[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Proposed Rules]
[Pages 71088-71259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21986]
[[Page 71087]]
Vol. 88
Friday,
No. 197
October 13, 2023
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 230, 232, 239, and 274
Registration for Index-Linked Annuities; Amendments to Form N-4 for
Index-Linked and Variable Annuities; Proposed Rule
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 /
Proposed Rules
[[Page 71088]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, and 274
[Release No. 33-11250; 34-98624; IC-35028; File No. S7-16-23]
RIN 3235-AN30
Registration for Index-Linked Annuities; Amendments to Form N-4
for Index-Linked and Variable Annuities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rule and form amendments to provide a tailored form to
register the offerings of registered index-linked annuities
(``RILAs''). Specifically, the Commission is proposing to amend the
form currently used by most variable annuity separate accounts, Form N-
4, to require issuers of RILAs to register offerings on that form as
well. To facilitate this amendment, the Commission is also proposing to
amend certain filing rules and make other related amendments. These
changes would, if adopted, implement the requirements relating to RILAs
contained in Division AA, Title I of the Consolidated Appropriations
Act, 2023. Further, the Commission is proposing other amendments to
Form N-4 that would apply to all issuers that would use that form under
the proposal. The Commission is also proposing to apply to RILA
advertisements and sales literature a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws. The Commission is proposing a
technical amendment to Form N-6 to correct an error from a prior
Commission rulemaking. Finally, the Commission requests comment as to
whether to require the registration of market-value adjustments
associated with certain annuities on Form N-4 as well.
DATES: Comments should be submitted on or before November 28, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/2023/09/rila); or
Send an email to [email protected]. Please include
File Number S7-16-23 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-16-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/2023/09/rila). Comments are also available for website viewing and printing
in the Commission's Public Reference Room, 100 F Street NE, Washington,
DC 20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's public
reference room. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. Retail investors seeking to comment on their experiences
with annuities generally and RILAs in particular may want to submit a
short Feedback Flyer, available at Appendix D.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (https://www.sec.gov/rules/2023/09/rila).
FOR FURTHER INFORMATION CONTACT: Christian Corkery, Michael Khalil,
Rachael Hoffman, James Maclean, Amy Miller, or Laura Harper Powell,
Senior Counsels; Bradley Gude, Branch Chief; Amanda Hollander Wagner,
Senior Special Counsel; or Brian McLaughlin Johnson, Assistant
Director, Investment Company Regulation Office, at (202) 551-6792;
Elisabeth Bentzinger or Min Oh, Senior Counsels; Michael Kosoff, Senior
Special Counsel, Disclosure Review and Accounting Office, at (202) 551-
6921, Division of Investment Management, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the following rules and forms:
---------------------------------------------------------------------------
\1\ 15 U.S.C. 77a et seq.
----------------------------------------------------------------------------------------------------------------
Commission reference CFR citation (17 CFR)
----------------------------------------------------------------------------------------------------------------
Securities Act of 1933 (``Securities Act''): \1\
Rule 156.............................................. Sec. 230.156
Rule 172.............................................. Sec. 230.172
Rule 405.............................................. Sec. 230.405
Rule 415.............................................. Sec. 230.415
Rule 424.............................................. Sec. 230.424
Rule 456.............................................. Sec. 230.456
Rule 457.............................................. Sec. 230.457
Rule 485.............................................. Sec. 230.485
Rule 497.............................................. Sec. 230.497
Rule 498A............................................. Sec. 230.498A
Regulation S-T:
Rule 313 of Regulation S-T............................ Sec. 232.313
Rule 405 of Regulation S-T............................ Sec. 232.405
Forms:
Form N-4.............................................. Sec. 239.17b and 274.11c
Form N-6.............................................. Sec. 239.17c and 274.11d
[[Page 71089]]
Form 24F-2............................................ Sec. 239.66 and Sec. 274.24
----------------------------------------------------------------------------------------------------------------
Table of Contents
I. Introduction and Background
A. Typical RILA Features
B. Current Registration Process
C. Evidence of Investor Views and Areas of Potential Confusion
D. Overview of Proposal
II. Discussion
A. Use of Form N-4
B. Contents of Form N-4
1. Front and Back Cover Pages (Item 1)
2. Key Information Table (Item 3)
3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
4. Principal Risks of Investing in the Contract (Item 5)
5. Addition of Contract Adjustments and Other Amendments to Fee
and Expense Disclosures (Items 4, 7, and 22)
6. Information About Contracts With Index-Linked Options (Item
31A)
7. Other Amendments and Provisions
8. Remaining Form N-4 Items
9. Inline XBRL
C. Option To Use a Summary Prospectus
D. Accounting (Items 16 and 26)
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and Amendments to Form 24F-2
2. Post-Effective Amendments and Prospectus Supplements
3. Prospectus Delivery
F. Materially Misleading Statements in RILA Sales Literature
G. Existing Commission Letters
H. Registered Market-Value Adjustment Annuities
I. Technical Amendment to Form N-6
J. Compliance Period
K. General Request for Comment From Retail Investors
III. Economic Analysis
A. Introduction
B. Baseline
1. Affected Parties
2. Current Regulatory Requirements
3. Market Practice
C. Benefits and Costs
1. Benefits
2. Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Creating an Entirely New Registration Form for RILAs
2. Alternatives to Specific Form N-4 Amendments
3. Require the Use of Form N-4 for Registered MVAs
4. Limiting Scope of Structured Data Requirements
F. Request for Comment
IV. Paperwork Reduction Act
A. Rule 498A
B. Form N-4
C. Form 24F-2
D. Investment Company Interactive Data
E. Request for Comment
V. Regulatory Flexibility Certification
VI. Consideration of Impact on the Economy
Statutory Authority
I. Introduction and Background
An annuity contract (``annuity'' or ``contract'') is a type of
insurance product in which an investor makes a lump-sum payment or a
series of payments in return for future payments from the insurance
company to meet retirement and other long-term financial goals. A RILA
is one of several types of annuity contracts offered by insurance
companies. An investor in a RILA allocates purchase payments to one or
more investment options under which the investor's returns (both gains
and losses) are based at least in part on the performance of an index
or other benchmark (collectively, ``indexes''), over a set period of
time (``crediting period'').\2\ In some cases, insurance companies
offer RILAs on a standalone basis with various index-linked investment
options (``index-linked options'') for investors to choose from. In
other cases, insurance companies offer ``combination'' annuity
contracts that provide index-linked options together with other
investment options, such as mutual funds (``portfolio companies'')
offered as investment options under a variable annuity (``variable
options'').\3\ An investor purchasing a combination contract, for
example, may have the ability to allocate purchase payments under the
contract to index-linked options; variable options that pass on the
returns of mutual funds selected by the investor; and/or fixed account
options for which the insurance company promises to pay a fixed and
stated minimum rate of interest. The market for RILAs has grown
significantly in recent years, with annual RILA sales of $41.1 billion
in 2022 alone, more than tripling since 2017.\4\ We understand that
RILAs are predominantly sold by broker-dealers, although investment
advisers may also provide advice on RILAs, and insurance companies also
may offer RILAs directly.
---------------------------------------------------------------------------
\2\ Insurance companies frequently refer to crediting periods as
``investment terms'' or sometimes simply ``terms.'' See, e.g.,
Investor Testing Report on Registered Index Linked Annuities, Office
of Investor Advocate Division (``OIAD Report'') at Section 2, RILAs:
Structure of Contracts and Investment Options, Investment Terms. As
noted in OIAD's report, investor testing suggested that investors
consistently struggled with this terminology, and a number of
participants seemed to equate ``investment term'' or ``term'' with
the length of the insurance contract rather than the length of the
investment product options within the RILA contract, leading them to
misunderstand the operation of the RILA. Id. at Section 5,
Qualitative Testing, Results from Round 1. In an effort to mitigate
that confusion, we have opted to use the term crediting period in
this release and in the proposed amendments to Form N-4. The most
common crediting periods are one, three, and six years. See id. at
Section 3, Overview of the RILA Market and Simulated Performance
over Historical Periods, RILA Indexes, Investment Terms, and
Insurance Features, Figure 2.
\3\ Variable annuity contracts and variable life insurance
contracts (together, ``variable contracts'') combine both investment
and insurance features. Investors generally allocate their purchase
payments to a range of investment options, typically mutual funds
which are separately registered and have their own prospectuses. The
investor's account value changes depending on the performance of the
investment options selected. Variable annuities allow investors to
receive periodic payments for either a definite period (e.g., 20
years), or for an indefinite period (e.g., the life of the
investor). See Updated Disclosure Requirements and Summary
Prospectus for Variable Annuity and Variable Life Insurance
Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020)
[85 FR 25964 (May 1, 2020)] (``VASP Adopting Release'') at nn.4-5
and n.8 and accompanying text.
\4\ See LIMRA, ``LIMRA: Record Annuity Sales in 2022 Expected to
Continue Into First Quarter 2023,'' news release, Mar. 8, 2023
(reporting 2022 RILA sales of $41.1 billion), https://www.limra.com/en/newsroom/news-releases/2023/limra-record-annuity-sales-in-2022-expected-to-continue-into-first-quarter-2023/ and LIMRA, ``LIMRA
Secure Retirement Institute: Total Annuity Sales Continued to
Decline in 2017,'' news release, Feb. 21, 2018 (reporting 2017 sales
of structured annuity products, i.e., RILAs, of $9.2 billion),
https://www.limra.com/en/newsroom/news-releases/2018/limra-secure-retirement-institute-total-annuity-sales-continued-to-decline-in-2017/.
---------------------------------------------------------------------------
RILAs are securities for purposes of the Securities Act of 1933
(``Securities Act'').\5\ Unlike variable annuity contracts for which
the Commission has adopted a specific registration form tailored to
those products, insurance companies currently register offerings of
RILAs on Securities Act registration
[[Page 71090]]
Forms S-1 or S-3.\6\ In 2022, Congress enacted Division AA, Title I of
the Consolidated Appropriations Act, 2023 (``RILA Act''), directing the
Commission to adopt a new registration form for RILAs within 18 months
of enactment.\7\ The RILA Act requires the Commission to design the
form to ensure that a purchaser using the form receives the information
necessary to make knowledgeable decisions, taking into account (1) the
availability of information; (2) the knowledge and sophistication of
that class of purchasers; (3) the complexity of the RILA; and (4) any
other factor the Commission determines appropriate. The RILA Act also
requires the Commission to engage in investor testing as part of its
rulemaking process and to incorporate the results of the testing in the
design of the form, with the goal of ensuring that key information is
conveyed in terms that a purchaser is able to understand. If the
Commission fails to adopt the form within 18 months of enactment, the
RILA Act provides that RILA issuers can begin registering RILA
offerings on existing Form N-4.
---------------------------------------------------------------------------
\5\ Depending on the context, ``RILA'' is also used in this
release to collectively refer to both stand-alone RILAs and the
index-linked options available in a combination contract. When
referring to the entity registering the RILA, we use the term ``RILA
issuer'' or ``insurance company.'' Index annuities that meet the
requirements of section 989J of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111-203) or section 3(a)(8) of
the Securities Act are treated as exempt securities for purposes of
the Securities Act, but RILAs do not fall within this exemption due,
in large part, to the shifting of a significant level of investment
risk from the RILA issuer to the investor. RILAs and index-linked
option, as used in this release, refer only to those index annuities
that are securities for the purposes of the Securities Act. See,
e.g., sections 101(a)(5) and (6) of Division AA, Title I of the
Consolidated Appropriations Act, 2023.
\6\ The registration forms for variable annuity contracts are
Form N-3 (for variable annuity separate accounts structured as
management companies) and Form N-4 (for variable annuity separate
accounts structured as unit investment trusts). The separate account
established by the sponsoring insurance company is the legal entity
that registers its securities. Separate accounts are typically
registered as investment companies under the Investment Company Act.
See section 2(a)(37) of the Investment Company Act. The Commission
first adopted the registration form for variable annuities over 30
years ago. See Registration Forms for Insurance Company Separate
Accounts that Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 14, 1985) [50 FR 26145] (June 25,
1985)]. In this release, we focus only on Form N-4, and not Form N-
3, because Form N-4 is the registration form identified in the RILA
Act and the form used to register the majority of variable annuity
contracts.
\7\ Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
---------------------------------------------------------------------------
We are proposing to amend Form N-4 to require RILA issuers to
register RILA offerings, including associated features of the RILA such
as any contract adjustments, on that form and to tailor the form's
requirements accordingly.\8\ We also are proposing to amend other rules
related to the securities offering process to allow these issuers to
conduct RILA offerings in the same way issuers conduct offerings of
variable annuities. Consistent with the RILA Act, these proposed
amendments collectively are designed to provide investors disclosures
tailored to RILAs and highlight key information about these complex
products, building on the Commission's layered disclosure framework in
place for variable annuities. We are also proposing certain amendments
to Form N-4 that would apply to offerings of variable annuities, based
on our experience with the form since its last amendment and the
investor testing conducted in connection with this rulemaking.\9\ In
addition, we are proposing to apply a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws to RILA advertisements and sales
literature. Finally, we are proposing a technical amendment to Form N-6
to correct an error from a prior Commission rulemaking.
---------------------------------------------------------------------------
\8\ Under this proposal, the amended Form N-4 will not register
the RILA issuers themselves, only the offering of RILA securities.
Unlike separate accounts which register variable annuities, RILA
issuers are not investment companies, and thus need not register
with the Commission as an investment company as separate accounts
do.
\9\ See VASP Adopting Release.
---------------------------------------------------------------------------
A. Typical RILA Features
RILAs are complex financial products that are sold to retail
investors. The following are some of the most prevalent features that
contribute to this complexity, and that might make it challenging for
an investor to assess the features, risks, and possible return profile
of a RILA. These features also are important ones for financial
professionals to consider when recommending that an investor purchase a
RILA.
Bounded Return Structure. Under a RILA, the insurance
company will credit positive or negative ``interest'' to the investor's
contract value at the end of each crediting period. The amount credited
is based, in part, on the performance of the specified index (e.g., the
S&P 500).\10\ The amount of any positive interest credited will also
depend on whether the contract includes provisions such as a ``cap
rate'' or ``participation rate.'' A cap rate places an upper limit on
an investor's ability to participate in the index's upside performance
directly (e.g., with a current cap rate of 5%, if the index is up 10%
at the end of the crediting period, the investor's contract value will
be credited with only 5% positive interest). A ``participation rate''
sets an investor's return to some specified percentage of the index's
return (e.g., an 80% participation rate would result in an investor
receiving positive interest of 80 cents on the dollar of gains in the
index). The contract generally will include one of these limits on how
much the insurance company will credit the investor if the performance
of the index goes up in value by the end of the crediting period
(collectively ``limits on gains''). Similarly, the contract generally
will include terms limiting the investor's losses to some extent if the
performance of the index goes down in value. This might include a
``buffer'' (which limits the investor's exposure to losses up to a
fixed percentage), or a ``floor'' (which places a lower limit on the
investor's exposure to loss) (collectively ``limits on losses''). For
example, with a ``buffer'' of -5%, if the index is down 2%, that
investor will not lose anything, but if the index is down 7% the
investor will lose 2% (the difference between the loss and the buffer
rate). With a ``floor'' of -5%, if the index is down 2%, the investor
will lose 2%, but if the index is down 7%, the investor will only lose
5%. These limits can be complex and overlapping, and may change at the
beginning of each new crediting period, subject to certain minimum
guarantees stated in the contract. Over time, the investor's contract
value will increase or decrease, depending on the performance of the
index and the particular contract provisions (such as the bounded
return structure). Despite the bounded return structure, a RILA is not
necessarily a low-risk investment product as the investor could lose a
significant amount of money if the index performs poorly.
---------------------------------------------------------------------------
\10\ Insurance companies typically choose indexes for the RILA
contract where any gains in the value of the index do not include
dividends paid on the securities that make up the index.
---------------------------------------------------------------------------
Fees and Expenses. For many RILAs, the investor pays no
direct or explicit ongoing fees and expenses under the RILA, and this
is sometimes a feature disclosed in RILA marketing materials. However,
the RILA's bounded return structure requires investors to agree to
tradeoffs that come with their own economic costs. In exchange for some
protection against losses if the index goes down in value, investors
must also agree to contractual provisions limiting the amount of gains
they will receive if the index goes up in value. A RILA's upside limits
on gains can reduce an investor's return in the same way that a direct
fee can and can help make the RILA more profitable to the insurance
company.
Charges and Penalties for Early Withdrawals. Investors
also can lose significant money if they withdraw their money early from
an investment option or from the contract. This can arise in several
circumstances. First, a RILA typically will specify a period of time
during which a ``surrender charge'' will apply, for example nine years
following an investor's last premium payment. Typically, this charge is
greatest in the first year of the surrender period, decreasing each
year until the end of the surrender period. An investor who
[[Page 71091]]
withdraws money during this period will pay a fee, such as 9% of the
amount withdrawn. Second, an insurance company may make an adjustment,
either to the investor's contract value or to the amount paid to the
investor, if amounts are withdrawn from an index-linked option before
the end of its crediting period or from the contract before the end of
a specified period. For example, when an investor in a RILA chooses a
particular index-linked option, the RILA may provide that the index-
linked option's crediting period is one year. If amounts are removed
from that index-linked option before the end of this one-year crediting
period, typically for any reason, the insurance company will apply an
``interim value adjustment'' or ``IVA.'' The IVA will adjust the
contract value based, generally, on a complex formula where the IVA may
change daily and can be positive or negative.\11\ As a result, the
investor could lose a significant amount of money, even if the index
has a gain at the time of the withdrawal.
---------------------------------------------------------------------------
\11\ Common methods of calculating this adjustment include
prorating the crediting method based on the number of days that have
elapsed since the start of the crediting period, employing a market-
based formula designed to approximate the present value of the index
and/or employing interest-rate-based MVAs to offset certain insurer
losses and costs, or some combination of these two. See Clifford E.
Kirsch, Variable Annuities and Other Insurance Investment Products
(Third Edition 2022) at 29-8, available at https://plus.pli.edu/Details/Details?start=0&rows=50&fq=%7e2B%7etitle_id%7e3A282B22%7e240085%7e2229%7e&fq=%7e2B%7eid%7e3A282B22%7e240085-CH29%7e2229%7e&sort=s_date+desc&origin=title.
---------------------------------------------------------------------------
Similarly, the insurance company might apply a positive or negative
``market value adjustment'' or ``MVA'' (collectively with IVAs, a
``contract adjustment'') to the contract value if the investor
partially or fully withdraws amounts from the contract. Contract
adjustments could be made in response to a number of contract
transactions, such as a surrender, withdrawal, payment of the death
benefit, or the start of annuity payments, and an investor could
experience a negative contract adjustment even when the investor takes
an otherwise permissible withdrawal, such as under a guaranteed living
benefit.\12\ These adjustments can also negatively impact other values
under the contract, such as the surrender value and death benefit.
Moreover, these fees and adjustments are not always mutually exclusive.
Indeed, under the terms of certain RILA contracts, an investor could
experience a decrease in contract value from a negative interim value
adjustment and a negative market value adjustment, depending on the
timing of the withdrawal, and also pay a surrender charge. An investor
may also be subject to income taxes and face a Federal income tax
penalty if the investor withdraws money before a certain age.\13\
---------------------------------------------------------------------------
\12\ Id. at 29-13. Under these benefits, RILA investors are
permitted to take a certain amount of guaranteed withdrawals from
their contract each year without reducing the value of guaranteed
withdrawals for future years. These can be a standard feature or an
optional rider chosen by an investor. Id. at 29-12.
\13\ See Updated Investor Bulletin: Indexed Annuities, SEC's
Office of Investor Education and Advocacy, July 31, 2020, https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_indexedannuities.
Staff reports and other staff documents (including those cited
herein) represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person.
---------------------------------------------------------------------------
Changes by Insurer. Crediting periods for an index-linked
option in a RILA contract generally range from one to six years. The
insurance company may change or remove key features of index-linked
options, such as the cap rates, floors, or even change the index. These
changes may often be made at the insurance company's discretion and
renewal provisions can and do change over time. Also, RILA contracts
typically state that an investor will be automatically renewed at the
end of a crediting period into the same or substantially similar index-
linked option, often with a new limit on gains. If the same index-
linked option is unavailable, the terms of the contract generally
provide that the insurance company may place the investor into a more
conservative investment option as a default, such as a fixed account or
an index-linked option with a 0% floor.
Taxes. Special tax rules generally apply to RILAs and
other annuities, with both tax advantages and potential adverse tax
impacts in certain circumstances. For example, assets within a RILA
generally grow tax-deferred. As discussed above, however, investors may
face a Federal income tax penalty if money is withdrawn before the
investor reaches a certain age.\14\
---------------------------------------------------------------------------
\14\ For these and other reasons, insurance companies generally
advertise RILAs as a long-term investment. This is similar to the
treatment of variable annuities. See VASP Adopting Release at n.14
and accompanying text.
---------------------------------------------------------------------------
Providing investors with key information is particularly important
in the context of RILAs, since their features are typically complex and
their risks may not be apparent or easily understood by prospective
investors absent clear disclosure. Form N-4's existing disclosure
requirements regarding features of annuities would complement the
proposed RILA-specific disclosures, such that the amended Form N-4
would provide investors with key information both about the annuity
contract and the associated registered index-linked or variable
investment options.
B. Current Registration Process
The current requirements for issuers offering RILAs and variable
annuities differ in many respects, both in terms of the disclosure
issuers must provide, and with respect to the registration process. We
highlight here some of these key differences.
On required disclosure, because the Commission currently does not
have a specific registration form for RILAs, insurance companies
register the offerings of RILAs on Forms S-1 or S-3.\15\ Although
specific disclosure requirements apply for certain securities such as
capital stock or debt, the forms' disclosure requirements are not
specifically tailored to particular kinds of securities given the wide
range of securities offerings that can be registered on the forms.\16\
Forms S-1 and S-3 thus do not include specific line-item requirements
addressing disclosures about RILAs and their complex features, such as
how limits on gains operate or the application of contract adjustments.
These forms also require issuers to disclose information about the
offering itself as well as extensive information about the registrant
issuing the securities that may be less material to a RILA investor
than information about the contract's features. Required information
about the registrant includes, for example, management's discussion and
analysis of financial condition and results of operations (``MD&A''),
which requires a narrative discussion of the registrant's financial
statements, and disclosure about executive compensation. Domestic
registrants also must include financial statements prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\17\
---------------------------------------------------------------------------
\15\ See, e.g., General Instruction I of Form S-1 (``This Form
shall be used for the registration under the Securities Act of 1933
(`Securities Act'); of securities of all registrants for which no
other form is authorized or prescribed'').
\16\ See Item 9 of Forms S-1 and S-3 and 17 CFR 229.202
(providing specific disclosure requirements for certain securities
such as capital stock, debt, warrants or rights, and directing
issuers of other types of securities to include a brief description
that is comparable to that required for the specified kinds of
securities).
\17\ See 17 CFR 210.4-01(a)(1) (stating that financial
statements filed with the Commission which are not prepared in
accordance with GAAP will be presumed to be misleading or inaccurate
unless the Commission has otherwise provided). See also infra
footnote 20.
---------------------------------------------------------------------------
[[Page 71092]]
Most variable annuities, in contrast, are registered on Form N-
4.\18\ This form is designed for variable annuities and has disclosure
requirements tailored to these investments. Providing investors with
key information in a reader-friendly format is particularly important
in the context of variable annuity contracts because their structure is
complex. Accordingly, Form N-4's disclosure requirements are designed
to provide investors with key information relating to a variable
contract's provisions, benefits, and risks in a concise and reader-
friendly presentation, along with targeted information about the
insurance company and the offering. Form N-4's disclosure requirements
thus focus more on the specific features of variable annuities than on
the issuing insurance company. This presentation is designed to
highlight the most important information for an investor in a variable
annuity, so that the only matters included in the prospectus are those
for which there is a substantial likelihood that a reasonable investor
would consider them important in deciding whether to invest.\19\ This
focus on the provisions of the variable contract itself, rather than
certain details about the operation of the insurance company, reflects
that a variable annuity contract is not a direct investment in the
capital stock or debt of the insurance company, but rather a contract
with the insurance company under which the investor's exposure to the
insurance company generally is limited to the company's ability to
honor any guarantees associated with the contract. In addition, rule
498A together with Form N-4 implements a layered disclosure approach
for variable annuities by permitting insurance companies and others to
use a summary prospectus framework for variable annuities while making
the more-detailed statutory prospectus, as well as the contract's
statement of additional information (``SAI''), available online. Form
N-4 also provides a limited exception for insurance companies to file
financial statements prepared in accordance with statutory accounting
principles (``SAP''), referred to as ``statutory requirements'' in the
form instructions, rather than GAAP. Specifically, insurance companies,
which act as the depositors of variable annuity separate accounts
registered on Form N-4, may use SAP financials solely when the
insurance company does not otherwise prepare GAAP financial statements
or GAAP financial information for use by a parent in the parent's
Securities Exchange Act of 1934 (``Exchange Act'') reports or the
parent's registration statements filed under the Securities Act.\20\
---------------------------------------------------------------------------
\18\ According to Form N-CEN filings received through March 23,
2023, there were 419 variable annuity separate accounts registered
as unit investment trusts (``UITs'') in 2022.
\19\ The Commission has long sought to tailor disclosures for
annuity products. See Registration Forms for Insurance Company
Separate Accounts, Investment Company Act Release No. 13689 (Dec.
23, 1983) [49 FR 614 (Jan. 5, 1984)] (``Form[] N-4 would permit
shorter and simpler prospectuses than are required under current
practice, . . . by incorporating many of the reduced disclosure
requirements of Form N-1A. Separate account disclosure requirements
that experience has shown are unnecessary also would be eliminated,
as well as certain disclosure requirements that are holdovers from
the requirements applicable to non-separate account unit investment
trust.''); Registration Form Used By Open-End Management Investment
Companies, Investment Company Act Release No. 12927 (Dec. 27, 1982)
[48 FR 813 (Jan. 7, 1983)] (``In order to shorten and simplify the
prospectus for mutual funds, the Commission has concluded that it is
necessary to eliminate certain types of information from the
prospectus, so that only matters of fundamental importance to most
mutual fund investors will be included in the prospectus'').
\20\ See, e.g., Instruction 1 to Item 31(b) in Form N-3 and
Instruction 1 to Item 26(b) in Form N-4. In addition, although Form
S-1 requires GAAP financial statements, exemptions have been granted
pursuant to 17 CFR 210.3-13 that permit insurance companies to
substitute SAP financials in lieu of GAAP financials when
registering RILAs on Form S-1 in circumstances permitted by Form N-
4. See, e.g., Letter from Jenson Wayne, Chief Accountant, Division
of Investment Management, to Stephen E. Roth, Eversheds Sutherland
(US) LLP, regarding Fidelity & Guaranty Life Insurance Company and
Fidelity & Guaranty Life Insurance Company of New York (Mar. 17,
2023) (available at https://www.sec.gov/files/fidelity-guaranty-031723.pdf) (``F&G Life Letter'').
---------------------------------------------------------------------------
With respect to the registration process, insurance companies
registering an offering of RILA securities are required under the
Securities Act to pay a registration fee to the Commission at the time
of filing a registration statement.\21\ This means that they pay
registration fees at the time they register the offer and sale of the
securities, regardless of when (or if) they sell them. The registration
statement for the RILA offering also must include current financial
information, including any annual update required by section 10(a)(3)
of the Securities Act.\22\ An insurance company registering a RILA
offering on Form S-1 must provide any section 10(a)(3) update to the
registration statement by filing a post-effective amendment which must
be declared effective, typically by the staff acting pursuant to
delegated authority.\23\
---------------------------------------------------------------------------
\21\ Section 6(b)(1) of the Securities Act [15 U.S.C.
77f(b)(1)]. Certain ``well-known seasoned issuers'' or ``WKSIs'' can
use a different registration process than what is described here.
See generally Securities Offering Reform, Investment Company Act
Release No. 26993 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
(``Offering Reform Release''). None of the insurance companies
offering RILAs are WKSIs, however, and we generally do not
anticipate that RILA issuers will meet the conditions to operate as
a WKSI. We therefore do not generally discuss the WKSI registration
process in this release. Even if a RILA issuer were to qualify as a
WKSI, the Securities Act rules that provide a streamlined offering
process for WKSIs generally would be inapplicable to RILA offerings
on Form N-4, as proposed. For example, although a WKSI can file an
automatic shelf registration statement, this would not be applicable
under the proposal because Form N-4 does not permit a shelf
registration statement and an automatic shelf registration statement
must be filed on Forms S-3, F-3, or N-2. See rule 405 (definition of
``automatic shelf registration statement''). As another example,
WKSIs are permitted to use the ``pay-as-you-go'' method of paying
securities registration fees, but the registration fees for RILA
offerings would be paid annually in arrears under the proposal. See
17 CFR 230.456(b).
\22\ Section 10(a)(3) of the Securities Act provides that when a
prospectus is used more than nine months after the effective date of
the registration statement, the information contained therein shall
be as of a date not more than sixteen months prior to such use. 15
U.S.C. 77j.
\23\ See Section 8(c) of the Securities Act [15 U.S.C. 77h(c)]
and 17 CFR 230.462 (``rule 462'').
---------------------------------------------------------------------------
If the offering is registered on Form S-3, the insurance company's
annual report on Form 10-K containing audited financial statements will
operate as a post-effective amendment to the registration statement for
purposes of section 10(a)(3).\24\ The insurance company is required to
provide a complete set of its financial statements, certain schedules,
and executive compensation disclosures in a structured data format
using Inline XRBL, but is not otherwise required to provide other
information in the registration statement as structured data.\25\
Insurance companies offering RILAs also are not required to deliver
prospectuses to investors because they can rely on the Commission's
``access equals delivery'' framework in rule 172, although in practice
we understand that insurance companies typically deliver prospectuses
to accompany or precede other communications.
---------------------------------------------------------------------------
\24\ An issuer filing a registration statement on Form S-3 will
incorporate by reference information in reports under the Exchange
Act filed after the registration statement has become effective,
including the issuer's annual report on Form 10-K. Accordingly,
certain information required to be included in the prospectus may be
included directly in the prospectus or included in an Exchange Act
report that is incorporated by reference into the prospectus.
\25\ See rule 405(b) of Regulation S-T.
---------------------------------------------------------------------------
When an insurance company registers a variable annuity separate
account on Form N-4, in contrast, it pays registration fees based on
the net issuance of securities, no later than 90 days after each fiscal
year end.\26\ The insurance company can update its registration
statement to include updated financial information required by section
10(a)(3) by filing an immediately effective post-effective amendment
under rule 485. These
[[Page 71093]]
provisions together are designed to allow insurance companies to
efficiently conduct continuous offerings of variable annuities. The
insurance company also must structure certain key information in Inline
XBRL to enhance the utility of that information to investors and must
deliver a prospectus to investors because the ``access equals
delivery'' framework in rule 172 is not available for variable
annuities.
---------------------------------------------------------------------------
\26\ See 17 CFR 270.24f-2 (``rule 24f-2'').
---------------------------------------------------------------------------
C. Evidence of Investor Views and Areas of Potential Confusion
Consistent with the RILA Act, the Commission received feedback on
individuals' comprehension and views on RILA disclosure through
investor testing. Specifically, we received feedback through
qualitative investor testing interviews, as well as quantitative
testing designed to assess whether the design of certain hypothetical
RILA disclosure provided to participants affects their comprehension of
the disclosed information. Each of these aspects of investor testing
was designed by the Commission's Office of the Investor Advocate
(``OIAD''). As described in more detail in section II.B below, this
feedback helped us to identify areas of Form N-4 that we propose to
amend to help ensure that a RILA purchaser receives key information
that the purchaser is able to understand.
OIAD conducted two rounds of qualitative interviews with a mix of
investors across demographic characteristics, locations, and levels of
financial literacy who either already owned annuities or had expressed
interest in investing in an annuity product.\27\ These interviews aimed
to generate hypotheses about certain content areas in RILA disclosure--
specifically, disclosure that could appear in select rows of the ``Key
Information Table'' (or ``KIT'') in RILA registration statements, as
discussed below--that may cause confusion and lead to impediments to
investor understanding of key information.\28\ These interviews
concentrated on assessing: (1) potential RILA disclosure, focusing on a
hypothetical KIT, for areas of confusion or misunderstanding; and (2)
participants' mental models regarding the way RILA products function,
including potential benefits, drawbacks, and risks of a RILA
investment. The interviews also included hypothetical scenarios.\29\
---------------------------------------------------------------------------
\27\ OIAD's qualitative testing consisted of two rounds of in-
depth hour-long interviews with twenty participants, using a semi-
structured, open-ended format so that participants could express
their reactions and beliefs, regardless of whether they are
accurate, in order to assess the reasoning of a sampling of
investors regarding RILA products, and their reactions to potential
RILA disclosures. See OIAD Report at Section 5, Qualitative Testing,
Methods.
\28\ OIAD Report at Section 1, Introduction and Executive
Summary.
\29\ See OIAD Report at Section 5, Qualitative Testing, Methods.
---------------------------------------------------------------------------
Feedback from both rounds of qualitative interviews generally
showed that the interview participants did not have much, if any,
familiarity with RILAs. Furthermore, interviews in both rounds
illustrated that many participants struggled to understand the details
of the RILA contract presented in sample KIT disclosure.\30\
---------------------------------------------------------------------------
\30\ Several participants in Round 2 were ``significantly more
sophisticated than the average investor,'' with some having worked
in a financial field or had over $1 million in retirement assets,
and these participants also ``struggled to correctly apply the
concepts discussed in the KIT.'' OIAD Report at Section 5,
Qualitative Testing, Results from Round 2.
---------------------------------------------------------------------------
With regard to the first round specifically, participants indicated
significant confusion about the features and fees associated with
RILAs, and often cited certain specific terminology, such as ``index
option,'' ``interim value adjustment,'' ``buffer,'' and ``investment
term,'' as confusing to them.\31\ For example, many participants
mistakenly conflated ``investment term'' with the length of the entire
insurance contract, leading them incorrectly to conclude that they
could avoid any fees or charges if they liquidated their investment at
the end of an initial one-year investment period.\32\ Participants
often did not appear to understand that there are multiple aspects of a
typical RILA contract that could negatively affect an investor's
contract value or the amounts an investor could withdraw from the
contract (e.g., the fact that a withdrawal could be subject to a
surrender charge, interim value adjustment, and tax penalty).\33\ Some
participants expressed that a chart or graph would be useful to help
them understand certain information presented about a RILA contract,
such as surrender periods or how the contract's bounded return
structure would function.\34\ Additionally, some participants indicated
they would need more specific information--besides the information in
the hypothetical KIT rows shared with them--to evaluate the
appropriateness of a RILA.\35\
---------------------------------------------------------------------------
\31\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1. As noted above, supra footnote 2, to alleviate the
confusion generated by ``investment term,'' we use the term
``crediting period'' in this release and in the proposed amendments
to Form N-4.
\32\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
\33\ See OIAD at Section 5, Qualitative Testing, Results from
Round 1.
\34\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\35\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------
While first-round interview participants may not have been able to
understand RILA features and economic tradeoffs fully after reviewing
sample KIT disclosure, some were able to identify certain potential
drawbacks and explain certain aspects of RILA contracts following their
review of this sample disclosure. This was demonstrated in
participants' responses to sample scenarios, where the interview
facilitator presented facts about a hypothetical investor's background,
and participants were asked to provide their opinions about whether a
RILA contract would be an appropriate investment option for those
investors and discuss their reasoning. For instance, participants in
the first-round interviews could generally identify that a RILA
contract could present particular risks for individuals without a long
time horizon.\36\ On the other hand, as noted above, these participants
often identified only a single charge or penalty that would apply even
in scenarios where, for example, a surrender charge, early withdrawal
tax penalty, and interim value adjustment might all apply.\37\ Some
participants were able to identify that a RILA contract could be
appropriate for an individual in light of factors such as desire to
protect against losses in the stock market, taking into account
considerations such as age, investment time horizon, and other sources
of liquid funds.\38\ Some interview participants also demonstrated that
they could use the KIT disclosure to discern quickly that they would
not be interested in purchasing a RILA contract, for example because of
liquidity needs or relatively short investment time horizons.\39\
---------------------------------------------------------------------------
\36\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1. However, OIAD's report also notes that in the second round
of testing, many participants did not understand that RILAs are
intended as a retirement savings vehicle, and that there may be tax
penalties for withdrawal prior to age 59\1/2\. See id., Results from
Round 2. Similarly, only 12.6% of participants in the quantitative
testing correctly identified that RILAs are investing vehicles that
are intended purely as retirement savings vehicles. Id., Section 6,
Quantitative Testing, Results, Summary of Quantitative Testing.
\37\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\38\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\39\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------
Commission staff used this feedback to update sample KIT disclosure
in between qualitative interview rounds. In particular, in the second
round, sample
[[Page 71094]]
KITs were modified to include: (1) the phrase ``investment term''
rather than ``term,'' (2) a table to show how investment term interacts
with contract length, (3) graphics to provide more information about
RILA loss limitation features such as floors and buffers, and (4)
expanded links to additional information to indicate that more
information could be available.\40\ Following these changes,
participants demonstrated modestly improved comprehension in certain
limited areas. For example, the sample KIT disclosure used in the
second-round of qualitative testing emphasized that contract
adjustments can substantially reduce the value of an investment if
investors withdraw money before the end of an investment term.
Participants who viewed this modified disclosure had greater success in
identifying the potential financial impact of this feature, with some
expressing concern about the potential magnitude of the contract
adjustment.\41\ Additionally, some second-round participants who viewed
the KIT contract adjustment disclosure also asked for more specific
information about how the adjustment is calculated, which suggests that
layered disclosure might be useful for these concepts.\42\ Even though
these participants were unable to define certain terms relevant to
contract adjustments (e.g., interim value adjustment), most second-
round participants seemed to understand that RILAs are not a short-term
investment and should only be used if an investor will not need to make
early withdrawals.\43\
---------------------------------------------------------------------------
\40\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Appendix C.
\41\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\42\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\43\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------
The second round of testing also introduced a table in the sample
KIT disclosure that attempted to help illustrate how fees were charged
over the surrender period of the contract, the difference between the
investment term (i.e., the crediting period) and the contract length,
and how the surrender charge and potential contract adjustments could
vary over different time frames.\44\ Nonetheless, participants in the
second round of testing still had difficulty distinguishing between
surrender charges and contract adjustments or understanding that both
can apply cumulatively to reduce an investor's contract value in cases
of early withdrawal.\45\ Most participants in the second round of
testing also continued to struggle with the mechanics of ``buffers,''
despite the inclusion of graphics in the hypothetical KITs designed to
illustrate how buffers work.\46\ There were a number of areas where
participants wanted information that was not part of the KIT rows being
tested, such as the specific index-linked options available under the
contract, and some participants with more investing experience wanted
information about past returns on the RILA, as well as additional
information on fees and charges--particularly regarding caps on gains
and other bounded return features--in order to understand the ways in
which insurance companies profit from RILAs.\47\
---------------------------------------------------------------------------
\44\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Results from Round 2.
\45\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\46\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\47\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------
Following the qualitative interviews, OIAD conducted quantitative
testing designed to assess comprehension of key concepts about RILAs
and the extent to which the organization of disclosures affected
participants' comprehension of the disclosed information.\48\
Approximately 2,500 participants completed OIAD's quantitative testing
study, which was fielded over an eight-day period and targeted groups
who were more likely to have some experience with financial
products.\49\ Participants received focused portions of a hypothetical
KIT to test disclosures. For example, participants were randomly
assigned to one of two formats for the sample KIT disclosure, one with
a Q&A format and one with a statement-based format.\50\ Overall, the
results of OIAD's quantitative testing suggest that most investors
experience challenges in understanding RILAs.\51\ This round of testing
reviewed overall comprehension of participants as well as whether
participants were able to assess four sub-scores: (1) appropriateness
of RILAs for investors based on their characteristics, (2) how a RILA
works, (3) how the charges and penalties associated with RILAs affect
liquidity, and (4) the insurance protections offered by RILAs.\52\
Across all participants, the average percentage of questions scored
correct was 58%, which, while higher than the expected score for people
randomly guessing (50%), was lower relative to what might be considered
a well-informed purchaser of a RILA product.\53\ However, the results
of the sub-scores varied, specifically 57% for appropriateness, 49% for
how a RILA works, 57% for insurance, and 62% for liquidity.\54\
Comprehension varied depending on the particular concept tested. For
example, 80.7% of participants were able to correctly identify that
RILA investors cannot access their money whenever they need it at no
cost, suggesting that the tested disclosures were sufficient to put
participants on notice to the potential for contract adjustments and
surrender charges.\55\ Conversely, only 12.6% of participants correctly
identified that RILAs are intended purely as retirement savings
vehicles, rather than a product appropriate for other, shorter-term
investing goals (e.g., education and home purchasing), suggesting
continued investor confusion on this topic.\56\ Additionally,
participants in the quantitative testing were classified into three
groups based on their experience with investing. Not surprisingly,
increased investment experience correlated with greater overall
comprehension, with non-investors (those with no existing investments)
averaging slightly less than 50% correct, 11.7 percentage points lower
than the average for the group with the most investment experience.\57\
The Q&A KIT format demonstrated a statistically significant, albeit
quantitatively small, improvement over the non-Q&A KIT format,
particularly with regard to the non-investor group, who saw a 5.7
percentage points increase in comprehension in connection with the Q&A
format with regard to overall comprehension.\58\
---------------------------------------------------------------------------
\48\ OIAD Report at Section 6, Quantitative Testing.
\49\ OIAD Report at Section 6, Quantitative Testing, Methods.
\50\ OIAD Report at Section 6, Quantitative Testing, Study
Design and Overview.
\51\ OIAD Report at Section 6, Quantitative Testing, Summary of
Quantitative Testing.
\52\ OIAD Report at Section 6, Quantitative Testing,
Comprehension Measures.
\53\ OIAD Report at Section 6, Quantitative Testing, Results.
\54\ OIAD Report at Section 6, Quantitative Testing, Results,
Table 6.
\55\ OIAD Report at Section 6, Quantitative Testing, Results.
\56\ OIAD Report at Section 6, Quantitative Testing, Results.
\57\ See OAID Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
\58\ See OIAD Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
---------------------------------------------------------------------------
Overall, investor testing successfully identified a range of
barriers to investor understanding of RILAs and associated disclosures.
However, with the few
[[Page 71095]]
exceptions noted above, variations in disclosures did not result in
significant improvements in investor comprehension in the investor
testing. Accordingly, while OIAD's investor testing has been successful
in identifying specific areas of investor confusion regarding RILAs,
those results were largely inconclusive in terms of determining
specific disclosures that are relatively more successful in addressing
the identified confusion.
We have incorporated those results in our design of the proposed
Form N-4 amendments, endeavoring to give particular attention to areas
of identified investor confusion while leveraging existing disclosure
requirements. Because investor testing did not, for the most part,
provide persuasive evidence of superior disclosures, we are proposing
to largely utilize the existing Form N-4 disclosures which have been
developed over time, and with which staff, investors, and RILA issuers
are already familiar. Building upon these existing disclosures has
additional benefits, because combination contracts offering both
variable and index-linked options will be required to comply with Form
N-4, making it more efficient to build on the form's requirements for
both types of investment options. We seek comment throughout this
release on specific areas for improvement that can aid investor
comprehension. Further, we are requesting specific input from the
retail investor community, through a short Feedback Flyer, relating to
their experiences with annuities generally and RILAs specifically.\59\
---------------------------------------------------------------------------
\59\ See infra section II.K; Appendix D.
---------------------------------------------------------------------------
Further, in addition to investor testing focused specifically on
sample RILA disclosure, our proposal--and the current disclosure
requirements in Form N-4 that we are building upon--also draw on the
Commission's past investor testing efforts, outreach, and other
empirical research concerning investors' preferences. This includes,
for example, information about summary content and layered disclosure
approaches.\60\ The Commission has historically received feedback
showing that investors generally prefer concise, layered
disclosure.\61\ Investors participating in certain past quantitative
and qualitative investor testing initiatives on the Commission's behalf
have also expressed preferences for, wherever possible, the use of a
summary containing key information about an investment product or
service written in clear, concise, and understandable language and
presented in an accessible format.\62\ Each of these sources of
evidence of investor preferences, understanding, and behaviors in
response to disclosures specific to RILAs and other investment products
more generally has provided important context and support for our
proposal's approach to RILA disclosure.
---------------------------------------------------------------------------
\60\ See Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts,
Investment Company Act Release No. 33286 (Oct. 30, 2018) [83 FR
61730 (Nov. 30, 2018)] (VASP Proposing Release) at paragraphs
accompanying nn.38-43.
\61\ See, e.g., Request for Comment on Fund Retail Investor
Experience and Disclosure, Investment Company Act Release No. 33113
(June 5, 2018) [83 FR 26891] (June 11, 2018] (``Investor Experience
RFC''). Feedback in comment letters generally showed that retail
investors prefer concise, layered disclosure and feel overwhelmed by
the volume of information they currently receive. Multiple comment
letters reflected a preference for shorter summary disclosures, with
additional information available online or upon request. See, e.g.,
Comment Letter of C. Scott (July 26, 2018) (expressing preference
for shorter summary disclosures, and suggesting disclosures ``trim
the fat and replace the text-heavy disclosures with something that
is clear, succinct, and transparent''); Comment Letter of Helena
Krus (July 29, 2018) (noting a preference to receive shorter summary
disclosures, with additional information available online or upon
request, and suggesting that the option should be available for all
documents over 5 pages).
\62\ See supra footnote 61; see also, e.g., SEC Staff, Study
Regarding Financial Literacy Among Investors (Aug. 2012). The key
information that investors found useful and relevant before
purchasing an investment product includes information on fees and
expenses, investment performance, principal risks, and investment
objectives. With respect to the presentation of disclosure, the
study indicates that investors preferred disclosures being ``written
in clear, concise, understandable language, using bullet points,
tables, charts, and/or graphs.'' Materials relating to this study,
including the staff's report, are available at http://www.investor.gov/publications-research-studies/sec-research.
---------------------------------------------------------------------------
D. Overview of Proposal
We are proposing to modernize and enhance the registration and
disclosure framework for RILAs by adapting the existing registration
and disclosure framework that is familiar to investors and issuers for
variable annuity separate accounts to accommodate RILAs.
Use of Form N-4. We are proposing to amend Form N-4 so
that issuers seeking to register the offering of RILAs must use that
form. To accommodate this, we are also proposing amendments to that
form that specifically address the features and risks of RILAs. For
example, we are proposing amendments to the form's ``Key Information
Table'' that highlight key features of RILAs that should be disclosed
so that investors may determine whether a RILA is an appropriate
investment for them. In particular, the KIT highlights key features of
a RILA contract that may be substantially different from the features
of investment products investors may be more familiar with, and that
investor testing suggests may not be readily apparent to investors.
Further, because the insurance company would register the offering of a
RILA on Form N-4 under the proposal, it would be subject to the
requirements in the form related to financial statements, including the
form instruction that currently permits variable annuity issuers to
file insurance company SAP financial statements in certain
circumstances.
Form N-4 Amendments for All Issuers. In addition to adding
RILAs to Form N-4, we are also proposing amendments to the form that
would be applicable to offerings of variable annuities. These proposed
amendments are informed by the staff's historical experience in
administering the form and respond to observations from investor
testing relevant to variable annuity offerings. For example, one
takeaway from investor testing was that the complicated jargon of RILA
contracts was a consistent impediment to investor comprehension of KIT
disclosures.\63\ To address this confusion, we are proposing to switch
the order of the Key Information Table and Overview of the Contract
items to introduce investors earlier to the terminology and concepts
underlying annuity contracts, in the hopes that this context will
improve investor comprehension of KIT disclosures. Because variable
annuities are also complicated investment products, we are proposing to
switch the order for these products as well, so that variable annuity
investors also have the benefit of this additional context.
---------------------------------------------------------------------------
\63\ See OIAD Report at Section 6, Quantitative Testing, Summary
of Quantitative Testing.
---------------------------------------------------------------------------
Summary Prospectus. Consistent with the inclusion of RILAs
on Form N-4, we are proposing to permit RILA issuers to make use of the
summary prospectus framework available to variable annuity registrants
on Form N-4.
Updates to the Filing Rules. To accommodate RILA
registrations on Form N-4, we are proposing to require RILA issuers to
pay fees in arrears on Form 24F-2 and we are proposing amendments to
address RILAs in the rules that variable annuities use to file post-
effective amendments and to update prospectuses.
Materially Misleading Statements in Sales Literature. The
proposed amendments would require RILA issuers to comply with rule 156,
which provides guidance as to when sales literature is materially
misleading under the Federal securities laws.
Our proposal, if adopted, would implement the RILA Act's mandate.
[[Page 71096]]
II. Discussion
A. Use of Form N-4
We propose to require insurance companies to use Form N-4 to
register the offering of RILAs, as well as amendments to the form to
require disclosures specific for these securities.\64\ As discussed
above, the registration forms currently used by RILA issuers do not
include line-item disclosure requirements addressing the unique aspects
of RILAs, like limits on gains or the application of contract
adjustments. They also require information about the issuer, such as
MD&A, that may be less important to annuity investors, given that they
are not making a direct investment in the insurance company, and that
the Commission has not determined to require for variable annuities.
Conversely, most variable annuity issuers already use Form N-4 to
register their securities and the form is designed to provide investors
with product-specific information about annuity contracts.\65\
Requiring insurance companies to register RILA offerings on Form N-4
therefore leverages the form's existing insurance-product specific
disclosure requirements, including disclosure requirements that help
effectuate the relatively new summary prospectus layered disclosure
framework the Commission adopted in 2020 for variable contracts. With
the RILA-specific disclosures we are proposing to add to Form N-4, we
intend that the form will provide investors with the information
necessary to make informed decisions about RILAs.
---------------------------------------------------------------------------
\64\ See proposed General Instruction B.1 of Form N-4. Form N-4,
as we propose to amend it, would provide that Form N-4 is ``to be
used by insurance companies to register index-linked annuity
contracts under the Securities Act of 1933.'' Insurance companies
therefore would not be permitted to register RILA offerings on Forms
S-1 or S-3, as they do today.
\65\ Variable annuities register on Form N-3 if they are issued
by separate accounts that are organized as management investment
companies. However, most variable annuities are issued by separate
accounts that are organized as unit investment trusts and therefore
use Form N-4. See supra footnote 6.
---------------------------------------------------------------------------
Including RILAs on Form N-4 also could provide further benefits to
investors by facilitating not only investor comparison among RILAs, but
also the comparison of index-linked options to variable options in the
same annuity contract. For example, investors would be able to review
summary information of all the available investment options of an
annuity contract--index-linked options, variable options, and fixed
options--and compare these options in one place in the prospectus
appendix required by Form N-4.\66\ Currently, we understand that
approximately 44% of the RILAs offered in the marketplace are offered
as index-linked options through combination products.\67\ Registering
the offerings of RILAs on Form N-4, rather than a new or different
form, also would be more efficient for insurance companies and
Commission staff. In this regard, insurance companies would benefit
from using a single form, with tailored disclosure requirements, to
register the offerings of both RILAs and combination contracts with
index-linked options. In addition, many of the insurance companies
issuing RILAs also issue variable annuity contracts and therefore are
familiar with the requirements of Form N-4. Using Form N-4 for RILAs
also would be efficient for our staff because the disclosure
requirements for variable contracts and RILAs would be consolidated in
one place. Further, because Congress has authorized RILA issuers to use
Form N-4 if the Commission fails to adopt a registration form for RILAs
within 18 months of the RILA Act's enactment, we believe that requiring
insurance companies to use the form is consistent with congressional
intent.
---------------------------------------------------------------------------
\66\ See infra section II.B.3(c).
\67\ Based on an informal Commission staff review of RILA
filings on the EDGAR system as of May 2, 2023.
---------------------------------------------------------------------------
Requiring insurance companies to register RILA offerings on Form N-
4 under the proposal would result in changes to RILA disclosure, in
that they would have to comply with the current Form N-4 disclosure
requirements in addition to the proposed new RILA-specific disclosure
requirements. While Form N-4 contains some of the issuer- and offering-
specific disclosures required by Forms S-1 and S-3, it does not contain
them all. Specifically, Form N-4 does not include many of the
disclosures relating to the mechanics of the offering (e.g., use of
proceeds, dilution, etc.); offering participants other than the issuer,
such as selling securities holders; and certain details of the issuer
(e.g., descriptions of property, executive compensation, etc.). These
disclosures may be more useful to an investor considering an investment
in the capital stock or debt securities of the insurance company rather
than an investment in a RILA issued by the insurance company. Unlike an
investor in the insurance company itself, a RILA investor's direct
investment exposure to the insurance company is limited to the
insurance company's claims-paying ability, which also is supported by
State insurance regulations and supervision designed to ensure that
insurance companies are able to satisfy their obligations under their
insurance contracts. Requiring insurance companies to register RILA
offerings on Form N-4 would leverage that form's annuity-focused
requirements to ensure that investors receive those disclosures that
would be the most important in the RILA context.
To accommodate the offering of RILAs on Form N-4 and to provide a
consistent framework for all offerings registered on the form, we are
proposing, as discussed in more detail below, changes to certain rules
and requirements such that RILA issuers would be subject to the same
process requirements as variable annuities.\68\ For example, similar to
the current offering processes for issuers of variable annuities,
insurance companies registering RILA offerings would be permitted to
use a streamlined summary prospectus and required to pay fees to
register their securities annually rather than at the time of filing a
registration statement.\69\ These changes would provide efficiencies
for insurance companies and Commission staff in establishing consistent
requirements for offerings registered on Form N-4. It would, however,
result in some trade-offs for RILA issuers. For example, insurance
companies currently registering RILA offerings on Form S-3 would lose
the ability to update their registration statement by incorporating by
reference their annual report but would be able to update their
registration statement annually with an immediately effective
amendment. On balance, and as discussed in more detail throughout this
release, requiring insurance companies registering RILA offerings to
follow the offering processes proposed in this release should result in
efficiencies for insurance companies and our staff. We anticipate that
requiring RILA offerings to be registered on Form N-4 will also benefit
investors by leveraging the form's annuity-specific disclosure
requirements and extending the variable annuity summary prospectus to
RILAs. Having a common registration form also should make it easier for
investors deciding between an investment in a RILA or a variable
annuity to compare the offerings.
---------------------------------------------------------------------------
\68\ See infra sections I.C and II.E.
\69\ See also infra section II.E.3 (discussing proposed changes
to rule 172).
---------------------------------------------------------------------------
We request comment on the proposed requirement to register RILA
offerings on Form N-4.
1. As proposed, should we require RILA issuers to use Form N-4? Is
another existing registration form more
[[Page 71097]]
appropriate for RILAs? If so, which registration form and why?
2. Given that any existing registration form would require RILA-
specific amendments, should the Commission instead develop a new form
specifically for RILAs?
3. Is it appropriate to require an annuity that offers different
types of investment options (e.g., variable options as well as index-
linked options) to address these different types of investment options
on the same registration form? Would requiring different registration
forms for annuities offering different types of investment options be
more or less efficient for insurance companies that offer variable
annuities, RILAs, and combination contracts?
4. Is there any information currently required by Forms S-1 or S-3
that we should also require RILA issuers to disclose?
5. Would requiring RILAs to follow the same filing and other
process requirements as variable annuities (such as requirements for
paying registration fees, and the ability to use a summary prospectus)
be efficient for insurance companies because they could use the same
processes to pay registration fees and update registration statements
for variable annuities, RILAs, and combination contracts?
6. Do commenters believe that there are any disclosures from Forms
S-1 and S-3 we are not including in the proposed Form N-4, particularly
the MD&A and executive compensation disclosures, that could be of
material relevance to RILA investors? If so, please explain their
relevance to RILA investors.
7. Do commenters agree with our estimate that approximately 44% of
RILA securities offered in the marketplace are offered as index-linked
options through combination products? If not, what percentage do
commenters think more accurately reflects RILA securities offered as
index-linked options through combination products, and what is the
basis for this estimate?
8. Should Form N-4, as amended, be the only form that insurance
companies could use to register RILA offerings? Should we permit the
continued use of Forms S-1 and S-3 in addition to the amended Form N-4?
Would this be appropriate, given that RILA issuers can already use
those forms? How would we ensure that investors receive the information
necessary to make informed decisions through use of those forms,
including the benefit of the proposed RILA-specific disclosure
requirements informed by investor testing?
9. Do commenters expect that any RILA issuers will meet the
conditions to operate as a WKSI, and if so, what is the basis for this
expectation?
10. Do commenters agree that leveraging Form N-4's annuity specific
disclosure requirements and summary prospectus regime would benefit
investors? Would registering RILA offerings on Form N-4 make it easier
for RILA investors to compare RILA offering with variable annuity
offerings? Are there any other potential benefits or disadvantages to
investors in registering RILA offerings on Form N-4 as compared to
other forms?
B. Contents of Form N-4
As proposed, many items of current Form N-4 would apply to RILAs.
We are also proposing updates to Form N-4 to include disclosures
specific to RILAs. In certain circumstances, we propose changing the
disclosures provided on the form that would apply to both RILAs and
variable annuities. The chart in Table 1 below outlines these items and
any substantive changes we are proposing.\70\ We discuss these changes
in more detail in the sections that follow.
---------------------------------------------------------------------------
\70\ Some proposed changes entail a non-substantive change such
as a change to a defined term or specifying that the provision would
continue to be applicable only to a registered separate account or
variable option. These are not flagged in the following table but
are instead discussed in section II.B.7 supra.
Table 1--Overview of Proposed Form N-4
----------------------------------------------------------------------------------------------------------------
Item Description Substantive changes Discussion
----------------------------------------------------------------------------------------------------------------
Prospectus (Part A)
----------------------------------------------------------------------------------------------------------------
1.................................. Front and Back Cover Adding new legends and Section II.B.1.
Pages. other standardized
disclosures applicable to
all issuers.
2.................................. Overview of the New RILA-specific Section II.B.3(a).
Contract. disclosures; moving order
of appearance up.
3.................................. Key Information....... New RILA-specific Section II.B.2.
disclosures; changing to a
question-and-answer
format; moving order of
appearance down; change
discussion of restrictions
on optional benefits to
cover all benefits.
4.................................. Fee Table............. New contract adjustment Section II.B.5.
disclosure.
5.................................. Principal Risks of Providing more detailed Section II.B.4.
Investing in the disclosures applicable to
Contract. all issuers.
6.................................. Description of the New RILA-specific Section II.B.3(a).
Insurance Company, disclosures and one new
Registered Separate item regarding variable
Account, and options.
Investment Options.
7.................................. Charges............... New disclosures related to Section II.B.5.
contract adjustments.
8.................................. General Description of No substantive change...... Section II.B.8(b).
Contracts.
9.................................. Annuity Period........ No substantive change...... Section II.B.8(b).
10................................. Benefits Available No substantive change...... Section II.B.8(b).
Under the Contract.
11................................. Purchases and Contract No substantive change...... Section II.B.8(b).
Value.
12................................. Surrenders and No substantive change...... Section II.B.8(b).
Withdrawals.
13................................. Loans................. No substantive change...... Section II.B.8(b).
14................................. Taxes................. No substantive change...... Section II.B.8(b).
15................................. Legal Proceedings..... No substantive change...... Section II.B.8(c).
16................................. Financial Statements.. No substantive change (but Section II.D.
see Item 26).
[[Page 71098]]
17................................. Investment Options New RILA-specific Section II.B.3(b).
Available Under the disclosures.
Contract.
----------------------------------------------------------------------------------------------------------------
Statement of Additional Information (Part B)
----------------------------------------------------------------------------------------------------------------
18................................. Cover Page and Table No substantive change...... Section II.B.8(b).
of Contents.
19................................. General Information No substantive change...... Section II.B.8(c).
and History.
20................................. Non-Principal Risks of No substantive change...... Section II.B.8(b).
Investing in the
Contract.
21................................. Services.............. No substantive change...... Section II.B.8(b).
22................................. Purchase of Securities New disclosure of specific Section II.B.5.
Being Offered. contract adjustment
information.
23................................. Underwriters.......... No substantive change...... Section II.B.8(c).
24................................. Calculation of Clarifying only applies to Section II.B.7.
Performance Data. variable options.
25................................. Annuity Payments...... No substantive change...... Section II.B.8(b).
26................................. Financial Statements.. Providing that RILA issuers Section II.D.
can use the relevant
instructions and adding
requirements relating to
changes in and
disagreements with
accountants for RILAs.
----------------------------------------------------------------------------------------------------------------
Other Information (Part C)
----------------------------------------------------------------------------------------------------------------
27................................. Exhibits.............. Adding power of attorney Section II.B.7(d).
for all issuers and
accountant letters for
RILA issuers as exhibits.
28................................. Directors and Officers No substantive change...... Section II.B.8(c).
of the Insurance
Company.
29................................. Persons Controlled or No substantive change...... Section II.B.8(c).
Under Common Control
with the Insurance
Company or the
Registrant.
30................................. Indemnification....... No substantive change...... Section II.B.8(c).
31................................. Principal Underwriters No substantive change...... Section II.B.8(c).
31A................................ Information about New disclosure of RILA Section II.B.6.
contracts with Index- specific information.
Linked Options.
32................................. Location of Accounts No substantive change...... Section II.B.7.
and Records.
33................................. Management Services... No substantive change...... Section II.B.8(b).
34................................. Fee Representation and Adding new RILA Section II.B.7(d).
Undertakings. undertakings.
----------------------------------------------------------------------------------------------------------------
1. Front and Back Cover Pages (Item 1)
We propose to require RILA issuers to include the information Form
N-4 currently requires on the front and back cover pages of the
prospectus. Currently, issuers are required to include on the front and
back cover pages basic identifying information about the issuer and the
contract, information on how to review the document (e.g., what the SAI
is and where to find it), as well as certain legends, for example, one
relating to the ability for an investor to cancel the contract within
10 days.\71\ The table below outlines these existing disclosures that
RILAs would be required to include if applicable.
---------------------------------------------------------------------------
\71\ One change specific to this legend would be to indicate
whether the insurance company will apply a contract adjustment on
any money returned during this period. Contract adjustments are a
defining element of a RILA, but can apply in other circumstances.
Nonetheless, given the context of this legend, we believe that it is
important for investors to know whether they will be subject to this
charge if they elect to have their money returned. See supra
sections II.B.5 (discussing contract adjustments generally) and II.F
(discussing that it could be materially misleading to advertise that
investors can receive their money back during a period of time
without indicating that a contract adjustment could apply).
Table 2--Existing Information Required by Item 1 of Form N-4
[With proposed adjustments]
------------------------------------------------------------------------
Item No. Disclosure Cover
------------------------------------------------------------------------
Identifying Information
------------------------------------------------------------------------
Item 1(a)(2).................. Insurance company's Front.
name.
Item 1(a)(3).................. Types of contracts Front.
offered (e.g., group,
individual, etc.).
Item 1(a)(4).................. Name and class of Front.
contract.
Item 1(a)(9).................. Date of prospectus.... Front.
Item 1(b)(4).................. EDGAR identifier Back.
number.
------------------------------------------------------------------------
[[Page 71099]]
Legends
------------------------------------------------------------------------
Item 1(a)(10)................. Statement that the Front.
Commission has not
approved or
disapproved of the
securities or passed
upon the accuracy or
adequacy of the
disclosure in the
prospectus and that
any contrary
representation is a
criminal offense (as
required in 17 CFR
230.481(b)(1)).
Item 1(a)(11)................. Statement that Front.
additional
information about the
contract is available
on Investor.gov.
Item 1(a)(12)................. A legend that states Front.
that if you are a new
investor, you may
cancel your contract
within 10 days of
receiving it with
some details about
the operation of this
process.
------------------------------------------------------------------------
Other Information
------------------------------------------------------------------------
Item 1(b)(1).................. Statement that the SAI Back.
contains additional
information, that it
is available to
investors, and how
investors may obtain
the SAI or make
inquiries about their
contracts.
Item 1(b)(2).................. Statement about Back.
whether and from
where information is
incorporated by
reference.
------------------------------------------------------------------------
In addition, we are proposing to add several new disclosures to the
cover page to accommodate RILAs. The first proposed amendment would
require the insurance company to identify the types of investment
options offered under the contract and cross-reference the prospectus
appendix that provides additional information about each option.\72\
Given the addition of investment options beyond variable options to the
form, this would help investors better understand what investment
options are available under the contract.
---------------------------------------------------------------------------
\72\ See proposed Item 1(a)(5) of Form N-4.
---------------------------------------------------------------------------
The other proposed amendments to the cover page would require
additional new disclosures that highlight RILAs' complexities and
certain associated risks. These include RILA's limitation on gains and
potential for loss, that they are not short-term investments, and that
payments under the contract are subject to the insurance company's
financial strength and claims-paying ability. The proposed legends
would require issuers to include statements on the front cover
disclosing the following:
(1) The contract is a complex investment and involves risks,
including the potential loss of principal;
(2) For contracts that include index-linked options, a prominent
statement that the insurance company limits the amount the investor can
earn, the potential for investment loss could be significantly greater
than the potential for investment gain, an investor could lose a
significant amount of money if the index declines in value, and a
prominent statement disclosing as a percentage the maximum amount of
loss from negative index performance that an investor could experience
after taking into account the minimum guaranteed limit on index loss
provided under the contract;
(3) The contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash, and
withdrawals could result in surrender charges, negative contract
adjustments, taxes, and tax penalties as applicable with a prominent
statement of the maximum potential loss resulting from a contract
adjustment, if applicable; and
(4) The insurance company's obligations under the contract are
subject to its financial strength and claims paying ability.\73\
---------------------------------------------------------------------------
\73\ See proposed Item 1(a) of Form N-4.
---------------------------------------------------------------------------
This cover page disclosure is designed to put an investor on notice
of these key considerations to help the investor make informed
decisions.
While these proposed additional disclosures are important for
investors in RILAs, they are also relevant in many cases to investors
in variable annuities. For example, while RILAs are complex
investments, variable annuities are complex as well. Variable
annuities, like RILAs, also are not short-term investments. As a
result, we are proposing to apply the proposed new disclosures to all
Form N-4 issuers to ensure that investors in both RILAs and variable
annuities receive appropriate disclosures.
We request comment on the requirement of RILAs to include the
information in Item 1 of Form N-4 on their registration statement and
the inclusion of new legends for all Form N-4 filers, as applicable, on
the front cover of the registration statement.
11. Would the new legends be effective in helping investors make
informed decisions with regards to RILAs? Do commenters agree that it
is appropriate to require the legends for variable annuities? Are the
disclosures in the Overview of the Contract, Key Information Table, and
elsewhere in the prospectus--as discussed later in this release--
sufficient such that these legends are not necessary? Conversely, are
legends effective in alerting investors to key concepts for a RILA or
variable annuity on the cover page of the prospectus? Are there
additional legends that are appropriate in light of the complexity of
RILAs and variable annuities? For example, should a legend be required
that specifically discloses a contract's upside limitation, such as due
to a participation rate or cap rate?
12. Are there any examples or illustrations of how RILAs operate
that we should require on the front or back cover pages? Are examples
or illustrations more effective communication tools than legends on the
cover page of the prospectus? Should examples or illustrations be
provided in addition to legends?
13. Is there any other information we should require on the front
or back cover pages?
[[Page 71100]]
2. Key Information Table (Item 3)
RILA issuers, like variable annuities issuers currently, would be
required to provide a Key Information Table in their registration
statements under the proposal. We also are proposing amendments to the
KIT's disclosure requirements to address key RILA features, as well as
other amendments that would apply to all Form N-4 issuers.
The KIT provides summary prospectus disclosure, including a brief
description of key facts about a variable annuity in a specific
sequence and in a standardized presentation.\74\ Specifically, the KIT
currently includes a summary of five topic areas: (1) fees and
expenses; (2) risks; (3) restrictions; (4) taxes; and (5) conflicts of
interest. The KIT functions as an integral part of the layered
disclosure approach in Form N-4 by identifying key considerations
upfront, with more detail to follow later in the prospectus. The
proposed amendments to the KIT, which are informed by investor testing,
are intended to build on this framework and highlight important
considerations related to RILAs, including certain aspects of RILAs
that our investor testing observed are difficult for investors to
understand and thus require clear disclosure in order to help investors
make informed investment decisions.\75\
---------------------------------------------------------------------------
\74\ See VASP Adopting Release at section II.A.1.c.ii; see also
infra section II.C.
\75\ See, e.g., OIAD Report at Section 5, Qualitative Testing
(following two rounds of in-depth interviews to assess potential
RILA KIT disclosure for areas of confusion or misunderstanding,
qualitative interviews suggested confusion with RILA terms and
concepts relating to, for example, contract adjustments such as
interim value adjustments and loss limiting features such as
buffers); OIAD Report at Section 6, Quantitative Testing, Results,
Subgroup Analysis (noting 5.7 percentage point effect of the Q&A KIT
structure on overall comprehension for ``non-investors'' during
quantitative testing).
---------------------------------------------------------------------------
Form N-4 currently prescribes format requirements for the KIT to
enhance the readability and comparability of the disclosure that also
would apply to RILA offerings under the proposal.\76\ Specifically,
RILA issuers would be required to disclose the required information in
the tabular presentation reflected in the instructions, in the order
specified, without any modification or substitution with alternate
terminology of the title, headings, and sub-headings for the tabular
presentation, unless otherwise provided. Consistent with the form's
current requirements, RILA issuers, however, would be permitted to
exclude any disclosures (other than the title, headings, and sub-
headings for this tabular presentation) in the KIT that are not
applicable, or modify any of the statements required to be included, so
long as the modified statement contains comparable information. RILA
issuers also would be required to provide cross-references to the
location in the statutory prospectus where the subject matter is
described in greater detail, either accessed by direct electronic link
or through equivalent methods or technologies, as required for variable
annuity KIT disclosure. Consistent with current requirements, RILA
issuers would include these cross-references adjacent to the relevant
disclosure, either within the table row, or presented in an additional
table column. As currently is required, all disclosures for the KIT
should be short and succinct, consistent with the limitations of a
tabular presentation.
