SEC eyes VA funds of funds

The Securities and Exchange Commission is looking at possible problems involving revenue sharing payments made by funds of funds. “Recently the commission has received inquiries about some arrangements that raise questions about the nature of the services being provided in return for revenue sharing payments,” said Andrew J. "Buddy" Donohue, director of the Division of Investment Management at the SEC. He spoke in Washington today at the annual compliance and regulatory affairs conference sponsored by the National Association for Variable Annuities. The SEC is eying variable annuities that may offer a fund of funds managed by an affiliate of the insurer. Funds of funds are mutual funds that invest in other mutual funds or hedge funds to diversify risk. “I am curious about the extent in which revenue sharing payments from the adviser of a bottom-tier fund to the insurance company or other affiliate of the adviser to the fund of funds would represent payments for services rendered rather than kickbacks for purchase of shares of the bottom-tier funds,” Mr. Donohue said. That could be a violation of securities anti-fraud law, he said. A fund of fund’s investment adviser has fiduciary duties to select the best investments for the fund of funds, he noted. “The division is considering these issues,” Mr. Donohue said, inviting the variable product industry to make comments on the “appropriate regulatory treatment” for such revenue sharing.