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Source: Fixed Annuity Premium Study, Beacon Research, Evanston, IL

Lori A. Richards, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), plans to leave the Securities and Exchange Commission after more than two decades of government service.

Ms. Richards has been the Director of OCIE since Chairman Arthur Levitt created it in May 1995. She managed the SEC’s nationwide examination oversight programs for investment advisers, hedge fund managers, mutual funds, broker-dealers, clearing agencies, transfer agents, trading markets, self-regulatory organizations and credit rating agencies. 

OCIE Associate Director-Chief Counsel John Walsh will serve as Acting Director of OCIE when Ms. Richards steps down on August 7. Mr. Walsh is a 20-year veteran of the SEC, including service in the Office of General Counsel, the Division of Enforcement, and as Special Counsel to Chairman Arthur Levitt. He has been a member of OCIE’s staff since its creation in 1995.

During her tenure, Ms. Richards helped the agency identify and address abusive trading by exchange specialists, shortcomings in credit rating agencies practices, conflicts of interest by pension consultants, asset valuation problems, insider trading, sales of securities to seniors at “free lunch” seminars, mutual funds’ payments for “shelf space” and many more issues.

Before becoming the Director of OCIE, Ms. Richards was executive assistant and senior adviser to Chairman Levitt. Prior to that, she was Associate Regional Administrator for Enforcement in the SEC’s Los Angeles office.

She received the SEC’s Distinguished Service Award in 2008 (the SEC’s highest award), and the Irving Pollack Award in 1992. She has a J.D. from Washington College of Law, and a B.A. in Political Science from Northern Illinois University.

© 2009 RIJ Publishing. All rights reserved.

Most credited rates for fixed annuities fell during second quarter, according to Beacon Research, which maintains the AnnuityNexus database. Average credited rates for 5-year, CD-type/rate-for-term annuities in Beacon’s Fixed Annuity Index were 3.45% in April, 3.21% in May and 3.16% in June.  

Aside from Thrivent’s Multi-Year Guarantee Series, Security One, and Security Plus products, whose guaranteed minimum rates rose to 1.50% from 1.00%, all other announced rate changes were reductions:

• Minimums for Old Mutual Financial Network’s: Dexterity 3, Dexterity 3 Plus, Fidelity Platinum, and Fidelity Platinum Plus fell to 1.10% from 1.20%. The lowest rate for Penn Mutual’s FPDA product dropped to 1.15% from 1.35%.
• Genworth of New York reduced rates for its SecureLiving series: Advantage NY (to 2.50% from 3.00%); Advantage Pro NY (to 2.00% from 3.00%); Smart Rate NY (to 2.00% from 3.00%); Stable 5 NY (to 2.00% from 3.00%); Independence NY (to 2.50% from 3.00%); and Liberty NY (to 2.00% from 3.00).
• Reliance Standard lowered the guaranteed rate on its Apollo MVA, Apollo SP, Eleos MVA, and Eleos SP products to 2.00% to 3.00%.

In other changes:

• On June 26, Great American Life introduced Safe Return, its first indexed product to offer a bailout cap and return of premium.
• Effective July 1, Lincoln National Life discontinued Lincoln Classic Flex 8 and Lincoln Classic Flex 12.  
• On July 1, two 3-year rate bands were added to the ING Guarantee Choice Annuity, a single premium MVA annuity.    
• On July 6, Integrity Life added a 7-year rate band to its SPDA Series II, a single premium, non-MVA annuity with a seven-year surrender period. 
• The Great American Life American Freedom Stars and Stripes, American Freedom 10-ST, and Secure American fixed rate annuities have been added to the AnnuityNexus database.

© 2009 RIJ Publishing. All rights reserved.

Despite widely publicized regulatory efforts to suppress the practice of attracting senior citizens to insurance sales seminars with offers of  “free lunches,” the practice apparently continues. And in one recent incident, variable annuity sellers, not indexed annuity sellers, were the accused.

In late June, the Securities and Exchange Commission charged Poughkeepsie, N.Y.-based Prime Capital Services and several of its employees with allegedly pursuing fraudulent and unsuitable sales of variable annuities to senior citizens at free-lunch seminars in Boca Raton, Delray Beach, Boynton Beach and Melbourne, Fla.  

Prime Capital Services (PCS) and its parent company recruited elderly investors to attend the seminars, after which the prospective investors were encouraged to meet privately with PCS representatives who then induced them to buy variable annuities, the SEC said.

