SEC Official Offers Road Map Of Priority Projects

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.”