SEC: Our Move On Index Annuities Is 'Reasonable'

Chevron is a 1984 decision which grants deference to a federal agency's interpretation of its own statutory mandate to decide whether it has authority to regulate an entity or product.

In its brief, the SEC argues that the securities laws do not define "annuity contract," and that the "Supreme Court has made clear that the only contracts unambiguously covered by that term are the traditional fixed annuities that existed when Section 3(a)(8) was enacted [in 1933]."

"Because indexed annuities did not exist in 1933 and confront purchasers with investments risk that traditional annuities do not, they are not unambiguously covered by Sec. 3(a)(8)," the SEC argues.

The SEC also says the SEC "reasonably concluded that indexed annuities described by Rule 151A expose purchasers to investment risk that the Securities Act was intended to address through disclosure to investors and, therefore, are not the sort of annuities that Congress intended to leave exclusively to state regulation through the Sec. 3(a)(8) exemption."

"The Commission reason that an indexed annuity in which the payout is more than likely not to be derived from the future performance of a securities index exposes an annuity purchaser to a significant investment risk, because his or her securities-linked return is not known in advance," the SEC says.

"This determination is consistent with case law, longstanding Commission interpretations, and common understanding of investment risk," the SEC says.

In addition, the NAIC lacks standing because "it has not identified an cognizable 'injury in fact' that its members (insurance regulators) or their constituents will suffer as a result of Rule 151A (which does not preempt any state law), and has not provided an 'affidavit or other evidence' demonstration a 'substantial probability of such an injury, as this court requires," the SEC says.

An NAIC Buyer's Guide published as part of NAIC's Annuity Disclosure Model regulation, "states that indexed annuities present a level of investment 'risk' that falls between the two extremes of variable annuities (which are securities) and traditional fixed-rate annuities (which are not securities)," the SEC says.

"The Commission's (and NAIC pre-litigation) view that purchasers of indexed annuities face investment risk makes sense," the SEC says. "Such risk exists because someone who invests in an indexed annuity does not know in advance how much he or she will receive under the contract, which depends on the fluctuating performance of a securities index."