SEC Considers New Annuity and Life Insurance Summary Disclosures

The proposal is intended to help investors better understand these contracts' features, fees and risks, and to more easily find the information needed to make an informed investment decision.

The U.S. Securities and Exchange Commission (SEC) this week voted to propose rule changes designed to simplify disclosures for investors in variable annuities and variable life insurance contracts.

According to SEC’s announcement, the proposal is intended to help investors better understand these contracts’ features, fees and risks, and to more easily find the information needed to make an informed investment decision. In short, the proposal seeks to ease up-front disclosure requirements during the sale of these products by allowing providers to furnish clients with summary documents—similar to those used by mutual fund providers—and subsequently direct them to online or printed resources for the full mandated disclosure information.

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SEC Chairman Jay Clayton says the proposal is based in large part on the results of “many roundtables with retail investors over the last several months.” These investors have emphasized their preference for clear and concise disclosure written in plain English.

“Providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long‑term nature of these contracts and their potential complexity,” Clayton says.

What’s in the proposal?

According to Clayton, the summary documents “would be a concise, reader‑friendly summary of key facts about the contract.” More detailed information about the contract would have to be made available online, and an investor also could choose to have that information delivered in paper or electronic format at no charge.  

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

Formally, this proposed new “Rule 498A” under the Securities Act would permit the use of two distinct types of contract summary prospectuses—an “initial summary prospectus” covering variable contracts currently offered to new investors and “updating summary prospectuses” to be furnished to existing investors over time, as relevant changes occur.

The initial summary prospectus would include the following information: “An overview of the contract; a table summarizing certain key information about the contract’s fees, risks, and other important considerations; and more detailed disclosures relating to fees, purchases, withdrawals, and other contract benefits.” 

The updating summary prospectus would include “a brief description of certain changes to the contract that occurred during the previous year, as well as the key information table from the initial summary prospectus.”

The SEC notes that in certain types of variable contracts, managers allocate their investment to one or more underlying investment options—typically mutual funds. With this fact in mind, the proposal requires that “certain key information about these funds be provided in both the initial summary prospectus and updating summary prospectus.”

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

The proposed rule also makes amendments to Forms N-3, N-4, and N-6—the registration forms for variable contracts. The amendments are designed to update and enhance the disclosure regime for these investment products. 

“These amendments are intended to improve the content, format, and presentation of information to investors, including by updating the required disclosures to reflect industry developments (e.g., the prevalence of optional insurance benefits in today’s variable contracts),” the proposal states.

In addition, the SEC proposed amendments to require the use of the “Inline eXtensible Business Reporting Language (Inline XBRL) format for the submission of certain required disclosures in the variable contract statutory prospectus.” According to SEC, this would provide a mechanism for allowing investors, their investment professionals, data aggregators, and other data users to efficiently analyze and compare the available information about variable contracts.

Comment period lasts through February 2019

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

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

Investment Product and Service Launches

SSGA Creates Fixed Income Data and Investment Publication, and Northern Trust Selects Diversity-Focused Firms to Offer Investment Insight.

State Street Global Advisors (SSGA) has launched the SPDR Bond Compass, a quarterly publication intended to provide investment professionals with data and investment outlooks, which they can use to engage their clients on fixed income investment strategies.

The Bond Compass uses proprietary research from State Street Global Markets, the research and trading division of State Street, and provides insight into how investors are positioning their portfolios.

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“The overall sense from our metrics is that, despite recent volatility, investors remain cautiously optimistic about growth in the medium term,” says Michael Metcalfe, global head of macro strategy for State Street Global Markets. “Bond flows are indicating that investors view inflation as broadly benign and are not currently troubled by the inflationary outlook, a trend confirmed by our online metrics through early October.  What we are seeing is a re-assessment of risk and a review of holdings across the curve, but not wholesale protection purchasing.  If you add to that some modest buying of credit, the flows seem to indicate that long term investors are not panicking just yet.” 

The analysis shows current indicators of investor holdings in a variety of fixed income instruments and overlays buying and selling behaviors from the past quarter. These data points provide insight into investor sentiment and allow observers the opportunity to cut through the noise of the market to see the reality of the investor positions beneath.  The contrast between existing holdings and recent buying trends enables additional insight into investor outlook for exposure in the future. 

“Clients’ use of fixed income ETFs [exchange-traded funds] continues to expand and investors are increasingly looking for valued-added insights to tailor bond portfolios for the current market,” says Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors. “Throughout the year we have seen investors de-risk credit portfolios, moving from fixed-rate high-yield ETFs to loans, while also shortening duration and adding some principal preservation. As a result, short-term government bond ETFs have seen a 59% increase in assets. The Bond Compass provides data driven insights our clients need, along with our timely investment outlook and the necessary tools for action.”

Northern Trust Selects Diversity-Focused Firms to Offer Investment Insight

Northern Trust Asset Management has selected five firms owned by people of color, women, veterans or people with disabilities to provide equity research helping inform the firm’s investment decisions.

The selected firms—Academy Securities, Inc.; CL King & Associates; Drexel Hamilton, LLC; Loop Capital Markets; and Telsey Advisory Group—offer specialized and differentiated perspectives that the firm says will provide insights as part of its equity research process. The effort stems from Northern Trust Asset Management’s 11-year-old “minority-owned brokerage program,” which this year set a target to execute 10% of all equity security trading commissions in common and collective funds with “minority brokers.”

“Investing has have evolved over the years, and diversity of thought in our research is a critical component to achieving the investment outcomes we seek,” says Chief Investment Officer Bob Browne, CFA. “We believe diversity drives innovative ideas, creative insights and expertise—and we’re pleased to welcome these five firms to our platform.”

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