RCA - Summer 2002 - Variable Annuity Performance

NASD member firms routinely file advertisements and sales literature that contain historical variable annuity performance data with NASD.1 While the majority of these communications comply with NASD Conduct Rule 2210, Communications with the Public, NASD has noted some inconsistencies in the way members present variable annuity performance data.

Pursuant to NASD Conduct Rule 2210(d)(1), members' communications about variable annuity performance must provide the reader with a sound basis for evaluating the facts with respect to the annuity. Communications may not omit material information that would cause the presentation of performance data to be misleading. Misleading statements or claims are prohibited in all NASD members' communications with the public.

Performance Pre-Dating the Offering of a Fund in the Variable Annuity

Members may advertise the performance of a fund earned at times prior to its offering in a variable annuity (pre-dated performance). Communications must clearly identify this pre-dated performance and explain that it pre-dates the offering of the fund as an investment option in the variable annuity. Communications must also disclose that this performance is hypothetical since the fund was not available in the variable annuity prior to a specified date.

In order to give the reader an accurate idea of the performance the variable annuity would have experienced had the fund been available in the variable annuity, pre-dated performance must be net of all recurring costs such as mortality and expense risk charges and annual administrative fees. Members must base such expenses on the charges at the time the fund became an investment option in the annuity.

In addition to recurring fees, the pre-dated performance must reflect the deduction of non-recurring charges such as sales loads and contingent deferred sales loads. NASD deems performance net of such costs to be material information that is necessary to make performance presentations fair and not misleading.

Members may present additional pre-dated performance that does not reflect charges, provided they label such information clearly and explain which charges have not been reflected. Nevertheless, members must not overemphasize pre-dated performance that does not reflect all charges.

SEC Requirements

In addition to compliance with NASD Conduct Rules, members' communications about variable annuity performance must adhere to the applicable SEC standards.2 Communications that include performance information and that are used prior to delivery of the prospectus must comply with SEC Rule 482. Communications that include performance information and that are preceded or accompanied by a prospectus must adhere to SEC Rule 34b-1. Both SEC rules set standards for variable annuity performance data. The rules permit the use of variable annuity total return information provided that, among other things, it is accompanied by average annual total returns computed in accordance with formulas set forth in SEC Forms N-3 or N-4, as applicable ("standardized total returns"). This article describes NASD requirements with respect to members' communications about variable annuity performance. Members should consult applicable SEC rules and forms for the requirements relating to SEC standardized total returns and other SEC requirements relating to performance advertising.

Any questions regarding the depiction of variable annuity performance in members' communications may be directed to the Advertising Regulation Department at (240) 386-4500.


1 NASD Conduct Rule 2210(c)(1) requires member firms to file all advertisements and sales literature regarding registered investment company securities, which include variable annuities, within 10 days of first use.

2 NASD Conduct Rule 2210(e) states in part, "...members' public communications shall conform to all applicable rules of the Commission, as in effect at the time the material is used."