Investment Company Act of 1940
(Who's minding the variable annuity store?)
Written by
Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
Reviewed by
Neel Lane is an independent contract paralegal who specializes in Medicaid and VA benefits. He helps people access and maximize the benefits that they're entitled to. He has over 30 years of experience in this area.
Today, the variable annuity scene is booming. In fact, Americans saving for retirement bought $92 billion worth of variable annuities in 2018. The Investment Act of 1940 is one of the ways the variable annuity companies are regulated. And since it's your retirement money, it's definitely worthwhile to know "who's minding the store."
Independent insurance agents are annuity professionals. They'll talk with you to help prioritize your retirement goals and decide if a variable annuity is right for you.
What’s an Investment Company?
Investment companies buy and sell securities with pools of money from shareholders. You may be familiar with a very popular type of investment company, mutual funds. Investment companies make it easy for the average person to get the benefits of professional money management.
Investors buy shares in the investment company. The value of the shares is equal to the value of the securities and cash the investment company has minus expenses and any liabilities. That's important, because the investment company has to use a ormula, called net asset value, to offer and redeem shares.
There are different types of investment companies, mutual funds, exchange-traded funds, unit trusts, and variable annuities. They each have different features but they all have one thing in common. They're regulated by the Investment Company Act of 1940.
What Is the Investment Company Act of 1940?
It's a federal law that helps protect the average investor from fraud while regulating the structure, management, and operations of investment companies.
Investment companies have to disclose their financial condition, investment objectives, and operations regularly. The annual shareholder report details past and current performance as well as operations and financial condition.
Rules of the road don't do much good unless they're enforced. The Securities and Exchange Commission, better known as the SEC, is the agency that enforces the Investment Company Act.
The SEC enforces the rules, but they don't tell the investment companies how to invest the money. The SEC is like a baseball umpire in that respect. The umpire makes sure everyone is playing by the rules, but they're not responsible for terrible pitching.
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How Are Variable Annuities Regulated by the Investment Company Act of 1940?
Insurance companies “build” variable annuities for sale by creating a separate account that's not part of any other business or activity of the insurance company. The separate account is treated as an investment company that has to register with the SEC, holding it to the same standards as any other investment company.
The Investment Company Act of 1940 addresses the variable annuity product itself as well as the investment company. The variable annuity fees charged by the insurance company have to meet a "reasonableness standard."
The total fees charged must reflect the value and expenses of the services provided by the insurance company to the variable annuity buyer.
But That's Not All
The Investment Company Act of 1940 regulates how investment companies operate and provide information. There are two other laws enforced by the SEC that protect investors including variable annuity buyers — the Securities Acts of 1933 and 1934.
Why are they important to investors? Under the 1933 act, all securities have to be registered with the SEC before they can be sold to the public. The registration statement has to include a prospectus. The prospectus has information that is important to the investor, like fees, features, and objectives. All variable annuity buyers are given a prospectus.
Now you can't just walk into Walmart or go on Amazon and buy securities. That's because the 1934 act only permits registered broker dealers and their representatives to sell them.
That's important to consumers because the Financial Industry Regulation Agency (FINRA) supervises all broker dealers and how they deal with the public. And FINRA has very specific rules about how broker dealers and their registered representatives sell variable annuities to their clients.
What Does All This Mean to Variable Annuity Buyers?
Well, no one ever said variable annuities are easy. They're a mix of insurance and investments which are complicated on their own, let alone together. If you own a variable annuity, or you're thinking about buying one, you're entitled to the same protections as any other investor.
At the end of the day though, the old adage is true — knowledge is power. The more you know, the better off you are. That's really what the regulation is about — to help you make smart choices. That's also what independent insurance agents are there for.
Get Annuities from the Experts
Our independent agents shop around to find you the best coverage.
What Next?
Variable annuities can be an important part of your retirement plan, but they're not for everyone. Independent insurance agents are annuity professionals. They can help you decide if a variable annuity is right for you.
FITTING VARIABLE LIFE INSURANCE AND VARIABLE ANNUITIES INTO THE REGULATORY FRAMEWORK OF THE INVESTMENT COMPANY ACT OF 1940 Steven Roth Sutherland Asbill
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