The sales presentations allegedly concealed high costs and lock-in periods. The SEC alleges that many of the variable annuities were unsuitable investments for the customers due to their age, liquidity, and investment objectives.

“They used free lunches as the low-tech bait for their high-scale scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. The enforcement action alleges that the variable annuities generally paid approximately six percent in total sales commissions. 

According to the SEC, PCS is a registered broker-dealer owned by Gilman Ciocia, Inc. (G&C), an income tax preparation business in Poughkeepsie that offers financial services in New York, New Jersey, Pennsylvania and Florida.

Certain written disclosures provided to customers and other records in customer files were incomplete or inaccurate, the SEC reported. In some cases, the paperwork allegedly was altered after it was signed by the customer to make it appear that disclosures were provided and the sales were suitable when, in fact, they were not.

© 2009 RIJ Publishing. All rights reserved.

The spike in broadcasts and sales of Michael Jackson’s recordings following the troubled celebrity’s recent unexpected death has been a boon to ABP, the vast Dutch pension fund that bought rights to the entertainer’s songs in 2008.  

Jackson died in Los Angeles on June 25, as he prepared for a series of comeback concerts in London. 

“The rights are being honored for all types of use: on radio and television broadcasts, downloads, CD and DVD sales, etc.,” said Andre Raaff, executive of Imagem Music Group, which manages ABP’s property rights stock.

ABP, the world’s third largest pension fund, bought a music catalog from Universal Music Group (UMG) for 120 million euros last year. The catalogue includes 14 songs by Jackson, including “Remember the Time”, “You Are Not Alone” and “In the Closet”.

“We only invest in hits that will bring in money every year,” said Raaff. He declined to give a figure but said, “We aim for a minimum return of eight percent a year.”

Counting its recent purchase of Boosey & Hawkes and Rodgers & Hammerstein music catalogues, Imagem owns about 250,000 works of music ranging in genre from pop to classical music to musicals with an estimated value of 500 million euros, he added.

© 2009 RIJ Publishing. All rights reserved.

The Supreme Court’s recent assent to review a lower court’s decision in Conkright et al. v. Frommert et al., in which pensioners won a $20 million judgment against the Xerox Corporation, has alarmed the original plaintiff’s attorneys.     

Peter K. Stris of Stris & Maher LLP, the attorney who has represented most of the Xerox pensioners, objects to Xerox’s continued efforts to seek a new decision allowing it to modify its pension payouts, charging that it could set a worrisome precedent for pension plan participants.

“Xerox wrongfully under-calculated the pensions of hundreds of individuals,” noted Stris in a press release. “About that there is no dispute. The fight is over the remedy. Xerox argues that it should decide how much money the plaintiffs get, and that its determination must receive deference from the courts.”

“There is no language in ERISA that supports Xerox-which is not surprising. The explicit purpose of the law is to protect pensioners. Xerox’s argument has no natural end: employers with vast resources could insist on endless attempts to re-calculate pensions,” the release said.

“And because ERISA does not permit the recovery of punitive damages, these employers could effectively tie up retirees everywhere in litigation forever,” the statement continued. “This litigation, which has continued for a decade, illustrates the very point. If the Supreme Court accepts the position urged by Xerox, no one’s pension will be safe.”

The Supreme Court will hear arguments in December or January.

An action against Xerox was filed in 1999 on behalf of former employees seeking to protect their pension payouts. Xerox, whose name remains a synonym for “photocopy,” faced dire financial troubles in 1999 and 2000, when it was beset by layoffs, a falling stock price, and near-bankruptcy.

© 2009 RIJ Publishing. All rights reserved.

State-regulated investment advisers would be subject to federal jurisdiction under a legislative proposal introduced last week in the House Financial Services Committee, chaired by Rep. Barney Frank, D-Mass., Investment News reported.

Under the proposed Consumer Financial Protection Agency Act of 2009, the new agency would regulate the 14,000 investment advisory firms overseen by state securities regulators, but not the 11,000 advisory firms regulated by the Securities and Exchange Commission.

The SEC regulates investment advisory firms that manage $25 million or more, while the states regulate smaller firms.

Under the terms of the legislation, the consumer protection agency would also oversee any person who sold or recommended such consumer-oriented financial products as mortgages, credit cards and tax refund loans.

Investment advisers registered with states would be monitored by the proposed agency “to the extent that the person provides investment [advice] to consumers or engages in other financial activities in connection with providing other consumer financial products or services,” Eric Stein, deputy assistant Treasury secretary for consumer protection, told Investment News.

