Tuesday, November 13, 2018

IM Director Blass praises ‘symphony of participants,’ vibrancy of financial markets

By Joanne Cursinella, J.D.

Speaking recently at the ALI CLE 2018 Conference on Life Insurance Company Products, Division of Investment Management Director Dalia Blass discussed variable products, investor choice, and regulatory consistency, while commenting on the “symphony of participants” she sees in the market, from investors of all ages, financial situations, and preferences to financial services providers with a variety of investment products and services that can meet unique investor needs.

Variable products and modernized framework. In prepared remarks, Blass pointed out that variable products represent $2 trillion in investor assets and that investors often turn to these products for their combination of capital market exposure and insurance guarantees that they can’t get elsewhere. Blass believes that investors benefit from a diversity of choices. “The products and services that you offer add to the symphony of choice that makes our markets vibrant,” she told her audience. The companion to choice is information, she added. The Commission has just proposed reforms to the disclosure framework for variable contracts that would introduce a layered disclosure to insurance products, update the registration forms, take a fresh look at addressing discontinued contracts and leverage technology.

Disclosure framework reform. The layered disclosure framework, which forms the core of the proposal, is similar to the layered disclosure that mutual funds have used since 2009, but are tailored to variable contracts, Blass said. The proposal features an initial summary prospectus for new investors and an updating summary prospectus for existing investors.

The initial summary prospectus would explain a contract’s features, costs, and risks, while the updating summary prospectus would provide information on changes that occur in subsequent years. This proposed framework would also permit layered disclosure about the underlying mutual funds in contracts. Certain information about the funds would be included in the summary prospectus and the full prospectus would be placed online. “This approach could allow investors to navigate the information in a way that responds to their needs,” Blass commented.

The proposal also includes a number of changes to modernize the rulebook for insurance products. The changes reflect the Division’s efforts to engage in retrospective review of the regulatory framework as the Division staff looks ahead, Blass said. Division staff reviewed statutory prospectus requirements, past Commission temporary rules, and prior staff statements to see where the framework for variable contracts could be modernized, she added.

Division staff is also looking to the future and the use of technology, Blass said. For example, the proposed amendments would require the use of structured data for certain disclosures, including the fee tables. This structured data would allow an investor to more easily compare the investment options offered by different variable contracts and assess whether a contract’s investment options meet the investor’s needs or goals, Blass pointed out.

What is needed now is constructive feedback on the proposal. Blass wants to know where the proposal “hit the mark” and where it didn’t. But in submitting comments, Blass made one request—not to approach comment letters as just a legal exercise. This rule, if adopted, could be on the books for a long time, she said, and Blass doesn’t want a rule that will be outdated the minute it is adopted. “[W]e want to future-proof it,” she added.

Investor choice and regulatory consistency. Blass next turned to the standards of conduct for financial professionals. In April, the Commission proposed a package of rulemakings including Form CRS, Regulation Best Interest, and the fiduciary duty interpretation for investment advisers, Blass reported. These proposals are intended to serve Main Street investors by bringing the legal requirements and mandated disclosures of financial professionals in line with investor expectations, Blass said. She highlighted two topics that she said are particularly important for this audience—investor choice and regulatory consistency.

Broker-dealers and investment advisers are different, and their compensation models are different; each offers its own features, advantages, and conflicts, Blass said. In addition, just as investors can benefit from a variety of financial services, they can also benefit from a variety of investment options. “For one investor, a mutual fund may check all the boxes; for another, an insurance product may work better,” Blass added.

Blass also believes that consistent rules are important, especially for products where multiple federal and state rules can apply. In her view, coordination among regulators is central to having an efficient, effective and rational framework.

Looking ahead. Blass concluded by pointing out that the Division has been involved in a number of other key policy initiatives. For example, Division staff recently issued no-action relief to permit issuers of structured indexed annuities to file audited financials in their registration statements that are prepared according to SAP (state statutory accounting principles) instead of GAAP (generally accepted accounting principles).

The Division also monitors the implementation of recently adopted rules. One of the key rules being monitored is the liquidity risk management rule, Blass said. She has heard concerns about the possible impact of this rule on fixed income markets if a fund holds more than 15 percent in illiquid investments. Some funds may be concerned that the rule forces them to sell assets immediately, possibly in a down market, but the rule does not require forced sales, only responsible actions, Blass said. Further, the staff has actively engaged on questions regarding the implementation of this rulemaking and will remain available to advise and assist as needed, Blass added.