Party Crashers

The Securities and Exchange Commission is signaling to industry lawyers it is focusing on the disclosures involved in annuities that provide living benefit riders.

In comments at an American Bar Association-sponsored conference, Eileen Rominger, director of the SEC’s investment Management Division said one of the areas the SEC is concerned about is disclosure of use of derivatives.

Disclosures should “clearly reflect the actual role that derivatives play in the overall investment strategy of your funds.”

Rominger made clear that the SEC views living benefits, “even when offered as riders’, to be an integral part of the contract offering.”

For that reason, Rominger said, insurers and their lawyers “should pay as much attention to disclosure concerning these benefits as you do to other features of a variable contract.”

Another issue is that the SEC finds that a number of living benefit products limit the investment options offered to purchasers.

“Indeed, 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,” Rominger said.

For example, she said variable annuity contracts often prohibit allocations to the more volatile funds, or require participation in a conservative asset allocation model that is designed and maintained with reference to the insurer’s exposure under its living benefits.

She said an important staff concern has been to ensure that investors are apprised of the trade-offs involved in such an arrangement.

“I believe that prospectuses should make clear to investors purchasing the benefits that these investment restrictions may limit the upside potential of their investment, and that such restrictions also reduce the likelihood that the downside protection offered by these benefits will ever actually be ‘in the money’,” she said.