Industry Pans SEC Proposed Disclosure Rule Information would have to be provided at the “point of sale”

By Matt Brady

The American Council of Life Insurers said last week that additional disclosures proposed by the Securities and Exchange Commission to be made at the “point of sale” could have a negative effect by overwhelming consumers with information.

In fact, the proposed disclosures potentially could serve to undermine already existing disclosure requirements that were implemented just last year, according to Carl Wilkerson, ACLI vice president and chief counsel for securities and litigation.

While acknowledging the proposal is well intentioned, “more disclosure is not better disclosure,” Wilkerson said.

Under the SEC proposal, broker-dealers would be required to provide customers with information regarding the costs and any conflicts of interest at the “point of sale” of mutual funds, college savings plans or variable insurance products. However, Wilkerson noted that the information is already made available to consumers from a variety of sources.

“Insurance and annuity purchasers have access to multiple sources of detailed information,” he said. “In addition to the point-of-sale document, consumers also receive a prospectus, a variable contract, buyers guides, NASD-approved sales literature and replacement disclosure forms when a replacement is involved.”

Wilkerson also noted that the SEC has not shown a regulatory need for the proposed new disclosures and that the research conducted by the SEC to demonstrate the need for added disclosures did not account for variable products. The ACLI noted that of the 33 consumers interviewed for research on the proposal, none had a variable annuity or variable life insurance policy.

“The life insurance industry has a long history of developing and supporting substantive regulatory initiatives protecting insurance consumers,” Wilkerson said, “but the point-of-sale proposal serves variable products consumers poorly.”

The proposed guidelines also did not sit well with those who would have to operate under them, namely the agents themselves. Two agent groups, the National Association of Insurance and Financial Advisors and the Association for Advanced Life Underwriting, also expressed concerns regarding the potential confusion that additional disclosures could create.

“We dispute the notion that these additional disclosures are in the best interests of consumers,” said NAIFA President C. Robert Brown. “The prospectus, which is reviewed by the SEC, already discusses the fees, risks and expenses associated with the product. Requiring a separate, duplicative document would run counter to the efforts of the SEC over the past decade to simplify the contents of prospectuses.”

Rather than asking agents and brokers to increase the amount of information they disclose, Brown suggested that regulators should instead encourage consumers to examine what they are provided and work toward “getting consumers to carefully read the prospectus they already receive.”

For those who favor increased disclosure, the proposed new disclosures were seen as a positive first step. Heather Almand, a spokesperson for the Financial Planning Association, said the group “supports the fact that they enhanced the disclosure requirements.” However, she noted that the FPAs assessment is only of the proposal, as the rule has not yet been finalized.

Other disclosure advocates, however, found the proposal somewhat disappointing in that it potentially could have only a minor effect. In comments submitted to the SEC on the proposal, a consortium of consumer groups commended the commission for seeking to improve the “woefully inadequate state of mutual fund disclosure,” but argued that the timing of the disclosures would limit their effectiveness in helping consumers make investment choices.

“Information that is relevant to the selection of the financial professional, including information about the practices they engage in that create conflicts of interest, should be required to be provided prior to the engagement, as it is for investment advisors,” said the groups, including the Consumer Federation of America, the Consumers Union, Fund Democracy and Consumer Action. “Information relevant to the purchase of a particular productincluding but by no means limited to information about distribution-related costs and financial incentives that may influence the product selectionshould be provided at the point when that purchase is recommended.”


Reproduced from National Underwriter Edition, April 8, 2005. Copyright 2005 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.