Regulators are taking action regarding what they view as abuse in the way that variable annuity products are sometimes marketed and sold. FINRA issued Regulatory Notice 08-39 in late July to consolidate all of its opinions on this subject into one place, said Clifford Kirsch, a partner at New York-based law firm Sutherland Asbill & Brennan and a member of FINRA's variable insurance product committee.

This was after FINRA analyzed several years of financial marketing on this issue. In fact, in one incident that underscored FINRA's concerns, Nationwide Investment Services Corp. distributed marketing materials about variable annuities that allegedly failed to prominently disclose the charges and fees associated with the product, according to NASD, the predecessor agency to FINRA. The company allegedly did not provide a balanced presentation of the risks and benefits associated with investing in a variable annuity. In fact, the product was not even clearly identified as a variable annuity. That enforcement action was one of more than 80 disciplinary actions taken against financial institutions between 2002 and 2004, according to a press release.

The proposed rule, if implemented would require more clarity for marketing materials on variable insurance products, including details on how those instruments perform over time and how an individual client's product might perform once fees and charges are incurred. The new rule also would streamline the agency's guidance concerning complicated illustrations that are designed to compare the mathematical principle of tax-deferred compounding versus taxable compounding.

That type of guidance highlights ongoing concerns about the complexity of variable insurance products, says Kenneth Kehrer of Kehrer-LIMRA, a Windsor, Conn., research and consulting firm. The products are complicated and are likely marketed more aggressively because they pay higher commissions than mutual funds, says Kehrer.

The typical commission on a large mutual fund sale might be 2.5% compared to about 6% for the variable annuity. "FINRA tends to worry about whether salespeople push them more aggressively," says Kehrer. Rule 08-39 also would shorten and simplify existing provisions regarding product identification, liquidity and guarantee claims in variable insurance products, as well as how they're advertised.

Among other concerns FINRA hopes to address are the ways in which investors had calculated the benefits of buying a variable annuity through a tax-qualified account, such as an individual retirement account. In such a case, a variable annuity does not provide any additional tax-deferred treatment of earnings beyond the treatment provided by the tax-qualified plan itself. The proposal also will require companies to urge investors to get a personalized and hypothetical illustration of a variable life insurance policy's performance.

"The enthusiasm of the creators [of these products] sometimes spills over into exaggerations about how wonderful they are," says Kehrer. "Naturally, this is a difficult thing to regulate, because the products change rapidly, becoming more complex."

Some of the new changes would include riders, features meant to provide additional coverage. Some riders might guarantee minimum income benefits, while others would help protect the investor's holdings when broad markets decline. For now, the industry will have its chance, until the end of September, to add its own views to the issue. That's when FINRA will wrap up the comment period on the proposal.