Units of two U.S. insurance companies. will pay US$20 million to settle charges they helped in market timing of mutual funds through the sale of variable annuities, the U.S. Securities and Exchange Commission said today.

This is the first enforcement action by the SEC against an insurance company involving market timing through variable annuities.

The regulator reached a settlement with various subsidiaries and successors of Conseco Inc. The units include: CIHC Inc.; Conseco Services LLC; Conseco Equity Sales Inc.; and the company to which Conseco sold its variable annuity business in 2002, Inviva Inc.; and its subsidiary Jefferson National Life Insurance Co.

The various companies have agreed to settlements that include a total payment of US$20 million in disgorgement and penalties as well as undertakings of compliance reforms.

In its investigation, the SEC found find that the prospectuses through which the insurance companies sold the variable annuities misleadingly represented, among other things, that the annuities were “not designed for professional market timing organizations.” In fact, the SEC finds that the insurance companies marketed and sold the annuities to professional market timers. Eventually, market timing assets constituted the majority of assets invested in these products. The insurance companies profited by the fees earned from the sales of the annuities to the market timers.

Under the settlements, the firms have agreed to pay US$15 million, including disgorgement of US$7.5 million and civil penalties of US$7.5 million.

Inviva and Jefferson National will pay US$5 million, including disgorgement of US$3.5 million and a civil penalty of US$1.5 million.

The SEC promised that these amounts will be distributed to shareholders of mutual funds affected by the market timing.

Inviva and Jefferson National will also undertake compliance measures to protect against future violations. These measures include retaining an independent consultant to review compliance procedures designed to prevent and detect market timing. The firms consented to entry of the orders without admitting or denying the SEC’s findings.

“The variable annuity products at issue here became vehicles for market timing in mutual funds. The insurance company sponsors were well aware of this – indeed, they encouraged it, but left their retail investors and the mutual funds themselves in the dark,” said Stephen Cutler, director of the SEC’s division of enforcement.