Variable Product Fees And Charges Are Under Attack–What To Do?
Fees and charges for variable insurance products are under attack.
The Securities and Exchange Commission staff has long been skeptical about these costs but now it seems the plaintiffs bar is zeroing in, too.
The old Willy Sutton bromide–”because thats where the money is”–probably explains the new development. As for the SEC staff, it probably still hasnt fully accepted the changes effected by the National Securities Markets Improvement Act of 1996. (NSMIA amended the Investment Company Act of 1940 to delete prior limits on variable insurance product charges and regulate them using a reasonableness standard attested to in a representation in the registration statement.)
This article looks at the types of attacks that are cropping up and also offers some strategies for coping in this environment.
A number of the attacks involve litigation. These take various forms and are based on various theories.
For instance, over 20 nationwide class actions have been brought in state courts attacking the disclosure relating to “modal premiums.”
Such cases claim there was no explicit disclosure of the fact and amount of “interest” charged when a purchaser pays his or her premium in installments. Further, they assert that the buyer pays more when paying in installments. These claims have been brought, even though the variable contract documents do show the amounts of the annual premium and the model premiums (whether monthly, quarterly, or semiannual).
Further, such cases charge interest rate disclosure is inappropriate and confusing because there is no loan.
The outcome? These cases have already resulted in settlements in the millions–this, even though it is hard to imagine that anyone in our culture is unaware that when you buy on installment you are charged more.
Another type of class action alleges violations of the Employee Retirement Income Security Act–because of so-called revenue sharing by the underlying funds with the insurer and its retirement products distributor.
Yet another class action complaint, filed recently, takes a different approach. The insurer had imposed an average premium tax charge, rather than assessing state specific premium tax charges. The complaint alleges that this amount is in excess of that assessed in the state, that the insurer was unjustly enriched, and that the cash values of the affected contracts would have been greater but for this excessive deduction.
Yet another example: The Court of Appeals for the Second Circuit has reviewed a case alleging that a variable annuitys mortality and expense risk charges were unreasonable, and violated Sections 26(f) and 27(i) of the ICA. You should also know that, in this case, the SEC did submit an amicus curiae brief; this brief asserted that Section 47(b) of the Investment Company Act provides a great remedy, so the court doesnt have to address the private right of action question.