Wednesday, July 22, 2009
The D.C. Circuit continues its practice of being tough on the SEC's compliance with the requirements for federal rulemaking . Yesterday the Circuit remanded to the agency the SEC's controversial rule 151A that stated that fixed indexed annuities (FIAs) are not annuity contracts within the meaning of the Securities Act (and therefore are treated as securities under the securities laws and not regulated solely by state insurance laws). American Equity Investment Life Ins. Co. v. SEC (D.C. Cir. 7/21/09)(Download D.C.OpiniononIndexAnnuities). According to the Court (1) the SEC's interpretation of "annuity contract" is reasonable under Chevron, but (2) the SEC failed to consider properly the effect of the rule on efficiency, competition and capital formation under section 2(b) of the Act. Therefore, the SEC must either complete an analysis sufficient to satisfy its obligations under section 2(b) or explain why that section does not govern this rulemaking.
On the SEC's interpretation of "annuity contract," the Court found that the statute is ambiguous on the scope of the phrase and that the prior Supreme Court decisions did not set forth a test that determined the treatment of FIAs. Accordingly, under Chevron, the SEC's interpretation of the statute will be upheld if it is reasonable. Because FIAs have characteristics that "involve considerations of investment not present in the conventional contract of insurance," a "variability in the potential return that results in a risk to the purchaser," the SEC's interpretation was reasonable.
As to the SEC's inadequate section 2(b) analysis, the Court first rejected the SEC's argument that the agency was not required to conduct a section 2(b) analysis, since the agency purported to conduct just such an analysis. It then found that the agency's analysis of the effect of the rule on efficiency, competition and capital formation was arbitrary and capricious, because it did not provide a reasoned basis for its conclusion that the rule would increase competition. The agency could not justify the rule on the ground that it would bring clarity to an uncertain area of law, since this reasoning would support any rule that the SEC adopted in a previously unregulated area. The SEC must provide an analysis of why this specific rule would promote competition. The SEC's analysis was also deficient because it did not make any finding on the existing level of competition under state regulation. Its efficiency and capital formation analyses were similarly deficient because it failed to analyze the efficiency of the current state regulation.