Insurer MetLife Inc. (MET), a major seller of annuities, and a group of state securities regulators have asked a court to uphold the U.S. Securities and Exchange Commission's rule treating equity indexed annuities as securities rather than insurance products.

Indexed annuities should be regulated under federal securities laws, as variable annuities are, say MetLife; the North American Securities Administrators Association, or NASAA; and the AARP Foundation, a nonprofit organization representing the interests of those age 50 and over, in a petition filed Friday with the U.S. Court of Appeals for the District of Columbia.

MetLife, which doesn't issue indexed annuities but does sell variable annuities, and the other parties say that there's no substantive reason for indexed annuities to be regulated differently than variable annuities under securities laws. Consumers could be harmed by deceptive indexed-annuity sales practices, and regulating indexed annuities under federal law, in addition to state insurance law, would subject them to stronger and more uniform standards, they say.

Indexed annuities are tied to the performance of stock indexes, but typically are sold by insurance agents. They are currently subject to state regulation. However, under the new rule, which was passed in December, indexed annuities issued on or after Jan. 12, 2011, would need to register with the commission and only could be sold by registered broker-dealers.

The brief supports the SEC in a case resulting from a lawsuit filed in January by a group of insurance and marketing companies challenging the rule. The suit was filed by American Equity Investment Life Insurance Co. (AEL), BHC Marketing, Midland National Life Insurance Co., National Western Life Insurance Co. (NWLI), OM Financial Life Insurance Co. and Tucker Advisory Group Inc. It has since been consolidated with another suit filed by the National Association of Insurance Commissioners, a group of state insurance regulators, and the National Conference of Insurance Legislators, representing state legislators.

Wendy Carlson, president and chief executive of American Equity Investment Life Insurance., said that the parties filing the recent brief have conflicting interests. MetLife sells variable annuities, AARP has an affiliation with New York Life Insurance Co. and NASAA is a group of state regulators "seeking to expand its jurisdiction," she said.

AARP's branded product with NY Life is a fixed immediate annuity product, not a variable annuity, said Richard Hisey, president of AARP Financial Inc. As for AARP's involvement in the brief, Hisey said, "The current economic environment and how that's affecting insurers has brought additional focus to this overall issue."

NASAA General Counsel Rex Staples disputed the statement that the group is trying to expand its jurisdiction. "What we're trying to do is ensure that something that is clearly a security under the law is, in fact, deemed to be a security," he said.

In the brief, the parties argue that "Indexed annuities have key securities characteristics, including the assumption of investment risk by investors, and they are marked as a means for investor to participate in securities market gains - features shared by variable annuities." Sellers of variable annuities are at a disadvantage, to the extent that sellers of indexed annuities operate under a different set of rules that are "less comprehensive, less uniform and less consistently applied," it says.

In addition, indexed annuities are "extremely complicated investments due to their intricate formulas and hidden costs," yet are sold to unsophisticated investors, it says. Deceptive and misleading sales practices that take advantage of this complexity "are all too often" use to sell the products, the brief says.

State insurance regulation of these products is inadequate by itself to protect investors from the complexities, risks and aggressive marketing tactics associated with securities, such as indexed annuities, the brief says. "In general insurance regulators do not have at their disposal the equivalent of the disclosure requirements, suitability standards and anti-fraud measures found in the securities laws," it says.

Moreover, their approach to enforcement varies considerably, the brief says.

The strong anti-fraud provisions and suitability standards that have been part of securities regulation for decades will deter abuses, and mandatory registration of the annuities as securities would increase the amount of information available to investors, it says.

By Daisy Maxey; Dow Jones Newswires; 201 938 4048; daisy.maxey@dowjones.com