---------------------------------------------------------------------------
\76\ See proposed instruction 1 to Item 3 of Form N-4.
---------------------------------------------------------------------------
We are proposing three modifications that would apply to
registration statements both for RILAs and for variable annuities.
These changes are designed to provide investors with a better
understanding of these products, and are informed in part by the
results of investor testing. First, we are proposing to require issuers
to present the information in the KIT in a question-and-answer
(``Q&A'') format.\77\ As a result of this change, the various line
items of the KIT would be rephrased as questions (e.g., ``Are there
charges for early withdrawals?'' instead of ``Charges for Early
Withdrawals''). The instructions would further require that, unless the
context otherwise requires, issuers should begin the response with a
``Yes'' or ``No'' in bold text when answering a question presented in a
given row of the KIT. Consistent with the directional results of the
quantitative investor testing, we anticipate that the Q&A format may
improve investor comprehension of RILA-specific topics. Because the
effect of the Q&A KIT structure on overall comprehension was larger for
non-investors than independent investors, this format may particularly
improve comprehension for less-experienced investors.\78\ We also
expect that rephrasing the current line items in a Q&A format would
more clearly convey the importance of the KIT information to help RILA
and variable annuity investors make informed investment decisions.\79\
---------------------------------------------------------------------------
\77\ Proposed instruction 1(d) to Item 3 of Form N-4.
\78\ For purposes of investor testing, participants were
classified into three groups: those with no investments in stocks,
bonds, mutual funds, or other securities (non-investors); those with
investments exclusively in retirement savings accounts (retirement
only); and those with investments outside of retirement accounts
(independent investors). See OIAD Report at Section 6, Quantitative
Testing, Subgroup Analysis, Investor Status. The report noted a 5.7
percentage point effect of the Q&A KIT structure on overall
comprehension for ``non-investors''. Id.
\79\ The Commission's proposed Q&A format is consistent with
previous rulemaking experience. See Form CRS Relationship Summary;
Amendments to Form ADV, Investor Act Release No. 5247 (June 5, 2019)
[84 FR 33492 (June 12, 2019)] (adopting question-and-answer format
in response to feedback from surveys and studies and commenters who
noted that ``the question-and-answer format is a more effective
design for consumer disclosures because it focuses on questions to
which a consumer wants answers and allows a consumer to skim quickly
and understand where to get more information.''). The proposed
format is also supported by prior surveys and studies to help design
effective disclosures to retail investors. See, e.g., Angela A.
Hung, et al., RAND Corporation, Investor Testing of Form CRS
Relationship Study (2018), available at https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf, at p. 23 (reporting that about 60% of respondents
favored a question-and-answer format over the sample relationship
summary format presented in the survey); Kleimann Communication
Group, Inc., Report on Development and Testing of Model Client
Relationship Summary, Presented to AARP and Certified Financial
Planner Board of Standards, Inc. (Dec. 5, 2018), available at
https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf, at
p. 4 (``Readers ask questions when they read, especially of
functional documents. . . . For good design, we want to build upon
this tendency by identifying key questions investors should or are
likely to ask and featuring them prominently in the text, thus
easing the cognitive task for readers. As a result, we used
questions in the headings to introduce each section's major
topic.''); Susan Kleimann, Making Disclosures Work for Consumers,
Presentation to the SEC's Investor Advisory Committee (June 14,
2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf (encouraging
the use of question-and-answer format, the use of headings to make
structure clear, and a strong design grid to organize elements,
among other disclosure design principles, to promote readability),
cited in VASP Adopting Release at n.112 and accompanying text. See
also Office of Investor Education and Assistance, U.S. Securities
and Exchange Commission, A Plain English Handbook (Aug. 1998) (``You
can make complex information more understandable by giving your
readers an example using one investor. This technique explains why
`question and answer' formats often succeed when a narrative
abstraction fails.'').
---------------------------------------------------------------------------
Second, we propose to change the order in which the KIT (current
Item 2) appears relative to the Overview of the Contract (current Item
3) disclosures.\80\ The Overview of the Contract disclosures provide
general information about the contract and important context about the
information summarized in the KIT. Based on our observations of
investor testing, we believe RILA investors may generally benefit from
more context to understand
[[Page 71101]]
the KIT disclosures. For example, interview participants generally
found certain RILA-specific terminology confusing, such as ``index,''
``investment term,'' ``interim value adjustment,'' and ``buffer.'' \81\
Further, investor testing indicated that investors had difficulty in
understanding the basic features and concepts of RILA contracts.\82\
The proposed Overview of the Contract disclosures would require
descriptions and examples to help investors understand these RILA
features and provide a basis for better understanding the issues
flagged by the KIT disclosures.\83\ Thus, based on investor testing, we
propose to change the location of the KIT so that it appears after
(rather than before) the Overview of the Contract section. Placing the
Overview of the Contract section first may similarly provide context of
the issues flagged in variable annuity KITs.
---------------------------------------------------------------------------
\80\ The current instructions to Form N-4 require that,
notwithstanding 17 CFR 230.421(a), the KIT, Overview, and Fee Table
must be disclosed in numerical order. General instruction C.3(a) of
Form N-4. The proposal would change this instruction to reflect the
change in order.
\81\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Summary of Qualitative Testing, Section 6,
Quantitative Testing, Summary of Quantitative Testing.
\82\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Summary of Qualitative Testing, Section 6 and 7 Quantitative
Testing, Summary of Quantitative Testing, Section 7, Conclusions,
Summary of Findings.
\83\ See, e.g., proposed Item 2(b)(2) of Form N-4.
---------------------------------------------------------------------------
Third, we propose to delete Form N-4's general instruction stating
that where the discussion of information required by the Overview of
the Contract (currently Item 3) or KIT (currently Item 2) also responds
to the disclosure requirements in other items of the prospectus,
registrants need not include additional disclosure in the prospectus
that repeats the information disclosed in the Overview of the Contract
or the KIT.\84\ In administering Form N-4, we have observed that this
instruction has led to confusion on the part of registrants. For
example, while both the KIT and Item 5 require disclosures about
principal risks, the KIT expressly contemplates that more detailed
information will be repeated later in the prospectus, specifically
requiring registrants to provide cross-references to the more detailed
prospectus discussion.\85\ Item 5 requires registrants to summarize the
principal risks of the contract in one place, and was not intended to
permit an insurance company to omit principal risks from that section
if those risks were also disclosed in the KIT.\86\ Moreover, the
layered disclosure framework requires a degree of repetition to ensure
both that the KIT contains key disclosures and that the detailed
sections that follow contain all of the key information about the given
topic. We believe this is particularly important for RILAs in light of
the challenges our investor testing suggests investors have in
understanding these products. This way, investors will see the key
risks regardless of whether they review targeted sections of the
prospectus.
---------------------------------------------------------------------------
\84\ General Instruction C.3.(a) of Form N-4.
\85\ See instruction 1(b) to Item 2 of Form N-4.
\86\ See Item 5 of Form N-4; VASP Adopting Release at text
following n.689 (``The principal risks section is designed to
provide a consolidated presentation of principal risks which can be
cross-referenced by registrants to reduce repetition that might
otherwise occur if the same principal risks are repeated in
different sections of the prospectus.'').
---------------------------------------------------------------------------
The proposed overall format of the KIT is depicted below:
Table 3--Proposed Key Information Table
------------------------------------------------------------------------
------------------------------------------------------------------------
Fees and Expenses:
Are There Charges for Early
Withdrawals?
Are There Transaction Charges?
Are There Ongoing Fees and Expenses?
Risks:
Is There a Risk of Loss From Poor
Performance?
Is this a Short-Term Investment?
What are the Risks Associated with the
Investment Options?
Is There Any Chance the Insurance
Company Won't Pay Amounts Due to Me
Under the Contract?
Restrictions:
Are There Restrictions on the
Investment Options?
Are there any Restrictions on Contract
Benefits?
Taxes:
What are the Contract's Tax
Implications?
Conflicts of Interest:
How are Investment Professionals
Compensated?
Should I Exchange My Contract?
------------------------------------------------------------------------
(a) Fees and Expenses
RILA contracts typically have implicit fees, expenses, and charges
for early or mid-term withdrawals that can be confusing or surprising
to investors, as observed in our investor testing.\87\ We anticipate
that investors would benefit from tailored disclosure about certain
unique features of a RILA contract's fee and expense structure as
described below to help them make informed decisions.
---------------------------------------------------------------------------
\87\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Results from Round 2.
---------------------------------------------------------------------------
Early Withdrawal Charges. As RILAs may have surrender charges, we
propose to require RILA issuers to provide the existing KIT surrender
charge disclosure in this first line item under the ``Fees and
Expenses'' heading so that RILA investors understand how surrender
charges are assessed (e.g., that if they make a withdrawal within a
specified period after their last premium payment, they may pay a
significant surrender charge that will reduce the value of their
investment).\88\ This disclosure must include the maximum surrender
charge, the maximum number of years that a surrender charge may be
assessed, and an example of the maximum surrender charge an investor
could pay in dollars based on a $100,000 investment. In a change to the
current form requirements, we also are proposing to require that
offerings of both variable annuities and RILAs disclose that this loss
will be greater if there is a negative contract adjustment, taxes, or
tax penalties, to make clear that an investor may lose more than just
the surrender charge upon an early withdrawal.
---------------------------------------------------------------------------
\88\ Proposed instruction 2(a) to Item 3 of Form N-4.
---------------------------------------------------------------------------
We also are proposing to require specific disclosure on contract
adjustments, which can result in investor losses if the investor
withdraws
[[Page 71102]]
money from an index-linked option, or withdraws money from the RILA
entirely before the end of a specified period.\89\ Specifically, if the
contract includes contract adjustments, the insurance company would be
required to include a statement that if all or a portion of account
value is removed from an index-linked option or from the contract
before the expiration of a specified period, the insurance company will
apply a contract adjustment, which may be negative. Similar to the
disclosures relating to surrender charges, this statement would include
the maximum potential loss (as a percentage of the investment)
resulting from a negative adjustment (e.g., ``[y]ou could lose up to
XX% of your investment due to the contract adjustment''). The insurance
company also would be required to provide an example of the maximum
negative adjustment that could be applied (in dollars) assuming a
$100,000 investment (e.g., ``[i]f you allocate $100,000 to an
investment option with a 3-year crediting period and later withdraw the
entire amount before the 3 years have ended, you could lose up to
$90,000 of your investment. This loss will be greater if you also have
to pay a surrender charge, taxes, and tax penalties.''). We also
propose to require the insurance company to provide a brief narrative
description of the contract transactions subject to a contract
adjustment (e.g., withdrawals, surrender, annuitization, etc.) as part
of the response to this item to make clear to investors the range of
transactions that could result in a contract adjustment.
---------------------------------------------------------------------------
\89\ As noted above, contract adjustments include adjustments
made when amounts are removed prematurely from an index-linked
option, often referred to as interim value adjustments, as well as
adjustments made when amounts are removed prematurely from the
contract, often referred to as market value adjustments. Thus, a
specified period would include index-linked option crediting periods
(which again, are typically referred to by insurance companies as
``investment terms'' or ``terms''), as well as any specified period
relating to a market value adjustment.
---------------------------------------------------------------------------
Transaction Charges. The second line item in the ``Fees and
Expenses'' section of the proposed amended KIT, ``Are there transaction
charges?,'' would require registrants to disclose that the investor may
also be charged for other transactions in addition to surrender charges
(and now contract adjustments), along with a brief narrative
description of the types of such charges (e.g., front loads, charges
for transferring cash value between investment options, etc.).\90\ This
line item is designed to provide a simple narrative description to
alert investors that surrender charges and contract adjustments are not
the only transaction charges they could pay. We are proposing to
require RILA issuers to provide this disclosure.
---------------------------------------------------------------------------
\90\ Proposed instruction 2(b) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Ongoing Fees and Expenses. The third line item in the ``Fees and
Expenses'' section, ``Are there ongoing fees and expenses?,'' is
designed to alert investors that they also will bear recurring fees on
an annual basis. This item currently requires the insurance company to
disclose (1) a minimum and maximum annual fee table and (2) a lowest
and highest annual cost table, both along with applicable legends.\91\
The minimum and maximum annual fee table is designed to consolidate the
more detailed information in the Fee Table that appears later in the
prospectus, in order to minimize the need for investors to perform
complex calculations to understand the fees they will pay.\92\ The
lowest and highest annual cost table is designed to provide investors
with a high-level cost illustration that will give investors a tool to
understand the basic cost framework of the contract.\93\ We are
proposing to require RILA issuers to provide this disclosure.\94\
---------------------------------------------------------------------------
\91\ See instruction 2(c) to Item 2 of Form N-4. The minimum and
maximum annual fee table requires a tabular description of the fees
and expenses that an investor may pay each year, depending on the
investment options chosen. This includes minimum and maximum
percentages for: base contract fees; portfolio company fees and
expenses; and optional benefits available for an additional charge.
The lowest and highest annual cost table requires a tabular
description of the lowest and highest cost an investor could pay
each year, based on current charges and a set of standardized
assumptions (e.g., $100,000 investment and 5% annual appreciation).
\92\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.144
and accompanying text; see also Item 4 of Form N-4.
\93\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.147
and accompanying text.
\94\ See proposed instruction 2(c) to Item 3 of Form N-4.
---------------------------------------------------------------------------
We also are proposing to require that where a contract imposes
limits on gains on the amount an investor can earn on an index-linked
option, insurance companies disclose that they impose these limits on
gains and that they serve as an implicit ongoing fee.\95\ In other
words, as a result of limits on gains imposed under a contract, an
investor is sacrificing the potential for investment gains that exceed
the cap or other limit on upside performance. Specifically, insurance
companies would prominently state that they impose an implicit ongoing
fee on index-linked options by limiting, through the use of a cap,
participation rate, or some other rate or measure, the amount an
investor can earn on an index-linked option. Further, insurance
companies would state that imposing this limit helps the insurance
company make a profit on the index-linked option, and that, in return
for accepting this limit on index gains, an investor will receive some
protection from index losses. This disclosure would be required to
precede the minimum and maximum annual fee table. If the contract
offers an index-linked option subject to limits on gains but does not
impose any explicit ongoing fees or expenses under the contract, and
thus there would be no need to include the minimum and maximum annual
fee and lowest and highest cost tables, the insurance company would
include this disclosure in lieu of such tables.\96\ Where there are no
explicit ongoing fees, minimum and maximum annual fee and cost tables
showing zero fees could mislead investors because an index-linked
option imposing limits on gains has implicit fees inherent in limiting
upside index participation.
---------------------------------------------------------------------------
\95\ See proposed instruction 2(c)(i)(G) to Item 3 of Form N-4.
\96\ Proposed instruction 2(c)(iii) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Lastly in this line item, we propose to revise the last sentence in
the required legend in the lowest and highest annual cost table to
include the underlined language: ``This estimate assumes that you do
not take withdrawals from the Contract, which could add surrender
charges and negative Contract Adjustments that substantially increase
costs.'' \97\ This would further alert investors to the cost impact of
a contract adjustment if they withdraw money early.
---------------------------------------------------------------------------
\97\ See proposed Instruction 2(c)(ii)(A) to Item 3 of Form N-4.
Currently, this legend only refers to surrender charges, not
negative contract adjustments.
---------------------------------------------------------------------------
(b) Risks
Risk of Loss. Under the first line item in the amended KIT under
the heading ``Risks,'' ``Is there a risk of loss from poor
performance?,'' we would, as required by an existing instruction in the
form, require RILA issuers to state that an investor can lose money by
investing in the contract. RILAs, like variable annuities, are subject
to the risk of investment loss. We also are proposing to amend this
instruction to provide that, if an annuity contract offers an index-
linked option, the insurance company must disclose, as a percentage,
the maximum amount of loss an investor could experience from negative
index performance, after taking into account the minimum guaranteed
limit on index loss provided under the
[[Page 71103]]
contract.\98\ For example, with a guaranteed buffer of -10%, a
registrant would disclose that investors could lose up to 90% of their
investment in an index-linked option due to poor index performance even
with the loss limitation feature. This amendment is designed to make
clear to investors investing in an index-linked option that they can
still lose money even though index-linked options typically include
features designed to limit investment loss.
---------------------------------------------------------------------------
\98\ See proposed Instruction 3(a) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Short-Term Investment. The second line item under the Risks
heading, ``Is this a short-term investment?,'' currently requires a
statement that the contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash along with a
brief explanation. This statement and an accompanying brief explanation
is equally applicable to RILAs and we therefore would require RILA
issuers to make the same disclosure.\99\ We also are proposing to amend
this item to require issuers of RILAs and variable annuities to state
that (1) amounts withdrawn from the contract may result in surrender
charges, taxes, and tax penalties; and (2) if applicable, that amounts
removed from an index-linked option or the contract before a specified
period may also result in a negative contract adjustment and loss of
positive index performance. These disclosures are designed to make
clear to investors some of the key reasons why these investments are
not short-term investments. These disclosures are particularly
important for an investor considering a RILA in light of the potential
negative consequences if the investor withdraws money early from a
particular index-linked option or the contract. We are not limiting
these disclosures to contracts with index-linked options, however,
because these disclosures may be equally material for a variable
annuity. To further illustrate that index-linked options are not short-
term investments even though they may have a short crediting period, we
also propose new risk disclosure for index-linked options that would
require issuers offering such investment options to state that contract
value will be reallocated at the end of the crediting period according
to the investor's instructions, and to disclose the default
reallocation in the absence of such instructions.
---------------------------------------------------------------------------
\99\ See proposed instruction 3(b) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Risks Associated with Investment Options. The third line item under
the Risk heading, ``What are the risks associated with the investment
options?,'' is intended to focus on the general risk of poor investment
performance.\100\ Currently, the KIT therefore requires the insurance
company to state that: (1) an investment in the contract is subject to
the risk of poor investment performance and can vary depending on the
performance of the investment options available under the contract; (2)
each investment option will have unique risks; and (3) the investor
should review these investment options before making an investment
decision. We are proposing conforming changes to the required statement
to refer to index-linked options now that RILAs are included on Form N-
4.\101\
---------------------------------------------------------------------------
\100\ VASP Adopting Release at the text accompanying n.170.
\101\ See proposed instruction 3(c) to Item 3 of Form N-4.
---------------------------------------------------------------------------
We also are proposing to require the insurance company to provide
additional information about any index-linked options offered under the
contract to highlight how the insurance company limits the investor's
participation in gains and losses of the index. For the risk of limited
upside, the insurance company would be required to (1) state that the
cap, participation rate, or some other rate or measure, as applicable,
will limit positive index returns (e.g., limited upside), (2) provide
an example for each type of limit imposed under the contract (e.g., if
the index return is 12% and the cap rate is 4%, the insurance company
will credit the investor 4% in interest at the end of the term), and
(3) prominently state that this may result in the investor earning less
than the index's return.\102\
---------------------------------------------------------------------------
\102\ See proposed instruction 3(c)(A) to Item 3 of Form N-4.
---------------------------------------------------------------------------
For the risk of limited protection in the case of market decline,
the insurance company would be required to (1) state that the floor,
buffer, or some other rate or measure, as applicable, will limit
negative index returns (e.g., limited protection in the case of market
decline), (2) provide an example for each type of limit imposed under
the contract (e.g., ``if the Index return is -25% and the buffer rate
is -10%, we will credit -15% (the amount that exceeds the buffer rate)
at the end of the crediting period''), and (3) prominently state that
even after limiting a negative index return, investors could still lose
up to XX% of their investment.\103\ The disclosure in this row of the
KIT is designed to highlight that each investment option, including an
index-linked option, will have unique risks. The proposed disclosure on
index-linked options would highlight one of the central economic
tradeoffs index-linked options present: that an investor will sacrifice
the potential for returns if the index goes up in exchange for some
protection from loss if the index goes down.
---------------------------------------------------------------------------
\103\ See proposed instruction 3(c)(B) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Insurance Company Risks. The fourth line item under the Risk
heading, ``Is there any chance the insurance company won't pay amounts
due to me under the contract?,'' is meant to alert investors that any
obligations, guarantees, or benefits under the contract that may be
subject to the claims-paying ability of the insurance company will
depend on the financial solvency of the insurance company.\104\ Form N-
4 therefore currently requires the insurance company to include a
statement to this effect in this row of the KIT and either to provide
the insurance company's financial strength ratings or state, if
applicable, that they are available upon request. We propose to require
a RILA issuer to provide the same statement, with a conforming change
to include index-linked options as an obligation of the insurance
company.\105\
---------------------------------------------------------------------------
\104\ See VASP Adopting Release at section II.A.1.c.ii.(ii); see
also proposed Instruction 3(d) to Item 2 of Form N-4 (``State that
an investment in the Contract is subject to the risks related to the
Insurance Company, including that any obligations (including under
any Fixed Options and Index-Linked Options), guarantees, or benefits
are subject to the claims-paying ability of the Insurance
Company.'').
\105\ See proposed instruction 3(d); see also infra section
II.B.7(b) (discussing changes of Form N-4's defined terms, including
replacing ``depositor'' with ``insurance company,'' to facilitate
inclusion of RILAs on the form).
---------------------------------------------------------------------------
(c) Restrictions
Investments. We propose to require RILA issuers to include the
disclosure required by the first line item under the heading
``Restrictions,'' ``Are there limits on the Investment Options?'' This
current item would be modified to require the insurance company to
state whether there are any restrictions that may limit the investment
options that an investor may choose, as well as any limitations on the
transfer of contract value among investment options.\106\ As these
limitations can exist for RILAs, we propose to require RILA issuers to
make
[[Page 71104]]
this disclosure so that investors can assess that disclosure in
determining whether the RILA is an appropriate investment for them.
---------------------------------------------------------------------------
\106\ See proposed instruction 4(a) to Item 3 of Form N-4. The
current item requires the insurance company to state whether there
are any restrictions that may limit the investments that an investor
may choose, as well as any limitations on the transfer of contract
value among portfolio companies. Consistent with the corresponding
changes made to defined terms, we would also clarify that this item
applies to any investment option, not just the portfolio companies
available as investment options under a variable option. See infra
section II.B.7.
---------------------------------------------------------------------------
Currently, the form also generally requires the insurance company
to state that it reserves the right to remove or substitute portfolio
companies as investment options, if applicable. Insurance companies
typically reserve the right to change the index-linked options that are
available under a contract as well as key features of available index-
linked options. To alert investors that the available index-linked
options and key terms of those index-linked options may change in the
future we are proposing to require the insurance company to state any
reservation of its rights under the contract, including, if applicable,
the right to (1) add or remove index-linked options, (2) change the
features of an index-linked option from one crediting period to the
next, including the changes to the index and the current limits on
gains and limits on index losses (subject to contractual minimum
guarantees), and (3) substitute the index of an index-linked option
during its crediting period. We are also proposing to require that
insurance companies disclose any right to stop accepting additional
purchase payments, which may be significant to investors given the
impact this reservation can have on investors' ability to accumulate
contract value for retirement, grow the death benefit, and increase
optional benefit values.
Contract Benefits. The second line item under ``Restrictions,''
``Are there any restrictions on contract benefits?'' requires a
statement about whether there are any restrictions or limitations
relating to benefits offered under the contract, and/or whether a
benefit may be modified or terminated by the insurance company. It also
requires a statement that withdrawals that exceed limits specified by
the terms of a contract benefit may affect the availability of the
benefit by reducing the benefit by an amount greater than the value
withdrawn and/or could terminate the benefit. We are proposing that
this item be broadened to include disclosure on restrictions or
limitations relating to any benefit under the contract, not just
optional benefits (as currently required). While a benefit under the
contract might be characterized as standard, it could have restrictions
that should be disclosed in the KIT because of the benefit's importance
to the investor's rights under the contract, such as a proportionate
withdrawal calculation under a standard death benefit.\107\ We propose
to require RILA issuers to include this disclosure, as such disclosure
is equally applicable to RILAs as it is to variable annuities.
---------------------------------------------------------------------------
\107\ See proposed instruction 4(b) to Item 3 of Form N-4.
Similarly, we are proposing a change to the discussion in the
overview of the contract item about contract features that would
broaden that discussion to cover both optional and standard contract
benefits. See proposed Item 2(c) of Form N-4.
---------------------------------------------------------------------------
(d) Taxes
We also propose to require RILA issuers to include the line item
under the heading ``Taxes,'' ``What are the Contract's tax
implications?'' \108\ This line item is designed to alert investors to
the tax implications of variable contracts and, as we propose to amend
this item, of RILAs. It currently requires a statement that an investor
should consult with a tax professional to determine the tax
implications of an investment in, and purchase payments received under,
the contract. The insurance company must also state that there is no
additional tax benefit to the investor if the contract is purchased
through a tax-qualified plan or individual retirement account
(``IRA''), and that withdrawals will be subject to ordinary income tax
and may be subject to tax penalties. We propose to subject RILAs to
this requirement because the same tax considerations apply.
---------------------------------------------------------------------------
\108\ See proposed instruction 5 to Item 3 of Form N-4.
---------------------------------------------------------------------------
(e) Conflicts of Interest
Investment Professional Compensation. We propose to require RILA
issuers to include the first line item under the heading ``Conflicts of
Interest,'' ``How are investment professionals compensated?'' \109\
This current line item for variable contracts is designed to alert
investors to the existence of compensation arrangements for investment
professionals and the potential conflicts of interest arising from
these arrangements.\110\ It requires issuers to disclose that an
investment professional may be paid for selling the contract to
investors. An issuer must describe the basis upon which such
compensation is typically paid (e.g., commissions, revenue sharing,
compensation from affiliates and third parties). An issuer providing
the required disclosure also must state that investment professionals
may have a financial incentive to offer or recommend the contract over
another investment. The same compensation arrangements and potential
conflicts are relevant for RILAs, and we therefore are proposing to
require an insurance company registering a RILA to provide the same
disclosure.
---------------------------------------------------------------------------
\109\ See proposed instruction 6(a) to Item 3 of Form N-4.
\110\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------
Exchanges. We propose to require RILA issuers to include the second
line item under the heading ``Conflicts of Interest,'' ``Should I
exchange my Contract?,'' with conforming changes.\111\ This current
line item for variable contracts is designed to alert investors to
potential conflicts of interest that may arise from contract sales that
stem from exchanges.\112\ It requires issuers to state that some
investment professionals may have a financial incentive to offer a new
contract in place of the one owned by the investor. An issuer must
further state that investors should only exchange their contract if
they determine, after comparing the features, fees, and risks of both
contracts, that it is preferable to purchase the new contract rather
than continue to own the existing contract. These same considerations
apply to an investor considering an exchange involving a RILA. In a
change that would apply to variable annuities and RILAs, and to put
investors on notice that there may also be costs or charges associated
with terminating an existing contract, we are also proposing that
issuers disclose in this legend that investors should consider any fees
or penalties to terminate the existing contract in considering whether
to exchange a contract.
---------------------------------------------------------------------------
\111\ See proposed instruction 6(b) to Item 3 of Form N-4; see
also infra section II.B.7.
\112\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------
(f) Requests for Comment on Key Information Table
We request comment generally on the proposed amendments to the KIT,
and specifically on the following issues.
14. Should we require all issuers to provide the ``Overview of the
Contract'' disclosure before the KIT, as proposed? Would this provide
relevant context for an investor to help understand the KIT disclosure
or, conversely, would it detract from the KIT's efficacy in conveying
key information about the contract up front in a consistent format? Are
there other reasons to precede the KIT disclosure with the current
``Overview of the Contract'' disclosure? Alternatively, should we allow
issuers to maintain the current order of disclosure and include new
rows in the KIT to provide contract overview disclosure to investors?
Would this be a more effective way to provide context for investor to
understand the KIT, or
[[Page 71105]]
would it lead to disclosure that is too lengthy for the KIT format and
potentially duplicate disclosure in the Overview of the Contract
section of the prospectus? Alternatively, should we require the
Overview of the Contract to precede the KIT only in prospectuses
offering annuity contracts with index-linked options, rather than for
all issuers?
15. Should we add disclosure to the KIT regarding whether index-
linked options offered under the contract are based on a price return
index (i.e., an index that only reflects price movements of the
security) or a total return index (i.e., one that includes additionally
factors like dividends), so that, where appropriate, investors
understand whether or not they can expect their account value to
increase as a result of dividends?
16. Should we add any additional headings and sub-headings to the
KIT, for example, a new heading ``Contract Overview,'' with related
line items or sub-headings ``What is the purpose of the contract?,''
``What is the time period for measuring growth (or loss) on my contract
value?,'' and/or ``Who may the contract be appropriate for?''? Would
this information be helpful to an investor in providing context for the
KIT disclosure or, conversely, would these requirements lead to lengthy
disclosure that makes the KIT less investor friendly?
17. Would rephrasing the topics of the KIT line items in a question
format and requiring the descriptions in the right-hand column of the
KIT to be presented in an answer format, as proposed, be helpful for
investors making an initial purchase of an annuity contract? Should we
make the Q&A format mandatory for all issuers that use Form N-4? Or
should we instead require that issuers state the line items in the
left-hand column as brief descriptions of the topics to be detailed in
the right-hand column of the KIT, as is currently required? Should any
of the required line items or sub-headings be worded in a different
way, or using different terminology, than the proposal would require?
18. Should we allow issuers to change the wording of the line item
questions in circumstances where the changes would not impede investor
comprehension and clear, consistent disclosure? Could this undermine
standardized disclosures and investors' ability to make comparisons of
certain disclosure topics among RILA and variable annuity prospectuses,
or would issuers' ability to customize the disclosure lead to more
informed investor decisions about that particular RILA?
19. Should we require issuers to add a new column in the KIT
labeled ``Location in the Prospectus'' or similar caption, and place it
next to the relevant disclosure presented in the table to provide
hyperlinked cross-references directly to the location in the statutory
prospectus where the investor can find more detailed information about
the subject matter or should we, as proposed, continue to permit
issuers to provide cross-references either within the table row or
presented as an additional column? Are there any particular sub-
headings or captions that would help investors identify where to find
information?
20. Should we mandate particular examples or illustrations in the
KIT? For example, should we require a chart of historical index
performance with the guaranteed minimum cap overlaid? Should we require
a table showing examples of the dollar amounts of losses and gains,
without fees, an investor would face in a variable annuity as compared
to RILAs with various floors, buffers, and caps over a four-year period
assuming various index movements? \113\ Are there other useful examples
or illustrations currently provided by RILAs that help to illustrate
their structure effectively to investors that we should include in the
KIT? For example, should we require a graphic in the KIT to illustrate
surrender charges and contract adjustments during different time
periods of the contract? If so, what should the requirements for these
graphics or illustrations be? Should we require illustrations in the
KIT showing how caps, floors, and/or buffers could affect an investor's
returns across different market scenarios? If so, what should these
scenarios be? As another example, we request comment below on requiring
insurance companies to disclose the difference between a hypothetical
$100,000 investment in an index-linked option and the value, or the
cost to assemble, the economic components underlying the index-linked
option.\114\ Should that disclosure be required in the KIT?
---------------------------------------------------------------------------
\113\ See N.Y. Comp. Codes R. & Regs. tit. 11, App. 28.8 (2023).
\114\ See Section II.B.3.b.
---------------------------------------------------------------------------
21. We have proposed that insurance companies include disclosures
in the KIT regarding any limits on gains the RILA imposes, including an
illustrative example demonstrating the operation of those limits. Would
this disclosure be improved by requiring that the example conform to
any specific parameters? Would other examples be helpful? For example,
should we require that the example use the most common limit on gains
offered under the RILA for the previous year? Should we require that
the example disclose the amount of gains an investor would have given
up due to the limit over the prior ten years, based on the index's
performance during that time and assuming the limit on gains discussed
in the example applied during each of those ten years? Should we
require that the example use only round numbers?
22. Should we allow or require issuers to provide cross-references
to charts or other graphics designed to facilitate investor
understanding of RILAs, including, e.g., educational resources designed
by the Commission staff? Should we require issuers to provide these
hyperlinked cross-references in the current right-hand column of the
KIT directly after the relevant sentence of disclosure? Would the KIT
be more succinct and easier to read if the hyperlinked cross-references
were placed on the cover page of the prospectus instead of the KIT?
Would requiring the registrant to state ``More information can be found
at:'' before or after these cross-references help investors easily find
the information they may need to make an informed investment decision?
Should we require cross-references to other prospectus sections to
include a specific page number in the prospectus where an investor
could find the information?
23. Besides hyperlinks, are there other technological tools that
would help an investor find information that is cross-referenced in the
KIT or on the cover page of the prospectus, such as QR codes or other
technological tools?
24. Is the level of detail of the disclosure that we propose in
each line item of the KIT appropriate? Does it strike the right balance
between providing enough information to alert an investor to the most
salient facts (including ongoing implicit fees, expenses, risks, and
conflicts) of the RILA contract, but not too much, or too detailed
information? If not, how should we modify the table and/or the
instructions? Are there other key features of RILA contracts that RILA
issuers should disclose in the KIT to help investors make an informed
investment decision?
25. RILAs are frequently marketed as a way to protect against
investment losses through loss-limiting features such as buffers and
floors. Should we require RILA issuers to provide more detailed
disclosures about how these loss-limiting features have affected RILA
investors historically? For example, would investors be better
positioned to
[[Page 71106]]
make informed decisions if we were to require RILA issuers to disclose:
(a) the total number of investor crediting periods (across all
investors and index-linked options) that utilized a loss-limiting
feature for a certain historical period (e.g., the past five years);
(b) the percentage of those investor crediting periods where an
investor's contract value benefited from a loss-limiting feature
(because the feature eliminated or reduced a negative credit resulting
from the performance of the index-linked option); and (c) the
percentage of those investor crediting periods where an investor's
contract value was not impacted by a loss-limiting feature. Should a
RILA issuer have experience with a certain minimum number of crediting
periods in order to be subject to this disclosure? What should a RILA
issuer disclose if their experience with loss-limiting features does
not meet the minimum threshold? Where in the prospectus would be the
appropriate location for this information? For example, if we require
this disclosure, do commenters feel it would be best positioned as part
of the KIT, in Item 6 (in the Limits on Index Losses section), or in
the Contract Overview? Are there other disclosures that commenters
would recommend in the alternative as a way to increase investor
knowledge about the utility of loss-limiting features and their ability
to positively affect investors' contract values? Whether or not we
require more detailed disclosures about the historical effects of loss-
limiting features, should we require similar disclosure about the
historical effects of limits on gains (i.e., upper limits on an
investor's ability to participate in an index-linked option's upside
performance)? Should we require disclosure comparing the economic
effects of the limits on gains to the limits on losses? For example,
should we require disclosure of the number of periods in which each
limit would have actually limited an investor's losses or capped an
investor's gains? Should we require disclosure of the dollar value of
losses an investor would be protected against compared to gains an
investor would give up over a prescribed period of time, such as the
past 10 years?
26. Are there any particular legends that should be included in the
KIT, e.g., ``We will not return your money at the end of the crediting
period unless you tell us to,'' ``The contract adjustment applies in
addition to any surrender charge,'' ``You may earn less than the
index's return,'' and/or ``You may lose up to [X]% of your investment
if you withdraw your money before the end of a crediting period. This
loss can be greater if there is a surrender charge, taxes, and/or tax
penalties''? If so, what legends and why?
27. Is the process of what happens at the end of the crediting
period adequately highlighted in the proposed KIT? Should insurance
companies be required to provide more specific details, either in the
KIT or elsewhere in the prospectus, about how investors can choose an
investment option at the end of the crediting period and the
limitations on those choices?
28. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Fees and Expenses'' line items convey the
appropriate amount of information to investors and concisely alert
investors to the most important fees, charges, penalties, and expenses
associated with the RILA contract?
29. Should the proposed ``Fees and Expenses'' line item, ``Are
there charges for early withdrawals?,'' include disclosure both about
the surrender charges and contract adjustments, as proposed? Would this
disclosure sufficiently alert investors to the typical contract
adjustment of a contract and its impact in reducing contract value (in
addition to any surrender charge) if the investor withdraws money
before the expiration of a specified period? Alternatively, should we
sub-divide this line item into two line items, with the one focused on
surrender charges and the other titled (for example) ``Are there
penalties for mid-term withdrawals?,'' focused on contract adjustments?
Would this help an investor to understand both concepts better? Or
would sub-dividing the line item cause confusion, for example by making
it seem as if a surrender charge and a contract adjustment could not
apply simultaneously? If so, should we require an explicit disclosure
that they could apply simultaneously?
30. Would the Minimum and Maximum Annual Fee and Lowest and Highest
Cost tables assist investors in understanding the costs of their
investment and help them compare the costs of different investment
options and optional benefits in the RILA context? Should we modify the
proposed disclosure or require other additional information to
accompany the tables?
31. Would the proposed disclosure that an issuer would provide
about contracts that do not impose ongoing fees and expenses adequately
convey the implicit ongoing fees of contracts with index-linked options
that have features that limit positive index return? If not, should we
modify the proposed disclosure or require additional information from
issuers?
32. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Risks'' line items adequately convey an
overview of the risks of investing in a contract with an index-linked
option? Are there other risks of investing in these contracts that we
should require a registrant to disclose in the proposed KIT? For
example, should we require RILA issuers to state that an investor can
lose money by investing in these contracts including a loss of
principal? Alternatively, should we require all issuers to state this,
not just RILA issuers?
33. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Restrictions'' line items convey the
appropriate amount of information about certain restrictions that
various contract options may entail, in light of the goals of the
proposed KIT and the unique nature of a RILA? Should an issuer be
required to disclose information about restrictions in the KIT other
than those associated with the contract's investment options and
benefits? If so, what? Instead, should we provide flexibility by
permitting issuers to disclose other restrictions at their discretion?
Do commenters agree that our proposal to require disclosure about
restrictions on contract benefits generally (as opposed to the current
requirement which is limited to optional benefits) is appropriate?
34. Is the disclosure that a RILA issuer (along with other issuers
that use Form N-4) would be required to provide in response to the
proposed ``Taxes'' line item appropriate, in light of the goals of the
proposed KIT? Given that some investors in these products may not have
the means or ability to consult a tax professional, should we require
additional disclosures in addition to the required statement that
investors should consult a tax professional? For example, should a RILA
issuer be required to consider which tax consequences are most likely
be faced by retail investors and to provide general information
regarding those consequences? For example, should an issuer be required
to emphasize more prominently that withdrawals will be subject to
ordinary income tax, and not the capital gains rates? Should the line
item require disclosure of the specific tax penalties and requirements
that investors in annuity contracts may incur (e.g., penalties for
withdrawal before age 59\1/2\, or that purchases through a tax-
qualified plan may be subject to required minimum distribution each
year beginning at age 70\1/2\)?
[[Page 71107]]
35. Are the disclosures that a RILA issuer (along with other
issuers that use Form N-4) would be required to provide in response to
the proposed ``Conflicts of Interest'' line items appropriate, in light
of the goals of the proposed KIT? Would these disclosures adequately
apprise investors of the potential conflicts that arise when their
investment professional is compensated for recommending an investment
into a new, or an exchange from, an existing RILA contract or variable
annuity contract? Should we revise these proposed disclosure
requirements, and if so, how?
36. Do the instructions associated with each of the proposed line
items clearly explain what an issuer would be required to disclose? In
keeping with the structured format of a tabular presentation, we sought
to promote concise disclosure by largely directing issuers to state,
rather than to explain, certain information in response to the required
line items. Should the instructions prescribe specific language or
should issuers have flexibility in drafting their responses? Are there
any particular instructions that we should include or modify in any
way, for clarity or for any other reason?
37. Should we require particular terms in the KIT (e.g., those that
are defined in a related glossary or list of definitions that the
insurance company chooses to include) to be formatted in a way that
will emphasize them, or indicate that they are defined elsewhere in the
prospectus, for example by using bold and/or italic font?
38. Should we apply the structural changes we are proposing to the
KIT in other variable insurance contract registration forms, that is,
Forms N-3 and N-6? The principles we outlined above regarding the
potential efficacy of these changes could be just as applicable in the
context of those forms as in the context of Form N-4. For example,
should we apply the proposed requirements for Forms N-3 and N-6 issuers
to present all disclosures in the KIT in a Q&A format and to begin each
response with a ``yes'' or ``no'' in bold text when answering a
question presented in a given row of the KIT, unless the context
otherwise requires? Similarly, should we require in those forms that
issuers include in their required legends on contract exchanges that
investors consider any fees or penalties to terminate the existing
contract before exchanging their contracts?
3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
We are proposing amendments to Form N-4 to provide investors with
the principal disclosures regarding RILAs and the index-linked options
available under the contract in three items of the form. First,
investors would receive a concise description of the basic information
about any index-linked option available under the contract as well as
any contract adjustments in Item 2 (Overview of the Contract), which,
as discussed above, would appear before the KIT.\115\ Second, investors
would be provided with detailed information about the index-linked
options available under the contract in Item 6 (Description of the
Insurance Company, Registered Separate Account, and Investment
Options). Lastly, investors would be provided with a summary
information table, with legends highlighting risks, that outlines the
available index-linked options in Item 17 (Investment Options Available
Under the Contract). These amendments build on the existing disclosure
requirements in each item to help ensure that investors have key
information about the annuity contract and available investment
options, regardless of whether the contract is a variable annuity, a
RILA, or combination contract offering both variable and index-linked
options.
---------------------------------------------------------------------------
\115\ Because we propose to require the KIT to appear before the
Overview of the Contract, current Item 3 (Overview of the Contract)
would be renumbered as Item 2.
---------------------------------------------------------------------------
(a) Overview of the Contract (Item 2)
We are proposing to amend Item 2 (Overview of the Contract) to
include information about RILAs generally and require the insurance
company to provide an overview of certain key elements of any index-
linked options offered under the contract and to highlight any contract
adjustments. This item is designed to describe certain basic and
introductory information about the contract and its benefits.\116\ It
currently requires a concise description of the contract. This
description must include information about (1) the contract's purpose
(e.g., to help the investor accumulate assets through an investment
portfolio), (2) the phases of the contract (the accumulation (savings)
and annuity (income) phases) including a discussion of the investment
options available under the contract, and (3) the primary features of
the contract (such as death benefits).
---------------------------------------------------------------------------
\116\ See VASP Adopting Release at text accompanying n.207.
---------------------------------------------------------------------------
We would require insurance companies to provide this existing
disclosure when registering RILA offerings, adjusted to account for the
specifics of RILAs, because it is equally relevant for these types of
annuity contracts. In particular, in addition to the general
information about the contract already required by Form N-4, the
following information would be required with respect to any index-
linked option offered under the contract:
A statement that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index;
A statement that an investor could lose a significant
amount of money if the index declines in value and prominent disclosure
of the maximum amount of loss (as a percentage) an investor could
experience from negative index performance, after taking into account
the minimum guaranteed limit on index loss provided under the contract;
and
An explanation that the insurance company limits the
negative or positive index returns used in calculating interest
credited to an index-linked option at the end of its crediting period,
accompanied by a brief description of the manner in which such returns
may be limited, along with an example and disclosure of the minimum
limit on index losses guaranteed for the life of the contract for any
index-linked option.\117\
---------------------------------------------------------------------------
\117\ See proposed Item 2(b)(2)(i) through(iv) of Form N-4.
---------------------------------------------------------------------------
We also are proposing to require the insurance company to state, if
applicable, that an investor could lose a significant amount of money
due to the contract adjustment if amounts are removed from an index-
linked option or from the contract prior to the end of a specified
period.\118\ The issuer would also provide a brief description of the
transactions subject to a contract adjustment. We would require a
prominent statement, as a percentage, of the maximum amount of loss an
investor could experience from a negative contract adjustment and that
this loss could be greater due to surrender charges and tax
consequences.
---------------------------------------------------------------------------
\118\ See proposed Item 2(d) of Form N-4.
---------------------------------------------------------------------------
These disclosures, together, are designed to highlight upfront some
of the key elements of a RILA. The required disclosure about any index-
linked option offered under the contract would highlight for investors
the key
[[Page 71108]]
features of these investment options in general: that returns are based
in part on an index, that investors could still lose a significant
amount of money under the contract, and that there are limits on both
positive and negative index performance. The required disclosure on
contract adjustments would highlight a separate but important
consideration for an investor considering investing in a RILA: that in
addition to any losses from poor index performance, the investor also
can lose a significant amount of money if the investor takes money out
of an index-linked option or the contract early. These disclosures
collectively also would provide context for the KIT, which immediately
follows this item under the proposal, as well as context for more
detailed disclosures that would appear elsewhere in the prospectus.
In addition to these items that are specific to RILAs, we also are
proposing to expand the current requirements for disclosures regarding
optional benefits in Form N-4. Currently, when summarizing a contract's
primary features, the form requires a discussion of any optional
benefits.\119\ A benefit under the contract, such as a non-optional
guaranteed living benefit, might be characterized as a standard (i.e.,
not optional) benefit but nonetheless be a key feature of the contract
that should be highlighted for investors in the overview section of the
prospectus. We are therefore proposing to require that the discussion
of benefits cover all of the primary contract benefits, not just
optional benefits.\120\ This requirement would apply to all contracts
registered on the form.
---------------------------------------------------------------------------
\119\ See current Item 3(c) of Form N-4.
\120\ See proposed Item 2(c) of Form N-4; see also supra
footnote 107 and accompanying text.
---------------------------------------------------------------------------
We request comment on the proposed summary disclosures contained in
Item 2.
39. Is the proposed information on index-linked options and
contract adjustments appropriate? Is there other or different
information we should require? For example, we are proposing to require
RILA issuers to include examples of how limits on gains and downside
protection operate but do not mandate a form of presentation. Should we
require these examples be provided in a graphical presentation, or
require only a narrative example? Should we require the examples be
converted into a dollar amount? Would investors understand the examples
more readily if we did this? As another example, should we require RILA
issuers to briefly summarize the index crediting methodologies
available under the contract?
40. Should we require the proposed disclosures for index-linked
options and contract adjustments in Item 2, including the existing
disclosure to be provided in the context of a RILA? Is this information
necessary for investors to understand the other disclosures in the
prospectus?
41. Should we, as proposed, broaden the current discussion of the
primary contract features to include a discussion of contract benefits
generally, not just optional benefits (the current focus of the
disclosure requirement)?
(b) Description of Insurance Company, Registered Separate Account, and
Investment Options (Item 6)
We propose to amend Item 6 of Form N-4 to modify certain existing
disclosure requirements and to expand the item to include new
disclosures for RILAs. Proposed Item 6(d), discussed further below,
would set forth most of the substantive new disclosure requirements for
contracts that include index-linked options. We would also include new
disclosures for any fixed options provided as part of the contract. The
information that would be required by the proposed amendments is
designed to convey key aspects of each index-linked option offered
under the contract to investors.
As an initial matter, the proposed amendments to Item 6 would
largely retain the existing requirement to provide a concise discussion
about the insurance company, registered separate account, and variable
options, subject to certain modifications in nomenclature to implement
definitional changes and minor restructuring to accommodate the
addition of RILAs to the form.\121\ Specifically, these changes would
incorporate the proposed changes to certain defined terms and revise
existing disclosures to clarify the entities that should be associated
with certain disclosures (e.g., because the insurance company would be
obligated to pay all amounts promised to investors under the contracts
subject to its financial strength and claims-paying ability, we would
require disclosure about this topic to be framed in terms of the
insurance company, not the registered separate account, as the
requirement is currently worded).\122\
---------------------------------------------------------------------------
\121\ See proposed Item 6(a) through (c) of Form N-4.
\122\ We also propose to add an instruction requiring the
insurance company to indicate whether it is relying upon the
exemption provided by 17 CFR 240.12h-7 (``rule 12h-7''), consistent
with the requirements of that rule. See proposed Instruction to Item
6(a) of Form N-4; see also rule 12h-7(f) (requiring issuers of
securities subject to insurance regulation that rely on the
exemption from the duty to file section 13(a) reports with respect
to securities registered under the Securities Act to provide a
statement indicating that fact in the relevant prospectus).
---------------------------------------------------------------------------
We are proposing to require one new disclosure item for contracts
that offer variable options, which would be similar to a proposed
disclosure for index-linked options, discussed below. Specifically, the
prospectus for such contracts would be required to include a statement
indicating that ``contract value allocated to a Variable Option will
vary based on the investment experience of the corresponding Portfolio
Company in which the Variable Option invests,'' and ``there is a risk
of loss of the entire amount invested.'' \123\ The risk of loss
inherent in a variable annuity is currently disclosed in the form's
``Key Information Table,'' and we are proposing to mandate this
disclosure in Item 6 as well to warn that an investor can lose the
entire amount invested in a variable option. In addition to informing
investors about investment risks in a variable option generally, where
an annuity contract offers both variable and index-linked options, this
disclosure also would help to explain the different nature of the
investment risks posed by each kind of investment option. In that case
the prospectus would disclose the maximum loss associated with the
index-linked options while also disclosing that, for the variable
options, the investor could lose the entire amount invested.
---------------------------------------------------------------------------
\123\ See proposed Item 6(c)(1) of Form N-4.
---------------------------------------------------------------------------
Description of Index-Linked Options
We are proposing to require the insurance company to disclose
information about the key features of the index-linked options
currently offered under the contract.\124\ These proposed disclosures
are designed to complement other proposed disclosures in the prospectus
about index-linked options generally by providing investors specific
information about each index-linked option's features and risks, akin
to the information that is currently available to investors about
variable options in the prospectuses for the mutual funds underlying
those options. Specifically, the insurance company would be required to
describe the index-linked options currently offered under the contract
as well as information about how interest is calculated and credited
for each index-linked option, specifically: (1) limits on index losses;
(2) limits on index gains; (3) crediting period; (4) crediting
methodology and
[[Page 71109]]
examples; (5) relevant indexes; (6) maturity; and (7) other material
features of the index-linked option. These disclosures are intended in
part to address points that investors found to be confusing in investor
testing.\125\ Further, some investors in the qualitative interviews
indicated that they would prefer more information about these points
relative to the KIT disclosures.\126\
---------------------------------------------------------------------------
\124\ See proposed Item 6(d) of Form N-4.
\125\ See OIAD Study at Section 7, Conclusions, Summary of
Findings and Discussion.
\126\ See OIAD Study at Section 5, Qualitative Testing, Summary
of Qualitative Testing.
---------------------------------------------------------------------------
Description of the Index-Linked Options Currently Offered
Under the proposed amendments, RILA issuers would be required to
describe the index-linked options currently offered under the contract,
including statements indicating that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index.\127\ To dispel potential investor confusion
relating to the reference to an index, we are proposing to require RILA
issuers to state that an investment in an index-linked option is not an
investment in the index or in any index fund.
---------------------------------------------------------------------------
\127\ See proposed Item 6(d)(1) of Form N-4.
---------------------------------------------------------------------------
Other cautionary statements regarding the index-linked options
offered would include that the potential for investment loss could be
significantly greater than the potential for investment gain, and that
an investor could lose a significant amount of money if the index
declines in value. To illustrate the potential scope of such a loss,
RILA issuers would have to prominently state (as a percentage) the
maximum amount of loss an investor could experience from negative index
performance over a crediting period, after taking into account the
minimum guaranteed limit on index loss provided under the contract.
Because index-linked options are often marketed as a way to limit
investment losses, this disclosure is designed to convey to investors
that they could still lose a significant amount on an index-linked
option, despite having a floor or buffer.
To emphasize the substantial risks associated with an early
withdrawal from an index-linked option, RILA issuers would be required
to state that an investor could lose a significant amount of money due
to the contract adjustment if amounts are removed from an index-linked
option prior to the end of its crediting period. To further underscore
the risk, RILA issuers would also prominently state (as a percentage)
the maximum amount of loss an investor could experience from a negative
contract adjustment, and that this loss could be greater due to
surrender charges and tax consequences.
To inform investors of the possibility that their investment
options could be unilaterally changed without action on their part, the
insurance company would be required to state, if applicable, that it
can add or remove index-linked options and change the features of an
index-linked options from one crediting period to the next, including
the index and current limits on gains and limits on index losses,
subject to contractual minimum guarantees.
Similar to the current requirement for prospectuses for contracts
that offer variable options, the insurance company would be required to
state that certain information regarding the features of each currently
offered index-linked option is available in an appendix to the
prospectus,\128\ and to provide a cross-reference to that appendix. An
instruction would permit this statement to be modified if needed to
conform to the corresponding table in the appendix.\129\ As described
further below, the appendix would also be amended to include a table
listing the index-linked options currently available under the
contract.\130\
---------------------------------------------------------------------------
\128\ See proposed Item 17 of Form N-4.
\129\ See infra footnote 164 and accompanying text.
\130\ See infra at section II.B.3(b) (describing proposed
amendments to Item 17 (Portfolio Companies Available Under the
Contract) to include parallel provisions for RILAs).
---------------------------------------------------------------------------
How Interest Is Calculated and Credited
To aid investors in making informed investment decisions, we
propose to require RILA issuers to describe how interest is calculated
and credited for each index-linked option.\131\ As part of this
description, the insurance company would be required to disclose any
limits on index losses and/or index gains, the crediting periods
available under the contract (e.g., 1, 3, and 6 years), a description
of an index-linked option's index crediting methodology, information
about each index, what happens when an index-linked option matures, and
any other material features associated with index-linked options. We
discuss each of these requirements in turn.
---------------------------------------------------------------------------
\131\ See proposed Item 6(d)(2) of Form N-4.
---------------------------------------------------------------------------
How Interest Is Calculated and Credited--Limits on Index Losses and
Gains
We are proposing to require the insurance company to describe, as a
primary element of a RILA contract, the limits on index losses and
gains for each index-linked option.\132\ In each case, and as
applicable, the insurance company would be required to state that such
limits apply and describe how index losses and gains would be limited
(for example, through the use of a floor or buffer to limit losses, or
a cap or participation rate to limit gains). We also are proposing to
require the insurance company to provide examples to help investors
understand how these limits work in practice. To illustrate the limits
on index losses, the prospectus would include an example showing how
the limit on index losses could operate to limit a negative return
(e.g., if the index return is -25% and the buffer is -10%, the
insurance company will credit -15% (the amount that exceeds the buffer)
at the end of the term, meaning the investor's contract value will
decrease by 15%). The prospectus similarly would include an example of
how the limit on gains could operate to limit a positive return (e.g.,
if the index return is 12% and the cap rate is 4%, the insurance
company will credit 4% in interest at the end of the term, meaning the
investor's contract value will increase by 4%).
---------------------------------------------------------------------------
\132\ See proposed Item 6(d)(2)(i) and (ii) of Form N-4.
---------------------------------------------------------------------------
We also propose to require the insurance company to disclose, for
each index-linked option, current limits on index losses and gains, as
well as the minimum limits on losses and gains that are guaranteed for
the life of the contract.\133\ The guaranteed minimum limits tend to be
lower than those currently provided for in the contract but will not
change for the life of the contract, whereas the actual limits for an
index-linked option will vary from crediting period to crediting
period. However, at no point will these limits be lower than the
guaranteed minimums. Both pieces of information are important to
understanding the potential returns of an index-linked option because
one of the central economic tradeoffs a RILA presents is an investor's
consideration of whether to sacrifice potential gains in exchange for
protection against potential losses. An investor therefore will not
only need to consider the guaranteed limits, but also understand that
the actual limits can vary over the life of the contract.\134\
[[Page 71110]]
We also propose to require the insurance company to state that current
limits on gains and limits on index losses will not change during the
index-linked option's crediting period. This would help investors
understand that although the current limits on gains and limits on
losses--unlike the minimum guaranteed limits--can change from crediting
period to crediting period, they will not change during any given
crediting period.
---------------------------------------------------------------------------
\133\ Proposed Items 6(d)(2)(i)(B) and 6(d)(2)(ii)(B) of Form N-
4.
\134\ This information about minimum guaranteed index gain
limits is also set forth in the appendix, which is part of the
summary prospectus. See proposed Instruction 7 to Item 17(b);
proposed rule 498A(b)(5)(ix). We are also proposing to require RILAs
to publish online limits on gains. See infra section II.B.3.c.
Although changes to an index-linked option, including current limits
on gains, are material, we recognize that these limits in particular
can change from time to time. Therefore, insurance companies may
update current limits on gains using a prospectus supplement filed
pursuant to rule 497 under the Securities Act. See infra section
II.E.2.
---------------------------------------------------------------------------
Because an insurer can generally set rates at its discretion and
may take into account a number of factors in setting those rates, we
are proposing that the insurance company explain how it selects rates
for limiting index losses and gains to help investors understand how
the features of a particular index-linked option will impact that
option's risk/return profile. In particular, we are proposing to
require the insurance company to describe the factors it considers in
determining the current limits on losses and gains for an index-linked
option (e.g., long-term interest rates, market volatility, the cost of
option contracts supporting the index-linked option guarantees,
etc.),\135\ and how that choice may impact other features of the option
set by the insurance company.
---------------------------------------------------------------------------
\135\ Similar disclosure has been required in other contexts.
See, e.g., Item 9(a) of Form N-4 (requiring disclosure of material
factors that determine the level of annuity benefits); see also
Instruction 2 to Item 7(a) of Form N-6 (requiring the identification
of factors that determine the applicable cost of insurance rate).
---------------------------------------------------------------------------
Giving investors information about the factors the insurer
considers in determining current limits--which are key features of an
index-linked option--may help manage their expectations regarding how
the product operates. If an investor sees that last year's cap on an
index-linked option was 22% and this year the cap is 17%, the proposed
disclosure may help them understand why the insurer's rates have
changed.\136\ If an insurer discloses that it takes various specified
factors into consideration, but ultimately sets rates at its own
discretion, the investor should know that as well.
---------------------------------------------------------------------------
\136\ For example, an insurer might disclose that caps and
participation rates may vary depending on factors such as market
volatility, hedging strategies and investment performance, the
investor's index effective date, or interest rates, among others.
---------------------------------------------------------------------------
The proposed disclosure about how the current limits on index gains
or losses may impact other aspects of the index-linked option is
designed to explain the inverse relationship between various features
of the index-linked option. For example, the insurance company could
include an explanation regarding how the limit on index losses for an
index-linked option could impact the current limit on index gains. This
could help an investor understand, for example, that if the insurance
company determines to increase the extent to which the index-linked
option will protect against loss, the insurance company may then reduce
the amount of upside index participation the investor could receive.
The prospectus would also require an explanation of the factors an
investor should consider regarding limits on index losses or gains
before selecting an index-linked option for investment. This disclosure
should assist an investor in choosing among the index-linked options
available under the contract, such as by explaining the difference
between a floor and a buffer, or by highlighting index-linked options
with features that assume more risk in return for higher potential
return, or vice versa.
How Interest Is Calculated and Credited--Crediting Period
We are proposing to require the insurance company to generally
describe the crediting periods of the index-linked options available
under the contract (e.g., 1, 3, and 6 years), along with the factors an
investor should consider regarding different crediting period lengths
before selecting an index-linked option.\137\ An example of one such
factor an insurance company could include as part of this disclosure
would be that crediting periods introduce timing risk that forces
investors to take losses at the end of a crediting period, and shorter
crediting periods might increase this risk.\138\ The insurance company
also would be required to prominently state that amounts must remain in
an index-linked option until the end of its crediting period to be
credited with all or partial interest, as applicable, and to avoid a
possible contract adjustment in addition to potential surrender charges
and tax consequences. This discussion would also include a description
of the transactions subject to a contract adjustment (e.g., living
benefits), with appropriate cross-references to related disclosures in
the prospectus. These disclosures collectively are designed to help an
investor make an informed investment decision when selecting an index-
linked option, taking into account that withdrawing money before the
end of the applicable crediting period can have adverse consequences.
---------------------------------------------------------------------------
\137\ See proposed Item 6(d)(2)(iii) of Form N-4.
\138\ See OIAD Report at Section 2, RILAs: Structure of
Contracts and Investment Options, Investment Terms (``The role of
[crediting periods] also creates a situation that may be unique for
RILA purchasers relative to other investments they hold. In
particular, RILA investors periodically realize gains or losses at
the end of each [crediting period]. In contrast, a mutual fund
investor (for example) could wait to sell the fund during down
markets, avoiding realizing those losses. Thus, the [crediting
period] feature adds a 'timing risk` for RILA investors relative to
certain other investments.'').
---------------------------------------------------------------------------
How Interest Is Calculated and Credited--Methodology and Examples
Each index-linked option has an ``index crediting methodology''
that explains how interest is calculated and credited to the contract.
For example, one index crediting methodology is ``point-to-point,''
that is, the amount credited to the contract is based upon a comparison
of the index's performance at two points in time (such as at the
beginning and end of the crediting period). We- propose to require
insurance companies to explain the index crediting methodologies used
in the index-linked options available under the RILA contract, along
with numerical examples about how these methodologies work. We further
propose to require insurance companies to provide a bar chart that
illustrates the annual total return of each index along with
hypothetical examples of index return after applying standardized
limitations on index gains and losses.
Specifically, insurance companies would be required to describe,
for each index crediting methodology,\139\ how interest is calculated
and credited at the end of a crediting period based on the interest
crediting formula or performance measure.\140\ Form N-4, as we propose
to amend it, would provide examples of common crediting methods that
the insurance company would describe if applicable, such as point-to-
point, step-up calculations, and enhanced performance.\141\ To help
[[Page 71111]]
investors understand how these crediting methods work, we also are
proposing to require the insurance company to include a numeric example
to illustrate the mechanics of each index crediting methodology.\142\
The examples would be required to show, in a clear, concise, and
understandable manner, how each crediting method functions when the
index has positive returns as well as negative returns to help
investors understand how the crediting method functions in both
circumstances.
---------------------------------------------------------------------------
\139\ We understand that many index-linked options use the same
crediting methodology. If all index-linked options offered by a RILA
contract use the same crediting methodology, the prospectus would
only include one example of that crediting methodology. If, however,
the index-linked options in a RILA contract offer more than one
crediting method, or if different index-linked options in a RILA
contract offer different crediting methods, this would affect the
number of examples to be provided. The number of examples to be
provided depends on the number of crediting methodologies, not the
number of index-linked options.
\140\ See proposed Item 6(d)(2)(iv)(A) of Form N-4.
\141\ As noted above, a point-to-point crediting methodology
compares the index's performance at two points in time (such as at
the beginning and end of the crediting period). Step-up calculations
guarantee a given rate if the index's returns are positive,
regardless of the index's actual performance, subject to certain
conditions. ``Enhanced performance'' increases a positive index
return, such as by offering a participation rate of more than 100%.
\142\ See proposed Item 6(d)(2)(iv)(C) of Form N-4.
---------------------------------------------------------------------------
Specifically, we would require numeric examples that reflect a
positive return above the limit on index gains, and a negative return
below the limit on index losses for each methodology. The examples also
would be required to assume hypothetical returns and limits that are
reasonable based on current and anticipated market conditions and sales
of the contract, and to reflect any charges subtracted from interest
credited to or deducted from contract value in the index-linked option
to allow investors to understand the impact of these charges on their
return. Additional examples, charts, graphs, or other presentations
would be permitted if they are clear, concise, understandable. Any
additional presentations that assume hypothetical returns and limits
also should assume hypothetical returns and limits that are reasonable
based on current and anticipated market conditions and sales of the
contract. We would also require insurance companies to include a
legend, in the format specified in the form, that (1) these examples
illustrate how the insurance company calculates and credits interest
under each index crediting methodology assuming hypothetical index
returns and hypothetical limits on index gains and losses and (2) the
examples assume no withdrawals.
We also are proposing to require a bar chart for each index
available under the currently-offered index-linked options showing the
index's annual return for the last 10 calendar years (or for the life
of the index, if less than 10 years), with the corresponding numerical
performance adjacent to each bar.\143\ Further, insurance companies
would be required to provide a hypothetical example alongside each
index return that reflects the return after applying a 5% cap and a -
10% buffer. If there are no caps or buffers offered under the contract
(if, for example, the contract includes a floor rather than a buffer),
insurance companies would be permitted to reflect a rate or measure
used to limit index gains or losses under the contract that is
comparable. Insurance companies would not be permitted to include
additional performance presentations, or historical index performance
that precedes the inception of the index. Further, insurance companies
would be required to provide two footnotes to this table, if
applicable, that disclose (1) that the index return does not reflect
dividends paid on the assets in the index, and (2) that the index
provider deducts fees and costs when calculating index return.
---------------------------------------------------------------------------
\143\ See proposed Item 6(d)(2)(iv)(B) of Form N-4.
---------------------------------------------------------------------------
These bar charts would also be accompanied by the following legend
in the format specified in the form:
The bar chart shown below provides the Index's annual returns
for the last 10 calendar years (or for the life of the Index if less
than 10 years), as well as the Index returns after applying a
hypothetical 5% cap and a hypothetical -10% buffer. The chart
illustrates the variability of the returns from year to year and
shows how hypothetical limits on Index gains and losses may affect
these returns. Past performance is not necessarily an indication of
future performance.
The performance below is NOT the performance of any Index-Linked
Option. Your performance under the Contract will differ, perhaps
significantly. The performance below may reflect a different return
calculation, time period, and limit on Index gains and losses than
the Index-Linked Options, and does not reflect Contract fees and
charges, including surrender charges and the Contract Adjustment,
which reduce performance.
This information is intended to provide context for the index-
linked options that the RILA contract offers and would better inform an
investor when deciding whether to invest in a RILA. For example, if an
index-linked option provides that the investor will experience at least
5% of the upside performance of an index, investors may view the
tradeoffs of this investment differently if the index historically has
returned, for example, 10% per year (thus capping gains at 5% during
those past periods) or 1% per year. Similarly, if an index-linked
option offers a -10% buffer, the investor could compare that against
the index performance in the bar chart and assess the extent to which
the buffer would have provided downside protection against market
losses in negative return years.
We appreciate, however, that historical index presentation alone,
without the addition of hypothetical caps and buffers, may mislead
investors into thinking that these historical rates of index
performance are what investors would have received under the contract
if they invested in a particular index-linked option. As we discuss in
more detail below, we are concerned that presenting historical RILA
performance without additional context can be potentially misleading
given that investors cannot access the same RILA terms as were
available historically. Relatedly, we are concerned that statements in
RILA advertisements are being made without sufficient context so that
investors can understand the qualifications to those statements.\144\
As an example of how historical index performance could confuse
investors, consider an investor who has selected an index-linked option
with performance based on the performance of XYZ Index and a one-year
crediting period, and this investor has allocated contract value to
that index-linked option over 10 consecutive crediting periods. This
investor's RILA contract value after 10 years likely will differ from
the XYZ Index's 10-year performance. Reasons for this likely difference
include, for example, that the index-linked option only provides a
portion of the performance of the index because of a cap rate, buffer,
or floor.
---------------------------------------------------------------------------
\144\ See also infra section II.F.
---------------------------------------------------------------------------
Accordingly, we are proposing to require insurance companies to
provide historical index information to investors, but with important
qualifications so that investors will not confuse this index
information for the historical performance of the RILA itself. In
particular, the overlay of hypothetical caps and buffers is designed to
help investors understand better how those limits can cause RILA
performance to differ from that of the index. Further, the legends we
are proposing also are designed to put investors on notice that the
presented performance is not the RILA's performance.
The proposed bar chart, including the proposed 10-calendar-year
period, is modeled on the risk/return bar chart in Item 4(b)(2) of Form
N-1A. Form N-4 also currently requires variable annuity issuers to show
10-years of performance in the portfolio company appendix. We
preliminarily believe that 10 calendar years is an appropriate time to
illustrate the performance of the index over the long term to help
guide investors. We are proposing to require a 5% cap rate and -10%
buffer rate to help investors understand how caps and buffers affect
the index return, but without using values that are so high or so low
that they will bear no resemblance to the
[[Page 71112]]
level of gains and losses that is being offered. The illustrative rates
are designed to achieve this effect because they are higher than
typical guaranteed levels of caps and floors, but lower than typical
currently offered levels.
How Interest Is Calculated and Credited--Indexes
The index underlying an index-linked option is a central feature of
the investment, as the investor's return will be based on the index's
performance, subject to applicable limits on gains and losses. We
therefore are proposing to require the insurance company to provide for
each index a brief description of the types of investments that compose
the index and where the investor can find more information about the
index.\145\ Where there is more than one version of an index (for
example a total return version and a price return version), the
disclosure would clearly state which version of the index relates to
the index-linked option. If the index is an exchange-traded fund
(``ETF''), the disclosure would have to clarify whether the index's
performance for purposes of determining the amounts credited in the
index-linked option is based on the ETF's net asset or closing value
and, if the performance is based on the ETF's share price, the impact
of using the share price as opposed to total return. These disclosures
collectively are designed to help ensure that investors understand the
applicable indexes. The disclosure would also state, if applicable,
that the index does not reflect dividends paid on its underlying
securities, or that the index deducts fees and costs when calculating
index performance, which will reduce index performance. This is
important disclosure because an index that does not reflect dividends
paid on underlying securities, or that deducts fees and costs, will
have a lower return, all else equal, than an index that includes
dividends and does not deduct fees and costs.
---------------------------------------------------------------------------
\145\ See proposed Item 6(d)(2)(v)(A) of Form N-4.
---------------------------------------------------------------------------
We also propose to require the insurance company to state that it
reserves the right to substitute an index prior to the end of the
crediting period.\146\ This would put investors on notice that the
index associated with a particular index-linked option--which is a key
driver of the investor's return--could change in the middle of a
crediting period. The insurance company also would be required to
disclose all circumstances that could necessitate a substitution, how
the insurance company would choose a replacement index, when and how
investors would be notified of this change, how index return will be
calculated at the end of the crediting period, and what would happen if
a suitable replacement index were not found, including whether the
index-linked option will be discontinued prior to the end of the
crediting period. This information would allow an investor to better
understand the likelihood of the insurance company making a
substitution and its potential effects.
---------------------------------------------------------------------------
\146\ See proposed Item 6(d)(2)(v)(B) of Form N-4. Insurers
generally reserve the right to change the index in the middle of the
crediting period if the index is discontinued or there is a
substantial change in the calculation of the index. Based on staff
experience, such changes are exceedingly rare.
