Other
Committee of Annuity Insurers
April 11, 2024
April 11, 2024
Investment Company Act of 1940 – Section 22(e)
Committee of Annuity Insurers
RESPONSE OF THE CHIEF COUNSEL’S OFFICE
DIVISION OF INVESTMENT MANAGEMENT
Your letter dated April 10, 2024 requests our assurance that we would not recommend enforcement action to the U.S. Securities and Exchange Commission (the “Commission” ) against an insurance company and the Separate Accounts it sponsors under Section 22(e) of the Investment Company Act of 1940 (the “Act”)[1] if, in the limited circumstances and subject to the conditions described in your letter, the insurance company temporarily delays for more than seven days the disbursement of redemption proceeds from Direct Held Variable Contracts owned by a Specified Adult based on the insurance company’s reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.[2] You represent that financial exploitation of seniors and other vulnerable adults has continued to grow and remains a serious problem, with substantial amounts lost annually to financial exploitation of seniors and other vulnerable adults.[3] FINRA Rule 2165 (Financial Exploitation of Specified Adults), adopted in 2017 and amended in 2022, provides similar flexibility with respect to customer accounts of FINRA members (i.e., broker-dealers), and a 2018 no-action letter from Commission staff provides similar Section 22(e) relief with respect to directly held mutual fund accounts.[4]
You state that the Direct Held Variable Contract redemption process is administered, and the redemption proceeds are paid, by the insurance company that sponsors the Separate Account and issues the Variable Contract. You state that when an insurance company suspects financial exploitation related to a Direct Held Variable Contract redemption, it cannot lawfully delay the disbursement of redemption proceeds for more than seven days while it investigates the situation because Section 22(e) of the Act prohibits a Separate Account from delaying the payment of Variable Contract redemption proceeds for more than seven days. You note that FINRA Rule 2165 applies to disbursements from customer accounts held with a broker-dealer firm, and does not apply to disbursements of redemption proceeds from the subaccounts of a Separate Account.
You state that insurance companies wish to protect Specified Adults from financial exploitation related to distributions under their Direct Held Variable Contracts. You state that either the insurance company or the selling firm or both may become aware of suspected financial exploitation, and the information will be shared among the parties as necessary. You state that the requested relief will enable insurance companies to protect senior and other vulnerable adult investors in a manner consistent with that permitted for broker-dealers under FINRA Rule 2165.
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against an insurance company and the Separate Accounts it sponsors under Section 22(e) of the Act if, in accordance with the terms and conditions described in your letter, the insurance company temporarily delays for more than seven days the disbursement of redemption proceeds from Direct Held Variable Contracts owned by a Specified Adult based on the insurance company’s reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted. Because our position is based upon the facts and representations made to us in your letter, any different facts or representations may require a different conclusion.
The statements in this letter represent the views of the Division of Investment Management only and does not express any legal conclusions on the questions presented. This letter is not a rule, regulation or statement of the Commission, and the Commission has neither approved nor disapproved its content. This no-action letter, like all staff statements, has no legal force or effect; it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
Terri G. Jordan
Branch Chief
CC: Jennifer O. Palmer, Senior Counsel
[1] Section22(e) of the Act prohibits a registered investment company from suspending the right of redemption or postponing the date of payment or satisfaction upon redemption of any redeemable security in accordance with its terms for more than seven days after the tender of such security to the company or its agent designated for that purpose for redemption. 15 U.S.C § 80a–22(e).
[2] For purposes of this letter, the term “Variable Contracts” means variable annuity contracts and variable life insurance policies registered as securities under the Securities Act of 1933 (the “1933 Act”) which are funded by insurance company sponsored separate accounts established under state law and registered with the Commission as investment companies under the Act (“Separate Accounts”). The term “Variable Contracts” does not include non-variable insurance contracts, such as fixed interest annuity contracts with market value adjustment features and index-linked annuity contracts, which non-variable insurance contracts are not subject to regulation under the Act but whose interests are registered as securities under the 1933 Act. The term “Direct Held Variable Contracts” shall mean only those Variable Contracts that are direct held products and are not custodied or held in a brokerage account.
The terms “Specified Adult” and “financial exploitation” as used in this letter have substantially the same meaning as those terms are defined in FINRA Rule 2165. A Specified Adult is: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the insurance company reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. See FINRA Rule 2165(a)(1). Financial exploitation means: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a Specified Adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority regarding a Specified Adult, to (i) obtain control, through deception, intimidation or undue influence, over the Specified Adult’s money, assets or property, or (ii) convert the Specified Adult’s money, assets or property. See FINRA Rule 2165(a)(4).
[3] Indeed, Commission staff have observed “compelling” and “alarming” evidence of financial abuse of senior investors. Stephen Deane, U.S. Securities and Exchange Commission, Office of the Investor Advocate, Elder Financial Exploitation: Why is it a concern, what regulators are doing about it, and looking ahead 8 (2018), available at https://www.sec.gov/files/elder-financial-exploitation.pdf.
[4] See Investment Company Institute, SEC No-Action Letter (Jun. 1, 2018), available at https://www.sec.gov/divisions/investment/noaction/2018/investment-company-institute-060118-22e.htm.