More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission’s Office of Investment Management is currently conducting two studies with the SEC’s Office of Investor Education and Advocacy: one to assess the effectiveness of mutual fund shareholder reports and the other to examine financial literacy among investors as mandated under Dodd-Frank, Eileen Rominger, director of the agency’s Investment Management office, said Thursday.
Rominger (left), speaking at a conference held by the American Law Institute-American Bar Association in Washington, also said that the agency continues progress on its variable annuity summary prospectus and warned lawyers as well as insurance practitioners to pay particular attention to disclosures around “living benefit” riders to variable annuities, because the SEC is focused on disclosure issues surrounding these riders.
The mutual fund shareholder reports study is designed to gather feedback from investors in order to help the SEC “determine how mutual fund shareholder reports could more effectively communicate information to individual investors,” Rominger said. The study, she said, will also “generate a baseline assessment of mutual fund shareholder reports, providing a way to measure potential improvements over time.”
The study on financial literacy, Rominger continued, will be particularly useful as it relates to the SEC’s responsibilities under a separate provision of the Dodd-Frank Act, “which expressly authorizes the commission to designate information to be provided by a broker or dealer to a retail investor before the purchase of an investment product or service–that is, at the point of sale,” Rominger noted.
Specifically, she said, “I hope that the study will be useful to the commission in considering any potential rulemaking with respect to point of sale disclosure for investment products and services, including variable insurance products.”
As to living benefit riders, which have been an important selling point for variable annuities since the market decline in 2008, Rominger noted that these benefits “include promised minimum contract values regardless of investment performance of the underlying funds, as well as withdrawal privileges that provide for a stream of income during retirement years, again regardless of investment performance of the underlying funds.”
The market volatility of the past few years, she continued, has caused many insurers to revisit the terms and the pricing of their living benefits, with SEC staff seeing “a wave of amendments to registration statements, adjusting fees for future sales and adjusting promised minimums under these living benefits.”
The SEC, Rominger said, views these living benefit riders as “an integral part” of a variable annuity contract, and warned that, for that reason, “you should pay as much attention to disclosure concerning these benefits as you do to other features of a variable contract.”
She pointed to disclosure issues surrounding these living benefit riders that SEC staff are particularly focused on.
First, she said, “a number of products limit the investment options offered to purchasers of living benefits. Indeed, purchasers of these optional benefits are facing increasing limitations on investment choices, reflecting an effort by insurers to limit volatility of the investments that are subject to the benefits.”
For example, she continued, “variable annuity contracts often prohibit allocations to the more volatile funds, or require participation in a conservative asset allocation model that is designed and maintained with reference to the insurer’s exposure under its living benefits.”
An important staff concern has been to ensure that investors are “apprised of the trade-offs involved in such an arrangement. I believe that prospectuses should make clear to investors purchasing the benefits that these investment restrictions may limit the upside potential of their investment, and that such restrictions also reduce the likelihood that the downside protection offered by these benefits will ever actually be ‘in the money,’” Rominger said.