SEC Improves Protections for Seniors and Other Investors in Equity-Indexed Annuities
On December 17, the Securities and Exchange Commission approved a new rule to help protect seniors and other investors from fraudulent and abusive practices that can occur in the sale of equity-indexed annuities.
Equity-indexed annuities, first introduced in the mid-1990s, have grown significantly over the years. In 2004 alone, sales of equity-indexed annuities increased more than 50 percent to approximately $23 billion. Today, more than $123 billion is invested in equity-indexed annuities.
Equity-indexed annuities are often sold to seniors and can lock up older investors' money for more than a decade. Until now, the question of whether equity-indexed annuities are insurance products or securities subject to investor protections under the federal securities laws has not been clearly answered. The rule that the SEC approved today establishes, on a prospective basis, the standards for determining when equity-indexed annuities are considered not to be annuity contracts under the securities laws and thus subject to the investor protections against fraud and misrepresentation, limiting the potential for sales practice abuses in the promotion of equity-indexed annuities to older investors.
"Investors who buy equity-indexed annuities are typically looking for a safer way to invest in securities. But if those investors need their money for medical expenses or rent, for example, they risk losing a substantial amount of the investment. At the same time, their upside is typically limited to less than what they would have gained by directly buying the indexed securities. Unfortunately, many equity-indexed annuities appear to have been marketed to investors who may be least able to scrutinize these details, including America's seniors," said SEC Chairman Christopher Cox.
"Senior investors will particularly benefit from these additional safeguards against abusive sales practices by unscrupulous marketers," Chairman Cox continued. "Investors in all types of securities are uniformly entitled to regulatory protections, and the SEC's action today will result in the extension of these same protections to investors in equity-indexed annuities who are exposed to investment risk."
The SEC's new rule defines the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933. The rule clarifies the status under the federal securities laws of equity-indexed annuities, under which payments to the purchaser are dependent on the performance of a securities index.
Section 3(a)(8) of the Securities Act provides an exemption under the Securities Act for certain insurance and annuity contracts. The SEC's new rule provides that an indexed annuity is not an "annuity contract" under this insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.
The SEC's rule addresses the manner in which a determination will be made regarding whether amounts payable by the insurance company under a contract are more likely than not to exceed the amounts guaranteed under the contract. The rule is principles-based, providing that a determination made by the insurer at or prior to issuance of a contract is conclusive if, among other things, both the insurer's methodology and the insurer's economic, actuarial, and other assumptions are reasonable.
The new definition applies only to equity-indexed annuities issued on or after Jan. 12, 2011. (Press Rel. 2008-298)
Statement from SEC Chairman Christopher Cox
Securities and Exchange Commission Chairman Christopher Cox today made the following statement:
"I commend President-elect Obama on his outstanding choice of Mary Schapiro to chair the Securities and Exchange Commission after my service ends next month. I have worked closely with Mary for many years on a wide range of financial industry and market regulation efforts, including the creation of FINRA and the protection of senior investors, and she has always been a consummate professional. Her experience at both the CFTC and SEC will be invaluable in tackling the challenges of regulatory restructuring that the next Congress will face. She is deeply committed to protecting investors and ensuring the integrity of our markets, and I know that the employees and alumni of the SEC join me in congratulating Mary and wishing her a smooth and expeditious confirmation." (Press Rel. 2008-299)
SEC Approves Interactive Data for Financial Reporting by Public Companies, Mutual Funds
The Securities and Exchange Commission has voted to require public companies and mutual funds to use interactive data for financial information, which has the potential to increase the speed, accuracy and usability of financial disclosure and eventually reduce costs for investors.
With interactive data, all of the facts in a financial statement are labeled with unique computer-readable "tags," which function like bar codes to make financial information more searchable on the Internet and more readable by spreadsheets and other software. Investors will be able to instantly find specific facts disclosed by companies and mutual funds, and compare that information with details about other companies and mutual funds to help them make investment decisions.
"Interactive data will help provide investors with the information they need, rather than just a warehouse of forms on which they can try to find it," said SEC Chairman Christopher Cox. "Interactive data will enable new analysis tools to put key information at every investor's fingertips within seconds, exactly as the investor wishes to see it."
