Securities and Exchange Commission Rule 151A and Annuities: Issues and Legislation

Baird Webel
Specialist in Financial Economics

Rena S. Miller
Analyst in Financial Economics

In January 2011, a new rule from the Securities and Exchange Commission (SEC), Rule 151A, entitled "Indexed Annuities and Certain Other Insurance Contracts," is slated to go into effect. This rule would effectively reclassify indexed annuities as both security products and insurance products. Since insurance products generally are regulated solely by the states, this rule will expand federal authority over indexed annuities, putting them in a similar classification as variable annuities, which are already regulated by both the SEC and the individual states.

The SEC has cited as a primary reason for increased federal oversight numerous problems with improper marketing and sales of these annuity products. This proposal has been controversial, with nearly 5,000 comments received by the SEC. The SEC's final rule was adopted on December 17, 2008, and was published in the Federal Register on January 16, 2009. While some changes were made from the initial proposed rule, the final rule retained the majority of the original language. The U.S. Court of Appeals recently considered a legal challenge to the SEC's rule, in American Equity Investment Life Insurance Co. vs. SEC. The court found that the SEC was not unreasonable in classifying indexed annuities as securities, but remanded the rule to the SEC for the SEC to provide a more thorough analysis of the effects of the rule upon competition, efficiency, and capital formation.

On June 4, 2009, Representative Gregory Meeks introduced the Fixed Indexed Annuities and Insurance Products Classification Act of 2009 (H.R. 2733). Senator Benjamin Nelson introduced an identical bill, S. 1389, in the Senate on June 25, 2009. The bills would specifically nullify SEC Rule 151A and return to the states sole regulatory authority over indexed annuities. Neither individual bill has been brought up for consideration by relevant committees. During the conference committee on the Wall Street Reform and Consumer Protection Act (H.R. 4173), Senator Harkin offered an amendment, ultimately adopted as Section 989J, that directs the SEC to treat as exempt securities annuities that meet a number of conditions. This language has been generally interpreted as preventing SEC oversight of indexed annuities, although its precise impact may be clarified by future court or regulatory decisions. The House passed the H.R. 4173 conference report on June 30, 2010, by a vote of 237-192. The Senate has yet to consider the conference report.

This report explains the different types of annuities, the taxation of annuities, and disentangles the federal and state roles in the regulation of annuities. It outlines the SEC rule, including practical considerations for implementation. It also discusses congressional action in response to the SEC rule.


Date of Report: July 1, 2010
Number of Pages: 15
Order Number: R40656
Price: $29.95

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