Introduction
Recently, in response to a request from the Committee of Annuity Insurers, the staff in the Chief Counsel's Office of the Securities and Exchange Commission's (SEC) Division of Investment Management issued a no-action letter (No-Action Letter) granting relief to life insurance company sponsors of variable insurance contracts from Section 22(e) of the Investment Company Act of 1940 (1940 Act) to address financial exploitation of seniors and other vulnerable adults.¹ The No-Action Letter permits life insurance company depositors of SEC registered separate accounts to delay the payment of redemption proceeds beyond the seven days permitted under Section 22(e) of the 1940 Act for certain variable insurance contracts owned by vulnerable adult investors where the insurance company suspects financial exploitation of the contract owner, subject to certain conditions.

Background
An insurance company that meets the conditions for relief may place a temporarily hold on the payment of redemption proceeds from the subaccount investment options under a Direct Held Variable Contract owned by a Specified Adult for up to 55 business days.² For purposes of the No-Action Letter, the term “Specified Adult” is defined as (i) a person age 65 and older; or (ii) a person age 18 and older who the insurance company reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. “Direct Held Variable Contracts” are variable annuity contracts and variable life insurance policies, registered as securities under the Securities Act of 1933 and funded by separate accounts registered as investment companies under the 1940 Act, which are directly held by the contract owner as opposed to being held in a brokerage account.

The no-action relief is intended to protect Specified Adults who own Direct Held Variable Contracts in a manner consistent with existing protections afforded to other vulnerable adult investors. FINRA Rule 2165 (Financial Exploitation of Specified Adults), which was adopted in 2017 and amended in 2022, permits broker-dealers to place a temporary hold on disbursements from customer accounts held with a broker-dealer firm for up to 55 business days where the broker-dealer has a reasonable belief of financial exploitation of a specified adult.³ The SEC also issued similar no-action relief in 2018 to permit mutual funds and their transfer agents to delay the payment of redemption proceeds from directly held mutual fund accounts although the delay permitted under that relief was for a significantly shorter period of time.4

Process for Imposing a Temporary Hold
An insurance company must take several steps in order to impose a temporary hold in reliance on the No-Action Letter. Those steps are:

1. Obtain Trusted Contact Person Information. At the time of application for a Direct Held Variable Contract, the insurance company must request the name and contact information for a trusted contact person age 18 or older. The insurance company may obtain trusted contact person information for previously-issued Direct Held Variable Contracts in the course of its routine business. The insurance company must maintain the trusted contact information provided and must disclose to the contract owner in writing that the company is authorized to contact the trusted contact person and may disclose information about the contract or request information about the contract owner’s contact details, health status, or the identity of persons with legal authority to act on behalf of the contract owner, such as a legal guardian or trustee, for the purpose of addressing suspected financial exploitation. An insurance company may only rely on the no-action relief in the absence of a trusted contact person if the company has made reasonable efforts to obtain trusted contact person information.
2. Finding of Reasonable Belief of Financial Exploitation. The insurance company can place a temporary hold on the payment of redemption proceeds only if it has a reasonable belief that financial exploitation of the Specified Adult who owns the Direct Held Variable Contract has occurred, is occurring, has been attempted, or will be attempted.
3. Allocation of Delayed Redemption Proceeds. When a temporary hold is imposed, the delayed redemption proceeds must be allocated to a subaccount that invests in an underlying money market fund available under the Direct Held Variable Contract. If there is no such money market subaccount available, the proceeds must be held in a general account investment option available under the contract whose interests are not registered securities. The insurance company must maintain records documenting where the proceeds are being held, and the next confirmation statement provided to the contract owner must identify the amount of the proceeds and where they are held.
4. Notify Relevant Parties. No later than 2 business days after a temporary hold is imposed, the insurance company must provide oral or written notice to (i) all persons authorized to submit orders related to the contract, including the contract owner; and (ii) the trusted contact person on file. Notice does not have to be provided to any of the aforementioned persons if they are unavailable or person(s) suspected of financial exploitation of the contract owner.
5. Internal Review. Upon imposing a temporary hold, the insurance company must immediately initiate an internal review of the facts and circumstances that gave rise to the reasonable belief of financial exploitation of the Specified Adult.
6. Duration of Temporary Hold. The initial temporary hold can remain in place for up to 15 business days while the insurance company conducts its internal review. If the internal review supports the insurance company’s reasonable belief of financial exploitation, the temporary hold can be extended for up to 10 business days. Thereafter, if (i) the company’s internal review continues to support the reasonable belief of financial exploitation and (ii) the insurance company has reported or provided notice to state regulators or to a court with jurisdiction over the matter, the temporary hold can be extended for up to 30 business days. A state regulator or court could terminate or extend a temporary hold at any time during this process.

