Risk Management

SEC Fines Insurers $20 Million

The companies sold variable annuities to market timers and said in their prospectuses that the products weren't aimed at timers, the commission cha...
Stephen TaubAugust 10, 2004

The Securities and Exchange Commission has fined a number of insurance companies $20 million for “facilitating market timing of mutual funds through the sale of variable annuities.”

The insurance companies include three subsidiaries of Conseco, Inc.: CIHC, Inc.; Conseco Services, LLC; and Conseco Equity Sales, Inc. Also named in the enforcement action were Inviva, Inc.—company to which Conseco sold its variable annuity business in 2002—and Inviva’s subsidiary, Jefferson National Life Insurance Co.

In addition to the fines, the insurers agreed to undertake compliance reforms. Those measures include hiring independent consultants to review compliance procedures designed to prevent and detect market timing.

The SEC charged that the prospectuses the insurance companies used to sell the variable annuities misleadingly represented that the annuities were “not designed for professional market timing organizations.”

On the contrary, the commission asserted, the insurance companies “affirmatively marketed and sold the annuities to professional market timers.” Eventually, market-timing assets made up most of those invested in the variable annuity products, according to commission.

The commission charged that the insurers profited by the fees earned from the sales of the annuities to the market timers. “It is particularly troubling when variable annuities, which are designed for and sold to retail investors to save for retirement and purchase life insurance, are affirmatively marketed to professional market timers,” said Mark Schonfeld, director of the commission’s Northeast Regional Office.

Conseco stated that it did not admit or deny any of the findings of the investigation. The company also said that it is “pleased to have revolved this legacy issue.”

David Smilow, Inviva’s chairman and chief executive officer, said the company has taken “major steps” to boost its monitoring and put in place “rigorous policies,” according to Reuters.

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