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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 Investment Company Act Rule 12b-1 concerning distribution plans during his tenure.

The division is actively pursuing investment company disclosure reform, according to Mr. 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. Mr. 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. Mr. Donohue said he hopes to see "robust participation" in the interactive data initiative.

Revenue sharing is an ongoing concern, according to Mr. 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 Investment Company Act Rule 22c-2, particularly in the hedge fund industry and its investments in variable annuities.

Mr. Donohue said that few commenters have provided the staff with cost data on its fund governance proposal to require funds to have 75 percent of independent directors and independent chairs. The cost of the proposal was the focus of the District of Columbia Circuit Court's decision. Commenters continue to hold strong views on the proposal, he said. Mr. 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 Mr. 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, Mr. Donohue added. The Commission will continue its focus on abusive sales tactics that target seniors.

Mr. 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, Mr. Donohue said good sales practices are essential.