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.

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.