Attempts by the government to more closely regulate indexed annuities are running up against more resistance from insurance companies.

The Securities and Exchange Commission has been pressing to treat indexed annuities whose payout is partly tied to an index of stocks or bonds as securities, arguing that they carry investment risk. But the insurance industry has opposed this treatment, saying that the annuities include a guaranteed minimum return that makes them less risky than other investments.

Efforts to regulate the industry had already been dealt a setback in December, when the SEC agreed to a two-year stay on its rule bringing indexed annuities under its jurisdiction. Now, one insurer is pushing for the rule to be abandoned altogether.

Old Mutual Financial Life Insurance filed a brief earlier this month urging the U.S. Court of Appeals for the District of Columbia to vacate the rule, saying the risk that the regulation will pass if it stays on the table is too great to wait.

What s troubling to many in the insurance industry, and arguably to the court, is that the SEC moved in a peremptory manner that excluded any serious research or data gathering, says Eric Marhoun, senior vice president and general counsel of Old Mutual. It s one of these situations where there wasn t a problem looking for a solution, since fixed indexed annuities don t expose individuals to market losses. The SEC had to develop an unprecedented ad hoc theory around investment loss to justify their regulating a product where market loss is never an issue.

The stakes of the decision are high. For instance, the rule would require those selling indexed annuities to become licensed brokers, says James Holtzman, an advisor with Legend Financial. Those currently selling the products "don't want to go through the time, costs and everything involved," he says.

The SEC estimates that implementing the new regulation would add 240,000 hours of burden -- 60,000 to the issuers themselves and 180,000 to outside professionals -- for a total cost of $72 million for the outside professionals, calculated at $400 an hour.

Old Mutual s Marhoun says the new rule would make the company s indexed annuities less attractive and valuable to consumers who would absorb the cost for increased regulatory compliance. It also would decrease the availability of the product, and could cause job loss and dislocation as many local insurance agencies would find it difficult to bear the cost of becoming registered and being thrown into the brokerage world, he says. The industry will be forced to gravitate toward full-service broker dealers, which could put small independent agencies out of businesses.

Here s how indexed annuities work. The products are designed to mirror, to varying degrees, a well-known index, such as the S&P 500. The products have floors, to ensure that the purchaser will never lose money on the investment some even have a minimum return. But they also have a ceiling that will cap the potential gains a purchaser can realize. In effect, they straddle the line between insurance and securities products.

The SEC says it recognizes that indexed annuities include features of insurance products and securities. "We have carefully considered where to draw the line, and we believe that the line that we have drawn is rational and reasonably related to fundamental concepts of risk and insurance, the SEC wrote in the final rule document filed with the SEC on Jan. 8, 2009.

Last year, the SEC proposed rule 151A, which the government says is designed to enhance the disclosure of information needed to make informed investment decisions; apply sales practice protections to those indexed annuities that are outside the insurance exemption; raise competition; and relieve reporting obligations required by state law.

Insurers took issue with the rule, arguing that if there's a minimum return, there s no risk. The annuity companies are saying that because there's a minimum rate of return, it's not truly based on an index, says James Holtzman, an advisor with Legend Financial. (To pull off the minimum returns, the insurance companies are most likely buying call options on a particular index, where there's only a little money up front, Holtzman says. They would get the profit in the case that it exceeds the maximum return, and if it dropped, they'd lose only the cost of buying the contract.)

An appeals court upheld Rule 151A summer of 2009, in the case of American Equity Life v. SEC, but requested the SEC provide more details on its economic implications. Old Mutual filed a petition in September asking for a two-year delay of the rule's effective date -- Jan. 12, 2011. After the court also showed concern, the SEC agreed to delay the effective date of the rule by two years until 2013, and to again open the rule for comment.

Old Mutual is calling for the rule to be vacated altogether. Remanding the rule while the SEC provides more information, "would leave the rule in legal limbo," Old Mutual said in a recent brief. The insurer said that such a move would "continue to suggest to the EIA annuities industry that the rule likely will be readopted."

Critics of the SEC s position also say the agency is shielding investors from what they describe as better outcomes. "The SEC's pretext for regulating these indexed annuities is in part based upon a really curious definition of risk," says David Babble, professor of insurance and finance at the Wharton school of business, and also senior advisor to Charles River and Associates. "The SEC says if there's a probability of earning more than the minimum amount guaranteed that it is risky, and therefore the SEC should be able to regulate it -- the ironic thing is the government is protecting its citizens from earning more than guaranteed."

On the other hand, that prize is capped. One of the key features to the indexed products is a guaranteed "maximum" return. "So if it was following the S&P 500, and the index returned 15%, you could be capped at 8.5%, for instance," says Holtzman. Investors willing to pay more for less risk may not realize they are getting a limited reward.

The SEC says investors should approach these products cautiously. Investment professionals say indexed annuities pose risk because investors don't understand them. /investing/mutual-funds/The-Problem-With-Annuities/

They get a lot of bad press, but it s really not the products' fault as much as it is the sales practices, says Craig Hemke, founder and president of Buyapension.com . Sometimes they re marketed by folks that aren t licensed, and may not necessarily know the ins and outs as well as they should.