As we discussed yesterday, th
e Securities and Exchange Commission’s (SEC’s) Office of Compliance Inspections and Examinations (OCIE) released its examination priorities for 2016 on January 11 (the “Examination Priorities”). Retirement investments continue to be an area of focus for OCIE as we march into the new year. Digging deeper into this area, OCIE identified variable annuities as a retirement product warranting special attention.
Variable annuities have become a popular component of retirement plans. Retirement investors are attracted to variable annuities because many variable annuities offer guaranteed income for life. The popularity and prominence of variable annuities have grown as employers have moved away from defined benefit plans toward defined contribution plans, a point highlighted by OCIE in its Examination Priorities. OCIE cited statistics showing that investors have twice as much money invested in defined contribution plans, as they do in defined benefit plans. Variable annuities often fill the gap created by the decline in defined benefit plans and provide peace of mind to investors that they will not outlive their retirement savings.
The shift toward defined contribution plans, and the attendant emergence of variable annuities, means that investors now bear more risk than ever when investing for their retirement. OCIE noted in its Examination Priorities that “the financial services industry is offering a broad array of information, advice, products, and services to retail investors to help them plan for, and live in, their retirement years.” OCIE plans to implement initiatives to assess the risks that variable annuities pose to investors. OCIE stated that it would assess three facets of variable annuities: (1) the suitability of sales to investors, (2) the adequacy of disclosures and (3) the supervision of variable annuity sales.
OCIE’s ReTIRE initiative, rolled out in July 2015, provides further insight into what OCIE may look for when conducting examinations of registrants selling variable annuities. The ReTIRE initiative focuses on the reasonable basis for recommendations, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices. Registrants that sell variable annuities should therefore be prepared to provide information and respond to inquiries regarding, inter alia:
- the process for recommending variable annuities to customers;
- the due diligence performed around investment options;
- compensation provided to incent representatives to recommend variable annuities;
- implementation and compliance with controls, oversight and supervisory policies regarding the sale of variable annuities; and
- the content and accuracy of marketing materials.
When OCIE rolled out the ReTIRE initiative, it encouraged registrants “to reflect upon their own practices, policies, and procedures in these areas to promote improvements in their supervisory, oversight, and compliance programs, as deemed appropriate.” In light of OCIE including variable annuities in its 2016 Examination Priorities, registrants that offer variable annuities should pay special heed to this advice.
Registrants that offer variable annuities and are subject to FINRA oversight should also be aware that FINRA made sales practices of variable annuities an examination priority in 2015. OCIE’s focus mirrors FINRA’s from last year. Just as OCIE has in its 2016 Examination Priorities, FINRA focused on “compensation structures that may improperly incent the sale of variable annuities, the suitability of recommendations, statements made by registered representatives about these products and the adequacy of disclosures made about material features of variable annuities.”