For public companies, interactive data financial reporting will occur on a phased-in schedule beginning next year. The largest companies who file using U.S. GAAP with a public float above $5 billion will be required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2009. This will cover approximately 500 companies. The remaining companies who file using U.S. GAAP will be required to file with interactive data on a phased-in schedule over the next two years. Companies reporting in IFRS as issued by the International Accounting Standards Board will be required to provide their interactive data reports starting with fiscal years ending on or after June 15, 2011.
Companies will be able to adopt interactive data earlier than their required start date. All U.S. public companies will have filed interactive data financial information by December 2011 for use by investors.
John White, Director of the SEC's Division of Corporation Finance, said, "The adoption of the interactive data requirement represents the product of more than three years of research, analysis and testing through our voluntary filing program - as well as the work of many people throughout the Commission. Interactive data is ready now for companies to provide, and for investors to use in their decision making."
Mutual fund investors will begin reaping the benefits of interactive data starting in 2011. Mutual funds will be required to begin including data tags in their public filings that supply investors with such information as objectives and strategies, risks, performance, and costs. This will allow investors to compare more than 8,000 mutual funds at the click of a mouse. A mutual fund also would be required to post the interactive data on its Web site, if it maintains one.
"This action will continue the Commission's strides towards using technology to provide investors with increased access to information about mutual funds," said Andrew J. Donohue, Director of the SEC's Division of Investment Management. "Just last month, the Commission adopted a new mutual fund disclosure framework that will provide investors with key mutual fund information in a concise, plain English format, while using technology to retain the comprehensive quality of the mutual fund information available today. Similarly, the rules adopted today will allow investors, through technology, to compare and analyze information among the array of funds offered in the market."
SEC Chief Accountant Conrad Hewitt said, "Accounting is the business language of the world. Interactive data has the potential to greatly enhance that language, making it easier, more informative and more readily available. Traditional financial statements that we have today will become more transparent and understandable as interactive searchable documents."
David M. Blaszkowsky, Director of the SEC's Office of Interactive Disclosure, added, "The availability of financial reports in the form of interactive data will transform how investors evaluate companies and securities and, more broadly, transform the relationship between the filer and the investor. Markets depend on and improve with better information, and even more so in difficult times. This action by the Commission is timely and welcome for investors in the U.S. and all over the world."
The SEC earlier this year unveiled its new financial reporting system - IDEA (Interactive Data Electronic Applications) - to accept interactive data filings and give investors faster and easier access to key financial information about public companies and mutual funds. The new IDEA system is supplementing and eventually replacing the agency's 1980s-era EDGAR database, marking the SEC's transition from collecting forms and documents to making financial information itself freely available to investors.
Investors can begin seeing this new information at http://idea.sec.gov. For participants in the SEC's Voluntary Filer Program, investors can find clearly labeled buttons taking them to a company or mutual fund's voluntary interactive data submissions. As soon as companies and funds make their mandatory interactive data submissions to the SEC, their financial information will be immediately available to investors through the SEC's IDEA system as well as on the Web sites of companies and funds disclosing the data. (Press Rel. 2008-300)
In the Matter of Milkie/Ferguson Investments, Inc.
On December 17, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Milkie/Fergson Investments, Inc. (Milkie) and Daniel Edward Levin (Levin).
The Order finds that on at least seven instances from March 2006 to September 2006, Levin, a registered representative with Milkie, offered and sold mutual fund class "A" shares in multiple fund families to retail customers without adequate disclosure of material information about the availability and financial impact of breakpoint discounts for which customers could have qualified. Specifically, Levin did not adequately disclose, before customers made investment decisions, all breakpoint discounts for which the customers could qualify in the fund families he recommended, nor did he adequately disclose the breakpoint discounts customers could have received by investing larger amounts in fewer fund families. Levin also failed to adequately disclose the financial impact those additional breakpoint discounts could have on the customers' contemplated transactions, and that purchases below the additional breakpoints would result in a greater profit to Levin. As a result of the conduct described above, Levin willfully violated Section 17(a)(2) and (3) of the Securities Act of 1933 (Securities Act).
The order further finds that Milkie, a broker-dealer registered with the Commission, had inadequate systems in place to implement procedures to assure that registered representatives provided the required information about breakpoints to customers before they made an investment decision. Specifically, Milkie had no or inadequate systems in place requiring registered representatives to submit documentation of breakpoint disclosures for managerial review. Such systems could reasonably have been expected to have prevented and detected Levin's misconduct. Accordingly, Milkie failed reasonably to supervise Levin within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (Exchange Act).
