Annuity industry pushes SEC for summary prospectus rule

Not on regulator's agenda until March 2015, industry believes sooner action would aid investor understanding

Jul 8, 2014 @ 12:25 pm

By Mark Schoeff Jr.

annuities, prospectus, securities and exchange commission, iri, advisers, variable annuities
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An interest group representing firms that sell variable annuities wants the Securities and Exchange Commission to speed up its work on a rule that would provide investors with a plain English summary of the costs, benefits and risks associated with the complex products.

The SEC has on its regulatory agenda a March 2015 release date for a variable annuity summary prospectus proposal, Susan Nash, associate director of the SEC Division of Investment Management, said at an Insured Retirement Institute conference last week.

“It's a staff priority,” she added. But she cautioned that the timing might slip.

IRI wants the proposal to be made this year so financial firms have time to produce the new prospectuses for product rollouts during the first half of 2015.

“We would urge the commission to accelerate their timeline,” Lee Covington, IRI senior vice president and general counsel, said in an interview. “We believe all the work necessary to put it in place has been done. If we don't have a summary prospectus rule in place by the end of this year, we won't see a summary prospectus in the marketplace until 2016.”

IRI sent its summary prospectus proposal to the SEC in 2008. The agency has had this in the works for years.

Sales of variable annuities are causing increasing concern among financial regulators as the product features, such as living benefits and surrender penalties, become more complicated.

The industry is looking for guidance from the SEC to sort out essential information that consumers need to make an informed decision about the investments and more detailed information that could overwhelm them, according to Stephen Roth, a partner at Sutherland Asbill & Brennan.

Today, variable annuity prospectuses run anywhere from 150 to 300 pages.

“We think the information can be distilled into a format that is more user-friendly, more readable and more understandable,” said Mr. Roth, who coordinates the Committee of Annuity Insurers, a group of 28 companies that account for more than 80% of annuity sales.

A summary prospectus would help explain variable annuities for customers at the point of sale, said Richard Choi, a shareholder at Carlton Fields Jorden Burt.

“The variable annuity summary will go a long way towards simplifying for the investor the benefits and costs of the product and how it works,” Mr. Choi said. “The VA summary is long overdue.”

An investment adviser who usually shies away from recommending variable annuities for his clients because of their costs and withdrawal restrictions said a summary prospectus would benefit investors by putting critical information in one place.

“That's a great idea,” said Mike Sedlak, managing member of Golden Trail Advisers. “You can evaluate something in 15 minutes rather than spending hours digging through a 50-page prospectus.”

The SEC in 2009 amended mutual fund disclosure forms to allow for summary prospectuses that would outline a fund's investment objectives and strategies, risks, costs and performance. As of the first quarter of this year, about 80% of funds offered such documents.

But the agency is finding that the mutual fund summaries are not so brief or clear.

“Our disclosure staff has observed that for many funds, this summary disclosure at the front of the prospectus has become complex, technical and duplicative,” SEC Division of Investment Management Director Norm Champ said at the IRI conference last week. “We are seeing some exceedingly long summary sections — far longer than the three or four pages the commission asked for. We see long, dense paragraphs that are difficult to read.”

The SEC also has noticed some of the same problems with variable annuity disclosures.

“These products are designed for long-term investment,” Mr. Covington of IRI said. “All of our member companies want to make investors understand the costs of withdrawing money before the intended holding period.”

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