General Conditions for Relief
In order to be eligible to rely on the No-Action Letter, an insurance company must first satisfy a number of disclosure and compliance conditions, including:

• Prospectus Disclosure. The insurance company must have disclosed in the Direct Held Variable Contract statutory prospectus that the company may place a temporary hold on the payment of redemption proceeds in accordance with the conditions of the relief.
• Employee Training. Prior to imposing a temporary hold, the insurance company, on behalf of its separate account, must develop and document training policies or programs that are reasonably designed to ensure its employees comply with the conditions of the relief.
• Written Procedures. The insurance company, on behalf of its separate account, must maintain written procedures that are reasonably designed to comply with the conditions of the relief. These written procedures must address the identification, escalation, and reporting of suspected financial exploitation of Specified Adults; and the determination of whether to release or reinvest delayed redemption proceeds. Each person who is authorized to place, terminate, or extend a temporary hold should be identified in the procedures.
• Rule 38a-1 Policies and Procedures. The insurance company, on behalf of its separate account, must establish, as part of the separate account’s Rule 38a-1 compliance policies and procedures,⁵ escalation and periodic reporting protocols under which the company would memorialize information regarding instances in which the company and its separate account relied on the relief, including (i) the company’s finding of reasonable belief of financial exploitation of a Specified Adult and (ii) how the matter was resolved consistent with the conditions of the relief.
• Recordkeeping. The insurance company, on behalf of its separate account, must maintain records related to its compliance with the conditions of the relief. These records include:
  • redemption request(s) that may constitute financial exploitation and result in a temporary hold;
  • the company’s finding of reasonable belief of financial exploitation of a Specified Adult;
  • the name and title of the employee that authorized a temporary hold;
  • notifications that were sent to the relevant parties;
  • the internal review undertaken; and
  • the reason and support for any extensions of a temporary hold.
  These records must be retained for at least six years, the first two years in an easily accessible place, and would be made available to the SEC upon request.

Conclusion
In granting no-action relief, the SEC staff acknowledged the “compelling” and “alarming” evidence of financial abuse of senior investors the staff has observed. Insurance companies that intend to rely on the No-Action Letter will need to, among other things, prepare new disclosure for their variable contract statutory prospectuses and adopt new Rule 38a-1 compliance policies and procedures for their registered separate accounts to ensure they satisfy the terms and conditions of the No-Action Letter.

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1 Committee of Annuity Insurers, SEC No-Action Letter (pub. avail. Apr. 11, 2024), available at https://www.sec.gov/investment/cai-22e-041124.

2 The no-action relief does not apply to proceeds from non-variable investment options such as general account investment options, fixed interest crediting options with a market value adjustment feature, or index-linked investment options, even if such options are made available under a Direct Held Variable Contract.

3 The term “specified adult” has substantially the same meaning under FINRA Rule 2165 as Specified Adult in the No-Action Letter. See FINRA Rule 2165(a)(1).

4 Investment Company Institute, SEC No-Action Letter (pub. avail. June 1, 2018), available at https://www.sec.gov/divisions/investment/noaction/2018/investment-company-institute-060118-22e.htm.

5 Rule 38a-1 under the 1940 Act requires each registered investment company, including SEC registered separate accounts, to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws. See 17 CFR § 270.38a-1.

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