Because variable annuities have sub-accounts that are structured much like mutual funds, the Securities and Exchange Commission has requested information on trading practices from most top insurers and some smaller ones, according to Judith Hasenauer, partner at Blazzard, Grodd & Hasenauer.
However, the letters received by insurance carriers are not necessarily indicative of further accusations from the agency, Hasenauer said. "I do not believe theres been a rush to judgment by the SEC. They are at the fact-finding stage," Hasenauer explained. "The letter was signed not by enforcement but by the examinations office."
The initial inquiries are part of the same sweep affecting the mutual fund industry, following an announcement last week by Commissioner William Donaldson of the SEC regarding the Commissions initiative to craft a set of rules to deal with late trading and market timing.
The problem of market timing is not, however, a new one for the industry. Because trades within variable annuities are not subject to capital gains taxes, the product often draws market timers who want to avoid the tax consequences of their frequent movement. Elective sessions on the topic are typically packed at conferences held by the National Association for Variable Annuities (NAVA), and it is clear that there is not one simple solution for the problem.
Paul Roye, director of the division of investment management at the SEC, has long acknowledged that variable annuities in particular struggle to properly deal with investors who engage in international arbitrage or frequent trading that is serious enough to have an effect on trading costs and valuation for funds.
In fact, the SEC has been vocally flexible in allowing a variety of different strategies by variable annuity issuers.
Now, however, the cooperative attitude may dissipate in the face of political pressure, and the SEC may end up adopting one-size-fits-all rules for a problem with a decidedly diverse scale, Hasenauer warned. Although the SEC has taken years to examine the problem thus far, the agency is clearly looking to act quickly now.
"They may be on an even shorter timetable now, given the political pressure," said Michael DeGeorge, general counsel for NAVA. "Certainly I would expect to see proposed rules by the end of this month if not sooner."
In the meantime, despite widely publicized actions by pension funds and college 529 savings plans to reconsider the use of accused funds in their plans, it seems that no such movement is likely to strike among variable annuities. Hasenauer said her firm has had "zero requests" for fund changes, adding that they can typically take half a year or more.
The most notable exception to this is that some carriers and fund advisors elected to shift assets away from Fred Alger Management after Sept. 11, 2001, but she said that was an extraordinary situation. Carriers are likely to be more circumspect about the use of managers such as Putnam Investments, which will wait and see what the longer-term impact is on investor opinion. "I think most variable annuity issuers are much more thoughtful in the process, and the marketplace will determine this," Hasenauer said.
DeGeorge echoed Hasenauers comments: "I would certainly think that insurance companies have had discussions with some of these fund managers and seeking reassurances that things would be done properly. I havent heard of any big movement afoot to drop these funds."