RCA - January 1996 - Ask The Analyst - Issues Raised About Variable Annuities

Q. When advertising on behalf of a variable annuity, is it acceptable to use a mutual fund company logo if the adviser to that company is actually managing the variable annuity accounts or sub-accounts?

A. As stated in the Guidelines for Communications With the Public About Variable Life insurance and Variable Annuities, the NASD objects to promoting variable products as mutual funds. To avoid confusion about which type of product is offered, a mutual fund family logo should not be used in a variable annuity advertisement. Nevertheless, it is acceptable to use the logo of the investment adviser that is managing the variable annuity accounts or sub-accounts, provided the adviser's relationship to the variable product is clear and the logo is not overemphasized.

Q. What disclosures must accompany a taxable versus tax-deferred illustration in variable annuity sales literature?

A. The NASD follows the current position of the SEC staff made in its 1995 Industry Comment Letter from the Division of Investment Management, Office of Insurance Products. In sum, the letter requires that members accurately depict the effect of all fees, charges, and tax implications of withdrawals and surrenders. To satisfy this requirement, members may show these items in the chart itself or prominently disclose them in a narrative.

With a narrative, the disclosure should appear directly beneath the chart and divulge mortality and expense charges in percentage form, any sales charges in percentage form, and any administrative fees in dollar amounts. If the chart appears in sales material for multiple variable annuities with different levels of fees and charges, a general reference to these costs placed directly beneath the chart would be sufficient. In both instances, the narrative also must state that the costs are not reflected in the illustration and that if they were, they would reduce the performance shown for the tax-deferred investment.

All illustrations must use a realistic rate of return and prominently disclose that there may be a 10 percent tax penalty on withdrawals by contract owners under age 59-and-a-half.