MassMutual Settles for $1.625M SEC Charges Over Failure to Disclose Allegations Related to Complex Investments’ “Cap”

In the wake of Securities and Exchange Commission charges accusing
Massachusetts Mutual Life Insurance Company of securities law violations, the insurance company has agreed to settle the allegations by paying a $1.625M penalty. The SEC contends that the insurer did not adequately disclose the potential negative impact of a “cap” it had placed on certain complex investments.

Per the Commission, MassMutual placed a cap feature that could potentially impact $2.5B of its variable annuities in specific optional riders that were offered to investors. However, sales materials and prospectuses did not properly explain that if they cap were reached, the GMIB (guaranteed minimum income benefit) value would cease to accrue interest. Instead, the disclosures appeared to infer that interest would keep growing after the GMIB value hit the cap while investors would still have the option for dollar-for-dollar withdrawals. Not only did several MassMutual sales representatives become confused by the disclosure content, but also clients were not properly apprised of how making withdrawals could hurt them financially were the cap to be reached about 10 years from now. MassMutual has since taken out the cap to make sure that no investors suffer financial harm.

Specifically, says the SEC order, between 2007 and 2009 the insurer offered investors GMIB 5 and 6 riders as an option on specific variable annuity instruments. The GMIB riders were presented as giving “Income Now” if withdrawals were made during the accumulation phase. “Income Later” could occur if investors opted to get annuity payments. (MassMutual’s sales material noted the guarantee in the riders, which state that even if a contract were to hit a 0 in value, an investor could still apply the GMIB value to a variable or fixed annuity.)

The riders came with a maximum GMIB value-a cap that would investors would not be able to hit until 2022. However, if the cap were reached by the GMIB value, every dollar taken out would lower the GMIB value by a pro-rata figure linked to the percentage drop on the contract value. After a number of these types of withdrawals-market conditions pending-the GMIB value and the contract value would go down and adversely impact how much a customer could apply to the future income stream and an annuity.

However, contends the SEC, several MassMutual sales agents did not fully comprehend all of this and they thought that if the GMIB value hit the cap, investors could still take withdrawals with the GMIB value staying at the cap. The sales force was also suffering from other misconceptions, such as wrongly believing that investors would be able to maximize benefits if they waited until the cap was reached by the GMIB value, take yearly withdrawals of 5 or 6 percent, and annuitize contracts to get an income stream linked to the maximum GMIB value. In fact, this type of investment strategy was actually more harmful than beneficial.

The Commission says that MassMutual should have identified the signs indicating that sales argents and others didn’t fully comprehend how post-cap withdrawals might impact the GMIB value and realized that its disclosures were not adequate enough. The insurer has agreed to settle without admitting to or denying the SEC’s findings.

Read the Administrative Proceeding (PDF)

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Contact our securities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.