Annuities: The Other Variable in Abusive Fund Trading

The investigations into the variable annuity industry are just gearing up, and it's difficult to say exactly how extensive improper trading may be. Other questions await answers as well.

Were any abusive traders in annuity accounts ever aided by certain providers via special arrangements, or was the abusive trading merely a case of certain parties taking advantage of the structure of annuities while insurers were a bit slow on the uptake about their real intent? Did variable annuity providers uniformly apply their market-timing restrictions?

Is late trading -- the clearly illegal practice involving executing fund trades after the 4 p.m. close but getting the same-day fund price instead of the next day's in violation of forward-pricing rules -- an issue?

Were brokers, trading-platform providers or any other intermediaries involved in abusive trading "under the radar" of insurers and fund firms? And, lastly, why didn't the onerous surrender charges and other fees associated with variable annuities keep abusive traders out?

Morningstar's Kinnel has an answer for the last question. "If you trade to your heart's content for a year or two, then take the money out after getting a 40% return, those withdrawals don't seem so onerous," he said.

While the other questions surely will be debated by regulators and the industry itself in the coming months, one thing is already clear: The industry is no longer the same. The variable annuity industry "has been somewhat behind the mutual fund industry in terms of awareness of market patterns and trading patterns," said Dechert's Huey-Burns. "People have thought of these as retirement products. As a result, the variable annuity industry has been a little bit slow to the table -- but the learning curve is increasing rapidly."