UPDATE 2-US court orders SEC to reconsider annuity rule

* SEC rule expanded equity index-linked annuities scrutiny

* Court says SEC failed to rigorously analyze impact (Adds SEC comment in 7th paragraph)

WASHINGTON, July 21 (Reuters) - A U.S. appeals court ordered the Securities and Exchange Commission to reconsider a rule it adopted in the final weeks of the Bush administration to expand scrutiny over annuities linked to equity indexes.

The U.S. Court of Appeals for the D.C. Circuit said in a ruling issued on Tuesday that the SEC "failed to properly consider the effect of the rule upon efficiency, competition and capital formation."

The SEC had agreed to define annuity contracts and optional annuity contracts as securities so it could better police the fast-growing market. The SEC's new definition applies to indexed annuities issued on or after Jan. 12, 2011.

The court said that the SEC had failed to rigorously analyze the impact as required by law but noted the SEC's argument that the agency believed its regulation would be better than a patchwork of state laws.

"After a more thorough review of the existing state law regime, the Commission may decide ultimately that (the regulation) Rule 151A will promote competition, efficiency, and capital formation," the court said in its decision.

The court's three-judge panel sent the rule back to the agency for reconsideration.

"We will continue to consider the procedural issue identified in the opinion," said SEC spokesman Kevin Callahan.

Annuities are insurance products in which the insurer promises to make periodic payments to the customer.

Equity indexed annuities possess insurance-product features such as a guaranteed minimum return, as well as securities elements like a return linked to an equity market. They have the potential to generate higher returns but are riskier than traditional fixed annuities.

SEC and state securities regulators have worried that the products are being sold to elderly investors, despite long accumulation periods that mean an annuity may not mature until after an elderly investor has died. Equity linked annuities also have higher surrender charges, making it difficult for investors to pull out when they need the money. (Reporting by Jeremy Pelofsky, editing by Tim Dobbyn and Gerald E. McCormick)