The current scandal affecting the mutual fund business now has spilled over into the variable annuity and variable life insurance business.
The Securities and Exchange Commission as well as the New York attorney general and several other state attorneys general have launched investigations into the VA and VL insurance business to determine if illegal activities involving abuses in after-hours trading and market timing have adversely affected variable contract owners.
The SEC also has launched rule-making procedures involving registered investment company shares that will, if adopted, have the potential to affect variable contracts.
This flurry of activity comes amid congressional legislative actions that are attempting to change laws affecting mutual funds that seem likely to be applied to variable contracts and the insurance companies that issue them. It is too early to predict the specific results, but it is possible to predict certain likely developments almost sure to take place and which will have significant impact on VA and VL policies.
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The trade associations for the industry are deeply involved in attempting to educate regulators, state prosecutors and Congress about variable contracts and how they work. They also are attempting to point out that in designing new regulations and laws, “one size does not fit all.”
It is particularly important for everyone involved to understand that variable insurance products are materially different from mutual funds. The variable products are, for example, designed as much longer term savings and financial planning vehicles, not as short-term trading products. That fact alone requires different procedures for each.
Even so, changes are coming in the way the variable insurance industry does business. Right now, insurers, broker-dealers and other distributors are busy rethinking their control procedures and the methods by which they ensure compliance with current laws and regulations as well as trying to adapt themselves to what they think will be implemented later on.
It is likely that the current way the products are priced will change. These changes may well come about in response to regulatory initiatives and enforcement proceedings.
Broker-dealers already have been put on notice about several things (see box). Also, one currently pending proposal would require that the actual dollar amount of commission paid on a sale, along with other sources of remuneration to the broker-dealer, be reported to purchasers on confirmations.
Current pricing strategies in the variable product industry have led to multiple classes of contracts to service multiple distribution systems, so broker-dealers now have numerous products available to sell with differing features, pricing and compensation. As a result, it may well be that insurers will begin to offer front-end loaded products once again. Such a practice would certainly simplify the compliance issues.