But “the proposed act contemplates that a state-registered investment adviser would remain primarily regulated by the state securities regulator with respect to those activities,” he said.

Approval of the Consumer Financial Protection Agency Act of 2009 could come as soon as August 1.

© 2009 RIJ Publishing. All rights reserved.

The Department of Labor’s ERISA Advisory Council is studying the need for closer supervision of stable value funds, a core defined contribution investment option that has been shaken by recent market turmoil, Pensions and Investments magazine reported.

The council will examine stable value funds on the second day of its July 21-23 meeting and then advise the DOL’s Employee Benefits Security Administration on the need for additional guidelines for the design and marketing of stable value funds to plan sponsors and retirement services providers.

In addition, the council will recommend whether additional guidance is needed to help plan sponsors and their consultants choose, value and monitor stable value funds. Individuals had about $642 billion in stable value funds through 167,000 defined contribution plans as of year-end 2008.

The recent movement into stable value funds, often from target-date funds is driving the recent discussion, said Trisha Brambley, a council member and president of RESOURCES for Retirement in Newtown, Pa.

Stable value has gone in and out of favor with defined contribution plans. The investment option accounted for 16.9% of the top 200 DC plans’ average portfolio for the year ended Sept. 30, 2002, according to Pensions & Investments data. That percentage dropped to 12.6% in 2007, as many participants took on more investment risk and diversified into equities. Last year, however, stable value accounted for 29.4% of DC plans’ average portfolio, as investors sought safety in turbulent markets.

The funds invest in a bond portfolio protected from wild swings in interest rates through contracts, or wraps, provided by insurers or banks. These wraps guarantee participants will receive the fund’s book value even if the market value falls.

The market value of the underlying securities has been falling in many funds, reducing returns and pressuring wrap providers to make up the difference. Many wrap providers are limiting new business or are looking to exit the business, said Philip Seuss, a Chicago-based principal at Mercer Human Resource Consulting.

The typical wrap fee also has ballooned to as much as 20 basis points, from just six to eight basis points a year ago, he said.

The 15-member ERISA Advisory Council also will look into the adequacy of disclosures to participants about stable value funds, and weigh the possible designation of stable value as qualified default investment alternatives in 401(k) plans. The council plans to report its findings to the Department of Labor in October. 

© 2009 RIJ Publishing. All rights reserved.

AIG is in negotiations to sell its American Life Insurance Co (Alico) to MetLife, which offered AIG  $11bn for the unit earlier this year, the New York Times’ Breaking Views column reported Monday.

Alico had statutory revenues of $32 billion and post-tax earnings of $1.3 billion before capital losses in 2008. About two-thirds of the company’s business is in Japan.

MetLife had $38 billion of cash and short-term investments at the end of the first quarter. And cash has continued to pour in as risk-averse customers flee to insurers with the best balance sheets. MetLife’s annuity sales in the first quarter were $7.4bn, more than double the amount in the same period last year. MetLife estimates it has excess capital of around $5bn, which is far greater than most of its rivals. Since mid-May, insurers have raised about $15 billion in capital, according to JPMorgan research. 

Insurers currently trade at about book value-compared with about 1.5 times book value before the financial crisis. Prices are likely to remain suppressed in the short run because financial companies must now keep more capital on their books and further hits to their commercial real estate holdings look likely. Valuing these businesses at replacement cost seems too conservative over the long run.

MetLife wants to expand its international business. It currently represents about 15% of the company’s earnings and has been expanding steadily. Overseas margins are higher, and unlike the mature US market, life insurance in places such as India and China is growing quickly.

The sticking point in previous talks between AIG and MetLife was price. Alico earned $1.3bn in 2008 before capital losses. AIG reportedly demanded $20 billion, which was more than MetLife was willing to pay. 

© 2009 RIJ Publishing. All rights reserved.

*Certificate type contracts are products that have interest rate terms that equal or exceed the surrender charge or that waive the surrender charge at the end of the selected rate term (window waiver).

**Effective yield prorates the bonus rate equally over the surrender charge period.

Source: www.AnnuityNexus.com, Beacon Research, Evanston, Illinois

In a new report entitled “Life-Annuity Forecast and Analysis 2009-2011,” Conning Research and Consulting cast doubt on the future of variable annuity sales, saying that “it is a wildcard whether they will ever regain [the] dominance” they enjoyed in the middle part of the decade.

