WASHINGTON - The Securities and Exchange Commission will continue to scrutinize the sale of bonus annuities and could issue clarification of or additional rules for the products, according to commission officials.

"You can expect us to comment on any presentation of a bonus product that does not fully and fairly disclose the downside, as well as the upside, of the product," said Paul Roye, director of the division of investment management. Roye spoke at the National Association for Variable Annuities regulatory affairs conference here last week.

Specifically, the SEC wants manufacturers and sellers of bonus products to make it clear to consumers that bonus products have "higher surrender charges, longer surrender charge periods and higher asset-based charges" to make up for the addition of bonuses, Roye said.

"There's no such thing as a free bonus," Roye said.

The SEC began investigating the sales tactics of bonus annuities at all of the leading bonus providers last November and has not determined when or if it will cease these investigations, Roye said in an interview following his speech. The commission has also not yet determined if these bonus sweeps will result in clarification of existing regulations or additional regulations, Roye said in the interview.

However, Susan Nash, senior assistant director at the SEC's division of investment management, said at the conference that the SEC may issue a rule or an interpretive or deficiency letter to specific firms about bonus products.

"Much of the strength in recent variable annuity sales has been attributed to the growth of bonus products," Roye said. "Of all the new products, no area has been more visible or controversial than bonus annuities."

The annuity industry has grown more than 2,000 percent, from $34.7 billion in assets in 1990 to $847 billion in assets as of March, Roye said. Since 1994, annuity assets have grown an average of 36 percent a year, while mutual fund assets have grown 24 percent annually, he said.

The SEC is continuing its investigation into the annuity sales practices of 10 insurance and investment firms that it has found to have questionable tactics, Nash said. The SEC made its discovery while examining 52 firms late last year, Nash said. Some of the investigations were due to routine inspections, while some were due to consumer complaints, she said. She did not disclose the number in each category. Of the 52 firms, the SEC found that 42 of them had questionable sales tactics and of these, 10 were serious enough to warrant continued investigation, Nash said.

The SEC has found that the firms were not conducting suitability screenings or had poor supervision or control of their salespeople, Nash said. The SEC is also concerned that companies are "churning or switching policies," she said.

The SEC also last week issued an investor alert on its website warning consumers about some of the trade-offs between bonus credits and product fees and surrender periods. The bulletin also warns investors about paying annuity mortality and expense fees and administrative fees of an annuity purchased through a tax-deferred account. The bulletin tells consumers that they might only want to consider buying a tax-deferred annuity through a tax-deferred account if they are interested in the lifetime payout or the death benefit of an annuity.

The SEC also believes that insurers and underwriters bear some responsibility along with their distributors to make sure distributors are conducting annuity suitability screenings, Roye said.

"We have been criticized by some in the industry for suggesting that insurers and their principal underwriters have some responsibility to monitor the suitability practices of selling dealers with regards to variable products," said Roye. "[T]he Insurance Marketplace Standards Association [has asked] the life insurance industry . . . to provide reasonable assurance that its distributors make reasonable efforts to determine the insurable needs or financial objectives of its customer[s]."

Roye also warned both the insurance and mutual fund industries against "overly aggressive advertising [highlighting] extraordinary returns," particularly from IPOs.

Unbundled annuities especially should make their optional, additional fees clear to investors, Roye said.

"The concern for potential distortion through advertising is perhaps even greater in the context of variable products," said Roye. "For example, given the recent trend towards the unbundling of contract features, it is important that the costs of the features that are understood to be part of an advertised contract are reflected in the separate account performance presented in the advertisement."

The SEC is also about to begin allowing firms to include information in advertisements that is different than that in a fund or annuity prospectus, Roye said. This will permit advertisements to contain more up-to-date information, he said.

Roye warned insurers against seeking to substitute one underlying fund in an annuity with another with the commission's permission as allowed by the Investment Company Act. Such substitutions are commonly done to replace one fund with another bearing a higher fee through application to the SEC, rather than through a reorganization, which would require a shareholder vote and be a fairer way of imposing higher fees, Roye said.

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