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Investment Management Director Discusses Current Regulatory Challenges
In remarks at a recent ALI-ABA conference on life insurance
company products, Andrew Donohue, the director of the SEC's Division of
Investment Management, reviewed the regulatory challenges facing the Division,
including simplified disclosure, revenue sharing and market timing. He said the
staff continues to review the comment letters on fund governance with a view
toward making a recommendation to the Commission and he hopes to address rule
12b-1 during his tenure.
The Division is actively pursuing investment company
disclosure reform, according to Donohue. He said the goal is to make the
information more user-friendly and to streamline its delivery through the use of
the Internet and interactive data. Donohue added that a number of industry
representatives are working on a recommendation to improve the disclosure regime
for variable annuities, which he welcomed.
The Division is considering a recommendation to permit
investment companies to offer securities through a short-form disclosure
document which can be delivered on paper or, with consent, electronically. The
streamlined document would include such key information as costs, investment
objectives and risks. Additional information would be available upon request.
The current fund profile is one model under consideration, he said.
The Division is also considering a recommendation to expand
the SEC's XBRL pilot program to include mutual funds to permit them to submit
tagged risk/return summary information. Donohue said he hopes to see
"robust participation" in the interactive data initiative.
Revenue sharing is an ongoing concern, according to
Donohue. The staff continues it review of comments in response to the proposal
to require point of sale disclosure by broker-dealers about revenue sharing and
similar arrangements, he said. The staff also continues to focus on market
timing and rule 22c-2, particularly in the hedge fund industry and its
investments in variable annuities.
Donohue said that few commenters have provided the staff
with cost data on its fund governance proposal to require funds to have 75% of
independent directors and independent chairs. The cost of the proposal was the
focus of the D.C. District Court's decision. Commenters continue to hold strong
views on the proposal, he said. Donohue encouraged the industry to look at
insurance fund boards and to put in place structures to promote independent
boards.
The staff will not consider rule 12b-1 in the immediate
future, according to Donohue, but he believes the rule deserves a fresh look.
After over 25 years of experience with the rule, it is time to reexamine its
use, he said. He added that the Division will be mindful of the two-tier
structure of variable annuity products as it considers the utility of rule
12b-1.
The staff continues to have concerns about sales practices
associated with variable products. The complexity of the variable insurance
industry makes good sales practices especially important, he said. Many of the
new variable insurance product features are designed for the aging population,
Donohue added. The Commission will continue its focus on abusive sales tactics
that target seniors.
Donohue also discussed his concerns with equity index
annuities, sometimes known as fixed indexed annuities, based on reports of high
commissions and poor sales practices. The Division is taking a close look at
these products, he advised, including their status under the federal securities
laws. The industry has sought more certainty about the regulatory environment
for equity index annuities as they design and market new indexed products, he
said. Regardless of their regulatory status, Donohue said good sales practices
are essential.
Jacquelyn Lumb
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