The report from the Hartford, Conn.-based firm attributed the cloudy outlook to a “combination of changes in consumer product preference, increased concern about the financial risk associated with variable annuities, clarification of indexed annuities, and the lack of any new types of guaranteed benefits.”

“The weakened financial condition of some insurers could lead them to exit the individual annuity line, seek additional capital, or merge with other insurers,” the report cautioned. 

“We’ll have to see how this market plays out,” said Terence Martin, vice president of insurance research at Conning and the report’s author. “The GLWB [guaranteed lifetime withdrawal benefit] seemed to be what [carriers] were going to capture the retirement market with, because there was a long-standing reluctance by consumers to exercise the annuity option, and this was a way to have your cake and eat it too.”

“I wouldn’t say that the product will disappear,” he added, “but it has certainly hit a bump in the road. It all depends on how the product will adapt to this new environment. We don’t know how consumers will react to the changes that insurers are putting out there. Some are re-pricing, were looking at restructuring this benefit. Will consumers find that product as attractive as they did before?”

The report noted that the life insurance industry as a whole posted a statutory net operating loss of $1 billion in 2008, compared to a gain of $34 billion in 2007. Realized capital losses were $50 billion, bringing the statutory net loss to $51 billion. 

The current recession has been unprecedented in some ways, the report said. In prior recessions, the impact was largely limited to stock price declines to which the life insurance companies, with over 80% of its assets in bonds and 10% in mortgages, were largely immune. “In contrast, this recession is having a significant effect on credit markets, and has hit insurance companies hard,” the report said.

In addition, variable annuity issuers have had to make huge contributions to general account reserves to cover the many “in the money” guarantees that followed the equity market decline.  In 2007, companies added only $17 billion of general account reserves. In contrast, companies—primarily variable annuity specialists—added $129 billion during 2008. 

© 2009 RIJ Publishing. All rights reserved.

More than three out of four American investors (79%) want to “see strong action taken to correct the problems that exist today” in the financial markets, including over a third (34%) who are “angry” about the debacle on Wall Street and the related failure of regulatory oversight.

Those were among the results, released June 25, of a survey of 1,256 U.S. retail investors conducted by Opinion Research Corporation (ORC) on behalf of ShareOwners.org, a new nonprofit, nonpartisan group formed to organize grassroots support for financial market reforms.

ShareOwners.org’s uses “Ning-based social networking” technology akin to the method used successfully by the Obama campaign during the 2008 presidential election process. The group received its initial funding from a court settlement and the Lens Foundation for Corporate Governance.

According to the survey:

• About three out of five investors (58%) are “less confident in the fairness of the financial markets” today than they were one year ago.
• More than half of American investors (52%) say “more information and online education about your rights and duties as a shareholder” would make them more confident about the fairness of the financial markets.  
• Nearly one in five investors (17%) would “consider becoming involved in a group to protect the rights and interests of shareholders or investors like you.”
• About one-third of investors (34%) said they would use a term as strong as ‘angry’ to describe their views about the need for reform.
• Nearly half of other investors (45%) said they want to see strong clean-up action taken.
• Nearly six out of 10 investors (57%) said that strong federal action would help “restore their lost confidence in the fairness of the markets.”

ShareOwners.org said it plans to send citizen comments in support of the group’s agenda to their members of Congress. The agenda includes four goals: stronger regulation (including a beefed-up SEC), increased accountability of corporate boards and chief executives, greater financial transparency and protection of the legal rights of investors. 

The group’s chairman is Richard Ferlauto, director of corporate governance and pension investment, American Federation of State, County and Municipal Employees (AFSCME). Advisors include Lynn E. Turner, former chief accountant at the U.S. Securities and Exchange Commission; John Wilcox, chairman, Sodali Ltd., and former senior vice president of corporate governance, TIAA-CREF; and economist Dr. Teresa Ghilarducci of The New School for Social Research.

© 2009 RIJ Publishing. All rights reserved.

Nationwide Mutual Insurance Company’s strength rating has been downgraded to ‘A’ from ‘A+’ by Fitch Ratings. The rating also affects the company’s affiliates and Nationwide Life Insurance Company and Nationwide Life Insurance Company of America.

Fitch also downgraded the ratings on Nationwide Mutual’s outstanding surplus notes to ‘BBB+’ from ‘A-‘, and the rating on the senior unsecured debt of Nationwide Financial Services, Inc. to ‘BBB’ from ‘BBB+’. The rating outlook remained negative.