---------------------------------------------------------------------------
How Interest Is Calculated and Credited--Maturity and Other Material
Features
To help investors anticipate what may happen at the end of an
index-linked option's crediting period, the insurance company also
would be required to state whether an investor would receive advanced
notice of a maturing index-linked option, how an investor might provide
instructions regarding the reallocation of the contract value rate at
the end of the crediting period, and any automatic default allocation
in the absence of such instructions.\147\ In describing these matters,
the prospectus must also explain how investors will be informed of the
index-linked option available for allocation at the end of a crediting
period, including any changes to the currently-offered index-linked
options and the discontinuance or addition of index-linked options.
---------------------------------------------------------------------------
\147\ See proposed Item 6(d)(2)(vi) of Form N-4.
---------------------------------------------------------------------------
Finally, we propose to require the insurance company to describe
any other material aspects of the index-linked option to ensure that
any other item not discussed above that could affect an investment
decision is disclosed.\148\ This would include disclosure related to
limitations on transfers to or from index-linked options, rate holds,
``bail-out'' provisions, start dates, and holding accounts.\149\ We
would also require a brief description of how charges may impact the
index-linked option's value if applicable as part of this discussion.
---------------------------------------------------------------------------
\148\ See proposed Item 6(d)(2)(vii) of Form N-4.
\149\ A ``rate hold'' locks in interest at the current cap (or
other rate limiting index gains) for the period between which the
insurance company receives the investor's annuity application and
the time the investor's premium payment is allocated to the index-
linked option. A bail-out provision is a contract provision that
provides if a current cap (or other rate limiting index gains) is
set below a specified value, the investor may withdraw value from
that index-linked option or RILA without a contract adjustment (and
in some cases without a surrender charge) during a specified period
after the start of the crediting period. A holding account is
typically a conservative investment option (typically a money market
fund or a fixed option) where amounts allocated to the index-linked
option are held until the next index-linked option start date. This
is used for index-linked options that start on a particular day each
month (e.g., the 15th of the month).
---------------------------------------------------------------------------
Fixed Options
In addition to variable options and index-linked options, annuity
contracts commonly include fixed investment options, such as
traditional, unregistered fixed options and unregistered index
options.\150\ In the variable annuity context, a fixed option provides
an alternative for investors who wish to avoid the market risk of
investing in a variable option. A fixed option can also serve as the
holding account for amounts that are pending allocation to a particular
investment option. In addition, a fixed option may be the default
allocation vehicle at the end of an index-linked option's crediting
period.
---------------------------------------------------------------------------
\150\ See proposed Item 6(e) of Form N-4. Interests in fixed
account options are exempt securities under Section 3(a)(8) of the
Securities Act.
---------------------------------------------------------------------------
Form N-4 generally requires registrants to describe the fundamental
features and risks of an annuity contract, including those, like fixed
options, that are distinct from the variable options offered through
the registered separate account.\151\ The form also currently requires
specific disclosure about fixed options in the KIT and the Contract
Overview.\152\ Because we are proposing to include disclosures relating
to index-linked options in Item 6, we are also proposing to require
disclosures on this other type of investment option available to
annuity contract investors so that they have a complete understanding
of what they may invest in through that contract, either actively, or
by default. This approach is designed to increase investor
comprehension by ensuring that substantive information about all of the
available investment options is presented in the same location in the
prospectus.
---------------------------------------------------------------------------
\151\ General Instruction C.1.(a) of Form N-4 (stating that
``[a] Registrant's prospectus should clearly disclose the
fundamental features and risks of the [Contracts], using concise,
straightforward, and easy to understand language.'').
\152\ Items 2 and 3 of Form N-4.
---------------------------------------------------------------------------
The proposed disclosures for fixed options would be similar to
those provided for index-linked options, tailored for the specifics of
a fixed option. Specifically, registrants would be required to describe
the fixed options currently offered under the contract and state that
information regarding the features of each currently-offered fixed
option, including its name, term, and
[[Page 71113]]
minimum guaranteed interest rate is available in an appendix with
cross-references.\153\ Further, registrants would be required to
describe how interest is calculated and when it is credited for each
fixed option as well as the length of the term and minimum guaranteed
interest rate (stated as a numeric rate, rather than referring to any
minimums permitted under State law). As with index-linked options, the
registrant also would be required to state whether an investor would
receive advance notice of a maturing fixed option, including what steps
an investor might take to provide instructions regarding the
reallocation of contract value at the end of the term, and any
automatic default allocation in the absence of such instructions. In
describing these matters, the registrant must also explain how
investors will be informed of the fixed options available for
allocation at the end of a term, including any changes to the currently
offered fixed options and the discontinuance or addition of fixed
options. Also as with index-linked options, we would require disclosure
of any other material aspect of the fixed options, including
limitations on transfers to or from the fixed options, rate holds,
start dates and holding accounts.
---------------------------------------------------------------------------
\153\ As discussed below, we are also proposing to require
disclosure relating to any fixed options currently offered under the
contract in the Item 17 appendix.
---------------------------------------------------------------------------
Request for Comment
We request comment generally on the proposed amendments to Item 6
of Form N-4, and specifically on the following issues:
42. Should we require each of the specific disclosures (e.g.,
disclosures relating to limits on index losses and gains, crediting
period, etc.) relating to the RILAs and index-linked options as
proposed? Would all of these proposed amendments provide information
that would be important to investors? Should we modify or expand any of
these proposed disclosure requirements?
43. Should we make any other changes to the required prospectus
disclosures addressing index-linked options? For example, we are
proposing to require numeric examples, charts, graphs, or other
presentations, as appropriate, to illustrate the mechanics of each type
of index crediting methodology.\154\ Would the proposed requirement be
likely to provide useful information for investors? If not, why not?
Would the inclusion of such examples, charts, and graphs be likely to
confuse investors about how index-linked options work? Is there a
concern that insurance companies would utilize these examples to over-
emphasize the benefits of RILAs relative to their risks? If so, how
could this be remedied? Should such examples be included in the
prospectus in response to Item 6, or would they be better located
elsewhere in the prospectus, for example, in Items 3 or 17? Given the
potential length of such examples, should they be included in an
appendix to the prospectus?
---------------------------------------------------------------------------
\154\ Proposed Item 6(d)(2)(iv) of Form N-4.
---------------------------------------------------------------------------
44. Should the current limits on gains and losses be required in
the statutory prospectus, as proposed? If not, where should such
disclosure be located? Should insurance companies update current limits
on gains as they change from time to time by filing a rule 497
prospectus supplement, or should a rule 485 post-effective amendment be
required?
45. Should we require the proposed disclosures relating to the
risks of investing in variable options?
46. Should we require that the historical performance of indexes be
disclosed as proposed? Is the proposed bar chart an effective or
appropriate presentation approach, or should we instead require another
presentation approach, such as a line graph or the 1-, 5-, and 10 year
table required in the Form N-1A? If so, why? Are there any concerns
that investors would confuse the inclusion of historical index
information with the performance of the index-linked option itself? If
so, are our proposed requirements to provide a hypothetical example of
a 5% cap and -10% buffer and a legend sufficient to make clear that the
performance illustrated by the bar chart does not show or suggest how
an investment in the contract will perform for the investor? Are the 5%
cap and -10% buffer appropriate limits to use in the hypothetical
examples? Instead of prescribing a specific cap and buffer, should we
require or permit issuers to include the current and/or guaranteed
limits as an overlay to the bar chart, or would this provide too much
visual clutter for investors, or be misleading in any way? Is 10
calendar years of index performance the right amount of time to
present?
47. Should we require discussion of fixed investment options
currently offered under the contract? Are the proposed disclosure items
appropriate for these types of investment options?
48. Is there other information we should require insurance
companies to disclose to help investors better understand the economic
tradeoffs associated with an index-linked option? For example, issuers
of structured notes that offer bounded returns similar to RILAs
disclose the issuer's valuation of the note, based on the value of (1)
the embedded derivatives; and (2) a fixed-income bond. This disclosure
allows investors to understand the difference between the issuer's
valuation and the original issue price that they are paying for the
structured note. Would a similar disclosure for RILAs, provided with
respect to each permutation of an index-linked option, be helpful to
investors? Would the difference between a hypothetical $100,000
investment in an index-linked option and the value, or the cost to
assemble, the economic components underlying the index-linked option be
informative to investors? Would it appropriately reflect the implied
cost the investor is paying when investing in that index-linked option?
If we were to require this disclosure, should it be expressed in
dollars, as a percentage of a hypothetical $100,000 investment, or
both? Should we require the insurance company to annualize the costs
over a stated period of time to express the cost as more akin to an
annual expense? Recognizing that RILAs are intended to be long-term
investments, what would be an appropriate period of time (e.g., 10, 20,
or 30 years)?
49. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require the
insurance company to compare a hypothetical $100,000 investment in the
index-linked option to the value, or cost, of the following components:
derivatives that would provide the index-linked option's investment
exposure; a fixed-income component; and the standard insurance features
offered with the index-linked option?
50. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require that
the insurance company value or price the derivatives using exchange-
listed derivatives, such as exchange-traded options, and based on
prices on the exchange, except in cases where exchange-listed
derivatives could not efficiently provide the index-linked option's
investment exposure? Would that approach provide for consistent and
reliable pricing? In practice are insurance companies typically
constructing and hedging index-linked options' investment exposure
using exchange-listed options or other derivatives where feasible?
51. If we were to require insurance companies to provide the
disclosure described in request for comment 48, in determining the
value of the derivatives underlying an index-linked option, should we
require insurance companies
[[Page 71114]]
to use a collection of hypothetical index options with an expiration
equal to the crediting period, consistent with our analysis in section
III.B.3? \155\
---------------------------------------------------------------------------
\155\ See infra footnote 429 and accompanying text.
---------------------------------------------------------------------------
52. If we were to require insurance companies to provide the
disclosure described in request for comment 48, what calculation would
be appropriate for the fixed-income component of an index-linked
option? Should we, for example, provide that the insurance company
should use the $100,000 hypothetical investment discounted by the rate
of interest the insurance company is crediting, or would credit, on
fixed annuities with a term equal to the duration of the crediting
periods of the index-linked option? Conversely, should we require the
insurance company to use the value of a risk-free zero-coupon bond with
a time to maturity equal to the crediting period of the index-linked
option, consistent with our analysis in section III.B.3?
53. If we were to require insurance companies to provide the
disclosure described in request for comment 48, how should the
insurance company value, or determine the cost of purchasing
separately, the standard insurance features? Do insurance companies
maintain internal pricing information that could be used for this
purpose where those features are not offered separately rather than in
connection with annuities or other financial products sold by the
insurance company? Should the cost or value of insurance be based on
amounts insurance companies are required to reserve in connection with
those insurance obligations? Should we require additional disclosure
related to early withdrawal charges, fees, or penalties? For example,
should we require more prominent placement of these features on
marketing or other materials, or should we require a comparison of
these features to potential benefits of the RILA to clarify for
investors possible trade-offs?
54. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we, in addition
to requiring the disclosure of this cost figure, also require the
insurance company separately to disclose the costs or values associated
with each component underlying the index-linked option?
55. If we were to require insurance companies to provide the
disclosure described in request for comment 48, where should insurance
companies place it in the registration statement? Would this
information be most helpful to investors if it were included in the
disclosure required by Item 6, which provides more detailed information
on each index-linked option, or in the summary prospectus appendix
identifying the RILA's investment options? Alternatively, should it be
disclosed the KIT as a range based on the available index-linked
options? If this information were in the summary prospectus, would it
change frequently and result in a high number of prospectus supplements
delivered to investors? If we were to further require the disclosure of
the underlying components and pricing assumptions used to determine the
cost to investors disclosure, would the SAI be an appropriate place for
that disclosure? Should these disclosures be structured using inline
XBRL as proposed for other additional disclosures?
(c) Appendix: Investment Options Available Under the Contract (Item 17)
We propose to amend Item 17 to include a discussion of the index-
linked options and fixed options available under the contract. This
item currently requires a variable annuity issuer to include in an
appendix to the prospectus a table that consolidates certain summary
information about each portfolio company offered under the contract.
The current appendix is designed to provide investors with an overview
of variable options available under the contract in a uniform, tabular
presentation that promotes comparison, because the investment
experience of an investor in a variable annuity will largely depend on
the underlying investments available under the contract.\156\
Similarly, we anticipate that an overview of the index-linked options
available to investors in a RILA, as well as any fixed option currently
available under the contract, would help investors understand and
compare the various investment options offered under the contract.
Consolidating this summary information about the contract's investment
options--equivalent to what is currently provided for variable
options--into a concise, easy to read tabular presentation should
enhance the ability of investors to understand, evaluate, and compare
all the investment options available under the contract.
---------------------------------------------------------------------------
\156\ VASP Adopting Release at n.267 and accompanying text.
---------------------------------------------------------------------------
To reflect the expanded scope of the appendix, we would amend the
current heading to ``Investment Options Available Under the Contract.''
\157\ We would provide a new instruction that explains that issuers may
modify this new heading as appropriate under the contract. For example,
if there are only variable options offered under the contract, an
issuer could change the heading to ``Portfolio Companies Available
Under the Contract,'' consistent with the current requirements of the
form. Because variable options, fixed options, and index-linked options
can vary by benefit offered under the contract, we also propose to move
the restrictions table currently required for variable annuities by
instruction 1(f) of Item 17 to be a separate requirement for all
investment options, with no other changes.\158\
---------------------------------------------------------------------------
\157\ ``Investment options'' are defined as any variable option,
index-linked option, or fixed option available under the contract.
See infra section II.B.7(b).
\158\ Proposed Item 17(d) of Form N-4.
---------------------------------------------------------------------------
Index-Linked Options
To accommodate the inclusion of index-linked options in the
appendix, we propose to add a new table titled ``Index-Linked
Options.'' \159\ As part of our approach to layered disclosure, the
information to be supplied in the table for index-linked options would
summarize certain prospectus disclosures required elsewhere in the
prospectus.\160\
---------------------------------------------------------------------------
\159\ See proposed Item 17(b) of Form N-4.
\160\ See, e.g., proposed Item 6(d) of Form N-4.
---------------------------------------------------------------------------
Legends
Similar to the requirements for variable annuities, the table for
index-linked options would be prefaced with a legend. Specifically, the
legend would state that the table lists index-linked options currently
available under the contract. Further, because insurance companies
typically change the index-linked options available over time, we would
require the legend to specify that the insurance company may change the
features of the index-linked options in the table (including the index
and the current limits on gains and limits on losses), offer new index-
linked options, or terminate existing index-linked options, and that
the insurance company will provide the investor with written notice
before making any of these changes.
As discussed above, current limits on index gains for index-linked
options would be disclosed in the prospectus in response to Item 6, and
changes to current limits on index gains would be disclosed in
prospectus supplements.\161\ However, to avoid frequent updates to the
summary prospectus, insurance companies would not be required to
include current limits on index gains for index-linked options in the
appendix as
[[Page 71115]]
those limits can change frequently.\162\ Instead, and in addition to
the disclosure in Item 6, to ensure that investors have convenient
access to changes in current limits on index gains, which can
significantly affect an investor's returns on an index-linked option,
the proposed legend would require insurance companies to state that
current limits on gains are available at a website address.\163\ This
website address must be specific enough to lead investors directly to
current rates, rather than to the home page or other section of the
website on which the rates are posted. Requiring RILA issuers
separately to include information about current limits on gains on
their websites would benefit investors by making this information
easier to find and understand. Furthermore, because websites may be
updated quickly, website disclosure would be efficient for compiling
index-linked options' current limits on gains, given our understanding
that these rates can change often and that insurance companies
currently disclose current rates on their websites.
---------------------------------------------------------------------------
\161\ See proposed Item 6(d)(2)(i)(B) of Form N-4 and supra
footnote 134.
\162\ As discussed below, the proposed appendix would appear in
the summary prospectus, but Item 6 would not. See infra section
II.C; see also infra section II.E.1 (discussing proposal to amend
rules 485 and 497 for RILAs).
\163\ Consistent with the current instructions to the form, any
website address, including this one, that is included in an
electronic version of the statutory prospectus would be required to
include an active hyperlink or other means of facilitating access
that leads directly to the relevant website address. However, this
requirement would not apply to an electronic summary prospectus that
is filed on EDGAR. See proposed General Instruction C.3.i of Form N-
4.
---------------------------------------------------------------------------
Lastly, set off from the rest of the legend and with emphasis, we
would require a notation that if amounts are withdrawn from an index-
linked option before the end of its crediting period, the insurance
company may apply a contract adjustment and that this may result in a
significant reduction in the investor's contract value that could
exceed any protection from the index's loss that would be in place if
an investor held the option until the end of the term. We are proposing
this notation given the potential impact on an investor's returns if
amounts are withdrawn prior to the end of a crediting period.
We propose to require the legend to include appropriate cross-
references to the section(s) of the prospectus that describe the
features of the index-linked options as well as the contract
adjustment. This approach is designed to help investors that are
interested in more detail about key aspects of the index-linked options
to locate that information quickly.
Table
The legend would be followed by a table that lists and highlights
key elements of each index-linked option available under the contract.
Specifically, the table would require, in sequential columns, the
identification of (1) each index by name; (2) type of index; (3)
crediting period, indicating the duration of the index-linked option in
years; (4) index crediting methodology; (5) limits on index loss if
held to the end of the crediting period; and (6) guaranteed minimum
limit on index gain.
The description of the type of index would be a brief statement of
which type of index it is (e.g., market index, exchange-traded fund,
etc.), or a brief statement describing the assets that the index seeks
to track (e.g., U.S. large-cap equities). The column indicating the
type of index crediting methodology used for each index-linked option
would only be required if the RILA utilizes multiple index crediting
methodologies under the contract (e.g., point-to-point, step-up,
enhanced upside, etc.).\164\ The disclosures regarding limits on index
loss would require an issuer to state the current percentage used in
the insurance company's interest credit methodology to limit the amount
of negative index return credited to the index-linked option and to
identify in the table whether this limit is a buffer, floor, or some
other rate or measure.\165\ In the last column, issuers would be
required to state the guaranteed minimum percentage that may be used to
limit the amount of positive index return credited to the index-linked
option and to identify in the table whether this limit is a cap,
participation rate, or some other rate or measure.\166\
---------------------------------------------------------------------------
\164\ If all index-linked options offered by a RILA contract
used the same crediting methodology, the table would not include the
column. See, e.g., supra footnote 139.
\165\ In contrast to current limits on index gain, we understand
that the current limits on index loss typically do not change
frequently.
\166\ As discussed above, instead of also requiring a column for
current limits on index gains (in addition to the column for
guaranteed minimum limit on index gains), the legend would state
that information about current limits on index gains is available at
a specified website address.
---------------------------------------------------------------------------
To ensure investors only receive disclosure relevant to them, RILAs
would only be permitted to include in the table those index-linked
options that are available under the contract. Further, to promote
disclosure in a consistent format to facilitate comparisons, issuers
would be allowed to add, modify, or exclude table headings only as
necessary to describe the material features of an index-linked option.
Insurance companies would also be required to indicate if any of the
index-linked options are restricted (e.g., because of a ``hard'' or
``soft'' close), consistent with the current disclosure requirements
for variable options. The proposed instructions also would state that
if an index provider calculates the index's return in a manner that
does not reflect the full investment performance of the assets tracked
by the index (e.g., the return does not reflect dividends paid on the
assets composing the index, the return reflects a fee or cost, etc.), a
footnote to the table must, if applicable, be included stating that the
index's return does not reflect the full investment performance of the
assets it tracks, which will reduce the index's performance. An
investor evaluating index-linked options may be more familiar with a
version of a given index that reflects the full performance of the
index constituents, and this disclosure would alert investors that the
index associated with a particular index-linked option will have
relatively lower returns.
Fixed Options
Consistent with our proposed approach to the Item 6 disclosure
requirements, we are proposing to require in the appendix summary
information about fixed options currently available under the contract.
These disclosure requirements would be similar to the legend and table
for index-linked options discussed above, adjusted to reflect fixed
option details. The fixed option legend, in addition to identifying
that what follows is a list of fixed options currently available under
the contract, would indicate that the insurance company (1) may change
the features of the fixed options identified, offer new ones, and
terminate existing ones and (2) will provide the investor written
notice before doing so. The fixed option table would include columns
identifying (1) the name of the fixed option, (2) the term, and (3) the
minimum guaranteed interest rate.\167\ Insurance companies would be
instructed to include appropriate cross-references in the legend to the
sections of the prospectus that describe the features of fixed options.
As with index-linked options, insurance companies could add, modify, or
exclude table heading only as necessary to describe material features
of a fixed option.
---------------------------------------------------------------------------
\167\ Consistent with the approach in Item 6, the minimum
guaranteed interest rate would be required to be stated as a numeric
rate rather than referring to any minimums permitted under State
law.
---------------------------------------------------------------------------
[[Page 71116]]
Request for Comment
We request comment generally on the proposed inclusion of index-
linked option summary information in the appendix, and specifically on
the following issues:
56. Should we require these new disclosures to be included in the
appendix? Are the proposed appendix disclosures for index-linked
options appropriate? Would they help investors to compare information
among index-linked options and generally understand the index-linked
options available? Is this information likely to be relevant and useful
to investors? Is there more or different information that we should
require? Should any of the information not be included? For example,
should we require current limits on gains to be disclosed in the
appendix, rather than requiring the appendix to include a website
address where information about current limits is available (as well as
requiring this information in the statutory prospectus)? Would
investors find it useful to have online access to information about
current limits on gains? Will investors find current limits on index
loss in the summary prospectus useful even if the current limits on
index gains are not included?
57. We are proposing to require in the statutory prospectus numeric
examples, charts, graphs or other presentations to illustrate the
mechanics of each type of index crediting methodology.\168\ Should we
permit or require some or all of these examples for index-linked
options to be included in the appendix? Would the inclusion of these
examples add undue length or complexity to the appendix, or overwhelm
the disclosure for other investment options? Could these concerns be
ameliorated by only permitting or requiring a limited number of
examples (e.g., no more than 4), or by placing certain other
limitations on the inclusion of such examples? If so, how? If we were
to require examples for index-linked options to be included in the
appendix, should we also require the examples to be included in the
Item 6 disclosures, or should such disclosures only be required in a
single location (and if so, which one)?
---------------------------------------------------------------------------
\168\ Proposed Item 6(d)(2)(iv) (Methodology and Examples) of
Form N-4. We are proposing to permit this information to be included
in an appendix. See supra section II.B.3(a).
---------------------------------------------------------------------------
58. Should we include the proposed disclosure in the appendix
relating to fixed options currently available under the contract? Are
there any changes we should make to the specific proposed disclosure
requirements?
4. Principal Risks of Investing in the Contract (Item 5)
An investment in a contract offering index-linked options exposes
investors to unique risks that may be different from those that are
common to other investment products, including contracts that solely
offer variable options. We propose to amend Item 5 to address certain
principal risks that are particularly relevant to investors in RILAs.
In addition to restructuring the current item to incorporate the
proposed risk disclosure requirements addressing index-linked options,
we propose certain structural changes that are designed to clarify
existing requirements but are not anticipated to result in
substantively different disclosure requirements for contracts offering
variable options. These proposed changes also would consolidate certain
risk disclosures insurance companies currently provide for variable
annuities in other sections of the prospectus. We are proposing to
require these disclosures in a single location to more consistently and
effectively communicate risks to investors. As the Commission has
previously explained, the principal risk disclosure in the prospectus
is designed to provide a consolidated presentation of principal risks,
which registrants can cross-reference to reduce repetition that might
otherwise occur if the same principal risks were repeated in different
sections of the prospectus.\169\
---------------------------------------------------------------------------
\169\ See VASP Adopting Release at n. 690 and accompanying text.
---------------------------------------------------------------------------
The principal risk disclosure item of Form N-4 currently consists
of a single paragraph requiring a registrant to summarize in the
prospectus the principal risks of purchasing a contract, including the
following risks: (1) poor investment performance, (2) that contracts
are unsuitable as short-term savings vehicles, (3) limitations on
access to cash value through withdrawals, and (4) the possibility of
adverse tax consequences. We propose to retain these substantive risk
disclosure requirements but would restructure the current single
paragraph into separate sub-items while also making certain minor
changes designed to clarify existing obligations.\170\ The proposed
sub-items are designed to be non-exclusive examples of the principal
risks of investing in the contract being registered. In addition to
existing disclosure requirements, these sub-items would also include
new risk disclosures specific to index-linked options, as
applicable.\171\ We are making parallel changes to the risk disclosures
most applicable to variable annuities to avoid any implication that
risk disclosure should be provided at a different level of detail than
the disclosures for RILAs. Most contracts offering variable options
that are currently registered on Form N-4 likely would not need to
revise their risk disclosure in response to the proposed amendments to
the risk disclosure requirements. In our experience, it is common
practice for these registrants currently to include the disclosures
that the proposal would require in their prospectuses as principal risk
disclosure (or elsewhere in their prospectuses).
---------------------------------------------------------------------------
\170\ See proposed Item 5(a)-(b), (d)-f) of Form N-4.
\171\ See proposed Item 5(c) of Form N-4.
---------------------------------------------------------------------------
The proposed approach would retain the current requirement for
registrants to explain the principal risks of purchasing a contract,
but would also require an explanation of the principal risks of
investing in an investment option, including the risks of poor
investment performance.\172\ Additionally, for index-linked options, a
registrant would disclose the maximum potential loss from negative
index performance over the crediting period, as a percentage. Although
disclosures that address certain risks of index-linked options would be
required in other locations in the prospectus, we are proposing that
RILA issuers include certain risk factors, such as this one, in the
consolidated summary of principal risks associated with the
contract.\173\ The maximum potential loss resulting from negative index
performance is a salient way to quantify potential returns for
particular investment options. For example, absent this disclosure, it
may not be apparent to investors that an index-linked option that
offers a -10% buffer still has the potential for 90% loss.\174\ This
statement would help
[[Page 71117]]
investors assess the particular risks associated with RILAs in the
context of the other required principal risk disclosures. The potential
risk of loss is particularly important for investors to understand
because RILAs are often presented to investors as having the benefit of
offering a balance between the opportunity for growth and the reduced
risk of loss relative to savings alone or more conservative
investments.\175\
---------------------------------------------------------------------------
\172\ See proposed Item 5(a) of Form N-4.
\173\ See proposed Item 1(a)(6) (Outside Front Cover Page)
(``Prominently disclose as a percentage the maximum amount of loss
from negative Index performance that an investor could experience
after taking into account the minimum guaranteed limit on Index loss
provided under the Contract.''); proposed Item 2(b)(ii) (Overview of
the Contract) (``[P]rominently state as a percentage the maximum
amount of loss an investor could experience from negative Index
performance, after taking into account the minimum guaranteed limit
on Index loss provided under the Contract.''); proposed Item
6(d)(1)(ii) (Investment Options) (``Prominently state as a
percentage the maximum amount of loss an investor could experience
from negative Index performance, after taking into account the
minimum guaranteed limit on Index loss provided under the
Contract.'').
\174\ We recognize that this example may suggest to some
investors that an option with a buffer is riskier than one with a
floor. In fact, the protection offered by a buffer is more likely to
be triggered than the protection offered by a floor. In general, a
buffer protects the investor from experiencing smaller, more common
losses on an index (as well a portion of any larger loses), while a
floor protects the investor from larger, less-common losses (but
does not protect against smaller losses). Insurers that offer both
buffers and floors should generally make this distinction clear to
investors in their Item 5 risk disclosures, as well as in response
to proposed Items 2(b)(2) and 6(d) of Form N-4.
\175\ See OIAD Report at Section 4, Review of RILA Marketing.
---------------------------------------------------------------------------
The next proposed sub-item, which concerns the risks of early
withdrawal, would retain the current requirement for registrants to
disclose that contracts are unsuitable as short-term savings vehicles
and to summarize the limitations on access to cash value through
withdrawals, including the possibility of adverse tax
consequences.\176\ We propose to expand this disclosure requirement to
specify that a summary of the limitations on access to cash value
through withdrawals may also include, if applicable, surrender charges,
as well as negative contract adjustments and loss of interest. These
are features of RILAs that implicate why they are not short-term saving
vehicles. In addition, insurance companies that offer index-linked
options would be required to state the maximum potential loss resulting
from a negative contract adjustment, as a percentage. Although this
last statement would be required to be provided in other locations in
the prospectus, we are proposing to include this risk disclosure in the
consolidated summary of principal risks because contract adjustments
can significantly affect contract value.\177\ Also, contract
adjustments are a distinctive feature of contracts with index-linked
options that we recognize (based on results of qualitative investors
interviews) investors can find difficult to understand. Quantifying
maximum potential loss resulting from a negative contract adjustment is
intended to illustrate the possible effects of these adjustments.
Further, unlike other types of losses, contract adjustments are
typically avoidable by investors. As a result, we anticipate that
showing the maximum loss possible would help investors evaluate whether
to take an action that would result in a contract adjustment. It also
would help investors understand the potentially significant risks that
they could face in a RILA, regardless of a RILA's bounded return
structure. Therefore, this statement would assist investors in
assessing unique risks associated with index-linked options in the
context of the other required principal risk disclosures.
---------------------------------------------------------------------------
\176\ See proposed Item 5(b) of Form N-4.
\177\ See proposed Item 1(a)(7) (Outside Front Cover Page)
(``Prominently state as a percentage the maximum potential loss
resulting from a negative Contract Adjustment, if applicable.'');
proposed Instruction 2(a) to Item 3 (Key Information Table)
(``Include in this statement the maximum potential loss (as a
percentage of the investment) resulting from a negative adjustment.
. . .''); proposed Item 4 (Fee Table--Transaction Expenses)
(``Contract Adjustment Maximum Potential Loss (as a percentage of
Contract value at the start of the Crediting Period or amount
withdrawn, as applicable)''); and proposed Instruction 1 to Item
7(e) (Contract Adjustment) (``State the maximum potential loss, as a
percentage, that could result from a negative Contract
Adjustment.'').
---------------------------------------------------------------------------
The next proposed sub-item, which concerns the principal risks
associated with index-linked options, would include new risk disclosure
requirements tailored to address unique risks associated with these
investment options.\178\ Under these proposed requirements, a
registrant would have to describe the principal risks of investing in
any index-linked options offered under the contract (in addition to the
risks of potential loss from negative index performance, as discussed
above). The proposed sub-item would require the prospectus to include a
statement that an investor in an index-linked options is not invested
in the index or in the securities tracked by the index. This reflects
our concern, based on the results of qualitative investor interviews,
that investors may be confused about whether an investment in an index-
linked option is a direct investment in the index.
---------------------------------------------------------------------------
\178\ See proposed Item 5(c) of Form N-4.
---------------------------------------------------------------------------
To help ensure that RILA prospectuses address certain key risks,
the proposed instructions to this disclosure requirement would specify
that discussion of the principal risks related to index-linked options
would be required to include the principal risks relating to, as
applicable: (1) limiting positive index returns; (2) the possibility of
losses despite limits on negative index returns; (3) interest crediting
methodologies; (4) the impact of contract fees on the amount of
interest credited; and (5) the reallocation of contract value at the
end of an index-linked option's crediting period. We are also proposing
instructions specifying that this discussion would be required to
include, as applicable, principal index risks relating to: (1) the type
of index (e.g., market risk, small-cap risk, foreign securities risk,
emerging market risk, etc.); (2) the exclusion of dividends from index
return; and (3) market volatility. These instructions would require
RILA issuers to specify which risks relate to each index offered under
the contract, and to describe the principal risks related to the
possible substitution of the index before the end of an index-linked
option's term.
An additional proposed new sub-item would require a description of
the principal risks associated with any contract benefits (e.g., death
benefits, living benefits), including the impact of excess withdrawals,
if applicable. These risks include, for example, investment
restrictions associated with a living benefit, which may limit
investment performance.\179\ As an additional example, there are risks
that withdrawals may substantially reduce the benefit, that some
guaranteed benefits are based on a contingency that may never occur
(e.g., the contract value falling to zero), that the rates for contract
benefits may change over time, and that certain benefits may be
discontinued prior to election. Because these risks could impact the
expected performance of the annuity, or in some cases could even
terminate the annuity, we are proposing to require issuers to disclose
them to in the prospectus.
---------------------------------------------------------------------------
\179\ See proposed Item 5(d) of Form N-4.
---------------------------------------------------------------------------
Another proposed new sub-item would require an explanation of the
principal risks associated with the insurance company's ability to meet
its guarantees under the contract, including risks relating to its
financial strength and claims-paying ability, which as described below
may be of particular concern for investors who allocate contract value
to index-linked options.\180\ We recognize that a summary of certain
insurance company risks is currently required to be disclosed in the
KIT.\181\ Moreover, although there is no corresponding disclosure
requirement that mandates the inclusion of insurance-company-related
risks in the principal risk disclosure in contract prospectuses, most
Form N-4 registrants already provide this disclosure. We therefore do
not expect that current Form N-4 registrants likely would have to
modify their disclosures to comply with the proposed requirement.
Nevertheless, we propose to require this disclosure to be included in
the consolidated principal risks section of the prospectus for
[[Page 71118]]
completeness, and to help ensure that a prospectus for a contract that
offers fixed options and index-linked options discloses the insurance
company's claims-paying ability with regard to its contractual
guarantees. In contrast to variable options, where amounts invested are
held in a separate account insulated from the insurance company's
general account and protected from general account creditors, assets
invested in an index-linked option are subject to the insurance
company's claims-paying ability for most RILAs.
---------------------------------------------------------------------------
\180\ See proposed Item 5(e) of Form N-4.
\181\ See current Instruction 3(d) to Item 2 of Form N-4.
---------------------------------------------------------------------------
Lastly, we propose a final new sub-item, which would require a
description of the principal risks relating to any material reservation
of rights under the contract, including if applicable, (1) the right to
remove or substitute portfolio companies; (2) add or remove index-
linked options and change the features of an index-linked option from
one crediting period to the next; (3) stop accepting additional
purchase payments; and (4) impose investment restrictions or
limitations on transfers.\182\ We propose to require this disclosure
because the ability to discontinue contract features, alter an
investor's ability to participate in an index's upside performance, and
otherwise change features is important information for investors when
making an investment decision.
---------------------------------------------------------------------------
\182\ See proposed Item 5(f) of Form N-4.
---------------------------------------------------------------------------
We request comment generally on the proposed amendments to Item 5
of Form N-4, and specifically on the following issues:
59. Do the proposed amendments to Item 5 appropriately describe the
types of principal risks that are typically associated with investing
in a contract that offers variable options and/or index-linked options?
Should different or additional principal risks be required to be
summarized in the prospectus?
60. Do commenters agree with the proposed approach of amending Item
5 to restructure the current item into separate sub-items? For
contracts offering variable options, do commenters agree that the
proposed changes would clarify existing requirements, but would not
generally result in substantively different principal risk disclosure
requirements? Would the proposed changes to Item 5 require contracts
offering variable options that are currently registered on Form N-4 to
revise their current risk disclosure, or could they continue to use
their existing disclosures? Why or why not? To the extent that Form N-4
registrants are currently disclosing risks on topics that the proposed
changes address in other parts of the prospectus, would this current
risk disclosure be considered to be ``principal'' risk disclosure?
61. Although we are proposing to require disclosure of specified
index-linked option-related principal risks to be provided in response
to the Item 5 disclosure requirements, we also propose to require
aspects of these risks to be disclosed in response to certain other
prospectus disclosure requirements, facilitating a layered disclosure
approach. Is this appropriate? What ``layers'' of risk disclosure are
appropriate for the summary prospectus, statutory prospectus, and SAI?
62. Are the proposed additions to the current principal risk
disclosures appropriate? If not, why not? Should we, for example,
require a registrant specifically to disclose principal risks
associated with index-linked options, contract benefits, the insurance
company, and any material reservation of rights under the contract, as
proposed? If not, why not? Is an insurer's ability to discontinue
contract features, reduce index limits on gains and otherwise change
features likely to be inconsistent with an investor's reasonable
expectations, as we state above? Should we modify any of the aspects of
these proposed principal risk disclosure requirements?
5. Addition of Contract Adjustments and Other Amendments to Fee and
Expense Disclosures (Items 4, 7, and 22)
We are proposing amendments to Form N-4 to require specific
disclosures regarding contract adjustments and other implicit RILA-
specific costs that can result in a significant erosion of investment
principal. The proposed disclosures are designed to provide investors
with a better understanding of the mechanics of these costs and the
associated potential for loss. Under the proposed approach, these
disclosure requirements would be set forth in Items 4, 7, and 22(d) of
Form N-4. We are also proposing revisions to the existing provisions of
these Items, applicable to all Form N-4 issuers, to clarify certain
terminology.
(a) Amendments to Fee Table Disclosure Requirements (Item 4)
We propose amending Item 4 to require specific disclosures
regarding contract adjustments and other costs specific to RILAs. Item
4 currently requires variable annuity registrants to provide
comprehensive information on the fees and expenses investors will pay
when buying, owning, and surrendering or making withdrawals from a
contract, as well as expenses paid each year during the time the
investor owns the contract. While RILAs typically do not charge the
explicit ongoing fees and expenses common to variable annuities,
investors do experience an implicit ongoing fee to the extent the
insurer limits, through the use of a cap, participation rate, or some
other rate or measure, index gains. Moreover, RILA issuers typically
utilize contract adjustments, which can result in a significant charge
to investors who make withdrawals from an index-linked option or from
the contract before the end of a specified period. Further, investor
testing suggested that most participants struggled to fully comprehend
the costs to investors of these products.\183\ These costs include
contract adjustments because they can negatively affect an investor's
contract value or the amounts an investor could withdraw from the
contract.\184\ Accordingly, we are proposing to include a detailed
description of contract adjustments in the prospectus, and that this
disclosure be proximate and similar to other disclosures regarding fees
and expenses. Thus, we are proposing several amendments to incorporate
the concept of contract adjustments as well as implicit ongoing fees
and expenses into the current Item 4 disclosure requirements. We
propose generally expanding the tabular disclosures that Item 4
requires to address contract adjustment costs that investors will pay
when buying, owning, and surrendering or making withdrawals from an
investment option, and as noted below, requiring disclosures about the
maximum potential loss that an investor could experience in connection
with a contract adjustment. We are also proposing to expand the tabular
disclosures with respect to annual contract expenses, to alert
investors to the implicit ongoing costs associated with limiting
positive index returns. In addition, we are proposing certain non-
substantive changes to the fee table disclosures and instructions that
would be applicable to all issuers.\185\
[[Page 71119]]
Particularized changes we propose to the fee table disclosures are
discussed below.
---------------------------------------------------------------------------
\183\ See OIAD Report at Section 6, Quantitative Testing,
Testing Impacts, Table 9 (noting that 16.2 percent of participants
understood that a participation rate reduces potential gains from
the market and 52.1 percent of participants understood that a cap
reduces potential gains from the market).
\184\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results From Round 2.
\185\ In order to eliminate unnecessary information in the
prospectus, we propose amending the general instructions to clarify
that registrants may omit a narrative explanation that is not
applicable under the contract. See proposed instruction 1 to Item 4
of Form N-4. We also are proposing an amendment to general
instruction 5 regarding the preparation of the Transaction Expenses
and Annual Contract Expenses tables, clarifying that the instruction
to disclose the maximum guaranteed charge as a single number where a
fee is calculated based on a benchmark does not apply to a contract
adjustment. See proposed instruction 5 to Item 4 of Form N-4.
---------------------------------------------------------------------------
Transaction Expenses Table
Form N-4 issuers currently must include a transaction expenses
table in their prospectuses, describing fees and expenses investors
must pay when buying, owning, and surrendering or making withdrawals in
connection with a contract. This requires a description of the sales
load imposed on purchases (as a percentage of purchase payments), the
deferred sales load (as a percentage of purchase payments or amount
surrendered, as applicable), and transfer fees. To provide proximate
and similar disclosure for RILA-specific costs, we propose to require
that insurance companies additionally include the maximum negative
contract adjustment that may be imposed, to be expressed as a
percentage of contract value at the start of the crediting period or
the amount withdrawn, as applicable. To provide investors notice of the
circumstances where they might be subject to this cost, we also propose
that insurance companies include a footnote describing all transactions
potentially subject to a contract adjustment.\186\
---------------------------------------------------------------------------
\186\ See proposed instruction 11 to Item 4 of Form N-4.
---------------------------------------------------------------------------
Currently this table also requires registrants to describe the
maximum exchange fee that investors could incur for any exchange or
transfer of contract value from the registrant to another investment
company, or between sub-accounts or to the insurance company's general
account. In a change relevant to all Form N-4 issuers, we are proposing
a terminology change, replacing the term ``exchange fee'' with
``transfer fee,'' as this term better reflects our experience, namely
that the vast majority of such fees are those imposed on transfers of
account value among investment options under the contract.\187\
---------------------------------------------------------------------------
\187\ See proposed Instruction 10 to Item 4 of Form N-4. Under
the proposed definition, ``transfer fee'' would encompass both the
maximum fee charged for any exchange or transfer of contract value
between investment options as well as the maximum fee charged for
any exchange or transfer of contract value from the registered
separate account to another investment company or from the
registered separate account to the insurance company's general
account. Thus, the proposed amendments regarding the definition and
terminology surrounding transfer fees would not result in any
substantive change for existing Form N-4 issuers.
---------------------------------------------------------------------------
Annual Contract Expenses
Form N-4 issuers currently must include an annual contract expenses
table in their prospectuses, detailing the fees and expenses that
investors pay each year in administrative expenses, base contract
expenses, and optional benefit expenses. Currently, base contract
expenses must be expressed as a percentage of average account value. In
a change relevant to all Form N-4 issuers, we propose an amendment that
would also allow base contract expenses to be expressed as a percentage
of average account value or contract value. We do not expect that this
change will substantively affect variable annuities' existing
disclosure. We are proposing this expansion to describe expenses
deducted where index-linked options or fixed options are implicated, as
those options do not generally use the concept of average account
value.\188\ Additionally, to place investors on notice of the unique
and ongoing trade-off costs associated with RILAs that may not be
captured by this table, we are proposing to require registrants to
include the following statement in the table:
---------------------------------------------------------------------------
\188\ We are also proposing two related, non-substantive
amendments to the instructions relating to annual contract expenses
relevant to all issuers. These changes are to broaden terminology
given the expanded scope of issuers that under the proposal could
file on Form N-4. Currently the instruction for describing
administrative expenses references ``any Contract, account, or
similar fee on all Investor Accounts;'' however, as noted below, we
propose deleting the term ``Investor Account,'' and accordingly also
propose amending this instruction to conform to that change.
Relatedly we are proposing to amend the instruction regarding base
contract expenses to remove a reference to fees and expenses
deducted ``from separate account assets or charged to all Investor
Accounts,'' replacing it with an instruction to consider fees and
expenses ``charged to any Investment Option.''
In addition to the fees described above, we limit the amount you
can earn on an Index-Linked Option. Imposing this limit helps us
make a profit on the Index-Linked Option. In return for accepting
this limit on Index gains, you will receive some protection from
Index losses.
Annual Portfolio Company Expenses
Form N-4 currently requires issuers to include in the prospectus an
annual portfolio company expenses table, disclosing the minimum and
maximum total operating expenses charged by the portfolio companies
offered by variable annuity contracts that may be periodically charged
to investors during the time they own the contract. This includes costs
incurred by portfolio companies directly and, if the portfolio company
invests in other mutual funds, the fees and expenses the portfolio
company indirectly incurs from these investments. In a change that also
would apply to variable annuities prospectuses, we are proposing that
registrants disclose that expenses shown in this table may change over
time and may be higher or lower in future. We propose this change for
two reasons. First, this modification would help to ensure that
investors understand that these charges may increase over time,
notwithstanding that these charges are described as maximum expenses.
Second, given that we are proposing similar disclosures with regard to
features of RILA offerings that are subject to change, we propose to
require a similar level of disclosure with regard to variable annuity
offerings where appropriate.
Example
Form N-4 issuers currently must provide an example in their
prospectuses that is designed to allow variable annuity investors to
compare the cost of investing in the contract with the cost of
investing in other variable annuity contracts. We propose amending the
example requirements to clarify, for variable annuity and RILA issuers,
that the example is designed to permit investors to compare costs of
investing solely in variable options under the contract with costs
associated with variable options offered under other annuity contracts.
Under the proposal, the example would be preceded with a legend
specifically stating that: the example assumes that all contract value
is allocated to variable options; the example does not reflect contract
adjustments; and costs would likely differ if an investor selects
index-linked options or fixed options.
(b) Charges (Item 7)
Currently, Item 7 requires registrants to provide a brief
description in their prospectuses of all current charges deducted from
purchase payments, investor accounts, or assets of the registrant.
Consistent with the proposed changes to Item 4, we also are proposing a
change in terminology that would affect all Form N-4 issuers, replacing
references in Item 7 to ``investor accounts'' and the assets of
``registrants'' with the terms ``contract value'' and ``investment
option'' assets, respectively. Therefore, in responding to Item 7,
variable annuity and RILA issuers would describe charges deducted from
purchase payments, contract value, or investment option assets.\189\
---------------------------------------------------------------------------
\189\ Additionally, we are proposing two non-substantive
terminology changes in Instruction 3 to Item 7(a) regarding how
registrants must describe the sources that will be used to cover
shortfalls where proceeds from sales load will not cover expected
costs. First, we propose replacing the term ``depositor'' with the
term ``insurance company.'' Second, where shortfalls are to be made
from an insurance company's general account, this instruction
requires a disclosure that amounts paid by the insurance company may
consist of proceeds derived from base contract expenses deducted
from the registered separate account. We propose striking this
italicized language referring to assets of the registered separate
account because it is superfluous given the definition of ``base
contract expenses'' in proposed Instruction 14 to Item 5, discussed
above.
---------------------------------------------------------------------------
[[Page 71120]]
For the reasons described above and given the potentially
significant economic consequences contract adjustments can have on RILA
investors, we are also proposing additional specific requirements to
incorporate contract adjustments into the prospectus's disclosure of
charges, which would entail detailed descriptions of any contract
adjustments under the contract. These disclosures are designed to be
comparable in scope and proximate to existing disclosures about
contract charges applicable to variable annuities.\190\
---------------------------------------------------------------------------
\190\ See instructions (a) through (d) to Item 7 of Form N-4.
---------------------------------------------------------------------------
Specifically, we are proposing that insurance companies would have
to: (1) disclose (as a percentage) the maximum potential loss that
could result from a negative contract adjustment; (2) define the period
during which any contract adjustment would apply; and (3) describe all
transactions subject to a contract adjustment.\191\ Insurance companies
also would have to include a description of how the contract adjustment
will affect the contract value, surrender value, death benefit, and any
living benefits, and disclose that a negative adjustment could reduce
the value under the contract in an amount greater than the value
withdrawn.\192\ They would also need to describe, in simple terms, how
the contract adjustment is determined under the contract, and the
relationship between the contract adjustment and any other charges or
fees applied under the contract, including, for example, the sequence
in which charges and adjustments are applied.\193\ The required
disclosure would also require the issuer to briefly describe the
purpose of the contract adjustment, including, for example, that the
contract adjustment transfers risk from the insurance company to the
investor to protect the insurance company from losses on its own
investments supporting contract guarantees if amounts are withdrawn
prematurely.\194\ Finally, issuers would be required to disclose how an
investor can obtain information about the current value of the contract
adjustment, while stating that this value can fluctuate daily, and that
the quoted value may differ from the actual value at the time of
adjustment.\195\
---------------------------------------------------------------------------
\191\ See proposed instructions (e)(1) through (e)(3) to Item 7
of Form N-4. In describing the transactions subject to a contract
adjustment, the insurance company would need to describe, for
example, whether adjustments apply if amounts are transferred or
withdrawn from an index-linked option or from the contract due to a
partial withdrawal, surrender, election of an annuity option, or
payment of death benefit proceeds, or where a particular optional
benefit (e.g., a withdrawal under a guaranteed living benefit) is
utilized, and to describe any circumstances under which the
adjustment will be waived.
\192\ See proposed instruction (e)(5) to Item 7 of Form N-4. If
applicable, the insurance company would also be required to state
the impact of the contract adjustment on interest to be credited to
an index-linked option at the end of its crediting period.
\193\ See proposed instructions (e)(4) and (e)(6) to Item 7 of
Form N-4. The description of how the contract adjustment is
determined would have to provide a meaningful explanation of all the
material features of the contract adjustment's application,
including: (1) information about any formula applied (e.g., a change
in value of hypothetical derivative instruments); (2) the factors
that may cause an adjustment (e.g., timing of withdrawal, index
volatility, increase in external interest rates); (3) a description
of any proportionate withdrawal calculations; and (4) how
adjustments are applied (e.g., allocated among the investment
options, applied to a withdrawal amount).
\194\ See proposed instruction (e)(7) to Item 7 of Form N-4.
\195\ See proposed instruction (e)(8) to Item 7 of Form N-4.
---------------------------------------------------------------------------
These proposed disclosures are intended to provide investors with
the necessary scope and level of detail of the contract adjustments
that could negatively affect an investor's contract value or the
amounts an investor could withdraw from the contract. These disclosures
are further justified given the RILA Act's requirement that the
Commission use the results of investor testing in designing a
registration form for RILAs. That mandated investor testing showed that
participants were confused about contract adjustments, their purpose,
the situations in which they could arise, their potential magnitude,
and their relationship to other fees and charges (e.g., surrender
fees).\196\ These disclosures are designed to address these areas of
identified confusion.
---------------------------------------------------------------------------
\196\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results From Round 2 and Section 7, Conclusions.
---------------------------------------------------------------------------
To simplify this disclosure, we propose specifying that detailed
disclosure on the method of calculating the contract adjustment appear
in the SAI, as opposed to the prospectus.\197\ We also propose
requiring that Item 7(e) include a cross-reference to Item 22 of Form
N-4, which would require more-detailed disclosure on the contract
adjustment's calculation (including illustrative examples as to
adjustment's operation) to appear in the SAI. The more detailed SAI
discussion is not, however, a substitute for the Item 7 requirements.
Thus, for example, an insurance company could not include the formula
underlying the contract adjustment calculation in the SAI in lieu of
the required discussion of the formula in the prospectus. Rather, in
addition to stating the formula in the SAI, the insurance company would
need to include in the prospectus a brief description, in simple terms,
of the manner in which contract adjustment is determined.
---------------------------------------------------------------------------
\197\ See proposed instruction (e)(4) to Item 7 of Form N-4.
---------------------------------------------------------------------------
Further, while the proposed disclosures are tailored to the
mechanics of contract adjustments, they are also designed to be, where
possible, consistent with existing requirements regarding disclosure of
current charges deducted from purchase payments, investor accounts, or
assets of the registrant. For example, Form N-4 currently requires
disclosure of current fees and charges, which are typically expressed
as a percentage. Because the value of a given contract adjustment can
change daily, we are proposing that insurance companies disclose the
maximum potential loss, as a percentage, that could result from a
negative contract adjustment (rather than mandate a disclosure of a
current contract adjustment value that could quickly become
outdated).\198\
---------------------------------------------------------------------------
\198\ See proposed instruction (e)(1) to Item 7 of Form N-4.
---------------------------------------------------------------------------
(c) Purchase of Securities Being Offered (Item 22)
We are proposing to amend Item 22, which addresses the purchase of
securities being offered, to require specific, detailed contract
adjustment disclosures to appear in RILA issuers' SAIs. As discussed
above, issuers would be required to provide a simple explanation of the
underlying mechanics of contract adjustments in their prospectuses,
while noting that further detail is available in the SAI and providing
a cross reference to that information. Under the proposal, in addition
to the discussion required in the prospectus by Item 7, Item 22 would
require issuers to explain fully the operation of any contract
adjustment that can be applied under the contract. This more detailed
explanation would not take the place of the prospectus discussion and
would need to address all the material features of the adjustment and
include an explanation
[[Page 71121]]
of any formulas used to calculate the adjustment, and at least one
numeric example to illustrate the application of the contract
adjustment. This numeric example would have to include a negative
adjustment, reflect surrender charges (if applicable), and disclose the
percentage change in contract value as a result of the adjustment.
The mechanics of contract adjustments under a RILA contract are
typically complex, often implicating the application of factors or
formulas that can be difficult for many investors to understand.
Because the application of a negative contract adjustment can
substantially affect an investor's contract value, however, we propose
to require the inclusion of information on negative contract adjustment
in the SAI, so that investors who wish to learn more about the
calculation may do so. In addition to promoting transparency generally,
this proposed disclosure would ensure that liability attaches under
section 11 of the Securities Act for any material misrepresentations
regarding the application of a contract adjustment.
We are also proposing to make applicable to RILA issuers certain
existing SAI disclosure requirements about the purchase of securities
being offered. Specifically, we are proposing revisions to the
instructions to the existing requirement to describe the manner in
which the securities are offered to the public, which would instruct
RILA issuers to respond by addressing any exchange privileges between
investment options.\199\ Additionally, we propose to make the existing
requirement to describe the method used to determine the sales load
applicable to RILA issuers.\200\ We do not propose applying the
existing disclosure requirement dealing with frequent transfer
arrangements to RILA issuers, as its provisions are relevant only to
variable annuity contracts.\201\
---------------------------------------------------------------------------
\199\ See proposed Item 22(a) of Form N-4.
\200\ See proposed Item 22(b) of Form N-4.
\201\ See proposed Item 22(c) of Form N-4.
---------------------------------------------------------------------------
(d) Request for Comment
We request comment on these proposed amendments.
63. Do commenters agree that it is appropriate to include a
discussion of contract adjustments in Items 4, 7, and 22 as proposed?
If not, how would commenters suggest issuers disclose contract
adjustments to ensure that investors have sufficient information to
make an informed investment decision regarding RILAs?
64. Is it appropriate to require the disclosure of the contract
adjustment maximum potential loss in the transaction expense table? Do
commenters agree that is appropriate to require that issuers express
the contract adjustment maximum potential loss as a percentage? If not,
what alternative measure would commenters suggest?
65. Do commenters agree that the proposal strikes the proper
balance in the location of the proposed contract adjustment
disclosures? Are there any contract adjustment disclosures we propose
including in the SAI that commenters believe would be more
appropriately located in the prospectus? Are there any contract
adjustment disclosures we propose including in the prospectus that
commenters believe would be better situated in the SAI?
66. Do commenters agree with our proposal that issuers be required
to include, in the annual contract expenses table, a statement
disclosing that, in addition to the expenses described in the table,
investors will be subject to limits on the amounts they can earn in
connection with index-linked options? Do commenters agree that it is
appropriate to include a statement addressing current limits on gains
in conjunction with the annual contract expenses table? Do commenters
agree the proposed statement captures the most salient concerns to
investors of these kinds of limits on gains? Do commenters have any
suggestions for alternate wording or placement of the statement?
67. Do commenters have any suggestions about additional or
alternative disclosures that would address the areas of confusion
regarding contract adjustments that this release describes as being
identified in investor testing?
68. Are there any concerns with our proposal to use the term
``contract adjustment'' when referring to MVAs (market value
adjustments) and IVAs (interim value adjustments)? Is there an
alternative term that we should use to describe these kinds of
adjustments?
69. Does our proposal to replace the term ``exchange fee'' with
``transfer fee'' in Item 4 raise any concerns?
70. With regard to the numeric examples we propose requiring in the
SAI, should there be any additional requirements for what those
examples would need to include? For example, should we require that the
example utilize the average negative contract adjustment in operation
for the preceding year, or the negative contract adjustment expected
over the next year? Should we also (or instead) require an example of a
contract adjustment in the prospectus? If so, why, and what particular
assumptions should we require in the example?
71. Do commenters agree with our recommendation to place the more
detailed disclosures associated with the mechanics of contract
adjustments (such as applicable formulas) in the SAI as opposed to the
prospectus? Why or why not?
72. In addition to the contract adjustment disclosures we have
proposed, should we also require issuers to provide a graphic
illustrating the operation of a contract adjustment? If so, where
should we require that graphic illustration be presented, and what
particular circumstances should it illustrate? For example, would it be
helpful to require issuers to include a graphic illustration
demonstrating how a contract adjustment works when investors withdraw
amounts from their contract prior to the end of a crediting period?
Should we require illustrations that demonstrate the operation of a
contract adjustment for investors in circumstances where they change to
a different index-linked option before the end of a crediting period,
and demonstrating how they can change investment options to minimize
the financial impact to their contract value?
6. Information About Contracts With Index-Linked Options (Item 31A)
We are proposing new Item 31A of Form N-4 to require census-type
information regarding RILAs offered in connection with the applicable
registration statement. Specifically, under proposed Item 31A, an
insurance company would be required to provide the following
information regarding any RILA offered through the registration
statement, as of the most recent calendar year-end: (1) the name of
each contract; (2) the number of contracts outstanding; (3) the total
value of investor allocations attributable to index-linked options; (4)
the number of contracts sold during the prior calendar year; (5) the
gross premiums received during the prior calendar year; (6) the amount
of contract value redeemed during the prior calendar year; and (7)
whether the contract is a ``combination contract,'' that is, a contract
that offers variable options in addition to index-linked options. This
information would be required as of the most recent calendar year-end
and, accordingly, would generally be updated through a post-effective
amendment to a registration statement on Form N-4.\202\
---------------------------------------------------------------------------
\202\ See proposed Item 31A of Form N-4. An issuer transitioning
from an existing registration statement on Form S-1 or S-3 to Form
N-4 through a post-effective amendment would be required to report
this information as of the most recently completed calendar year in
its first post-effective amendment transitioning onto Form N-4.
---------------------------------------------------------------------------
[[Page 71122]]
This information is census-type data that would provide contract-
level disclosures designed to assist the Commission and staff in
identifying trends in insurance companies' offerings of RILAs. This
information would also provide improved transparency to investors by
supplementing the information available about the marketplace for the
contracts offered in connection with a registration statement. These
items are relatively limited in scope and primarily consist of
information that should generally be readily available to issuers. The
particular data required is similar to that provided by registered
separate accounts that likewise assist the Commission and staff in
identifying trends in variable annuities.\203\
---------------------------------------------------------------------------
\203\ See Item F.14 of Form N-CEN; see also Investment Company
Reporting Modernization, Investment Company Act Release No. 32314
(Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] at the sentences
following n.1142.
---------------------------------------------------------------------------
We are proposing to require information to be presented as of the
most recent calendar year-end to provide the Commission and its staff
with information that will be updated with an annual frequency for
offerings of RILAs. We anticipate that this information would typically
be updated as part of an issuer's annual update to its registration
statements for such contracts.\204\ This approach would result in
information provided as of a uniform date for all offerings of RILAs,
regardless of the issuer's filing date, and, in turn, would provide for
increased comparability across issuers and contracts.\205\ Requiring
this information to be updated annually is intended to achieve an
appropriate balance between providing the Commission and its staff with
current information while avoiding overburdening issuers. An annual
snapshot should be sufficient for the census-type nature of the
information and would provide Commission staff with appropriate
intervals of data points over time in which to identify trends in
insurance companies' offerings of RILAs. Requiring these issuers to
report such census information semi-annually or more frequently would
place an increased burden on issuers that may not be justified by a
commensurate increase in the value of the information received by the
Commission.
---------------------------------------------------------------------------
\204\ See 15 U.S.C. 77j(a)(3).
\205\ We understand that insurance companies offering RILAs have
a December 31 fiscal year end which, in practice, means a
distinction between calendar year and fiscal year would result in
limited effect on the reporting.
---------------------------------------------------------------------------
This reporting would provide the Commission with additional
transparency into the RILA market segment, which would in turn improve
the effectiveness of the Commission's oversight of offerings on Form N-
4. Requiring this high-level reporting would permit the Commission to
identify trends occurring in this market segment over time and assist
with allocating the Commission's resources in administering the form.
This reported information on index-linked options would complement
parallel census-type information that is currently required to be
reported annually on Form N-CEN by registered unit investment trusts
offering variable annuities.\206\ The new census-type information
therefore would help provide the Commission with a more complete
picture of the marketplace for insurance products offered through
registration statements on Form N-4. In addition, this information may
benefit the public in supplementing the information available about
RILAs.
---------------------------------------------------------------------------
\206\ Issuers registering combination contracts on Form N-4
would be required to exclude amounts allocated to a variable option
when providing information in response to Item 31A as these
allocations would be separately reported by registered separate
accounts on Form N-CEN.
---------------------------------------------------------------------------
We request comment on these proposed amendments.
73. Are the required reporting elements in Item 31A of proposed
Form N-4 appropriate and clear? If not, what elements require
additional instruction?
74. Do commenters agree that it is appropriate to require reporting
under Item 31A to be provided as of calendar year-end? Do commenters
agree that there is limited practical difference between requiring a
fiscal year-end and calendar year-end requirement in light of
investment company practices?
75. Should we require additional or different reporting of census-
type reporting regarding RILAs? If so, should we also amend the
requirements of Form N-CEN to ensure parallel reporting by registered
unit investment trusts offering variable annuities registered on Form
N-4?
76. Would RILA issuers face any significant challenges in providing
the required reporting elements? If so, why?
77. Do commenters agree that it would be appropriate for issuers
with existing contracts to report information required by proposed Item
31A for the calendar year prior to the calendar year the issuer first
transitions its registration statement onto Form N-4?
7. Other Amendments and Provisions
Our proposed amendments also include certain other amendments to
Form N-4 and related rules designed to accommodate the inclusion of
RILA issuers on that form. These include amendments to Form N-4's
facing sheet, definitions, exhibit list, and required representations,
as well as amendments to certain Securities Act rules that help to
implement the proposal. These proposed amendments are discussed below.
(a) Facing Sheet
We are proposing amendments to include a new checkbox section on
the facing sheet. Specifically, an issuer would be required to identify
in this new section: (1) if it is a new registrant, defined as, as
applicable, a registered separate account or insurance company that has
not filed a Securities Act registration statement or amendment thereto
within 3 years preceding this filing; \207\ (2) if it is an emerging
growth company (``EGC''), as defined by Rule 12b-2 under the Exchange
Act; (3) if it is an EGC, whether it has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act; and (4) if it is relying on an exemption from
Exchange Act reporting requirements in reliance on rule 12h-7.\208\
These changes would help the Commission better understand the types of
registration statements being filed on Form N-4 and, in the case of the
EGC information, mirrors similar facing sheet requirements found in
Form S-1. In addition, we are proposing amendments to the description
of the types of entities that use Form N-4 to include insurance
companies that offer index-linked options, either as stand-alone or
combination products.\209\
---------------------------------------------------------------------------
\207\ For example, a variable annuity separate account that has
not previously filed a Securities Act registration statement would
identify itself as a new registrant, regardless of whether the
sponsoring insurance company has filed a recent Securities Act
registration statement or amendment thereto as the proposed
requirements request information on the registrant. In the same
manner, an insurance company filing on Form N-4 would determine
whether it is a new registrant solely with respect to its own
Securities Act registration statement filings.
\208\ In addition to this checkbox, we are proposing an
instruction that implements the requirements of rule 12h-7 to
indicate that the insurance company is relying upon the exemption
provided by that rule in the relevant prospectus. See supra section
II.B.3.b.
\209\ See supra section II.A.
---------------------------------------------------------------------------
(b) Definitions (General Instruction A)
We are proposing amendments to General Instruction A to update the
[[Page 71123]]
existing definitions in Form N-4, add new definitions to accommodate
the inclusion of RILAs on Form N-4, and implement these proposed
definitions throughout the form. However, unless otherwise stated, the
proposed amendments to the definitions in General Instruction A would
not alter the existing obligations under Form N-4 for current issuers
on Form N-4. These changes should provide a standard set of definitions
to convey form provisions in a consistent and efficient manner without
the need for lengthy descriptions in each instance and clarify which
form provisions apply to which categories of issuers and investment
products.\210\
---------------------------------------------------------------------------
\210\ We are also proposing to amend Form N-4 throughout to use
the gender-neutral reference of ``investor'' where appropriate. See,
e.g., proposed Instruction 6 to Item 2 of Form N-4.
---------------------------------------------------------------------------
Specifically, we propose to add a new definition for ``index-linked
option.'' The proposed definition covers RILAs and index-linked options
offered in combination contracts, as an investment option offered under
any contract, pursuant to which the value of the contract, either
during an accumulation period or after annuitization, or both, will
earn positive or negative interest based, in part, on the performance
of a specified index.\211\ This is a functional definition focused on
the key features of a RILA and would cover RILAs as defined in the RILA
Act. We also propose to define ``fixed option'' as an investment option
under the contract pursuant to which the value of the contract, either
during an accumulation period or after annuitization, or both, will
earn interest at a rate specified by the insurance company, subject to
a minimum guaranteed rate under the contract. Further, we would change
the existing definition of ``variable annuity contract'' to ``variable
option'' and move the parts of that definition that refer to annuity
contracts generally to a new definition for ``contract.'' In connection
with the addition of other types of investment options on Form N-4, we
are proposing to amend ``portfolio company'' to clarify that this term
relates to the investment companies offered as investment options in
contracts containing variable options. We also propose to add a new
defined term ``investment option'' to refer collectively to any index-
linked, variable, or fixed option. We propose to add these items to
help clarify which provisions of amended Form N-4 apply to which types
of annuities or investment options.
---------------------------------------------------------------------------
\211\ Because RILA returns may not be one for one with the
index, we propose to indicate that positive or negative interest is
only based ``in part'' on the index's performance.
---------------------------------------------------------------------------
Because an insurance company issuing a RILA is not acting as a
depositor, we propose to change the definition of ``depositor'' to
``insurance company.'' The proposed definition refers to the insurance
company that issues the contract, which company is subject to state
supervision, and that the insurance company may also be the depositor
or sponsor for a variable annuity separate account. We would also add a
new definition of ``registered separate account'' defined as the
separate account in which the contract participates with regard to any
variable option offered under the contract, and refine the definition
of ``registrant'' to mean either the registered separate account or
insurance company, as applicable. These changes further help to clarify
which provisions of the form apply to variable annuities and RILAs.
We also propose to add definitions of ``index,'' \212\ ``contract
adjustment,'' \213\ and ``crediting period'' \214\ to refer to these
RILA-centric concepts in the form and, in the case of ``contract
adjustment'' and ``crediting period,'' help clarify when the relevant
disclosures would be required. Lastly, we propose to eliminate the
currently defined term ``investor account.'' Insurance companies
typically do not use this term in their disclosure, and the more
generalized concept of contract value, which also is designed to
address the value of an investor's investment, is intended to convey
the characteristics of the broader scope of annuities that insurance
companies could register on Form N-4 under the proposal.
---------------------------------------------------------------------------
\212\ As proposed, ``index'' means any index, rate, or benchmark
(such as a registered exchange-traded fund that tracks an index)
used in the calculation of positive or negative interest credited to
an index-linked option. See proposed General Instruction A to Form
N-4.
\213\ As proposed, ``contract adjustment'' means a positive or
negative adjustment made to the value of the contract by the
insurance company if amounts are withdrawn from an index-linked
option or from the contract before the end of a specified period.
This adjustment may be based on calculations using a predetermined
formula, or a change in interest rates, or some other factor or
benchmark. See id.
\214\ As proposed, ``crediting period'' means the period of time
over which an index's performance is measured, subject to applicable
limits on index gains and losses, to determine the amount of
positive or negative interest that will be credited to an index-
linked option at the end of the period.
---------------------------------------------------------------------------
We also are proposing related amendments throughout Form N-4 to
help implement the proposed new definitions. For example, we are
proposing to clarify the applicability of certain variable annuity or
Investment Company Act-specific disclosure to limit those requirements
to ``registered separate accounts'' or ``variable options'' when
appropriate.\215\ As another example, the form requires disclosure of
the procedures to purchase an annuity contract including certain
particularized information.\216\ We would apply this provision
generally to all annuities including RILAs, but are only requiring
certain disclosures relating to the operation of accumulation units and
sub-accounts to contracts with variable options as those elements are
not utilized by RILAs.
---------------------------------------------------------------------------
\215\ See, e.g., proposed Items 3, 7, 8, 24, 32, and 34(a) of
Form N-4; see also proposed definitions for ``class'' (clarifying
applies to all contracts) and ``platform charge'' (clarifying only
applies if there is a variable option).
\216\ See Item 11 of Form N-4.
---------------------------------------------------------------------------
(c) Rules 405, 480, 481, 483, and 484
We are proposing amendments to rule 405 under the Securities Act to
add the new defined terms ``Form available solely to investment
companies registered under the Investment Company Act of 1940'' and
``registered index-linked annuity'' for purposes of Securities Act
rules.
Certain Securities Act rules apply only to registration statements
that are prepared on a form available solely to a registered investment
company or a business development company. These rules are 17 CFR
230.480 (``rule 480''), 17 CFR 230.481 (``rule 481''), 17 CFR 230.483
(``rule 483''), and 17 CFR 230.484 (``rule 484'') under the Securities
Act, and include forms such as Forms N-1A, N-2, N-3, N-4, N-5, and N-6.
These rules prescribe requirements relating to: information given with
the title of securities; information contained in registration
statements; exhibits filed as part of the registration statement; and
undertakings required with respect to requests for acceleration.
By virtue of moving RILAs, which are not issued by a registered
investment company, onto Form N-4, Form N-4 would be outside the scope
of this description absent the proposed amendments. As such, the
proposed new defined term ``form available solely to investment
companies registered under the Investment Company Act of 1940'' would
specify that these rules would continue to apply to registration
statements filed on Form N-4. Specifically, we are proposing to amend
rule 405 to state that ``a form available solely to investment
companies registered under the Investment Company Act of 1940''
includes the form used to register the offering of securities of a
registered index-linked annuity for purposes of the Securities Act of
1933. By operation of this new
[[Page 71124]]
term, RILA registration statements on Form N-4 would be subject to
rules 480, 481, 483, and 484.\217\ We propose to subject RILA
registration statements to these rules to help facilitate a consistent
application of Form N-4 requirements.
