The Illinois Supreme Court has unanimously affirmed that fixed-indexed annuities are not securities and are not subject to regulation by securities regulators.

The long-awaited decision shields the annuities industry in Illinois from attempts by regulators and legislators to subject agents and advisors to securities rules, including best-interest and fiduciary regulations, when they sell fixed annuities.

“If the Illinois Secretary of State had been successful in classifying fixed annuities as securities, it would have had national ramifications and required individuals to obtain securities licensure in order to sell these products,” said Pam Heinrich, general legal counsel for the National Association of Fixed Annuities (NAFA).

An appeal of the ruling would have to be considered by the U.S. Supreme Court. The state attorney general did not return calls and it was not know if it is considering such an appeal.

The industry came roaring back in 2018, in part because of the demise of the U.S. Department of Labor fiduciary rule last year, which made it difficult for agents and advisors to sell fixed annuities in retirement accounts. 

Annual sales of fixed annuities hit a record high of $132 billion in 2018, a 25 percent jump from the previous year, as investors retreated from a volatile stock market and were attracted by larger payouts created by rising interest rates, according to the Limra Secure Retirement Institute.

The decision to exempt the products from securities rules is especially critical “as discussions about fixed annuity regulation and legislation continue to evolve at both the state and federal levels,” Heinrich said.

The case began in April 2014 when the Illinois secretary of state brought an administrative action against Richard Van Dyke, an investment advisor who sold fixed indexed-annuities to his clients.

The secretary eventually ruled that the annuities sold by Van Dyke were not only insurance products regulated by the Illinois Department of Insurance, as they had been for decades, but were also subject to regulation by the secretary as securities.

The secretary’s ruling was subsequently affirmed by a state circuit court, but in July 2016, a three-judge panel of Illinois’s Fourth District Appellate Court unanimously reversed the decision and held that fixed-indexed annuities “are not securities under Illinois law.”

Illinois’s attorney general pressed on with its appeal and was granted a review by the Illinois Supreme Court, which in a unanimous decision on Thursday upheld the Appellate Court’s earlier ruling and reiterated that under Illinois law, fixed-indexed annuities are not securities. The Supreme Court’s decision was based on two basic points: The Securities Act itself does not allow for the regulation of fixed-indexed annuities as securities and, because fixed annuities are already regulated as insurance, it would be “incongruous” to also regulate them as securities.

The Supreme Court also rejected the state’s argument that even if the annuities were not securities, Van Dyke committed fraud in recommending them as an investment advisor, and agreed with the Appellate Court that the secretary’s finding of fraud was unsupported by the evidence. 

“The Illinois decision is an important outlier for the country,” Heinrich said. “Our association was actively involved in this case from its outset, and we are thrilled that our work, in partnership with our outside legal counsel, has resulted in a significant win for the industry.”

NAFA formed a working group to battle the secretary’s decision in 2013, got the Appellate Court’s ruling published to set legal precedent and retained counsel to file an amicus brief in the case.

“It was critical to explain how regulating these annuities as securities would make Illinois the only state in the country to do so, potentially driving much of this $4 billion annual business out of the state,” NAFA’s outside counsel King Poor of Quarles & Brady said.

Nationwide, 2018 fixed annuities sales beat the previous 2016 record by roughly $15 billion, according to LIMRA.

Indexed and fixed-rate-deferred annuities contributed to much of that growth. Indexed annuities shattered their previous annual record, set in 2016, by $9 billion to hit $69.6 billion for the year. Sales of fixed-rate deferred annuities increased $10 billion over 2017 to total $44.2 billion, a volume not seen since the financial crisis.