The rating action primarily reflects a consolidated risk-adjusted capital position, as estimated by Fitch as of March 31, 2009, that falls below prior ratings expectations. The decline in capital in part reflects the privatization of the life insurance subsidiaries early this year, which was previously reflected in Fitch’s ratings.

Among other explanations for the downgrade, Fitch said that Nationwide Financial Services “will continue to experience pressure on operating earnings in 2009, driven by lower investment income and lower asset-based fee income.

“Further, variable annuity writers such as Nationwide Life Insurance and Nationwide Life Insurance Company of America continue to be under considerable pressure as the decline in equity market values over the past year has required additional general account reserves to cover guarantees attached to the variable annuities the companies have sold.

“While Fitch acknowledges that the organization has economic hedging programs in place to reduce its exposure to these policy guarantees, some exposure remains.”

© 2009 RIJ Publishing. All rights reserved.

The American College, a prominent educator of financial services professionals in Bryn Mawr, Pa., announced the appointment of eight senior industry and academic leaders to the Advisory Board of the New York Life Center for Retirement Income. They are:

• John Ameriks, Ph.D., principal and head of the Investment Counseling & Research Group, Vanguard.
• Andy Barksdale, executive vice president of Marketing and Relationship Management, LPL Financial Institution Services.
• Garth A. Bernard, President and CEO, Sharper Financial Group L.L.C.
• Paul Horrocks, Corporate Vice President, Individual Annuity Department, New York Life Insurance Company.
• Michael Lackey, CLU, ChFC, Vice President, Agency Department, New York Life Insurance Company.
• David A. Littell, JD, ChFC, CFP, Joseph E. Boettner Chair in Research, Professor of Taxation, The American College.
• R. Morris Sims, MSM, CLU, ChFC, Vice President and Chief Learning Officer, Agency, New York Life Insurance Company.
• Walt Woerheide, PhD, CFP, Vice President of Academic Affairs, Dean, Frank M. Engle Distinguished Chair in Economic Security Research, Professor of Investments, The American College.

The New York Life Center for Retirement Income at The American College, funded in 2007 by a gift from New York Life Insurance Company, provides financial service professionals with advanced knowledge concerning retirement concepts and strategies. It produces an annual guide for retirement planners and a series of videos featuring insights from industry thought leaders. 

The Center also partners with leading organizations that serve seniors, within and outside the life insurance industry. It also offers technical knowledge to financial advisors and agents in matters related to the retirement decisions facing clients. Its director is Kenn Beam Tacchino, JD.

“Today, we are in the midst of the greatest financial crisis since the Great Depression,” said Larry Barton, Ph.D., president and chief executive officer of The American College. “But thanks to the in-depth scholarship, research and information provided by the New York Life Center for Retirement Income, financial advisors, consumers and key economic decision-makers have access to the critical information they need to better understand the financial implications of their retirement options.”

© 2009 RIJ Publishing. All rights reserved.

Only 30% of advisers to employer-sponsored retirement plans believe that plan sponsors should manage retirement income distributions for retired participants, according to a survey of PlanAdviser magazine readers conducted in April and May.

But about two-thirds of respondents recommend offering retirement income investments within the plan, and over 70% of those polled said they currently manage retirement plan distributions for plan participants.

The survey also found:

• “A mutual funds/fixed annuity combination” and “variable annuities with a guaranteed minimum withdrawal benefit” were the “most attractive” types of investment options for use in retirement income planning/distribution.
• “Fixed income/stable value” funds and “dividend-paying mutual funds” were the next most attractive.
• The least attractive options, payout mutual funds and absolute return funds, were also the options with which advisers were least familiar.
• The most common tactics observed among plan participants for making up a savings shortfall were “changing/delaying retirement age” and “increasing savings rate.”
• Almost half of those polled said that less than 50% of their clients were “on track to reach their retirement savings.”
• About 81% said that a person needed from 80% to 100% of their current gross income “to live comfortably in retirement.”

Of the 135 advisers who responded to a survey sent to 4,700 advisers in the magazine’s database and posted in e-newsletters, about two-thirds said they had five or more years’ experience as plan advisers, about 43% specialized in advising retirement plans, 45% had 41 or more plan clients, about 55% were affiliated with either an independent broker-dealers or national full-service wirehouse, and about 70% focused their practice on plans with assets of  $2 million to $75 million.

© 2009 RIJ Publishing. All rights reserved.