In recent months, the Advertising/Investment Companies Regulation Department (the Department) has observed an increase in communications with the public promoting "bonus credit" variable annuities. These products offer credits equal to a percentage of the amount invested in the variable annuity contract. Bonus credits generally range from 3 percent to 5 percent of the money invested. In order to fund these bonus credits, the contracts typically impose high mortality and expense charges and lengthy surrender charge periods.
Members must file their advertisements and sales literature concerning variable annuities with the Department under NASD Conduct Rule 2210(c)(1). The Department has commented on communications regarding bonus credit variable annuities and has recommended revisions necessary to make the material consistent with applicable standards of Rule 2210. In order to meet these standards, bonus credit variable annuities communications that prominently promote the bonus credit should also prominently explain that fees and expenses may be higher, and the surrender periods may be longer, than contracts that do not provide the bonus feature.
Several member firms have attempted to use hypothetical illustrations with the contract prospectus that depicts how the bonus credit will affect the contract's value. Such illustrations must reflect the costs associated with the annuities, including ongoing mortality and expense risk charges, administrative costs, and surrender charges. Members also should avoid the use of hypothetical illustrations that unduly raise investor expectations as to the variable annuity's future value. NASD Conduct Rule 2210(d)(2)(N) prohibits member communications from predicting or projecting investment results.
Hypothetical illustrations must meet several conditions in order to avoid being viewed as projections and to ensure that they provide the reader with a sound basis for evaluating the facts with respect to the annuity. The illustrations may present assumed rates of return of up to 12 percent provided that a 0 percent rate is also presented. In addition to the disclosure discussed above for the presentation of bonus credits, the presentation must explain prominently that the illustration is hypothetical, that it is intended to show how the annuity operates, and that it may not be used to project or predict investment results.
The Department will continue to scrutinize bonus product sales material and require revisions to any material that does not present information about the product in a fair and balanced manner, or that contains illustrations that appear to predict or project the future value of the contract.
Any questions regarding bonus product sales material may be directed to the Department staff at (202) 728-8330.