The Hartford lands on regulators' radar

Insurance regulators in New York are joining Connecticut's insurance commissioner in examining whether The Hartford made improper disclosures or engaged in misleading practices in its marketing of a new variable annuity. Meanwhile, the Iowa Insurance Division said it's closely watching Connecticut and Finra to see what actions, if any, to take. Some plaintiff's attorneys are also predicting litigation woes for The Hartford Financial Services Group Inc., which on Aug. 23 sent clients a letter that made statements intended to entice them to swap their benefit-rich variable annuities for an updated product. “This letter leaves out material information that reasonable investors would want to know to consider whether this [VA exchange] is viable for them,” said Steven B. Caruso, a resident partner at Maddox Hargett & Caruso PC. “This is a half-baked solicitation that's designed to spur action [by clients],” In the letter — which was ob-tained by InvestmentNews — The Hartford said it had introduced a VA with “new features” not included in previous contracts. It is available to those who meet “certain eligibility requirements” through its Personal Retirement Manager Exchange Program Opportunity. The move infuriated many advisers, who claimed that the insurer didn't tell them in advance about the letter, and felt that the swap wouldn't be beneficial for many clients. “Our concern would have to be with the disclosure made,” said Andy Mais, spokesman for the New York State Insurance Department. New York's Regulation 60 requires proposed life insurance and annuity replacements to provide critical information, including surrender charges and projected returns, which would allow clients to compare products. Thomas R. Sullivan, Connecticut's insurance commissioner, wrote in an e-mail that The Hartford's replacement VA has been filed and approved by the state's insurance department. “However, in light of the concerns that have been identified by financial advisers through InvestmentNews, the department will look into this matter further to determine whether any misleading practices have occurred,” Mr. Sullivan wrote. He and Mr. Mais said that their offices haven't received any consumer complaints related to the product or the letter. The Iowa Insurance Division is looking to Connecticut and the Financial Industry Regulatory Authority Inc., which also oversees variable annuities, for guidance.

DEFERRING A DECISION

“Recognizing that Commissioner Sullivan is not only the domestic regulator but also chair of the [National Association of Insurance Commissioners' Life Insurance and Annuities Committee], if he needs to bring the matter to any further attention, we will follow on that level,” said Tom Alger, spokesman for the Iowa Insurance Division. “We want to see what they do rather than making a decision.” Finra spokeswoman Nancy Condon declined to comment. Tim Benedict, a spokes-man for The Hartford, wrote in an e-mail: “The Hartford works closely with state insurance regulators and responds promptly to regulatory requests.” He declined to comment further. Several attorneys contacted said that per common law and securities regulations, more information should have been provided to the clients who received the letters. “What triggers the duty to disclose under common law can vary from state to state, but failure to disclose amounts to deceit under common law,” said Scot D. Bernstein, a plaintiff's attorney at an eponymous firm. Securities laws impose a duty to disclose, and as variable annuities are securities, the insurer may have had to reveal more information about the prospective exchange, he said. “Even the initial communication, to me, is problematic because it sets people up for the expectation that they have this opportunity; you're going into the conversation thinking that [the exchange] is a good thing,” Mr. Bernstein said. The letter doesn't include information on the length of the surrender period for the new annuity, nor does it cover fee information or divulge the fact that investors could lose the guaranteed living benefits that they had with their older product, advisers and lawyers said. The new variable annuity, called the Personal Retirement Manager, has an eight-year surrender period and a total annual ex-pense of 1.25%, according to data from Advanced Sales Corp., an annuity research firm. If clients were to swap into the product, they would be starting a brand-new surrender period and giving up living benefits tied to their old product. Prospectuses containing the details of the product didn't accompany the client letter, advisers said. That could be a potential violation of securities laws, Mr. Bernstein said. “Securities laws impose a duty to disclose, so the extent you deal with them and there are material facts that aren't disclosed, then [The Hartford] has a potential problem,” he said. Further, the letter raises the question as to whether The Hartford is violating Finra's Rule 2330, which includes disclosure and suitability requirements, Mr. Caruso said. “Finra's rules require them to have a customer-specific basis for a suitability determination,” he said. “If they sent this to everyone, it's clear that it's not customer-specific.” Finra also has rules regarding communications with the public on variable-insurance products. “It's obviously classified as advertising material, so it has to be fair and balanced,” said attorney Tom Mason, a sole practitioner. “To the extent that it isn't fair or that it can cause people to misinterpret or misunderstand what's happening, Finra has jurisdiction over it.” Although The Hartford is an insurance company, Hartford Securities Distribution Co. Inc. — the firm that distributes and underwrites the new variable annuity — is a Finra-registered firm and would fall under the self-regulatory organization's jurisdiction. Not everyone thinks that the letter should raise red flags. Steven B. Davis, a partner at Stradley Ronon Stevens & Young LLP, said the letter was not inappropriate because it recommended that clients talk to their advisers about the exchange. The suitability checks that go on during the exchange process ought to catch any cases in which such a switch wouldn't be beneficial for the customer, said “If the system works the way it's designed to, then this letter is just a piece of helpful information,” he said. Still, plaintiff's attorneys argue that if the letter was going out to clients, then an easy-to-understand disclosure ought to have accompanied it — a disclosure simple enough for those contract holders to grasp without their advisers' intercession. E-mail Darla Mercado at -dmercado@investmentnews.com.