Coalition files suit to block SEC indexed annuities rule.

The U.S. Securities and Exchange Commission overstepped its statutory authority by promulgating a rule that would define most indexed annuities as securities products, a lawsuit filed by a coalition of life insurers and marketing organizations charges.

Filed in the U.S. Court of Appeals for the D.C. Circuit, the suit by the Coalition for Indexed Products charges SEC Rule 151A violates the Securities Act of 1933 and prior Supreme Court precedent. It alleges that the commission violated the Administrative Procedures Act when it adopted the rule in December 2008 without due consideration of objections raised by state regulators, legislators, insurers, agents and some members of Congress.

Set to take effect in January 2011--a two-year grandfather period that is twice the typical implementation length--the rule defines indexed annuities as securities when the amounts payable by an insurer are more likely than not to exceed the amounts guaranteed under the contract. The rule, published in the Jan. 16 edition of the Federal Register, states "this indicates that the majority of the investment risk for the fluctuating, securities-linked portion of the return is borne by the individual purchaser" not the insurer.

"Indexed annuities are attractive to purchasers because they offer the promise of market-related gains," the rule states. "Thus, purchasers obtain indexed annuity contracts for many of the same reasons that individuals purchase mutual funds and variable annuities, and open brokerage accounts."

But the coalition--whose members include American Equity life Insurance Co., Midland National Life Insurance Co., National Western Life Insurance Co. and OM Financial Life Insurance Co., as well as independent marketing organizations BHC Marketing and Tucker Advisory Group--petitioned the court to vacate the rule and its requirements, and issue a permanent injunction prohibiting the commission from implementing and enforcing the requirements.

Separately, the coalition filed a motion requesting the SEC stay implementation of the rule for the amount of time that the case is in litigation, or that the commission "join them in seeking expedited review before the D.C. Circuit."

While the returns of fixed annuities are set at inception, and those of variable annuities fluctuate with investment returns, equity-indexed annuities typically guarantee a certain amount of principal protected from losses. First introduced in 1995, equity-indexed annuities have grown from $14 billion of sales in 2003 to $25 billion in 2007.