S.E.C. Warns Against Misleading Buyers of Annuities

By JOSEPH B. TREASTER
The New York Times
June 6, 2000


In the midst of a federal examination of the sale of variable annuities, a fast-growing and controversial combination of mutual funds and insurance, a senior regulator issued a stern warning today that misleading tactics and incomplete disclosure would not be tolerated.

The regulator, Paul F. Roye of the Securities and Exchange Commission, zeroed in on bonuses offered by some companies to attract variable annuities customers and told an industry group that his agency was concerned that investors were being given the false impression that they were receiving something for nothing.

"There's no such thing as a free bonus," he said, noting that bonuses are generally tied to variable annuities with higher fees and penalties so that the companies selling them eventually get their money back. Other critics have pointed out that after the companies had been reimbursed they continue to receive higher fees for the life of the investment.

Mr. Roye, who is the director of the commission's Division of Investment Management, said his agency would take issue with any company that failed to "fully and fairly disclose the downside as well as the upside" of variable annuities. And while the industry contends that some buyers benefit from the bonus feature, Mr. Roye said that "increasing sales at the expense of those for whom these products are not suited will not be tolerated."

Mr. Roye was addressing several hundred executives of insurance companies, which produce variable annuities, and of banks and brokerage firms, which, along with financial planners, are the main sellers of variable annuities.

Officially, through a spokesman, the group, the National Association for Variable Annuities, said it welcomed the close scrutiny. "If anything is going on that shouldn't be going on, then I think everyone will see that any improper activity will be stopped," said Mark Mackey, the group's executive director.

But it was clear that many of the executives listening to Mr. Roye's speech at lunch feared that highlighting deceptive practices could put a crimp in an industry that while still smaller than the mutual fund business has been increasing assets under its control at the rate of 36 percent a year for several years. In contrast, contributions to mutual funds have been increasing by about 25 percent a year. Over time, Americans have invested $1.2 trillion through variable annuities compared with more than $6.8 trillion through mutual funds.

"It's scary," said one executive in the audience. "I understand the risk and the problems, but I don't necessarily agree that the S.E.C. should be doing things this way." As Mr. Roye spoke, the room was hushed, and when he finished, no one applauded.

The nationwide examination of variable annuity sales practices, which is concentrating on the new bonuses, has been under way for nearly six months. The agency, and the National Association of Securities Dealers, which is also participating, have taken no action so far. But later this week the heads of S.E.C. offices around the country are meeting here to review their work on variable annuities as well as other regulatory matters, moving closer to a conclusion.

Earlier this morning, as part of its consumer education program, the S.E.C. issued what officials referred to as an "investor alert" to help consumers understand "the benefits, risks and costs of variable annuities."

During a panel discussion this morning, Susan Nash, a senior assistant director at the S.E.C., disclosed for the first time that the agency had examined the records of 52 investment and insurance companies involved in the sale of variable annuities last year, partly in the course of routine oversight and partly in response to complaints. She said 80 percent of the companies were cited for failure to follow regulations related to sales. Of the infractions, she said, 20 percent were serious enough to warrant further investigation and possible penalties.

Other agency officials said the total level of infractions was about par for the financial services business, including mutual fund companies and groups of financial advisers. But they said that usually about 3 to 6 percent of the infractions were regarded as serious. The agency would not identify the companies that were examined, but said those receiving sanctions would be identified.

At one point, Mr. Roye challenged the insurance companies: "Ask yourselves whether your products are designed with investors' interests in mind or whether they will act as a spur to inappropriate sales practices.

"If you are on the sales side," Mr. Roye said, "ask yourself whether you have safeguards in place to prevent unsuitable sales and whether you are taking a second look at transactions that appear to be unsuitable."

Pointing to recent sanctions against mutual fund companies and brokerage firms, Mr. Roye said: "We are not sympathetic in problematic situations when firms either have no" procedures for safeguarding investors' interests, or have them "but do not implement them."

Copyright © 2000 The New York Times Company



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