83 FR 61730 - Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts
SECURITIES AND EXCHANGE COMMISSION
Federal Register Volume 83, Issue 231 (November 30, 2018)
Page Range
61730-61943
FR Document
2018-24376
The Securities and Exchange Commission is proposing rule and form amendments that are intended to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts. The proposal would modernize disclosures by using 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 available online and electronically or in paper format on request. The proposed new rule would permit a person to satisfy its prospectus delivery obligations under the Securities Act of 1933 for a variable annuity or variable life insurance contract by sending or giving a summary prospectus to investors and making the statutory prospectus available online. The proposed rule also would consider a person to have met its prospectus delivery obligations for any portfolio companies associated with a variable annuity or variable life insurance contract if the portfolio company prospectuses are posted online. In addition, we are proposing amendments to the registration forms for variable annuity and variable life insurance contracts to update and enhance the disclosures to investors in these contracts, and to implement the proposed summary prospectus framework. We are further proposing to require variable contracts to use the Inline eXtensible Business Reporting Language (``Inline XBRL'') format for the submission of certain required disclosures in the variable contract statutory prospectus. We are also proposing certain technical and conforming amendments to our rules and forms, including amendments to rules relating to variable life insurance contracts, as well as rescission of certain related rules and forms. Lastly, we are seeking comments regarding parallel amendments to rules governing mutual fund summary prospectuses and registration forms applicable to other types of registered investment companies.
Federal Register, Volume 83 Issue 231 (Friday, November 30, 2018)
[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Proposed Rules]
[Pages 61730-61943]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2018-24376]
[[Page 61729]]
Vol. 83
Friday,
No. 231
November 30, 2018
Part II
Book 2 of 2 Books
Pages 61729-62240
Securities and Exchange Commission
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17 CFR Parts 230, 232, 239, et al.
Updated Disclosure Requirements and Summary Prospectus for Variable
Annuity and Variable Life Insurance Contracts; Proposed Rule
Federal Register / Vol. 83 , No. 231 / Friday, November 30, 2018 /
Proposed Rules
[[Page 61730]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, 240, 270, and 274
[Release Nos. 33-10569; 34-84508; IC-33286; File No. S7-23-18]
RIN 3235-AK60
Updated Disclosure Requirements and Summary Prospectus for
Variable Annuity and Variable Life Insurance Contracts
Agency: Securities and Exchange Commission.
Action: Proposed rule.
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Summary: The Securities and Exchange Commission is proposing rule and
form amendments that are intended to help investors make informed
investment decisions regarding variable annuity and variable life
insurance contracts. The proposal would modernize disclosures by using
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 available online and electronically or in paper
format on request. The proposed new rule would permit a person to
satisfy its prospectus delivery obligations under the Securities Act of
1933 for a variable annuity or variable life insurance contract by
sending or giving a summary prospectus to investors and making the
statutory prospectus available online. The proposed rule also would
consider a person to have met its prospectus delivery obligations for
any portfolio companies associated with a variable annuity or variable
life insurance contract if the portfolio company prospectuses are
posted online. In addition, we are proposing amendments to the
registration forms for variable annuity and variable life insurance
contracts to update and enhance the disclosures to investors in these
contracts, and to implement the proposed summary prospectus framework.
We are further proposing to require variable contracts to use the
Inline eXtensible Business Reporting Language (``Inline XBRL'') format
for the submission of certain required disclosures in the variable
contract statutory prospectus. We are also proposing certain technical
and conforming amendments to our rules and forms, including amendments
to rules relating to variable life insurance contracts, as well as
rescission of certain related rules and forms. Lastly, we are seeking
comments regarding parallel amendments to rules governing mutual fund
summary prospectuses and registration forms applicable to other types
of registered investment companies.
Dates: Comments should be submitted on or before February 15, 2019.
Addresses: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File No. S7-23-18 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 S7-23-18. 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. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Room 1580,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information you wish to make available publicly.
