From the January 2010 issue of Investment Advisor • Subscribe!

Broker/Dealer News

The Insured Retirement Institute, the variable annuity trade group formerly known as NAVA, praised on December 4 SEC Chairman Mary Schapiro's public call for a VA summary prospectus, which IRI President and CEO Cathy Weatherford said in a prepared statement was "long overdue and much anticipated."

Schapiro called for the VA summary prospectus in a speech December 3 before the Consumer Federation of America in which she notably said, "We need to have a strong fiduciary standard for all securities professionals."

Making her case that retail investors "should be provided clear, simple, meaningful disclosure at the time they are making an investment decision," Schapiro also argued that said disclosure "should include information about the compensation the professional will receive on each product being sold--and information about the conflicts that may be causing the advisor or salesman to steer the investor to a certain investment."

Admitting that taking such an approach might be "difficult," Schapiro said the SEC would, however, "not be deterred by the complexity of the product," and used variable annuities as the example, since VAs, she said, "are widely regarded as one of the most difficult-to-understand products on the market." That is when she disclosed that SEC staff is "developing a simplified "summary prospectus" for variable annuities.

The SEC mandated a similar summary prospectus for all mutual funds; the deadline for fund companies to comply is January 1, 2010.

Morningstar, Inc. recently began publishing credit ratings for approximately 100 of the largest U.S. companies. During the next year, Morningstar says it plans to produce credit ratings for up to 1,000 companies currently covered by its equity analyst team. The ratings are available for free at Forecasts and scores underlying the ratings are available to Morningstar's institutional equity research clients. Morningstar says its credit rating is based on four key quantitative and qualitative factors:

o Business Risk--an evaluation of industry and company risk factors, including Morningstar's proprietary Economic Moat and Uncertainty Rating. Economic Moat is a measurement of a company's competitive advantage and the Uncertainty Rating measures the predictability of future cash flows.

o Cash-Flow Cushion--a proprietary, forward-looking ratio that measures Morningstar analysts' forecasts of future cash flows against firms' financial obligations.

o Solvency Score--a proprietary scoring system that measures a firm's financial leverage, liquidity, interest coverage, and profitability to determine its financial health relative to other firms.

o Distance to Default--a quantitative model that estimates the probability of a firm falling into financial distress based on the market value and volatility of its assets.

Financial Research Corp. (FRC) recently released a new study titled Building a Better Sub-Advisory Business: Hiring, Retaining, & Firing in a Changing Market. Building on FRC's study published in 2005, the new report reveals product changes and strategic initiatives investment managers plan to take over the next year. The report also highlights new and more effective ways for sponsor firms to manage their external relationships to drive better business results. "As the market rebounds from the recent crisis, FRC expects to see escalating demand for external management expertise over the next five years," said Lynette DeWitt, study author and FRC's director of sub-advisory research. "Firms surveyed by FRC state that in 2010, external investment managers will be hired to support new product strategies such as global asset allocation, absolute return, micro-cap growth, and alternative funds."

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