ANNUITY COEPTIS: IS THERE A WAY TO AVOID AMERICAN EQUITY INVESTMENT LIFE INSURANCE CO. V. SEC BECOMING A HERALD FOR THE SEC GAINING REGULATORY CONTROL OVER ALL SECURITIES-RELATED INSURANCE PRODUCTS?

This note is a critique of the July 2009 D. C. Circuit case American Equity Investment Life Insurance Co. v. SEC, in which the court rejected a challenge to the Securities Exchange Commission's Rule 151A, which had subjected fixed index annuities to SEC regulation. The court held that the 1933 Securities Act's section 3(a)(8) exemption for insurance did not exempt fixed index annuities from SEC regulation. This note begins by exploring in considerable detail the case law on the insurance exemption contained in the 1933 Securities Act. The note then looks at the history of the rise of fixed index annuities, and examines the economic theory that underlies index investing, which is the investment strategy that gave birth to a demand for fixed index annuities. The note proceeds to look at contemporary case law applying the insurance exemption to decide whether fixed index annuities are exempt from SEC regulation under section 3(a)(8). The note then offers substantive analysis of why fixed index annuities should be exempt as insurance. The note argues that fixed index annuities transfer the risk of stock-picking from insured to insurer and that the beta risk vs. non-beta risk distinction from index investing theory is a suitable basis for regulating index annuities differently than variable annuities. The note argues that fixed index annuities pose challenges of solvency and contractual interpretation, which are the regulatory challenges of insurance, but do not pose disclosure challenges, which are the regulatory challenges that the SEC addresses. The note then argues that the D. C. Circuit completely misunderstood the economics of how fixed index annuities function. The note concludes by offering policy arguments on why it is best for the states and not the SEC to regulate fixed index annuities.