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CALIFORNIA CORPORATE & SECURITIES LAW

Court Rules Fixed Income Annuity Is Not A Security Under The CSL

Because annuity contracts involve the payment of money in the expectation of future payments, one might conclude that they are securities within the meaning of the California Corporate Securities Law of 1968.  Evidently, that is what Mr. Abbit or at least his lawyer believed when they filed a class action lawsuit against an insurer alleging, among other things, violations of the “California Securities Act” [sic].  Abbit v. ING USA Annuity & Life Ins. Co., 2016 U.S. Dist. LEXIS 117630 (S.D. Cal. Aug. 30, 2016)

U.S. District Court Judge Gonzalo P. Curiel, however, had no trouble granting summary judgment in favor of the defendants:

Under California law, annuities are exempted from securities laws. Cal. Corp. Code § 25019 (“‘Security’ does not include . . . any . . . annuity contract.”).

A couple technical points, however, are in order.

First, Section 25019 defines “security” for purposes of the CSL.  It excludes certain instruments from the definition. An exclusion is not the same as an exemption.  Section 25100 in contrast identifies types of securities that are exempt from the CSL’s qualification requirements.  Although Section 25100(e) exempts any security the issuance of which is subject to authorization by the Insurance Commissioner, this exemption does not cover annuities that an insurance company is authorized to sell, but that are not subject to individual authorization by the Insurance Commissioner.  One important reason to distinguish between an exclusion and an exemption is that exempt securities remain subject to the CSL’s antifraud provisions.

Second, Section 25019 does not exclude all annuity contracts as is implied by the quotation above.  To come within the exclusion, an annuity must be a contract under which an insurance company admitted in California promises to pay a sum of money (whether or not based upon the investment performance of a segregated fund) either in a lump sum or periodically for life or some other specified period.  Thus, an annuity contract made by a non-admitted insurer or a company that is not an insurance company would not fall within the exclusion.  The parenthetical relating to investment performance is intended to include variable in addition to fixed annuity contracts.

If Judge Curiel’s name sounds familiar, it is because he is also the judge handling the lawsuit against Trump University.

 

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