Investors wishing to provide comments regarding the proposed summary
prospectus may wish to submit our Feedback Flier, available at Appendix
C.
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.
FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, James Maclean, Amy
Miller, Senior Counsels; Amanda Hollander Wagner, Branch Chief; Michael
C. Pawluk, Senior Special Counsel, Investment Company Regulation
Office, at (202) 551-6792; Keith Carpenter or Michael Kosoff, Senior
Special Counsels, Disclosure and Review Office, at (202) 551-6921,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is proposing new rule 498A [proposed rule 17 CFR
230.498A] under the Securities Act. The Commission is also proposing
amendments to the following rules:
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Commission reference CFR citation (17 CFR)
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Regulation S-T [17 CFR 232.10 through 232.903]:
Rule 11............................................... Sec. 232.11.
Rule 405.............................................. Sec. 232.405.
Securities Act of 1933 (``Securities Act''): \1\
Rule 159A............................................. Sec. 230.159A.
Rule 421.............................................. Sec. 230.421.
Rule 431.............................................. Sec. 230.431.
Rule 482.............................................. Sec. 230.482.
Rule 485.............................................. Sec. 230.485.
Rule 497.............................................. Sec. 230.497.
Rule 498.............................................. Sec. 230.498.
Securities Exchange Act of 1934 (``Exchange Act''): \2\
Rule 14a-16........................................... Sec. 240.14a-16.
Investment Company Act of 1940 (``Investment Company
Act''): \3\
Rule 0-1.............................................. Sec. 270.0-1.
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Rule 6c-7............................................. Sec. 270.6c-7.
Rule 6c-8............................................. Sec. 270.6c-8.
Rule 6e-2............................................. Sec. 270.6e-2.
Rule 6e-3(T).......................................... Sec. 270.6e-3(T).
Rule 11a-2............................................ Sec. 270.11a-2.
Rule 14a-2............................................ Sec. 270.14a-2.
Rule 26a-1............................................ Sec. 270.26a-1.
Rule 27c-1............................................ Sec. 270.27c-1.
Securities Act and Investment Company Act:
Form N-3.............................................. Sec. 239.17a and 274.11b.
Form N-4.............................................. Sec. 239.17b and 274.11c.
Form N-6.............................................. Sec. 239.17c and 274.11d.
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Finally, the Commission is proposing to rescind:
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a et seq.
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Commission reference CFR citation (17 CFR)
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Investment Company Act:
Rule 26a-2......................... Sec. 270.26a-2.
Rule 27a-1......................... Sec. 270.27a-1.
Rule 27a-2......................... Sec. 270.27a-2.
Rule 27a-3......................... Sec. 270.27a-3.
Rule 27d-2......................... Sec. 270.27d-2.
Rule 27e-1......................... Sec. 270.27e-1.
Rule 27f-1......................... Sec. 270.27f-1.
Rule 27g-1......................... Sec. 270.27g-1.
Rule 27h-1......................... Sec. 270.27h-1.
Form N-27E-1....................... Sec. 274.127e-1.
Form N-27F-1....................... Sec. 274.127f-1.
Form N-27I-1....................... Sec. 274.302.
Form N-27I-2....................... Sec. 274.303.
Securities Act and Investment Company
Act:
Form N-1........................... Sec. 239.15 and 274.11.
