SEC Proposes Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts

November 1, 2018/US SEC

The Securities and Exchange Commission today announced that it has voted to propose rule changes designed to improve disclosure for investors about variable annuities and variable life insurance contracts.  The proposal is intended to help investors better understand these contracts’ features, fees, and risks, and to more easily find the information that they need to make an informed investment decision.

“This proposal is another important step in the Commission’s efforts to provide Main Street investors with better information to make informed investment decisions.  I have participated in many roundtables with retail investors over the last several months, and investors have emphasized their preference for clear and concise disclosure,” said SEC Chairman Jay Clayton.  “Providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long‑term nature of these contracts and their potential complexity.”

The proposal would newly permit these contracts to use a summary prospectus to provide disclosures to investors.  This document would be a concise, reader‑friendly summary of key facts about the contract.  More‑detailed information about the contract would be available online, and an investor also could choose to have that information delivered in paper or electronic format at no charge.  

Mutual funds have been permitted to use a similar layered approach to disclosure—with investors receiving a summary prospectus, and more-detailed information available on request—since 2009.  

The Commission has requested public comment on the proposed rule changes, as well as on hypothetical summary prospectus samples that it has published.  The Commission has also published a Feedback Flier that it will use to seek investor input about what improvements would make the summary prospectus easier to read and understand, and what information investors would like to see included.  

The public comment period will remain open through February 15, 2019.

FACT SHEET

Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

Oct. 30, 2018

Action

The Commission proposed a new rule, and rule and form amendments, that are intended to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts.   The proposed rule would permit a person to satisfy its prospectus delivery obligations under the Securities Act for a variable contract by sending or giving a summary prospectus to investors and making the statutory prospectus available online.  The proposal leverages both technology and a layered disclosure approach to improve the ability of investors to understand and evaluate variable contracts.

Proposal’s Highlights

New Option to Use a Summary Prospectus for Variable Contracts 

Proposed new rule 498A under the Securities Act would permit the use of two distinct types of contract summary prospectuses:

  • initial summary prospectuses covering variable contracts currently offered to new investors; and
  • updating summary prospectuses for existing investors.

The initial summary prospectus would include: an overview of the contract; a table summarizing certain key information about the contract’s fees, risks, and other important considerations; and more detailed disclosures relating to fees, purchases, withdrawals, and other contract benefits.  The updating summary prospectus would include a brief description of certain changes to the contract that occurred during the previous year, as well as the key information table from the initial summary prospectus.

In certain types of variable contracts, investors allocate their investment to one or more underlying investment options (typically, mutual funds).  Certain key information about these funds would be provided in both the initial summary prospectus and updating summary prospectus.

Availability of Variable Contract Statutory Prospectus and Other Materials

The proposed rule would require the variable contract’s statutory prospectus, as well as the contract’s Statement of Additional Information (SAI), to be publicly accessible, free of charge, at a website address specified on, or hyperlinked in, the cover of the summary prospectus.  An investor who receives a contract summary prospectus would be able to request the contract’s statutory prospectus and SAI to be sent in paper or electronically, at no cost to the investor.

Optional Method to Satisfy Prospectus Delivery Requirements for Underlying Mutual Funds

The proposed rule would permit variable contracts to make prospectuses for underlying mutual fund investment options, and other documents relating to these funds, available online.  The variable contract’s summary prospectus would provide certain key information about these funds.  Investors would be able to request and receive these funds’ prospectuses (and the other related documents that are available online) in paper or electronically at no cost.

Updates to Variable Contract Registration Forms

The amendments to Forms N-3, N-4, and N-6—the registration forms for variable contracts—that the Commission proposed are designed to update and enhance the disclosure regime for these investment products.  These amendments are intended to improve the content, format, and presentation of information to investors, including by updating the required disclosures to reflect industry developments (e.g., the prevalence of optional insurance benefits in today’s variable contracts).  In addition, the Commission proposed amendments to require the use of the Inline eXtensible Business Reporting Language (Inline XBRL) format for the submission of certain required disclosures in the variable contract statutory prospectus.  This would provide a mechanism for allowing investors, their investment professionals, data aggregators, and other data users to efficiently analyze and compare the available information about variable contracts.

Other Amendments

Finally, the Commission proposed certain technical and conforming amendments to its rules that would reflect the new regime for variable contract summary prospectuses.  The Commission also proposed other amendments and the rescission of certain rules and forms that were rendered moot by legislative actions or are otherwise no longer necessary.

What’s Next?

The comment period for the proposal will close on February 15, 2019.  This comment period will permit investors and other interested parties the opportunity to review the proposal materials, and to submit comments, data, and other information to the comment file.

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