The SEC Doesn’t Want To See ‘Safe’ Words, Either: Opinion
August 18, 2014 by Linda Koco
The Securities and Exchange Commission (SEC) appears to be no more enamored of the word “safe” when used with insurance products than is the Colorado Insurance Division.
The SEC’s director of investment management Norm Champ said the SEC has “concerns” when names of variable insurance products suggest safety or protection from loss.
“We understand that insurance contracts often provide some protection against risk of loss,” he said in a July speech before an Insured Retirement Institute conference.
“However, when an insurance contract is also an investment product, it is important that the product name not overstate the safety and security provided by insurance aspects of the contract in a way that could be confusing or misleading to investors.”
Those words come from the text on his speech posted on the SEC website.
The comments are similar to ones made by Colorado regulators a few weeks later when discussing why the state has added the terms “safe,” “secure” and “certificate of deposit or CD” to its list of terms now prohibited from use in life and annuity advertisements. Regulators found the terms were being used in ways that could mislead consumers, Vincent Plymell, communications manager in the Colorado Department of Regulatory Agencies, said in an email.
In his speech, Champ made clear that the SEC doesn’t want to see safety-type terminology in mutual fund documents either. SEC Guidance Update (No. 2013-12), published in November, outlines the SEC’s concerns with the use of mutual fund names that suggest safety or protection from loss.
When a mutual fund includes a word or phrase that suggests safety or protection from loss, said Champ in discussing the guidance, “the name may contribute to investor misunderstanding of the risks associated with the investment and, in some circumstances, could be misleading.” Terms such as “protected” and “guaranteed,” he said, “when used in a fund name without some additional qualification, may contribute to investor misunderstanding about the potential for loss associated with an investment.”
The qualification would need to provide an adequate description of the “nature and limits” of any protection offered, he said.
The staff is so concerned about lack of proper depiction that, during the disclosure review process, it has requested that some funds and contracts change their names, Champ said.
The federal thinking seems clear: If you use those words in SEC documents, provide adequate qualifiers or omit the terms altogether.
That speaks to one question that industry professionals have asking since learning of the expanded prohibited terms list in Colorado — i.e., will other regulators follow suit? The SEC has already done so; in fact, it moved on this last year by way of publishing formal guidance involving mutual funds. Now, according to Champ’s speech, the SEC is applying the same filter to variable annuity names.
This doesn’t mean that state regulators will automatically join in. But if insurance and securities regulators continue to confer, and if they decide to “harmonize” with the SEC on prohibited terms, some common rules could emerge.
A natural question to ask is, how far with this go? The SEC notice does not mention the term secure as an example of troublesome words for fund or variable annuity names. But Colorado’s amended advertising regulation does. A derivative of the word “secure” is “security.” Will that word be banned too? And will the SEC reject that word as well?
Our economy definitely needs regulators to keep an eye out for the interests of all, even if it includes curtailing use of certain words in certain contexts. But this needs to be done carefully, and with feedback from the regulated, so as to ensure the best income for all.
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