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Table of Contents
I. Introduction and Background
A. Overview of Variable Annuities and Variable Life Insurance
Products
B. Prospectus Disclosure and Delivery
1. Requirements for Variable Contract Prospectus Disclosure and
Delivery
2. Evolution of Layered Disclosure and Delivery of Information
to Investors
C. Rulemaking Proposal Overview
II. Discussion
A. New Option To Use a Summary Prospectus for Variable Contracts
1. Initial Summary Prospectus
2. Updating Summary Prospectus
3. Legal Effect of Use of Summary Prospectus for Variable
Contracts
4. Online Accessibility of Contract Statutory Prospectus and
Certain Other Documents Relating to the Contract
5. Other Requirements for Summary Prospectus and Other Contract
Documents
6. Incorporation by Reference
7. Filing Requirements for the Summary Prospectus
8. Definitions in the Proposed Rule
B. Optional Method To Satisfy Portfolio Company Prospectus
Delivery Requirements
1. Current Delivery Practices for Portfolio Company Prospectuses
2. New Option To Satisfy Prospectus Delivery Requirements
C. Discontinued Variable Contracts
D. Proposed Amendments to Registration Forms
1. General Instructions
2. Part A (Information Required in a Prospectus)
3. Part B (Information Required in a Statement of Additional
Information)
4. Part C (Other Information)
5. Guidelines
E. Inline XBRL
F. Technical and Conforming Amendments to, and Requests for
Comment on, Other Aspects of the Regulatory Framework for Variable
Contracts
G. Compliance Date
III. Economic Analysis
A. Introduction
B. Economic Baseline
1. Overview of Variable Products Market
2. Statutory and Regulatory Disclosure Requirements
C. Benefits and Costs of the Proposed Rule
1. Optional Summary Prospectus Regime
2. Treatment of Discontinued Variable Contracts
3. Changes to Forms N-3, N-4, and N-6
4. Inline XBRL
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Mandating Summary Prospectuses
2. Summary Prospectuses Delivered With Statutory Prospectuses
3. Contract-Specific Updating Summary Prospectuses
4. Do Not Provide Updating Summary Prospectuses
5. Inline XBRL
6. Alternatives to Form N-3, N-4, and N-6 Amendments
7. Requiring All Variable Contracts (Including Currently
Discontinued Contracts) To Prepare Updated Registration Statements
and Deliver Statutory or Summary Prospectuses
8. Alternatives to Commission's Position on Alternative
Disclosure Contracts
F. Request for Comments
IV. Paperwork Reduction Act
A. Form N-3
B. Form N-4
C. Form N-6
D. Registered Investment Company Interactive Data
E. Proposed Rule 498A
F. Request for Comments
V. Regulatory Flexibility Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority and Text of Proposed Amendments
Appendices
Appendix A: Hypothetical Initial Summary Prospectus
Appendix B: Hypothetical Updating Summary Prospectus
Appendix C: Feedback Flier--Variable Annuity Summary Prospectus
I. Introduction and Background
To meet life insurance needs and other financial goals, investors
may consider variable annuity and variable life insurance contracts
(together, ``variable contracts'' or ``contracts'') as a way of
combining insurance guarantees with the potential for long-term
investment appreciation.\4\ Variable contracts are generally more
complex than other retail investment products, such as mutual funds, in
a variety of ways. These investment products combine both investment
and insurance features. They frequently offer a menu of optional
benefits that an investor may select to customize the contract to meet
his or her individual needs. In addition, most have two-level fee
structures, where fees are assessed at both the contract level by the
issuer (including any additional charges for optional benefits selected
by the investor) and at the underlying investment option level. Further
transactional charges may also apply, some of which could be
substantial, for example, in the case of withdrawals made from a
contract prior to a specified number of years.\5\ Special tax rules
also apply to variable products, with both tax advantages and potential
[[Page 61732]]
adverse tax impacts in certain circumstances.\6\
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\4\ For an overview of variable annuities and variable life
insurance contracts, see infra section I.A.
\5\ A contract may impose a ``surrender charge'' if, after
purchase payments are made, an investor withdraws money from the
contract during a stated period typically ranging from six to ten
(or even more) years.
\6\ For example, assets within a variable contract grow tax-
deferred, and transfers between investment options under the
contract are not taxable events. However, investors may face a 10%
federal income tax penalty if money is withdrawn before the investor
reaches 59\1/2\ years old. For these and other reasons, a variable
contract generally is sold as a long-term investment.
