2012 - SEC - In the Matter of Massachusetts Mutual Life Insurance Company - 10p

  • (p2) - MassMutual's failure, in its disclosures, to sufficiently explain the effect of the cap on withdrawals confused sales agents and others.
    • (p2) - MassMutual was aware that some sales agents and others did not understand the effect of post-cap withdrawals, which should have led it to improve its disclosures more quickly than it did. 
  • (p3) - 1. MassMutual designs and offers for sale variable annuities including annuities called "Transitions Select" and "Evolution" through prospectuses, sales literature, and wholesalers employed by MassMutual to promote the company's annuity products and explain their features to sales agents.
  • (p7-8) - 16. While MassMutual was offering GMIB riders, there were indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted it to the fact that its disclosures were inadequate. Among them were:
    • a. In January 2008, in preparation for offering MassMutual's GMIB riders to its customers, a broker-dealer's affiliated insurance sales agency published an analysis of the GMIB 6 rider for its registered representatives. The analysis, prepared based on MassMutual's prospectuses, its sales literature, and communications with MassMutual employees, contains a statement that mistakenly represented that, if the GMIB value reached the cap, annual interest credits and the ability to withdraw up to the amount of those credits would remain available to contract owners. Before the insurance sales agency published the analysis, it showed a MassMutual GMIB product expert and MassMutual sales personnel a draft version that included the erroneous description of the rider, but MassMutual did not correct it. After publication, MassMutual senior sales personnel circulated the analysis among its wholesalers without identifying the error
      • 5 MassMutual had two classes of wholesalers: external wholesalers who met with sales agents in the field, and internal wholesalers who provided sales support to external wholesalers and sales agents.
    • c. In September 2008, a Sales Support Director emailed one of the company’s GMIB product experts that MassMutual’s wholesalers were not informing sales agents of the effect of taking withdrawals after the GMIB value reaches the cap. He wrote, in part: "I would never use this term with a producer [a sales agent] but I feel this is a 'gotcha' . . . . I'm sure there is not a single wholesaler (internal or external) that warns reps and agents that if the client begins withdrawals after hitting the cap the 'dollar-for-dollar' treatment is lost."
    • d. In October 2008, a supervisory internal wholesaler at MassMutual emailed an external wholesaler and his supervisor that the fact that MassMutual would adjust the GMIB value pro rata for all withdrawals taken after the cap "is not clear in the prospectus. I read it and it really is hidden . . . . Almost in code."
    • e. In November 2008, a sales agent at a general agency of MassMutual complained, to a liaison to MassMutual's home office, that the pro-rata adjustment after the cap "is not how it was sold to us, and in turn not how we sold it to our clients. Every agent I have spoken in our office and elsewhere is not aware of this.”
  • (p8-9) - 19. As a result of the conduct described above, MassMutual willfully6 violated Section 34(b) of the Investment Company Act, which makes it unlawful for any person to make any untrue statement of a material fact or to omit to state any fact necessary in order to prevent the statements made, in the light of the circumstances under which they were made, from being materially misleading in any registration statement, application, report, account, record, or other document filed with the Commission or the keeping of which is required pursuant to Section 31(a) of the Investment Company Act. Prospectus disclosures that do not go far enough in explaining the features of a product violate Investment Company Act Section 34(b). In re Fundamental Portfolio Advisors, Inc., 56 SEC 651, 675 (2003) (“prospectus disclosures, while accurate, do not go far enough”).
    • 6 A willful violation of the securities laws means merely "'that the person charged with the duty knows what he is doing.'" Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor "'also be aware that he is violating one of the Rules or Acts.'" Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)).