---------------------------------------------------------------------------
\217\ These rules currently apply to registration statements on
Form N-4. Rule 480 prescribes requirements relating to information
given with the title of securities. Rule 481 prescribes certain
information to be required in the registration statement (e.g.,
certain legends to appear on the front and back cover pages of
prospectuses). Rule 483 prescribes certain requirements relating to
exhibits filed as part of the registration statement. Rule 484
prescribes certain required undertakings with respect to requests
for acceleration under 17 CFR 230.461 when certain arrangements
exist with respect to indemnification of specified persons against
liability under the Securities Act.
---------------------------------------------------------------------------
We are also proposing to add a definition of ``registered index-
linked annuity'' to rule 405, which provides consistent definitions for
select terms used throughout the Securities Act rules, to simplify
references to RILAs in the proposed Securities Act rule amendments.
Specifically, we would define ``registered index-linked annuity'' as an
annuity or an option available under an annuity (1) that is deemed a
security; (2) that is offered or sold in a registered offering; (3)
that is issued by an insurance company that is the subject to the
supervision of either the insurance commissioner or bank commissioner
of any state or any agency or officer performing like functions as such
commissioner; (4) that is not issued by an investment company; and (5)
whose value, either during the accumulation period or after
annuitization or both, will earn positive or negative interest based,
in part, on the performance of any index, rate, or benchmark.
Under the RILA Act, the term ``registered index-linked annuity''
means an annuity (A) that is deemed to be a security, (B) that is
registered with the Commission in accordance with section 5 of the
Securities Act, (C) that is issued by an insurance company that is
subject to the supervision of the insurance commissioner or bank
commissioner of any State or any agency or officer performing like
functions as such commission, (D) that is not issued by an investment
company, and (E) the returns of which are based on the performance of a
specified benchmark index or rate (or a registered exchange traded fund
that seeks to track the performance of a specified benchmark index or
rate) and may be subject to a market value adjustment if amounts are
withdrawn before the end of the period during which that market value
adjustment applies.\218\ The proposed definition in rule 405 differs in
certain respects from this definition, but covers all offerings that
would be included in the RILA Act's definition. These differences are
intended to simplify the definition and use terminology that is
consistent with other rules under the Securities Act. For example, the
proposed definition clarifies that the insurance company is registering
the offering of a RILA, rather than the RILA itself, with the
Commission.\219\ As another example, the proposed definition in rule
405 does not include a reference to a ``market value adjustment,'' as
the RILA Act's definition does, because the RILA Act did not require
that feature as a predicate for being a ``RILA.'' \220\ Since the
presence of a market value adjustment does not factor into the
assessment of whether a security is a RILA under the RILA Act's
definition, it is unnecessary to refer to this feature in the proposed
definition in rule 405. The proposed definition, however, continues to
encompass the full scope of the RILA Act's definition.
---------------------------------------------------------------------------
\218\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
\219\ This is functionally the same as the requirement of the
RILA Act that the RILA ``be registered with the Commission in
accordance with section 5 of the Securities Act of 1933.'' See
section 101(a)(5) of Division AA, Title I of the Consolidated
Appropriations Act, 2023.
\220\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022)
(defining RILA as an annuity, among other things, the returns of
which may be subject to a market value adjustment if amounts are
withdrawn before the end of a period in which that market value
adjustment is applied) (emphasis added).
---------------------------------------------------------------------------
(d) Exhibits and Undertakings (Items 27 and 34)
As a function of moving RILAs onto Form N-4 and subjecting them to
the requirements of rule 483, RILA issuers would be required to file
various exhibits as part of a registration statement, similar to the
requirements these issuers are subject to when registering RILA
offerings on Forms S-1 and S-3 currently.\221\ Further, in addition to
the requirements of rule 484, we are proposing to amend Item 34 of Form
N-4 to include certain undertakings currently required of RILAs as part
of their Form S-1 and S-3 registration statements.\222\
---------------------------------------------------------------------------
\221\ See Item 16 of Form S-1; Item 16 of Form S-3; Item 601 of
Regulation S-K.
\222\ The disclosure currently required in Item 34, the fee
representation mandated of registered separate accounts under the
Investment Company Act, would be retained as paragraph (a) of this
item, limited in application to variable options, and the new
undertakings added as new paragraph (b) and limited to index-linked
options. See also 15 U.S.C. 80a-26(f)(2)(A). We would also rename
this item ``Fee Representation and Undertakings.''
---------------------------------------------------------------------------
Item 27--Exhibits
RILA issuers are currently subject to the integrated disclosure
requirements of Regulation S-K when registering their offerings, which
provide requirements for exhibits that must be filed as part of the
registration statement.\223\ Conversely, issuers on Form N-4 are
required to file the exhibits required by rule 483 and Item 27 of Form
N-4. To provide consistent requirements for Form N-4 issuers, we are
proposing amendments to require RILA issuers to adhere to the same
requirements as current issuers on Form N-4. RILA issuers and current
Form N-4 issuers are subject to somewhat different provisions for
filing exhibits to a registration statement. However, there are
significant similarities between the types of the exhibits that each
type of issuer is required to file, and thus we generally are not
proposing to change those requirements. RILA registration statements
will therefore continue to include the types of exhibits currently
included in their registration statements on Forms S-1 and S-3. For
example, RILA issuers filing on Form N-4 would continue to be required
to file such exhibits as the insurance company's certificate of
incorporation and by-laws, forms of contracts offered in connection
with the registration statement, underwriting agreements, legal
opinions, and other material contracts, as applicable.\224\
---------------------------------------------------------------------------
\223\ See 17 CFR 229.601.
\224\ See 17 CFR 229.601; proposed Item 27 of Form N-4.
---------------------------------------------------------------------------
We are not, however, proposing to amend Item 27 of Form N-4 to
include required exhibits under Regulation S-K that are generally not
applicable to RILAs or would no longer be relevant in light of the
proposed amendments.\225\ For example, RILA registration statements are
currently required to include a filing fee exhibit. Under the proposed
amendments, RILA issuers would no longer include registration fee
payments as part a registration statement or post-effective amendment
filing. Therefore, the proposed amendments to Item 27 of Form N-4 omit
this existing exhibit requirement for RILAs.\226\
---------------------------------------------------------------------------
\225\ See 17 CFR 229.601; proposed Item 27 of Form N-4. For
example, some items, like Item 601(b)(96) of Regulation S-K which
requires a technical report summary to be filed as an exhibit to a
registration statement on Form S-1 when a registrant discloses
information concerning its mineral resources, are wholly
inapplicable to RILAs.
\226\ See 17 CFR 229.601(b)(107).
---------------------------------------------------------------------------
We are, however, proposing to amend Form N-4's required exhibits
list to add new Item 27(p) for all issuers, which would require the
filing of any power of
[[Page 71125]]
attorney included pursuant to rule 483(b).\227\ While this exhibit is
already required to be filed with a Form N-4 registration statement
under rule 483(b), practices differ in regards to the placement of a
required power of attorney exhibit within the exhibit list. This
amendment is designed to assist the public in comparing these exhibits
by standardizing their location in the registration statement. In
addition, we are proposing conforming changes in Item 27 to reflect the
proposed amendments to the definitions in Form N-4.
---------------------------------------------------------------------------
\227\ RILA registration statements on Forms S-1 and S-3
similarly include a power of attorney, when applicable, to be filed
as part of the registrations statement. See 17 CFR 229.601(b)(24).
See also supra section II.D (discussing the addition of a new
exhibit relating to changes in accountants).
---------------------------------------------------------------------------
Item 34--Fee Representation and Undertakings
We are also proposing amendments to Item 34 of Form N-4 to require
RILA issuers to include specific undertakings in their registration
statements on Form N-4. Under the proposed amendments, a RILA issuer
would be required to furnish two undertakings as part of the
registration statement on Form N-4. These undertakings are (1) to file,
during any period in which offers or sales are being made, through a
post-effective amendment to its registration statement, any prospectus
required by section 10(a)(3) of the Securities Act and (2) that, for
the purposes of determining liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof. These proposed undertakings are the same as two
undertakings RILA issuers currently provide in registration
statements,\228\ and mirror the effect of similar provisions of section
24(e) of the Investment Company Act, which applies to amendments to
Form N-4 registration statements by registered separate accounts.\229\
We are proposing that RILA issuers continue to furnish these
representations concerning post-effective amendments to a registration
statement as, under the proposed amendments, RILAs may be continuously
offered on a registration statement for an indefinite amount of time.
In that time, a RILA registration statement may be subject to a number
of various post-effective amendments. Conversely, the proposed
amendments do not include other undertakings which may be currently
required in RILA registration statements. These undertakings relate to
the process for conducting continuous offerings under rule 415, which
RILAs will no longer be subject to under the proposed amendments. In
addition, we are not including other undertakings that are unnecessary
in light of the proposed amendments as a whole.\230\ For example, RILA
issuers currently are required to include an undertaking to remove from
registration any of the securities being registered that remain unsold
at the termination of an offering through a post-effective
amendment.\231\ However, under the proposed amendments, RILA issuers
will be registering an indeterminate amount of securities and paying
registration fee payments in arrears on amended Form 24F-2 for the life
of an offering. Under this approach, a RILA issuer would only pay
registration fees on the exact amount of net issuance of securities
relating to an offering and therefore, it is unnecessary to
additionally require an undertaking that relates to a surplus
registration of securities during an offering.
---------------------------------------------------------------------------
\228\ See rule 415(a)(3) and 17 CFR 229.512(a). Under the
proposed amendments, RILAs would be exempt from the conditions of
rule 415, including furnishing the required undertakings pursuant to
Item 512(a) of Regulation S-K. See infra footnote 331. For example,
RILA registration statements would no longer be required to include
a statement that the issuer undertakes to file a post-effective
amendment to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. We preliminarily believe this
requirement is not necessary for RILA registration statements on
Form N-4 in light of the other amendments we are making to the
prospectus and registration statement filing process for RILAs. See
infra section II.E (discussing proposed amendments to rules 485 and
497 under the Securities Act).
\229\ See Section 24(e) of the Investment Company Act [15 U.S.C.
80a-24(e)]. Section 24(e) generally requires a registered separate
account to amend its registration statement annually to update its
prospectus for the purposes of section 10(a)(3). Section 24(e) also
provides that, for the purposes of liability under Securities Act,
the effective date of the latest amendment is deemed to be the
effective date of the registration statement with respect to
securities sold after the effectiveness of amendment.
\230\ See 17 CFR 229.512(a).
\231\ See 17 CFR 229.512(a)(3).
---------------------------------------------------------------------------
(e) Request for Comment
We request comment on these proposed amendments.
78. Are the instructions for the proposed new section on the facing
sheet appropriate? Should there be additional or different options for
the proposed new section on the facing sheet?
79. Are the definitions in Part A of the General Instructions of
Form N-4 appropriate? If not, which definitions require additional
clarity or modifications? For example, do commenters believe it is
appropriate to use the collective term ``registrant'' to include
insurance companies that may not be registered entities under the
Securities Act? Do the definitions effectively convey which provisions
apply to which type of annuity contract?
80. Do commenters agree with the statement that ``investor
account'' is not generally used in insurance company disclosures to
investors relating to annuity contracts?
81. Did we appropriately scope those provisions that practically
only apply to variable options to those types of investment options?
Are there any other disclosures we should limit to variable options?
Conversely, are there provisions we limited to variable options that we
should also apply to index-linked options?
82. Should we add any additional definitions to Part A of the
General Instructions to Form N-4? Should we retain the term ``investor
account''?
83. Is the definition of ``Index-Linked Option'' appropriate?
Should we revise the definition in any way? Does this definition
encompass all potential RILAs and index-linked options offered in
combination contracts as proposed as required by the RILA Act?
84. Do commenters agree that the proposed definition of
``registered index-linked annuity'' in rule 405 is appropriate? Do
commenters agree that the proposed definition is inclusive of the types
of RILAs encompassed in the definition of ``registered index-linked
annuity'' in the RILA Act?
85. Do commenters agree that with the proposed definition of ``Form
available solely to investment companies registered under the
Investment Company Act of 1940?'' Do commenters think this may cause
confusion as RILA issuers are not investment companies registered under
the Investment Company Act?
86. Should we require RILA issuers to adhere to rules 480, 481,
483, and 484 when registering RILAs on Form N-4?
87. Do commenters agree that the Exhibit List for proposed Form N-4
encompasses the types of exhibits that RILA issuers currently include
in registration statements and is appropriate for RILAs? If not, what
exhibit requirements should govern RILAs registered on Form N-4? Are
there additional exhibits that RILA issuers should be required to file
as part of their registration statements on Form N-4? Are there any
exhibits that the integrated disclosure requirements of Regulation S-K
currently include that we should require on Form N-4?
[[Page 71126]]
88. Is it appropriate to require RILA issuers to furnish the
undertakings in Item 34 of proposed Form N-4? Are there different or
additional undertakings that should be required for these issuers?
8. Remaining Form N-4 Items
We propose to make applicable to RILAs the remaining requirements
and disclosure items on the existing Form N-4 discussed below, which we
do not propose to substantively change.\232\ The general instructions
to the proposed form include both organizational requirements along
with substantive requirements for the preparation of the registration
statement, including instructions relating to the organization,
presentation, and prospectuses permitted to be included in a
registration statement. The remaining disclosure items principally
provide investors with information about the annuity contract and how
it operates. In addition, these items provide basic information about
the insurance company or the securities offering itself, consistent
with some of the disclosures provided currently in Forms S-1 or S-3.
---------------------------------------------------------------------------
\232\ As noted above, some of these items would be amended to
account for changes in defined terms and to use gender-neutral
terminology. See supra section II.B.7.
---------------------------------------------------------------------------
(a) General Instructions
RILAs offerings registered on Form N-4 will need to comply with the
general instructions of that form. These general instructions are
structured to include four parts: (A) Definitions; \233\ (B) Filing and
Use of Form; (C) Preparation of the Registration Statement; and (D)
Incorporation by Reference.\234\ This would result in a number of
substantive outcomes for those issuers.\235\ Specifically:
---------------------------------------------------------------------------
\233\ See supra section II.B.7(b) (discussing proposed
amendments to the definitions used in the form).
\234\ The items described in this section can generally be found
in proposed General Instruction C of Form N-4. See also supra
section II.B. [Other Amendments] (discussing definitional updates).
EDGAR permits registrants to file required financial statements
separately under a specific submission type. Thus, registrants may
incorporate by reference into their post-effective amendment and
other filings the financial statements filed under this EDGAR
submission type. See VASP Adopting Release at n.592.
\235\ We are also proposing to correct a typographical error in
General Instruction B.2(b) regarding items that can be omitted for
registration statements or amendments filed only under the
Investment Company Act. Currently, the instructions state that
issuers can omit from Part C Items 26(c), (k), (l), and (m), but
those items do not exist in the form and Item 26 (Financial
Statements) is in the SAI, not Part C. This is supposed to refer to
Item 27 (Exhibits), which do exist, are in Part C, and are more
Securities Act in nature. This instruction would be updated to refer
instead to Item 27 as a result.
---------------------------------------------------------------------------
Plain English. The instructions provide a number of points
to issuers on how best to promote effective communication between
issuers and prospective investors. For example, issuers are directed to
use document design techniques that promote effective communication and
to respond to the items in the form as simply and directly as
reasonably possible and avoid the use of formulas as the primary means
of communicating certain terms or features of a contract.\236\ Issuers
are also encouraged to use, as appropriate, Q&A formats beyond the KIT,
tables, and other presentation methods in the form generally.\237\
---------------------------------------------------------------------------
\236\ See proposed General Instructions C.1.(a) and (c) to Form
N-4. This specific text is not intended to discourage use of a
formula, but rather, to clarify that if a formula is used in
connection with a term or feature, investors are first provided
appropriate plain English disclosure regarding the operation of the
term or feature. See VASP Adopting Release at n.591.
\237\ See proposed General Instruction C.3.(c) to Form N-4. As
discussed above, we are proposing to require Q&A formatted responses
to the Key Information Table. See supra section II.B.2.
---------------------------------------------------------------------------
Organization. Issuers are directed to organize information
in the prospectus and SAI to make it easy for investors to understand,
with some limitations on the order of presentation.\238\
---------------------------------------------------------------------------
\238\ See proposed General Instruction C.3.(b) to Form N-4.
---------------------------------------------------------------------------
Other Information. Issuers are permitted to include (other
than in Items 2 or 3) information in the prospectus or SAI not
otherwise required as long as the additional information is not
incomplete, inaccurate, or misleading and does not, because of its
nature, quantity, or manner of presentation, obscure, or impede
understanding of the information that is required.\239\ In similar
circumstances, issuers may include sales literature in the
prospectus.\240\
---------------------------------------------------------------------------
\239\ See proposed General Instruction C.3.(b) to Form N-4.
\240\ See proposed General Instruction C.3.(g) to Form N-4.
---------------------------------------------------------------------------
Terminology. Issuers are required to define special terms
used in the prospectus in any presentation that clearly conveys meaning
to investors.\241\ Only these special terms must be defined or listed
in any glossary or list of definitions elected to be used.\242\
Registrants are not required to use the same terminology as that used
in the form as long as the registrant clearly conveys the meaning of,
or provides comparable information as, the form's terminology.
---------------------------------------------------------------------------
\241\ See proposed General Instruction C.3.(d) to Form N-4.
\242\ Registrants are also permitted to define terminology only
used in one section in such section.
---------------------------------------------------------------------------
Multiple Contracts. Issuers are permitted to describe
multiple contracts that are essentially identical in a single
prospectus, and the instructions discuss the presentation of
information regarding multiple contracts in these circumstances.\243\
Further, issuers are permitted to combine multiple prospectuses into a
single registration statement where the contracts are substantially
similar.
---------------------------------------------------------------------------
\243\ See proposed General Instruction C.3.(e) to Form N-4. The
instructions state that ``essentially identical'' is a facts and
circumstances-based determination but that contracts that differ in
providing optional benefits or being group or individual contracts
are not essentially identical whereas variances due only to State
regulatory requirements would be.
---------------------------------------------------------------------------
Timing. The instructions state that, consistent with
Securities Act rules, in most circumstances prospectuses and SAIs used
after the effective date of the registration statement shall be dated
approximately as of such effective date, but that a revised or amended
prospectus or SAI used thereafter need only bear the approximate date
of its issuance. Each supplement to the prospectus or SAI shall be
dated separately the approximate date of its first use.\244\
---------------------------------------------------------------------------
\244\ See proposed General Instruction C.3.(f) to Form N-4; 17
CFR 230.423.
---------------------------------------------------------------------------
Provision of Websites. Any websites included in an
electronic version of the prospectus must include active hyperlinks or
other means of facilitating access that leads directly to the relevant
website address, though this requirement does not apply to a prospectus
filed on EDGAR.\245\
---------------------------------------------------------------------------
\245\ See proposed General Instruction C.3.(i) to Form N-4.
---------------------------------------------------------------------------
Incorporation by Reference. In addition to the general
requirements of the Commission rules on incorporation by reference,
issuers are not permitted to incorporate by reference information
required to be in the prospectus unless otherwise permitted by the
form, but may incorporate by reference the SAI into the prospectus
without delivering the SAI and incorporate by reference information
required to be included in the SAI or Part C.\246\
---------------------------------------------------------------------------
\246\ Proposed General Instruction D of Form N-4.
---------------------------------------------------------------------------
Collectively, these general instructions are designed to require
clear disclosure to investors about the variable annuity contracts
currently registered on the form and to make clear how issuers must
prepare and file their registration statements. Requiring RILA issuers
to prepare their registration statements in accordance with these
instructions would likewise facilitate the provision of clear
disclosure to
[[Page 71127]]
investors and provide clear direction to these issuers on how to
prepare and file their registration statements. Further, applying these
requirements to RILAs as proposed would help ensure the comparability
of different annuity offerings, for example, by ensuring that the
filings are held to the same plain English, multiple contract
disclosure, timing, website, and incorporation by reference standards.
(b) Contract Disclosures
The table below summarizes disclosures in the existing Form N-4
about the annuity contract, how it operates, and how it is serviced by
the insurance company, that we propose making applicable to RILA
issuers without substantive change.
Table 4--Contract Disclosures
------------------------------------------------------------------------
Item Description
------------------------------------------------------------------------
Prospectus (Part A)
------------------------------------------------------------------------
General Description of the A general description of the contract,
Contracts (Item 8). including disclosure of the parties'
material rights under the contract;
relevant contract provisions and
limitations; contract obligations funded
by the insurance company's general
account; class of purchasers, and
material changes that can be made to the
contract by the insurance company.
Annuity Period (Item 9)...... A description of the annuity options
available, including a discussion of
material factors that determine the
benefits; annuity commencement date;
frequency and duration of annuity
payments; the effect of assumed
investment return; any minimum amount
necessary for an annuity option and the
consequences of an insufficient amount;
rights to change annuity options; and,
if applicable, a disclosure that the
investor will be unable to withdraw any
contract value amounts after the annuity
commencement date.
Benefits Available Under the A tabular summary overview of the
Contract (Item 10). benefits available under the contract
(e.g., standard or optional death
benefits, standard or optional living
benefits, etc.), briefly discussing,
among other things: whether the benefit
is optional; current and maximum fees
associated with the benefit; how the
benefit amount is calculated; and any
associated restrictions or limitations.
Purchases and Contract Value A description of the procedures for
(Item 11). purchasing a contract, including concise
explanations of minimum initial and
subsequent purchase payment required,
when these payments are credited, and
how they are allocated to investment
options. Also an identification of the
principal underwriters (other than the
insurance company) of the contracts and
other information about that underwriter
such as any affiliations.
Surrenders and Withdrawals A description of how surrenders and
(Item 12). withdrawals can be made from a contract,
including limits on the ability to
surrender, how proceeds are calculated,
and when surrenders and withdrawals are
payable. Issuers must also describe
potential effect of surrenders and
withdrawals, including how they could
affect a contract's value or benefits,
and whether any charges or contract
adjustments will apply. Issuers should
also describe any involuntary redemption
provisions and any revocation rights,
disclosing the calculation methodology
and any associated limitations to
investment options.
Loans (Item 13).............. A description of the loan provisions of
the contract, including, for example,
loan availability and related
restrictions, interest mechanics, the
effect of a loan on the contract's value
and death benefit, other effects that a
loan could have on a contract; and loan
procedures.
Taxes (Item 14).............. A description of the material tax
consequences to the investor and
beneficiary of buying, holding,
exchanging, or exercising rights under
the contract. The description should
include a discussion of the taxation of
annuity payments, death benefit
proceeds, periodic and non-periodic
withdrawals, loans, and any other
distribution that may be received under
the contact, as well as the tax benefits
accorded the contract and other material
tax consequences. Issuers must identify
the types of qualified plans for which
the contracts are intended to be used
and describe any effect of taxation on
the determination of contract values.
------------------------------------------------------------------------
Statement of Additional Information (Part B)
------------------------------------------------------------------------
Cover Page and Table of A statement of the name of the insurance
Contents (Item 18). company, the contract, and related class
or classes. This item also requires a
table of contents, a statement that the
SAI is not a prospectus, information
about how to obtain the prospectus, and
a discussion of information the SAI
incorporates by reference.
Non-principal Risks of A summary of the non-principal risks of
Investing in the Contract purchasing a contract not otherwise
(Item 20). disclosed in the prospectus.
Services (Item 21)........... Information on services provided to the
registrant in connection with the
contract. If not disclosed elsewhere,
this requires a summary of the
substantive provisions of certain
management-related service contracts.
The registrant must also provide the
name and address of its independent
public accountant. Where affiliates of
the insurance company act as agents for
the registrant in connection with the
contract, issuers are required to
provide specific information about the
services performed and remuneration paid
for the services. Issuers must also
disclose if the insurance company is the
principal underwriter of the contract.
Annuity Payments (Item 25)... A description of the method for
determining the amount of annuity
payments if not described in the
prospectus and how any change in the
amount of a payment after the first
payment is determined.
------------------------------------------------------------------------
Other Information (Part C)
------------------------------------------------------------------------
Management Services (Item 33) A summary of the substantive provisions
of any management-related service
contracts not discussed in Parts A or B,
including the last three years' payment
history.
------------------------------------------------------------------------
[[Page 71128]]
These requirements apply to existing Form N-4 issuers because these
disclosures provide investors in these products with a concise
presentation of material information about the annuity contract they
would be purchasing, as well as other information that provides
necessary context about the contracts such as management service
disclosures.\247\ Because disclosure of this information is equally
fundamental to the ability of investors to make informed investment
decisions about RILA contracts, we are proposing to apply these
requirements to RILAs. For example, existing Form N-4 issuers are
required to summarize standard and optional benefits available to the
investor under the contract because these benefits are primary features
of variable contracts and are also often key differentiators between
competing products.\248\ Insurance companies also offer these benefits
in connection with RILAs.
---------------------------------------------------------------------------
\247\ See Registration Forms for Insurance Company Separate
Accounts That Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 24, 1985) [50 FR 26145 (June 25, 1985)]
(``Forms N-3 and N-4 Adopting Release'').
\248\ See VASP Adopting Release at n.26 and accompanying text.
---------------------------------------------------------------------------
(c) Issuer and Offering Disclosures
In addition to disclosures about the contract, the proposed
amendments to Form N-4 would require that RILA issuers make certain
disclosures relating to the issuer and offering consistent with the
form's current requirements. The table below summarizes these items,
omitting items in Form N-4 that, by their terms, would not apply to
RILAs.
Table 5--Issuer and Offering Disclosures
------------------------------------------------------------------------
Similar form S-1
Item Description disclosure
------------------------------------------------------------------------
Prospectus (Part A)
------------------------------------------------------------------------
Legal Proceedings (Item 15)... A description of Item 11(c)
material pending (legal
legal proceedings to proceedings).
which the registered
separate account, the
principal
underwriter, or the
insurance company is
a party, including
similar information
regarding any
proceedings
instituted or known
to be contemplated by
a governmental
authority.
------------------------------------------------------------------------
Statement of Additional Information (Part B)
------------------------------------------------------------------------
General Information and Basic information Item 11(a)
History (Item 19). regarding the (description of
background and business).
organization of the
insurance company,
including the
jurisdiction in which
it is organized and a
description of its
business.
Underwriters (Item 23)........ Identification of the Item 8 (plan of
principal distribution).
underwriters (other
than the insurance
company), and for
affiliated
underwriters, a
description of the
nature of the
affiliation. For each
principal underwriter
distributing the
registrants'
contracts, the
insurance company
must provide
information about the
offering and related
commissions. If the
registrant made
payments to an
underwriter of or
dealer in the
contracts during its
last fiscal year over
a threshold amount,
the registrant must
disclose certain
information about
those payments.
------------------------------------------------------------------------
Other Information (Part C)
------------------------------------------------------------------------
Directors and Officers of the A statement of the Item 11(k)
Insurance Company (Item 28). name, principal (directors and
business address, executive
position, and office officers).
held for each
director or officer
of the insurance
company.
Persons Controlled by or Under Disclosure of persons Item 11(k)
Common Control with the directly or (directors and
Insurance Company or the indirectly controlled executive
Registrant (Item 29). by or under common officers).
control with the
registrant or the
sponsoring insurance
company.
Indemnification (Item 30)..... Information about the Item 14
effect of relevant (indemnificatio
indemnification n of directors
agreements, and officers).
arrangements, or
statutory provisions
through which
underwriters or
affiliates are
insured or
indemnified against
any liability
incurred in their
official capacity.
Principal Underwriters (Item A statement of Item 8 (plan of
31). investment companies, distribution).
other than any
registered separate
account related to
the filing, each
principal underwriter
is also acting as a
principal
underwriter. More
detailed information
about principal
underwriters
identified in Item
23, such as recent
information about
commissions and other
compensation received
from the registrant
by each principal
underwriter.
------------------------------------------------------------------------
Information about the issuer and the offering process are relevant
when purchasing an annuity contract, including in the context of a
RILA.\249\ These items, which largely correspond to items currently
required to be disclosed by RILAs on Forms S-1 and S-3 as detailed in
the table above, provide the appropriate amount of information about
the issuing insurance company and the offering of securities in a way
tailored to annuity contract investors. For example, because an
investor's rights under RILAs are dependent on the insurance company's
claim-paying ability, RILA purchasers also share an interest in
disclosures of material pending legal proceedings involving the
insurance company or related parties. On the other hand, where Form S-1
disclosures have less relevance to RILAs, we have not included those
disclosures in proposed Form N-4.
---------------------------------------------------------------------------
\249\ See Forms N-3 and N-4 Adopting Release.
---------------------------------------------------------------------------
[[Page 71129]]
(d) Request for Comment
We request comment on our proposed application of these
requirements and disclosures to RILAs.
89. Is it appropriate to require RILA issuers to meet these general
instructions of the form? Should we tailor any particular provision to
account for the differences between RILAs and the variable annuities
that currently use the form? For example, is there any reason to treat
RILAs different for purposes of the ``essentially identical'' test?
90. The investor testing results suggested that investors had
significant difficulty in understanding certain terminology used in
connection with RILAs, in particular the words ``term'' and
``investment term.'' \250\ Should we, as a result, change any
instruction to aid in investor understanding? For example, the form
currently provides that the prospectus disclosure requirements in Form
N-4 are intended to elicit information for an average or typical
investor who may not be sophisticated in legal or financial
matters.\251\ In light of this feedback in investor testing, should we
amend this instruction or otherwise provide that insurance companies
should not use ``term,'' ``investment term,'' or other terminology that
investors found confusing? Regardless of whether insurance companies
use ``investment term'' or different terminology, in the glossary
definition of the ``investment term'' (or another term to describe that
concept) should insurance companies be required to specifically
disclose to investors that the ``investment term'' is not the same as
the life of the contract? As another example, should we require, rather
than permit, the use of a glossary or list of definitions for the
entirety of the form so that investors have one place to look to
understand a particular term? Should we clarify what terms are
``special terms''? What terminology in particular should be considered
a special term in the RILA context?
---------------------------------------------------------------------------
\250\ See OIAD Report at Section 7, Conclusions, Summary of
Findings.
\251\ See Instruction C.1.b of Form N-4.
---------------------------------------------------------------------------
91. Should we define certain key terms that insurance companies
must use in their registration statement to help to mitigate investor
confusion and help investors compare one RILA to another? Which key
terms should we address and how should they be defined?
92. Is it appropriate, as proposed, to apply these exiting Form N-4
disclosure requirements to RILA issuers? Are any of these disclosure
items inappropriate for including in a RILA registration?
93. Are there other details about the RILA contract, not otherwise
addressed above, that we should require be disclosed on amended Form N-
4? Are there details regarding the issuer or offering that we should
require?
94. Certain of these disclosures are repeated throughout the
registration statement. For example, similar disclosures regarding
principal underwriters are contained in the prospectus (Item 11) and
SAI (Item 23). Should we limit these items to a particular location in
the registration statement?
95. Under the proposal, certain information that RILA issuers
currently provide on Forms S-1 and S-3 would still be required by Form
N-4, but would be placed in the SAI rather than the prospectus. Should
any of the information we propose to require in the SAI instead be
provided in the prospectus?
96. Are these items properly ordered? Should we move any of these
items to greater prominence or move items from the prospectus, SAI, or
Part C to another part of the registration statement?
9. Inline XBRL
We are proposing to require RILA issuers to tag certain of the
information they would disclose in their prospectuses and SAIs in a
structured, machine-readable data language. Specifically, we are
proposing to require RILA issuers to tag the required information in
Inline XBRL in accordance with Rule 405 of Regulation S-T (17 CFR
232.405) and the EDGAR Filer Manual.\252\ The proposed requirements for
RILA issuers would include tagging of the overview and more in-depth
descriptions of index-linked options and contract adjustments that RILA
issuers would have to include in their prospectuses under the proposal,
the proposed disclosure of census-type information regarding contracts
with index-linked options, and information disclosed about changes in
and disagreements with accountants.\253\ RILA issuers, in addition to
variable contracts issuers whose contracts offer fixed options, would
have to tag the proposed descriptions of fixed options available under
the contract.\254\ Form N-4 filers also would have to tag the proposed
new disclosures indicating that the insurance company is relying on the
exemption provided by rule 12h-7, and variable contract issuers would
have to tag the proposed new statement relating to the risks of
variable options.\255\
---------------------------------------------------------------------------
\252\ This proposed tagging requirements would be implemented by
amending General Instruction C.3(h) of Form N-4, and by revising
rule 405(b) of Regulation S-T to include the proposed RILA-specific
disclosures. Pursuant to rule 301 of Regulation S-T, the EDGAR Filer
Manual is incorporated by reference into the Commission's rules. In
conjunction with the EDGAR Filer Manual, Regulation S-T governs the
electronic submission of documents filed with the Commission. Rule
405 of Regulation S-T specifically governs the scope and manner of
disclosure tagging requirements for operating companies and
investment companies, including the requirement in rule 405(a)(3) to
use Inline XBRL as the specific structured data language to use for
tagging the disclosures.
\253\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Items 2(b)(2), 2(d), 6(d), 7(e), 26(c), and 31A.
\254\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Item 6(e).
\255\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Items 6(a) (instruction) and 6(c)(1).
---------------------------------------------------------------------------
In addition, RILA issuers would have to tag those prospectus
disclosures that Form N-4 currently requires to be tagged.\256\ These
include the following disclosure items: the Key Information Table, Fee
Table, Principal Risks of Investing in the Contract, Other Benefits
Available Under the Contract, and Investment Options Available Under
the Contract in the statutory prospectus. The proposed Inline XBRL
requirements, like the current Inline XBRL requirements for Form N-4
issuers, would only apply to contracts being sold to new investors. The
result of this proposed approach would be that prospectus disclosure
for contracts that are no longer being sold to new investors would not
need to be tagged, as we believe tagging this disclosure would have
less utility for current investors and other market participants.\257\
Issuers of variable annuities registered on Form N-4 are currently
required to tag certain registration statement disclosure items using
Inline XBRL.\258\ These items are those that would be most suited to
being tagged in a structured format and be of greatest utility for
investors and other data users that seek structured data to analyze and
compare RILA contracts. This rationale is the same as that which the
Commission articulated in originally adopting these tagging
requirements in
[[Page 71130]]
the context of variable annuity disclosure.\259\
---------------------------------------------------------------------------
\256\ See rule 405(b) of Regulation S-T; proposed General
Instruction C.3(h) of Form N-4; see also proposed Items 3, 4, 5, 10,
and 17.
\257\ See VASP Adopting Release at paragraph accompanying n.904.
\258\ See General Instruction C.3(h) of current Form N-4; see
also Interactive Data to Improve Financial Reporting, Release No.
33-9002 (Jan. 30, 2009) [74 FR 6776], as corrected by Release No.
33-9002A (Apr. 1, 2009) [74 FR 15666] (requiring operating companies
to submit financial statements accompanying their registration
statements and periodic and current reports in XBRL).
\259\ See VASP Adopting Release at section II.E.
---------------------------------------------------------------------------
In addition to these existing items, requiring Inline XBRL tagging
of the new disclosure requirements we are proposing to include in Form
N-4 would benefit investors, other market participants, and the
Commission by making the disclosures more readily available and easily
accessible for aggregation, comparison, filtering, and other
analysis.\260\ We chose these particular items in the form to
structure--including those that issuers of variable annuities would
newly have to structure--because we believe that they are the most
salient to investors and benefit most from being structured. We believe
that tagging this disclosure, along with the requirement for RILA
issuers to tag the same other disclosure items that are currently
tagged, would result in information being tagged that would best permit
investors and other data users to analyze and compare RILAs. For
example, this would enable automated extraction and analysis of
descriptions of index-linked options available under the contract,
information regarding the features of each currently offered index-
linked option, and information regarding contract adjustments. This
would allow investors and other market participants more efficiently to
perform large-scale analysis and comparison across RILAs (including the
index-linked options that different RILAs offer) and time periods.
Similarly, the requirement to tag information about fixed options will
permit the same type of analysis with respect to these investment
options--including comparing fixed options across contracts, as well as
index-linked options, variable options, and fixed options offered under
the same contract.
---------------------------------------------------------------------------
\260\ See supra footnotes 253-255. These primarily include the
proposed new disclosure items that are specific to RILAs, as opposed
to extant Form N-4 disclosure items to which we are proposing
incremental amendments to address RILAs along with variable
annuities.
---------------------------------------------------------------------------
As another example, census-type information about variable annuity
contracts, which is parallel to the SAI disclosure we propose to
require for contracts with index-linked options, is currently reported
in structured data format.\261\ Requiring census-type information about
contracts with index-linked options to be tagged in Inline XBRL would
help the Commission and staff identify trends in insurance companies'
offerings of the contracts, similar to the tools the Commission and
staff currently have to identify trends in the offering of variable
annuity contracts. An Inline XBRL requirement also would facilitate
other analytical benefits, such as more easily extracting and searching
disclosures about annuities, and automatically comparing these
disclosures against prior periods.
---------------------------------------------------------------------------
\261\ See supra section II.B.I.A.6; see also Item F.14 of Form
N-CEN.
---------------------------------------------------------------------------
We are proposing to require RILA issuers to submit Interactive Data
Files as follows, consistent with the approach for issuers of variable
annuities registered on Form N-4:
For most post-effective amendments, Interactive Data Files
would have to be filed either concurrently with the filing, or in a
subsequent amendment that is filed on or before the date that the post-
effective amendment that contains the related information becomes
effective; \262\
---------------------------------------------------------------------------
\262\ See proposed General Instruction C.3(h)(i)(B) of Form N-4.
This instruction relates to post-effective amendments filed pursuant
to paragraph (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
---------------------------------------------------------------------------
For initial registration statements (and post-effective
amendments other than as described in the bullet immediately above),
Interactive Data Files would have to be filed in a subsequent amendment
on or before the date the registration statement or post-effective
amendment that contains the related information becomes effective;
\263\ and
---------------------------------------------------------------------------
\263\ See proposed General Instruction C.3(h)(i)(A) of Form N-4.
This instruction relates to initial registration statements and
post-effective amendments other than those filed pursuant to
paragraph (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
---------------------------------------------------------------------------
For any form of prospectus filed pursuant to rule 497(c)
or (e), Interactive Data Files would have to be submitted concurrently
with the filing.\264\
---------------------------------------------------------------------------
\264\ See proposed General Instruction C.3(h)(ii) of Form N-4.
---------------------------------------------------------------------------
We anticipate that this approach would facilitate the timely
availability of important information in a structured format for
investors, investment professionals, and other data users yielding
substantial benefits. For data aggregators responding to investor
demand for the data, the availability of the required disclosures in
the Inline XBRL format concurrent with filing or before the date of
effectiveness would allow them to quickly process and share the data
and related analysis with investors.
Like other issuers, RILA issuers could request temporary and
continuing hardship exemptions for the inability to timely file
electronically the Interactive Data File.\265\
---------------------------------------------------------------------------
\265\ See rule 201 Regulation S-T (temporary hardship exemption)
and rule 202 of Regulation S-T (continuing hardship exemption).
---------------------------------------------------------------------------
Request for Comments
We request comment generally on the proposed amendments to require
the use of Inline XBRL, and specifically on the following issues:
97. Should we adopt rules that make the submission of structured
data in the Inline XBRL format mandatory for RILA issuers?
98. Is it appropriate that RILA issuers would have to tag the same
disclosure items that variable annuity issuers tag? Why or why not? If
RILA issuers were to be required to tag other disclosure items that are
also applicable to variable annuities, should variable annuity issuers
also be required to tag these same items?
99. Is it appropriate that all Form N-4 filers would have to tag
certain of the new disclosure items that we are proposing to add to
Form N-4, in particular, proposed Items 2(b)(2), 2(d), 6(a)
(instruction), 6(c)(1), 6(d), 6(e), 7(e), 26(c), and 31A of Form N-4?
Should insurance companies not be required to tag any of these items,
and if so, why not? Are there other proposed disclosure items that we
should also require insurance companies to tag? If so, why?
100. Is it appropriate that the approach for RILA issuers to submit
Interactive Data Files be consistent with the current approach for
issuers of variable annuities registered on Form N-4, as proposed? If
not, what alternative approach would be more appropriate and why? Is it
appropriate that, like variable annuities registered on Form N-4, the
proposed Inline XBRL requirements for RILA issuers would apply only to
contracts being sold to new investors? Do commenters agree that tagging
the prospectus disclosure would have less utility for current investors
and other market participants?
101. Are any other amendments necessary or appropriate to require
the submission of the proposed required information in Inline XBRL? If
so, what are they?
C. Option To Use a Summary Prospectus
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations.\266\
[[Page 71131]]
Investors would continue to have access to the RILA statutory
prospectus and other information about the RILA contract online, with
paper or electronic copies of this information upon request.\267\ This
proposed approach would provide parity between RILA issuers and issuers
of variable annuities registered on Form N-4, which are permitted to
use summary prospectuses to satisfy their prospectus delivery
obligations.
---------------------------------------------------------------------------
\266\ Section 5(b)(2) of the Securities Act makes it unlawful to
carry or cause to be carried a security for purposes of sale or for
delivery after sale ``unless accompanied or preceded'' by a
prospectus that meets the requirements of section 10(a) of the Act.
See section 10(a) of the Securities Act (generally requiring a
prospectus relating to a security to contain the information
contained in the registration statement). For purposes of this
release, a prospectus meeting the requirements of a section 10(a)
prospectus is referred to as a ``statutory prospectus.'' For
purposes of this section, we refer to RILA contracts and combination
contracts together as ``RILA contracts.''
\267\ To further effectuate the changes being proposed, we
propose to exclude RILA offerings from the provisions of rule 172,
which provides that a final prospectus will be deemed to precede or
accompany a security for sale for purposes of Securities Act section
5(b)(2) as long as the final prospectus meeting the requirements of
Securities Act section 10(a) is filed or the issuer will make a good
faith and reasonable effort to file it with the Commission as part
of the registration statement within the required rule 424
prospectus filing timeframe. Consistent with registered investment
companies and business development companies, RILA offerings would
be subject to a separate framework governing communications with
investors under the proposal. See supra section II.E; see also
Offering Reform Release at section VI.B.1.b.
---------------------------------------------------------------------------
RILA Summary Prospectus Overview
The current summary prospectus rule for variable contracts uses a
layered disclosure approach designed to provide investors directly with
key information relating to the contract's terms, benefits, and risks
in a concise and reader-friendly presentation, with more detailed
information available elsewhere. We anticipate that the summary
prospectus framework would improve investor understanding of RILA
contracts, as the Commission similarly expressed when it adopted the
summary prospectus rule for variable contracts.\268\ This proposed
approach for RILA contracts builds on the Commission's decades of
experience with layered disclosure and rules permitting the use of
summary prospectuses.\269\ The proposal also recognizes investors'
expressed preferences for concise and engaging disclosure of key
information. Accordingly, we believe the proposed approach is
consistent with the RILA Act's mandate of designing disclosure
requirements ``with the goal of ensuring that key information is
conveyed in terms that a purchaser is able to understand.'' \270\
---------------------------------------------------------------------------
\268\ See VASP Adopting Release at n.21 and accompanying text.
\269\ See id.; see also Enhanced Disclosure and New Prospectus
Delivery Option for Registered Open-End Management Investment
Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009)
[74 FR 4545 (Jan. 26, 2009)] (``2009 Summary Prospectus Adopting
Release''); Tailored Shareholder Reports for Mutual Funds and
Exchange-Traded Funds; Fee Information in Investment Company
Advertisements, Investment Company Act Release No. 34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)] (``Tailored Shareholder Reports
Adopting Release'') (adopting rules incorporating a layered
disclosure approach to open-end funds' annual and semi-annual
reports to shareholders).
\270\ See VASP Adopting Release at n.20 and accompanying text;
Tailored Shareholder Reports Adopting Release at nn.10, 11, and 29
and accompanying text; see also supra discussion following footnote
7.
---------------------------------------------------------------------------
The proposed amendments to rule 498A would broaden the scope of the
rule to address RILA contracts.\271\ Under the proposed amendments, the
rule's conditions for relying on the rule to satisfy prospectus
delivery obligations would be the same for RILA contracts as for
variable contracts.\272\ These conditions include the requirements to
send or give a summary prospectus to an investor no later than the time
of the ``carrying or delivery'' of the contract security, as well as:
(1) requirements for the contents that must be included in a summary
prospectus, (2) limitations on binding a summary prospectus with other
materials, and (3) requirements that the summary prospectus, statutory
prospectus, and contract statement of additional information must be
publicly accessible, free of charge, on a website in the manner that
the rule specifies.
---------------------------------------------------------------------------
\271\ To facilitate this change, and to make the terminology
used in rule 498A more consistent with certain terms used in the
proposed amendments to Form N-4, we are also proposing a number of
amendments to the rule's definitions. Specifically, we would (1)
amend the definitions to ``Class,'' ``Contract,'' Investment
Option,'' ``Registrant,'' ``Variable Annuity Contract,'' and
``Variable Life Insurance Contract'' to address RILA contracts, and/
or to make changes to these definitions that correspond with
amendments to certain definitions in Form N-4 (either definitions of
these same terms in Form N-4, or definitions of other terms in Form
N-4 that would otherwise affect the way these terms are defined in
rule 498A); (2) add definitions for ``Fixed Option,'' ``Index-Linked
Option,'' ``Insurance Company,'' ``Registered Separate Account,''
``RILA Contract,'' and ``Variable Option'' consistent with their
counterparts in the proposed Form N-4 amendments; and (3) deleting
the definition of ``Depositor.'' These changes are necessary to
communicate the provisions of the rule that would be applicable to
RILA and combination contracts.
\272\ See proposed rule 498A(f). Rule 498A also provides that a
communication relating to an offering registered on Form N-4 that a
person sends or gives after the effective date of the registration
statement (other than a prospectus that Section 10 of the Securities
Act permits or requires) will not be deemed a prospectus under
section 2(a)(10) of the Securities Act, under certain conditions.
The proposed amendments to rule 498A would extend this provision to
RILA contracts. See rule 498A(g). Under the proposed amendments, the
rule 498A provision addressing information that may be incorporated
by reference into a summary prospectus also would apply the same to
RILAs as it does to other contracts currently within the scope of
the rule. See rule 498A(d).
---------------------------------------------------------------------------
The proposed amendments to rule 498A would involve the use of two
distinct types of summary prospectuses for RILA contracts, employing
the same approach the rule currently uses for variable contracts. An
``initial summary prospectus,'' covering contracts offered to new
investors, would include certain key information about the contract's
most salient features, benefits, and risks, presented in plain English
in a standardized order. The rule amendments would also require
``updating summary prospectuses'' to be provided to existing investors
in RILA contracts as a condition to relying on the rule. The updating
summary prospectus would include a brief description of certain changes
to the contract that occurred during the previous year, as well as a
subset of the information required to appear in the initial summary
prospectus. Certain key information about the index-linked options that
the contract offers would be provided in both the initial summary
prospectus and updating summary prospectus.\273\
---------------------------------------------------------------------------
\273\ This proposed approach is consistent with the approach for
information about variable options in variable contracts' summary
prospectuses, in which certain key information about the portfolio
companies offered as variable options appears in both the initial
summary prospectus and updating summary prospectus. See proposed
rule 498A(b)(5)(ix); proposed rule 498A(c)(6)(iv).
---------------------------------------------------------------------------
As under current rule 498A for variable contracts, the proposed use
of summary prospectuses for RILA contracts would be voluntary. This
would be appropriate to provide RILA issuers sufficient time to
transition to a summary prospectus regime, as well as in recognition of
the fact that there could be different relative benefits of using a
summary prospectus for certain RILA issuers and investors in these
contracts.\274\ Similar considerations informed the Commission's
decision to adopt a voluntary summary prospectus regime for variable
contracts.\275\
---------------------------------------------------------------------------
\274\ The Commission similarly discussed the relative benefits
to variable contract issuers of using a summary prospectus, based on
the types of products that these issuers offer and the length of
their current prospectuses, as well as the benefit of more concise
disclosure to investors, in adopting rule 498A. See, e.g., VASP
Adopting Release at section IV.E.1 (discussion in the Economic
Analysis section of the release, addressing the Commission's
consideration of mandating summary prospectuses for variable
contracts).
\275\ See VASP Adopting Release at discussion accompanying
nn.41-45; see also infra section III.C.1.c (discussing that
different issuers and investors could expect to benefit differently
from this optional prospectus delivery regime, although we expect a
majority of RILA issuers to choose to use summary prospectuses and
that therefore the majority of RILA investors will have the option
to use both summary prospectuses and statutory prospectuses in their
decision-making, in whatever proportion investors think is best for
their preferences).
---------------------------------------------------------------------------
Initial Summary Prospectus
As under the current rule 498A, an initial summary prospectus for a
RILA
[[Page 71132]]
contract may only describe a single contract that the RILA issuer
currently offers for sale.\276\ An initial summary prospectus may
describe more than one class of a currently offered contract.\277\
Aggregating disclosures for multiple contracts, or currently offered
and no-longer-offered features and options of a single contract, can
hinder investors from distinguishing between contract features and
options that apply to them and those that do not. As a result, an
initial summary prospectus could simplify and consolidate lengthy and
complex disclosures. The content and ordering of items is designed to
highlight aspects of a RILA contract that may not be emphasized in
marketing materials and other disclosures.
---------------------------------------------------------------------------
\276\ See proposed rule 498A(b)(1).
\277\ The definition of the term ``class'' in the proposed
amendments is the same as the definition in the current rule (that
is, as a class of a contract that varies principally with respect to
distribution-related fees and expenses). Proposed rule 498A(a).
---------------------------------------------------------------------------
Like other summary prospectuses that rule 498A addresses, we are
proposing a standardized presentation for RILA initial summary
prospectuses to require certain disclosure items that we believe would
be most relevant to investors to appear at the beginning of the initial
summary prospectus, followed by supplemental information.\278\ The
required presentation could also facilitate comparisons of different
RILA contracts, as well as comparisons between RILA contracts and
variable annuities. An initial summary prospectus must contain the
information required by the rule, and only that information, in the
order specified by the rule.\279\ The information would be required to
appear in the same order, and under relevant corresponding headings, as
the rule specifies.
---------------------------------------------------------------------------
\278\ See VASP Adopting Release at paragraph accompanying nn.58-
59.
\279\ Proposed rule 498A(b)(5).
---------------------------------------------------------------------------
The chart in Table 6 below outlines the information that we propose
to require to appear in an initial summary prospectus for a RILA
contract. We would not change these content requirements, with the
exception of the ordering of the Overview of the Contract and KIT
disclosures, from the current variable annuity requirements. The
Commission has historically viewed these items as providing annuity
investors with key information relating to a contract's terms,
benefits, and risks in a concise and reader-friendly presentation, and
highlighting aspects of the contract that may not be emphasized in
marketing materials and other disclosures.\280\ We preliminarily
believe that this rationale is equally true in the context of RILA
disclosure. Further, as discussed above, we propose that the Overview
of the Contract disclosures (currently Item 3 of Form N-4, but proposed
to be re-numbered as Item 2) should precede the KIT (currently Item 2
of Form N-4, but proposed to be re-numbered as Item 3), due to the
context that the Overview section provides and based upon our
experience with the form [and taking into account the results of
investor testing].\281\ This change would be reflected in the
requirements of rule 498A.\282\ Otherwise, the same order of
disclosures would be provided as under the current rule.
---------------------------------------------------------------------------
\280\ See VASP Adopting Release at nn. 47-48 and accompanying
text. To the extent that these content requirements are unchanged
from the content requirements for variable annuity summary
prospectuses, our rationale for these requirements has not changed
from the rationale that is discussed throughout the sections of the
VASP Adopting Release that address each of the content items
discussed in Table 6 below. See VASP Adopting Release at section
II.A.1.c. Further, we provide our reasoning as to why these
particular disclosures are important to investors in the RILA
context as a general matter in section II.B, supra.
\281\ See supra section II.B.I.A.2.
\282\ Currently, rule 498A requires issuers to place ``Important
Information You Should Consider About the [Contract]'' disclosures
before ``Overview of the [Contract] disclosures.''
Table 6--Outline of the Initial Summary Prospectus
----------------------------------------------------------------------------------------------------------------
Relevant paragraph Item of Form N- Applicable to
Heading in initial summary in proposed 4 (as proposed Applicable to RILA variable annuities
prospectus amendments to rule to be amended) contracts? registered on Form
498A N-4?
----------------------------------------------------------------------------------------------------------------
Cover Page:
Identifying Information Rule 498A(b)(2)(i) .............. [check]............ [check]
(front cover page) \1\. through (iv).
Legends (front cover page) Rule 498A(b)(2)(v). .............. [check]............ [check]
\2\.
EDGAR Contract Identifier Rule 498A(b)(3).... .............. [check]............ [check]
(back cover page).
Table of Contents (optional). Rule 498A(b)(4).... .............. [check]............ [check]
Content:
Overview of the [Contract]... Rule 498A(b)(5)(ii) 2 [check]............ [check]
(each paragraph of (each paragraph of
Item 2, as Item 2 except
applicable). (b)(2) and (d),
which are
generally only
applicable to RILA
contracts).
Important Information You Rule 498A(b)(5)(i). 3 [check]............ [check]
Should Consider About the (with line items (with line items
[Contract]. applicable to RILA applicable to
contracts, as variable
specified in annuities, as
instructions to specified in
Item 3). instructions to
Item 3).
Benefits Available Under the Rule 498A(b)(5)(iv) 10(a) [check]............ [check]
[Contract].
Buying the [Contract]........ Rule 498A(b)(5)(v). 11(a) [check]............ [check]
Making Withdrawals: Accessing Rule 12(a) [check]............ [check]
the Money in Your [Contract]. 498A(b)(5)(vii).
Additional Information About Rule 4 [check]............ [check]
Fees. 498A(b)(5)(viii).
[[Page 71133]]
Appendix: [Investment Options/ Rule 498A(b)(5)(ix) 17 [check]............ [check]
Portfolio Companies] (Item 17(b) and (Item 17(a) and
Available Under the Contract. 17(c), as 17(c), as
applicable). applicable).
----------------------------------------------------------------------------------------------------------------
Notes to Table 6:
\1\ The beginning or front cover page of a RILA contract's initial summary prospectus, like the initial summary
prospectus of a variable annuity registered on Form N-4, would need to include the following information: (1)
the insurance company's name; (2) the name of the contract, and the class or classes if any, to which the
initial summary prospectus relates; (3) a statement identifying the document as a ``Summary Prospectus for New
Investors''; and (4) the approximate date of the first use of the initial summary prospectus.
\2\ The required legends would be the same for RILA contracts and for variable annuities registered on Form N-4.
These legends address the purpose of the summary prospectus, the availability of the statutory prospectus and
other information, information regarding the permitted cancellation period for the contract, and a statement
that additional information about RILA contracts has been prepared by Commission staff and is available at
investor.gov. The initial summary prospectuses for RILA contracts as well as variable annuities also would
have to include the additional statements that we are proposing to require on the cover page of the prospectus
for all Form N-4 issuers. See supra section II.B.1; see also proposed Item 1(a)(6)-(8) of Form N-4.
A RILA initial summary prospectus would be permitted to include a
table of contents. A table of contents must show the page number of the
various sections or subdivisions of the summary prospectus, and
immediately follow the cover page in any initial summary prospectus
delivered electronically.
The topics of the contents included in an initial summary
prospectus--as well as the required headings under which these contents
must appear--are the same for a RILA contract summary prospectus as for
a summary prospectus of a variable annuity registered on Form N-4.\283\
Further, certain of these required contents would vary in substance to
reflect the unique aspects of RILA contracts as compared to variable
annuities. These are indicated in Table 1 above and include:
---------------------------------------------------------------------------
\283\ Proposed rule 498A(b)(5).
---------------------------------------------------------------------------
Disclosure provided under the heading ``Overview of the
Contract'' (Item 2 of Form N-4), where disclosure for RILA contracts
must include specific information about index-linked options currently
offered under the contract, as well as interim value adjustments or
market value adjustments that could affect an investor's contract
value;
Disclosure provided under the heading ``Important
Information You Should Consider About the Contract'' (Item 3 of Form N-
4), where certain rows in the required table are specific to RILA
contracts as opposed to variable annuities;
Disclosure provided under the heading ``Additional
Information About Fees'' (Item 4 of Form N-4), where the requirements
for fee information for RILA contracts differ from the parallel
requirements for variable annuities (reflecting that RILA contracts
generally do not entail annual contract expenses, but there are other
costs associated with an investment in a RILA contract); and
Disclosure under the heading ``Appendix: Investment
Options Available Under the Contract'' (Item 17 of Form N-4), where a
RILA contract would include a different summary table for index-linked
options offered under the contract than the summary table of variable
options offered under a variable annuity.
Each of these disclosure items, which would also appear in a RILA
statutory prospectus, is discussed in more detail in section II.B
above.
Updating Summary Prospectus
As under current rule 498A, RILA issuers would not send an updated
initial summary prospectus to investors each year. Instead, any RILA
issuers would send an updating summary prospectus, which would provide
a brief description of certain changes with respect to the contract
that occurred within the prior year.\284\ This would allow investors to
focus their attention on new or updated information relating to the
contract. Additionally, the updating summary prospectus would include
certain of the items required in the initial summary prospectus that
are most likely to entail contract changes and where any such contract
changes are most likely to be important to investors because they
affect how investors evaluate RILA contracts and are relevant to
investors when considering additional investment decisions or otherwise
monitoring their contracts. This is consistent with the Commission's
approach for variable annuity updating summary prospectuses.\285\
---------------------------------------------------------------------------
\284\ A RILA issuer, like a variable annuity issuer, could only
use an updating summary prospectus if it uses an initial summary
prospectus for each currently offered contract described under the
contract statutory prospectus to which the updating summary
prospectus relates. Proposed rule 498A(c)(1). See also VASP Adopting
Release at n.209 and accompanying text.
\285\ See VASP Adopting Release at section II.A.2.a. As
discussed above, the policy rationale for content requirements that
would be the same among updating summary prospectuses for RILA
contracts and variable annuity contracts--as well as the rationale
for the location of these contents--is the same as that which the
Commission articulated in adopting rule 498A. To the extent that
these content requirements are unchanged from the content
requirements for variable annuity summary prospectuses, our
rationale for these requirements has not changed from the rationale
that is discussed throughout the sections of the VASP Adopting
Release that address each of the content items discussed in Table 7
below. See VASP Adopting Release at section II.A.2.c. Further, we
provide our reasoning as to why these particular disclosures are
important to investors in the RILA context as a general matter in
section II.B, supra.
---------------------------------------------------------------------------
Because the initial summary prospectus is designed for someone
making an initial investment decision, we believe that existing RILA
investors would benefit more from receiving a shorter-form document
including a brief summary of the changes to the contract, than from
receiving the initial summary prospectus year after year.\286\ This
approach also takes into account the cost to maintain and update
separate initial summary prospectuses for currently offered contracts
and those no longer offered.
---------------------------------------------------------------------------
\286\ The Commission discussed this rationale when it initially
adopted rule 498A. See VASP Adopting Release at section II.A.2.a.
---------------------------------------------------------------------------
Unlike an initial summary prospectus, which could describe only a
single contract that a RILA issuer currently offers for sale, an
updating summary prospectus for a RILA could describe one or more
contracts covered in the statutory prospectus to which the updating
summary prospectus relates,
[[Page 71134]]
as under current rule 498A.\287\ Similar to the initial summary
prospectus, an updating summary prospectus could also describe more
than one class of a contract.
---------------------------------------------------------------------------
\287\ Proposed rule 498A(c)(2); see also VASP Adopting Release
at nn.342-343 and accompanying paragraph.
---------------------------------------------------------------------------
Updating summary prospectuses for RILA contracts, like initial
summary prospectuses, would include specific disclosure items appearing
in a prescribed order, under relevant corresponding headings.\288\ An
updating summary prospectus for a RILA contract would have to contain
the information required by the rule, and only that information, in the
order specified by the rule. The chart in Table 7 below outlines the
information that we propose to require to appear in an updating summary
prospectus for a RILA contract.
---------------------------------------------------------------------------
\288\ Proposed rule 498A(c)(6).
Table 7--Outline of the Updating Summary Prospectus
----------------------------------------------------------------------------------------------------------------
Relevant paragraph Applicable to
Heading in updating summary in proposed Item of Applicable to RILA variable annuities
prospectus amendments to Rule amended Form N- contracts? registered on Form
498A 4 N-4?
----------------------------------------------------------------------------------------------------------------
Cover Page:
Identifying Information Rule 498A(c)(3)(i) .............. [check]............ [check]
(front cover page) \1\. through (iv).
Legends (front cover page) Rule 498A(c)(3)(v). .............. [check]............ [check]
\2\.
EDGAR Contract Identifier Rule 498A(c)(4).... .............. [check]............ [check]
(back cover page).
Table of Contents (optional) Rule 498A(c)(5).... .............. [check]............ [check]
\3\.
Content:
Updated Information About Rule 498A(c)(6)(i) .............. [check]............ [check]
Your Contract. through (ii).
Important Information You Rule 3 [check]............ [check]
Should Consider About the 498A(c)(6)(iii). (with line items (with line items
[Contract]. applicable to RILA applicable to
contracts, as variable
specified in annuities, as
instructions to specified in
Item 3). instructions to
Item 3).
Appendix: [Investment Options/ Rule 498A(c)(6)(iv) 17 [check]............ [check]
Portfolio Companies] (Item 17(b) and (Item 17(a) and
Available Under the Contract. 17(c), as 17(c), as
applicable). applicable).
----------------------------------------------------------------------------------------------------------------
Notes to Table 7:
\1\ The beginning or front cover page of a RILA contract's updating summary prospectus, like the updating
summary prospectus of a variable annuity registered on Form N-4, would need to include the following
information: (1) the insurance company's name; (2) the name of the contract(s), and the class or classes if
any, to which the updating summary prospectus relates; (3) a statement identifying the document as an
``Updating Summary Prospectus''; and (4) the approximate date of the first use of the updating summary
prospectus.
\2\ The required legends would be the same for RILA contracts and for variable annuities registered on Form N-4.
These legends address the purpose of the summary prospectus, the availability of the statutory prospectus and
other information, and a statement that additional information about RILA contracts has been prepared by the
SEC staff and is available at investor.gov. The updating summary prospectuses for RILA contracts as well as
variable annuities also would have to include the additional statements that we are proposing to require on
the cover page of the prospectus for all Form N-4 issuers. See supra section II.B.1; see also proposed Item
1(a)(6) through (8) of Form N-4.
\3\ The requirements for this optional table of contents would be the same for an updating summary prospectus as
for an initial summary prospectus. See proposed rule 498A(b)(4); proposed rule 498A(c)(5).
The updating summary prospectus for a RILA contract would be
required to include a concise description of certain changes to the
contract made after the date of the most recent updating summary
prospectus or statutory prospectus that was sent or given to investors.
These changes would appear under the heading ``Updated Information
About Your Contract,'' with a required legend following the
heading.\289\ The changes that the rule would require a RILA issuer to
describe include those that relate to: (1) the availability of
investment options under the contract; (2) the overview of the
contract; (3) the KIT; (4) certain information about fees; (5) benefits
available under the contract; (6) purchases and contract value; and (7)
surrenders and withdrawals. The updating summary prospectus also could
include a concise description of any other changes that the RILA issuer
wishes to disclose, provided they occurred within the same time period
as the other changes the rule would require the issuer to describe. In
providing a concise description of a contract-related change in the
updating summary prospectus, RILA issuers would have to provide enough
detail to allow investors to understand the change and how it will
affect them.\290\
---------------------------------------------------------------------------
\289\ The legend would be the same for RILA contracts and
variable annuities: ``The information in this Updating Summary
Prospectus is a summary of certain [Contract] features that have
changed since the Updating Summary Prospectus dated [date]. This may
not reflect all of the changes that have occurred since you entered
into your [Contract].'' Proposed rule 498A(c)(6)(i)(A).
\290\ Proposed rule 498A(c)(6)(i)(B); see also VASP Adopting
Release at paragraph accompanying n.374.
---------------------------------------------------------------------------
The topics for which a change would necessitate a description in
the updating summary prospectus would be the same for RILA contracts as
for variable annuities registered on Form N-4. We do not anticipate
that disclosures addressing these topics in a contract statutory
prospectus would change frequently, and thus providing investors with a
notice and a brief description of any changes that do occur may be more
informative than repeating all the disclosures each year.\291\ Despite
the infrequency of changes, investors should be notified of any changes
to these items given their importance to the investor's experience of
investing in a RILA contract.\292\
---------------------------------------------------------------------------
\291\ See VASP Adopting Release at paragraph following n.372.
\292\ See id. at paragraph accompanying nn.365-369.
---------------------------------------------------------------------------
We are proposing to amend rule 498A to specify that, in the context
of a RILA
[[Page 71135]]
contract updating summary prospectus, the change of availability of
investment options includes a change to any of the features of the
index-linked options disclosed in the table that Item 17(b) of Form N-4
requires (that is, the table in the appendix of investment options that
will appear in a RILA contract summary prospectus).\293\ When the
Commission adopted rule 498A, it stated that a change that has affected
availability of portfolio companies (or investment options) includes
changes in the portfolio companies (or investment options) offered
under the contract or available in connection with any optional
benefit.\294\ In the context of index-linked options, any change to the
features of the index-linked options that the required table would
describe--that is, the index, type of index, crediting period, index
crediting methodology, limit on index loss, and/or guaranteed minimum
limit on index gain--would meaningfully change the investor's
experience of investing in a RILA contract with the index-linked option
that investor had previously chosen. For this reason, under the
proposed amendments a change to any of these features would represent a
change in the availability of the investment options that the RILA
contract offers.
---------------------------------------------------------------------------
\293\ Proposed rule 498A(c)(6)(i).
\294\ VASP Adopting Release at n.361.
---------------------------------------------------------------------------
The topics of the additional contents included in an updating
summary prospectus--as well as the required headings under which these
contents must appear--would be the same for RILA contracts and for
variable annuities registered on Form N-4.\295\ Certain of these
required contents, however, would vary in substance to reflect the
unique aspects of RILA contracts as compared to variable annuities.
These are indicated in Table 2 above and include:
---------------------------------------------------------------------------
\295\ Proposed rule 498A(c)(6).
---------------------------------------------------------------------------
Disclosure provided under the heading ``Important
Information You Should Consider About the Contract'' (Item 3 of Form N-
4), where certain rows in the required table are specific to RILA
contracts as opposed to variable annuities; and
Disclosure under the heading ``Appendix: Investment
Options Available Under the Contract'' (Item 17 of Form N-4), where a
RILA contract would include a different summary table for index-linked
options offered under the contract than the summary table of variable
options offered under a variable annuity.
Online Accessibility of Contract Statutory Prospectus and Certain Other
Documents Relating to the Contract
Investors who receive a RILA contract initial or updating summary
prospectus would have access to more detailed information about the
RILA contract, either by reviewing the information online, or by
requesting the information to be sent in paper or electronically. In
this respect, the proposed amendments would include the same
requirements for RILA contracts as for variable contracts. These
requirements further the layered disclosure framework that rule 498A
creates for variable contracts and would, under the proposed
amendments, similarly create for RILA contracts. Those insurance
companies that issue RILAs, to the extent that they also issue variable
annuity contracts that use summary prospectuses under rule 498A,
therefore should be generally familiar with the practice of making this
information available online and be able to integrate it with existing
processes for variable annuities. Similar to what the Commission
expressed in the context of variable annuity summary prospectuses,
permitting RILA investors to access the contract statutory prospectus
in several ways (online and by physical or electronic delivery) would
maximize the accessibility and usability of this information and that
investors have historically indicated a preference for both online and
paper resources.\296\
---------------------------------------------------------------------------
\296\ See VASP Adopting Release at n.417 and accompanying text;
and Office of Investor Education and Advocacy of the U.S. Securities
and Exchange Commission, Study Regarding Financial Literacy Among
Investors (Aug. 2012), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf, at iv, xix.
These proposed requirements are unchanged from the requirements for
variable annuity summary prospectuses, and our rationale for these
requirements has not changed from the Commission's rationale that is
discussed throughout the sections of the VASP Adopting Release that
discuss online accessibility requirements. See VASP Adopting Release
at sections II.A.5 and II.A.6.
---------------------------------------------------------------------------
Under the proposed amendments, a RILA issuer relying on rule 498A
(like a variable annuity issuer relying on this rule currently), would
have to make the contract's current initial summary prospectus,
updating summary prospectus, statutory prospectus, and SAI (together,
the ``required online contract documents'') available online.\297\
These required online contract documents would be required to be
publicly accessible, free of charge, at the website address that the
cover page of the summary prospectus specifies, on or before the time
that the person relying on the rule provides the summary prospectus to
investors.\298\ The website address on which the required online
contract documents appear must be specific enough to lead investors
directly to the documents, although the website could be a central site
with prominent links to each document.\299\ The required online
contract documents would have to be presented in a manner that is
human-readable and capable of being printed on paper in human-readable
format, and persons accessing the documents must be able to permanently
retain electronic versions of the documents. The proposed amendments
include requirements for linking within the electronic versions of the
contract statutory prospectus and SAI that are available online, and
also for linking between electronic versions of contract summary and
statutory prospectuses that are available online.
---------------------------------------------------------------------------
\297\ For proposed requirements relating to the required online
contract documents, see generally proposed rule 498A(h).
\298\ A current version of each of the required online contract
documents would have to remain available for at least 90 days
following either: (1) the time of the ``carrying or delivery'' of
the contract security if a person is relying on the rule to satisfy
its section 5(b)(2) prospectus delivery obligations; or (2) if a
person is relying on the rule to send communications that will not
be deemed to be prospectuses, the time that the person sends or
gives the communication to investors. Proposed rule 498A(h)(1).
\299\ Proposed rule 498A(b)(2)(v)(B).
---------------------------------------------------------------------------
Both initial summary prospectuses and updating summary prospectuses
for RILA contracts would, like variable annuity summary prospectuses,
be required to define any ``special terms'' elected by the registrant,
using any presentation that clearly conveys their meaning to
investors.\300\ In RILA contract summary prospectuses that are
available online, the proposed amendments (like the current rule)
require that investors be able either to view the definition of each
special term upon command, or to move directly back and forth between
each special term and the corresponding entry in any glossary or list
of definitions the summary prospectus includes.
