Proposed disclosure rules could hurt level-load sales.
The way mutual funds and variable annuities are sold may change dramatically this year. The Securities and Exchange Commission's proposed Rule 33-8358 calls for a complete overhaul of confirmation information for mutual fund and variable insurance product sales.
In a nutshell, the rule calls for complete transparency of all costs and any conflict of interest involved in the sales. The comment period on this proposed rule, part of the SEC's crackdown on mutual fund and variable annuity sales abuses, was slated to end April 12. Go to www.sec.gov for more detailed information.
The SEC is proposing confirmation statements that would include: purchase information; sales charges; contingent deferred sales charges; asset sales charges; service fees, such as 12b-1 and individual fund fees to underwriters; commissions to broker-dealers; soft dollars compensation and shelf space fees to broker-dealers; revenue sharing arrangements; and differential compensation for selling proprietary products. Any conflicts of interests must also be disclosed on the statement.
The proposed rule also calls for statements to list the fees, the impact of each fee on a $10,000 investment and how the fee stacks up against the fees of the median mutual fund or variable annuity, as well as the range of fees. The SEC is expected to set up a database to compile the industry information to be used on the confirmation statement.
The rule also calls for a point-of-sale brochure that must be given to prospective investors, listing the same information as the confirmation statement..
Mutual fund and variable annuity trade groups support the new rules, but they advocate some changes to simplify the process.
James Doyle, spokesperson for the Investment Company Institute, says that the confirmation fee disclosure is one part of a number of rules the SEC has proposed to provide more information to investors. "The ICI supports these rules and has been calling for changes since the late 1990s," Doyle says. "The Institute is working with our members to finalize the letter."
Michael DeGeorge, general counsel for the National Association of Variable Annuities, says the proposed guidelines do not fit the product structure of variable insurance products.
"We support the concept of disclosing all the costs on the confirmations," he says. "But the rules are not designed for use with variable annuities. They are tailored to mutual funds. There are significant differences that need to be discussed. If they want to include variable annuities, they need to issue rules for variable insurance products."
Others say information requested in the rule already is reported in the prospectus, so the new rule will increase the cost of doing business and duplicate information. Broker-dealers give prospectuses to investors prior to the sale of a product. And fund groups deliver a statement to the investor following the sale. "We do not have problems with enhanced disclosure to the investor since it will add to investor confidence," writes Jane Riley, compliance officer with The Leaders Group, a broker-dealer in Littleton, Colo., in an SEC comment letter. The proposal as written seems to be directed at the broker-dealer, she continues, with no requirement on the fund sponsors to provide the point-of-sale information or the post-sale disclosure in a uniform manner.