The consequences likely to be faced by insurers crafting new products for the “baby boomer” generation are just a few of the issues the Securities and Exchange Commission will be examining in the coming months, according to one of its division directors.

The potential consequences for companies devising these new products include reform of the rules governing disclosure, revenue sharing and life under Sarbanes-Oxley, according to Andrew Donohue, director of the SECs Division of Investment Management in Washington.

He made his comments at the annual compliance and regulatory affairs conference of the National Association for Variable Annuities.

These products are being developed as the “baby boom” generation reaches its retirement years and seeks to belatedly deal with concerns that they might outlive their assets.

“In this regard, the staff is seeing interest in the idea of combining insurance guarantees with investment vehicles, other than variable insurance products, in order to protect investors from outliving their assets,” Donohue noted, adding that products such as these raise “interesting issues” for the SEC, and potentially serious consequences.

“If a contract is a security, it must be registered under the Securities Act and the insurer becomes subject to Exchange Act reporting and Sarbanes-Oxley requirements — not a minor consequence to potential insurance company issuers of these products who do not otherwise come under the Exchange Act,” he said.

“I anticipate an interesting dialogue about these issues as insurers position themselves to meet this new market.”

At the meeting Donohue outlined a number of other proposals that are “hot button” topics for the SEC right now.

“Sometimes the reason is obvious — when the Commission responds to specific problems within the industry by strengthening regulations,” he said. “This happened in response to the problems of late trading and market timing.”

At other times, “regulatory initiatives are proactive” he added, saying this is his preference.

“As part of the Division’s ongoing responsibilities, we review the regulations governing investment companies and investment advisors, and consider whether any of them need to be revised, updated, or eliminated,” he said. “With the passage of time and developments in the investment management industry, some regulations may need to be refined to serve their purposes in light of product developments and changes in industry practices.”

One issue that could loom large over the next few months, he said, is the Commission’s review of Rule 12b-1, which Donohue noted was characterized as “ripe for review” by SEC Chairman Christopher Cox in April.

“In this regard, the Commission has been taking steps towards examining how the rule is currently used and determining whether it continues to fulfill its original purpose of allowing funds to use a small portion of their assets to facilitate distribution,” Mr. Donohue said.

This review will likely be important to the variable annuities industry, he said, as “a number of funds underlying variable insurance products” have adopted 12b-1 plans in connection with distributing fund shares through variable contract sales.

“Your industry has thus become very much a part of the 12b-1 picture,” he said, and as such should take advantage of the opportunity to share comments with the SEC.

“Your insights will greatly assist us in identifying and evaluating the appropriate course for any reforms,” Mr. Donohue said. “We especially need your assistance to ensure that, regardless of what direction reform may take, the specific issues and nuances relevant to the variable products industry are fully considered.”

Donohue also asked for industry thoughts on potential revenue sharing issues, particularly those involving funds of funds where a variable annuity may offer as an investment option a fund of funds managed by an affiliate of the insurer.

“In these structures, a contract owner would choose to invest in the fund of funds, and the fund of funds would have complete control over its underlying investments — indeed, the fund of funds’ investment advisor would have fiduciary duties with respect to the selection of those investments,” he said. “In such a structure, I am curious about the extent to which revenue sharing payments from an advisor of a bottom-tier fund to the insurance company or other affiliates of the advisor of the fund of funds could represent payments for services rendered, rather than kickbacks for purchases of shares of the bottom-tier funds, which could raise issues under Section 17 of the Investment Company Act.”

One of the major issues being taken up is disclosure reform, and Mr. Donohue noted the issue is considered a significant part of the Chairman’s “war on complexity” in the information provided to investors.

The SEC, he said, envisions a streamlined interactive system involving layers of information. “The initial layer would be streamlined information available to assist in the investment decision,” he said. “This would include key information investors need to make informed decisions, such as investment objectives and strategies, costs, risks, and historical returns.” Beyond that, he said, investors, or their advisors, would have access to a number of supplemental layers of information, allowing them to determine for themselves how much they need to know about a product, and to do so in an electronic format.

“To the extent that those disclosure initiatives yield benefits for fund investors, the benefits should be magnified for those who invest in funds through variable products,” he said. “Given the sheer number of underlying fund options some products offer, it is difficult, at best, for an investor to navigate the ‘phone book’ of fund offering documents currently delivered in connection with variable product sales.”