---------------------------------------------------------------------------
\300\ Proposed rule 498A(e).
---------------------------------------------------------------------------
Satisfying each of these requirements regarding online
accessibility of contract statutory prospectuses and certain other
documents relating to the contract is a condition for a RILA issuer to
rely on rule 498A to satisfy prospectus delivery obligations.\301\
Failure to comply with any of these conditions could result in a
violation of section 5(b)(2) unless the contract statutory prospectus
is delivered by means other than reliance on the rule. We recognize,
however, that there may be times when, due to events
[[Page 71136]]
beyond a person's control, the person may temporarily not be in
compliance with the rule's conditions regarding the availability of the
required online contract documents. The proposed amendments, like the
current rule, includes a safe harbor provision addressing temporary
noncompliance.\302\
---------------------------------------------------------------------------
\301\ Proposed rule 498A(f)(4); proposed rule 498A(g)(4).
\302\ Proposed rule 498A(h)(4). This provides that the
conditions regarding the availability of the required online
contract documents will be deemed to be met, even if the required
online contract documents are temporarily unavailable, provided that
the person has reasonable procedures in place to ensure that those
materials are available in the required manner. A person relying on
the rule to satisfy prospectus delivery obligations is required to
take prompt action to ensure that those materials become available
in the manner required as soon as practicable following the earlier
of the time when the person knows, or reasonably should have known,
that the documents were not available in the manner required.
---------------------------------------------------------------------------
Other Requirements for Summary Prospectus and Other Contract Documents
Like current rule 498A, the proposed amendments to rule 498A
include additional requirements for RILA contract summary
prospectuses.\303\ These include:
---------------------------------------------------------------------------
\303\ For these additional proposed requirements, see generally
proposed rule 498A(i).
---------------------------------------------------------------------------
Certain requirements relating to the delivery of paper or
electronic copies of the required online contract documents upon
request;
The requirement that a contract summary prospectus must be
given greater prominence than any materials that accompany the contract
summary prospectus;
Requirements that: (1) the required online documents be
presented in a format that is convenient for reading and printing, and
(2) a person be able to retain electronic versions of these documents
in a format that is convenient for reading and printing; and
The requirement for any website address that is included
in an electronic version of the summary prospectus to be an active
hyperlink.
Failure to comply with these additional requirements would not,
however, negate a person's ability to rely on the rule to satisfy
prospectus delivery obligations.
Request for Comments
We request comment on the proposed amendments to rule 498A, which
would permit RILA issuers to use a summary prospectus to satisfy
statutory prospectus delivery obligations:
102. Is it appropriate to permit RILA issuers, as well as issuers
of ``combination contracts,'' to use a summary prospectus to satisfy
statutory prospectus delivery obligations? Why or why not?
103. Would the current rule 498A framework, which provides for an
initial summary prospectus and an updating summary prospectus, be
appropriate for RILA contracts?
104. Is it appropriate that the use of summary prospectuses for
RILA contracts be voluntary, as proposed? Should the use of summary
prospectuses for RILA contracts instead be mandatory?
105. Should an initial summary prospectus for a RILA contract only
describe a single contract that the RILA issuer currently offers for
sale, as proposed? Instead should we permit an initial summary
prospectus to describe more than one contract? Do commenters recommend
any other changes to the proposed scope requirements for initial
summary prospectuses for RILA contracts?
106. Is the proposed presentation for RILA initial summary
prospectuses appropriate, or should we modify the initial summary
prospectus presentation requirements in any way?
107. Are the proposed summary prospectus cover page requirements
appropriate? For example, is it appropriate that initial (and updating)
summary prospectuses for RILA contracts as well as variable annuities
also would have to include the additional statements that we are
proposing to require on the cover page of the prospectus for all Form
N-4 issuers?
108. Do the proposed RILA initial summary prospectus content items
represent the disclosure that would best highlight the key terms,
benefits, and risks of a RILA contract? Do the proposed content items
capture key considerations that a typical contract investor would find
salient? Should an initial summary prospectus include additional
information an investor would need in order to make an informed
investment decision, and if so, what would this information be? For
example, is there any information we are proposing to include in Item 6
of Form N-4 that we should include in the summary prospectus?
Alternatively, should we exclude or modify any of the proposed initial
summary prospectus disclosure requirements? To the extent that
commenters suggest changes that would result in different content
across initial summary prospectuses for RILA contracts versus variable
annuities, why would such changes be appropriate, and how should we
address these suggested changes in the context of ``combination
contracts'' offering a combination of index-linked options and variable
options?
109. Under the proposal, would initial summary prospectuses for
RILA contracts, on average, be longer, shorter, or about the same
length as variable annuity initial summary prospectuses? What would
account for any meaningful differences in average length?
110. Is the proposed updating summary prospectus approach
appropriate for existing RILA investors? Do commenters agree that
existing RILA investors would benefit more from a brief summary of the
changes to the contract reflected in the statutory prospectus than from
receiving all of the disclosures in the initial summary prospectus?
Instead should existing RILA investors receive a summary prospectus
akin to the initial summary prospectus year after year?
111. Should we permit, as proposed, an updating summary prospectus
for a RILA contract to describe one or more contracts covered in the
related statutory prospectus? Do commenters recommend any other changes
to the proposed scope requirements for updating summary prospectuses
for RILA contracts?
112. We request comment on the proposed requirement to include a
brief description of certain contract-related changes in the updating
summary prospectus. Would this disclosure requirement be useful to
investors? Is the scope of changes that a RILA issuer would be required
to discuss appropriate? Are there other topics about which we should
require a RILA issuer to describe a change? Should we define a change
in the availability of investment options that would require disclosure
as a change to any of the features of the index-linked options that the
table that Item 17(b) of Form N-4 would require, as proposed? If not,
what definition would be more appropriate and why?
113. Do the other proposed RILA contract updating summary
prospectus content items represent the disclosure that would be most
appropriate and useful for existing investors, for example in
considering whether to continue making additional purchase payments or
reallocate contract value? If not, what alternative disclosure should
we require?
114. Should rule 498A include, as proposed, the same requirements
with respect to online accessibility of a RILA contract statutory
prospectus and certain other documents relating to the contract as the
rule provides for variable annuities (including, as described above,
the requirements to make the required online contract documents
[[Page 71137]]
available online, presentation and linking requirements for these
documents, and requirements relating to the definitions of ``special
terms'')? If not, what alternative requirements should we adopt to help
ensure that investors who receive a RILA contract summary prospectus
have access to more detailed information about the RILA contract if
they want it? For example, should the required online contract
documents also include information about the current limits on gains
for each index-linked option offered under the contract? As another
example, should the required online contract documents for issuers of
RILAs and variable annuities that rely on rule 498A also include the
financial statements of the registrant and/or insurance company, to the
extent that these financial statements are not included in the SAI (if,
for instance, an insurer's financial statements are filed on Form N-
VPFS or Form 10-K, and are incorporated by reference into the
registration statement)? To what extent would using the same approach
for both RILAs and variable annuities ease compliance burdens on
insurers? Is it appropriate that, as proposed, satisfying each of these
proposed online accessibility requirements would be a condition for a
RILA issuer to rely on rule 498A to satisfy prospectus delivery
obligations? Are there any modifications we should make to the proposed
safe harbor provision for temporary noncompliance?
115. Should rule 498A include, as proposed, the same other
requirements for summary prospectuses (relating to delivery upon
request, prominence of the summary prospectus in relation to
accompanying materials, ``convenient for reading and printing''
formatting, and hyperlinking requirements) as the rule currently
requires for variable annuity summary prospectuses? Is it appropriate
that, as proposed, satisfying each of these proposed requirements would
not be a condition for a RILA issuer to rely on rule 498A to satisfy
prospectus delivery obligations?
D. Accounting (Items 16 and 26)
We are proposing to permit RILA issuers to provide financial
statements on amended Form N-4 in the same way that insurance companies
currently do on Form N-4. The principal consequence of this change
would be that the financial statements filed in connection with a RILA
registration statement could be prepared in SAP to the same extent as
currently permitted for insurance companies' financial statements filed
on that form. Instruction 1 to Item 26(b) of Form N-4 currently permits
insurance companies that are the depositors of variable annuity
separate accounts to prepare their financial statements for use in a
registration statement filed on Form N-4 in accordance with SAP if the
depositor would not have to prepare its financial statements in
accordance with GAAP except for use in that registration statement or
other registration statements filed on Forms N-3, N-4, or N-6 (the
forms used to register insurance products that are issued by investment
companies).\304\ The instruction further states that the depositor
insurance company's financial statements must be prepared in accordance
with GAAP if it prepares financial information in accordance with GAAP
for use by its parent (as defined in Regulation S-X) in any report
under sections 13(a) and 15(d) of the Exchange Act or any registration
statement filed under the Securities Act.\305\ In interpreting this
instruction the Commission has stated that the insurance product forms
do not require the use of GAAP when: (1) GAAP financial statements are
not prepared for either the depositor or its parent; or (2) the
depositor's parent prepares GAAP financial statements, but the
depositor's accounts are immaterial to its parent's consolidated
financial statements and, therefore, neither partial GAAP financial
statements nor a GAAP reporting package is prepared by the
depositor.\306\
---------------------------------------------------------------------------
\304\ Similar to insurance products currently filing
registration statements on these forms, RILA issuers would also be
required, if all of the required financial statements of the
insurance company are not in the prospectus, to state in the
prospectus, under a separate caption, where the financial statements
may be found and to briefly explain how investors may obtain any
financial statements not in the SAI. Proposed item 16 of Form N-4.
\305\ Similar instructions are contained in the other forms used
to register insurance products issued by investment companies. See
instruction 1 to Item 31(b) of Form N-3 and instruction 1 to Item
28(b) of Form N-6.
\306\ See Registration Form for Insurance Company Separate
Accounts Registered as Unit Investment Trusts that Offer Variable
Life Insurance Policies, Investment Company Act Release No. 23066
(Mar. 13, 1998) [63 FR 13988 (Mar. 23, 1998)] (discussing the same
instruction in Form N-6).
---------------------------------------------------------------------------
Forms S-1 and S-3 do not include an instruction similar to
Instruction 1 of Item 26(b) of Form N-4. Rather RILAs registered on
these forms are required to provide their financial statements in
accordance with GAAP. The Commission, however, acting through authority
delegated to the staff, has permitted insurance companies registering
on Form S-1 to include SAP financial statements in RILA registration
statements in the circumstances permitted by Form N-4.\307\ The
Commission has stated that this approach appropriately recognizes the
cost burdens that would be imposed if the Commission were to require
GAAP financial statements in cases where the depositor is not otherwise
required to prepare financial information in accordance with GAAP.\308\
We preliminarily believe this is also true for insurance companies that
offer RILAs and that it is important to provide for the consistent
treatment of financial statements for all insurance companies that meet
the circumstances permitted by Form N-4. As a result, permitting RILA
issuers to rely on Instruction 1 to Item 26 to provide SAP financial
statements to the same extent as issuers registering offerings of
variable annuities on Form N-4 would be consistent with investor
protection. In addition, SAP financial statements, which focus on an
issuer's ability to meet its obligations under its insurance contracts,
as regulated by state law, appear to provide sufficient material
information for investors evaluating RILAs.
---------------------------------------------------------------------------
\307\ See, e.g., F&G Life Letter.
\308\ See Registration Form for Insurance Company Separate
Accounts Registered as Unit Investment Trusts That Offer Variable
Life Insurance Policies, Investment Company Act Release No. 25522
(Apr. 12, 2002) [67 FR 19848 (Apr. 23, 2002)]; see also VASP
Adopting Release at n.813 and accompanying text.
---------------------------------------------------------------------------
Another consequence of requiring insurance companies to register
offerings of RILAs on Form N-4 is that they will have greater
flexibility to update their registration statement without the need to
update certain financial statements. Under section 10(a)(3) of the
Securities Act, RILA issuers, like variable annuity issuers, generally
must file a post-effective amendment annually to update their audited
fiscal year-end financial statements. In addition, Regulation S-X
requires Form S-1 filers to include unaudited interim financial
statements in any new registration statement or post-effective
amendment that goes effective later than 134 days after the end of the
insurer's fiscal year.\309\ Form N-4 filers are not subject to this
requirement.\310\ In addition, after the end of an insurer's fiscal
year, RILA issuers must include year-end audited financial statements
in any new registration statement or post-effective amendment filed 45
days after the fiscal
[[Page 71138]]
year-end.\311\ However, Form N-4 filers instead have a 90-day grace
period.\312\ As a result of the proposal to include RILAs on Form N-4,
RILA issuers therefore would be able to file and amend their
registration statements during certain times of year without the need
to update their financial statements, which RILA issuers cannot do
today.\313\ These approaches, in consideration of consistency in
treatment among all insurance companies that meet the circumstances
permitted by Form N-4, are equally appropriate for RILA filers on Form
N-4.
---------------------------------------------------------------------------
\309\ 17 CFR 210.3-12(a). RILA issuers that rely on rule 12h-7
are not required to provide periodic Exchange Act reports, including
quarterly reports that include interim financial statements.
Therefore, they must prepare interim financial statements for
Securities Act registration statements, like Form S-1 and Form S-3,
even though they do not prepare interim financial statements for
other purposes.
\310\ See Instruction 3 to Item 26(b) of Form N-4.
\311\ See 17 CFR 210.3-01(c).
\312\ See Instruction 3 to Item 26(b) of Form N-4.
\313\ A further consequence of the proposed changes would be
that insurance companies would generally be making available their
RILA-related financial statements to investors on an annual basis,
consistent with the timing of financial statements for variable
annuities. Currently, insurance companies relying upon rule 12h-7
provide their RILA-related financials annually, whereas insurance
companies not relying on that rule provide financial statements
quarterly. Insurance companies not relying on rule 12h-7 will file
financial statements more frequently than annually if there are any
post-effective amendments to the registration statement that require
updated financial statements. See Form 10-Q.
---------------------------------------------------------------------------
We are also proposing to require RILAs to provide the information
relating to changes in and disagreements with accountants on accounting
and financial disclosure as detailed in 17 CFR 229.304 (``Item 304 of
Regulation S-K''). Further, RILAs would be required to provide as an
exhibit any letter from the insurance company's former independent
accountant regarding its concurrence or disagreement with the
statements made by the insurance company in the registration statement
concerning the resignation or dismissal as the insurance company's
principal accountant. These items are currently provided by RILAs on
Forms S-1 and S-3 and are designed to address the practice of ``opinion
shopping'' for an auditor willing to support a proposed accounting
treatment designed to help a company achieve its reporting objectives
even though that treatment might frustrate reliable reporting.\314\ The
proposed amendments would not be required for variable annuities in
light of their tiered investment company structure. Variable annuities
typically invest indirectly in mutual funds offered as investment
options under such contracts, which themselves are subject to similar
disclosure obligations relating to changes in and disagreements with
accountants on accounting and financial disclosure.\315\
---------------------------------------------------------------------------
\314\ See Disclosure Amendments to Regulation S-K, Form 8-K and
Schedule 14A Regarding Changes in Accountants and Potential Opinion
Shopping Situations, Investment Company Act Release No. 16358 (Apr.
12, 1988) [53 FR 12924 (Apr. 20, 1988)]; see also item 11(i) of Form
S-1.
\315\ See Item 27(b)(4) of Form N-1A.
---------------------------------------------------------------------------
We request comment on these aspects of the proposal.
116. Is it appropriate, as proposed, to permit RILA issuers to use
the same approach with respect to the use of SAP financial statements,
for purposes of preparing financial statements that are included on a
registration statement on Form N-4, as Form N-4 currently provides for
insurance company issuers? Why or why not?
117. Would SAP financials provide sufficient material information
for a RILA investor to make an informed investment decision? Why or why
not?
118. Why do insurance companies currently provide SAP financials
instead of GAAP financials in their Form N-4 registration statements
when permitted to do so? Do SAP financials currently provide sufficient
material information for a variable annuity investor to make an
informed investment decision?
119. Should we require the proposed items relating to changes in
accountants for RILAs? If so, should we also require these items for
all Form N-4 filers? If the information called for in Item 304 of
Regulation S-K is required, is it appropriately placed in the SAI?
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and Amendments to Form 24F-2
We are proposing to require insurance companies to pay securities
registration fees relating to RILA offerings using the same method used
for variable annuities.\316\ Specifically, issuers registering the
offerings of RILAs on amended Form N-4 would be deemed to be
registering an indeterminate amount of securities upon effectiveness of
the registration statement.\317\ These issuers would then be required
to pay registration fees annually based on their net sales of these
securities, no later than 90 days after the issuer's fiscal year ends,
on the form that is used by registered separate accounts to pay
securities registration fees relating to variable annuities (Form 24F-
2).\318\ We are further proposing to specify the calculation method for
paying securities registration fees for RILA offerings, consistent with
the fee calculation methodology that applies to variable
annuities.\319\ We are also proposing amendments to Form 24F-2 to
specify when issuers can take credits for RILA redemptions that pre-
date their use of that form and when expiring annuity contracts are
rolled over into a new crediting period, as well as other non-
substantive and conforming amendments.\320\
---------------------------------------------------------------------------
\316\ To accommodate the changes proposed in this release, EDGAR
would be modified to require insurance companies registering RILAs
to use a different CIK than that used for their other offerings. One
CIK would be utilized to register the offerings of RILAs on Form N-4
and pay registration fees for securities relating to RILA offerings
on Form 24F-2. The other would be utilized to register the insurance
company's other offerings of securities as they do currently. As a
result, insurance companies would need to utilize separate CIKs for
their RILA-related filings. If the issuer only offers RILAs, it
should only use one CIK. Further, we are proposing to amend rule 313
of Regulation S-T in order to permit filings relating to RILA
offerings to have both an investment company type and contract
identifier in order to facilitate RILA issuers' filing these forms
and for ease in identification of particular RILA contracts.
\317\ The proposed rule amendments would apply the same
registration fee payment approach to RILAs that is currently
provided by rule 24f-2 to current Form N-4 issuers. See proposed
rules 456(e) (providing that where the registration statement
relates to a RILA offering, RILA issuers would be deemed to have
registered an indeterminate amount of securities for purposes of
sections 5 and 6(a) of the Securities Act upon the effective date of
its registration statement); and 457(u) (providing for RILA issuers
to pay registration fees for securities relating to RILA offerings
on the same annual net basis as other Form N-4 issuers); see also
proposed Form 24F-2. See section 4(e) of the Exchange Act [15 U.S.C.
78d-4(e)]; section 28 of the Securities Act [15 U.S.C. 77z-3]. We
preliminarily believe that these actions are necessary or
appropriate in the public interest and consistent with the
protection of investors.
\318\ As a general matter, the proposed amendments would provide
the same process for registering an indeterminate amount of
securities relating to RILA offerings as is currently provided for
exchange-traded vehicle securities under rule 456(d) (which, in
turn, mirrors of the process for current Form N-4 issuers to
register securities) except that (1) this process would be mandatory
for RILAs and (2) RILA issuers would pay fees on Form 24F-2 instead
of through a prospectus supplement in accordance with rule 424. See
also Securities Offering Reform for Closed-End Investment Companies,
Investment Company Act Release No. 33836 (Apr. 8, 2020) [85 FR 33290
(June 1, 2020)] (``Closed-End Fund Offering Reform Adopting
Release''). For example, the proposed amendments would provide the
same mechanics as other Form 24F-2 issuers when addressing interest
calculations for late payments.
\319\ All payments of filings fees for RILA registration
statements would continue to be made by wire transfer, debit card,
or credit card or via an ACH and there would be no refunds. See 17
CFR 230.111; proposed instruction A.5 to Form 24F-2.
\320\ In addition to conforming changes in proposed Form 24F-2
to effectuate the changes discussed below, in order to improve the
form we are proposing to: (1) remove reporting relating to shares
paid for prior to Oct. 11, 1997; (2) remove the statement in current
Instruction A.3 to consult the EDGAR Filer Manual because the
instructions referenced in Instruction A.3 are intended to be
removed from the EDGAR Filer Manual; (3) remove current Instruction
C.4, which includes EDGAR header tags for Item 5 of the form, as
this information is no longer sufficient for filing purposes and
current technical specifications are provided through the technical
specifications page on the Commission's web page; (4) revise current
Instruction C.9 for Item 5(vii) to correspond to the current
instructions for fee filing rates on the Commission's website; (5)
correct the website linked in current Instruction D.1; and (6)
remove the estimated Paperwork Reduction Act burden cited in current
Instruction F as extraneous in light of the OMB approval box that
contains information on this topic.
---------------------------------------------------------------------------
[[Page 71139]]
Currently, insurance companies, like most issuers, register a
specific amount of securities when registering RILAs and are required
to pay a registration fee for those securities to the Commission at the
time of filing a registration statement on Form S-1 or S-3.\321\ In
contrast, the Investment Company Act provides that certain registered
investment companies, including the variable annuity separate accounts
that file on Form N-4, are deemed to have registered an indefinite
amount of securities upon the effective date of their registration
statement.\322\ Instead of paying registration fees at the time of
filing a registration statement, registered separate accounts pay
registration fees in arrears based on their net issuance of securities,
no later than 90 days after the issuer's fiscal year end, on Form 24F-
2.\323\ As a result, RILA issuers must currently ensure that they do
not inadvertently sell more securities than they have registered,
however this is not a concern in relation to variable annuities.
Further, RILA issuers pay fees at effectiveness on Forms S-1 or S-3 for
the securities being registered, while registered separate accounts do
not pay a fee at effectiveness on Form N-4 but rather pay fees annually
on Form 24F-2 on the net sales of securities that year.
---------------------------------------------------------------------------
\321\ In general, issuers today--including insurance companies
issuing securities relating to RILA offerings--are required under
the Securities Act to pay a registration fee to the Commission at
the time of filing a registration statement. See sections 6(b)(1)
(requiring applicants to pay a fee to the Commission at the time of
filing a registration statement) and (c) (providing that a
registration statement shall not be deemed to have taken place
without payment of a registration fee) of the Securities Act [15
U.S.C. 77f(b)(1) and (c)]. This means they pay registration fees at
the time they register the offering of securities, regardless of
when (or if) they sell them. In addition, although well-known
seasoned issuers have additional flexibility in paying filing fees,
none of the insurance companies that issue securities relating to
RILA offerings currently claim status as a well-known seasoned
issuer. See supra footnote 21.
\322\ See 15 U.S.C. 80a-24(f).
\323\ See id.; Form 24F-2.
---------------------------------------------------------------------------
Consistent with the other elements of this proposal, these proposed
amendments are designed to require insurance companies to use the same
framework to pay securities registration fees for RILAs that they do
for variable annuities. Insurance companies offer RILAs in a manner
substantially similar to variable annuities and would similarly benefit
from paying registration fees on an annual net basis and from
registering offerings of an indeterminate number of securities. The
proposed amendments would provide registration fee payment parity for
an insurance company that may offer one or more related insurance
products, including index-linked options offered as part of combination
annuity contracts.\324\ Requiring insurance companies to pay
registration fees for securities relating to RILA offerings on Form
24F-2 would therefore be efficient for insurance companies. This
approach would eliminate the risk that a RILA issuer may inadvertently
oversell securities with respect to a registration statement on Form N-
4, and the payment of fees on an annual net basis furthermore should
lead to a reduction in overall filing fees relating to RILAs.\325\
Further, by requiring RILA and variable annuity offerings to use the
same form and payment method, this process also would be efficient for
the Commission.
---------------------------------------------------------------------------
\324\ For combination products, each issuer of securities under
the product (e.g., the separate account for the variable option and
the insurance company for the index-linked option) would file a
separate Form 24F-2 relating to the payment of registration fees for
its respective securities offered under the product.
\325\ As part of the proposed amendments to Form 24F-2, RILA
issuers would be required to include the value of any expiring
annuity contract or index-linked option that is rolled over into a
new crediting period in its calculation of the aggregate sale price
of securities sold during the fiscal year. RILA issuers further
would be required to report such contracts or options as a
redemption. This would result in zero net sales being reported in
this situation. See proposed instruction C.4 to Form 24F-2.
---------------------------------------------------------------------------
The proposed fee calculation method is also consistent with the
continuous offering of RILAs to investors. These investors may make
additional allocations or other investment decisions over time with
respect to an investment in a RILA. One effect of this is that RILA
issuers, unlike other Form S-1 or S-3 issuers, may have increased
difficulty in using the filing fees associated with unsold securities
of a particular RILA offering to offset the filing fees due for a
subsequent registration statement. This is because many RILA issuers
are not easily able to terminate a RILA offering, a necessary step to
recoup fees paid on unsold securities for use in a separate RILA
offering.\326\
---------------------------------------------------------------------------
\326\ See 17 CFR 230.457(p). To facilitate the transition to
calculating fees on an annual net basis and filing Form 24F-2, a
RILA's fee calculation should exclude excess securities that were
registered under its last registration statement that remain unsold
prior to the effectiveness of any final rule. See proposed
instruction C.5 to Form 24F-2. This would be so that a filing fee is
not charged twice for the same securities being registered.
---------------------------------------------------------------------------
We are also proposing amendments to Form 24F-2 that would indicate
when RILA issuers can take credits for redemptions of securities not
claimed in a prior fiscal year (``non-claimed prior redemptions'').
Typically, issuers that file Form 24F-2 can take credit for these
redemptions to offset some of the purchases being reported for the
current fiscal year. This is only intended to be available for non-
claimed prior redemptions that had occurred since the use of the form
(and the payment of registration fees on an annual net basis) was
available to the issuer.\327\ The form, however, includes a legacy
instruction for any non-claimed redemptions in a prior fiscal year that
ends no earlier than October 11, 1995. This specific date is related to
the timing of open-end funds' and unit investment trusts' transition to
Form 24F-2.\328\ With the addition of RILAs to this form, we are
removing the reference to October 11, 1995 in Item 5(iii) of Form 24F-2
and amending the related instructions so that it is clear that issuers
will only be able to take credit for non-claimed prior redemptions that
occur on or after the date the issuer became eligible to use the form,
which for RILA issuers would be the effective date of the proposed
amendments, if adopted.\329\
---------------------------------------------------------------------------
\327\ See generally Closed-End Fund Offering Reform Adopting
Release at n.348.
\328\ See Registration Under the Securities Act of 1933 of
Certain Investment Company Securities, Investment Company Act
Release No. 22815 (Sep. 10, 1997) [62 FR 47934 (Sep. 12, 1997)] at
n.9.
\329\ In addition to RILA issuers, interval funds have been able
to use Form 24F-2 since Aug. 1, 2021 (the effective date of rule
24f-2 as applied to interval funds), so these funds likewise would
only be able to take credit for non-claimed prior redemptions since
that date.
---------------------------------------------------------------------------
We request comment on the proposed fee payment methodology for
RILAs and the proposed amendments to Form 24F-2.
120. Is it appropriate to require RILA issuers to pay registration
fees in arrears for the registration of securities? Would the process
be more efficient for insurance companies than the current registration
fee processes used by RILA issuers? If not, what is the appropriate
manner in which RILA issuers should pay registration fees? For example,
should we instead amend Form N-4 to permit or require the payment of
fees on that form for RILA issuers at the time the issuer files the
registration statement, consistent with insurance companies' current
practices when paying registration fees for securities offerings
registered on Forms S-1 and S-3?
121. Instead of requiring RILA issuers to pay registration fees in
arrears as proposed, should we permit RILA issuers to choose whether to
take this treatment or use some other registration fee system?
[[Page 71140]]
122. Is the proposed calculation methodology appropriate for RILAs?
If not, what aspects of the methodology should be changed and why?
123. Is it appropriate to have RILA issuers file Form 24F-2 for
this purpose, or should we instead have RILA issuers file a prospectus
pursuant to rule 424(i), consistent with the treatment of exchange-
traded vehicle securities under rule 456(d)?
124. Are the proposed amendments to Form 24F-2 appropriate? Should
we tailor Form 24F-2 to RILAs in other ways? Are the proposed
amendments clear as to how a RILA issuer would use that form? Are there
any other clarifications we should offer?
125. Should we, as proposed, require separate Form 24F-2 filings
for index-linked options and variable options that are offered as
investment options in combination contracts? If not, how can we amend
Form 24F-2 and rules 456 and 457 to accommodate combination contracts,
given different legal entities are issuing the securities associated
with different types of investment options?
126. Are the proposed amendments to rule 456 and 457 sufficiently
clear as to how RILA issuers should calculate and pay the registration
fees for securities relating to RILA offerings? Should we amend the
rules further to provide more clarity?
127. The proposed amendments to rule 456 and Form 24F-2 provide
procedures for how to address a merger or the cessation of operations
of the issuer, which in the RILA context is the insurance company
issuing the RILA. Are these provisions necessary for RILA issuers?
Should these instructions instead address the cessation or merger of
the particular RILA being reported?
128. Do commenters agree with the proposed requirements for how to
address non-claimed prior redemptions? Why or why not?
129. Are there any other considerations or changes we should make
to facilitate requiring RILA issuers to pay registration fees in
arrears, either regarding securities already registered by RILA issuers
or for some other reason?
2. Post-Effective Amendments and Prospectus Supplements
To facilitate the registration of RILA offerings on Form N-4 and
consistent with the other elements of this proposal, we are proposing
amendments to require RILA issuers to use the same framework for filing
post-effective amendments to the registration statement that other
issuers on Form N-4 currently use. Specifically, the proposal would
amend rule 485 to require RILA issuers to use that rule when amending
RILA registration statements on Form N-4. This change would permit RILA
issuers to file post-effective amendments that become automatically
effective under rule 485(a) after a specified period of time after the
filing or, in certain enumerated circumstances, immediately effective
under rule 485(b).\330\ In addition, we are also proposing amendments
that would require RILA issuers to apply rule 497 under the Securities
Act when appropriate to file RILA prospectuses and prospectus
supplements with the Commission.\331\ These amendments are intended to
facilitate a uniform post-effective amendment and prospectus filing
framework for issuers on Form N-4 and should provide increased
efficiencies for RILA issuers and Commission staff by applying
consistent procedures for all security offerings registered on Form N-
4.
---------------------------------------------------------------------------
\330\ See rule 485(b).
\331\ Consistent with this change, we are also proposing
corresponding changes to (1) rule 424(f) to specify that RILA
issuers must use rule 497 rather than rule 424 when filing
prospectuses and prospectus supplements, and (2) rule 415(b) to
exempt RILA offerings from the requirements of paragraph (a) of that
rule consistent with the treatment of variable annuity separate
accounts.
---------------------------------------------------------------------------
Our rules currently provide different processes for RILA issuers on
Forms S-1 and S-3 and current issuers on Form N-4 to update and keep
current a registration statement or prospectus. Form N-4 is used by
separate accounts that are unit investment trusts that offer variable
contracts to register their securities under the Investment Company Act
and to register an indefinite amount of continuously-sold securities
under the Securities Act. Therefore, these issuers have a system of
updating their disclosures that facilitates that structure. Issuers on
Form N-4 typically update their registration statements annually
through a post-effective amendment filed in accordance with rule 485 in
order to, among other things, comply with Securities Act
requirements.\332\ Rule 485(b) provides for the immediate effectiveness
of many of the routine updates that issuers on Form N-4 may make over
the course of a continuous, long-term offering, for example, those
amendments filed for no purpose other than to bring the financial
statements up to date under section 10(a)(3) of the Securities
Act.\333\ These issuers also file forms of prospectuses used in their
offerings through rule 497 and can supplement their prospectuses, also
known as ``stickering,'' to reflect certain changes to the information
disclosed by making a filing with the Commission in accordance with
rule 497.
---------------------------------------------------------------------------
\332\ See, e.g., section 10(a)(3) of the Securities Act [15
U.S.C. 77j(a)(3)].
\333\ See rule 485(b)(1)(i). Material post-effective amendments,
however, are not immediately effective. See rule 485(a).
---------------------------------------------------------------------------
Conversely, RILA issuers currently follow the processes operating
companies use to update their registrations statements. Operating
companies that are engaged in a continuous offering of securities, like
RILA issuers, are similarly required to update their registration
statement each year and may update their registration statement for
changes other than to bring the financial statements up to date.\334\
For RILAs whose offerings are registered on Form S-1, these updates
typically occur through a post-effective amendment.\335\ Rule 462
currently provides RILA issuers with a limited set of circumstances,
none of which are specific or generally relevant to RILA offerings, in
which a post-effective amendment to a registration statement is
effective upon filing.\336\ Rather, when a RILA issuer seeks to update
a RILA registration statement on Form S-1, the issuer must file a post-
effective amendment that is typically declared effective by Commission
staff acting pursuant to delegated authority.\337\
---------------------------------------------------------------------------
\334\ See, e.g., section 10(a)(3) of the Securities Act; rule
415(a); Item 512 of Regulation S-K.
\335\ Under Form S-3, the section 10(a)(3) update need not be
made through a post-effective amendment. Rather, under this form,
the section 10(a)(3) update generally occurs when the issuer files
its annual report on Form 10-K containing the issuer's audited
financial statements for its most recently completed fiscal year.
\336\ See rule 462(d) and (e). For example, this rule provides
that a post-effective amendment that seeks only to add exhibits to a
registration statement would be effective upon filing. In addition,
although a well-known seasoned issuer is permitted to file a post-
effective amendment to an automatic shelf registration statement
with immediate effectiveness, none of the insurance companies
currently offering RILAs currently claims status as a well-known
seasoned issuer.
\337\ See 15 U.S.C. 77h; 17 CFR 229.501(a); 17 CFR 230.473. See
also supra footnote 335 (describing the Form S-3 post-effective
amendment process).
---------------------------------------------------------------------------
In addition to differences in the post-effective amendment process,
RILA issuers also follow different processes to file prospectuses than
current Form N-4 filers, relying on rule 424 rather than rule 497.
Although these rules provide for similar processes, there are certain
differences. For example, rule 424 requires an issuer to file a
prospectus only if the issuer makes substantive changes or additions to
a previously-filed prospectus, whereas rule 497 requires funds to file
every prospectus that varies from any previously-filed prospectus.\338\
Accordingly, under the proposed amendments, a RILA issuer
[[Page 71141]]
would be required to file every prospectus relating to a RILA offering
that varies in form from a previously filed prospectus before it is
first used.\339\ This approach would provide a publicly accessible,
usable database of current RILA prospectuses which would also assist
the Commission in conducting its regulatory functions. In addition,
rule 424 includes provisions related to continuous or delayed
securities offering under rule 415.\340\ However, in light of the
proposed amendments to the RILA registration framework, these
provisions would no longer be applicable to RILAs.\341\
---------------------------------------------------------------------------
\338\ See rule 424(a); rule 497.
\339\ See proposed rule 497(e).
\340\ See rule 424(b).
\341\ See proposed rule 415(b).
---------------------------------------------------------------------------
Consistent with the other elements of this proposal, the proposed
amendments are designed to provide parity between RILAs and other
annuities registered on Form N-4. RILAs, like variable annuities, are
longer-term investment products that are continuously offered and must
maintain a current registration statement and up-to-date prospectus for
new investors as well as for existing investors that may be able to
make additional contributions or reallocate assets. Accordingly,
applying rule 485's simplified post-effective amendment process is a
more appropriate framework for RILA registration statements in light of
their similarity to variable annuities. RILA registration statements
are routinely updated over the course of an offering and may be subject
to material and non-material amendments over the long-term nature of
the investment product. As such, the proposed amendments addressing the
post-effective amendment process for RILA registration statement should
provide benefits to current RILA issuers using Form S-1 by reducing
administrative complexity when updating financial statements included
in a registration statement or when making other changes to a
registration statement through rule 485's provisions for automatic and
immediate effectiveness.\342\ Requiring RILA issuers to rely on the
simplified post-effective amendment process would enable these issuers
to update their disclosures in a manner that complements and
facilitates RILAs' offering structure and particularly provide
efficiency in the context of combination contracts.
---------------------------------------------------------------------------
\342\ See proposed rule 485.
---------------------------------------------------------------------------
Requiring RILA issuers to rely on rules 485 and 497 also would
provide a uniform post-effective amendment and prospectus filing
framework for all issuers using Form N-4 and provide insurance
companies that may offer one or more related insurance products,
including index-linked options offered as part of combination annuity
contracts, consistent filing requirements across related products. This
should also result in enhanced efficiencies as these issuers would no
longer be required to manage distinct filing processes for related
products. In addition, employing the framework provided by rules 485
and 497 would provide Commission staff with an increased degree of
administrative efficiency by facilitating the review of amendments
containing material changes to RILA registration statements while
permitting amendments with non-material changes to become effective
immediately.
We request comment on the proposed application of rules 485 and 497
to RILAs.
130. Should we require RILA issuers to file post-effective
amendments to registration statements on Form N-4 under rule 485? Are
there additional circumstances not currently enumerated in the rule for
which we should permit the immediate effectiveness of post-effective
amendments?
131. Do commenters agree that the current post-effective amendment
process for RILA registration statements on Form S-1 may result in
increased uncertainty and costs for RILA issuers than if the same
issuers used the proposed post-effective amendment process under
proposed rule 485 to amend RILA registration statements? Will using the
process required by rule 485 mitigate these concerns?
132. Should we require RILA issuers to file prospectuses and
prospectus supplements under rule 497 rather than under rule 424? If
not, what is a more appropriate process for RILA issuers to file
prospectuses and prospectus supplements given the proposed move of RILA
registration statements to Form N-4?
133. How would RILA issuers be affected by the requirement to file
the exact form of prospectus under rule 497, given rule 424 only
requires filers to file prospectuses that contain substantive changes
from or additions to a previously filed prospectus?
134. Are there other filing rules that should be amended to help
facilitate the movement of RILA registration statements to Form N-4? Is
so, please explain what rules should be amended and the rationale for
the suggested changes.
3. Prospectus Delivery
We also propose to prohibit the use of rule 172 in connection with
the offering of a RILA. Under rule 172, a final prospectus is deemed to
precede or accompany a security for sale for purposes of Securities Act
section 5(b)(2) as long as the final prospectus meeting the
requirements of Securities Act section 10(a) is filed or the issuer
will make a good faith and reasonable effort to file it with the
Commission as part of the registration statement within the required
rule 424 prospectus filing timeline.\343\
---------------------------------------------------------------------------
\343\ See Rule 172(b) and (c); see also Offering Reform Release
at n.561 and accompanying text.
---------------------------------------------------------------------------
Registered investment companies, including variable annuity
separate accounts, are excluded from rule 172 and therefore must
deliver a prospectus to investors.\344\ Therefore, we are excluding
RILA offerings from rule 172 to ensure that investors receive a
prospectus about these complex investments and because we are proposing
to treat offerings of RILAs like offerings of variable annuities in
other respects. Moreover, we understand that, as a practical matter,
RILA issuers typically do not rely on rule 172 because RILA issuers
typically deliver prospectuses to accompany or precede other
communications, such as annuity applications, in order to avoid those
communications being offers that otherwise would be non-conforming
prospectuses that violate section 5 of the Securities Act.\345\
---------------------------------------------------------------------------
\344\ Id. at section VI.B.1.b.
\345\ See section 2(a)(10) of the Securities Act (providing, in
part, that a communication sent or given after the effective date of
the registration statement shall not be deemed a prospectus if it is
proved that prior to or at the same time with such communication a
written prospectus meeting the requirements of section 10(a) was
sent or given to the person to whom the communication was made). See
also Offering Reform Release at n.561 (stating that a final
prospectus only filed as provided in rule 172 will not be considered
to be sent or given prior to or with a written offer within the
meaning of this clause of section 2(a)(10)).
---------------------------------------------------------------------------
We request comment on excluding RILA offerings from rule 172.
135. Is our understanding correct that RILA issuers typically
deliver prospectuses to investors to accompany or precede other
communications, and thus do not rely on rule 172? If not, in what
circumstances to RILA issuers typically rely on rule 172? Is there any
reason we should permit RILA issuers to rely on rule 172 even though
issuers cannot rely on the rule for other offerings registered on Form
N-4?
F. Materially Misleading Statements in RILA Sales Literature
We are proposing to amend rule 156 to make its provisions
applicable to RILA sales literature. Under the Federal securities laws
applicable to all securities (including RILA offerings), it
[[Page 71142]]
is unlawful for any person to use materially misleading communications
in connection with the offer or sale of any security.\346\ Rule 156
does not prohibit or permit any particular representations or
presentation, rather it is an interpretive rule that provides factors
to be weighed in considering whether a statement involving a material
fact is or might be misleading in the specific context of investment
company sales literature for purposes of the Federal securities laws,
including sales literature relating to the sale of variable annuities.
Applying this rule to RILA sales literature is consistent with the RILA
Act in that it would provide RILA issuers guidance on ways to avoid
presenting investors with materially misleading advertisements, which
should help ensure that investors receive the information necessary to
make informed decisions about these products.\347\
---------------------------------------------------------------------------
\346\ See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
\347\ See Mutual Fund Sales Literature Interpretive Rule,
Investment Company Act Release No. 10915 (Oct. 26, 1979); [44 FR
64070 (Nov. 6, 1979)] (``Rule 156 Release'').
---------------------------------------------------------------------------
Rule 156 provides guidance on whether a statement involving a
material fact is misleading in sales literature, depending on an
evaluation of the context in which it is made, with the rule providing
four non-exhaustive factors to guide in this determination.\348\ While
these factors have some relevance to the marketing of all securities,
similarities between variable annuities and RILAs (as to how and to
whom they are marketed), make the extension of rule 156 to RILAs
particularly appropriate. Like investment company sales literature
generally (and variable annuity marketing materials particularly), RILA
advertisements discuss complex investment features, and RILA issuers
should benefit from rule 156's contextual analysis in considering
whether a particular representation is materially misleading. Thus, the
proposed amendments to rule 156 would help address these concerns by
focusing attention to specific areas of RILA sales literature that we
have identified as being particularly susceptible to misleading
statements.\349\
---------------------------------------------------------------------------
\348\ See rule 156(b).
\349\ See, e.g., Rule 156 Release (Rule 156 is ``intended to
highlight general areas which, based on the Commission's regulatory
experience with investment company sales literature, had proven to
be particularly susceptible to misleading statements'').
---------------------------------------------------------------------------
Commission staff have reviewed RILA advertisements to better
understand how insurance companies market these products to investors.
As part of this review, and based upon prior experience reviewing RILA
registration statements, the staff identified common RILA marketing
approaches that could benefit from rule 156's guidance about
advertising statements that could be misleading under the Federal
securities laws without appropriate context.
For example, in the sales literature reviewed by the staff,
insurance companies typically marketed RILAs as growth products based
primarily on the linkage to an underlying index. Current rule
156(b)(1)(ii) provides that a statement could be misleading because of
``[t]he absence of explanations, qualifications, limitations or other
statements necessary or appropriate to make such statement not
misleading.'' Thus, if rule 156 were applied to RILAs as proposed, rule
156 would assist insurance companies in considering whether
representations about a RILA as a growth product would require
qualification in light of particular RILA features, such as the
existence and extent of any limitations on upside index performance.
Representations that highlight downside protections of a RILA could
similarly be misleading without the context of the cost or limitation
of those protections (e.g., upside limitations). The same analysis
would apply to representations that tout customization without
discussing the trade-offs associated with that customization (e.g.,
long lock-up periods to get the best rates or having to experience a
contract adjustment when making a change), or fail to explain that the
insurance company has reserved the right to change or remove key
features of the contract while surrender charges still apply. If RILA
sales literature discussed these aspects of the contract without
adequately explaining these limitations or the insurer's discretion to
alter key features, that omission could make the advertisement
misleading. Accordingly, the application of rule 156(b)(1)(ii) to RILA
sales literature would require an insurance company to consider whether
an advertisement would be materially misleading if it suggests a given
RILA is a loss-avoidance vehicle or a customizable product in the
absence of qualifying explanations or statements. Similarly, if sales
literature advertises a particular feature of the product's bounded
return structure (including, e.g., a specified index; an upside feature
such as a particular ``cap rate'' or ``participation rate''; or a
downside feature such as a ``floor'' or ``buffer'') that is not
available for the life of the product or the full term of any surrender
charge period, the rule would require consideration of whether the
statement is misleading without providing additional context as to the
insurer's discretion.
As another example, current rule 156(b)(4) provides that
``[r]epresentations about fees or expenses associated with an
investment in a fund could be misleading because of statements or
omissions made involving a material fact, including situations where
portrayals of the fees and expenses associated with an investment in
the fund omit explanations, qualifications, limitations, or other
statements necessary or appropriate to make the portrayals not
misleading.'' While RILA investors are not typically charged direct
ongoing fees or expenses, RILAs do typically limit an investor's
ability to participate in upside performance, and charges like contract
adjustments can impose costs upon highlighted features such as
guaranteed benefits. In the context of RILA sales literature, the
proposed application of this provision of rule 156 to RILA
advertisements would require consideration about whether
representations or portrayals either of a RILA's costs or charges
(e.g., advertising implying that a RILA had low costs or no ongoing
charges), or optional benefits that are subject to a contract
adjustment, would necessitate qualifying statements or explanations
regarding the costs or tradeoffs to the investor to receive an
advertised benefit or those generally associated with the RILA.\350\
---------------------------------------------------------------------------
\350\ Insurance companies may apply a contract adjustment to the
investors' account when an investor annuitizes or takes advantage of
benefits like ``free withdrawal'' provisions (that typically permit
investors to withdraw up to 10% of the contract value each year
without paying a surrender charge), death benefits, systemic
withdrawals, and guaranteed benefits. See The Design and Regulatory
Framework of Registered Index-Linked Annuities, ALI CLE Conference
on Life Insurance Products 2022 (``It is important to note that
interim value adjustments may apply to surrenders and all types of
`withdrawals,' such as free look payments; annuitization; death
benefit payments; deductions for third party advisory fees; systemic
withdrawals; and even income payments under guaranteed benefit
riders.'')
---------------------------------------------------------------------------
Lastly, current rule 156(b)(2)(i) states that ``[r]epresentations
about past or future investment performance could be misleading because
of statements or omissions made involving a material fact, including
situations where: [p]ortrayals of past income, gain, or growth of
assets convey an impression of the net investment results achieved by
an actual or hypothetical investment which would not be justified under
the circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading.'' In the context of
RILA advertising, the
[[Page 71143]]
proposed provision would require consideration of whether illustrations
about the operation of a RILA or its features could be misleading
because, for example, they use assumptions (such as limits on gains or
index performance that includes dividends whereas the RILA's index does
not include dividends) that are not currently offered or exceed what
could be reasonably anticipated or use ``cherry picked'' data.
Including historical index performance in an advertisement also would
mislead investors if, for example, it suggested that the performance
shown is predictive of future performance of the index or a RILA. On
the other hand, using the index's historical performance to illustrate
how a RILA works in a fair and balanced way (e.g., by showing index
performance relative to representative limits on gains and losses, as
some RILA advertisements currently do) would be consistent with the
proposed extension of rule 156 to RILA advertisements, assuming those
advertisements otherwise include appropriate caveats to ensure that the
illustrations are not misleading.\351\ Moreover, our preliminary view
is that purporting to show the historical performance of the RILA or
any particular index-linked option itself would generally be materially
misleading. This is because the terms of a RILA investment, such as
limits on gains, change frequently, making past performance irrelevant
to current investors who are not able to utilize those past rates in
current market conditions. In addition, to the extent that a RILA is
using a point-to-point crediting method, that RILA's return to an
investor would be particularly sensitive to the specific date the
investor purchased the RILA and when the crediting period ends for the
index-linked option chosen by the investor.\352\ This further increases
the likelihood of a current investor's investment experience deviating
from the historical performance of a given RILA, even when that RILA
had similar terms to those currently offered. Our understanding is that
insurance companies do not currently advertise the historical
performance of the RILA or any particular index-linked option itself.
---------------------------------------------------------------------------
\351\ See rule 156(b)(1)(ii) (statement can be misleading
because of ``absence of explanations, qualifications, limitations or
other statements necessary or appropriate to make such statement not
misleading'').
\352\ See, e.g., OIAD Report at Section 3, Comparing RILA
Features, Variations in Term Length and Simulated Returns; Section
7, Conclusions, Implications of the Research: The Economics of
RILAs.
---------------------------------------------------------------------------
In addition to rule 156, advertisements and sales literature for
existing N-4 issuers is subject to 17 CFR 230.482 (``rule 482''). Rule
482 requires, among other things, enhanced disclosures in investment
company and business development company advertisements designed to
convey balanced information to prospective investors, particularly with
respect to standardizing representations of a fund's past
performance.\353\ These provisions were introduced as a result of the
Commission's experience with fund advertisements that were creating
unrealistic or misleading expectations through representations
regarding past performance.\354\ Accordingly, rule 482 now permits
funds to use performance data in their advertisements, but only
according to standardized methodologies set forth in the rule. Unlike
the rules applicable to most RILAs, rule 482 also permits registered
investment companies and business development companies to provide
advertisements and sales literature to investors without it being
accompanied or preceded by a statutory prospectus.\355\
---------------------------------------------------------------------------
\353\ See Amendments to Investment Company Advertising Rules,
Investment Company Act Release No. 26195 (Sept. 29, 2003) [68 FR
57760 (Oct. 6, 2003)] (``482 Amendment Release'').
\354\ See id.
\355\ See 17 CFR 230.433(b)(2).
---------------------------------------------------------------------------
While not required by the RILA Act, we nevertheless considered
whether RILA advertising might raise similar concerns that would
justify amending rule 482 to include RILAs. As explained below, we have
not yet seen sufficient evidence to support an expansion of rule 482 to
RILAs at this time, though we acknowledge such concerns may develop in
the future.\356\ This conclusion largely follows from the rule's
standardized performance data requirements, which do not align with
current practices in RILA advertisements. While variable annuity
marketing materials frequently utilize standardized performance
returns, this is not the case with RILA advertisements. Rather than
relying on past performance, insurance companies typically market RILAs
on other bases that are less amenable to standardized performance
metrics, for example highlighting that these are flexible products
whose features can be customized to fit a particular investor's needs.
RILA advertising also typically does not attempt to utilize past
performance, suggesting there is neither a need for rules prescribing
RILA-specific past performance metrics, nor sufficient experience to
inform the development of such metrics. For these reasons, we would not
change rule 482 to include RILAs.
---------------------------------------------------------------------------
\356\ As a result, RILA sales literature, as ``free writing''
prospectuses, would continue to be subject to 17 CFR 230.164 and 17
CFR 230.433, as well as any other applicable rule that permits a
communication notwithstanding the ``gun jumping'' provisions of the
Securities Act.
---------------------------------------------------------------------------
We request comment on the proposed application of rule 156 to RILAs
and our proposal not to amend rule 482 to include RILAs.
136. Would the application of rule 156 to RILA sales literature
help to prevent or address material misstatements in those
communications? Is there any other action we should take to address
this concern?
137. Are there differences between variable annuities and RILAs
that would justify not extending rule 156 to RILA sales literature as
proposed?
138. Instead of extending rule 156 to RILAs, should we create a new
rule that specifically and solely deals with materially misleading
information in RILA sales literature? If so, what is it about RILAs
that necessitates a RILA-specific rule about materially misleading
sales literature, and what particular areas or topics should we address
in a RILA-specific sales literature rule?
139. Do commenters agree with the contextual concerns highlighted
above with regards to the representations typically used in RILA sales
literature? Are there other claims or suggestions in RILA sales
literature that insurance companies use that we should be concerned
about?
140. Do insurance companies currently utilize any performance
metrics in RILA advertisements? Why do insurance companies not
currently utilize past performance in RILA sales literature to the same
extent as variable annuity advertisements? Is there a way to
standardize RILA past performance information? Is there a way to view
RILA past performance information as other than as materially
misleading?
141. Do commenters agree that advertising the historical
performance of a RILA or any particular index-linked option would be
misleading in light of the customized nature of RILA contracts and the
pace at which the RILA features that determine RILA performance are
subject to change?
142. Are there benefits to investors in amending rule 482 to
include RILA advertising materials? If so, how should it be amended?
How would we address past performance metrics for a RILA in light of
the customized nature of RILAs and the changing nature of RILA
features?
[[Page 71144]]
143. Should we permit insurance companies to provide RILA sales
literature to investors without being accompanied or preceded by a
summary or statutory prospectus as variable annuities do? How would
insurance companies be able to present such a complex product to
investors in a way that they can understand?
G. Existing Commission Letters
Certain Commission letters, or portions thereof, exempting
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1 based on the authority
provided in 17 CFR 210.3-13 (``3-13 Exemptions'') would be withdrawn or
rescinded in connection with any adoption of this proposal in light of
the proposed change to permit RILAs to provide SAP financial statements
on amended Form N-4 in the same way that other insurance companies are
permitted to do so on current Form N-4.\357\ Following the compliance
date of any final rule, some letters, or portions thereof, would be
moot, superseded, or otherwise inconsistent with the final rule and,
therefore, would be withdrawn or rescinded. If commenters believe that
additional Commission letters or other actions, or portions thereof,
should be withdrawn or rescinded, they should identify the letter or
guidance, state why it is relevant to the proposal, how it or any
specific portion thereof should be treated, and the reason therefor.
Based on the proposal, 3-13 Exemptions that would be withdrawn or
rescinded would include, but would not necessarily be limited to, all
of the 3-13 Exemptions listed below.
---------------------------------------------------------------------------
\357\ Rule 3-13 provides, in part, that the ``Commission may,
upon the informal written request of the registrant, and where
consistent with the protection of investors, permit the omission of
one or more of the financial statements herein required or the
filing in substitution therefor of appropriate statements of
comparable character.'' We would not be rescinding exemptions
provided in any of the letters outlined below provided with respect
to non-RILA insurance products because they are not affected by this
rulemaking.
Table 8--Existing Commission Letters
------------------------------------------------------------------------
Name Date
------------------------------------------------------------------------
Great-West Life & Annuity Insurance Company and Great- 9/28/2018
West Life & Annuity Insurance Company of New York...
Athene Annuity and Life Company...................... 9/28/2018
Allianz Life Insurance Company of North America and 9/28/2018
Allianz Life Insurance Company of New York..........
MONY Life Insurance Company of America............... 3/7/2019
Symetra Life Insurance Company and First Symetra 8/8/2019
National Life Insurance Company of New York.........
Forethought Life insurance Company................... 10/17/2019
Nationwide Life Insurance Company.................... 10/17/2019
Minnesota Life Insurance Co.......................... 6/11/2020
MEMBERS Life Insurance Co............................ 11/6/2020
Transamerica Life Insurance Company and Transamerica 2/11/2021
Financial Life Insurance Company....................
Midland National Life Insurance Company.............. 8/12/2021
Protective Life Insurance Company and Protective Life 10/14/2022
and Annuity Insurance Company.......................
Everlake Life Insurance Company...................... 10/21/2022
Fidelity & Guaranty Life Insurance Company and 3/17/2023
Fidelity & Guaranty Life Insurance Company of New
York................................................
Delaware Life Insurance Company and Gainbridge life 4/28/2023
Insurance Company...................................
------------------------------------------------------------------------
We request comment on the proposed recessions.
144. Are there any other Commission letters or actions that should
be rescinded or withdrawn if the proposal is adopted?
145. Are there any staff letters or guidance pieces that would be
moot, superseded, or otherwise inconsistent with the final rule?
146. In a future rulemaking, should we consider codification of any
3-13 Exemptions that have been granted to other insurance products? If
so, what considerations should the Commission consider in doing so?
H. Registered Market-Value Adjustment Annuities
In addition to RILAs, there are other non-investment company
insurance products that are securities under the Federal securities
laws. Like RILAs, offerings of these securities are currently
registered by insurance companies on Forms S-1 or S-3. For example,
some annuity contracts that offer fixed investment options and apply
market-value adjustment annuities (``MVAs'') to amounts withdrawn from
such fixed options before the end of the fixed option's term (e.g., due
to contract withdrawals, transfers to other investment options, and
annuitization) are required to register the MVA with the Commission
(``registered MVAs'').\358\ For these annuities, fixed options are
either offered on their own or in a combination contract with variable
options. Like RILAs, a significant feature of a registered MVA is the
contract adjustment.
---------------------------------------------------------------------------
\358\ Registered MVAs are securities because the MVA feature
imposes certain investment risks on purchasers. See Section 3(a)(8)
of the Securities Act and 17 CFR 230.151; see also SEC v. Variable
Annuity Life Insurance Co. of America, 359 U.S. 65, 77 (1959).
---------------------------------------------------------------------------
Because RILAs and registered MVAs differ only with respect to the
manner in which interest is calculated and credited, many of the
disclosures we are proposing for RILAs on Form N-4 would also be
appropriate for registered MVAs. This is particularly true of the
proposed disclosures relating to the operation of contract adjustments,
given their importance in both a RILA and a registered MVA.
We are not proposing to require insurance companies to register
offerings of registered MVAs on Form N-4 at this time because the RILA
Act does not address these securities and imposes specific timelines
for the Commission both to propose rules and to adopt final rules. We
request comment below, however, on whether we should also require
insurance companies to register offerings of registered MVAs on Form N-
4. To help commenters evaluate these requests for comment, we also have
analyzed the changes to Form N-4 we believe would be necessary to
accommodate offerings of these securities:
Adding registered MVAs to the list of permissible uses of
Form N-4 on the facing page and general instructions; \359\
---------------------------------------------------------------------------
\359\ See, e.g., proposed General Instruction B.1 of Form N-4.
---------------------------------------------------------------------------
Adjusting the definition of ``Contract Adjustment'' in the
form to
[[Page 71145]]
account for investment options beyond index-linked options;
In the discussion of how interest is calculated for the
contract's fixed options in the description of the insurance company,
registered separate account, and investment options, requiring: (1) a
statement that an investor could lose a significant amount of money due
to the contract adjustment if amounts are removed from a fixed option
prior to the end of its term, (2) a description of the transactions
subject to a contract adjustment with cross-references to the related
disclosure in the prospectus, and (3) a prominent statement of the
maximum amount of loss, as a percentage, an investor could experience
from a negative contract adjustment and that this loss could be greater
due to surrender charges and tax consequences; \360\
---------------------------------------------------------------------------
\360\ See proposed Item 6(e)(2) of Form N-4.
---------------------------------------------------------------------------
Adjusting the disclosures in the prospectus about contract
adjustments in the charges-related disclosures to account for
investment options beyond index-linked options having contract
adjustments; \361\
---------------------------------------------------------------------------
\361\ See proposed Item 7(e) of Form N-4.
---------------------------------------------------------------------------
In the appendix of available investment options, in the
discussion of fixed options, requiring: (1) a legend stating that if
amounts are withdrawn from a fixed option before the end of its term,
the insurance company may apply the contract adjustment and that this
may result in a significant reduction in contract value; and (2) the
provision of appropriate cross-references to the prospectus disclosure
relating to contract adjustments; \362\
---------------------------------------------------------------------------
\362\ See proposed Item 17(c) of Form N-4.
---------------------------------------------------------------------------
Requiring registered MVAs to provide the same disclosure
proposed for RILAs regarding changes in accountants; \363\
---------------------------------------------------------------------------
\363\ See proposed Item 26(c) of Form N-4. As with RILAs, if
insurance companies were required to use Form N-4 for registered
MVAs, they would also be permitted to use SAP in registered MVA
registration statements to the same degree as other Form N-4 filers.
See supra section II.D. If we were to do this, 3-13 Exemptions
provided in connection with registered MVAs would be withdrawn or
rescinded for the reasons discussed in section II.G above.
---------------------------------------------------------------------------
Requiring registered MVAs to provide the same census-type
information as we are proposing for RILAs; \364\ and
---------------------------------------------------------------------------
\364\ See proposed Item 31A of Form N-4.
---------------------------------------------------------------------------
Requiring the same undertakings and exhibits for
registered MVAs as we are proposing for RILAs.\365\
---------------------------------------------------------------------------
\365\ See proposed Items 27(q) and 34(b) of Form N-4.
---------------------------------------------------------------------------
In addition to these changes to Form N-4, if we were to require
insurance companies to use Form N-4 to register offerings of registered
MVAs, we would anticipate providing the same functional changes we are
proposing for RILAs, that is, the ability to use a summary prospectus
and the use of the same filing and marketing rules, for the same reason
as we are proposing these changes for RILAs.\366\ For example, we could
create a defined term ``registered market value-adjusted annuity'' in
rule 405 that would be an annuity (1) that is deemed a security; (2)
that is offered or sold in a registered offering; (3) that is issued by
an insurance company that is subject to the supervision of either the
insurance commissioner or bank commissioner of any State or any agency
or officer performing like functions as such commissioner; (4) not
issued by an investment company; and (5) whose value may reflect a
positive or negative adjustment (based on calculations using a
predetermined formula, or a change in interest rates, or some other
factor or benchmark) if amounts are withdrawn before the end of a
specified period. We could then use this definition to apply to
registered MVAs those Securities Act rules we propose to apply to
RILAs.\367\ We would also expect to have the same requirements as to
the use of Inline XBRL for similar reasons.\368\
---------------------------------------------------------------------------
\366\ See supra sections II.C, E, and F.
\367\ This definition mirrors that of ``registered index-linked
annuity'' we are proposing to add to rule 405 for RILAs, other than
the last provision which borrows from the definition of ``contract
adjustment'' we are proposing to add to Form N-4. We could also
consider creating a defined term in rule 405 that combines both the
RILA and registered market-value adjusted annuity definitions for
simplicity.
\368\ See supra section II.B.9.
---------------------------------------------------------------------------
We request comment on whether to require insurance companies to
register the offering of registered MVAs on Form N-4.
147. Would it be appropriate to require insurance companies to
register the offering of registered MVAs on Form N-4 (as proposed to be
as amended in this proposal)? Should all of the changes suggested above
apply to registered MVAs?
148. Is the definition of ``registered market-value adjusted
annuity'' included above as an example the correct one?
149. Are there any other disclosures that would be relevant in the
registered MVA context?
I. Technical Amendment to Form N-6
The Commission is proposing a technical amendment to Form N-6 to
reflect the correct placement of an amendment to this form that the
Commission adopted in 2020 in the release titled ``Facilitating Capital
Formation and Expanding Investment Opportunities by Improving Access to
Capital in Private Markets'' (herein referred to as the ``Exempt
Offering Framework Adopting Release'').\369\ In that release, the
Commission adopted, among other amendments, amendments to certain
instructions associated with the Exhibits items of Form N-4 and Form N-
6. The amendatory instructions in the Exempt Offering Framework
Adopting Release erroneously referred to outdated Exhibits items of
these forms. That is, the amendatory instructions referred to Items 24
and 26 respectively, instead of Items 27 and 30 respectively (as
adopted by the Commission in earlier amendments to Forms N-4 and N-6 in
the VASP Adopting Release).\370\ The amendments we are proposing to
Form N-4 correctly reflect the placement of the amendment that the
Commission adopted in the Exempt Offering Framework Adopting Release in
Item 27 of the form instead of in Item 24. We are also proposing a
technical amendment to Item 30 of Form N-6 that correctly reflects the
placement of the amendment that the Commission adopted in the Exempt
Offering Framework Adopting Release in this item instead of in Item 26.
---------------------------------------------------------------------------
\369\ Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets,
Investment Company Act Release No. 34082 (Nov. 2, 2020) [86 FR 3496
(Jan. 14, 2021)].
\370\ See Exempt Offering Framework Adopting Release at
amendatory instructions 50 and 51; see also VASP Adopting Release at
section II.C.4 (Table 6).
---------------------------------------------------------------------------
J. Compliance Period
We are proposing a compliance date one year after publication of
final amendments in the Federal Register.\371\ All initial registration
statements and post-effective amendments that are annual updates to
effective registration statements on Form N-4 that are filed after the
compliance date would be required to comply with the amendments. This
compliance period is designed to give registrants sufficient time to
comply with the proposed changes, including to update their
registration statements; to prepare to use rules 485 and 497 to update
their registration statements and file prospectuses with the
Commission; and to begin paying securities registration fees on Form
24F-2.
---------------------------------------------------------------------------
\371\ This compliance period would apply for all of the
amendments in this release other than the technical amendment to
Form N-6 discussed in section II.I supra.
---------------------------------------------------------------------------
RILAs that have previously registered offerings of securities on
Forms S-1 or S-3 would file a post-effective amendment to their
registration statement pursuant to rule 485(a) at the
[[Page 71146]]
time of their next annual update following the compliance date, using
Form N-4.\372\ In appropriate circumstances, we would consider requests
by registrants with respect to existing variable annuity contracts to
file post-effective amendments pursuant to Securities Act rule
485(b)(1)(vii) when these post-effective amendments make conforming
changes to comply with the proposed amendments to Form N-4.\373\
---------------------------------------------------------------------------
\372\ A post-effective amendment filed under rule 485(a) [17 CFR
230.485(a)] generally becomes effective either 60 days or 75 days
after filing, unless the effective date is accelerated by the
Commission. RILA registrants generally should be able to rely on
template filing relief, in which case they would not need to file a
rule 485(a) filing for each RILA. See proposed amended rule
485(b)(1)(vii). Existing RILA issuers that only issue RILAs and will
be using the same CIK would be permitted to transition by filing a
485APOS or 485BPOS in EDGAR. Both of these submission types allow
the entity to keep its current Securities Act file number, and both
allow the filer to obtain new contract IDs and the needed Form N-4
investment company type designation in EDGAR. RILA issuers that will
be acquiring new CIKs for their RILA offerings would need to
transition by filing an administrative Form N-4 submission under a
newly-issued CIK to obtain a new Securities Act file number, new
contract IDs, and the Form N-4 investment company type (which is
used for EDGAR purposes only).
\373\ A post-effective amendment filed under rule 485(b) may
become effective immediately upon filing. A post-effective amendment
may be filed under rule 485(b) if it is filed for one or more
specified purposes, including to make nonmaterial changes to the
registration statement. A post-effective amendment filed for any
purpose not specified in rule 485(b) generally must be filed
pursuant to rule 485(a). Under rule 485(b)(1)(vii), the Commission
may approve the filing of a post-effective amendment to a
registration statement under rule 485(b) for a purpose other than
those specifically enumerated in the rule. The Commission's staff
has been delegated the authority to approve registrants' requests
under rule 485(b)(1)(vii). 17 CFR 200.30-5(b-3)(1).
---------------------------------------------------------------------------
We also are proposing to provide a six-month delayed effective date
for all amendments except for the amended Form N-4, amended rule 498A,
and technical amendments to Form N-6, such that all other final
amendments would be effective six months after publication in the
Federal Register. Thus, we propose that a registrant would be able to
rely on rule 498A to satisfy its obligations to deliver a RILA
contract's statutory prospectus beginning on the effective date of the
rule amendments, provided that the registrant is also in compliance
with the amendments to Form N-4. The delayed effective date for
remaining amendments would provide the Commission time to prepare the
EDGAR system to accommodate transitioning RILA offerings onto the
proposed framework.\374\
---------------------------------------------------------------------------
\374\ There would be no transition period associated with the
technical amendment to Form N-6 discussed in section II.I supra.
---------------------------------------------------------------------------
We are not delaying the effective date of the proposed changes to
Form N-4 and rule 498A, however, to allow registrants to begin filing
registration statements under the revised form as soon as possible. We
believe allowing registrants to use the new form as soon as possible
following the Commission's adoption of final amendments is consistent
with Congress's intent in directing the Commission to prepare and
finalize a new form for RILAs within 18 months of enactment.
We request comment on the proposed compliance period:
150. Would the proposed compliance period provide registrants
sufficient time to prepare to comply with the amendments? Would more
time be appropriate or, conversely, should we provide a shorter
compliance period to ensure that investors receive the benefit of the
proposed amendments more quickly?
151. Should we provide a separate compliance period to provide more
time for insurance companies to comply with the requirement to
structure certain disclosure in Inline XBRL? For example, should we
provide an additional year period after the date insurance companies
are required to first update their disclosure?
152. Is it appropriate to permit a registrant to rely on rule 498A
to satisfy its obligations to deliver a RILA contract's statutory
prospectus beginning on the effective date of the rule amendments,
provided that the registrant is also in compliance with the amendments
to Form N-4?
K. General Request for Comment From Retail Investors
We are requesting input from the retail investor community relating
to the experiences of seeking information about, and investing in, a
RILA. We understand that RILAs are typically sold to retail investors.
This, together with the congressional mandate to design disclosure
requirements for RILAs with the goal of ensuring that key information
is conveyed in terms a purchaser is able to understand, makes feedback
from retail investors particularly relevant as we consider the
disclosures that would be required in a RILA registration form.\375\
Specifically, we invite retail investors seeking to comment on their
feedback with annuities generally and RILAs in particular to submit a
short Feedback Flyer, available at Appendix D.
---------------------------------------------------------------------------
\375\ See supra discussion accompanying and following footnote
7.
---------------------------------------------------------------------------
III. Economic Analysis
A. Introduction
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the
Securities Act, and section 2(c) of the Investment Company Act state
that when the Commission is engaging in rulemaking under such titles
and is required to consider or determine whether the action is
necessary or appropriate in (or, with respect to the Investment Company
Act, consistent with) the public interest, the Commission shall
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors. Further,
section 23(a)(2) of the Exchange Act requires the Commission to
consider, among other matters, the impact such rules would have on
competition and states that the Commission shall not adopt any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
We are proposing amendments to our rules designed to carry out the
requirements of Section 101(b) Division AA, Title I of the Consolidated
Appropriations Act, 2023, to establish a registration form for RILAs.
The Commission is proposing to amend the form currently used by most
variable annuity separate accounts, Form N-4, to require issuers of
RILAs to register offerings on that form as well. To facilitate this
amendment, the Commission is also proposing to amend certain filing
rules and make other related amendments. In addition, we are proposing
other amendments to Form N-4 that would apply to all issuers that use
that form. We are also proposing to apply a current Commission rule
that provides guidance as to when sales literature is materially
misleading under the Federal securities laws to RILA advertisements and
sales literature.
