In a June 28 address before the Insured Retirement Institute 2011 Government, Legal & Regulatory Conference, Eileen Rominger, Director of the SEC's Division of Investment Managment, discussed some areas of the variable insurance product industry that have come under the scrutiny of her Division. Among these areas, Rominger noted that underlying funds are frequently managed by advisers that are affiliated with the sponsoring insurance company, resulting in a potential conflict.
The Division has become increasingly concerned about potential conflicts of interest that may result from the fact that the amount of an insurance company's liability under living benefit riders is directly related to the performance of funds that are managed by its affiliate. Recently, we have begun to see prospectus disclosure acknowledging the conflict, and even indicating that the management of a fund could be influenced by the risk exposure faced by the adviser's affiliate, the insurance company. Further still, one recent filing disclosed an arrangement under which a fund, which will be a required investment allocation for participants in certain living benefit riders, will be managed through adherence to a formula that uses data provided periodically by the affiliated insurer.
Of note to directors, Rominger outlined her expectations of directors of funds in the situation she describes:
Beyond the disclosure implications here, keep in mind that separate accounts and underlying funds, as investment companies, are subject to the Investment Company Act's conflict of interest provisions. These were designed by Congress to prevent any overreaching on the part of fund affiliates in their dealings with the fund. From that perspective, I think it is important that the board of directors of any fund that may be subject to conflicting interests on the part of its adviser be vigilant watchdogs for the fund's investors, ensuring that arrangements entered into are for the benefit of those investors. To accomplish that goal, I believe board deliberations should squarely address any potential conflict on the part of the fund's adviser and other service providers. (emphasis added) Meanwhile, a fund's adviser and the insurance company that offers a fund on its platform should be careful in formulating arrangements to head off any potential for overreaching in their dealings with the fund.
In short, Rominger stated that despite the disclosure to investors of these potential conflicts, directors remain the principal watchdogs protecting shareholders from overreaching by their fund's adviser or the sponsoring insurance company.
The full text of Rominger's address is available at: http://www.sec.gov/news/speech/2011/spch062811epr.htm