Insurers will benefit most on advertising changes

Federal regulators are finally ready to sweep away a thicket of red tape that has tied the insurance industry in knots over mutual fund advertising.

If the change is adopted, insurance companies are likely to go on a spending spree to tout the performance of the mutual funds they offer in variable annuities and other products.

While the rule affects all mutual fund advertising, the insurance industry clearly tops the list of beneficiaries, says Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I.

Funds are currently allowed to advertise their own performance figures.

The new rule would permit them to compare their numbers with those of other funds.

The insurance industry, however, is no closer to unraveling the red tape preventing another long-coveted change.

No willingness

The National Association of Securities Dealers has yet to show any willingness to allow companies to advertise the track records of fund managers who move to new jobs, even if they continue to manage in the same way.

The Securities and Exchange Commission, in contrast, supports such a move.

“While we understand that the NASD doesn’t believe [that such disclosures should be allowed] for fund advertising, we would hope that’s an issue they would continue to review,” says Cynthia Fornelli, deputy director of the SEC’s division of investment management.

For the past five years, the NASD has barred advertising that compares performances, even though the SEC began to allow the information in prospectuses starting in 1995.

Since then, the SEC has steadily broadened the industry’s authority to use performance figures in prospectuses, but the NASD has dawdled, according to industry members.

The association came out with the latest version of a rule change in November, after kicking the idea around for two years.

Chagrined insurers

While the NASD technically falls under the SEC’s wing, the federal agency has delegated broad authority to the self-regulating organization to oversee mutual fund advertising.

That arrangement has resulted in the current disconnect between the two rulemaking bodies – much to the chagrin of insurers.

The SEC is expected to approve the change, perhaps as early as next month, says Carl Wilkerson, chief counsel for securities at the American Council of Life Insurers in Washington.

“It seemed unnecessary to have the time gap,” Mr. Wilkerson added.

The proposal should give the industry a significant leg up in the struggle to sell new products.

“My guess is that the effect of this is to lower the barriers of entry into the mutual fund business of entities that are already managing money,” but not as registered mutual funds, says Edward Rosenbaum, director of research for mutual fund research company Lipper Inc. in Summit, N.J.

“An important barrier to entry into the mutual fund business is the lack of availability of a pre-existing track record,” Mr. Rosenbaum says.

“It’s one of the few meaningful barriers to entry in the industry.”

Specifically, the rule change would allow companies to advertise the performance of funds even if the same funds are used in different forms.

That would include such products as variable annuities that use other investment companies’ mutual funds as subaccounts.

The performance of unregistered funds, such as separate accounts or hedge funds, also could be used in ads if an investment company registers those accounts as mutual funds.

In addition, a composite of the performance of different funds managed by the same investment adviser could be advertised.

There are “a lot of clones in the insurance world,” Mr. Rosenbaum says. The most prominent use of such “clones” is mutual fund subaccounts within variable annuities.

“People are creating multimanaged fund products as well,” Mr. Bobroff says.

whose performance?

While the insurance industry wants the NASD to allow advertising for funds managed by the same manager in the same style at different companies, the Investment Counsel Association of America in Washington disagrees.

“We feel the performance is really the performance of the firm,” says Karen Barr, general counsel of the association, which represents SEC-regulated investment advisers.

“One would be hard-pressed to find a case where truly the person who left was solely or almost solely responsible for the performance,” says Ms. Barr.