While the Commission has developed a set of specific registration
forms for variable insurance contracts, RILA issuers cannot use those
forms because a RILA issuer is not an investment company. Currently,
insurance companies register the offerings of RILAs on the Securities
Act registration forms that are typically used to register traditional
debt or equity offerings, Forms S-1 and S-3. Because Forms S-1 and S-3
are not tailored to the particular characteristics of RILAs (or indeed
insurance products more generally), these forms include a number of
disclosure requirements that may be less material to investors when
[[Page 71147]]
evaluating an insurance product like a RILA and do not include line-
item requirements mandating RILA-specific information that is of
importance to investors in these products. The inclusion of disclosures
that are of little relevance to investors and the omission of
information that is of importance to investors limits the usefulness of
the information investors currently receive about RILAs and thus their
ability to make informed investment decisions. In addition, Forms S-1
and S-3 require the use of GAAP financial statements, rather than the
SAP financial statements that the State insurance regulators require.
SAP financial statements, which focus on an issuer's ability to meet
its obligations under its insurance contracts, as regulated by State
law, appear to provide sufficient material information for investors
evaluating RILAs. Investors may also benefit from the lower cost
burdens on issuers provided by the use of SAP financial statements, to
the extent that those savings are passed along to investors. The
proposed rule would increase the usefulness of the information provided
to current and prospective investors in RILAs by:
Adapting the existing registration and disclosure
framework for variable insurance contracts to accommodate RILAs;
Requiring RILA-specific disclosure requirements in Form N-
4, including disclosures specific to the underlying investment options,
such as, for each available index-linked option, the index, crediting
period, and index crediting methodology;
Proposing amendments to Form N-4 based on our experience
in administering the form and in reaction to our observations of
investor testing, which would be applicable to all issuers that use
this registration form and which are designed to improve disclosures;
Switching the order of the Key Information Table and
Overview of the Contract items;
Utilizing a question and answer format for the Key
Information Table;
Removing an instruction that permits registrants to omit
additional disclosure in the prospectus that repeats information
disclosed in the Overview of the Contract or the Key Information Table;
and
Extending the current rule providing factors to be weighed
in considering whether a statement involving a material fact is or
might be misleading in the specific context of investment company sales
literature to RILAs, in order to address misleading statements about
RILA fees, product features, and certain performance presentations in
RILA sales literature.
We have considered the potential costs and benefits that would
result from the proposed rules, as well as the potential effects on
efficiency, competition, and capital formation. Certain potential
economic effects of the proposed rule would stem from the statutory
mandate, while others would stem from the discretion we are exercising.
We discuss the potential economic effects of the proposed amendments in
section III.C. We also consider certain alternatives to our proposed
approach to implementing the statutory mandate, as discussed in section
III.E. We note that, where possible, we have attempted to quantify the
costs, benefits, and effects on efficiency, competition, and capital
formation expected to result from the proposed rule. In some cases,
however, we are unable to quantify the economic effects because we lack
the information necessary to provide a reasonable and reliable
estimate. Nevertheless, as described more fully below, the Commission
is providing both a qualitative assessment and quantified estimate of
the economic effects, where feasible. The Commission invites commenters
to include estimates and data that could help it form useful estimates
of the economic effects of the proposed amendments.
B. Baseline
1. Affected Parties
The proposed rule would affect issuers of and investors in RILAs,
as well as issuers of and investors in variable annuities that are
registered on Form N-4.
a. The Market for Annuity Products
As of January 2023, there were 90 RILAs registered with the
Commission issued by 23 insurance companies.\376\ Among the 90 RILAs,
50 are stand-alone RILA products, while 40 are combination contracts
that offer index-linked options as well as variable options. The number
of RILAs registered with the SEC on Form S-1 is 52, while the remaining
38 are registered on Form S-3. A little over half of the registered
RILAs (47 RILAs) report SAP financials, with the remainder (43 RILAs)
reporting GAAP financials.\377\
---------------------------------------------------------------------------
\376\ Based on analysis of Forms S-1, S-3 and POS AM filed by
RILA issuers.
\377\ EDGAR Database. Certain Commission letters, or portions
thereof, exempt insurance companies from the requirement to provide
financial statements prepared in accordance with GAAP in connection
with the registration of an offering of RILAs on Form S-1. See
Section II.G.
---------------------------------------------------------------------------
RILA contracts currently offer a variety of index-linked options.
Specifically, RILA contracts that are currently registered with the
Commission offer index-linked options whose returns are linked, in
part, to between two and nine indices with an average among RILAs of
4.3 indices.\378\ The indices associated with current RILA contracts
commonly include the S&P 500, Russell 2000, and NASDAQ-100. RILA
contracts offer index-linked options with less well known indices and
ETFs as well, but with much less frequency.\379\
---------------------------------------------------------------------------
\378\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
\379\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
---------------------------------------------------------------------------
As discussed in Section I, index-linked options whose returns are
based, in part, on the same index may nevertheless have different
elements that contribute to an investor's returns. Notably, different
index-linked options whose returns are linked to the same index may
offer different crediting periods (the set length of time for measuring
growth of contract value based on the performance of the linked index--
for example, one or three years), crediting methodologies, and buffer
or floor levels. RILAs that are currently registered with the
Commission offer between 4 and 64 index-linked options, with an average
of 22.8 index-linked options. Common crediting periods include one,
two, three, and six years, with one year being most common. In the
past, index-linked options with terms as long as 10 years have been
offered, although the longest index-linked option term currently
offered is six years. For those ``combination'' contracts that offer
index-linked options and variable options, the number of variable
options ranges from 1 to 100, with an average of 10.4 variable options.
The most common variable option is a money market fund--in all
instances of combination contracts, a money market fund (or, in one
case, a similar liquid investment) is offered as a variable option.
Table 9 provides information on the dollar amount of RILA sales
from 2016 to 2022.\380\ RILA sales have increased from $7.3 billion in
2016 to $41.1 billion in 2022, which represents a 463% increase between
these two years.
---------------------------------------------------------------------------
\380\ Fact Tank: Sales Data, Life Insurance Marketing and
Research Association, https://www.limra.com/en/newsroom/fact-tank/
(using data from the U.S. Individual Annuity Sales surveys for Q4
for each year from 2016 through 2022).
[[Page 71148]]
Table 9--Sales of RILAs, 2016-2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sales of RILAs ($ billions)...... 7.3 9.0 11.2 17.4 24.1 38.7 41.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Fact Tank: Sales Data, Life Insurance Marketing and Research Association, https://www.limra.com/en/newsroom/fact-tank/ (using data from the U.S.
Individual Annuity Sales surveys for Q4 for each year from 2016 through 2022).
A recent survey of insurers found that 85% of respondents believed
in 2021 that RILA sales would increase by 10% or more over the next
three years, 10% believed that RILA sales would increase by less than
10%, while 5% believed that RILA sales would remain the same over that
time period. No respondents indicated that they believed RILA sales
would decrease.\381\ When surveyed about the factors driving the growth
in RILA sales, the three most commonly cited reasons were: (1)
increased understanding of RILAs among advisers and broker-dealers
(85%), (2) the entrance of large, reputable insurers into the RILA
market (80%), and (3) increased supply due to the entrance of large
issuers and distributors of RILAs (80%).\382\ Respondents also
indicated that they expected to see the largest increases in sales
among the following distribution channels: independent agents or
broker/dealers, captive insurance agents, regional broker/dealers, and
wirehouses.\383\ RILAs were also the product most insurers indicated
had ``tremendous'' growth potential over the near term.\384\
---------------------------------------------------------------------------
\381\ Cerulli Associates & Insured Retirement Institute, Custom
Key Findings, U.S. Annuity Markets 2021: Acclimating to Industry
Trends and Changing Demand Ex. 1 (2021) (``Cerulli Report''),
available at https://www.irionline.org/wp-content/uploads/2022/02/IRI-Key-Findings_2021_Final_12622.pdf.
\382\ Id. at Exhibit 2.
\383\ Id. at Exhibit 3. Other RILA distribution channels
include: brokerage general agencies/independent marketing
organizations, registered investment advisers, and direct sales.
\384\ Cerulli Report at Exhibit 5.
---------------------------------------------------------------------------
As of 2019, there were a total of 2,396 unique variable annuity
products offered by a total of 33 companies.\385\ Net assets totaled
$2,018.0 billion. Also in 2019, variable annuity sales totaled $98.3
billion.\386\ Of the total sales, $62.8 billion (64% of total sales)
were annuities within qualified plans and $35.5 (36%) were non-
qualified annuities.\387\ Investors purchased annuities across various
distribution channels--captive agents, $34.5 billion, (35% of total
sales); independent financial planners/NASD firms, $39.2 billion (40%);
banks/credit unions, $9.2 billion (9%); wirehouses/regional broker-
dealers, $12.6 billion (13%); and direct response, $2.8 billion
(3%).\388\
---------------------------------------------------------------------------
\385\ See Insured Retirement Institute Retirement Fact Book 2020
(``IRI Fact Book''). In 2018 (the last year for which this
information is available in the 2020 edition), the total number of
variable annuity contracts in force was 17.9 million, with an
average individual contract value of $113,053.
\386\ Id.
\387\ Id.
\388\ Id.
---------------------------------------------------------------------------
b. Issuing Insurance Companies
The number of insurance companies currently offering securities
registered as RILAs with the Commission is 23, from 19 insurance
company complexes. Out of these 23 insurance companies, 15 of them
register RILAs on Form S-1, while the remaining 8 use Form S-3.\389\
---------------------------------------------------------------------------
\389\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
---------------------------------------------------------------------------
Insurance companies offer, on average, 4 RILA contracts, ranging
from a maximum of 11 RILAs to a minimum of 1 RILA. The top two issuers
offer 21 RILAs in total, or 29% of the number of existing RILA
products.\390\
---------------------------------------------------------------------------
\390\ Calculated using data obtained from Forms S-1, S-3 and POS
AM filed by RILA issuers.
---------------------------------------------------------------------------
c. Investors
In 2021 there were an estimated 83 million individuals aged 45-64
and 56 million individuals aged 65 or older in the United States,
representing 25 percent and 17 percent of the total population,
respectively.\391\ The number of individuals age 65 or older is
projected to be 65 million (19 percent of the total projected
population) in 2025, 78 million (21 percent of the projected
population) in 2035, 83 million (22 percent of the projected
population) in 2045, and 90 million (24 percent of the projected
population) in 2055.\392\
---------------------------------------------------------------------------
\391\ Annual Estimates of the Resident Population for Selected
Age Groups by Sex for the United States: Apr. 1, 2020, to July 1,
2021 (NC-EST2021-AGESEX). We do not have demographic data on RILA
investors. A 2013 survey found that 86 percent of individual annuity
investors purchased their first annuity before age 65, including 47%
who were between the ages of 50 and 64 years old. The average age of
investors at first purchase of an annuity is 51. The average current
annuity investor age is 70. See The Gallup Organization and Mathew
Greenwald & Associates for The Committee of Annuity Insurers, Survey
of Ownership of Individual Annuity Contracts (2013).
\392\ Projected Age Groups and Sex Composition of the
Population: Main Projections Series for the United States, 2017-
2060. U.S. Census Bureau, Population Division: Washington, DC.
---------------------------------------------------------------------------
Individuals that are planning for, or are already in, retirement
face increasing challenges with respect to achieving their income goals
for retirement. First, people are living longer. Second, traditional
defined-benefit retirement systems that provide guaranteed income are
being replaced with defined-contribution systems that require people to
accumulate their own retirement savings.\393\ Evidence suggests that,
on average, individuals may not be saving appropriately to meet their
retirement goals. For example, one survey found that while 74 percent
of individuals are saving for retirement: (1) 51 percent of older
individuals have less than $50,000 saved for retirement, (2) 57 percent
of individuals save less than 10 percent of their income, and (3) 33
percent of individuals save less than 5 percent of their income.\394\
In addition to the finding that individuals may not be saving an
appropriate amount for retirement, there is also concern that
individuals may not be taking on an appropriate amount of financial
risk.\395\
---------------------------------------------------------------------------
\393\ John Y. Campbell, Restoring Rational Choice: The Challenge
of Consumer Financial Regulation (NBER Working Paper No, 22025,
2016), available at http://www.nber.org/papers/w22025 (``Campbell
Paper'').
\394\ Insured Retirement Institute, Retirement Readiness Among
Older Workers 2021 (2021) (``IRI Survey''), available at https://www.irionline.org/wp-content/uploads/legacy/default-document-library/iri-retirement-readiness-2021_fullreport.pdf.
\395\ See Campbell Paper. Campbell argues that individuals take
too little financial risk and that the willingness to take financial
risk varies with wealth--individuals with greater wealth are willing
to take on more financial risk than individuals with less wealth.
---------------------------------------------------------------------------
Investors may not be saving appropriately to meet their retirement
goals for several reasons. For example, individuals may face meaningful
burdens (e.g., search costs) when trying to identify appropriate
investments or savings products. Once identified, investors may face
additional burdens (e.g., acquiring and analyzing large amounts of
information) to determine which specific investments or saving products
among the ones identified allow investors to best meet their savings
goals.\396\ Second, improving
[[Page 71149]]
technology has permitted the development of more complex and confusing
financial products.\397\ As a result of the burden associated with
identifying appropriate investments, as well as the burden of acquiring
and analyzing information to choose among the set of appropriate
investments, investors may spend less time and effort (i.e., resources)
than is required to make appropriate investment decisions.
---------------------------------------------------------------------------
\396\ John Y. Campbell, Howell E. Jackson, Brigitte C. Madrian,
and Peter Tufano, Consumer Financial Protection, 25 J. Econ.
Perspectives 91 (2011) (``Campbell et al. Paper''). Campbell et al.
note that making decisions about financial products often requires
considerable information on terms and conditions, particularly for
financial decisions that are undertaken only infrequently.
\397\ See Campbell Paper.
---------------------------------------------------------------------------
Investors may not be saving appropriately for other reasons, as
well. For example, some investors may not make the appropriate
decisions for themselves even if they were presented with all the
information that was required to make a decision. Decision making
limitations may be particularly problematic in the context of saving
for retirement because learning from experience is difficult. Investing
in retirement products is only done infrequently and the outcomes from
investing decisions are delayed, perhaps for decades, and are subject
to large random shocks, so that personal experience is slow to
accumulate and is contaminated by noise. Also, financial innovation can
reduce the relevance of an investor's prior experiences. For example,
prior experience investing in investment vehicles with unbounded
returns would be less relevant for investing in RILAs (which have
bounded returns) than it would be for investing in variable annuities
(which have unbounded returns).\398\ Another possibility is that
investors may have preferences that lead them to favor present
consumption over future consumption (``present-biased preferences'')
and, as a result, they save an inappropriate amount for
retirement.\399\ Finally, many people have a limited financial capacity
to save, particularly individuals already burdened with student loans
and mortgages.
---------------------------------------------------------------------------
\398\ See Campbell et al. Paper. The Campbell Paper identifies
five aspects of ``financial ignorance'' that may lead to poor
investor decision making. First, investors may lack understanding of
basic concepts necessary to make appropriate decisions. For example,
investors appear to lack an understanding of diversification and the
tradeoff between risk and return. Second, investors may not
understand the terms of financial contracts. Third, it appears that,
rather than using all available historical data to form views about
future returns on alternative strategies, investors rely on their
own specific experiences to form an opinion. Fourth, individuals
appear to not understand their own difficulties with financial
decision making. Finally, investors appear to not understand the
incentives faced by other parties and the effect these incentives
have on their strategic behavior. Other studies suggest poor
investment decisions may result from investor uncertainty and lack
of investor familiarity with different assets. For example,
individuals may not invest appropriately because individuals are
unable, given historical experience, to form precise estimates of
how they expect assets to perform in the future. See, e.g., Raymond
Kan and Guofu Zhao (2007). Optimal Portfolio Choice with Parameter
Uncertainty, Journal of Financial and Quantitative Analysis, 27(3),
621-656. Rather than being unable to form precise estimates of how
they expect assets to perform in the future, investors may not have,
perhaps due to not having the requisite experience, the ability to
form any expectation about how they expect an asset to perform in
the future. If investors' ambiguity is great enough, they simply may
choose not to invest in particular assets. See, e.g., David Easley
and Maureen O'Hara (2009). Ambiguity and Nonparticipation: The Role
of Regulation, Review of Financial Studies, 22(5), 1817-1843.
Finally, investors may make poor investment decisions because they
choose to overweight investment in assets with which they are
familiar, and underweight, or exclude, investment assets with which
they are less familiar. See, e.g., Gur Hubberman (2001). Familiarity
Breeds Investment, Review of Financial Studies, 14(3), 659-680 and
Massimo Massa and Andrei Simonov (2006). Hedging, Familiarity, and
Portfolio Choice, Review of Financial Studies, 19(2), 633-685.
\399\ See Campbell et al. Paper. Campbell et al. note that
individuals with present-biased preferences favor present
consumption which can lead an individual to make decisions today
that reduce their future welfare in a way that the individual later
regrets.
---------------------------------------------------------------------------
2. Current Regulatory Requirements
As discussed in section I above, RILAs are securities for purposes
of the Securities Act, and public offerings of RILAs, therefore, must
be registered with the Commission.\400\ Unlike variable annuity
contracts for which the Commission has adopted a specific registration
form tailored to those products, insurance companies register RILA
offerings on Form S-1 or Form S-3.
---------------------------------------------------------------------------
\400\ See supra footnote 5 and accompanying text.
---------------------------------------------------------------------------
Form S-1 is available to any issuer (except foreign governments and
issuers of asset-backed securities) to register securities for which no
other registration form is authorized or prescribed. A registration
statement on Form S-1 contains extensive disclosure about all aspects
of the issuer's business and financial condition and consists of two
parts: a prospectus (Part I), and additional information not required
to be included in the prospectus (Part II), but that is publicly
available on the Commission's EDGAR website. Form S-1 allows
incorporation by reference only on a very limited basis. The prospectus
must contain financial statements meeting the requirements of
Regulation S-X, which generally includes audited financial statements
prepared in accordance with GAAP.\401\ Currently, disclosures about
RILA offerings are largely unstructured. The audited financial
statements in the prospectus, if prepared in accordance with GAAP, must
be tagged in Inline XBRL if the Form S-1 contains a price or a price
range.\402\ Form S-1 must be declared effective by the Commission
before any sales of the registered securities may be made. The time
required for Commission review will depend on the number and complexity
of Commission comments and the issuer's ability to adequately address
those comments. The issuer must pay the Commission registration fee
before it files a Form S-1. The amount of the fee is based on the
proposed maximum aggregate offering price.\403\ The issuer must
indicate the amount of each type of security being registered and
calculate the fee payable for each security.
---------------------------------------------------------------------------
\401\ Certain Commission letters, or portions thereof, exempt
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1. As discussed in
Section III.B.1.a, 47 RILAs report SAP financials.
\402\ See 17 CFR 229.601(b)(101)(i)(B).
\403\ Generally, Form S-1 (or S-3) fees paid for a withdrawn
registration statement are available to the issuer for use with its
future registration statements. The amount available for use as an
offset under rule 429 under the Securities Act equals the portion of
the filing fee paid that is associated with any unsold securities of
the same class registered on an earlier registration statement. Once
a filing fee has been used as an offset, those unsold securities on
the earlier registration statement are deemed deregistered. RILAs
are continuously offered to investors, who in many cases are long-
term investors that may make additional allocations or other
investment decisions with respect to an investment in a RILA.
Because RILA investors may make additional allocations or other
investment decisions with respect to an investment, unless a prior
RILA offering is completely unsold, RILA issuers may have increased
difficulty in using filing fees associated with unsold securities of
a prior offerings.
---------------------------------------------------------------------------
Form S-3 is a ``short-form'' registration statement under the
Securities Act that can be used by companies that have been subject to
reporting obligations under the Exchange Act for at least one year and
that satisfy certain other requirements.\404\ Reporting obligations
under the Exchange Act include audited financial statements prepared in
[[Page 71150]]
accordance with GAAP and structured in Inline XBRL. A registration
statement on Form S-3 contains extensive disclosure about all aspects
of the issuer's business and financial condition and consists of two
parts: a prospectus which includes, either directly or incorporated by
reference from the issuer's Exchange Act filings, detailed information
about the issuer (Part I), and additional information not required to
be included in the prospectus (Part II), but that is publicly available
on the Commission's EDGAR website.
---------------------------------------------------------------------------
\404\ The issuer must be either organized under U.S. law with
its principal business operations in the United States or a foreign
private issuer that reports under the Exchange Act using the
domestic reporting forms. The issuer must have a class of securities
registered under section 12(b) or 12(g) of the Exchange Act, or be
required to file reports under section 15(d) of the Exchange Act.
The issuer must have been subject to the reporting requirements of
the Exchange Act and have filed all reports and materials required
under sections 13, 14, and 15(d) of the Exchange Act for the 12
calendar months preceding the filing of Form S-3, and, with certain
exceptions, must have timely filed all such reports and other
materials required to be filed during the 12 calendar months and any
portion of a month immediately preceding the filing of the
registration statement. An issuer that meets all of the requirements
of Form S-3 and that has a public float of $75 million or more
(i.e., ``seasoned issuers'') may use Form S-3 to register any
offering of debt or equity for cash.
---------------------------------------------------------------------------
Registration using Form S-3 offers issuers advantages over
registration using Form S-1. First, Form S-3 allows significant
incorporation by reference, which allows for shorter prospectuses and
makes Form S-3 easier to complete. Also, Form S-3 also allows for
forward incorporation by reference, eliminating the need to file post-
effective amendments to keep registration statements current.
A Form S-3 filed by a non-WKSI must be declared effective by the
Commission. A Form S-3 receives either a full review, a targeted review
of one or more sections of the registration statement, or no review.
Commonly, a full review takes approximately 30 days with targeted
reviews taking less time. The time to resolve any Commission comments
will depend on the number and complexity of the Commission's comments.
An issuer must pay Commission filing fees before it files Form S-3. The
amount of the filing fee is based on the proposed maximum aggregate
offering price.
Under the Federal securities laws applicable to all securities
(including RILA offerings), it is unlawful for any person to use
materially misleading communications in connection with the offer or
sale of any security.\405\ Rule 156 is an interpretive rule that
provides factors to be weighed in considering whether a statement
involving a material fact is or might be misleading in the specific
context of investment company sales literature, including literature
relating to the sale of variable annuities.
---------------------------------------------------------------------------
\405\ See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
---------------------------------------------------------------------------
As discussed in section I above, in 2022 Congress enacted the RILA
Act directing the Commission to adopt a new registration form for RILAs
within 18 months of enactment (i.e., the end of June 2024). If the
Commission fails to adopt the form by the end of June 2024, the RILA
Act provides that issuers can begin registering the offering of RILAs
on Form N-4.
3. Market Practice
Annuities can play a role in helping investors save for retirement
and receive guaranteed lifetime income during retirement.\406\ There
are multiple types of annuities available to help investors who have
different financial goals or tolerances for risk save for retirement:
fixed annuities, variable annuities, and RILAs. Fixed annuities offer
investors preservation of their investment by guaranteeing a minimum
rate of return, but with little opportunity for asset growth. During
the accumulation phase,\407\ a traditional (i.e., book value) fixed
annuity offers investors a fixed rate of return (known in advance) for
a given period of time.\408\ A market value adjusted annuity (see
section II.H) is similar to a traditional annuity, but the assets are
subject to a market value adjustment based on interest rate
changes.\409\ Fixed index annuities guarantee a certain rate of
return,\410\ but also provide the potential for (limited) additional
returns based on the performance of a specified market index.\411\
---------------------------------------------------------------------------
\406\ Id. The IRI Fact Book argues that annuities give investors
the ability to create their own pensions. The IRI Fact Book also
argues that, unlike mutual funds, annuities offer a wide variety of
guarantees to protect an investor's investment. For example, death
benefits provide principal protection in the event that an investor
dies during a market downturn.
\407\ During the accumulation phase, also called the savings
phase, capital builds up. In this phase, the investor pays premiums
into the contract to accumulate assets. See IRI Fact Book.
\408\ Id. The IRI Fact Book also notes that fixed annuities
involve less investment risk because they offer a guaranteed minimum
rate of interest. The minimum rate is not affected by fluctuations
in market interest rates.
\409\ Id. The IRI Fact Book contends that fixed index annuities
are designed for investors who want to partake in the benefits of a
market-linked vehicle with a protected investment floor if there is
a downturn in the index.
\410\ Currently, insurance companies with a minimum A.M. Best
Insurance Ratings of A- offer fixed rate annuities that guarantee
between 3.70% and 5.40% for a three-year period, and between 3.20%
and 5.25% for a ten-year period. Multi-Year Guarantee Annuities
(MYGA), ANNUITY ADVANTAGE (accessed Aug. 17, 2023, and filtered by
``State'' of ``- All''; ``Min AM Best'' of ``A-''; ``Years'' of
``10''; and ``Range'' of ``Exact''), https://www.annuityadvantage.com/annuity-rates-quotes/multi-year-guarantee-annuities/?rating=4&years=10&pos=300&sort=guarantee_period_yield&limit=all.
\411\ IRI Fact Book.
---------------------------------------------------------------------------
Variable annuities accumulate savings based on the performance of
the underlying investment options chosen by an investor. Typically,
investors are able to choose among investment options that pass on the
returns of a wide variety of mutual funds such as equity funds, bond
funds, funds that combine equities and bonds, actively managed funds,
index funds, domestic funds, and international funds.\412\ Depending on
the investment options chosen, variable annuities can offer investors
the greatest opportunity for asset growth, but they also can involve
the greatest amount of investment-based risk, compared to other types
of annuities.\413\
---------------------------------------------------------------------------
\412\ Id.
\413\ Additionally, variable annuities often involve direct
fees, such as insurance charges, and indirect expenses, including
management and other fees and expenses associated with the
underlying mutual funds in which the variable annuity subaccounts
invest. See IRI Fact Book.
---------------------------------------------------------------------------
RILAs are an index-linked product that can be purchased by
individual investors as part of both qualified and non-qualified
retirement accounts.\414\ RILAs combine features of fixed-index
annuities and variable annuities. RILAs limit or reduce downside risk
in return for an investor accepting limited upside performance. In
exchange for giving up the complete protection of principal offered by
fixed annuities, a RILA investor is potentially afforded greater upside
potential than that provided by fixed annuities, though typically less
than the potential upside of investing in the same index within a
variable annuity.\415\ RILAs allow investors some ability to customize
a level of risk with which they are comfortable.\416\ Like other
annuities, RILAs have an accumulation phase followed by a payout phase.
The accumulation phase is divided into one or more crediting
periods.\417\ Also like other annuities, after a ``surrender charge''
period (generally, 3 to 10 years following an investor's last premium
payment), investors can usually surrender their contract at the end of
any crediting period and receive full account value.\418\ Investors,
however, may lose money if they withdraw early from an investment
option or from the contract, as explained in section I.A above.
---------------------------------------------------------------------------
\414\ Thorsten Moenig, It's RILA Time: An Introduction to
Registered Index-Linked Annuities, 89 J. Risk & Ins. 339 (2022)
(``Moenig Paper'').
\415\ See IRI Fact Book.
\416\ Id. The IRI Fact Book also contends that historically
investors generally fell into one of two camps: those willing to
exchange safety of principal for modest returns, and those able to
tolerate the higher risk of being invested in securities in exchange
for greater upside potential. RILAs address a developing demand for
products that allow investors some ability to customize a level of
risk with which they are comfortable. Structured annuities (i.e.,
RILAs) meet the needs of the in-between investor who wants some
degree of certainty but also desires some upside potential.
\417\ Id.
\418\ Id.
---------------------------------------------------------------------------
At the end of a crediting period, the issuer credits a RILA
investor's contract value with ``interest'' (which can be either
positive or negative) that is based on the performance of a specified
index,
[[Page 71151]]
subject to restrictions on the upside, through a cap and/or
``participation rate,'' as well as some form of downside
protection.\419\ If the index declines, the credited loss is lessened
by either a floor (a maximum loss percentage), a buffer (index losses
are credited to the RILA investor's contract value only when they
exceed a certain threshold), or a downside participation rate (the loss
credited to contract value is a certain percentage of the index
loss).\420\ RILA downside protection mechanisms typically do not change
over time, whereas issuers may, and likely will, change upside limits
on gains for both new contracts as well as existing contracts to
reflect changing market conditions.\421\ If a RILA contract offers
downside protection in the form of a floor, then the increased
volatility would expose the issuer to greater downside risk. To offset
the increased downside risk, an issuer might choose to reduce its
upside risk by lowering cap rates.\422\ If the RILA contract offers
downside protection in the form of a buffer, then increased volatility
would expose the issuer to reduced downside risk. The reduced downside
risk might cause issuers to increase cap rates.\423\
---------------------------------------------------------------------------
\419\ Id.
\420\ Id. The Moenig Paper argues that RILAs are structurally
similar to fixed-index annuities except that RILAs may credit
negative returns. A fixed-index annuity can be viewed as a special
case of a RILA with a floor of 0%. The insurer provides full
protection on the index return in exchange for a low cap rate
(commonly between 2% and 4%).
\421\ See Moenig Paper.
\422\ Id.
\423\ Id.
---------------------------------------------------------------------------
Also, unlike variable annuities, most RILAs do not include any
direct ongoing fees or charges to the investor. Insurance companies,
however, can benefit from offering RILAs in at least three ways. First,
insurance companies can benefit from a favorable imbalance between the
downside protections that a RILA contract offers, and the upside limits
the contract offers.\424\ That is, insurance companies set the level of
upside limits such that their value (to the issuer) exceeds the cost of
providing the downside protection mechanism to investors.\425\ One
study estimates an average annual cost to investors from the imbalance
between the downside protections that a RILA contract offers and the
upside limits is approximately 0.17% of the RILA investment
amount.\426\ To assess if the findings of the study continue to be
relevant for the current RILA market, the staff conducted an
independent analysis of RILA contract terms. Specifically, staff
examined 24 one-year term rates linked to the S&P 500 index, Nasdaq 100
index, Russell 2000 index, and MSCI EAFE.\427\ These rates were offered
by three insurance companies across a two-week interval.\428\ In
particular, staff calculated the fair value of the portfolio, composed
of a risk-free zero-coupon bond with one-year maturity and a collection
of hypothetical index options with one-year expiration that would
replicate the promised payoff for each contract.\429\ Staff used the
Black-Scholes formula for European options to derive fair prices of
these hypothetical index options. In estimating the implied volatility
for each specific strike price, staff utilized an estimated one-year
volatility surface.\430\ The volatility surface estimates the values
for implied volatility across a range of standardized options with
varying implied strike prices, including both calls and puts. Staff
then linearly interpolated between the implied volatilities with
implied strikes adjacent to the strike price of each hypothetical
option to obtain the implied volatility. This implied volatility is
used as an input in the Black-Scholes formula to derive the fair values
of the options.\431\ Staff assumed that the options expire in exactly
one year. The annual cost of each contract is defined as the difference
between the par value and the calculated risk-neutral fair price of the
contract, divided by the par value.\432\
---------------------------------------------------------------------------
\424\ Id.
\425\ We understand that for shorter crediting periods and for
common indexes such as the S&P 500, insurance companies are able to
use exchange-traded derivative securities to closely approximate the
insurer's liabilities from a RILA contract at the end of each
crediting period. For example, for a RILA with both a floor and a
cap, the insurance company can hedge its liability by purchasing a
call option (with an appropriate strike price given the floor) and
selling a call (with a higher strike price that is dependent on the
cap). The insurance company can offer a cap such that the proceeds
from selling the call with the higher strike price exceed the cost
of purchasing the call option with the lower strike price. For a
RILA with a downside buffer (as opposed to a floor) and a cap, the
process for insurance companies to hedge their liabilities is
similar, but with a different mix of options. In the case of a RILA
with a downside buffer and a cap, the insurance company would
purchase a call option, sell a call option (with a higher strike
price), and selling a put option (with a lower strike price, as
appropriate given the downside buffer). In this case, the insurance
company can offer a cap such that the proceeds from selling the call
and the put exceed the cost of the call option with the lower of the
two strike prices.
\426\ See Moenig Paper; Public Filings on EDGAR.
\427\ The staff obtained the term rates from Rates: Current
rates for Allianz Index Advantage ADV Variable Annuity, Allianz,
https://www.allianzlife.com/what-we-offer/Annuities/registered-index-linked-annuities/index-advantage-adv/rates (visited Sept. 14,
2023); Variable Annuities, Equitable, https://equitable.com/retirement/products/variable-annuities (click ``View Performance Cap
Rates'') (visited Sept. 14, 2023); Nationwide Defender Annuity,
Nationwide (Sept. 1, 2023), (visited Sept. 14, 2023).
\428\ Each contract designates a distinct set of buffer and cap
rates with no additional features. The sample period spans from
September 5 to 15, 2023. The Moenig Paper cited an industry survey
as a source for the data in its analysis. We understand that the
industry survey cited does not contain updated product-level
contract-level details beyond the data cited in the Moenig Paper. We
request comment on data sources (e.g., pricing vendors) that should
be considered for these calculations. See infra section III.F.
\429\ More specifically, the options position encompasses a long
At-the-Money (ATM) call option, coupled with a short Out-the-Money
(OTM) call option with strike price equal to the index value
increased by a factor of the cap rate and a short OTM put option
with strike price equal to the index value decreased by a factor of
the buffer rate.
\430\ The volatility surface data is obtained through IvyDB
OptionMetrics.
\431\ The other model inputs--the end-of-day S&P 500 index value
and the risk-free interest rate--are obtained through IvyDB
OptionMetrics.
\432\ The staff incorporated any explicit annual product fee
charged by the insurance company into the cost calculation. This
analysis could be extended to incorporate several additional factors
that differentiate the RILA from the replicating strategy that would
be priced in a market. For example, it does not consider any
effective difference to the investor in liquidity because of early
withdrawal charges or penalties, differences in portfolio value
prior to maturity, death benefits, or specific crediting methods. We
request comment on these aspects of pricing of RILA contracts below.
See infra section III.F.
---------------------------------------------------------------------------
Table 10 presents the mean and median annual costs for each of the
twenty-four contracts during the sample period. The annual costs hover
around zero for all contracts. The mean annual costs are positive for
nearly all of the contracts, ranging from 0.04% for contract 22 and
0.93% for contract 20, but negative for others, such as contract 1,
contract 2, contract 3, and contract 16. These results are consistent
with the Moenig Paper's findings of a mean cost of 0.17%.
Table 10--Pricing of Twenty-Four Sample RILA Contracts
------------------------------------------------------------------------
Mean (%) Median (%)
------------------------------------------------------------------------
Contract 1.............................. -0.30 -0.30
Contract 2.............................. -0.64 -0.64
[[Page 71152]]
Contract 3.............................. -0.30 -0.29
Contract 4.............................. 0.57 0.61
Contract 5.............................. 0.34 0.34
Contract 6.............................. 0.37 0.50
Contract 7.............................. 0.42 0.44
Contract 8.............................. 0.39 0.40
Contract 9.............................. 0.60 0.58
Contract 10............................. 0.72 0.74
Contract 11............................. 0.51 0.46
Contract 12............................. 0.09 0.09
Contract 13............................. 0.22 0.22
Contract 14............................. 0.24 0.25
Contract 15............................. 0.35 0.36
Contract 16............................. -0.08 -0.11
Contract 17............................. 0.16 0.11
Contract 18............................. 0.12 0.13
Contract 19............................. -0.08 -0.22
Contract 20............................. 0.93 0.93
Contract 21............................. 0.63 0.64
Contract 22............................. 0.04 0.04
Contract 23............................. 0.33 0.33
Contract 24............................. 0.38 0.38
------------------------------------------------------------------------
Note: The table summarizes the annual costs for each of the twenty-four
contracts offered by three insurance companies during a two-week
interval. See Rates: Current rates for Allianz Index Advantage ADV
Variable Annuity, Allianz, https://www.allianzlife.com/what-we-offer/Annuities/registered-index-linked-annuities/index-advantage-adv/rates
(visited Sept. 14, 2023); Variable Annuities, Equitable, https://equitable.com/retirement/products/variable-annuities (click ``View
Performance Cap Rates'') (visited Sept. 14, 2023); Nationwide Defender
Annuity, Nationwide (Sept. 1, 2023), https://nationwidefinancial.com/media/pdf/VAM-3629AO.pdf (visited Sept. 14, 2023). At the end of each
business day, we employ a market price approach to compute the fair
value of each contract. We then compare the fair value to the par
value to derive the annual cost and incorporate any explicit product
fee. Subsequently, we compute the mean and median annual costs for
each contract over the two-week measurement period.
Also, we understand that, generally, insurance companies can
benefit from offering RILAs by investing RILA proceeds into fixed-
income securities such as corporate bonds, thereby earning a ``credit
risk premium.'' Further, insurance companies can benefit when a RILA
offers index-linked options whose index for measuring performance is a
price-based index that does not account for dividend payments. For
example, if an investor chooses an index-linked option whose
performance is based, in part, on the S&P 500 Price Return Index, the
credited return may be based on the point-to-point change in the S&P
500, which does not include the dividend payments of the underlying
stocks.\433\ The excluded dividends can act as an implicit ``fee'' on
investors with the magnitude of the implicit fee being comparable to
average dividend rates among the underlying index stocks.\434\
---------------------------------------------------------------------------
\433\ See supra footnote 431.
\434\ Id. The Moenig Paper provides the following example. If
stock prices rise by 7% on average over the crediting period, in
addition to paying 2% in dividends, then the RILA account would be
credited 7%, even though investors in the underlying stocks would
earn a 9% return. Omitting dividend payments benefits insurers by
reducing the cost of providing a given amount of downside protection
(e.g., through lower option prices).
---------------------------------------------------------------------------
While most RILAs do not include any explicit ongoing fees or
charges to the investor, RILAs typically have charges for early or mid-
term withdrawals. As discussed in section II.B.2.a, charges for early
or mid-term withdrawals could include, surrender charges, contract
adjustments, and transaction charges (separate from surrender
charges).\435\
---------------------------------------------------------------------------
\435\ See also supra footnote 431.
---------------------------------------------------------------------------
RILAs differ from other annuity contracts in other ways as well.
Variable annuities involve a direct investment of premiums into
subaccount(s) that correspond to one, or more, of many mutual funds.
RILA premiums, on the other hand, are not directly invested into the
assets of the underlying index, and typically investors can only choose
among index-linked options whose returns are based on a small number of
mainstream indexes.\436\ Also, the financial guarantees common to
variable annuities are long term and are only applied when the contract
terminates, either at maturity or due to the investor's death, or if
the account value reaches zero due to guaranteed withdrawals.\437\
These factors make variable annuity guarantees difficult to value and
hedge due to their long-term nature (potentially 25 years, or
more).\438\ The guarantees that RILA contracts offer as part of their
bounded return structure, on the other hand, are short-term (i.e., they
are limited to the crediting period of the index-linked option the
investor selects, which is usually one, two, three, or six years) and
tied to the performance of a common index, so that issuers can hedge
the embedded liabilities accurately through the financial markets.\439\
---------------------------------------------------------------------------
\436\ See Moenig Paper.
\437\ Id.
\438\ Id.
\439\ Id.
---------------------------------------------------------------------------
Further, guarantees that RILA contracts offer may be much less
dependent on investor behavior than variable annuity guarantees.
Variable annuity investors may have a strong incentive to surrender or
exchange their policy when an embedded guarantee loses its value (i.e.,
moves ``out of the money'').\440\ The guarantees RILA contracts offer
reset with the end of the crediting period of the index-linked option
the investor selects, so such guarantees are more commonly ``at the
money'' and investors do not have as strong of an incentive to
surrender or exchange their policies.\441\
---------------------------------------------------------------------------
\440\ Thorsten Moenig and Nan Zhu (2018). Lapse-and-Reentry in
Variable Annuities, Journal of Risk and Insurance, 85(4), 911-938
(``Moenig and Zhu Paper'').
\441\ See Moenig Paper.
---------------------------------------------------------------------------
[[Page 71153]]
Additionally, RILAs and variable annuities differ with respect to
their use of proceeds. As discussed in Section II.B.4, variable annuity
proceeds are held in separate accounts and, therefore, insulated from
the issuer's creditors. Variable annuity proceeds in unitized sub-
accounts must be invested as the investor chooses and returns are
credited to the account directly. Like variable annuity proceeds, RILA
proceeds are placed into a (non-unitized) separate account. As a
result, the proceeds are not insulated from the issuer's creditors.
Also, RILA proceeds can be invested as the issuer sees fit.
We understand that for index-linked options offering shorter
crediting periods, and whose returns are based on common indexes such
as the S&P 500 Index, insurance companies are able to invest RILA
proceeds in exchange-traded derivative securities that closely
approximate the issuer's liabilities from a RILA contract at the end of
each crediting period.\442\ In doing so, insurance companies are able
to hedge away their risk at a low cost. Further, we understand that
insurance companies can, and do, invest the remaining proceeds into
fixed-income securities (e.g., corporate bonds) that allow them to earn
a ``credit risk premium.'' \443\ The credit risk premium can be an
important source of benefits to issuers.\444\
---------------------------------------------------------------------------
\442\ Id.
\443\ Id.
\444\ Id.
---------------------------------------------------------------------------
C. Benefits and Costs
1. Benefits
a. Use of Form N-4
Unlike variable annuity offerings that are registered on Form N-4,
insurance companies register RILA offerings on Forms S-1 or S-3. These
forms include a number of disclosure requirements that are specific to
the insurance company issuing the RILA that the Commission does not
require in the registration statements for offerings of variable
annuities.
We are proposing that insurance companies use Form N-4 to register
the offering of RILAs and we are proposing to adapt Form N-4 for that
purpose.\445\ Because it is an existing form, we believe RILA issuers
and investors are familiar with Form N-4. As a result of expanding the
scope of Form N-4 to address RILAs, RILA offerings would be registered
on the same form as variable annuities. Requiring that insurance
companies register RILA offerings on Form N-4 would leverage insurance-
product specific disclosure requirements reflected in the form and also
would permit the summary prospectus layered disclosure framework the
Commission adopted in 2020 for variable annuities.
---------------------------------------------------------------------------
\445\ See proposed General Instruction B.1 of Form N-4.
---------------------------------------------------------------------------
The following sections discuss the specific benefits deriving from
the contents and requirements of the form in detail. In addition to
these benefits, expanding the scope of Form N-4 to include RILAs would
benefit investors by making it easier for them to evaluate and compare
RILAs, and also to compare other annuity products with RILAs. For
example, investors may require less effort to evaluate and compare
annuity products that register using the same form. To the extent that
investors require less effort to evaluate and compare these annuity
products, investors may be more likely to make decisions that better
align with their investment goals.
b. Contents of Form N-4
The proposal is designed to facilitate the Commission's goal it
sought to achieve in adopting Form N-4, namely to help investors make
an informed investment decision regarding the annuity products that are
registered on that form. The registration process on Form N-4 uses a
layered disclosure approach designed to provide investors with key
information relating to the contract's terms, benefits, and risks in a
concise and more reader-friendly presentation, with access to more
detailed information for those investors who want it. Providing
investors with key information is particularly important in the context
of annuity contracts since their structure is typically more complex
than other types of investment products commonly sold to retail
investors.
Specifically, the proposal would update the contents of Form N-4 to
specifically address RILAs, including by: (1) amending the form's
general instructions; (2) amending the requirements for front and back
cover pages; (3) updating the Key Information Table; (4) providing new
principal disclosures regarding RILA investment options; and (5)
providing for new contract adjustment and fee disclosures. The proposal
would also include certain other technical and conforming amendments to
Form N-4 and related rules designed to accommodate the inclusion of
RILA offerings on that form as well as requiring the insurance company
to provide disclosure in response to the remaining items on Form N-4 to
the extent applicable.
(1) General Instructions
The proposal would require RILA offerings registered on Form N-4 to
comply with the general instructions of that form, including
requirements related to: (1) using document design techniques that
promote effective communication, (2) organizing information to make it
easier for investors to understand, (3) including information in the
prospectus or SAI not otherwise required so long as the additional
information is not incomplete, inaccurate, or misleading, and does not
obscure or impede understanding of the information that is required,
(4) requiring Form N-4 filers to define special terms used in the
prospectus in any presentation that clearly conveys meaning to
investors, (5) allowing insurance companies to describe multiple
contracts that are essentially identical in a single prospectus, (6)
making available the dates of both the prospectus and SAI, (7)
providing an interactive data file related to certain information on
the form, (8) requiring insurance companies to include active
hyperlinks, or other means of facilitating access that leads directly
to the relevant website, for an electronic version of the prospectus,
and (9) the use of incorporation by reference. The general instructions
are designed to require clear and consistent disclosure to investors
about annuity contracts currently registered on the form and to make
clear how filers must prepare and file their registration statements.
We believe clear disclosure benefits investors by making it easier
for investors to evaluate and compare offerings. Concise and decision-
useful disclosures can help facilitate the investment decision-making
process. Also, the presentation of information in a consistent manner
could facilitate not only the evaluation and comparison among RILA
offerings, but also could facilitate the comparison of RILAs to other
annuity products.\446\ Further, certain investors, while aware of
variable annuities, simply may not be aware of RILAs as an investment
option. Presentation of information in a consistent manner on Form N-4
could increase investor awareness of RILAs as an investment option.
---------------------------------------------------------------------------
\446\ The consistent presentation of information also could
facilitate information collection by third parties such as
investment advisers and data aggregators who could then, in turn,
provide information to investors.
---------------------------------------------------------------------------
(2) Front and Back Cover Pages
The proposal would make certain changes to information currently
required on the front and back pages of
[[Page 71154]]
a prospectus for all registrants on Form N-4. Like variable annuities
registered on Form N-4, RILAs would be required to present certain
information on the front and back cover pages of the prospectus. The
proposal would require several new cover page disclosures for all Form
N-4 issuers. One of these would provide additional information
distinguishing among the investment options available in the annuities
registering on Form N-4 and cross-reference the prospectus appendix
that provides additional information about each option. These changes
could help investors better understand what investment options are
available under the contract, in an easily identifiable location. Also,
the proposal would require the inclusion of three new legends that
highlight risks that are particularly prevalent in RILAs. The new
legends that highlight risk that are particularly prevalent in RILAs
should benefit investors by putting them on notice of these key
considerations at the outset, helping the investor make informed
decisions.
(3) Key Information Table
As required for current Form N-4 issuers, the proposal would
require RILA issuers to provide a Key Information Table in their
registration statements. The KIT includes a summary of five areas: (1)
fees and expenses, (2) risks, (3) restrictions, (4) taxes, and (5)
conflicts of interest. The KIT is important summary disclosure for
investors that is included in the prospectus, and the proposed
amendments to the KIT requirements are intended to highlight important
considerations related to RILAs, including certain unique and/or opaque
aspects of RILAs.\447\ Consistent with our layered disclosure approach
for variable annuities registered on Form N-4, RILA issuers would be
required to provide cross-references in the KIT to the location in the
statutory prospectus where the subject matter is described in greater
detail. Certain of the amended KIT requirements would apply to all Form
N-4 issuers. In particular, in a change from the current KIT
requirements for Form N-4 issuers, the amendments would require that
responses in an item be presented in a Q&A format.\448\ In a change for
all Form N-4 issuers, the proposal also would change the order in which
the KIT appears relative to the Overview of the Contract disclosures in
the prospectus.
---------------------------------------------------------------------------
\447\ Many of the summary points presented in the KIT are
discussed in greater detail in other parts of the form. In this way,
the KIT is an integral part of the layered disclosure approach the
Commission traditionally has taken with annuity products. To ensure
that the KIT serves this function effectively, we also are proposing
to delete Form N-4's general instruction stating that where the
discussion of information required by the Overview of the Contract
(currently Item 3) or KIT (currently Item 2) also responds to the
disclosure requirements in other items of the prospectus,
registrants need not include additional disclosure in the prospectus
that repeats the information disclosed in the Overview of the
Contract or the KIT. See infra footnote 84 and accompanying text.
\448\ Currently, such format is suggested but not required. See
General Instruction C.3.(c) of Form N-4.
---------------------------------------------------------------------------
Overall, the proposed KIT requirements (like the current KIT
requirements for variable annuities) are designed to provide a brief
description of key facts about a RILA in a specific sequence and in a
standardized presentation that is designed to be easy to read and
navigate. We believe that a standardized presentation that is designed
to be easy to read and navigate benefits investors by making it easier
for investors to evaluate and compare RILA offerings. Also, the
standardized presentation of information could facilitate not only the
evaluation and comparison among RILA offerings, but also could
facilitate the comparison of RILAs to other annuity products.
(4) Principal Disclosure Regarding RILA Offerings
The proposal would amend Form N-4 to require disclosure that would
provide investors with information about all annuities whose offerings
are registered on Form N-4 as well as with specific information about
RILAs and the index-linked options available under the RILA contracts.
With regard to Form N-4 issuers generally, the proposal would require
registrants to disclose investment option risk, early withdrawal risk,
contract benefits risk, insurance company risk, and the risk of
contract changes. With regard to specific information about RILAs, the
proposal includes requirements related to: (1) information about RILAs
generally and an overview of certain key elements of any index-linked
option offered under the contract; (2) a more in-depth description of
index-linked investment options available under the contract; (3) the
inclusion of an appendix that consolidates certain summary information
related to index-linked options and fixed options available under the
contract (which would accompany similar information about variable
options offered under a ``combination'' contract); and (4) certain
principal risk disclosures relating to investing in the RILA contract
that the prospectus describes.
The proposed disclosure requirements are designed to provide
additional information regarding the risk of investing in Form N-4
issuers generally, as well as the unique aspects of RILAs and certain
summary and detailed information about index-linked options available
under a RILA contract. The information could benefit investors by
making it easier for investors to evaluate and compare variable annuity
products registered on Form N-4. The required disclosure relating to
index-linked and fixed options available under a contract could benefit
investors by facilitating the comparison of these investment options to
other investment options available under the contract, as well as to
investment options that other RILA contracts offer.
(5) Addition of Contract Adjustments and Other Amendments to Fee and
Expense Disclosures
RILA investors have the ability to take a withdrawal or transfer
out their money before the end of a crediting period. If amounts are
removed from an investment option before the end of a crediting period,
typically an insurance company will apply an interim value adjustment
to the investor's contract value. The IVA, which will adjust the
contract value based on a formula, can move up and down as market
conditions change throughout the crediting period and may adjust daily.
The IVA is irrelevant if the investor does not move money from an
investment option until the end of the crediting period, but it becomes
relevant if the investor withdraws or transfer the money before the end
of a crediting period. Similarly, a positive or negative market value
adjustment could apply if amounts are partially or fully withdrawn from
the contract before the end of a specified period. These contract
adjustments, whose calculation varies by insurance company, may have a
positive or negative effect on the value of the contract.
We propose amendments to Form N-4 to require specific disclosures
with respect to contract adjustments. Currently, Form N-4 requires
variable annuity registrants to provide comprehensive information on
the fees and expenses that investors will pay when buying, owning, and
surrendering a contract, including expenses paid each year during the
time the investor owns the contract. Although RILAs typically do not
charge the explicit fees and expenses common to variable annuities,
they do typically utilize contract adjustments. Since negative
adjustments may result in substantial costs to investors, we believe
that it is important to include a detailed description of
[[Page 71155]]
contract adjustments in the registration statement.
Specifically, we are proposing to expand current disclosure
requirements to address contract adjustments that could affect
investors' contract value when buying, owning, and surrendering or
making withdrawals from an investment option. We are also proposing
certain other specific disclosures about contract adjustments, such as
requiring disclosures about the maximum potential loss that an investor
could experience in connection with a negative contract adjustment.
We believe that these disclosures would benefit investors since
they would be able to better evaluate the costs of purchasing and
owning annuity contracts, including RILAs. In addition, these
disclosures can make less-informed investors aware of RILAs' unique
characteristics, which could increase investor understanding of RILAs
as an investing option.
(6) Other Amendments to Form N-4
The proposal would include certain other amendments to Form N-4 and
related rules designed to accommodate the inclusion of RILA offerings
on Form N-4. These include amendments to Form N-4's facing sheet,
definitions, exhibit list, and required representations, as well as
amendments to certain Securities Act rules that help to implement the
proposal. Because these other amendments to Form N-4 and related rules
are designed to accommodate the inclusion of RILA offerings on Form N-
4, the benefits that could accrue as a result of these other amendments
are those that result from RILA issuers registering offerings on Form
N-4 rather than Form S-1 or Form S-3.
The proposal would also amend Form N-4's required exhibits list to
add new Item 27(p) for all issuers, which would require the filing of
any power of attorney included pursuant to rule 483(b). While this
exhibit is already required to be filed with a Form N-4 registration
statement under rule 483(b), practices differ in regard to the
placement of a required power of attorney exhibit within the exhibit
list. This amendment would benefit investors in comparing these
exhibits for all annuity products whose offerings are registered using
Form N-4 by standardizing the location of these exhibits in the
registration statement. Facilitating the comparison of annuity products
could benefit investors by helping them to invest in RILAs in a manner
that is consistent with their overall financial needs and objectives.
We are also proposing to add new Item 31A in Form N-4 to require
census-type information on RILAs offered in connection with the
applicable registration statement. Under this proposed new item, an
insurance company would have to provide information regarding any RILA
offered through the registration statement, as of the most recent
calendar year-end, including (1) the name of each contract; (2) the
number of contracts outstanding; (3) the total value of investor
allocations attributable to index-linked options; (4) the number of
contracts sold during the prior calendar year; (5) the gross premiums
received during the prior calendar year; (6) the amount of contract
value redeemed during the prior calendar year; and (7) whether the
contract is a combination contract. The information in new Item 31A
would help the Commission and staff in identifying trends in insurance
companies' offerings of RILAs and have a more complete understanding of
the marketplace for annuity securities.
We also propose amendments to Item 34 of Form N-4 to require RILA
issuers to include two specific undertakings in their registration
statements on Form N-4: (1) to file, during any period in which offers
or sales are made, through a post-effective amendment to its
registration statement, any prospectus required by section 10(a)(3) of
the Securities Act and, (2) that, for the purposes of determining
liability under the Securities Act, each post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. These proposed
undertakings are the same as two undertakings RILA issuers currently
provide in registration statements. We believe that it remains
appropriate for RILA issuers to continue to furnish these
representations concerning post-effective amendments to a registration
statement as, under the proposed amendments, RILAs may be continuously
offered on a registration statement for an indefinite amount of time.
(7) Remaining Items
The proposal would require RILA issuers to provide disclosure in
response to the remaining items on Form N-4 to the extent applicable.
These are items that we have previously determined are relevant in the
context of variable annuity offerings. Requiring RILA filers to provide
disclosure in response to the remaining items on Form N-4 to the extent
applicable would help ensure that comparable information is provided in
a standardized, consistent manner for all filers using Form N-4.
We believe standardized, consistent disclosure of comparable
information benefits investors by making it easier for investors to
evaluate and compare RILA offerings. Also, the presentation of
information in a standardized, consistent manner across all filers
using Form N-4 could facilitate not only the evaluation and comparison
among RILA offerings, but also could facilitate the comparison of RILAs
to variable annuities. Further, certain investors, while aware of
variable annuities, simply may not be aware of RILAs as an investment
option. Presentation of information in a standardized, consistent
manner on Form N-4 could increase investor awareness of RILAs as an
investing option. Facilitating the comparison of annuity products could
benefit investors by helping them to invest in RILAs in a manner that
is consistent with their overall financial needs and objectives.
(8) Inline XBRL
The proposal would require many of the newly added disclosures on
Form N-4 to be structured (i.e., tagged) in Inline XBRL, a structured,
machine-readable data language.\449\ In addition, RILA issuers would
have to tag those prospectus disclosures that Form N-4 currently
requires to be tagged.
---------------------------------------------------------------------------
\449\ See supra section II.B.9.
---------------------------------------------------------------------------
Currently, disclosures about RILA offerings are largely
unstructured; only the insurance company's financial statements, if
reported in GAAP and included in a registration statement that includes
a price or price range, are required to be tagged in Inline XBRL.\450\
Certain of the existing disclosures on Form N-4 are required to be
tagged in Inline XBRL.\451\
---------------------------------------------------------------------------
\450\ See supra footnote 402.
\451\ Currently tagged disclosures include: Item 2 (Key
Information), Item 4 (Fee Table), Item 5 (Principal Risks of
Investing in the Contract), Item 10 (Benefits Available under the
Contract), and Item 17 (Portfolio Companies under the Contract). See
Instruction C.3.h of Form N-4; 17 CFR 232.405(b)(2)(iii).
---------------------------------------------------------------------------
The proposed tagging requirements are designed to make the tagged
disclosures more readily accessible for aggregation, comparison,
filtering, and other analysis. As a point of comparison, XBRL
requirements for public operating company financial statement
disclosures have been observed to improve investor understanding of the
disclosed
[[Page 71156]]
information.\452\ While those observations are specific to operating
company financial statement disclosures (including footnotes), and not
to disclosures on Form N-4, they indicate that the proposed Inline XBRL
requirements would provide investors with increased insight into key
features of the contract that is described in the Form N-4 registration
statement. For example, the data tagging could allow third parties such
as financial data aggregators to efficiently compare and otherwise
process the disclosed information into analyses accessible to
investors.
---------------------------------------------------------------------------
\452\ See, e.g., Birt, J., Muthusamy, K. & P. Bir, XBRL and the
Qualitative Characteristics of Useful Financial Information, 30
Account. Res. J. 107 (2017) (finding ``financial information
presented with XBRL tagging is significantly more relevant,
understandable and comparable to non-professional investors'');
Cahan, S.F., Chang, S., Siqueira, W.Z. & K. Tam, The roles of XBRL
and processed XBRL in 10-K readability, J. Bus. Fin. Account. (2021)
(finding 10-K file size reduces readability before XBRL's adoption
since 2012, but increases readability after XBRL adoption,
indicating ``more XBRL data improves users' understanding of the
financial statements''); Efendi, J., Park, J.D. & C. Subramaniam,
Does the XBRL Reporting Format Provide Incremental Information
Value? A Study Using XBRL Disclosures During the Voluntary Filing
Program, 52 Abacus 259 (2016) (finding XBRL filings have larger
relative informational value than HTML filings).
---------------------------------------------------------------------------
c. Option To Use a Summary Prospectus
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations. Investors would
continue to have access to the RILA statutory prospectus and other
information about the RILA contract online, with paper or electronic
copies of this information upon request. The current summary prospectus
rule for variable contracts uses a layered disclosure approach designed
to provide investors directly with key information relating to the
contract's terms, benefits, and risks in a concise and reader-friendly
presentation, with more detailed information available elsewhere. The
proposed amendments to rule 498A would broaden the scope of the rule to
address RILA contracts.
As discussed in section II.C above, the proposed amendments to rule
498A would involve the use of two distinct types of summary
prospectuses for RILA contracts, employing the same approach the rule
currently uses for variable contracts. An ``initial summary
prospectus,'' covering contracts offered to new investors, would
include certain key information about the contract's most salient
features, benefits, and risks, presented in plain English in a
standardized order. The rule amendments would also require ``updating
summary prospectuses'' to be provided to existing investors in RILA
contracts. The updating summary prospectus would include a brief
description of certain changes to the contract that occurred during the
previous year, as well as a subset of the information required to
appear in the initial summary prospectus. Certain key information about
the index-linked options that the contract offers as investment options
would be provided in both the initial summary prospectus and updating
summary prospectus.
The proposed rule would create a choice for insurance companies.
They may meet their prospectus delivery obligations by providing the
statutory prospectus, or they may satisfy these obligations by
providing a summary prospectus and making statutory prospectuses and
other required documents available online. Those insurance companies
that expect to benefit by providing summary prospectuses would choose
to rely on the proposed amendments to meet their prospectus delivery
obligations. Those insurance companies that do not expect to benefit
from this optional prospectus delivery regime would choose to continue
to provide statutory prospectuses to investors.
The presentation proposed for the initial summary prospectus may
also reduce the investor effort required to compare RILA contracts, to
consider different index-linked options that a RILA offers, or to
compare RILA contracts with each other and with variable annuity
contracts, when an investor considers a new investment. Information
provided in a concise, user-friendly presentation could allow investors
to compare information across contracts and as a result, may lead
investors to make decisions that better align with their investment
goals.\453\
---------------------------------------------------------------------------
\453\ Research suggests that individuals are generally able to
make more efficient decisions when they have comparative information
that allows them to assess relevant trade-offs. See, e.g.,
Christopher K. Hsee, George F. Loewenstein, Sally Blount, Max H.
Bazerman (1999). Preference Reversals Between Joint and Separate
Evaluations of Options: A Review and Theoretical Analysis,
Psychological Bulletin, 125(5), 576-90; see also Jeffrey R. Kling,
Sendhil Mullainathan, Eldar Shafir, Lee Vermeulen, Marian V. Wrobel
(2012). Comparison Friction: Experimental Evidence from Medicare
Drug Plans, Quarterly Journal of Economics, 127(1), 199-235. In a
randomized field experiment, some senior citizens choosing between
Medicare drug plans were randomly selected to receive a letter with
personalized, standardized, comparative cost information. Plan
switching was 28% in the group that received a letter with
personalized, standardized, comparative cost information, but only
17% in the comparison group, and the intervention caused an average
decline in predicted consumer cost of about $100 a year among letter
recipients.
---------------------------------------------------------------------------
If insurance companies choose to meet their prospectus delivery
obligations by delivering summary prospectuses to investors, with other
documents available online, investors would then have a choice as well.
Under the layered disclosure framework we are proposing for RILAs,
investors would receive information in the form of a summary
prospectus, with more detailed information available online if the
investor chooses to access it.\454\ Thus, investors can continue to
review the statutory prospectuses by accessing them online, or they may
request paper or electronic delivery of statutory prospectuses on an ad
hoc basis. Alternatively, investors may choose only to consult the
summary prospectuses. Further, if investors want to rely on some
combination of summary and statutory prospectuses to receive
information about the contract, that choice is available to them as
well. Given the Commission's experience administering the optional
summary prospectus regime for variable annuities, we expect a majority
of RILA issuers would choose to use summary prospectuses. Thus, we
expect that the vast majority of investors will have the option to use
both summary prospectuses and statutory prospectuses in their decision-
making, in whatever proportion investors think is best for their
preferences.
---------------------------------------------------------------------------
\454\ During investor testing, several participants felt they
would need information beyond the information contained in the KIT
to make a decision about a RILA. See OIAD Report at Section 5,
Qualitative Testing, Results from Round 1.
---------------------------------------------------------------------------
Initial Summary Prospectus. Should insurance companies issuing
RILAs choose to use summary prospectuses, investors may benefit in a
number of ways.\455\ The proposed initial summary prospectus for RILAs
would be limited to describing only the contract and features currently
available under the statutory prospectus. This focus could make more
salient the features and risks of a RILA, thereby facilitating
investors' evaluation of those features and risks.
---------------------------------------------------------------------------
\455\ Some investors may prefer to read statutory prospectuses,
and therefore, the advantages associated with summary disclosure, as
described in this section, may not apply to those investors. The
statutory prospectus would, under the proposed rule, be available
online and in paper or electronic format upon request.
---------------------------------------------------------------------------
We are proposing a standardized presentation for RILA initial
summary prospectuses to require certain disclosure items that would be
most relevant to investors to appear at the beginning of the initial
summary prospectus, followed by supplemental
[[Page 71157]]
information. An initial summary prospectus must contain the information
required by the rule, and only that information, in the order specified
by the rule.\456\ The information would be required to appear in the
same order, and under relevant corresponding headings, as the rule
specifies. The required presentation could also facilitate comparisons
of different RILA contracts, as well as comparisons between RILA
contracts and variable annuities.
---------------------------------------------------------------------------
\456\ Proposed rule 498A(b)(5).
---------------------------------------------------------------------------
We believe standardized, consistent disclosure of comparable
information benefits investors by making it easier for investors to
evaluate and compare RILA offerings. Also, the presentation of
information in a standardized, consistent manner could facilitate not
only the evaluation and comparison among RILA offerings, but also could
facilitate the comparison of RILAs to other variable annuities.
Further, certain investors, while aware of variable annuities, simply
may not be aware of RILAs as an investment option. Presentation of
information in a standardized, consistent manner in an initial summary
prospectus could increase investor awareness of RILAs as an investing
option.
In addition, given the time required to review a statutory
prospectus, RILA investors may benefit from summary prospectuses
because they offer a shorter alternative to statutory prospectus
disclosure. There is evidence that suggests that consumers benefit from
summary disclosures.\457\ Within the specific context of investing,
there is evidence from related contexts that suggests that summary
prospectuses allow investors to spend less time and effort to arrive at
the same portfolio decision as if they had relied on a statutory
prospectus.\458\ This research is consistent with the 2012 Financial
Literacy Study, which showed that at least certain investors favor a
layered approach to disclosure with the use, wherever possible, of
summary documents containing key information about an investment
product or service.\459\
---------------------------------------------------------------------------
\457\ There is evidence that the summarization of key
information is useful to consumers. See, e.g., Sumit Agarwal,
Souphala Chomsisengphet, Neale Mahoney, Johannes Stroebel,
Regulating Consumer Financial Products: Evidence from Credit Cards
(NBER Working Paper No. 19484, rev. 2014), available at https://www.nber.org/papers/w19484. The authors find that a series of
requirements in the CARD Act, including provisions designed to
promote simplified disclosure, has produced decreases in both over-
limit and late fees, saving US credit card users $20.8 billion
annually; see also Robert L. Clark, Jennifer A. Maki & Melinda
Sandler Morrill, Can Simple Informational Nudges Increase Employee
Participation in a 401(k) Plan? 80 S. Econ. J. 677 (2014). The
authors find that a flyer with simplified information about an
employer's 401(k) plan, and about the value of contributions
compounding over a career, had a significant effect on participation
rates.
\458\ See John Beshears, James J. Choi, David Laibson & Brigitte
C. Madrian, How Does Simplified Disclosure Affect Individuals'
Mutual Funds Choices?, in Explorations in the Economics of Aging 75
(David A. Wise ed., 2010) (``Beshears Paper''), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices. We note, however,
that while the authors find evidence that investors spend less time
making their investment decision when they are able to use summary
prospectuses, there is no evidence that the quality of their
investment decisions is improved. In particular, ``On the positive
side, the Summary Prospectus reduces the amount of time spent on the
investment decision without adversely affecting portfolio quality.
On the negative side, the Summary Prospectus does not change, let
alone improve, portfolio choices. Hence, simpler disclosure does not
appear to be a useful channel for making mutual fund investors more
sophisticated . . .'' Id. at 13 (manuscript page).
\459\ See 2012 Financial Literacy Study.
---------------------------------------------------------------------------
Also, investors allocate their attention selectively,\460\ and the
sheer volume of disclosure in a statutory prospectus may discourage
some investors from reading contract statutory prospectuses. The
observations of a telephone survey conducted on behalf of the
Commission with respect to mutual fund statutory prospectuses (which
are typically shorter than variable contract statutory prospectuses,
and shorter than RILA statutory prospectuses are expected to be under
the proposal) are consistent with the view that the volume of
disclosure may discourage investors from reading statutory
prospectuses.\461\ That survey observed that many mutual fund investors
do not read statutory prospectuses because they are long, complicated,
and hard to understand. Responses to investor surveys in other
contexts, also suggest that shareholders may be more likely to read
more concise shareholder reports.\462\
---------------------------------------------------------------------------
\460\ See George Loewenstein, Cass R. Sunstein & Russell Golman.
(2014) Disclosure Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014).
\461\ Prior to the Commission's 2009 adoption of mutual fund
summary prospectus rules, the Commission engaged a consultant to
conduct focus group interviews and a telephone survey concerning
investors' views and opinions about various disclosure documents
filed by companies, including mutual funds. During this process,
investors participating in focus groups were asked questions about a
hypothetical Summary Prospectus. Investors participating in the
telephone survey were asked questions relating to several disclosure
documents, including mutual fund prospectuses. See Abt SBI, Inc.,
Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May
2008), available at https://www.sec.gov/comments/s7-28-07/s72807-142.pdf. Although the results from the investor testing reflect
stated investor preferences, they do not provide us with information
with respect to the extent to which RILA investors would actually be
more likely to read a RILA summary prospectus relative to a
statutory prospectus.
\462\ Tailored Shareholder Reports Adopting Release.
---------------------------------------------------------------------------
To the extent summary prospectuses increase readership of RILA
contract disclosures, they could improve the quality and efficiency of
portfolio allocations made on the basis of disclosed information for
those investors who otherwise would not have read the statutory
prospectus.
The presentation proposed for the initial summary prospectus may
also reduce the investor effort required to compare RILA contracts, to
consider different index-linked options that a RILA offers, or to
compare RILA contracts with each other and with variable annuity
contracts, when an investor considers a new investment. Information
provided in a concise, user-friendly presentation could allow investors
to compare information across contracts and as a result, may lead
investors to make decisions that better align with their investment
goals.\463\ For example, the proposed amendments would require
insurance companies to distill certain key product information into
tables, which could facilitate comparison across different products.
---------------------------------------------------------------------------
\463\ See supra footnote 453.
---------------------------------------------------------------------------
Further, the proposed framework for RILA contract summary and
statutory prospectuses also includes design elements to facilitate
investor use. In particular, the proposed amendments include
requirements for linking both within the electronic version of a
contract statutory prospectus and between the electronic versions of
the contract statutory prospectus and the contract summary prospectus.
The linking requirement would permit investors who use the electronic
versions of contract prospectuses to quickly navigate between related
sections within the contract statutory prospectus and back and forth
between related sections of the contract summary prospectus and the
contract statutory prospectus. Further, the proposal would also require
that investors either be able to view the definition of each special
term used in an online summary prospectus upon command, or to move
directly back and forth between each special term and the corresponding
entry in any glossary or list of definitions that the summary
prospectus includes. This requirement would facilitate understanding of
terms that may be confusing or unfamiliar among investors viewing the
documents online.
