SEC exams will put a greater focus on variable annuities next year, the agency’s exam and inspection chief said Thursday.

One of the reasons for the increased scrutiny is that broker-dealers are selling more of the products, said Willie Davis, chief of the SEC Office of Compliance Inspections and Examinations.

Part of the exam effort will involve talking to broker-dealers about what they are being told about the products by the insurance companies creating them, Davis told the American Law Institute Conference on Life Insurance Company Products in Washington, D.C.

Norm Champ, SEC Investment Management Division director, also spoke at the conference, saying his unit is worried about the increased use of derivatives as a hedging tool in variable annuities.

He said this could be redundant protection for downside risk that may limit upside potential.

Champ also said his division is also working on meeting the four-year-old mandate of the Dodd-Frank Act that calls for the SEC to stress test the largest asset managers.

Broken Windows

Also at the conference,. SEC Associate Director Stephen Cohen defended Chairman Mary Jo White’s “broken windows” initiatives—an effort to be more aggressive uncovering smaller securities industry transgressions—against charges it was diverting SEC staff time from big problems.

“Broken windows is not about turning every compliance violation into an enforcement action,” Cohen said. “In no way is this taking our resources from important areas.”

Cohen said the aim is to bring the hammer down on the types of small violations that have become a mounting issue because of the attitude that “everybody’s doing it.”Among financial advisors, the SEC is looking hard at undisclosed fees and custody violations, he said.