Based on the above, the Order censures Milkie, requires Levin to cease-and-desist from committing or causing any violations and future violations of Sections 17(a)(2) and (3) of the Securities Act and requires Milkie and Levin to each pay a civil money penalty in the amount of $25,000. Milkie and Levin consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 33-8990; 34-59115; File No. 3-13312)
In the Matter of Michael J. Park
On December 18, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions (Order) against Michael J. Park (Park). The Order finds that Park, who is 41 years old and resides in Brentwood, Tennessee, was a registered representative associated with a registered broker-dealer from Aug. 21, 2002, to June 26, 2008. The Order further finds that on October 29, 2008, a judgment was entered by consent against Park, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder in the civil action entitled Securities and Exchange Commission v. Michael J. Park, et al., Civil Action Number 3:08-cv-00962, in the United States District Court for the Middle District of Tennessee. The Order finds that the Commission's complaint alleged that Park did business under the name of Park Capital Management Group (PCMG), although no entity appears to have been formed with that name. The Order further finds that from at least 2001 to as recently as June 2008, Park defrauded at least 20 investors out of at least $6 million. Park induced investors to give him their money by representing that they could earn substantial returns. Once the investors transferred funds to PCMG, Park misappropriated the funds to subsidize his lifestyle and to finance other ventures.
Based on the above, the Order bars Park from association with any broker, dealer or investment adviser. Park consented to the issuance of the Order without admitting or denying the findings in the Order, except he admitted the entry of the injunction.
The Commission acknowledges the assistance of the United States Attorney's Office for the Middle District of Tennessee, which conducted a parallel investigation of this matter. (Rel. 34-59116; IA-2822; File No. 3-13313)
In the Matter of in Ocean Resources, Inc.
An Administrative Law Judge has issued an Initial Decision as to Online Gaming Systems Ltd. (n/k/a Advanced Resources Group Ltd.) (Initial Decision) in Ocean Resources, Inc., Administrative Proceeding No. 3-13139. The Order Instituting Proceedings alleged that Respondent Online Gaming Systems Ltd. (n/k/a Advanced Resources Group Ltd.) (ARG) failed repeatedly to file required annual and quarterly reports while its securities were registered with the Securities and Exchange Commission.
The Initial Decision finds these allegations to be true as to Respondent ARG. It revokes the registrations of each class of registered securities of Online Gaming Systems Ltd. (n/k/a Advanced Resources Group Ltd.) pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Initial Decision No. 365; File No. 3-13139)
In the Matter of Executive Registrar & Transfer, Inc.
An Administrative Law Judge has issued an Initial Decision in Executive Registrar & Transfer, Inc., Administrative Proceeding No. 3-12966. The Initial Decision finds that Respondent Executive Registrar & Transfer, Inc. (Executive), willfully violated Sections 17(a)(3), 17(f)(2), and 17A(d)(1) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 17Ac2-1, 17Ac2-2, 17Ad-2, 17Ad-6, 17Ad-7, 17Ad-10, 17Ad-13, 17Ad-15, 17Ad-16, 17Ad-17, 17Ad-19, and 17f-2 thereunder. Further, the Initial Decision finds that Respondent John J. Donnelly (Donnelly) willfully aided and abetted Executive's statutory violations.
The Initial Decision concludes that Executive failed to keep and retain required records, to fingerprint personnel, to timely amend and file required reports and forms, to turnaround non-routine transfer items promptly, to maintain balanced books and files, to create written procedures compliant with Exchange Act rules, and to provide notice of termination to the appropriate securities depository. The Administrative Law Judge determined that Donnelly aided and abetted Executive's violations, as well as similar violations which occurred at a transfer agency previously controlled by Donnelly.