Updating Summary Prospectus. As under current rule 498A, we are not
proposing that RILA issuers send an
[[Page 71158]]
updated initial summary prospectus to investors each year. Instead, any
RILA issuer that relies on rule 498A would send an updating summary
prospectus, which would provide a brief description of certain changes
with respect to the contract that occurred within the prior year.\464\
The updating summary prospectus would also include certain of the
information required in the initial summary prospectus that we consider
most relevant to investors when considering additional investment
decisions.\465\ Further, updating summary prospectuses for RILA
contracts, like initial summary prospectuses, would include specific
disclosure items appearing in a prescribed order, under relevant
corresponding headings.\466\ An updating summary prospectus for a RILA
contract would have to contain the information required by the rule,
and only that information, in the order specified by the rule.
---------------------------------------------------------------------------
\464\ Proposed rule 498A(c)(1).
\465\ See supra footnote 285 and accompanying text.
\466\ Proposed rule 498A(c)(6).
---------------------------------------------------------------------------
The proposed updating summary prospectus for RILAs would have many
of the same benefits for investors associated with the initial summary
prospectus discussed above, with respect to presenting key information
in an easier and less time-consuming manner for investors.
Specifically, because many terms of the RILA contract do not change
from year-to-year, the contract statutory prospectus may contain large
amounts of disclosure that is duplicative of disclosure that the
investor has previously received. Those changes that do occur may be
important to investors, but the disclosure about these changes could be
difficult for the investor to identify given the volume of prospectus
disclosure that investors would otherwise receive, and the current lack
of a requirement to identify new or changed information.
Under the proposed amendments, the updating summary prospectus
would include a concise description of important changes affecting the
statutory prospectus disclosure relating to certain topics that
occurred within the prior year--namely: (1) the availability of
investment options under the contract, (2) the overview of the
contract, (3) the KIT, (4) certain information about fees, (5) benefits
available under the contract, (6) purchases and contract value, and (7)
surrenders and withdrawals. These are topics that are most likely to
entail contract changes and, for the reasons previously noted, are the
types of contract changes most likely to be important to investors
because they affect how investors evaluate RILA contracts and are
relevant to investors when considering whether to continue in the
existing option (if available) or transfer funds to a different option.
The proposed updating summary prospectus, if used by issuers to satisfy
their prospectus delivery obligations, would likely reduce the burden
on investors and increase their understanding of their contract by
highlighting certain changes to the contract made during the previous
year, while foregoing the repetition of most information that had
remained unchanged.
d. Use of Statutory Accounting
The proposal would permit RILA issuers to provide financial
statements on amended Form N-4 in the same way that insurance companies
currently do on Form N-4.\467\ As a result of this change, the
financial statements filed in connection with a RILA registration
statement could be prepared in SAP to the same extent as currently
permitted for insurance companies' financial statements filed on that
form. We expect this approach to appropriately recognize the cost
burdens if we were to require GAAP financial statements in cases where
the insurance company is not otherwise required to prepare financial
information in accordance with GAAP. In addition, SAP financial
statements, which focus on an issuer's ability to meet its obligations
under its insurance contracts, as regulated by State law, appear to
provide sufficient material information for investors evaluating RILAs.
As a result, permitting insurance companies to provide SAP financial
statements when registering the offering of a RILA to the same extent
as they can in connection with variable annuities on Form N-4 would be
consistent with investor protection. Also, investors could benefit to
the extent the reduced cost burdens provided by SAP financial
statements are passed along to investors.
---------------------------------------------------------------------------
\467\ Certain Commission letters, or portions thereof, exempt
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1. As discussed in
Section III.B.1.a, among RILA contracts that are currently
registered with the Commission, 47 RILAs report SAP financials and
43 RILAs report GAAP financials.
---------------------------------------------------------------------------
The proposal also would require RILAs to provide information
relating to changes in and disagreements with accountants on accounting
and financial disclosure as detailed in 17 CFR 229.304 (``Item 304 of
Regulation S-K''). Further, RILAs would be required to provide as an
exhibit any letter from the insurance company's former independent
accountant regarding its concurrence or disagreement with the
statements made by the insurance company in the registration statement
concerning the resignation or dismissal as the insurance company's
principal accountant. These items are currently provided by RILAs on
Forms S-1 and S-3 and are designed to address the practice of ``opinion
shopping'' for an auditor willing to support a proposed accounting
treatment designed to help a company achieve its reporting objectives
even though that treatment might frustrate reliable reporting.\468\
Because the requirements for Form N-4 filers under the proposal are the
same as for Form S-1 and Form S-3 filers currently, we would not expect
any additional benefits from the requirement to provide information
relating to changes in and disagreements with accountants on accounting
and financial disclosure.
---------------------------------------------------------------------------
\468\ See Disclosure Amendments to Regulation S-K, Form 8-K and
Schedule 14A Regarding Changes in Accountants and Potential Opinion
Shopping Situations, Investment Company Act Release No. 16358 (Apr.
12, 1988) [53 FR 12924 (Apr. 20, 1988)]; see also item 11(i) of Form
S-1.
---------------------------------------------------------------------------
e. Filing Rules
Fee Payment Method and Amendments to Form 24F-2. The proposal would
require RILA issuers to pay registration fees for RILAs using the same
method that other filers on Form N-4 currently use. Issuers registering
the offerings of RILAs on amended Form N-4 would be deemed to be
registering an indeterminate amount of RILAs upon effectiveness of the
registration statement. These issuers would then be required to pay
registration fees annually based on their net sales of these
securities, no later than 90 days after the issuer's fiscal year ends,
on the form that is used by current Form N-4 filers to pay registration
fees (Form 24F-2). The proposal would further specify the calculation
method for paying RILA registration fees, consistent with the fee
calculation methodology that applies to current Form N-4 filers. The
proposal would also indicate when issuers can take credits for RILA
redemptions that pre-date their use of that form and when expiring
annuity contracts are rolled over into a new crediting period as well
as other minor technical amendments.
The proposed filing rules would provide benefits to insurance
companies. Rather than registering a specific amount of securities,
insurance companies would register an indefinite amount of securities
upon the effective date of their registration statement. Registering an
indefinite amount of
[[Page 71159]]
securities benefits insurance companies by eliminating the risk that a
RILA issuer may inadvertently oversell securities with respect to a
registration statement on Form N-4. The payment of fees on an annual
net basis furthermore should lead to a reduction in overall filing fees
relating to RILAs. To the extent that there are cost savings for
issuers, some of those savings may potentially be passed on to
investors.
Post-Effective Amendments and Prospectus Supplements. As discussed
in section II.E, the proposal would require RILA issuers to use the
same framework for filing post-effective amendments to the registration
statement as is currently used by other filers on Form N-4. First, the
proposal would amend rule 485 under the Securities Act to require RILA
issuers to use that rule when amending RILA registration statements on
Form N-4. Requiring RILA issuers to use that rule when amending RILA
registration statements on Form N-4 would permit RILA issuers to file
post-effective amendments that become automatically effective under
rule 485(a) after a specified period of time after the filing or, in
certain enumerated circumstances, immediately effective under rule
485(b). Issuers may benefit to the extent automatic effectiveness
allows issuers to tap favorable windows of opportunity in the RILA
market, to structure terms of RILAs on a real-time basis to accommodate
investor demand, and to determine or change the plan of distribution in
response to changing market conditions.
Second, the proposal would require RILA issuers to apply rule 497
under the Securities Act when appropriate to file RILA prospectuses and
prospectus supplements with the Commission. Under the proposed
amendments, a RILA issuer would be required to file every prospectus
relating to a RILA offering that varies in form from a previously filed
prospectus before it is first used. This approach--rather than
requiring filing only if the issuer makes substantive changes from or
additions to a previously-filed prospectus--may benefit both investors
and issuers. The requirement that insurance companies file every
prospectus that varies in form from a previously filed prospectus
before it is first used could facilitate investor evaluation and
comparison by making publicly available the most timely information
currently available to investors. We would expect this benefit to be
minimal, however, because rule 424 under the Securities Act requires
RILA issuers only to file prospectuses that contain substantive
changes. Prospectuses required to be filed under rule 497 that would
not be required to file under rule 424, then, would be prospectuses
updated with minor, non-substantive changes and likely of limited
informational benefit to investors.
As discussed above, certain issuers use a short-form registration
statement on Form S-3, which requires less information than Form S-1
and allows for significant incorporation by reference. Certain issuers
also can rely on rule 430B under the Securities Act to omit certain
information from the ``base'' prospectus when the registration
statement becomes effective and later provide that information in a
subsequent Exchange Act report (forward) incorporated by reference, a
prospectus supplement, or a post-effective amendment. Issuers
registering annuity product offerings on Form N-4, on the other hand,
have limited ability to incorporate information by reference into their
registration statements and cannot forward incorporate information from
subsequently filed Exchange Act reports. Issuers registering annuity
product offerings on Form N-4 also cannot rely on rule 430B to omit
certain information from the base prospectus. Under the proposal, then,
RILA investors would have all the information available in one location
rather than needing to separately access the information on a website
or request the incorporated materials. As a result, costs to investors
for assembling and assimilating necessary information could decrease,
with a potentially stronger effect for investors that may not have the
technical capabilities or monetary resources to search efficiently
through multiple information sources.
Issuers may benefit from applying rule 497 as well. The proposed
rule would facilitate a uniform post-effective amendment and prospectus
filing framework for all Form N-4 filers, which would provide insurance
companies with more consistent filing requirements across similar
products. This, in turn, could benefit insurance companies by making it
easier to execute such offerings and may decrease compliance costs.
f. Materially Misleading Statements in RILA Sales Literature
The proposal would amend rule 156 to make its provisions applicable
to RILA sales literature. Rule 156 is an interpretive rule that
provides factors to be weighed in considering whether a statement
involving a material fact is or might be misleading in the specific
context of investment company sales literature, including literature
relating to the sale of variable annuities. Proposed amendments to rule
156 would indicate that whether a statement involving a material fact
is misleading in RILA sales literature would depend on an evaluation of
the context in which it is made, with the rule providing non-exhaustive
factors to guide in this determination.
For example, rule 156(b)(1)(ii) currently provides that a statement
could be misleading because of the absence of explanations,
qualifications, limitations or other statements necessary or
appropriate to make such statement not misleading. This provision,
where made applicable to RILA sales literature, would generally require
an insurance company to consider whether an advertisement would be
materially misleading if it markets the investment as a growth
investment, a loss-avoidance vehicle, or a customizable product in the
absence of qualifying explanations or statements. Similarly, if sales
literature advertises a particular feature of the product's bounded
return structure that is not available for the life of the product or
the full term of any surrender charge period, the provision as made
applicable to RILA sales literature would require consideration of
whether the statement is misleading without providing additional
context as to the issuer's discretion to make changes.
Further, rule 156(b)(4) currently provides that representations
about fees or expenses associated with an investment in a fund could be
misleading because of statements or omissions made involving a material
fact, including situations where portrayals of the fees and expenses
associated with an investment in the fund omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading. We are proposing to
amend this provision also to address representations about the fees or
expenses associated with a RILA contract. In the context of RILA sales
literature, this provision as amended would require consideration about
whether representations or portrayals either of a RILA's costs or
charges, or optional benefits that are subject to a contract
adjustment, would require qualifying statements or explanations
regarding the economic costs to the investor to receive an advertised
benefit or those generally associated with the RILA.
Also, rule 156(b)(2)(i) currently states that representations about
past or future investment performance could be misleading because of
statements or omissions made involving a material fact. This includes
situations where
[[Page 71160]]
portrayals of past income, gain, or growth of assets convey an
impression of the net investment results achieved by an actual or
hypothetical investment which would not be justified under the
circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading. This provision,
where made applicable to RILA sales literature, would require
consideration of whether illustrations about the operation of a RILA or
its features could be misleading because, for example, they use
assumptions that are not currently offered or exceed what could be
reasonably anticipated or use ``cherry picked'' data.
By reducing the potential for misleading or fraudulent statements
in RILA sales literature, applying rule 156 to RILAs would provide
investors with protections and help ensure that investors receive the
information necessary to make informed decisions about these products.
Ensuring that investors receive the information necessary to make
informed decisions could benefit investors by facilitating investor
evaluation of RILAs as well as investor comparison of RILAs to other
annuity products.
2. Costs
The proposal could lead to certain additional costs for insurance
companies. These costs would likely vary across insurance companies,
depending on their existing lines of business. Costs may also vary
depending on the extent to which insurance companies create
prospectuses that vary in form from previously filed prospectuses and
the frequency of certain events, such as changes in accountants and
disagreements with accountants on accounting and financial disclosure.
Generally, the costs would be lower for insurance companies that
currently offer products that register on Form N-4, for those insurance
companies that do not change or remove key features of RILAs
frequently, and for those insurance companies that do not experience
changes in, and disagreements with, accountants on accounting and
financial disclosure.
We anticipate that the costs to insurance companies would be
comprised of both direct compliance costs and indirect costs. Direct
costs for insurance companies would consist of internal costs (for
compliance attorneys and other non-legal staff, such as computer
programmers, to prepare and review the required disclosure) and
external costs (including filing fees, outside legal and accounting
fees, as well as any costs associated with outsourcing all or a portion
of the Form N-4 filing responsibilities to a filing agent, software
consultant, or other third-party service provider).
The proposal could lead to certain costs for investors as well. Any
portion of additional costs that is not borne by insurance companies
would ultimately be passed on to RILA investors. Investors also may
bear costs associated with certain proposed changes such as the
proposed change in filing rules as well as an insurance company's
option to use a summary prospectus.
a. Direct Costs
Form N-4. We believe that the direct costs associated with the
proposed amendments would be most significant for the first Form N-4
registration statement that an insurance company would be required to
prepare and file because the insurance company would need to
familiarize itself with the new registration form and may need to
configure its systems to efficiently gather the required information.
In subsequent periods, we anticipate that insurance companies would
incur significantly lower costs because much of the work involved in
the initial registration statement preparation and filing is non-
recurring and because of efficiencies realized from system
configuration and reporting automation efforts accounted for in the
initial filing period. The costs associated with preparing and filing a
new registration statement (on Form N-4 as opposed to Forms S-1/S-3)
would be ameliorated to the extent an insurance company currently has
experience and systems in place to prepare and file registration
statements on Form N-4 (e.g., the insurance company currently offers
variable annuities whose offerings are registered on Form N-4). We
estimate the aggregate additional annual internal time cost to be
$16,133,834 and the aggregate annual external cost burden to be
$2,914,740.\469\
---------------------------------------------------------------------------
\469\ See infra Table 13.
---------------------------------------------------------------------------
Insurance companies would also incur compliance costs to tag many
of the newly required Form N-4 disclosures (as well as those prospectus
disclosures that Form N-4 currently requires to be tagged) in Inline
XBRL. Various XBRL and Inline XBRL preparation solutions have been
developed and used by operating companies and investment companies to
fulfill their structuring requirements, and some evidence suggests
that, for smaller operating companies, XBRL compliance costs have
decreased over time.\470\ We estimate the total aggregate additional
annual internal time cost for XBRL compliance would be $308,560 and the
aggregate annual external cost burden to be $63,000.\471\ In addition,
22 of the 23 insurers that issue RILAs also offer variable products
registered on Forms N-3, N-4, or N-6, all of which are currently
structured, or otherwise have experience tagging registration
statements.\472\
---------------------------------------------------------------------------
\470\ An AICPA survey of 1,032 public operating companies with
$75 million or less in market capitalization in 2018 found an
average cost of $5,850 per year, a median cost of $2,500 per year,
and a maximum cost of $51,500 per year for fully outsourced XBRL
creation and filing, representing a 45% decline in average cost and
a 69% decline in median cost since 2014. See AICPA, XBRL Costs for
Small Companies Have Declined 45% since 2014 (2018), available at
https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/xbrl-costs-for-small-companies.pdf. Note that this survey was limited to small
operating companies. Additionally, a NASDAQ survey of 151 listed
issuers and other respondents in 2018 found an average XBRL
compliance cost of $20,000 per quarter, a median XBRL compliance
cost of $7,500 per quarter, and a maximum XBRL compliance cost of
$350,000 per quarter in XBRL costs per quarter. See Letter from
Nasdaq, Inc. (Mar. 21, 2019); Request for Comment on Earnings
Releases and Quarterly Reports, Securities Act Release No. 10588
(Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)].
\471\ See infra Table 16.
\472\ Based on analysis of Forms S-1, S-3, and POS AM filed by
RILA issuers.
---------------------------------------------------------------------------
As such, to the extent these companies comply with Inline XBRL
requirements internally rather than outsourcing to an external service
provider, they may already be familiar with Inline XBRL software and
may be able to leverage existing Inline XBRL preparation processes and/
or expertise in complying with the new tagging requirements. This would
limit the compliance costs arising from the new tagging requirements
for these issuers to only those costs related to selecting additional
Inline XBRL tags for those new disclosures proposed to be tagged, and
reviewing the tags selected for those disclosures. Accordingly, we do
not anticipate that the costs associated with Form N-4 tagging would be
significant enough to deter insurance companies from entering the
market for RILAs. As such, we do not expect that the new and modified
tagging requirements in this proposal would decrease competition in the
market for RILAs.\473\
---------------------------------------------------------------------------
\473\ See also infra section III.D.
---------------------------------------------------------------------------
Option to Use a Summary Prospectus. Issuers will benefit from the
option to use a summary prospectus to the extent that providing layered
disclosure through a summary prospectus regime (including costs of
producing and delivering initial summary and updating summary
prospectuses and of making statutory prospectuses, and other
[[Page 71161]]
documents available online) is less expensive than providing statutory
prospectuses to new investors and updated statutory prospectuses to
existing investors annually. Insurance companies choosing to provide
summary prospectuses would bear a one-time cost of preparing both the
initial summary prospectus and the updating summary prospectus, as well
as costs associated with preparing updated versions the updating
summary prospectus in the future on at least an annual basis. We
estimate the average annual burden to prepare initial and updating
summary prospectuses to be $5,000 per registration.\474\
---------------------------------------------------------------------------
\474\ See Table 11, Rule 498A PRA Estimates.
---------------------------------------------------------------------------
Insurance companies that choose to provide summary prospectuses are
required to make statutory prospectuses and other materials available
online. We estimate the aggregate cost to comply with the proposed
website posting requirements of the rule for documents relating to
RILAs to be $772 per registrant.\475\ However, some of these costs may
have already been incurred by issuers of ``combination'' contracts
offering variable options as well as index-linked options.
---------------------------------------------------------------------------
\475\ See Table 11, Rule 498A PRA Estimates.
---------------------------------------------------------------------------
Insurance companies that rely on rule 498A to use summary
prospectuses for variable annuities are also required to include inter-
and intra-document linking and special terms definitions. One linking
requirement would allow the reader to move back and forth between a
table of contents of the contract statutory prospectus or SAI, and the
related sections of each document. Although prospectuses and SAIs are
not required to have individual headings corresponding to the items in
the registration forms, we assume that the sections of a prospectus or
SAI would correspond with the item requirements of the forms. We
estimate that Form N-4 filers would require 27 back-and-forth internal
links. The other linking requirement would allow the reader to move
back and forth between each section of the summary prospectus and any
related section of the contract statutory prospectus and SAI that
provides additional detail. This back-and-forth movement could occur
either directly from the summary prospectus to the relevant section of
the statutory prospectus or SAI, or indirectly by linking from the
summary prospectus to a table of contents in the statutory prospectus
or SAI. For our analysis, we assume direct links as those will tend to
be more costly when compared with indirect linking through a table of
contents.
An initial summary prospectus for a Form N-4 issuer includes eight
sections. The Key Information Table has instructions stating that,
wherever feasible, a registrant should provide cross-references or
links to the location in the statutory prospectus where the subject
matter is described in greater detail. There are 12 sections of the Key
Information Table. Therefore, we estimate that there would be 18 back-
and-forth links between initial summary prospectuses and statutory
prospectuses for a Form N-4 issuer.
An updating summary prospectus for a Form N-4 issuer includes three
sections, one of which, the Key Information Table, includes 12
sections. One section is the ``Updated Information About Your
Contract'' section. The number of links in this section would depend on
the number of updates discussed. For example, assuming discussion of
four updates, we estimate the number of back-and-forth links between a
Form N-4 issuer's updating summary prospectus and statutory prospectus
to be 16.
The proposed rule amendments would also require that RILA investors
either be able to view the definition of each special term used in an
online summary prospectus upon command (e.g., by ``hovering'' the
computer's pointer or mouse over the term), or to move directly back-
and-forth between each special term and the corresponding entry in any
glossary or list of definitions that the summary prospectus includes.
We assume that RILA issuers could replicate links to a glossary or the
computer code required to implement access to definitions by
``hovering'' over a term with little or no burden, but that there would
be a burden associated with creating the requisite link or code for
each special term. Accordingly, we estimate the cost to comply with the
proposed requirement to include inter- and intra-document linking and
special terms definitions as described above would include 6 burden
hours and a cost of $800 annually, per registrant.\476\
---------------------------------------------------------------------------
\476\ See VASP Adopting Release at n.1084.
---------------------------------------------------------------------------
Filing the Prospectus. As discussed in section II.E, RILA issuers
follow different processes to file prospectuses than current Form N-4
filers. For example, a RILA issuer is required to file a prospectus
only if the issuer makes substantive changes or additions to a
previously-filed prospectus, whereas current Form N-4 filers are
required to file every prospectus that varies from any previously-filed
prospectus. Accordingly, under the proposed amendments, a RILA issuer
would be required to file every prospectus relating to a RILA offering
that varies in form from a previously filed prospectus before it is
first used. The proposed requirement could increase the number of
prospectuses required to be filed by RILAs which could, in turn,
increase costs for issuers.\477\ For each additional prospectus
required to be filed by RILAs, we estimate an addition internal cost
burden of $113,659.70 and an external cost burden of $24,000.\478\
---------------------------------------------------------------------------
\477\ The potential increase in cost could be greater for Form
S-3 filers than for Form S-1 filers. Form S-3 requires less
information than Form S-1. Also, Form S-1 allows incorporation by
reference only on a very limited basis. Form S-3 allows for forward
incorporation by reference. Form S-3 filers may need to produce
incrementally more information to file on Form N-4 than Form S-1
filers. Transitioning to Form N-4 could be more expensive for Form
S-3 filers than for Form S-1 filers, as a result.
\478\ See Table 11, Rule 498A PRA Estimates. As discussed in
footnote 477, these costs could be greater for Form S-3 filers than
for Form S-1 filers. Also, we estimate an additional internal time
cost of $2,436 for each additional prospectus required to be filed
by separate account registrants.
---------------------------------------------------------------------------
Materially Misleading Statements in RILA Sales Literature. The
proposal would amend rule 156 to make its provisions applicable to RILA
sales literature. The cost of the proposed amendments would include the
direct cost of analyzing advertising materials in light of the guidance
rule 156 provides. This may require review and approval of
advertisements beyond what occurs currently, particularly because
determining whether a statement involving a material fact is misleading
in RILA sales literature would depend on an evaluation of the context
in which it is made. We expect some of these costs to be borne in the
first year after the rule adoption. That is, these costs would be
transition costs and not sustained beyond the first year. We estimate
that the transition costs associated with the proposed advertising rule
amendments would be $5,715.\479\ Also, ongoing sales literature
activity may require internal review and approval of advertisements. We
estimate that the costs associated with ongoing sales literature
activity would be $1,905, annually.\480\ These costs would be borne
[[Page 71162]]
by issuers and third parties who prepare RILA advertisements.
---------------------------------------------------------------------------
\479\ We estimate an initial burden of 15 hours, per
advertisement, to review existing advertising materials at a blended
cost of $381 ($5,715 = 15 x $381). See Tailored Shareholder Reports
for Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements adopting release at footnote 744.
\480\ We estimate an initial burden of 5 hours, per
advertisement, to review existing advertising materials at a blended
cost of $381 ($5,715 = 15 x $381). See Tailored Shareholder Reports
for Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements adopting release at footnote 745.
---------------------------------------------------------------------------
b. Indirect Costs
Form N-4. While the prospectuses and other registration statement
disclosure required by the proposal would likely facilitate investor
evaluation and comparison of RILAs, investors could experience certain
transition costs under the proposal, and some investors may experience
other ongoing costs. Transition costs would include the costs of the
inconvenience to some investors of adapting to the new materials and to
the changes in the presentation of information. Investors would also
bear a one-time cost of the inconvenience of adjusting to the changes
in the disclosures they receive. These costs are likely to be
relatively lower for investors with less experience investing in RILAs.
Option to Use a Summary Prospectus. While we expect that, should
insurance companies opt to use summary prospectuses, the majority of
investors would benefit from their disclosures, certain investors may
incur costs. For example, although research indicates that investors
generally prefer to receive summary disclosures there may be RILA
investors who prefer to rely on statutory prospectuses when making
investment decisions. While RILA statutory prospectuses would continue
to be available online and in paper or electronic copy upon request,
access to those statutory prospectuses would require investors to take
additional steps, imposing some burden. For example, investors choosing
to access the statutory prospectus online rather than requesting a
paper copy would need to manually enter a hyperlink from a paper
updating summary prospectus or click on a link to a website containing
the statutory prospectus. To the extent that internet access and use
among RILA investors is not universal, those investors without home
internet access might experience a reduction in their ability to
quickly and easily access statutory prospectus information.\481\ Even
for those investors with home internet access, there may be some
resistance to taking the additional step of accessing the statutory
prospectus online.
---------------------------------------------------------------------------
\481\ According to the most recent U.S. census data,
approximately 85% of U.S. households had some form of broadband
internet access in their home in 2018, and 92% had a computer (e.g.,
desktop, laptop, tablet or smartphone). See Michael Martin, Computer
and internet Usage in the United States: 2018, U.S. Census Bureau
(Apr. 21, 2021), available at https://www.census.gov/library/publications/2021/acs/acs-49.html; see also Pew Research Center,
internet/Broadband Fact Sheet (Apr. 7, 2021), available at https://www.pewresearch.org/internet/fact-sheet/internet-broadband/
(``Today, 93% of American adults use the internet.'' and ``Today,
roughly three-quarters of American adults have broadband internet
service at home.''); see also Ani Petrosyan, internet Usage in the
United States--Statistics & Facts, Statista (Aug. 31, 2023),
available at https://www.statista.com/topics/2237/internet-usage-in-the-united-states/#topicOverview (``Today, over 90 percent of
Americans have access to the internet'').
---------------------------------------------------------------------------
Use of Statutory Accounting Principles. The proposal would permit
RILA issuers to provide financial statements on amended Form N-4 in the
same way that insurance companies currently do on Form N-4. One
consequence of this change would be that the financial statements filed
in connection with a RILA registration statement could be prepared in
SAP to the same extent as currently permitted for insurance companies'
financial statements filed on that form. The proposed rule would create
a choice for certain insurance companies. They may prepare their
registration statements in SAP, or they may prepare their registration
statements in GAAP. Those insurance companies that expect to benefit
from preparing their registration statements in SAP (e.g., through
reduced costs) would choose SAP. Those insurance companies that do not
expect to benefit from the option to prepare their registration
statements in SAP would continue to prepare their registration
statements in GAAP. Because the proposed rule would, for certain
issuers, create the option, but not the obligation, to prepare their
registration statements in SAP, we do not believe this provision of the
proposed rule would create additional costs.
Filing and Prospectus Delivery Rules. As discussed in section II.E,
when a RILA issuer seeks to amend a RILA registration statement on Form
S-1, the issuer must file a post-effective amendment that is typically
declared effective by Commission staff acting pursuant to delegated
authority on such date as the Commission may determine. To the extent
that investors previously benefited from the Commission staff's review
of these filings before they become effective, allowing filings of RILA
offerings to become automatically effective may eliminate such reviews
and, as a result, possibly increase the costs to investors. However,
issuers would still face liability under the Federal securities laws
for registration statement disclosures (e.g., sections 12 and 17 of the
Securities Act and section 10(b) and rule 10b-5 under the Exchange
Act), which may ameliorate the potential costs associated with reduced
staff review. Moreover, rule 485 only permits updates to become
immediately effective in limited, enumerated circumstances, in order to
provide an opportunity for staff review for all other changes.
As discussed in section II.E.3, we understand that RILA issuers
typically deliver prospectuses to accompany or precede other
communications, such as annuity applications. It is possible that
providing layered disclosure through a summary contract prospectus
regime (including costs of delivering initial summary and updating
summary prospectuses and making statutory prospectuses and other
documents available online) could result in reduced costs for
issuers.\482\
---------------------------------------------------------------------------
\482\ See VASP Adopting Release. In the VASP Adopting Release we
estimate that printing and mailing expenses are $0.18 less for
initial and updating summary prospectuses than for statutory
prospectuses. Because we understand RILA prospectuses to not be as
long as variable annuity prospectuses, we would expect savings among
RILA issuers to be less than the VASP Adopting Release savings, but
we do not have a basis for believing savings for RILA issuers will
be of an order of magnitude less than the VASP Adopting Release
savings. We therefore believe savings for RILA issuers will be
between approximately $.02 and $.18. We estimate the internal cost
time of online posting of contract documents to be $772. See infra,
Table 11.
---------------------------------------------------------------------------
Materially Misleading Statements in RILA Sales Literature. Issuers
and third parties involved in preparing or disseminating investment
company advertisements may incur costs to comply with the proposed
advertising rule amendments. While reducing the potential for
misleading or fraudulent statements in RILA sales literature would
provide investors with protections and help ensure that investors
receive the information necessary to make informed decisions about
these products, investors could bear the costs of these amendments
through increased expenses that funds would incur to implement the
proposal. Alternatively, if the cost of compliance with these proposed
amendments were significant, some RILAs might reduce advertising to
lower the extra costs of compliance. If this were to occur, investors
who would otherwise rely on advertisements to make investment decisions
about RILAs or compare RILAs with other investment products might have
less complete information for these purposes.
D. Effects on Efficiency, Competition, and Capital Formation
Efficiency. To investors, the costs of purchasing a RILA are more
than just the dollar cost of the contract and include the value of an
individual's time spent evaluating the contract and its various
aspects. Further, for those
[[Page 71163]]
investors who do not gain a full understanding of the contract, there
could be a cost stemming from a potential mismatch between an
investor's goals and the purchased contract. Depending on the size of
an individual's potential purchase, certain of these additional costs
could be considerable in comparison to the monetary costs associated
with contract purchase and could discourage investors from considering
RILAs even in circumstances where investment in a RILA would be
beneficial.
For their part, insurance companies only supply RILAs to the extent
they expect the benefits derived from providing the contracts to be
greater than the costs of supplying the contract. For issuers, costs
include not only those costs associated with producing and servicing
RILAs, but also those costs associated with meeting various statutory
and regulatory obligations.
These costs borne by both insurance companies and individuals are
examples of market ``frictions.'' Market frictions have the effect of
reducing the benefits from (i.e., the efficiency of) contracting
between market participants.\483\ Rules that reduce costs for
investors, issuers, or both, reduce market frictions and potentially
enhance the benefits from contracting between market participants. By
facilitating investor evaluation and comparison of RILAs as well as
facilitating the comparison of RILAs to other annuity contracts, the
proposed rule could reduce frictions for investors. Requiring insurance
companies to use a single registration form and filing process for all
RILAs as well as all variable annuity separate accounts that are
structured as unit investment trusts, as well as allowing RILA issuers
to provide financial statements on amended Form N-4 in the same way
that insurance companies currently do on Form N-4, may also reduce
certain compliance burdens for insurance companies. In addition,
requiring RILA issuers to tag certain key information in Inline XBRL
would enable investors, third-party information providers, Commission
staff, and other data users to capture and analyze that information
more quickly and efficiently than is possible when the same information
is provided solely in a static, text-based format.
---------------------------------------------------------------------------
\483\ If market frictions are sufficiently large, market
frictions could eliminate exchange altogether.
---------------------------------------------------------------------------
These increases in efficiency could lead investors to save more
appropriately to meet their retirement goals. For example, for existing
RILA investors the proposal may increase the likelihood that investors
choose to invest more or less money in RILAs in a manner that is
consistent with their overall financial needs and objectives--a level
that may be higher or lower than current levels. Similarly, the
proposal may lead existing investors to choose to allocate their money
into different investment options that the RILA offers, or different
RILAs (or other insurance products like variable annuities) that best
meet their needs. The proposal also may help promote investment in
RILAs by investors who currently do not invest in RILAs, to the extent
such investments are appropriate for them. Finally, access to clearer
information about the contract provisions may reduce the chances that
an investor makes mid-crediting period withdrawals or transfers or
surrenders a RILA when the costs of doing so does not justify the
benefits.
Competition. If the proposed rule increases efficiency of exchange
in the RILA market, then we may observe a change in investment in
RILAs. For example, if there are individuals who currently do not
invest in RILAs (or invest less than they would have) because the costs
other than the price of the contract are too high (including the effort
to gain sufficient understanding of the product) or they are not aware
of RILAs as an investment, then to the extent the proposed rule lowers
those costs or makes investor more aware of RILAs, we would expect to
observe more investors entering the RILA market. Conversely, there may
be RILA investors who, because of the burden, choose not to read
statutory prospectuses. To the extent those investors are more likely
to read summary prospectuses, those investors may decide, as a result,
that other investments or products are better suited to their
investment goals. This could result in fewer investments in RILAs. If
there are insurance companies who limit their participation in the RILA
market as a result of the requirement to register RILA offerings on
Form S-1 or Form S-3 or because of the costs of current prospectus
delivery requirements, those insurance companies may increase
participation in the RILA market. To the extent that competition in a
market is related to the size of the market, the net effect of these
potential changes in investor demand for, and issuer supply of, RILAs
could affect competition in the RILA market.
The proposed rule could also affect competition by requiring that
information about RILAs be presented in a concise, user-friendly way,
which could allow investors to compare information across products.
Requiring RILA issuers to tag certain key information in Inline XBRL
could further facilitate comparisons of information across registrants
by making it easier for investors (directly or through third-party data
aggregators) to extract and aggregate information through automated
means for analysis and comparison, which could increase competition
among RILA issuers for investor capital. For example, the proposed rule
requires issuers to distill certain key product information into
tables. The presentation of this information in a table facilitates
evaluation among different RILAs as well as comparison to variable
annuities. Greater comparison among different RILAs as well as
comparison to variable annuities could lead to greater competition.
Furthermore, by reducing the costs associated with aggregating data
across RILAs, the proposed Inline XBRL requirement could reduce
barriers to entry for third-party data aggregators and induce
competition among firms that supply information about RILAs to
investors, including other third-party aggregators and sales agents.
The effect on competition between insurance companies could be
limited, however, to the extent RILA investors rely on an agent to help
them select their RILA contract and the investment options under the
contract and do not have access to broad comparisons across different
RILAs (or among different investment options that the RILA offers) at
the time of sale.\484\ Agents generally only provide their customers
with a subset of all RILAs available in the general marketplace. Thus,
while the product information in summary prospectuses would facilitate
comparison across products offered by the agent, the effect would
likely be limited to the agent's set of products rather than to the
broader market.
---------------------------------------------------------------------------
\484\ We do not have data on the extent to which investors rely
on agents when purchasing RILAs. In 2019, $95.5 billion of total
variable annuity sales of $98.3 billion (97%) were through a
distribution channel involving an agent. If investors rely on agents
when purchasing RILAs to the same extent they do when purchasing
variable annuities, then the vast majority of RILA investors rely on
agents when purchasing RILAs.
---------------------------------------------------------------------------
Capital Formation. As discussed in connection with the potential
effects of the proposed rule on competition, if the proposed rule
increases the efficiency of exchange in the RILA market, then we may
observe a change in investment in RILAs. As discussed in section
III.B.3, unlike variable annuities that involve a direct investment of
premiums into one or more mutual funds, which in turn invest in
underlying securities, RILA premiums are not directly invested into the
assets of the indexes that are
[[Page 71164]]
associated with the index-linked options offered under the contract,
but are typically invested into fixed-income securities such as
corporate bonds. To the extent that an increase or decrease in the
demand for RILAs is not driven by investors substituting either away
from, or into, variable annuities or other investment vehicles as an
alternative, we would not expect changing demand for RILAs to have any
effect on the underlying securities. An increase or decrease in the
demand for RILAs could, however, increase or decrease the demand for
fixed-income securities such as corporate bonds. To the extent the
proposed rule would cause investors to either substitute away from, or
into, variable annuities or another investment that entail investment
in underlying funds (which, in turn, invest in a portfolio of
securities), there could be an effect on capital formation. If
investors substitute away from variable annuities or other investment
vehicles into RILAs, there could be a reduction in the demand for the
underlying securities and, by extension, a reduction in capital
formation. If investors substitute away from RILAs and into variable
annuities or other investment vehicles, there could be an increase in
the demand for the underlying securities. To the extent issuers invest
RILA proceeds into fixed-income securities such as corporate bonds,
there could be an increase in the demand for those securities.
The proposed Inline XBRL requirements could increase the efficiency
of capital formation to the extent that making disclosures available in
a structured format reduces some of the information barriers that make
it costly for RILA issuers to find appropriate sources of new
investors. Smaller issuers in particular may benefit more from enhanced
exposure to investors. If tagging certain disclosures in a structured
format increases the availability, or reduces the cost, of collecting
and analyzing key information about RILAs, smaller RILA issuers may
benefit from improved coverage by third-party information providers and
data aggregators.
E. Reasonable Alternatives
1. Creating an Entirely New Registration Form for RILAs
The proposed rule would require the registration of RILA offerings
on Form N-4. Most variable annuities use Form N-4, which has disclosure
requirements tailored to these investments that provide investors with
key information about a variable annuity's terms, benefits, and risks
in a concise and reader-friendly presentation. Currently, insurance
companies register RILA offerings on Forms S-1 or S-3, which allow
registering general debt or equity offerings. Forms S-1 and S-3 require
issuers to disclose not only information about the offering itself, but
also extensive information about the registrant issuing the securities.
In addition, registrants must include financial statements prepared in
accordance with GAAP, unless an exemption has been granted pursuant to
17 CFR 210.3-13 that permit insurance companies to substitute SAP
financials in lieu of GAAP financials. Form N-4, on the other hand,
allows insurance companies to file financial statements prepared in
accordance with SAP if they do not otherwise prepare GAAP financial
statements. As an alternative, we could have required insurance
companies to register RILA offerings on an entirely new form.
Form N-4 was designed for investment companies, and RILA issuers
are not investment companies. A new form specifically tailored to RILAs
could be more beneficial than working to fit them into an existing
framework that was designed with a different structure in mind.
A completely new registration form for RILA offerings could
negatively affect investors' ability to compare different RILAs with
variable annuities that register on Form N-4 (including ``combination''
contracts that offer index-linked options as well as variable options).
Furthermore, given that we are proposing to amend Form N-4 to address
those aspects specific to RILAs, but many of the current form
requirements are relevant to the registration of RILA offerings, a
completely new and separate form for RILAs would not offer much (if
any) benefit to investors in terms of new information compared to the
proposed amendments to Form N-4. Since most variable annuity issuers
already use Form N-4 to register their securities, and many RILA
contracts are offered as ``combination'' contracts, the amended Form N-
4 would efficiently provide investors with product-specific information
about these combination contracts. As a result, investors would be able
to compare annuity products, and the investment options that these
products offer, with less time and effort. To the extent that investors
use less time and effort to compare annuity products and their
underlying investment options, investors may be more likely to make
decisions that align better with their investment goals.
We preliminarily believe that requiring RILA offerings to be
registered on Form N-4 rather than on an entirely new form would also
be more efficient for insurance companies since they would generally
follow the same procedures they already use for the registration of
variable annuities. Using Form N-4 to register variable annuities and
RILA offerings would also be less costly for insurance companies than
using Form N-4 for variable annuities and a completely new form for
RILAs since registrants are already familiar with Form N-4. It also
would be less costly because, if RILA offerings had to be registered on
a form other than Form N-4, combination contracts offering variable
options and index-linked options would have to use two separate
registration forms.
Commission staff would also benefit from using Form N-4 for RILAs
because the disclosure requirements for variable annuities and RILAs
would be located in one form only, and registration statements for
these products would be subject to the same filing and review
processes. This would reduce the use of resources by Commission staff
needed to review the registration statements of RILAs and variable
annuities.
2. Alternatives to Specific Form N-4 Amendments
The Commission is proposing amendments to Form N-4 so that
insurance companies can register RILA offerings using that form. While
the substance of many of the requirements in Form N-4 would not change
from the current version of the form, we are proposing to update some
items to include disclosures specifically tailored to RILAs. In certain
limited circumstances, we have changed the disclosure requirements
provided on the form for all filers, including those registering
variable annuities.
As an alternative, we could have proposed more or less tailoring
the form for RILAs. A larger number of amendments tailored to RILAs
than the number we propose would be more costly for insurance companies
registering RILA offerings because insurance companies that offer
combination contracts (or that otherwise register variable annuities on
Form N-4) would have to make more changes to their disclosure. For
example, we could have required insurance companies to provide a
diagram in the KIT to illustrate surrender charges and contract
adjustments during different time periods of the contract, or
illustrations showing how caps, floors, and/or buffers could affect an
investor's returns across different market scenarios.
Also, we could require insurance companies to provide information
related to the economic tradeoffs
[[Page 71165]]
associated with index-linked options. For example, we could require the
insurance company to compare a hypothetical investment in the index-
linked option to the value, or cost, of a combination of (i)
derivatives that would provide the index-linked option's investment
exposure; (ii) a fixed-income component; and (iii) the standard
insurance features offered with the index-linked option, similar to the
analysis in the Moenig Paper and the analysis conducted by the staff in
section III.B.3.\485\ In such a comparison, we could either require
that the insurance company should use the hypothetical investment
discounted by the rate of interest the insurance company is crediting,
or would credit, on fixed annuities with a term equal to the duration
of the crediting periods of the index-linked option, or we could
require the insurance company to use the value of a risk-free zero-
coupon bond with a time to maturity equal to the crediting period of
the index-linked option, consistent with our analysis in section
III.B.3.\486\ We could also consider requiring additional disclosure
related to the setting of early withdrawal charges or penalties and
their impact on such a comparison of hypothetical investments. For
example, we could require the calculation of a disclosure similar to
the analysis in the Moenig Paper and the analysis conducted by the
staff in section III.B.3 to explicitly include the impact of early
withdrawal charges or penalties on the liquidity of the investment. We
could also require more prominent placement of these features on
marketing or other materials, or we could require a comparison of these
features to potential benefits of the RILA to clarify for investors
possible trade-offs.
---------------------------------------------------------------------------
\485\ See supra section II.B.3.b.
\486\ Id.
---------------------------------------------------------------------------
Conversely, a smaller number of amendments tailored to RILAs than
the number we propose would be less costly for insurance companies.
Since insurance companies already use Form N-4 to register variable
annuities, and most RILA issuers offer variable annuities registered on
Form N-4 (including, in many cases, combination contracts), we
preliminarily believe that the costs of complying with the disclosure
requirements of the amended form would not be substantial.
The amendments to Form N-4 that we propose would promote investor
understanding of RILA contracts by presenting information in a clear
and concise manner. Proposing a larger number of amendments tailored to
RILAs may add too much, or less relevant, information, which may
overwhelm investors who may not have the time or capacity to process
all the information.\487\ Proposing only a subset of amendments
tailored to RILAs, as compared with the proposed approach, could result
in less investor understanding relative to the understanding resulting
from the proposed amendments.
---------------------------------------------------------------------------
\487\ See, e.g., Julie R. Agnew and Lisa R. Szykman (2005).
Asset Allocation and Information Overload: The Influence of
Information Display, Asset Choice, and Investor Experience, Journal
of Behavioral Finance, 6(2), 57-70, and Alejandro Bernales, Marcela
Valenzuela and Ilknur Zer (2023). Effects of Information Overload on
Financial Markets: How Much Is Too Much? International Finance
Discussion Papers 1372, Washington: Board of Governors of the
Federal Reserve System.
---------------------------------------------------------------------------
3. Require the Use of Form N-4 for Registered MVAs
As discussed above, while we are not proposing to require insurance
companies to register offerings of registered MVAs on Form N-4, one
alternative would have been requiring insurance companies to register
the offering of registered MVAs on Form N-4.\488\ These offerings are
currently registered on Forms S-1 or S-3 but differ from RILAs only
with respect to the manner in which interest is calculated and
credited.\489\ As a result, many of the benefits and costs identified
above regarding RILAs would also be true in applying the same
registration and disclosure framework to offerings of registered MVAs,
including potentially a change to the filing fee process to file on
Form 24f-2 and requiring the issuers to follow rule 156. For example,
as with RILAs, expanding the scope of Form N-4 to include registered
MVAs would benefit investors by making it easier for them to compare
registered MVAs, and also compare registered MVAs with other annuity
product offerings registered using Form N-4.\490\ In particular,
because both RILAs and registered MVAs include contract adjustments,
the inclusion of specified disclosures about contract adjustments would
benefit investors since they would be able to better evaluate the costs
of purchasing and owning annuity contracts, including registered MVAs.
Requiring the registration of registered MVAs on Form N-4 also would
entail efficiency benefits to insurance companies that offer
combination contracts, for example ones that include both variable
annuities registered on Form N-4 and registered MVAs, as the use of the
same registration form for all of these products may reduce these
companies' compliance burdens.
---------------------------------------------------------------------------
\488\ See supra section II.H.
\489\ Based on internal estimates, there are 45 registered MVAs
from 15 different insurance companies. 27 of these registered MVAs
are in combination contracts whereas 18 are standalone. 27 of these
registered MVAs use Form S-1 and 18 use Form S-3. Lastly, 26 of
these registered MVAs use GAAP financials and 19 use SAP.
\490\ See supra section III.C.1.
---------------------------------------------------------------------------
Conversely, including registered MVAs on Form N-4 would also entail
similar costs to those outlined above for the proposed registration and
disclosure approach for RILAs. These would include direct costs to the
insurance company, for example filing fees, as well as outside legal
and account fees. Direct costs also would include costs associated with
filing the first Form N-4 registration statement in connection with the
registration of a registered MVA offering, where the insurance company
would be required to familiarize itself with the new registration form
and may need to configure its systems to efficiently gather the
required information. Further, investors would bear certain indirect
costs, such as the cost of adapting to new materials and the changes in
the presentation of information.
Ultimately, we determined not to propose to require insurance
companies to register offerings of registered MVAs on Form N-4 at this
time, but we request comment on this reasonable alternative.
4. Limiting Scope of Structured Data Requirements
The proposed rule would require many of the newly added disclosures
on Form N-4 to be tagged in Inline XBRL, and also would require RILA
issuers to tag those prospectus disclosures that Form N-4 currently
requires to be tagged. Alternatively, the Commission could have limited
the tagging requirement to only those disclosures being added to Items
of Form N-4 that are already tagged in Inline XBRL.\491\ Under this
alternative, disclosures relating to: the overview of the contract; the
description of the Insurance company, registered separate account, and
investment options; charges; purchases and contract value; purchase of
securities being offered; disagreements with and changes to
accountants; information about contracts with index-linked options and
fixed options subject to a contract adjustment; and fee representations
and undertakings would not be tagged.
---------------------------------------------------------------------------
\491\ See supra footnote 451.
---------------------------------------------------------------------------
Limiting the scope of tagging requirements in this manner would
result in reduced compliance burdens for insurance companies, which
would be required to apply fewer tags to their
[[Page 71166]]
disclosures on Form N-4 filings. However, the alternative would also
remove the informational benefits associated with making those
disclosures available in a machine-readable manner. Furthermore,
because Form N-4 filers already have Inline XBRL tagging obligations
with respect to certain of the form's disclosure requirements, the
burden reductions resulting from such an alternative would be limited.
F. Request for Comment
Throughout this release, we have discussed the anticipated benefits
and costs of the proposed rule and its potential effect on efficiency,
competition, and capital formation. While we do not have comprehensive
information on all aspects of RILA registration and reporting, we are
using the data currently available in considering the effects of the
proposed rule. We request and encourage any interested person to submit
comments regarding the proposed rule, our analysis of the potential
effects of the rules and other matters that may have an effect on the
proposed rules. We request that commenters identify sources of data and
information with respect to annuity contracts in general, but also with
respect to RILAs in particular, as well as provide data and information
to assist us in analyzing the economic consequences of the proposed
rules. We are also interested in comments on the qualitative benefits
and costs we have identified and any benefits and costs we may not have
discussed. We urge commenters to be as specific as possible.
Comments on the following questions are of particular interest.
153. What additional qualitative or quantitative information should
be considered as part of the baseline for the economic analysis of
these amendments?
154. Are the benefits and costs of proposed amendments accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account? If possible, please offer ways of estimating these benefits
and costs. What additional considerations can be used to estimate the
benefits and costs of the proposed amendments?
155. To the extent commenters believe any specific additional data
sources would help better quantify the benefits and costs of the
proposal, we request that commenters provide this data. In particular,
the following data could be particular informative: historical
information about current limits on index gains associated with the
index-linked options offered under a RILA, quantitative data about
contract adjustments incurred by investors who make withdrawals from an
index-linked option or from a RILA contract before the end of a
specified period, and/or data regarding the frequency with which RILA
contracts are annuitized.
156. Are the effects on competition, efficiency, and capital
formation arising from the proposal accurately characterized? If not,
why not?
157. Are there any other reasonable alternatives to the proposed
new rule that should be considered? Are there any additional benefits
or costs that should be associated with the reasonable alternatives
considered?
158. We indicate that insurance companies benefit from the sale of
RILAs in at least three ways. First, insurance companies can benefit
from a favorable imbalance between the downside protections that a RILA
contract offers, and the upside caps the contract offers. Second,
insurance companies invest RILA proceeds into fixed-income securities
such as corporate bonds, thereby earning a ``credit risk premium.''
Finally, insurance companies can benefit when a RILA offers index-
linked options whose index for measuring performance is a price-based
index that does not account for dividend payments. Are we correct in
our characterization of how insurance companies benefit from the sale
of RILAs? In what other ways, if any, do insurance companies benefit
from the sale of RILAs?
159. We characterize RILAs as combining features of fixed-index
annuities and variable annuities--limiting or reducing downside risk in
return for an investor accepting capped upside performance. In exchange
for giving up the complete protection of principal offered by fixed
annuities, a RILA investor is afforded greater upside potential than
that provided by fixed annuities, though typically less than the
potential upside of a variable annuity. Is our characterization of
RILAs, compared to other annuity products, correct? If not, how do
RILAs compare to other annuity products?
160. In Section III.B.3, we analyze the imbalance between the
downside protections that a RILA contract offers, and the upside limits
the contract offers. Does our analysis reflect a risk-neutral valuation
for a RILA with a cap and buffer or floor? What alternative
considerations should we include in calculating such a valuation? Do
the methodological assumptions (such as generating prices through the
linear interpolation of implied volatilities) create significant bias
or other problems for the analysis? How do RILAs set surrender charges
or other early withdrawal charges or penalties, and should these
charges or penalties be considered when performing this calculation
since they reduce the liquidity of the investment? Should we require
additional disclosure related to early withdrawal charges, fees, or
penalties? For example, should we require more prominent placement of
these features on marketing or other materials, or should we require a
comparison of these features to potential benefits of the RILA to
clarify for investors possible trade-offs? Are there other data sources
(e.g., pricing vendors) that should be considered for these
calculations? Are there certain time periods or types of contracts that
we should consider when doing these or similar calculations? What
considerations should be used in assessing whether the cost derived in
our analysis is large or small? Also, are other measures related to the
economic content of downside protections and upside limits that would
be beneficial for investors?
161. We indicate that for shorter crediting periods and for common
indexes such as the S&P 500, issuers are able to use exchange traded
derivative securities to closely approximate the issuer's liabilities
from a RILA contract at the end of each crediting period. Do issuers
use exchange derivative securities to approximate the issuer's
liabilities from a RILA contract? If not, how do issuers use the
proceeds from RILA sales?
162. Under the proposed rule, to what extent would insurance
companies choose to meet their disclosure obligation by providing
investors with summary prospectuses while making statutory and other
documents available on a website? As discussed above, we expect the
vast majority of investors will have the option to use both summary
prospectuses and statutory prospectuses in their decision-making, in
whatever proportion investors think is best for their preferences. To
what extent would investors in RILA contracts whose issuers elect to
rely on rule 498A request to receive statutory prospectuses in paper or
electronically, or seek access to statutory prospectuses online?
163. Would any positive or negative effect of the proposed rule on
investors be disproportionately greater for certain investors than for
others? If so, which investors would be disproportionately affected, to
what extent, and how would such effects manifest? What, if any,
additional measures could help mitigate any such disproportionate
effects?
[[Page 71167]]
Please provide supportive data to the extent available.
164. To what extent might reduced burdens (e.g., using SAP
accounting rather than GAAP accounting) borne by issuers be passed on
to existing investors? Under what circumstances, and in what form,
would insurance companies pass benefits through to existing investors?
165. To what extent would the proposed rule affect the ability of
investors to understand the investment risks of RILAs and to
efficiently allocate capital? Would investors be more likely to
allocate additional capital to RILAs? What would be the effect on
issuer competition for investor capital?
166. To what extent would investors realize benefits from Inline
XBRL tagging requirements for certain newly added disclosures on Form
N-4, as opposed to tagging requirements for only those disclosures
within currently tagged Form N-4 Items? How would this approach affect
costs for insurance companies? Would there be any cost saving?
167. To what extent would an increase or decrease in the demand for
RILAs be driven by investors substituting either away from, or into,
variable annuities or other investment vehicles? We assume that if
investors do substitute away from, or into, variable annuities or other
investment vehicles into RILAs, that the effect on capital formation
would be small. Is our assumption correct? If not, why would the effect
on capital formation be larger than what we assumed?
IV. Paperwork Reduction Act
We are proposing amendments to several rules and forms that would
modify the registration, offering, and communications processes for
RILAs under the Securities Act. We are also proposing amendments to
Form N-4 and related rules that would apply to all issuers of that
form.\492\ The proposed amendments, if adopted, would implement the
requirements relating to RILAs in the RILA Act.\493\ The proposed
amendments would have an impact on the current collections of
information burdens under the Paperwork Reduction Act of 1995 (``PRA'')
of the following rules and forms: Rule 498A, Form N-4, Investment
Company Interactive Data, and Form 24F-2. The titles for the existing
collections of information are: (1) ``Rule 498A Summary Prospectus for
Variable Annuity and Variable Life Insurance Contracts'' (OMB Control
No. 3235-0765), which we would retitle to ``Rule 498A Summary
Prospectus for Variable and Index-Linked Annuity and Variable Life
Insurance Contracts;'' (2) ``Form N-4, Registration Statement of
Separate Accounts Organized as Unit Investment Trust'' (OMB Control No.
3235-0318), which we would retitle to ``Form N-4, Registration
Statement of Separate Accounts Organized as Unit Investment Trust or of
Index-Linked Annuity Contracts;'' (3) ``Annual Notice of Securities
Sold Pursuant to Rule 24f-2.'' (OMB Control No. 3235-0456), which we
would retitle to ``Annual Notice of Securities Sold Pursuant to 17 CFR
270.24f-2 or 230.456(e);'' and (4) ``Investment Company Interactive
Data'' (OMB Control No. 3235-0642).
---------------------------------------------------------------------------
\492\ We are proposing amendments rules 485 and 497 of
Regulation C (OMB Control No. 3235-0074), which describes the
procedures to be followed in preparing and filing registration
statements with the Commission, and rule 405 of Regulation S-T (OMB
Control No. 3235-0424), which specifies the requirements that govern
the electronic submission of documents. The proposed amendments
would require RILA issuers to tag specified information in
registration statements filed on Form N-4 or post-effective
amendments thereto, as well as in forms of prospectuses filed
pursuant to rule 497(c) or 497(e) under the Securities Act that
include information that varies from the registration statement
using Inline XBRL These burdens are included in our estimates for
the Investment Company Interactive Data collection of information
discussed in section IV.D below.
\493\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
---------------------------------------------------------------------------
The Commission is submitting these collections of information to
OMB for review and approval in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The hours and costs associated with preparing and filing
the forms constitute reporting and cost burdens imposed by each
collection of information. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. We discuss
below the collection of information burdens associated with proposed
amendments to rule 498A and Investment Company Interactive Data, as
well as Forms N-4 and 24F-2, which are filed with the Commission and
are not kept confidential. A description of the proposed amendments,
including the need for the information and its proposed use, as well as
a description of the likely respondents, can be found in Section II
above, and a discussion of the economic effects of the proposed
amendments can be found in Section III above.
A. Rule 498A
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations. Consistent with
current rule 498A, the proposed use of summary prospectuses for RILAs
would be voluntary, but the rule's requirements would be mandatory for
issuers that elect to send or give a summary prospectus in reliance
upon proposed rule 498A. We are also proposing to make certain
amendments to Form N-4 that would affect the variable annuity summary
prospectuses currently provided to investors. The proposed amendments
to rule 498A are part of a layered disclosure approach that is designed
to provide investors with a summary prospectus to help them make
informed investment decisions regarding RILAs, as discussed in more
detail above. These amendments would result in a change in our estimate
of the burdens associated with this collection of information,
specifically to account for these additional requirements for issuers
that use rule 498A currently and to add RILAs to the estimates.
The respondents to these collections of information would be RILA
issuers and registered variable annuity separate accounts. The
information provided under rule 498A will not be kept confidential.
In our most recent Paperwork Reduction Act submission for Rule
498A, we estimated for rule 498A a total aggregate annual hour burden
of 14,688 hours, and a total aggregate annual external cost burden of
$11,559,420.\494\ We estimate that 90 RILAs would be registered using
Form N-4 if the proposal was adopted and that that there are 419
registrants on current Form N-4 that would be impacted by the proposed
amendments.\495\ The summary prospectus is voluntary, so the percentage
of RILA issuers that will choose to utilize it is uncertain. Given this
uncertainty, we have assumed that insurance companies will choose to
use a summary prospectus for 90% of all RILAs, which is the same as our
current estimate for variable annuity separate accounts. The table
below summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to rule 498A.
---------------------------------------------------------------------------
\494\ On Nov. 13, 2020, the Office of Management and Budget
approved this collection of information estimate for rule 498A.
\495\ The RILA estimate is based on a review of RILA
registration statements filed with the Commission as of May 2023 and
the current Form N-4 registrants estimate is based on Form N-CEN
reports through Apr. 15, 2023.
[[Page 71168]]
Table 11--Rule 498A PRA Estimates
----------------------------------------------------------------------------------------------------------------
Internal Internal Annual
initial burden annual burden Wage rate \2\ Internal time external cost
hours hours costs burden
----------------------------------------------------------------------------------------------------------------
Proposed Estimates
----------------------------------------------------------------------------------------------------------------
Separate Account Registrants
----------------------------------------------------------------------------------------------------------------
Proposed Amendments.......... \1\ 9 \1\ 6 $425 (compliance $2,550 ..............
attorney).
Number of registrants \3\.... .............. x 419 x 419 ..............
Total annual burden.......... .............. 2,514 $1,068,450 ..............
Use of summary prospectus.... .............. x 90% x 90% ..............
Total new annual burden for .............. 2,262.60 $961,605 ..............
Reliance on Rule 498A.
----------------------------------------------------------------------------------------------------------------
RILA Registrants
----------------------------------------------------------------------------------------------------------------
Preparation and filing of 40 \4\ 24.67 $313 (blended $7,709.38 \8\ $5,000
Initial Summary Prospectus/ rate) \5\.
Updating Summary Prospectus.
Online Posting of Contract 2 \6\ 2.67 $289 (webmaster) $771.63 ..............
Documents.
Total burden per registrant.. .............. 27.34 8,481.01 $5,000
Number of registrants \7\.... .............. x 90 x 90 x 90
Total annual burden.......... .............. 2,460.60 $763,290.90 $405,000
Use of summary prospectus.... .............. x 90% x 90% x 90%
Total new annual burden for .............. 2,214.54 $686,961.81 $364,500
Reliance on Rule 498A.
----------------------------------------------------------------------------------------------------------------
Estimates for Printing and Mailing by RILA Registrants \9\
----------------------------------------------------------------------------------------------------------------
Initial Summary Prospectus...................................................................... $120,000
Updating Summary Prospectus..................................................................... $1,048,000
Total annual burden............................................................................. $1,168,000
Use of summary prospectus....................................................................... x 90%
Total new annual burden for Reliance on Rule 498A............................................... $1,051,200
----------------------------------------------------------------------------------------------------------------
Total Burdens
----------------------------------------------------------------------------------------------------------------
Responses Internal Internal External
hour hour cost cost
estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 676 14,688 $3,900,193 $11,559,420
burden estimates.
Aggregate proposed additional \10\ + 83 + 4,477.14 + 1,648,566.81 + $1,415,700
annual burden estimates.
Revised aggregate annual = 759 = 19,165.14 = 5,548,759.81 = $12,975,120
burden estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Burden estimates also include the burden associated with the proposed amendments for separate account
registrants that use a notice document as part of the modernized alternative disclosure framework in
connection with discontinued variable annuity contracts. See VASP Adopting Release at section II.E. Internal
annual burden hours represents initial burden estimates annualized over a three-year period plus three hours
of on-going annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets Association's Office Salaries in the
Securities Industry 2013. The estimated wage figures are modified by Commission staff to account for an 1,800-
hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and
adjusted to account for the effects of inflation. See Securities Industry and Financial Markets Association,
Report on Management & Professional Earnings in the Securities Industry 2013 (as adjusted to account for
inflation, the ``SIFMA Wage Report'').
\3\ Estimate is based on a review of N-CEN reports through Apr. 15, 2023. In its most recently approved PRA
submission, the Commission estimated that 426 registrants on Form N-4 would be subject to the information
collection burden under current rule 498A. For the estimated burden of the proposed amendments to rule 498A,
we have taken into account updated data regarding the number of registrants on Form N-4.
\4\ Represents initial burden estimates annualized over a three-year period plus 11 hours of ongoing annual
burden hours.
\5\ Represents a blended wage rate of a compliance attorney ($425 per hour) and an intermediate accountant ($200
per hour). $313 is based on the following calculation: ($425 + $200)/2 = $313 rounded to the nearest whole
dollar.
\6\ Represents initial burden estimates annualized over a three-year period plus two hours of ongoing annual
burden hours.
\7\ This estimate is based on the number of RILAs, as estimated through review of RILA registration statements
filed with the Commission as of May 2023.
\8\ We estimate that each insurance company that chooses to rely on rule 498A with regards to a RILA will incur
a one-time collective external cost burden of $10,000 per registration statement to prepare both a new initial
summary prospectus and a new updating summary prospectus for offerings on Form N-4. We also estimate an on-
going collective burden of $2,500 per registration statement during each subsequent year to prepare updates to
these materials. The three-year average cost of these estimates is $5,000.
\9\ Costs associated with printing and mailing for separate account registrants are already accounted for in the
currently approved burdens for rule 498A. Estimates for RILA issuers printing and mailing costs are based on
the currently approved burdens for printing and mailing costs under rule 498A.
\10\ The estimated number of new responses is based on the total of the number of RILA responses under the
proposed amendments (90 responses) and the difference between the number of responses for registered separate
accounts under the current aggregate annual burden estimate (426 responses) and the proposed additional annual
burden estimates (419 responses). (90 RILA responses subtracted by 7 registered separate account responses).
B. Form N-4
Under the proposed amendments, RILA issuers would register
offerings on Form N-4, as amended to address the features and risks of
RILAs. We are also proposing other amendments to Form N-4 that would
apply to all issuers that use that form. For example, we are proposing
to switch the order of the Key Information Table and Overview of the
Contract items, require issuers to present information in the KIT in a
Q&A format, and to require more specific principal risk disclosures.
These amendments would result in a change in our estimate of the
burdens associated with this collection of information, specifically to
account for these additional requirements for issuers that use Form N-4
currently and to add RILAs to the estimates.
Form N-4 generally imposes two types of reporting burdens on
issuers that use the form: (1) the burden of preparing and filing the
initial registration statement; and (2) the burden of preparing and
filing post-effective amendments to a previously effective registration
statement. In our most recent Paperwork Reduction Act submission for
Form N-4, we estimated for Form N-4 a total aggregate annual hour
burden of 292,487 hours, and a total aggregate annual external cost
[[Page 71169]]
burden of $33,348,866.\496\ Compliance with the disclosure requirements
of Form N-4 is mandatory, and the responses to the disclosure
requirements will not be kept confidential. The respondents to these
collections of information would be RILA issuers and registered
variable annuity separate accounts. The purpose of the information
collection requirements on Form N-4 are to meet the filing and
disclosure requirements of the Securities Act and Investment Company
Act, as applicable, and to provide investors with information necessary
to evaluate an investment in an offering of securities registered on
the form.
---------------------------------------------------------------------------
\496\ On Oct. 26, 2021, the Office of Management and Budget
approved without change this burden estimate.
---------------------------------------------------------------------------
We estimate that 90 RILA respondents and 419 separate account
registrants would be subject to collection of information requirements
under the proposed amendments to Form N-4.\497\ The table below
summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to Form N-4.
---------------------------------------------------------------------------
\497\ For RILA registrants, this estimate is based on a review
of RILA registration statements filed with the Commission as of May
2023. For separate account registrants, this amount is based on Form
N-CEN reports through Apr. 15, 2023.
Table 12--Form N-4 PRA Estimates for Initial Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Internal Internal Annual
initial burden annual burden Wage rate \2\ Internal time external cost
hours hours costs burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Separate Account Registrants
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments............................. 12 \1\ 14 $406 (blended rate for compliance $5,684 ..............
attorney and senior programmer)
\3\.
Estimated number of annual responses \4\........ .............. x 42 .................................. x 42 ..............
Total new annual burden......................... .............. 588 .................................. $238,728 ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
RILA Issuers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments to Form N-4................. 300 \5\ 390.89 $406 (blended rate for compliance $158,701.34 \8\ $40,000
attorney and senior programmer)
\3\.
Website availability requirement \6\............ .............. 0.5 $286 (webmaster).................. $143 ..............
Estimated number of annual responses \7\........ .............. x 20 .................................. x 20 x 20
Total new annual burden......................... .............. 7,827.80 .................................. $3,176,886.80 $800,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Responses Internal hour Internal hour cost External cost
estimate estimate estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates....... 30 8,427 .................................. $2,494,716 $754,740
Aggregate proposed additional annual burden \9\ + 32 + 8,416.80 .................................. + $3,416,614.80 + $800,000
estimates.
Revised aggregate annual burden estimates....... = 62 = 16,843.80 .................................. = $5,911,330.80 = $1,554,740
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period, plus 10 hours of ongoing annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation.
\3\ The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386).
$406 is based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
\4\ The estimate of the annual number of registration statements filed on Form N-4 is based on the average annual number of filings received by the
Commission over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the Commission estimated that
separate accounts will make approximately 30 initial registration statement filings per year. For the estimated burden of the proposed amendments to
Form N-4, we have taken into account updated data regarding the number of initial filings on Form N-4.
\5\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 290.89 hours of ongoing annual burden hours.
The ongoing annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N-4 plus 10 hours of
ongoing annual burden hours.
\6\ The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites.
See Item 17 of proposed Form N-4.
\7\ This estimate is based on a review of Morningstar data regarding the number of new RILA product launches that occurred over the prior three calendar
years (2020-2022), rounded to the nearest ten. Current RILA registration statements would make their first filing on proposed Form N-4 as a post-
effective amendment. See supra footnote 195 and accompanying text.
\8\ We estimate that the external cost to prepare and file an initial registration statement on Form N-4 is $40,000 per filing.
\9\ The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (20 responses) and the
difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (30 responses) and the
proposed additional annual burden estimates (42 responses). (20 RILA responses plus 12 registered separate account responses).
Table 13--Form N-4 PRA Estimates for Post-Effective Amendment Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours costs cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Separate Account Registrants
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments............................. 12 \1\ 6 $406 (blended rate for compliance $2,436 ................
attorney and senior programmer)
\3\.
Estimated number of annual responses \4\........ .............. x 1,016 .................................. x 1,016 ................
Total new annual burden......................... .............. 6,096 .................................. $2,474,976 ................
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 71170]]
RILA Issuers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments to Form N-4................. 210 \5\ 279.95 $406 (blended rate for compliance $113,659.70 \8\ $24,000
attorney and senior programmer)
\3\.
Website availability requirement \6\............ .............. 0.5 $286 (webmaster).................. $143 ................
Estimated number of annual responses \7\........ .............. x 90 .................................. x 90 x 90
Total new annual burden......................... .............. 25,240.50 .................................. 10,242,243 $2,160,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Responses Internal hour .................................. Internal hour External cost
estimate cost estimate estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates....... 1,366 + 284,060 .................................. $84,100,454 + $32,594,126
Aggregate proposed additional annual burden \9\-260 + 31,336.50 .................................. + $12,717,219 + $2,160,000
estimates.
Revised aggregate annual burden estimates....... = 1,106 = 315,369.50 .................................. = 96,817,673 = $34,754,126
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period, plus two hours of on-going annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation.
\3\ The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386).
$406 is based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
\4\ The estimate of the annual number of post-effective amendments to registration statements on Form N-4 is based on the average annual number of
filings received by the Commission over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the
Commission estimated that separate accounts will make approximately 1,366 post-effective amendment filings per year on Form N-4. For the estimated
burden of the proposed amendments to Form N-4, we have taken into account updated data regarding the number of post-effective amendment filings on
Form N-4.
\5\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 207.95 hours of ongoing annual burden hours.
The ongoing annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N-4 plus an addition 2
hours of ongoing annual burden hours.
\6\ The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites.
See Item 17 of proposed Form N-4.
\7\ This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
\8\ We estimate that the external cost to prepare and file a post-effective registration statement on Form N-4 is approximately $24,000 per filing.
\9\ The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (90 responses) and the
difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (1,366 responses) and
the proposed additional annual burden estimates (1,016 responses). (90 RILA responses subtracted by 350 registered separate account responses).
Table 14--Total Burden Estimates for Form N-4
----------------------------------------------------------------------------------------------------------------
Internal
Responses annual burden Internal time Annual external
hours \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
Total Burden Estimates Including Amendments
----------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates. 1,366 292,487 $86,595,170 $33,348,866
Aggregate proposed additional annual -228 + 39,753.30 + + $16,133,833.80 + $2,914,740
burden estimates.........................
