(June 6) – “In the midst of a federal examination of the sale of variable annuities, a fast-growing and controversial combination of mutual funds and insurance, a senior regulator issued a stern warning today that misleading tactics and incomplete disclosure would not be tolerated,” writes Joseph B. Treaster in today’s New York Times.

“The regulator, Paul F. Roye of the Securities and Exchange Commission, zeroed in on bonuses offered by some companies to attract variable annuities customers and told an industry group that his agency was concerned that investors were being given the false impression that they were receiving something for nothing.”

“‘There’s no such thing as a free bonus,” he said, noting that bonuses are generally tied to variable annuities with higher fees and penalties so that the companies selling them eventually get their money back. Other critics have pointed out that after the companies had been reimbursed they continue to receive higher fees for the life of the investment.”

“Mr. Roye, who is the director of the commission’s Division of Investment Management, said his agency would take issue with any company that failed to “fully and fairly disclose the downside as well as the upside’ of variable annuities. And while the industry contends that some buyers benefit from the bonus feature, Mr. Roye said that ‘increasing sales at the expense of those for whom these products are not suited will not be tolerated.'”

“Mr. Roye was addressing several hundred executives of insurance companies, which produce variable annuities, and of banks and brokerage firms, which, along with financial planners, are the main sellers of variable annuities.”

“Officially, through a spokesman, the group, the National Association for Variable Annuities, said it welcomed the close scrutiny. ‘If anything is going on that shouldn’t be going on, then I think everyone will see that any improper activity will be stopped,’ said Mark Mackey, the group’s executive director.”

“But it was clear that many of the executives listening to Mr. Roye’s speech at lunch feared that highlighting deceptive practices could put a crimp in an industry that while still smaller than the mutual fund business has been increasing assets under its control at the rate of 36 percent a year for several years. In contrast, contributions to mutual funds have been increasing by about 25 percent a year. Over time, Americans have invested $1.2 trillion through variable annuities compared with more than $6.8 trillion through mutual funds.”

“‘It’s scary,’ said one executive in the audience. ‘I understand the risk and the problems, but I don’t necessarily agree that the S.E.C. should be doing things this way.’ As Mr. Roye spoke, the room was hushed, and when he finished, no one applauded.”

“The nationwide examination of variable annuity sales practices, which is concentrating on the new bonuses, has been under way for nearly six months. The agency, and the National Association of Securities Dealers, which is also participating, have taken no action so far. But later this week the heads of S.E.C. offices around the country are meeting here to review their work on variable annuities as well as other regulatory matters, moving closer to a conclusion.”