RIA Compliance Blog
Last month at the American Law Institute’s Conference on Life Insurance Company Products, the chief of the SEC’s Office of Compliance, Inspections, and Examinations (“OCIE”) informed attendees that the agency will increase its focus on variable annuities during 2015. Also attending the conference was the Director of the SEC’s Division of Investment Management (“DIM”), who discussed his views on how to address concerns created by new trends in variable annuities and the recent growth of alternative mutual funds.
One of the reasons for the increased focus on variable annuities is that broker-dealers are beginning to sell more and more of these products to their clients, said the SEC’s chief of OCIE. As a result, OCIE exams will include discussions with broker-dealers about what the insurance companies are telling them about the products they provide to make sure broker-dealers understand the products they are selling and are accurately explaining the products to their clients.
The Director of DIM also observed that many issuers are beginning to limit the amount of annuity offerings that include living benefit features like guaranteed minimum accumulation and withdrawal benefits. According to the Director of DIM, some issuers are even doing away with the living benefit features entirely and are launching “investment only” contracts. These changes in variable annuities raise some new and important disclosure issues.
The SEC has also seen a recent increase in insurance companies using derivatives to hedge risks in variable annuities. The concern over using derivatives is that they might limit the benefits of the variable annuity when the owner of the contract has already paid for market loss protections. The Director of DIM stressed that insurers need to make sure that adding such downside protection does not become redundant and thereby limit the upside earning potential of the variable annuity.
The Director of DIM noted that the growth of alternative mutual funds has been significant over the past few years. The amount of inflows into alternative mutual funds in 2013 was five times more than the inflows in 2012. Alternative mutual funds can be complex in their investment strategies, making the goal of clear and effective disclosure increasingly difficult. DIM will focus accordingly on alternative investment disclosure and specifically derivatives disclosure to increase an investor’s ability to accurately evaluate their firm’s investment strategies and operations.
The Director of DIM further stated that disclosures of alternative strategies should be tailored in a way to show how the funds will be used in order to achieve their investment objectives. Use of these strategies should be reviewed when determining whether annual registration statements should be updated to include such strategies and their accompanying risks.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our attorneys can help assist financial service providers in complying with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.