Revised aggregate annual burden hours..... = 1,168 = 332,240.30 = $102,729,004 = $36,263,606
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period.
C. Form 24F-2
Under the proposed amendments, insurance companies would be
required to pay applicable securities registration fees relating to
RILAs in arrears on Form 24F-2. Consistent with the other elements of
this proposal, these proposed amendments are designed to require
insurance companies to use the same framework to pay securities
registration fees for RILAs that they do for variable annuities. Form
24F-2 is the annual notice of securities sold by certain funds that
accompanies the payment of registration fees with respect to the
securities sold during the fiscal year, net of securities redeemed or
repurchased during the year. Compliance with Form 24F-2 is mandatory.
Responses to this form are not kept confidential.
In our most recent Paperwork Reduction Act submission for Form 24F-
2, we estimated for Form 24F-2 a total aggregate annual hour burden of
27,176 hours, and a total aggregate annual external cost burden of
$0.\498\ The likely respondents to the proposed amendments would
include RILA issuers and current Form 24F-2 filers, which open-end
investment companies, unit investment trusts, registered closed-end
investment companies that make periodic repurchase offers under 17 CFR
270.23c-3, and face-amount certificate companies. We estimate that 90
RILA respondents would be subject to these proposed amendments and
would file one Form 24F-2 filing each per year.\499\ The table below
summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to Form 24F-2.
---------------------------------------------------------------------------
\498\ On May 14, 2021, the Office of Management and Budget
approved this burden estimate.
\499\ This estimate is based on a review of RILA registration
statements filed with the Commission as of May 2023. We do not
believe that the proposed amendments to Form 24F-2 will affect the
estimated burdens associated with current Form 24F-2 filers. We have
not amended the currently approved burdens for current Form 24F-2
filers with more recent data for the purposes of this PRA estimate.
[[Page 71171]]
Table 15--Form 24F-2 PRA Estimates
----------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours costs cost burden
----------------------------------------------------------------------------------------------------------------
Proposed Estimates
----------------------------------------------------------------------------------------------------------------
Clerical work to file Form 3 \1\ 3 $82 (compliance $246 $0
24f-2. clerk).
Submission in a structured 3 \1\ 3 $316 $948 $0
data format. (programmer).
Total annual burden per .............. 6 ............... $1,194 .................
response.
Number of annual responses .............. x 90 ............... x 90 x 90
\3\.
Total new annual burden..... .............. 540 ............... $107,460 $0
----------------------------------------------------------------------------------------------------------------
Total Estimated Burdens Including Amendments
----------------------------------------------------------------------------------------------------------------
Responses Internal Internal time Annual external
annual burden costs cost burden
hours
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 6,794 27,176 ............... $4,633,508 $0
burden.
Aggregate proposed + 90 + 540 ............... + $107,460 + $0
additional annual burden
estimates.
Revised aggregate burden = 6,884 = 27,716 ............... = $4,140,968 = $0
estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 2
hours of ongoing annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage
figures are modified by Commission staff to account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation.
\3\ This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
D. Investment Company Interactive Data
The Investment Company Interactive Data collection of information
references current requirements for certain registered investment
companies and BDCs to submit to the Commission in Inline XBRL certain
information provided in response to specified form and rule
requirements included in their registration statements and Exchange Act
reports. We are proposing amendments to Form N-4, as well as rule 405
of Regulation S-T, that would require certain new structured data
reporting requirements for RILA issuers.\500\ The proposed amendments
would require RILA issuers to tag specified information in registration
statements filed on Form N-4 or post-effective amendments thereto, as
well as in forms of prospectuses filed pursuant to rule 497(c) or
497(e) under the Securities Act that include information that varies
from the registration statement using Inline XBRL.\501\ The purpose of
the information collection is to make information regarding RILAs
easier for investors to analyze and to help automate regulatory filings
and business information processing, and to improve consistency across
all types of investment products offered on Form N-4 with respect to
the accessibility of information they provide to the market.
---------------------------------------------------------------------------
\500\ The Investment Company Interactive Data collection of
information do not impose any separate burden aside from that
described in our discussion of the burden estimates for this
collection of information.
\501\ See supra section II.B.9.
---------------------------------------------------------------------------
Insurance companies that use Form N-4 to register variable
annuities are currently required to tag certain registration statement
disclosure items using Inline XBRL.\502\ For the insurance companies
that would now be registering RILAs on Form N-4, our proposed data
tagging requirements would represent new burdens. Nevertheless, RILA
issuers generally do have prior experience submitting filings to the
Commission in Inline XBRL. The vast majority of insurance companies
that currently register RILAs on Forms S-1 and S-3 also separately file
Form N-4 to register variable annuities and variable life insurance
products or currently tag their RILA registration statements and are
thus familiar with the current Form N-4 tagging requirements.\503\ In
addition, insurance companies that register RILAs on Forms S-1 and S-3
that file GAAP financial statements must tag them using Inline
XBRL.\504\ Given this prior experience, we do not expect the proposed
tagging requirements to be as burdensome to many RILA issuers as it
would be for issuers that would be going through the Inline XBRL
tagging and submission process for the first time.
---------------------------------------------------------------------------
\502\ See General Instruction C.3(h) of current Form N-4. As
discussed above, some of the proposed items would also require
certain variable annuity issuers to provide a few additional
disclosures, which though relatively minor, would also have to
tagged.
\503\ Based on analysis of Forms S-1, S-3, and POS AM filed by
RILA issuers, 22 of the 23 insurance companies that issue RILAs also
offer variable products registered on Forms N-3, N-4, or N-6, all of
which are currently structured, or otherwise have experience tagging
registration statements.
\504\ See Inline XBRL Filing of Tagged Data, Securities Act
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
---------------------------------------------------------------------------
In our most recent Paperwork Reduction Act submission for the
Investment Company Interactive Data collection of information, we
estimated a total annual hour burden of 323,724 hours, and a total
annual external cost burden of $16,041,450.\505\ Compliance with the
interactive data requirements is mandatory, and the responses will not
be confidential.
---------------------------------------------------------------------------
\505\ This estimate is based on the last time the PRA renewal
for the Investment Company Interactive Data information collection
was approved in 2023. See ICR Reference No. 202212-3235-007,
available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202212-3235-007.
---------------------------------------------------------------------------
The table below summarizes our PRA estimates for the burdens
associated with the proposed tagging requirements that would apply to
RILAs that file with the Commission on Form N-4.
Table 16--Investment Company Interactive Data
----------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
Proposed Burdens
----------------------------------------------------------------------------------------------------------------
Proposed disclosures for 1 \4\ 1 $406 (blended $406 \5\ $50
current N-4 filers \3\. rate for
compliance
attorney and
senior
programmer).
Number of current N-4 filers .............. x 400 ............... x 400 x 400
\6\.
[[Page 71172]]
Total new burden estimates .............. 400 ............... $162,400 $20,000
for current N-4 filers.
Proposed Form N-4 9 \8\ 4 $406 (blended $1,624 \9\ $700
disclosures for RILAs \7\. rate for
compliance
attorney and
senior
programmer).
Number of RILAs \10\........ .............. x 90 ............... x 90 x 90
Total new burden estimates .............. 360 ............... $146,160 $63,000
for RILAs.
Total new aggregate annual .............. \11\ 760 ............... \12\ $308,560 \13\ $63,000
burden.
----------------------------------------------------------------------------------------------------------------
Total Proposed Estimated Burdens Including Amendments
----------------------------------------------------------------------------------------------------------------
Responses Internal hour Internal hour External cost
estimate cost estimate estimate
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 14,702 323,724 ............... $27,066,240 $16,041,450
burden estimates.
Proposed additional annual + 90 + 760 ............... + $308,560 + $63,000
burdens.
Revised aggregate annual 14,792 324,484 ............... $27,374,800 $16,124,450
burden estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The PRA estimates assume that the types of professionals that will be involved in complying with the new
interactive data requirements. The Commission's estimates of the relevant wage rates are based on the SIFMA
Wage Report. The $406 wage rate reflects current estimates of the blended hourly rate for an in-house
compliance attorney ($425) and a senior programmer ($386). $406 is based on the following calculation: ($425 +
$386)/2 = $406. This estimate represents the average burden for a filer on Form N-4 that is currently subject
to interactive data requirements.
\3\ Estimated incremental burden for a variable annuity Form N-4 filer that is subject to the form's current
interactive data requirements.
\4\ Includes initial burden estimates annualized over a three-year period, plus 0.67 hour of ongoing annual
burden hours. The estimate of 1 hour is based on the following calculation: ((1 initial hour/3) + 0.67 hour of
additional ongoing burden hours) = 1 hour.
\5\ Estimated incremental external cost for Form N-4 variable annuity registrants that already submit certain
information using Inline XBRL.
\6\ Based on Form N-CEN filing data for 2022, we estimate that 400 variable annuity registrants file on Form N-
4.
\7\ Estimated average burden for a RILA that files on Form N-4 that is currently subject to interactive data
requirements on other Commission forms.
\8\ Includes initial burden estimates annualized over a three-year period, plus 1 hour of ongoing annual
burdens. The estimate of 4 hours is based on the following calculation: ((9 initial hours/3) + 1 hour of
additional ongoing burden hours) = 4 hours.
\9\ We estimate an incremental external cost for RILAs that would be newly filing on Form N-4 of $700 to reflect
one-time compliance and initial set-up costs. Because RILAs are currently subject to Inline XBRL tagging
requirements on other forms, we do not estimate any burdens related to one time-costs associated with becoming
familiar with structured data requirements (e.g., the acquisition of new software or the services of
consultants).
\10\ Estimated number of RILAs that currently file on Forms S-1 and S-3.
\11\ 760 hours = (400 variable annuity registrants x 1 hour = 400) + (90 RILAs x 4 hours = 360).
\12\ $308,560 internal time cost = (400 variable annuity registrants x $406 = $162,400) + (90 RILAs x $1,624 =
$146,160).
\13\ $63,000 annual external cost = (400 variable annuity registrants x $50 = $20,000) + (90 RILAs x $700 =
$63,000).
E. Request for Comment
We request comment on whether our estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
to: (1) evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology. Persons wishing to
submit comments on the collection of information requirements of the
proposed amendments should direct them to the OMB Desk Officer for the
Securities and Exchange Commission,
[email protected], and should send a copy to
Vanessa Countryman, Secretary, Securities and Exchange Commission, 100
F Street NE, Washington, DC 20549-1090, with reference to File No. S7-
16-23. OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this release;
therefore a comment to OMB is best assured of having its full effect if
OMB receives it within 30 days after publication of this release.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-16-23, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.
V. Regulatory Flexibility Certification
Section 3(a) of the Regulatory Flexibility Act of 1980
(``Regulatory Flexibility Act'') \506\ requires the Commission, when
issuing a rulemaking proposal, to prepare and make available for public
comment an initial regulatory flexibility analysis that describes the
impact of the proposed rule and form amendments on small entities
unless we certify that the rule and form amendments, if adopted, would
not have a significant economic impact on a substantial number of small
entities.\507\ Pursuant to 5 U.S.C. 605(b), we hereby certify that the
proposed amendments to Forms N-4 and 24F-2, rules 313 and 405 of
Regulation S-T, and rules 156, 172, 405, 415, 424, 456, 457, 485, 497,
and 498A under the Securities Act, would not, if adopted, have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\506\ 5 U.S.C. 603(a).
\507\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
We are proposing amendments to Form N-4 pursuant to the authority
set forth in the Securities Act, particularly sections 6, 7, 8, 10, 19,
and 28 thereof [15 U.S.C. 77f, 77g, 77h, 77j, 77s, and 77z-3], the
Exchange Act, particularly sections 3, 4, 10, 12, 13, 14, 15, 17, 23,
35A, and 36 thereof [15 U.S.C. 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78q,
78w, 78ll, and 78mm]; the Investment Company Act, particularly sections
8, 30, and 38 thereof [15 U.S.C. 80a-8, 80a-29, and 80a-37], and the
RILA Act, particularly section 101 thereof [Pub. L. 117-328, div. AA,
title I, 136 Stat. 4459 (2022)]. Form-N-4 is the registration form
currently used by most variable annuity separate accounts. These
proposed amendments would implement the requirements relating to RILAs
contained in the RILA Act by allowing Form N-4 to also be used for the
registration of RILAs.
The proposed amendments would add to Form N-4 new disclosure
requirements that specifically address
[[Page 71173]]
the features and risks of RILAs. Specifically, the proposal would amend
the contents of Form N-4, including the form's general instructions,
requirements for front and back cover pages, the key information table,
principal disclosures regarding RILA investment options, and contract
adjustment and fee disclosures. These amendments would apply only to
insurance companies registering RILAs. We are also proposing applying
the form's existing disclosure requirements to RILAs where appropriate.
For example, we are proposing to permit insurance companies to provide
financial statements on amended Form N-4 regarding RILAs in the same
way that that they do under the current Form N-4 for variable
annuities, including permitting the use of SAP to the same extent as
variable annuities.
In addition to adding RILAs to Form N-4, we are proposing
amendments to the form that would be applicable to all issuers, which
are designed to improve disclosures based upon our experience in
administering the form and feedback received in investor testing. For
example, we are proposing to switch the order of the key information
table and overview of the contract items in the prospectus to require
more specific principal risk disclosures. All Form N-4 filers would be
subject to these proposed amendments.
To facilitate to the inclusion of RILAs on Form N-4, we are
proposing amending Form 24F-2, rules 313 and 405 of Regulation S-T, and
rules 156, 172, 405, 415, 424, 456, 457, 485, 497, and 498A, pursuant
to authority set forth in the Securities Act, particularly sections 6,
7, 8, 10, and 19(a), and 28 thereof [15 U.S.C. 77e, 77f, 77g, 77h, 77j,
and 77s, and 77z-3(a)], the Exchange Act, particularly sections 3, 4,
10, 12, 13, 14, 15, 17, 23, 35A, and 36 thereof [15 U.S.C. 78c, 78d,
78j, 78l, 78m, 78n, 78o, 78q, 78w, 78ll, and 78mm]; the Investment
Company Act, particularly sections 8, 30, and 38 thereof [15 U.S.C.
80a-8, 80a-29, and 80a-37], and the RILA Act, particularly section 101
thereof [Pub. L. 117-328, div. AA, title I, 136 Stat. 4459 (2022)]. For
example, the proposed amendment to rule 498A would permit RILA issuers
to use a summary prospectus to satisfy statutory prospectus delivery
obligations, and the proposed amendments to rules 485 and 497 would
make those rules applicable to RILA issuers when amending RILA
registration statements on Form N-4 or when filing prospectuses and
prospectus supplements with the Commission.\508\ The proposed
amendments to Form 24F-2, Rule 313 of Reg S-T, and rules 456 and 457
would require insurance companies to pay securities registration fees
relating to RILA offerings according to the same method used for
variable annuities. Because we propose subjecting RILA offerings to an
investor communication framework similar to the framework applicable to
variable annuity offerings, the proposed amendments to rule 172 would
exclude RILA offerings from that rule's provisions. The proposed
amendment of rule 405 of Reg S-T would require inline XBRL tagging of
RILA-specific disclosures, while the proposed amendment of rule 405
would add a new defined term for RILAs to facilitate their registration
on Form N-4 and to simplify references to RILAs in our proposed rule
amendments. The proposed amendments to rule 156 would require RILA
issuers to comply with the rule's guidance as to when sales literature
is materially misleading under the Federal securities laws.
---------------------------------------------------------------------------
\508\ Relatedly, we propose amending rule 424 to specify that
RILA issuers must use rule 497 rather than rule 424 when filing
prospectuses and prospectus supplements, and making similar
amendments to rule 415 to exempt RILA offerings from its provisions,
consistent with the framework applied to existing N-4 issuers.
---------------------------------------------------------------------------
For purposes of the Securities Act and the Regulatory Flexibility
Act, generally, an issuer, other than an investment company, will be
considered a small entity if it has net assets of $5 million or less as
of the end of its most recent fiscal year, and the issuer's offering
does not exceed $5 million.\509\ RILA issuers are not investment
companies and based on a review of EDGAR filings of existing RILA
issuers, we do not expect any RILA issuers will be treated as small
entities. The analysis is different for existing N-4 filers (i.e.,
variable annuity issuers), as the insurance company separate accounts
registering variable annuities are deemed to be investment companies.
Generally, for purposes of the Investment Company Act and the
Regulatory Flexibility Act, an investment company is a small entity if,
together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of
the end of its most recent fiscal year.\510\ Because State law
generally treats separate account assets as the property of the
sponsoring insurance company, rule 0-10 aggregates each separate
account's assets with the assets of the sponsoring insurance company,
together with assets held in other sponsored separate accounts.\511\ As
a result, the Commission expects few, if any, separate account to be
treated as small entities.
---------------------------------------------------------------------------
\509\ 17 CFR 230.157 (defining ``small business'' or ``small
organization'' under the Securities Act for purposes of the
Regulatory Flexibility Act); 15 U.S.C 77c(b)(1) (defining ``small
entity'' to mean ``small business,'' ``small organization,'' or
``small governmental jurisdiction'').
\510\ 17 CFR 270.0-10(a).
\511\ 17 CFR 270.0-10(b).
---------------------------------------------------------------------------
For this reason, we believe that the proposed amendments would not,
if adopted, have a significant economic impact on a substantial number
of small entities.
The Commission encourages written comments on the certification. We
solicit comment as to whether the proposed form and rule amendments
could have an effect on small entities that has not been considered. We
ask that commenters describe the nature of any impact on small entities
and provide empirical data to support the extent of the impact.
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), the Commission must advise OMB whether a
proposed regulation constitutes a 184 ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results in or is
likely to result in:
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
Statutory Authority
The amendments contained in this release are being proposed under
the authority set forth in the Securities Act, particularly sections 6,
7, 8, 10, 19, and 28 thereof [15 U.S.C. 77a et seq.]; the Exchange Act,
particularly sections 3, 4, 10, 12, 13, 14, 15, 17, 23, 35A, and 36
thereof [15 U.S.C. 78a et seq.]; the Investment Company Act,
particularly, Sections 8, 30, and 38 thereof, and the
[[Page 71174]]
RILA Act, particularly section 101 thereof [Pub. L. 117-328, div. AA,
title I, 136 Stat. 4459 (2022)].
List of Subjects
17 CFR Part 230
Advertising, Confidential business information, Investment
companies, Reporting and recordkeeping requirements, Securities.
17 CFR Part 232
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Form Amendments
For reasons set forth in the preamble, we are proposing to amend
title 17, chapter II of the Code of Federal Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48
Stat. 78, 79, 81, and 85, as amended (15 U.S.C. 77f, 77h, 77j, 77s).
Sec. 230.457 also issued under secs. 6 and 7, 15 U.S.C. 77f and
77g.
* * * * *
0
2. Revise Sec. 230.156 to read as follows:
Sec. 230.156 Investment company and registered index-linked annuity
sales literature.
(a) Under the Federal securities laws, including section 17(a) of
the Securities Act of 1933 (15 U.S.C. 77q(a)) and section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and Sec. 240.10b-5
of this chapter (Rule 10b-5) thereunder, it is unlawful for any person,
directly or indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, to use sales literature which is
materially misleading in connection with the offer or sale of
registered index-linked annuity (as defined in Sec. 230.405 (Rule
405)) securities or securities issued by an investment company. Under
these provisions, sales literature is materially misleading if it:
(1) Contains an untrue statement of a material fact; or
(2) Omits to state a material fact necessary in order to make a
statement made, in the light of the circumstances of its use, not
misleading.
(b) Whether or not a particular description, representation,
illustration, or other statement involving a material fact is
misleading depends on evaluation of the context in which it is made. In
considering whether a particular statement involving a material fact is
or might be misleading, weight should be given to all pertinent
factors, including, but not limited to, those listed below.
(1) A statement could be misleading because of:
(i) Other statements being made in connection with the offer of
sale or sale of the securities in question;
(ii) The absence of explanations, qualifications, limitations or
other statements necessary or appropriate to make such statement not
misleading; or
(iii) General economic or financial conditions or circumstances.
(2) Representations about past or future investment performance
could be misleading because of statements or omissions made involving a
material fact, including situations where:
(i) Portrayals of past income, gain, or growth of assets convey an
impression of the net investment results achieved by an actual or
hypothetical investment which would not be justified under the
circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading; and
(ii) Representations, whether express or implied, about future
investment performance, including:
(A) Representations, as to security of capital, possible future
gains or income, or expenses associated with an investment;
(B) Representations implying that future gains or income may be
inferred from or predicted based on past investment performance; or
(C) Portrayals of past performance, made in a manner which would
imply that gains or income realized in the past would be repeated in
the future.
(3) A statement involving a material fact about the characteristics
or attributes of an investment company or registered index-linked
annuity could be misleading because of:
(i) Statements about possible benefits connected with or resulting
from services to be provided or methods of operation which do not give
equal prominence to discussion of any risks or limitations associated
therewith;
(ii) Exaggerated or unsubstantiated claims about management skill
or techniques, characteristics of the investment company or registered
index-linked annuity or an investment in securities issued by such
company, services, security of investment or funds, effects of
government supervision, or other attributes; and
(iii) Unwarranted or incompletely explained comparisons to other
investment vehicles or to indexes.
(4) Representations about the fees or expenses associated with an
investment in the fund or registered index-linked annuity could be
misleading because of statements or omissions made involving a material
fact, including situations where portrayals of the fees and expenses
associated with an investment in the fund or registered index-linked
annuity omit explanations, qualifications, limitations, or other
statements necessary or appropriate to make the portrayals not
misleading.
(c) For purposes of this section, the term sales literature shall
be deemed to include any communication (whether in writing, by radio,
or by television) used by any person to offer to sell or induce the
sale of securities of any investment company or registered index-linked
annuity. Communications between issuers, underwriters and dealers are
included in this definition of sales literature if such communications,
or the information contained therein, can be reasonably expected to be
communicated to prospective investors in the offer or sale of
securities or are designed to be employed in either written or oral
form in the offer or sale of securities.
(d) Nothing in this section may be construed to prevent a business
development company or a registered closed-end investment company from
qualifying for an exemption under Sec. 230.168 or Sec. 230.169.
0
3. Amend Sec. 230.172 by revising paragraph (d) to read as follows:
Sec. 230.172 Delivery of prospectuses.
* * * * *
(d) Exclusions. This section shall not apply to any:
(1) Offering of any investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), other than a
registered closed-end investment company;
(2) A business combination transaction as defined in Sec.
230.165(f)(1);
(3) Offering registered on Form S-8 (Sec. 239.16b of this
chapter); or
[[Page 71175]]
(4) Offering of any registered index-linked annuity (as defined in
Sec. 230.405 (Rule 405)) securities.
0
4. Amend Sec. 230.405 by adding in alphabetical order definitions for
``Form available solely to investment companies registered under the
Investment Company Act of 1940'' and ``Registered index-linked
annuity'' to read as follows:
Sec. 230.405 Definitions of terms.
* * * * *
Form available solely to investment companies registered under the
Investment Company Act of 1940. A form available solely to investment
companies registered under the Investment Company Act of 1940 includes
the form used to register the offering of securities of a registered
index-linked annuity for purposes of the Securities Act of 1933.
* * * * *
Registered index-linked annuity. The term registered index-linked
annuity means an annuity or an option available under an annuity:
(1) That is deemed a security;
(2) That is offered or sold in a registered offering;
(3) That is issued by an insurance company that is the subject to
the supervision of either the insurance commissioner or bank
commissioner of any State or any agency or officer performing like
functions as such commissioner;
(4) That is not issued by an investment company; and
(5) Whose value, either during the accumulation period or after
annuitization or both, will earn positive or negative interest based,
in part, on the performance of any index, rate, or benchmark.
* * * * *
0
5. Amend Sec. 230.415 by revising paragraph (b) to read as follows:
Sec. 230.415 Delayed or continuous offering and sale of securities.
* * * * *
(b) This section shall not apply to any registration statement
pertaining to a registered index-linked annuity (as defined in Sec.
230.405 (Rule 405)), securities issued by a face-amount certificate
company, or redeemable securities issued by an open-end management
company or unit investment trust under the Investment Company Act of
1940 or any registration statement filed by any foreign government or
political subdivision thereof.
0
6. Amend Sec. 230.424 by revising paragraph (f) to read as follows:
Sec. 230.424 Filing of prospectuses, number of copies.
* * * * *
(f) This section shall not apply with respect to prospectuses of an
investment company registered under the Investment Company Act of 1940
(other than a registered closed-end investment company) or prospectuses
that pertain to a registered index-linked annuity (as defined in Sec.
230.405 (Rule 405)). References to ``form of prospectus'' in paragraphs
(a), (b), and (c) of this section shall be deemed also to refer to the
form of Statement of Additional Information.
* * * * *
0
7. Amend Sec. 230.456 by adding paragraph (e) to read as follows:
Sec. 230.456 Date of filing; timing of fee payment.
* * * * *
(e)(1) Notwithstanding paragraph (a) of this section, where a
registration statement relates to an offering of registered index-
linked annuity (as defined in Sec. 230.405 (Rule 405)) securities, an
issuer shall be deemed to register an offering of an indeterminate
amount of such securities and shall, not later than 90 days after the
end of any fiscal year during which it has publicly offered such
securities, pay a registration fee to the Commission calculated in
accordance with Sec. 230.457(u) (Rule 457(u)) and file Form 24F-2
(referenced in 17 CFR 274.24) with the Commission.
Instruction 1 to paragraph (e)(1): To determine the date on which
the registration fee must be paid, the first day of the 90-day period
is the first calendar day of the fiscal year following the fiscal year
for which the registration fee is to be paid. If the last day of the
90-day period falls on a Saturday, Sunday, or Federal holiday, the
registration fee is due on the first business day thereafter.
(2) When registering an offering of an indeterminate amount of
registered index-linked annuity securities pursuant to paragraph (e)(1)
of this section, the securities sold will be considered registered, for
purposes of section 6(a) of the Act, if the registration fee has been
paid and the issuer has filed a Form 24F-2 filing pursuant to paragraph
(e)(1) of this section not later than the end of the 90-day period.
(3) A registration statement filed in accordance with the
registration fee payment provisions of paragraph (e)(1) of this section
will be considered filed as to the securities identified in the
registration statement for purposes of this section and section 5 of
the Act when it is received by the Commission, if it complies with all
other requirements under the Act, including this part.
(4) For purposes of this section, if an issuer ceases operations,
the date the issuer ceases operations will be deemed to be the end of
its fiscal year. In the case of a liquidation, merger, or sale of all
or substantially all of the assets (``merger'') of the issuer, the
issuer will be deemed to have ceased operations for the purposes of
this section on the date the merger is consummated; provided, however,
that in the case of a merger of an issuer or a series of an issuer
(``Predecessor'') with another issuer or a series of an issuer
(``Successor''), the Predecessor will not be deemed to have ceased
operations and the Successor will assume the obligations, fees, and
redemption credits of the Predecessor incurred pursuant to this section
if the Successor:
(i) Had no assets or liabilities, other than nominal assets or
liabilities, and no operating history immediately prior to the merger;
(ii) Acquired substantially all of the assets and assumed
substantially all of the liabilities and obligations of the
Predecessor; and
(iii) The merger is not designed to result in the Predecessor
merging with, or substantially all of its assets being acquired by, an
issuer (or a series of an issuer) that would not meet the conditions of
paragraph (e)(4)(i) of this section.
(5) An issuer paying the fee required by paragraph (e)(1) of this
section or any portion thereof more than 90 days after the end of the
fiscal year of the issuer shall pay to the Commission interest on
unpaid amounts, calculated based on the interest rate in effect at the
time of the interest payment by reference to the ``current value of
funds rate'' on the Treasury Department's Bureau of Fiscal Service
internet site at https://fiscal.treasury.gov/, or by calling (202) 874-
6995, and using the following formula: I = (X) (Y) (Z/365), where: I =
Amount of interest due; X = Amount of registration fee due; Y =
Applicable interest rate, expressed as a fraction; Z = Number of days
by which the registration fee payment is late. The payment of interest
pursuant to this paragraph (e)(5) shall not preclude the Commission
from bringing an action to enforce the requirements of this paragraph
(e).
(6) An immaterial or unintentional failure to comply with a
requirement of this paragraph (e) will not result in a violation of
section 6(a) of the Act (15 U.S.C. 77f(a)), so long as:
[[Page 71176]]
(i) A good faith and reasonable effort was made to comply with the
requirement; and
(ii) In the case of a late payment of a registration fee, the
issuer pays the registration fee and any interest due thereon as soon
as practicable after discovery of the failure to pay the registration
fee.
0
8. Amend Sec. 230.457 by revising paragraph (u) to read as follows:
Sec. 230.457 Computation of fee.
* * * * *
(u) Where an issuer elects or is required to register an offering
of an indeterminate amount of exchange-traded vehicle securities in
accordance with Sec. 230.456(d) (Rule 456(d)) or registered index-
linked annuity securities (as defined in Sec. 230.405 (Rule 405)) in
accordance with Sec. 230.456(e) (Rule 456(e)), the registration fee is
to be calculated in the following manner:
(1) Determine the aggregate sale price of such securities sold
during the fiscal year.
(2) Determine the sum of:
(i) The aggregate redemption or repurchase price of such securities
redeemed or repurchased during the fiscal year; and
(ii) The aggregate redemption or repurchase price of such
securities redeemed or repurchased during a prior fiscal year that were
not used previously to reduce registration fees payable to the
Commission, if the prior fiscal year ended no earlier than August 1,
2021 in the case of exchange traded vehicle securities, or [EFFECTIVE
DATE OF THE FINAL RULE] in the case of registered index-linked annuity
securities.
(3) Subtract the amount in paragraph (u)(2) of this section from
the amount in paragraph (u)(1) of this section. If the resulting amount
is positive, the amount is the net sales amount. If the resulting
amount is negative, it is the amount of redemption credits available
for use in future years to offset sales.
(4) The registration fee is calculated by multiplying the net sales
amount by the fee payment rate in effect on the date of the fee
payment. If the issuer determines that it had net redemptions or
repurchases for the fiscal year, no registration fee is due.
0
9. Amend Sec. 230.485 by revising the section heading and paragraphs
(a)(1) and (b) introductory text to read as follows:
Sec. 230.485 Effective date of post-effective amendments filed by
certain registered investment companies or issuers offering registered
index-linked annuities.
(a) * * *
(1) Except as otherwise provided in this section, a post-effective
amendment to a registration statement filed by a registered open-end
management investment company, unit investment trust or, separate
account as defined in section 2(a)(37) of the Investment Company Act of
1940 [15 U.S.C. 80a-2(a)(37)] or to register an offering of a
registered index-linked annuity securities (as defined in Sec. 230.405
(Rule 405)) shall become effective on the sixtieth day after the filing
thereof, or a later date designated by the registrant on the facing
sheet of the amendment, which date shall be no later than eighty days
after the date on which the amendment is filed.
* * * * *
(b) Immediate effectiveness. Except as otherwise provided in this
section, a post-effective amendment to a registration statement filed
by a registered open-end management investment company, unit investment
trust or separate account as defined in section 2(a)(37) of the
Investment Company Act of 1940 [15 U.S.C. 80a-2(a)(37)] or to register
an offering of a registered index-linked annuity securities shall
become effective on the date upon which it is filed with the
Commission, or a later date designated by the registrant on the facing
sheet of the amendment, which date shall be not later than thirty days
after the date on which the amendment is filed, except that a post-
effective amendment including a designation of a new effective date
pursuant to paragraph (b)(1)(iii) of this section shall become
effective on the new effective date designated therein, Provided, that
the following conditions are met:
* * * * *
0
10. Amend Sec. 230.497 by revising the section heading and paragraphs
(c) and (e) to read as follows:
Sec. 230.497 Filing of investment company or registered index-linked
annuity prospectuses--number of copies.
* * * * *
(c) For investment companies filing on Sec. Sec. 239.15A and
274.11A of this chapter (Form N-1A), Sec. Sec. 239.17a and 274.11b of
this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this chapter
(Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter (Form N-
6), or an offering of registered index-linked annuities (as defined in
Rule 405 (Sec. 230.405)) being filed on Form N-4, within five days
after the effective date of a registration statement or the
commencement of a public offering after the effective date of a
registration statement, whichever occurs later, 10 copies of each form
of prospectus and form of Statement of Additional Information used
after the effective date in connection with such offering shall be
filed with the Commission in the exact form in which it was used.
Investment companies filing on Forms N-1A, N-3, N-4, or N-6 and issuers
of registered index-linked annuities filing on Form N-4 must, if
applicable pursuant to General Instruction C.3.(g) of Form N-1A,
General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of
Form N-4, or General Instruction C.3.(h) of Form N-6, submit an
Interactive Data File (as defined in Sec. 232.11 of this chapter).
* * * * *
(e) For investment companies filing on Sec. Sec. 239.15A and
274.11A of this chapter (Form N-1A), Sec. Sec. 239.17a and 274.11b of
this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this chapter
(Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter (Form N-
6), or an offering of registered index-linked annuities being filed on
Form N-4, after the effective date of a registration statement, no
prospectus that purports to comply with Section 10 of the Act (15
U.S.C. 77j) or Statement of Additional Information that varies from any
form of prospectus or form of Statement of Additional Information filed
pursuant to paragraph (c) of this section shall be used until five
copies thereof have been filed with, or mailed for filing to the
Commission. Investment companies filing on Forms N-1A, N-3, N-4, or N-6
and issuers of registered index-linked annuities filing on Form N-4
must, if applicable pursuant to General Instruction C.3.(g) of Form N-
1A, General Instruction C.3.(h) of Form N-3, General Instruction
C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6, submit
an Interactive Data File (as defined in Sec. 232.11 of this chapter).
* * * * *
0
11. Revise Sec. 230.498A to read as follows:
Sec. 230.498A Summary Prospectuses for separate accounts offering
variable annuity and variable life insurance contracts, and contracts
offering registered index-linked options.
(a) Definitions. For purposes of this section:
Class means a class of a Contract that varies principally with
respect to distribution-related fees and expenses.
Contract means a Variable Annuity Contract, a Variable Life
Insurance Contract, or a RILA Contract as defined in this section,
respectively, as well as any Variable Annuity Contract or RILA Contract
that offers a combination of
[[Page 71177]]
Index-Linked Options, Variable Options, and/or Fixed Options.
Fixed Option means an Investment Option under a Contract pursuant
to which the value of the Contract (for a Form N-3 or Form N-4
Registrant, either during an accumulation period or after
annuitization, or both) will earn interest at a rate specified by the
Company, subject to a minimum guaranteed rate under the Contract.
Index-Linked Option means an Investment Option offered under a
Contract, pursuant to which the value of the Contract, either during an
accumulation period or after annuitization, or both, will earn positive
or negative interest based, in part, on the performance of a specified
index, rate, or benchmark (such as a registered exchange-traded fund
that tracks an index).
Initial Summary Prospectus means the initial summary prospectus
described in paragraph (b) of this section.
Insurance Company means the insurance company issuing the Contract,
which company is subject to State supervision. The Insurance Company
may also be the depositor or sponsor of any Registered Separate Account
in which the Contract participates.
Investment Option means a Fixed Option, an Index-Linked Option,
and/or a Variable Option, as applicable.
Portfolio Company means any company in which a Registrant on Form
N-4 or Form N-6 invests and which may be selected as a Variable Option
by the investor.
Portfolio Company Prospectus means the Statutory Prospectus of a
Portfolio Company and a summary prospectus of a Portfolio Company
permitted by Sec. 230.498.
Registered Separate Account means a separate account (as defined in
section 2(a)(14) of the Securities Act (15 U.S.C. 77b(a)(14)) that has
an effective registration statement on Sec. Sec. 239.17a and 274.11b
of this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this
chapter (Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter
(Form N-6) and that has a current prospectus that satisfies the
requirements of section 10(a) of the Act (15 U.S.C. 77j(a)).
Registrant means, as applicable, a Registered Separate Account or
the Insurance Company.
RILA Contract means any accumulation contract or annuity contract,
any portion thereof, or any unit of interest or participation therein,
issued by an Insurance Company, that offers Index-Linked Options.
Statement of Additional Information means the statement of
additional information required by Part B of Form N-1A, Form N-3, Form
N-4, or Form N-6.
Statutory Prospectus means a prospectus that satisfies the
requirements of section 10(a) of the Act (15 U.S.C. 77j(a)).
Summary Prospectus refers to both the Initial Summary Prospectus
and the Updating Summary Prospectus.
Updating Summary Prospectus means the updating summary prospectus
described in paragraph (c) of this section.
Variable Annuity Contract means any accumulation contract or
annuity contract, any portion thereof, or any unit of interest or
participation therein, issued by an Insurance Company, pursuant to
which the value of the contract, either during an accumulation period
or after annuitization, or both, varies according to the investment
experience of a Portfolio Company.
Variable Life Insurance Contract means a life insurance contract,
issued by an Insurance Company, that provides for death benefits and
cash values that may vary with the investment performance of any
separate account.
Variable Option means:
(1) In the context of a Registrant on Form N-4 or Form N-6, an
Investment Option under any Contract pursuant to which the value of the
Contract (for a Form N-4 Registrant, either during an accumulation
period or after annuitization, or both) varies according to the
investment experience of a Portfolio Company;
(2) In the context of a Registrant on Form N-3, any portfolio of
investments in which a Registrant on Form N-3 invests and which may be
selected as an option by the investor.
(b) General Requirements for Initial Summary Prospectus. An Initial
Summary Prospectus that complies with this paragraph (b) will be deemed
to be a prospectus that is authorized under section 10(b) of the Act
(15 U.S.C. 77j(b)) and section 24(g) of the Investment Company Act (15
U.S.C. 80a-24(g)) for the purposes of section 5(b)(1) of the Act (15
U.S.C. 77e(b)(1)).
(1) Scope of Initial Summary Prospectus. An Initial Summary
Prospectus may only describe a single Contract (but may describe more
than one Class of the Contract) currently offered by the Registrant
under the Statutory Prospectus to which the Initial Summary Prospectus
relates.
(2) Cover Page or Beginning of Initial Summary Prospectus. Include
on the front cover page or the beginning of the Initial Summary
Prospectus:
(i) The Insurance Company's name;
(ii) The name of the Contract, and the Class or Classes if any, to
which the Initial Summary Prospectus relates;
(iii) A statement identifying the document as a ``Summary
Prospectus for New Investors'';
(iv) The approximate date of the first use of the Initial Summary
Prospectus;
(v) The following legend, which for Initial Summary Prospectuses of
Contracts registered on Form N-4 would be included along with the
statements described in Item 1(a)(6) through (8) of Form N-4:
This Summary Prospectus summarizes key features of the [Contract].
Before you invest, you should also review the prospectus for the
[Contract], which contains more information about the [Contract's]
features, benefits, and risks. You can find this document and other
information about the [Contract] online at [__]. You can also obtain
this information at no cost by calling [__] or by sending an email
request to [__].
You may cancel your [Contract] within 10 days of receiving it
without paying fees or penalties. In some states, this cancellation
period may be longer. Upon cancellation, you will receive either a full
refund of the amount you paid with your application or your total
contract value. You should review the prospectus, or consult with your
investment professional, for additional information about the specific
cancellation terms that apply.
Additional information about certain investment products, including
[variable annuities/registered index-linked annuities/variable life
insurance contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.
(A) A Registrant may modify the legend so long as the modified
legend contains comparable information.
(B) The legend must provide a website address, other than the
address of the Commission's electronic filing system; toll-free
telephone number; and email address that investors can use to obtain
the Statutory Prospectus and other materials, request other information
about the Contract, and make investor inquiries. The website address
must be specific enough to lead investors directly to the Statutory
Prospectus and other materials that are required to be accessible under
paragraph (h)(1) of this section, rather than to the home page or other
section of the website on which the materials are posted. The website
could be a central site with prominent links to each document. The
legend may indicate, if applicable, that the Statutory Prospectus and
other information are
[[Page 71178]]
available from a financial intermediary (such as a broker-dealer)
through which the Contract may be purchased or sold. If a Registered
Separate Account that has an effective registration statement on Form
N-3 relies on Sec. 270.30e-3 of this chapter to transmit a report, the
legend must also include the website address required by Sec. 270.30e-
3(c)(1)(iii) of this chapter if different from the website address
required by this paragraph (b)(2)(v)(B).
(C) The paragraph of the legend regarding cancellation of the
Contract may be omitted if not applicable. If this paragraph is
included in the legend, the paragraph must be presented in a manner
reasonably calculated to draw investor attention to that paragraph.
(D) The legend may include instructions describing how a
shareholder can elect to receive prospectuses or other documents and
communications by electronic delivery.
(3) Back Cover Page or Last Page of Initial Summary Prospectus.
(i) If a Registrant incorporates any information by reference into
the Summary Prospectus, include a legend identifying the type of
document (e.g., Statutory Prospectus) from which the information is
incorporated and the date of the document. If a Registrant incorporates
by reference a part of a document, the legend must clearly identify the
part by page, paragraph, caption, or otherwise. If information is
incorporated from a source other than the Statutory Prospectus, the
legend must explain that the incorporated information may be obtained,
free of charge, in the same manner as the Statutory Prospectus.
(ii) Include on the bottom of the back cover page or the last page
of the Initial Summary Prospectus the EDGAR contract identifier for the
contract in type size smaller than that generally used in the
prospectus (e.g., 8-point modern type).
(4) Table of Contents. An Initial Summary Prospectus may include a
table of contents meeting the requirements of Sec. 230.481(c).
(5) Contents of Initial Summary Prospectus. An Initial Summary
Prospectus must contain the information required by this paragraph
(b)(5) with respect to the applicable registration form, and only the
information required by this paragraph (b)(5), in the order provided in
paragraphs (b)(5)(i) through (ix) of this section, except that, for an
Initial Summary Prospectus related to a Contract registered on Form N-
4, provide the information provided in paragraph (b)(5)(ii) before the
information provided by paragraph (b)(5)(i).
(i) Under the heading ``Important Information You Should Consider
About the [Contract],'' the information required by Item 2 of Form N-3,
Item 3 of Form N-4, or Item 2 of Form N-6.
(ii) Under the heading ``Overview of the [Contract],'' the
information required by Item 3 of Form N-3, Item 2 of Form N-4, or Item
3 of Form N-6.
(iii) Under the heading ``Standard Death Benefits,'' the
information required by Item 10(a) of Form N-6.
(iv) Under the heading ``Benefits Available Under the [Contract],''
the information required by Item 11(a) of Form N-3 or Item 10(a) of
Form N-4. Under the heading ``Other Benefits Available Under the
[Contract],'' the information required by Item 11(a) of Form N-6.
(v) Under the heading ``Buying the [Contract],'' the information
required by Item 12(a) of Form N-3, Item 11(a) of Form N-4, or Item
9(a) through (c) of Form N-6.
(vi) Under the heading ``How Your [Contract] Can Lapse,'' the
information required by Item 14(a) through (c) of Form N-6.
(vii) Under the heading ``Making Withdrawals: Accessing the Money
in Your [Contract],'' the information required by Item 13(a) of Form N-
3, Item 12(a) of Form N-4, or Item 12(a) of Form N-6.
(viii) Under the heading ``Additional Information About Fees,'' the
information required by Item 4 of Form N-3, Item 4 of Form N-4, or Item
4 of Form N-6.
(ix) Under the heading ``Appendix: [Portfolio Companies]
[Investment Options/Portfolio Companies] Available Under the
Contract,'' include as an appendix the information required by Item 18
of Form N-3, Item 17 of Form N-4, or Item 18 of Form N-6.
Alternatively, an Initial Summary Prospectus for a Contract registered
on Form N-3 may include the information required by Item 19 of Form N-
3, under the heading ``Additional Information About Investment Options
Available Under the Contract.''
(c) General Requirements for Updating Summary Prospectus. An
Updating Summary Prospectus that complies with this paragraph (c) will
be deemed to be a prospectus that is authorized under section 10(b) of
the Act (15 U.S.C. 77j(b)) and section 24(g) of the Investment Company
Act (15 U.S.C. 80a-24(g)) for the purposes of section 5(b)(1) of the
Act (15 U.S.C. 77e(b)(1)).
(1) Use of Updating Summary Prospectus. A Registrant may only use
an Updating Summary Prospectus if the Registrant uses an Initial
Summary Prospectus for each currently offered Contract described under
the Statutory Prospectus to which the Updating Summary Prospectus
relates.
(2) Scope of Updating Summary Prospectus. An Updating Summary
Prospectus may describe one or more Contracts (and more than one Class)
described under the Statutory Prospectus to which the Updating Summary
Prospectus relates.
(3) Cover Page or Beginning of Updating Summary Prospectus. Include
on the front cover page or at the beginning of the Updating Summary
Prospectus:
(i) The Insurance Company's name;
(ii) The name of the Contract(s) and the Class or Classes, if any,
to which the Updating Summary Prospectus relates;
(iii) A statement identifying the document as an ``Updating Summary
Prospectus'';
(iv) The approximate date of the first use of the Updating Summary
Prospectus; and
(v) The following legend, which must meet the requirements of
paragraphs (b)(2)(v)(A), (B), and (D) of this section, as applicable,
and for Updating Summary Prospectuses of Contracts registered on Form
N-4 would be included along with the statements described in Item
1(a)(6) through (8) of Form N-4:
The prospectus for the [Contract] contains more information about
the [Contract], including its features, benefits, and risks. You can
find the current prospectus and other information about the [Contract]
online at [__]. You can also obtain this information at no cost by
calling [__] or by sending an email request to [__].
Additional information about certain investment products, including
[variable annuities/registered index-linked annuities/variable life
insurance contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.
(4) Back Cover Page or Last Page of Updating Summary Prospectus.
Include on the bottom of the back cover page or the last page of the
Updating Summary Prospectus:
(i) The legend required by paragraph (b)(3)(i) of this section; and
(ii) The EDGAR contract identifier(s) for each contract in type
size smaller than that generally used in the prospectus (e.g., 8-point
modern type).
(5) Table of Contents. An Updating Summary Prospectus may include a
table of contents meeting the requirements of Sec. 230.481(c).
[[Page 71179]]
(6) Contents of Updating Summary Prospectus. An Updating Summary
Prospectus must contain the information required by this paragraph
(c)(6) with respect to the applicable registration form, in the order
provided in paragraphs (c)(6)(i) through (iv) of this section.
(i) If any changes have been made with respect to the Contract
after the date of the most recent Updating Summary Prospectus or
Statutory Prospectus that was sent or given to investors with respect
to the availability of Investment Options (for Registrants on Form N-3)
or Portfolio Companies (for Registrants on Forms N-4 and N-6) under the
Contract (including, for RILA Contracts, a change to any of the
features of the Index-Linked Options disclosed in the table that Item
17(b) of Form N-4 requires), or the disclosure that the Registrant
included in response to Item 2 (Key Information), Item 3 (Overview of
the Contract), Item 4 (Fee Table), Item 11 (Benefits Available Under
the Contract), Item 12 (Purchases and Contract Value), or Item 13
(Surrenders and Withdrawals) of Form N-3; Item 2 (Overview of the
Contract), Item 3 (Key Information), Item 4 (Fee Table), Item 10
(Benefits Available Under the Contract), Item 11 (Purchases and
Contract Value), or Item 12 (Surrenders and Withdrawals) of Form N-4;
and Item 2 (Key Information), Item 3 (Overview of the Contract), Item 4
(Fee Table), Item 9 (Premiums), Item 10 (Standard Death Benefits), Item
11 (Other Benefits Available Under the Contract), Item 12 (Surrenders
and Withdrawals), or Item 14 (Lapse and Reinstatement) of Form N-6,
include the following as applicable, under the heading ``Updated
Information About Your [Contract]'':
(A) The following legend: ``The information in this Updating
Summary Prospectus is a summary of certain [Contract] features that
have changed since the Updating Summary Prospectus dated [date]. This
may not reflect all of the changes that have occurred since you entered
into your [Contract].''
(B) As applicable, provide a concise description of each change
specified in paragraph (c)(6)(i) of this section. Provide enough detail
to allow investors to understand the change and how it will affect
investors, including indicating whether the change only applies to
certain Contracts described in the Updating Summary Prospectus.
(ii) In addition to the changes specified in paragraph (c)(6)(i) of
this section, a Registrant may provide a concise description of any
other information relevant to the Contract within the time period that
paragraph (c)(6)(i) of this section specifies, under the heading
``Updated Information About Your [Contract].'' Any additional
information included pursuant to this paragraph (c)(6)(ii) should not,
by its nature, quantity, or manner of presentation, obscure or impede
understanding of the information that paragraph (c)(6)(i) of this
section requires.
(iii) Under the heading ``Important Information You Should Consider
About the [Contract],'' provide the information required by Item 2 of
Form N-3, Item 3 of Form N-4, or Item 2 of Form N-6.
(iv) Under the heading ``Appendix: [Portfolio Companies/Investment
Options/Portfolio Companies] Available Under the [Contract],'' include
as an appendix the information required by Item 18 of Form N-3, Item 17
of Form N-4, or Item 18 of Form N-6. Alternatively, an Updating Summary
Prospectus for a Contract registered on Form N-3 may include, under the
heading ``Additional Information About [Investment Options] Available
Under the [Contract],'' the information required by Item 19 of Form N-
3.
(d) Incorporation by Reference into a Summary Prospectus. (1)
Except as provided by paragraph (d)(2) of this section, information may
not be incorporated by reference into a Summary Prospectus. Information
that is incorporated by reference into a Summary Prospectus in
accordance with paragraph (d)(2) of this section need not be sent or
given with the Summary Prospectus.
(2) A Registrant may incorporate by reference into a Summary
Prospectus any or all of the information contained in the Registrant's
Statutory Prospectus and Statement of Additional Information, and any
information from the Registrant's reports under Sec. 270.30e-1 of this
chapter that the Registrant has incorporated by reference into the
Registrant's Statutory Prospectus, provided that:
(i) The conditions of paragraphs (b)(2)(v)(B), (c)(3)(v), and (h)
of this section are met;
(ii) A Registrant may not incorporate by reference into a Summary
Prospectus information that paragraphs (b) and (c) of this section
require to be included in an Initial Summary Prospectus or Updating
Summary Prospectus, respectively; and
(iii) Information that is permitted to be incorporated by reference
into the Summary Prospectus may be incorporated by reference into the
Summary Prospectus only by reference to the specific document that
contains the information, not by reference to another document that
incorporates such information by reference.
(3) For purposes of Sec. 230.159, information is conveyed to a
person not later than the time that a Summary Prospectus is received by
the person if the information is incorporated by reference into the
Summary Prospectus in accordance with paragraph (d)(2) of this section.
(e) Terms used in the Summary Prospectus. Define special terms used
in the Initial Summary Prospectus and Updating Summary Prospectus using
any presentation style that clearly conveys their meaning to investors,
such as the use of a glossary or list of definitions.
(f) Transfer of the Contract Security. Any obligation under section
5(b)(2) of the Act (15 U.S.C. 77e(b)(2)) to have a Statutory Prospectus
precede or accompany the carrying or delivery of a Contract security in
an offering registered on Form N-3, Form N-4, or Form N-6 is satisfied
if:
(1) A Summary Prospectus is sent or given no later than the time of
the carrying or delivery of the Contract security (an Initial Summary
Prospectus in the case of a purchase of a new Contract, or an Updating
Summary Prospectus in the case of additional purchase payments in an
existing Contract);
(2) The Summary Prospectus is not bound together with any materials
except Portfolio Company Prospectuses for Portfolio Companies available
as Variable Options under the Contract, provided that:
(i) All of the Portfolio Companies are available as investment
options to the person to whom such documents are sent or given; and
(ii) A table of contents identifying each Portfolio Company
Prospectus that is bound together, and the page number on which each
document is found, is included at the beginning or immediately
following a cover page of the bound materials.
(3) The Summary Prospectus that is sent or given satisfies the
requirements of paragraph (b) or (c) of this section, as applicable, at
the time of the carrying or delivery of the Contract security; and
(4) The conditions set forth in paragraph (h) of this section are
satisfied.
(g) Sending Communications. A communication relating to an offering
registered on Form N-3, Form N-4, or Form N-6 sent or given after the
effective date of a Contract's registration statement (other than a
prospectus permitted or required under section 10 of the Act) shall not
be deemed a
[[Page 71180]]
prospectus under section 2(a)(10) of the Act (15 U.S.C. 77b(a)(10)) if:
(1) It is proved that prior to or at the same time with such
communication a Summary Prospectus was sent or given to the person to
whom the communication was made;
(2) The Summary Prospectus is not bound together with any
materials, except as permitted by paragraph (f)(2) of this section;
(3) The Summary Prospectus that was sent or given satisfies the
requirements of paragraph (b) or (c) of this section, as applicable, at
the time of such communication; and
(4) The conditions set forth in paragraph (h) of this section are
satisfied.
(h) Availability of the Statutory Prospectus and Certain Other
Documents.
(1) The current Initial Summary Prospectus, Updating Summary
Prospectus, Statutory Prospectus, Statement of Additional Information,
and in the case of a Registrant on Form N-3, the Registrant's most
recent annual and semi-annual reports to shareholders under Sec.
270.30e-1 of this chapter, are publicly accessible, free of charge, at
the website address specified on the cover page or beginning of the
Summary Prospectuses, on or before the time that the Summary
Prospectuses are sent or given and current versions of those documents
remain on the website through the date that is at least 90 days after:
(i) In the case of reliance on paragraph (f) of this section, the
date that the Contract security is carried or delivered; or
(ii) In the case of reliance on paragraph (g) of this section, the
date that the communication is sent or given.
(2) The materials that are accessible in accordance with paragraph
(h)(1) of this section must be presented on the website in a format, or
formats, that:
(i) Are human-readable and capable of being printed on paper in
human-readable format;
(ii) Permit persons accessing the Statutory Prospectus or Statement
of Additional Information for the Contract to move directly back and
forth between each section heading in a table of contents of such
document and the section of the document referenced in that section
heading; provided that, in the case of the Statutory Prospectus, the
table of contents is either required by Sec. 230.481(c) or contains
the same section headings as the table of contents required by Sec.
230.481(c); and
(iii) Permit persons accessing a Summary Prospectus to move
directly back and forth between:
(A) Each section of the Summary Prospectus and any section of the
Statutory Prospectus and Contract Statement of Additional Information
that provides additional detail concerning that section of the Summary
Prospectus; or
(B) Links located at both the beginning and end of the Summary
Prospectus, or that remain continuously visible to persons accessing
the Summary Prospectus, and tables of contents of both the Statutory
Prospectus and the Contract Statement of Additional Information that
meet the requirements of paragraph (h)(2)(ii) of this section.
(iv) Permit persons accessing the Summary Prospectus to view the
definition of each special term used in the Summary Prospectus (as
required by paragraph (e) of this section) upon command (e.g., by
moving or ``hovering'' the computer's pointer or mouse over the term,
or selecting the term on a mobile device); or permits persons accessing
the Contract Summary Prospectus to move directly back and forth between
each special term and the corresponding entry in any glossary or list
of definitions in the Contract Summary Prospectus (as described in
paragraph (e) of this section).
(3) Persons accessing the materials specified in paragraph (h)(1)
of this section must be able to permanently retain, free of charge, an
electronic version of such materials in a format, or formats, that meet
each of the requirements of paragraphs (h)(2)(i) and (ii) of this
section.
(4) The conditions set forth in paragraphs (h)(1) through (3) of
this section shall be deemed to be met, notwithstanding the fact that
the materials specified in paragraph (h)(1) of this section are not
available for a time in the manner required by paragraphs (h)(1)
through (3) of this section, provided that:
(i) The Registrant has reasonable procedures in place to ensure
that the specified materials are available in the manner required by
paragraphs (h)(1) through (3) of this section; and
(ii) The Registrant takes prompt action to ensure that the
specified documents become available in the manner required by
paragraphs (h) through (3) of this section, as soon as practicable
following the earlier of the time at which it knows or reasonably
should have known that the documents are not available in the manner
required by paragraphs (h)(1) through (3) of this section.
(i) Other Requirements (1) Delivery upon request. If paragraph (f)
or (g) of this section is relied on with respect to a Contract, the
Registrant (or a financial intermediary through which the Contract may
be purchased) must send, at no cost to the requestor and by U.S. first
class mail or other reasonably prompt means, a paper copy of the
Contract Statutory Prospectus, Contract Statement of Additional
Information, and in the case of a Registrant on Form N-3, the
Registrant's most recent annual and semi-annual reports to shareholders
under Sec. 270.30e-1 of this chapter, to any person requesting such a
copy within three business days after receiving a request for a paper
copy. If paragraph (f) or (g) of this section is relied on with respect
to a Contract, the Registrant (or a financial intermediary through
which Contract may be purchased) must send, at no cost to the
requestor, and by email, an electronic copy of any of the documents
listed in this paragraph (i)(1) to any person requesting a copy of such
document within three business days after receiving a request for an
electronic copy. The requirement to send an electronic copy of a
document may be satisfied by sending a direct link to the online
document; provided that a current version of the document is directly
accessible through the link from the time that the email is sent
through the date that is six months after the date that the email is
sent and the email explains both how long the link will remain useable
and that, if the recipient desires to retain a copy of the document, he
or she should access and save the document.
(2) Greater prominence. If paragraph (f) or (g) of this section is
relied on with respect to a Contract, the Summary Prospectus shall be
given greater prominence than any materials that accompany the Summary
Prospectus.
(3) Convenient for reading and printing. If paragraph (f) or (g) of
this section is relied on with respect to a Contract:
(i) The materials that are accessible in accordance with paragraph
(h)(1) of this section must be presented on the website in a format, or
formats, that are convenient for both reading online and printing on
paper; and
(ii) Persons accessing the materials that are accessible in
accordance with paragraph (h)(1) of this section must be able to
permanently retain, free of charge, an electronic version of such
materials in a format, or formats, that are convenient for both reading
online and printing on paper.
(4) Website addresses. If paragraph (f) or (g) of this section is
relied on with respect to a Contract, any website address that is
included in an electronic version of the Summary Prospectus
[[Page 71181]]
must include an active hyperlink or provide another means of
facilitating access through equivalent methods or technologies that
lead directly to the relevant website address. This paragraph (i)(4)
does not apply to electronic versions of a Summary Prospectus that are
filed on the EDGAR system.
(5) Compliance with this paragraph (i) not a condition to reliance
on paragraph (f) or (g) of this section. Compliance with this paragraph
(i) is not a condition to the ability to rely on paragraph (f) or (g)
of this section with respect to a Contract, and failure to comply with
this paragraph (i) does not negate the ability to rely on paragraph (f)
or (g) of this section.
(j) Portfolio Company Prospectuses--(1) Transfer of the Portfolio
Company security. Any obligation under section 5(b)(2) of the Act to
have a Statutory Prospectus precede or accompany the carrying or
delivery of a Portfolio Company security is satisfied if, and
information contained in the documents referenced in paragraph
(j)(1)(ii) of this section is conveyed for purposes of Sec. 230.159
when:
(i) An Initial Summary Prospectus is used for each currently
offered Contract described under the related registration statement;
(ii) A summary prospectus is used for the Portfolio Company (if the
Portfolio Company is registered on Form N-1A); and
(iii) The current summary prospectus, Statutory Prospectus,
Statement of Additional Information, and most recent annual and semi-
annual reports to shareholders under Sec. 270.30e-1 of this chapter
for the Portfolio Company are publicly accessible, free of charge, at
the same website address referenced in paragraph (h)(1) of this
section, and are accessible under the conditions set forth in
paragraphs (h)(1), (h)(2)(i) and (ii), and (h)(3) and (4) of this
section, with respect to the availability of documents relating to the
Contract.
(2) Communications. Any communication relating to a Portfolio
Company (other than a prospectus permitted or required under section 10
of the Act) shall not be deemed a prospectus under section 2(a)(10) of
the Act (15 U.S.C. 77b(a)(10)) if the conditions set forth in paragraph
(j)(1) of this section are satisfied.
(3) Other requirements. The materials referenced in paragraph
(j)(1)(iii) of this section must be delivered upon request, presented,
and able to be retained under the conditions set forth in paragraphs
(i)(1) and (3) of this section. Compliance with this paragraph (j)(3)
is not a condition to the ability to rely on paragraph (j)(1) or (2) of
this section, and failure to comply with this paragraph (j)(3) does not
negate the ability to rely on paragraph (j)(1) or (2) of this section.
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
12. The general authority citation for part 232 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-11, 7201 et seq.;
and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
13. Amend Sec. 232.313 by revising paragraphs (a) and (b) to read as
follows:
Sec. 232.313 Identification of investment company type and series
and/or class (or contract).
(a) Registered investment companies, business development
companies, and offerings of registered index-linked annuities must
indicate their investment company type, based on whether the
registrant's last effective registration statement or amendment (other
than a merger/proxy filing on Form N-14 (Sec. 239.23 of this chapter)
was filed on Form N-1 (Sec. Sec. 239.15 and 274.11 of this chapter),
Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), Form N-2
(Sec. Sec. 239.14 and 274.11a-1 of this chapter), Form N-3 (Sec. Sec.
239.17A and 274.11b of this chapter), Form N-4 (Sec. Sec. 239.17b and
274.11c of this chapter), Form N-5 (Sec. Sec. 239.24 and 274.5 of this
chapter), Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
Form S-1 (Sec. 239.11 of this chapter), Form S-3 (Sec. 239.13 of this
chapter), or Form S-6 (Sec. 239.16 of this chapter) in those EDGAR
submissions identified in the EDGAR Filer Manual.
(b) Registered investment companies or offerings of registered
index-linked annuities whose last effective registration statement or
amendment (other than a merger/proxy filing on Form N-14 (Sec. 239.23
of this chapter) was filed on Form N-1A (Sec. Sec. 239.15A and 274.11A
of this chapter), Form N-3 (Sec. Sec. 239.17A and 274.11b of this
chapter), Form N-4 (Sec. Sec. 239.17b and 274.11c of this chapter), or
Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter) must, under
the procedures set forth in the EDGAR Filer Manual:
(1) Provide electronically, and keep current, information
concerning their existing and new series and/or classes (or contracts,
in the case of separate accounts), including series and/or class
(contract) name and ticker symbol, if any, and be issued series and/or
class (or contract) identification numbers;
(2) Deactivate for EDGAR purposes any series and/or class (or
contract, in the case of separate accounts) that are no longer offered,
go out of existence, or deregister following the last filing for that
series and/or class (or contract, in the case of separate accounts),
but the registrant must not deactivate the last remaining series unless
the registrant deregisters; and
(3) For those EDGAR submissions identified in the EDGAR Filer
Manual, include all series and/or class (or contract) identifiers of
each series and/or class (or contract) on behalf of which the filing is
made.
* * * * *
0
14. Amend Sec. 232.405 by revising paragraphs (a)(3)(i) introductory
text, (a)(3)(ii), (b)(1) introductory text, (b)(2) introductory text,
(b)(2)(iii), and the final sentence of Note 1 to the section to read as
follows:
Sec. 232.405 Interactive Data File Submissions.
* * * * *
(a) * * *
(3) * * *
(i) If the electronic filer is not a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, and is not within one of the categories
specified in paragraph (f)(1)(i) of this section, as partly embedded
into a filing with the remainder simultaneously submitted as an exhibit
to:
* * * * *
(ii) If the electronic filer is a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
[[Page 71182]]
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, and is not within one of the categories
specified in paragraph (f)(1)(ii) of this section, as partly embedded
into a filing with the remainder simultaneously submitted as an exhibit
to a filing that contains the disclosure this section requires to be
tagged; and
* * * * *
(b) * * *
(1) If the electronic filer is not a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, an Interactive Data File must consist of only
a complete set of information for all periods required to be presented
in the corresponding data in the Related Official Filing, no more and
no less, from all of the following categories:
* * * * *
(2) If the electronic filer is an open-end management investment
company registered under the Investment Company Act of 1940, a separate
account (as defined in Section 2(a)(14) of the Securities Act)
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a registered index-linked annuity issuer as defined in Rule 405
under the Securities Act (17 CFR 232.405), a unit investment trust as
defined in Section 4(2) of the Investment Company Act of 1940 (15
U.S.C. 80a-4), or a clearing agency that provides a central matching
service, an Interactive Data File must consist of only a complete set
of information for all periods required to be presented in the
corresponding data in the Related Official Filing, no more and no less,
from the information set forth in:
* * * * *
(iii) Items 2(b)(2), 2(d), 3, 4, 5, 6(a) (instruction), 6(c)(1),
6(d), 7(e), 10, 17, 26(c), and 31A of Sec. Sec. 239.17b and 274.11c of
this chapter (Form N-4);
* * * * *
Note 1 to Sec. 232.405: * * * For an issuer that is a management
investment company or separate account registered under the Investment
Company Act of 1940 (15 U.S.C. 80a et seq.), a registered index-linked
annuity issuer as defined in Rule 405 under the Securities Act (17 CFR
232.405), a business development company as defined in Section 2(a)(48)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), or a
unit investment trust as defined in Section 4(2) of the Investment
Company Act of 1940 (15 U.S.C. 80a-4), General Instruction C.3.(g) of
Form N-1A, General Instruction I of Form N-2, General Instruction
C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, General
Instruction C.3.(h) of Form N-6, General Instruction 2.(l) of Form N-
8B-2 (Sec. 274.12 of this chapter), General Instruction 5 of Form S-6,
and General Instruction C.4 of Form N-CSR, as applicable, specifies the
circumstances under which an Interactive Data File must be submitted.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
15. The general authority citation for part 239 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a),
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24,
80a-26, 80a-29, 80a-30, 80a-37; and sec. 71003 and sec. 84001, Pub.
L. 114-94, 129 Stat. 1321, unless otherwise noted.
* * * * *
0
16. Revise Form N-4 (referenced in Sec. Sec. 239.17b and 274.11c).
Note: Form N-4 is attached as Appendix A to this document. Form
N-4 does not appear in the Code of Federal Regulations.
0
17. Amend Form N-6 (referenced in Sec. Sec. 239.17c and 274.11d) by
revising Instruction 3 to Item 30.
Note: Form N-6 is attached as Appendix B to this document. Form
N-6 will not appear in the Code of Federal Regulations.
18. Add Sec. 239.66 to read as follows:
Sec. 239.66 Form 24F-2, annual filing of securities sold pursuant to
registration of certain investment company securities and registered
index-linked annuities.
Form 24F-2 shall be used as the annual report filed by face amount
certificate companies, open-end management companies, unit investment
trusts, and registered index-linked annuities pursuant to Sec. Sec.
230.456, Sec. 230.457, or 270.24f-2 of this chapter for reporting
securities sold during the fiscal year.
0
19. Revise Form 24F-2 (referenced in Sec. Sec. 239.66 and 274.24).
Note: Form 24F-2 is attached as Appendix C to this document.
Form 24F-2 will not appear in the Code of Federal Regulations.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
20. The authority citation for part 274 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37, unless
otherwise noted.
* * * * *
0
21. Revise Sec. 274.24 to read as follows:
Sec. 274.24 Form 24F-2, annual filing of securities sold pursuant to
registration of certain investment company securities and registered
index-linked annuities.
Form 24F-2 shall be used as the annual report filed by face amount
certificate companies, open-end management companies, unit investment
trusts, and registered index-linked annuities pursuant to Sec. Sec.
230.456, 230.457, or 270.24f-2 of this chapter for reporting securities
sold during the fiscal year.
By the Commission.
Dated: September 29, 2023.
Vanessa Countryman,
Secretary.
Note: The following appendices will not appear in the Code of
Federal Regulations.
BILLING CODE 8011-01-P
[[Page 71183]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.000
[[Page 71184]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.001
[[Page 71185]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.002
[[Page 71186]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.003
[[Page 71187]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.004
[[Page 71188]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.005
[[Page 71189]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.006
[[Page 71190]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.007
[[Page 71191]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.008
[[Page 71192]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.009
[[Page 71193]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.010
[[Page 71194]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.011
[[Page 71195]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.012
[[Page 71196]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.013
[[Page 71197]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.014
[[Page 71198]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.015
[[Page 71199]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.016
[[Page 71200]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.017
[[Page 71201]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.018
[[Page 71202]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.019
[[Page 71203]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.020
[[Page 71204]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.021
[[Page 71205]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.022
[[Page 71206]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.023
[[Page 71207]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.024
[[Page 71208]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.025
[[Page 71209]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.026
[[Page 71210]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.027
[[Page 71211]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.028
[[Page 71212]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.029
[[Page 71213]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.030
[[Page 71214]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.031
[[Page 71215]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.032
[[Page 71216]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.033
[[Page 71217]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.034
[[Page 71218]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.035
[[Page 71219]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.036
[[Page 71220]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.037
[[Page 71221]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.038
[[Page 71222]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.039
[[Page 71223]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.040
[[Page 71224]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.041
[[Page 71225]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.042
[[Page 71226]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.043
[[Page 71227]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.044
[[Page 71228]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.045
[[Page 71229]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.046
[[Page 71230]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.047
[[Page 71231]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.048
[[Page 71232]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.049
[[Page 71233]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.050
[[Page 71234]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.051
[[Page 71235]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.052
[[Page 71236]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.053
[[Page 71237]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.054
[[Page 71238]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.055
[[Page 71239]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.056
[[Page 71240]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.057
[[Page 71241]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.058
[[Page 71242]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.059
[[Page 71243]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.060
[[Page 71244]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.061
[[Page 71245]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.062
[[Page 71246]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.063
[[Page 71247]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.064
[[Page 71248]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.065
[[Page 71249]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.066
[[Page 71250]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.067
[[Page 71251]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.068
[[Page 71252]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.069
[[Page 71253]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.070
[[Page 71254]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.071
[[Page 71255]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.072
[[Page 71256]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.073
[[Page 71257]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.074
[[Page 71258]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.075
[[Page 71259]]
[GRAPHIC] [TIFF OMITTED] TP13OC23.076
[FR Doc. 2023-21986 Filed 10-12-23; 8:45 am]
BILLING CODE 8011-01-C