## Facts

- The respondents, regulated by the District of Columbia and several states as insurance companies, sold “variable annuity” contracts in interstate commerce.
- The contracts promised annuity payments that fluctuated based on each purchaser’s pro rata participation in the issuer’s investment portfolio and the portfolio’s gains and losses.
- Premiums were calculated using mortality expectations and expense factors, but the amount payable to annuitants depended solely on investment performance.
- The contracts provided no specified definite annual payment and no guaranteed minimum return; the annuitant bore the entire investment risk.
- The SEC sought an injunction, alleging the contracts were unregistered “securities” under the Securities Act of 1933 and that the issuers were “investment companies” under the Investment Company Act of 1940.
- The district court and the D.C. Circuit treated the contracts as exempt insurance and denied relief.

## Issues

1. Whether variable annuity contracts with no guaranteed return are “securities” subject to registration under the Securities Act of 1933 and regulation under the Investment Company Act of 1940.
2. Whether the contracts and issuers fall within the statutory exemptions for “insurance”/“annuity” contracts or “insurance companies,” or are protected from federal regulation by the McCarran-Ferguson Act.

## Decision

- The Supreme Court reversed.
- The Court held the variable annuity contracts were “securities” under the federal securities laws and required registration under the Securities Act of 1933.
- The Court held the respondent issuers were subject to regulation as “investment companies” under the Investment Company Act of 1940.
- The Court held the insurance-related exemptions did not apply because the contracts lacked an element of fixed return and the issuers did not assume the investment risk.
- The Court held the McCarran-Ferguson Act did not bar SEC regulation because the offering was not the “business of insurance” as used in that Act.

## Legal Principles

- Federal law determines the scope of federal securities-law exemptions; state regulatory labels and an issuer’s self-description are not controlling.
- A defining attribute of “insurance” and traditional “annuity” contracts is the issuer’s assumption of investment risk through fixed benefits or minimum guarantees.
- Instruments that place investment risk on the purchaser and tie payouts to portfolio performance function as investment products and may be regulated as securities.
- The McCarran-Ferguson Act does not preclude application of federal securities statutes to products that are not, in the federal sense, insurance or the “business of insurance.”

## Conclusion

Because the variable annuity contracts provided no guaranteed return and shifted investment risk to purchasers while pooling funds for investment, they were securities and their issuers were investment companies subject to federal securities regulation, notwithstanding state insurance regulation and the McCarran-Ferguson Act.


S.E.C. v. Variable Annuity Life Ins. Co. of Am., 359 U.S. 65 (1959)