Two top officials at the Financial Industry Regulatory Authority and the Securities and Exchange Commission recently highlighted their concerns regarding annuities.
Carlo di Florio, FINRA’s chief risk officer, said that the self-regulator continues to be “very focused” on variable annuities, as they remain one of the “top” products for customer complaints.
Norm Champ, director of the SEC’s Division of Investment Management, noted the agency’s concern with variable annuity disclosure documents, which mirror similar problems as mutual fund prospectuses in their lack of plain English disclosures.
SEC staff, Champ said, has noticed “that it is a challenge to accurately describe complex features of these [variable annuity] contracts and, in particular, enhanced death benefits and living benefits in clear, concise language.”
Despite these concerns, however, the long-awaited release of a formal SEC proposal regarding a VA summary prospectus has been delayed once again.
Both Champ and di Florio spoke at the Insured Retirement Institute’s Government Legal & Regulatory conference held in Washington in late June and early July.
Di Florio said that while there’s been a “bit of de-risking” in the VA marketplace, other product providers are issuing VAs “with all the same risks” as complex structured products, such as VAs that include “buffers and caps.”
Di Florio noted that it’s important for reps selling these types of VAs to be able to explain the “trade-off between the buffer and the cap.”
Annuities with buffers and caps differ from more traditional variable annuities in that they may add to the existing product complexity by varying exposure to market volatility, and require a more sophisticated analysis of product features such as the trade-off between the upside caps and downside buffers.
FINRA is also watching other complex products such as interest-rate sensitive products like long duration bonds and exchange-traded funds, as well as corporate bonds, di Florio said.
Chief among customer complaints about VAs, di Florio said, are disclosure, sales practices, VA exchanges and surrender charges.
Structured VAs, also called “collared VAs,” include caps on the account value growth with some downside protection, according to IRI.
Structured VAs are generally filed as variable annuities, though the account value growth is similar to fixed indexed annuities, as the performance is tied to an index such as the S&P 500, IRI explained in a recent white paper.
IRI offered the following examples of the choices that structured products offer clients.