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Regulation and Compliance > Federal Regulation > SEC

SEC's Rominger: 'Proliferation' of Variable Products Raises Regulatory Worries

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Eileen Rominger, director of the Securities and Exchange Commission’s (SEC) Division of Investment Management, said Tuesday that the securities regulator is seeing a “proliferation” of new variable insurance product designs and innovations, some of which “raise substantive regulatory concerns.”

The insurance industry is coming out with these new product designs, Rominger (left) said in comments Tuesday at the Insured Retirement Institute’s (IRI) regulatory conference in Washington, to tackle what she said is the “most pressing economic concern of the aging baby boomer generation: the management of retirement income.”

Rominger said that while the regulatory concerns around the new variable products are often driven “by the fact that variable separate accounts must operate within the regulatory framework of the Investment Company Act,” even the simpler, more traditional variable contracts that the SEC sees “that do not present significant regulatory issues still face the challenge of clear and useful disclosure, as even the simplest contract designs can be difficult to explain in straightforward plain English.”

Since being named to head the investment management division in February, Rominger said that she “is struck by the many challenges raised in the regulation of variable contracts.”

One area of particular concern is the proliferation of “living benefit riders” in variable annuity contracts, which Rominger said have been “one of the dominant forces driving contract sales in recent years.” These riders provide insurance with regard to minimum contract values or minimum periodic withdrawals, she explained, but these benefits “have both direct and indirect costs.”

First, she said, “the investor pays directly for these benefits by way of a charge against contract value, which significantly affects investment performance and reduces the upside potential of the contract.” Since 2008, she continued, “when so many of these benefit riders were ‘in the money’ as a consequence of the recent global financial crisis, the [SEC] staff has seen many filings reflecting increased fees charged for these benefits.”

Another drawback is that purchasers of these optional benefits “are facing increasing limitations on investment choices, reflecting an effort by insurers to limit volatility of the investments that are subject to the benefits.”

The SEC also expects to see an increase in new types of annuities “funded by or patterned on instruments that have become popular elsewhere in the marketplace,” Rominger said, “as more and more investors turn their attention from accumulating assets to managing income.”

She pointed to two indexed annuities recently registered at the SEC that she said “bear similarities to structured notes that lately have garnered a lot of attention both in the media and from the commission staff.”

These contracts, if held to term, she continued, “promise some percentage of the return of a specified equity or commodity index, but provide only very limited downside protection if the contract is surrendered early. In this regard the contracts are similar to certain so-called ‘structured notes with principal protection.’”

The Financial Industry Regulatory Authority (FINRA) and the SEC jointly issued an investor alert in early June about structured notes with principal protection. The alert noted that while these structured products “have reassuring names, they are not risk-free, and the terms of such notes related to any protections to or guarantee of principal require a careful review,” she said.

For example, she continued, “despite the name ‘principal protection,’ protection levels vary, with some of these products potentially returning as little as 10 percent of principal.”


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