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SEC Takes Aim at Variable Annuity and Life Insurance Disclosures

The Securities and Exchange Commission is proposing rule changes to the disclosure regime for variable annuity and variable life insurance contracts in an effort to help investors with their investment decisions.

According to an Oct. 30 announcement, the proposal seeks to build upon the commission’s experience creating a summary prospectus option for mutual funds in 2009, but targeted to help investors better understand variable contract features, fees and risks by leveraging both technology and a layered disclosure approach.

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. Investors also would be permitted to choose to have that information delivered in paper or electronic format at no charge.

Summary Prospectuses

The SEC explains that proposed new rule 498A would permit the use of two distinct types of contract summary prospectuses that would be voluntary to satisfy the registrant’s section 5(b)(2) obligation:

  • 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 considerations; and

  • more detailed disclosures relating to fees, purchases, withdrawals and other contract benefits.

The “updating summary prospectus” would include a 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 addition, certain key information about underlying investor-allocated investment options (typically, mutual funds) would be provided in both the initial summary prospectus and updating summary prospectus.

“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,” explains 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.”

Availability of Statutory Prospectus

Under the proposed rule, the variable contract’s statutory prospectus as well as the contract’s Statement of Additional Information (SAI) would be required to be publicly accessible at no charge at a website address specified in the summary prospectus cover. 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.

Delivery Requirements for Underlying Mutual Funds

The proposed rule would also permit variable contracts to make prospectuses for underlying mutual fund investment options and other related documents available online. Investors also could request to receive these prospectuses in paper or electronically at no cost.

Updates to Registration Forms

The commission has also proposed amendments to update registration forms N-3, N-4, and N-6 with the intent to improve the content and presentation of information, including by updating the required disclosures to reflect industry developments, such as the prevalence of optional insurance benefits in today’s variable contracts.

Finally, the proposed amendments would require use of the Inline eXtensible Business Reporting Language (Inline XBRL) format for certain required disclosures in the statutory prospectus. According to the summary, this would allow investors, investment professionals, data aggregators and other data users to efficiently analyze and compare the available information about variable contracts.

Comments Requested

Comment on the proposed rule changes and on the hypothetical summary prospectus samples are requested by Feb. 15, 2019. The commission has also published a Feedback Flier to seek investor input about what improvements would make the summary prospectus easier to understand and what information investors would like included.