As a result of these violations, the Initial Decision orders Executive to cease and desist from committing or causing future violations of the aforementioned federal securities laws. The Initial Decision also revokes Executive's registration as transfer agent and bars Donnelly from associating with any registered transfer agent. (Initial Decision No. 366; File No. 3-12966)
SEC Charges Wall Street Professionals and Others With Widespread Insider Trading
On December 18, the Commission filed insider trading charges against nine defendants and also named three relief defendants. The Commission's complaint alleges that from at least March 2004 through July 2008, Matthew Devlin (Devlin), then a registered representative at Lehman Brothers, Inc. (Lehman) in New York City, traded on and tipped at least four of his clients and friends with inside information about 13 impending corporate transactions. According to the complaint, some of Devlin's clients and friends, three of whom worked in the securities or legal professions, tipped others who also traded in the securities. The complaint alleges that the illicit trading yielded over $4.8 million in profits.
As alleged in the complaint, although many of the defendants had accounts with Lehman, they often attempted to avoid detection by trading in the securities of the target companies in numerous accounts that were not associated with Lehman or Devlin. The complaint alleges that to further conceal their illicit trading, at least two of the defendants sold off some of the shares they had purchased based on inside information prior to public announcements of the deals. In addition, Devlin and one of his tippees arranged to buy shares on Devlin's behalf so Devlin could profit from the nonpublic information but evade scrutiny. When this tippee's name appeared on a watch list, Devlin and the tippee agreed that Devlin would stop providing him inside information.
The complaint alleges that Devlin misappropriated the confidential nonpublic information about the corporate transactions from his wife, a partner in the New York City office of an international public relations firm working on the deals. As alleged in the complaint, because the inside information was valuable, some of the traders referred to Devlin and his wife as the "golden goose." The complaint further alleges that by providing inside information, Devlin curried favor with his friends and business associates and, in return, was rewarded with cash and luxury items, including a Cartier watch, a Barneys New York gift card, a widescreen TV, a Ralph Lauren leather jacket and Porsche driving lessons.
The complaint alleges that, based on the information provided by Devlin, the defendants variously purchased the common stock and/or options of the following public companies: InVision Technologies, Inc.; Eon Labs, Inc.; Mylan, Inc.; Abgenix, Inc.; Aztar Corporation; Veritas, DGC, Inc.; Mercantile Bankshares Corporation; Alcan, Inc.; Ventana Medical Systems, Inc.; Pharmion Corporation; Take-Two Interactive Software, Inc.; Anheuser-Busch, Inc.; and Rohm and Haas Company. At the time that Devlin tipped the other defendants about these companies, each company was confidentially engaged in a significant transaction that involved a merger, tender offer, or stock repurchase.
Defendants Matthew Devlin, Jamil Bouchareb, Daniel Corbin, Frederick Bowers, Thomas Faulhaber, Eric Holzer, Jeffrey Glover, Corbin Investment Holdings, LLC and Augustus Management, LLC are charged with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 14e-3. The SEC seeks injunctive relief, disgorgement of illicit profits with prejudgment interest, and civil penalties. Defendants Maria Checa, Checa International, Inc. and Lee Corbin are charged as relief defendants and the SEC seeks their trading profits.
The U.S. Attorney's Office for the Southern District of New York filed related criminal charges today against some of the defendants named in the Commission's complaint. The Commission wishes to thank the U.S. Attorney's Office and the Federal Bureau of Investigation for their assistance in connection with this matter. The Commission also thanks FINRA, NYSE Regulation, Inc., the International Securities Exchange and the Options Regulatory Surveillance Authority for their assistance. [SEC v. Matthew C. Devlin, Jamil A. Bouchareb, Daniel A. Corbin, Frederick E. Bowers, Thomas R. Faulhaber, Eric A. Holzer, Jeffrey R. Glover, Corbin Investment Holdings, LLC and Augustus Management, defendants, and Maria T. Checa, Lee H. Corbin, LLC and Checa International, Inc., relief defendants, Civil Action No. 08-CV-11001 (S.D.N.Y.) (JGK)] (LR-20831)
STANDARDS SETTING BOARDS
2009 PCAOB Budget and Accounting Support Fee
The Commission voted to approve the budget of the Public Company Accounting Oversight Board under Section 109 of the Sarbanes-Oxley Act of 2002. (Rel. 33-8989; 34-59113)
Proposed Rule Change
The Chicago Board Options Exchange filed a proposed rule change pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934 (SR-CBOE-2008-117) to amend Exchange Rule 4.21 relating to third party deposits. Publication is expected in the Federal Register during the week of December 22. (Rel. 34-59104)
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