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The SEC Says It Is Striving For Flexibility In Reviewing Substitution Applications

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The SEC Says It Is Striving For Flexibility In Reviewing Substitution Applications



The Securities and Exchange Commission staff is trying to be flexible and to ease the regulatory burdens involved in substitution application, a top SEC official said.

Speaking before the annual regulatory affairs conference of the National Association for Variable Annuities, Paul F. Roye said that the SEC staff is required under the Investment Company Act to examine each substitution application to assure the protection of variable contract owners.

However, the SECs director of investment management added, the staff has eased the regulatory burden of substitution applications in some circumstances.

Specifically, Roye said, during the past year the SEC granted two no-action letters to insurance companies facing the liquidation of an unaffiliated fund, and who wanted to invest the proceed in a money market fund on behalf of contract owners who had not given alternative instructions.

Roye said the staff considered several factors in making these decisions. In particular, he said, the staff noted that there was no affiliation between the insurance company and the liquidating fund.

This suggested, he said, that the transaction was not intended to enrich the insurance company to the detriment of contract owners.

The staff also considered, Roye said, that notice had been sent to contract owners along with the opportunity to select an alternative investment.

In another no-action letter, Roye said, an insurance company wanted to replace a more expensive class of shares with a cheaper class of the same fund.

The effect of the proposed transaction, he said, was to give contract owners an investment in the same fund managed by the same investment advisor but at a lower cost. The SEC staff, Roye said, granted the no-action assurance.

These no-action letters, he said, are a good reflection of the staffs flexibility in this area and its openness to considering the shareholder protection concerns raised by each proposed transaction.

Moreover, Roye said, his understanding is that several insurers have foregone the filing of substitution applications under similar circumstances as a result of the no-action letters.

But even for insurance companies that do file applications, he said, the SEC staff is trying to be flexible, while at the same time trying to craft workable standards that can be applied consistently to like applications.

Roye said he is confident the SEC staff will continue to receive substitution applications that require new exceptions of refinements to the current exemptive standards.

The staffs focus, he said, will continue to be whether a substitution involves the abuses against which the Investment Company Act was designed to protect.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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