteed minimum return. But like the return on a security, the expected return on an FIA depends on the performance of a securities index, such as the Nasdaq 100 Index. As a result, the actual yield is more variable than that of a traditional annuity, resulting in greater investment risk for the purchaser. Under Rule 151A, even if an annuity is issued by a state-licensed insurance company, it is still not deemed an "annuity" within the meaning of section 3(a)(8) if (1) its yield is calculated after the crediting period and (2) the amounts payable "are more likely than not to exceed the amounts guaranteed under the contract."
Section 2(b) of the Act specifies that the SEC has a responsibility to consider the effect that a new rule of this sort will have on efficiency, competition, and capital formation. In its attempt to meet this requirement, the SEC provided general statements, including the claim that Rule 151A would enhance competition by providing greater clarity to an area of law that was unclear and would improve efficiency by requiring fuller disclosure to investors. The SEC made no finding to determine whether the proposed rule would provide better results than those obtained under the existing state-law regime.
If you were the manager of an insurance company seeking to challenge Rule 151A, what arguments would you make? What arguments would you expect the SEC to make in its defense? W hat standard will a court apply when evaluating the rule and the SEC's findings? Is Rule 151A valid? [ American Equity Investment Life Insurance Co. v. SEC , 613 F.3d 166 (D.C. Cir. 2010).]