SEC approval of Hancock VA funds seen as uncertain

Oct 16, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Advisers don't seem to like John Hancock Life Insurance Co.'s plan to substitute its own mutual funds for outside funds in its variable annuities, and the Securities and Exchange Commission might not either, industry observers say.

The Boston-based company is seeking SEC approval to replace its 44 non-proprietary VA funds - from a platform of New York-based DWS Scudder Distributors Inc. - with proprietary funds (Investment News, Oct. 2).

"The application is still pending" said SEC spokesman John Heine, who declined to comment further.

Hancock didn't immedi-

ately return phone calls seeking comment.

"I'm not familiar with any SEC precedents in cases similar to what Hancock is doing," said Scott DeMonte, founder of, part of WealthNet Inc. in Fayetteville, N.Y. "Their action is unusual, because the trend among insurers is to increase non-proprietary offerings."

Materiality, penalties key

Attorneys who are not directly involved in the dispute but who are familiar with SEC procedures think that approval hinges on whether the fund substitutions are deemed to be material changes in the original prospectuses that cause the investments to no longer conform to what the VA clients intended to purchase.

"An argument could be made that clients bought the VAs because of the arm's-length nature of the outside funds, or that they liked and trusted the Scudder funds," said Bill Singer, a securities attorney and shareholder with Stark and Stark of Lawrenceville, N.J.

"Sellers of Hancock VAs are hoping that the SEC doesn't approve the switch," said an adviser in Florida who asked not to be identified. According to the adviser, the proprietary funds the insurer is proposing don't even exist yet, so it is impossible to compare their performance or fees with the funds they are replacing.

"The funds are to be set up only if the SEC approves Hancock's request," the adviser said.

Hancock is in the process of expanding its stable of proprietary funds, having added 27 in the past year, and is adding nine more this month, for a total of 63 funds. The 44 new VA funds would be in addition to those funds.

A New Jersey adviser who also asked not to be identified said that clients are happy with their current funds and purchased the annuities in part based on the fund offerings.

One of the reasons that advisers liked the Scudder Wealthmark VA line was its diversity of funds, the Florida adviser added. He wants Hancock to permit tax-free Section 1035 exchanges out of the affected annuities and without any deferred charges, for clients who want a different variable annuity.

"Switching to a single fund family is bad faith and a conflict of interest," the Florida adviser said.

A key point the SEC will consider, the attorneys noted, is whether clients will have the option to cancel or exchange their annuities without penalties. The Hancock submission states that all expenses incurred in connection with the proposed substitutions will be paid by the insurer.

However, it isn't clear whether clients would be able to exchange their variable annuity for another without penalties.

Relative performance of the existing funds versus that of the replacement funds is a key consideration for the SEC and for advisers and their clients, according to Rod Heggy, a securities attorney with Federman and Sherwood in Oklahoma City.

The lack of performance history for the funds is an advantage for Hancock, because it doesn't have to demonstrate past comparable performance with the existing funds, Mr. Singer pointed out. The insurer also can use this to its advantage by contending that it is setting up funds that are most advantageous to this particular group of VA investors, he added.

However, advisers have complained that Hancock eliminated sector funds and a socially conscious fund that some VA clients wanted.

Attorneys also noted that insurers lawfully can promote usage of proprietary mutual funds in their variable annuities, as long as they don't engage in sales contests or other incentives that have resulted in fines against several banks and broker-dealers. In addition, it is sometimes an advantage to have a proprietary VA fund, because the insurer may be more vigilant about monitoring market timing and other fund abuses in its own funds.


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