Life insurers are concerned that a regulation proposed by the Securities and Exchange Commission to curb abusive market timing will put variable annuities at a disadvantage to mutual funds because the proposed rule fits two-tier structures poorly.
There are more appropriate alternatives to curbing market timing than the proposed regulation, says the American Council of Life Insurers in a comment letter.
The proposal by the SEC is for an amendment to a final regulation already published by the SEC to deal with market-ting abuse, such as so-called “sticky asset” arrangements with hedge funds that prompted consumer, regulatory and congressional indignation.
The rule shares some similarities with two bills considered by Congress to deal with the problem.
Adding to the financial services industry’s concern about the issue, the changes the SEC is drafting now may have to be in place by Oct. 16, the date the SEC has established for compliance with the entire rule, according to Carl Wilkerson, ACLI vice president and chief counsel, securities and litigation.
Alternative market timing solutions for two-tier structures, such as fair value pricing or limitations on excessive transactions, “operate successfully and more equitably for variable contracts and pension plans,” and should be substituted for a market timing rule for these instruments, the letter said.
The current proposal, ACLI officials said in a letter dated April 10, is “heavily skewed in favor of retail mutual funds’ operation, structure and convenience.”
It hurts so-called “two-tier” financial products, such as annuities and pension plans funded by separate accounts organized as unit investment trusts, according to the ACLI.
The ACLI suggests that as an alternative to imposing a redemption fee in the retirement plan context, the Labor and Treasury Departments authorize pension record keepers to take individual action against participants engaging in market timing.
“The ACLI believes these approaches would improve the rule’s economic and competitive burdens on variable contracts and pension plans in a balanced, competitive manner,” it says in its comment letter.
As proposed by the SEC, which administers the Investment Company Act of 1940, the rule, known as Rule 22c-2, allows mutual funds to impose and retain a fee on redemptions within seven or more days of a purchase to offset the costs of short-term trading strategies, such as market timing. Under the regulation, the redemption fee can total up to 2% of the amount redeemed.