On the heels of the Mark Cuban embarrassment, here’s another bit of bad news for the Securities and Exchange Commission. Earlier this week, the U.S. Court of Appeals for the D.C. Circuit ruled in a challenge by six insurance companies to an SEC rule that would impose federal securities regulation on fixed indexed annuities. The court, in an opinion written by Chief Judge David Sentelle, concluded that the SEC’s analysis of Rule 151A’s effect on efficiency, competition, and capital formation was “arbitrary and capricious,” and instructed the SEC to address the deficiencies.

Fixed indexed annuities are contracts that pay a minimum value plus interest based on the performance of an index like the S&P 500, guaranteeing purchasers a return of their principal, plus interest. As we noted in January, when we first wrote about the insurers’ challenge, the lawyer who argued at the court of appeals for the insurance companies, Eugene Scalia, is a familiar thorn in the SEC’s side. On behalf of the Chamber of Commerce, Scalia has twice successfully challenged a proposed SEC rule that would require mutual fund boards to be at least 75 percent independent, including an independent chair.

In this case, Scalia argued that, by definition, fixed indexed annuities should not be considered securities, as the SEC proposed. He also argued that fixed indexed annuities have historically been overseen by state insurance regulators, who also oppose the new rule.

Though the court actually rejected most of Scalia’s main argument that the agency erred in not considering the annuities exempt from securities laws, the appellate panel agreed with his alternate argument that the agency hadn’t sufficiently considered the effect of the new rule on the market for the annuities. The ruling called the agency’s conclusion that new rules clarifying the status of fixed indexed annuities would enhance competition, “flawed.”

“The securities laws say explicitly that annuities are to be regulated by the states, not the SEC,” Scalia said in a statement. “Unfortunately, the Commission engaged in a flawed rulemaking process whose result is a rule that conflicts with Congress’s intent and with two Supreme Court decisions.”