4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools
Key Takeaways
Rule 2211 requires variable contract communications to identify the product as a variable annuity or variable life policy, never imply it is a mutual fund or a short-term liquid investment, and not overstate guarantees that depend on the insurer's claims-paying ability.
Hypothetical illustrations in variable life communications may use gross returns up to 12%, must include a 0% gross return, and must reflect the maximum guaranteed mortality and expense charges.
Rule 2212 permits rankings only from independent ranking entities, or rankings an investment company creates using a ranking entity's performance measurements, and rankings must be current to the most recent calendar quarter.
Except for money market funds, a ranking may not cover less than one year unless it is based on yield, and a total-return ranking must be accompanied by 1-, 5- and 10-year rankings as the fund's history allows.
Rule 2214 requires investment analysis tools to disclose their methodology, assumptions and limitations, and members must give FINRA access to a tool on request.
Variable Life and Variable Annuity Communications (Rule 2211)
Rule 2211 supplements Rule 2210 for retail communications and correspondence about variable life insurance (VLI) and variable annuities (VA).
General considerations (Rule 2211(a)):
- Product identification. The communication must clearly identify the product as a variable life insurance policy or variable annuity. A proprietary name that already includes that description is enough. The piece must not represent or imply that the product or its underlying account is a mutual fund.
- Liquidity. There must be no representation that VLI or VAs are short-term, liquid investments. Statements about access to values must be balanced by clear language about the negative impact of early redemptions, such as surrender charges and tax penalties, and the chance of receiving less than was invested. VLI discussions of loans and withdrawals must explain their effect on cash value and death benefits.
- Guarantees. The safety of insurer guarantees, such as a guaranteed death benefit, payout schedule or fixed account, must not be overemphasized, because guarantees depend on the issuing insurer's claims-paying ability. Guarantees must not be presented as applying to the separate account's investment return or principal, and insurer financial ratings must not be implied to apply to the separate account.
Specific considerations (Rule 2211(b)):
- Predating performance. A fund's performance from before it was added to a variable product may be shown only if the fund did not change significantly. Performance of an existing fund may not be used to promote a similar new "clone" option.
- Comparisons and rankings must follow Rule 2210(d)(2) and Rule 2212.
- VLI investment emphasis. Communications for single-premium VLI may emphasize investment features if the insurance features are adequately explained. Communications for other VLI must balance the two.
- VLI hypothetical illustrations. Illustrations may use any combination of assumed gross returns up to 12%, provided one rate is 0%. They must reflect the maximum guaranteed mortality and expense charges, though current charges may also be shown. The illustration must be preceded by an explanation that it is hypothetical and is not a projection. A personalized illustration may not exceed 12%. Comparisons with other products based on hypothetical performance are generally inappropriate, except for a "buy term and invest the difference" comparison meeting specified conditions.
Deferred VA communications are not covered by the VLI illustration provision. They remain subject to Rule 2210(d)(1)(F)'s ban on projections and to Rule 2210(d)(4)'s 10% limit for tax-deferral illustrations.
Investment Company Rankings (Rule 2212)
| Topic | Rule 2212 requirement |
|---|---|
| Permitted sources | Rankings created and published by an independent Ranking Entity, or rankings created by the fund or its affiliate based on a Ranking Entity's performance measurements. Self-created categories also trigger pre-use filing under Rule 2210(c)(2)(A) |
| Headlines | A headline may not imply that a fund or family is the best performer in a category unless it is actually ranked first |
| Prominent disclosures | Category name, number of funds or families in it, name of the Ranking Entity (and whether the fund or an affiliate created the category), length and ending date of the period, and the ranking criteria, such as total return |
| Other disclosures | That past performance does not guarantee future results; for front-end load funds, whether the ranking reflects the load; any material fee waiver effect; the publisher; and the meaning of symbols such as stars |
| Currency | Current to the most recent calendar quarter ended before use or submission for publication |
| Time periods (non-money market funds) | No ranking for a period of less than one year unless based on yield. A total-return ranking must be accompanied by 1-, 5- and 10-year total-return rankings from the same entity and category, as the fund's age allows. A yield ranking must use the current SEC standardized yield and be accompanied by those total-return rankings |
| Categories | Must provide a sound basis for evaluation. Categories based on asset size are prohibited |
| Multiple classes | Rankings of several classes with one portfolio must disclose the common portfolio and different expenses |
Bond Mutual Fund Volatility Ratings (Rule 2213)
A bond mutual fund volatility rating is an independent third party's description of how sensitive a bond fund's NAV is to changes in market conditions and the economy, based on objective factors such as credit quality, price volatility, performance, and interest rate, prepayment and currency risk. A retail communication may include one only if:
- the rating is not described as a "risk" rating;
- it is the most recent rating and is current at least to the most recently completed calendar quarter;
- the criteria are based exclusively on objective, quantifiable factors;
- the rating entity makes its methodology available through a toll-free number, a website or both; and
- the communication discloses the issuer of the rating, the current rating and its date, where the methodology can be found, that there is no standard method for assigning ratings, whether consideration was paid for the rating, the types of risk it measures, and that the fund may not keep the same rating or perform as rated.
Investment Analysis Tools (Rule 2214)
An investment analysis tool is an interactive technological tool that produces simulations and statistical analyses of the likelihood of various investment outcomes, such as a Monte Carlo retirement projector. Rule 2214 is a limited exception to the projection ban. The tool, any written reports it produces and related retail communications must:
- describe the criteria and methodology, including limitations and key assumptions;
- explain that results may vary with each use and over time;
- where applicable, describe the universe of investments considered, explain how securities are selected, disclose whether the tool favors certain securities and why, and state that other investments may have similar or superior characteristics; and
- display FINRA's required statement that the projections are hypothetical, do not reflect actual investment results, and are not guarantees of future results.
The current rule requires the member to provide FINRA's Advertising Regulation Department access to the tool upon request; an earlier version required firms to file tool templates. A member may not imply that FINRA endorses the tool. Recommendations based on the tool remain subject to Reg BI or the suitability rule.
A principal is reviewing a variable life insurance illustration that shows hypothetical gross returns of 0%, 6% and 10% and uses the policy's current, lower mortality and expense charges for all three rates. What must be changed under Rule 2211?
The 0% rate must be removed because it understates the product's value
Nothing, because illustrations may use any charges the insurer currently assesses
The illustration must reflect the maximum guaranteed mortality and expense charges for each assumed rate, although current charges may also be shown
The 10% rate must be raised to 12% to show the full permitted range
A fund advertisement features a ranking from an independent ranking entity based on the fund's three-month total return. Under Rule 2212, may this ranking be used for a stock fund?
No, because Rule 2212 permits rankings only in institutional communications
Yes, because recent performance is the most relevant to investors
Yes, if the ranking entity is named and the number of funds in the category is disclosed
No, because rankings for periods shorter than one year are prohibited for non-money-market funds unless based on yield, and total-return rankings must be accompanied by longer-period rankings
A member offers clients an online Monte Carlo tool that estimates the probability of meeting retirement goals. What does Rule 2214 currently require regarding FINRA?
The tool must be filed with FINRA at least 10 business days before first use
The member must provide FINRA's Advertising Regulation Department access to the tool upon request, and the tool and its reports must carry the required disclosures
FINRA must certify the tool's methodology before customers may use it
The tool must be filed within 10 business days after first use
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