SEC Director of Division of IM Norm Champ's Speech on Life Insurance Company Products

SEC Director of the Division of Investment Management ("IM") Norm Champ spoke at the American Law Institute Continuing Legal Education Group ("ALI CLE") 2013 Conference on Life Insurance Company Products regarding recent industry developments, related disclosure issues, and developments with regard to mutual fund directors.

Director Champ began by discussing relevant industry trends, including the development of deferred annuity riders. According to Mr. Champ, these offer investors the ability to build a stream of future annuity payments over time rather than in a single, lump-sum purchase payment at the end of the deferral period for annuity payments that begin immediately. Since the amounts transferred out of variable subaccounts to purchase these deferred income payments are no longer available to the contract owner, Champ stated that there is a loss of liquidity which should be carefully considered by investors when determining whether to transfer amounts out of the variable portion of the contract. Additionally, Champ noted, investors should consider the exposure to the insurer's credit risk that accompanies a transfer into the general account.

Champ went on to discuss the importance of good disclosure, explaining that "a prospectus needs to explain how a contract works in an even and balanced way, and the costs and potential pitfalls need to be made clear." He mentioned the recent concern regarding the use of names of insurance products and underlying funds which include terms such as "protected" and "guaranteed." According to Champ, the use of these terms may contribute to investors misunderstanding the potential for loss associated with the investment. He noted that the SEC has recently requested that some funds and contracts change their names.

Mr. Champ also highlighted the role that directors of underlying mutual funds play in the compliance programs of those funds. Champ stated that it is important for directors to be aware of and monitor potential conflicts of interest, since underlying funds are frequently managed by advisers that are affiliated with the insurance company. He mentioned recent enforcement actions by the SEC which have focused on the process by which the boards of registered funds must evaluate and approve their funds' advisory contracts and related disclosure requirements, such as the SEC's action against the former directors of the Regions Morgan Keegan funds. According to Mr. Champ, "this case furthered the important regulatory goal of ensuring that directors of registered funds fulfill their critically important obligations under the Investment Company Act to fair value certain securities for which market quotations aren't readily available."

Mr. Champ concluded his speech by discussing recent rulemaking initiatives and Division of IM developments. He mentioned the money-market fund proposal and the variable annuity disclosure reform, which would provide a framework for disclosure that is more "concise" and "user-friendly." He highlighted key changes that are under way within the Division of IM, such as the work of the Risk and Exam Office ("REO") and the publication of guidance updates.

See: Director Champ's Speech.