SEC Action Builds Pressure for ETFs in Variable Contracts

On October 31, 2024, the SEC censured a major wirehouse for selling mutual funds to customers when lower-priced exchange-traded fund (ETF) “clones” of those funds were available. The SEC found that when recommending the mutual funds, the wirehouse and its registered representatives failed to consider the costs associated with the mutual funds as compared to the less expensive ETF clones and thereby failed to have a reasonable basis to believe that the recommendations were in the best interests of the wirehouse’s customers.

According to the SEC, this failure constituted a violation of the “care” obligation of the SEC’s Regulation Best Interest. For various economic and regulatory reasons, ETFs currently are not offered as options under variable annuity or variable life insurance contracts. Doing so will require assembling a puzzle, each piece of which will represent a solution for a different problem. Perhaps the single biggest challenge, though, is presented by Treasury Department regulations predating ETFs that have the effect of preventing the use of ETFs as investment options in variable contracts.

In 2022, however, Congress directed the Treasury to amend its regulations to permit ETF investment options in variable contracts. The Treasury was given seven years to amend its regulations, but such amendments could be adopted sooner. Indeed, the threat of enforcement actions such as those described above may give additional impetus to the general trend favoring ETFs over mutual funds, thereby increasing pressure for quicker action by the Treasury. On the other hand, for various reasons, it is not yet clear how much, if any, overall cost savings to investors would result if and when ETFs are available in variable contracts.

Nonetheless, it can be hoped that the recent SEC enforcement action will motivate Treasury staff to expedite the adoption of the necessary revisions to its rules to give investors at least the potential to experience lower costs from having ETF options in variable contracts.

©2026 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.