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SEC Director Spells Out 2001 Initiatives


NEW YORK - The SEC this year will finalize its proposed rules that funds invest, under normal market conditions, at least 80 percent of their assets in a manner consistent with the name of the fund, said Paul Roye, director of the SEC's division of investment management.

Roye, last week, spelled out some of the initiatives the SEC will undertake this year, as well as some areas of particular concern at an industry conference on securities products of insurance companies. The Practising Law Institute of New York sponsored the conference.

If a fund chooses to call itself a bond fund, for example, it will now be required to invest at least 80 percent of assets in bonds, said Roye. The same rule will hold true for funds focusing on a certain country or geographic region as well as those that suggest a certain tax status of securities, he said. The proposals were made in February, 1997. Until now, the SEC has required that funds invest at least 65 percent of assets in a manner that corresponds with the name of the fund.

While investors should not rely solely on the name of the fund when choosing a fund to invest in, the change "will give investors greater assurance that an investment company's investment will be consistent with the name," Roye said.

In the coming year, the SEC will also continue to keep an eye on mutual fund fees, Roye said. The SEC last week released its study of the fees charged by mutual funds. (See related story p. 1) In the study, the SEC stopped short of mandating any changes to the current regulations that now govern mutual fund fees.

Also on the SEC's 2001 agenda are several issues related to variable annuities. Bonus annuities will continue to be scrutinized, said Roye. Last year, the SEC said it had concerns about this type of annuity that offers investors an immediate credit of between one percent and five percent of the amount invested.

In June, the SEC published a brochure for investors that explained some of the intricacies of annuities and warned investors that so-called bonus annuities can turn out to be more costly than annuities without bonuses. (MFMN 6/12/2000)

"For some investors, the bonus makes sense," said Roye. But bonus annuities also usually carry higher asset-based charges, have higher surrender charges and usually have longer surrender periods, said Roye.

"We are concerned that these charges can more than offset the bonus," he said.

Abuses can occur if a variable annuity investor is persuaded to exchange an old contract for a new bonus annuity while not being aware that new, higher charges and longer surrender periods apply.

"You can expect the SEC staff to comment on any variable annuity that does not fully disclose the downside and upside of this product," he said.

The SEC will also be looking at the performance figures disclosed for bonus annuities to be sure that the impact of fees such as contingent deferred sales charges are properly taken into account. The performance of bonus annuities can be artificially inflated by leaving out these fees in performance calculations, said Roye. The SEC is also watching out for suitability in the sales of bonus annuities, said Roye. It is working with NASD Regulation to be sure that bonus annuity sales materials "have fair, honest disclosure," Roye said.

"We've observed practices in sales of these products that are problematic, so stay tuned," he said.

A spokesperson for the SEC declined to comment on any administrative actions the SEC was considering taking against companies or any particular company being investigated. However, there has been one related action recently, the SEC said. In September, the SEC brought the first administrative action of its kind against Raymond A. Parkins, Jr. of The Parkins Investment Advisory Corp. in Orlando, Fla., said Richard Walker, director of the division of enforcement of the SEC. Walker spoke at a conference in Washington, D.C. in October.