WASHINGTON BUREAU — The U.S. Securities and Exchange Commission (SEC) is keeping a close eye on variable annuity living benefits disclosures.
Eileen Rominger, director of the SEC's division of investment management, talked about those concerns here at a regulatory conference organized by the Insured Retirement Institute (IRI), Washington.
Rominger said the SEC has become "increasingly concerned" about potential conflicts of interest that may result from the fact that the amount of an insurance company's liability under living benefit riders is directly related to the performance of funds that are managed by its affiliate.
"Recently, we have begun to see prospectus disclosure acknowledging the conflict, and even indicating that the management of a fund could be influenced by the risk exposure faced by the adviser's affiliate, the insurance company," Rominger said.
One recent filing disclosed an arrangement under which a fund, which will be a required investment allocation for participants in certain living benefit riders, will be managed through adherence to a formula that uses data provided periodically by the affiliated insurer, Rominger said.
"Beyond the disclosure implications here, keep in mind that separate accounts and underlying funds, as investment companies, are subject to the Investment Company Act's conflict of interest provisions," Rominger said.
She said it is important that the board of directors of any fund that may be subject to conflicting interests on the part of its advisor "be vigilant watchdogs for the fund's investors," ensuring that arrangements entered into are for the benefit of those investors.
"To accomplish that goal, I believe board deliberations should squarely address any potential conflict on the part of the fund's adviser and other service providers," Rominger said.
Meanwhile, "a fund's advisor and the insurance company that offers a fund on its platform should be careful in formulating arrangements to head off any potential for overreaching in their dealings with the fund," Rominger said
She said the SEC is paying close attention to the disclosure filings because living benefit riders in variable annuity contracts have proliferated, especially since the market decline of 2008.
