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March 23, 2005 at 07:00 PM
by Joan E. Boros
It has been over 40 years since the federal courts held that variable annuities were securities and subject to the Investment Company Act of 1940.
Even so, the square peg/round hole rule hasnt changed. The square peg, in this case, is variable insurance contracts. The situation for these contracts in this area generally has not gotten any rounder.
The most recent example is the March 11, 2005, release issued by the Securities and Exchange Commission regarding the SECs adoption of final Rule 22c-2. This rule addresses the imposition of “voluntary” redemption fees by mutual funds, and it requests additional comments on certain issues.
The rules provisions (and the SECs requests for comments) do reflect recognition, albeit limited, of some of the special features and structures of variable insurance products. However, this recognition does not go deep enough to accommodate the products unique features. The result is that the rule imposes special burdens on much of the industry. And, it does not resolve potential conflicts between the rule and state insurance laws pertaining to redemption fees.
The rule, definitions and requirements are extremely detailed and best reviewed in whole. (Go to http://www.sec.gov/rules/final.shtml and click on Release IC-26782.)
The March 11, 2005, release that accompanies the rule seeks to address variable insurance contract features as well as the special circumstances of separate accounts inside variable contracts (such as full or partial withdrawals, and periodic rebalancing). Furthermore, it acknowledges that the IRS received a number of comments raising the issue of potential conflict with state insurance law that a mandatory redemption fee could raise.
But the release also requests comments on other possible provisions that dont seem to acknowledge adequately the variable insurance/separate account structure. In view of that, the only reasonable course of action for the industry is to request that the associated administrative burdens be addressed. (It is difficult to imagine that most, if not numerous, underlying unaffiliated fund boards would be comfortable concluding they arent compelled to impose a redemption fee.)