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Investors should understand the features, risks, and charges
associated with any potential investment. Providing investors with key
information is particularly important in the context of variable
contracts, since their structure is typically more complex than other
types of investment products. The operation and terminology associated
with these products can be difficult for investors to understand.
Moreover, variable contract prospectuses are often quite lengthy
(frequently more than a hundred pages), particularly in the case of
products that include optional benefits. It is also common for insurers
to describe different versions of the contract in one prospectus, some
of which may no longer be available to new investors, leaving investors
to wade through a lengthy document to find disclosures relevant to the
particular contract that they purchased or are considering purchasing.
In addition, variable contract investors generally allocate their
purchase payments to a range of investment options. For most variable
contracts, these investment options typically are mutual funds, which
are separately registered and have their own prospectuses.\7\ Because
insurers issuing variable contracts typically bundle prospectuses for
the underlying portfolio companies together with the variable contract
prospectus, the disclosures that investors receive at the time of the
initial purchase and on an annual basis thereafter can be
voluminous.\8\
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\7\ For purposes of this release, we refer to these entities as
``portfolio companies.''
\8\ For example, variable annuity contracts offer an average of
59 investment options, with some contracts offering more than 250
investment options. See Insured Retirement Institute, IRI Fact Book
2018 (``IRI Fact Book''), at 170. Furthermore, variable life
insurance contracts offer an average of 64 investment options, with
some contracts offering more than 300 investment options. These
variable life figures are based on June 2018 data obtained from
Morningstar Direct.
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We are concerned that the volume, format, and content of
disclosures in the variable contract context may make it difficult for
some investors to find and understand key information that they need to
make an informed investment decision. To improve the current disclosure
framework and update the manner in which variable contract investors
receive and review prospectuses and related information, we are
proposing new rule 498A under the Securities Act that permits the use
of a summary prospectus to satisfy statutory prospectus delivery
obligations, along with other rule and form amendments intended to
implement the summary prospectus framework. Investors would continue to
have access to the contract statutory prospectus and other information
about the contract online (and could receive paper or electronic copies
upon request), which would continue to provide more-detailed
information about the contract.
Specifically, the approach under the proposed new rule contemplates
the use of two types of summary prospectuses: An ``initial summary
prospectus'' to be provided to new investors, and an ``updating summary
prospectus'' to be provided to existing investors. To help investors
make an informed investment decision, each type of summary prospectus
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 website
addresses or hyperlinks to more detailed information posted online and
delivered electronically or in paper format on request. In proposing
new rule 498A, we are considering approaches that could affect, and
raise the possibility of future amendments to, certain parallel
provisions of rule 498 and certain of our registration forms applicable
to other types of registered investment companies.
A. Overview of Variable Annuities and Variable Life Insurance Products
Variable contracts are contracts between an investor and an
insurance company that provide investors with exposure to the
securities markets while also offering certain insurance protections,
such as protection against market losses, protection against outliving
their assets, or assurances that their beneficiaries will receive a
certain amount upon death.\9\ Unlike traditional annuities and life
insurance contracts, variable contracts have an investment component
that allows investors the possibility of increasing their potential
benefits.\10\ Variable contracts also offer tax benefits such as tax-
deferral on investment earnings until distribution. This combination of
insurance guarantees and tax-deferred investment may be appealing to
investors.
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\9\ The average contract value for individual variable annuities
is approximately $106,187. See IRI Fact Book, supra note 8, at 170.
Americans who own annuities have a median annual household income of
$64,000 (80% have total annual household incomes below $100,000).
Most individual annuity owners are retired. Although the average age
of an annuity owner is 70, the average age at which owners purchased
their first annuity is 51. See The Gallup Organization and Mathew
Greenwald & Associates for The Committee of Annuity Insurers, Survey
of Owners of Individual Annuity Contracts (2013) (``Gallup
Survey''), at 8-9. There is limited data available regarding
variable life insurance contracts, but based upon the data that is
available, the Commission believes that the demographics of
investors for those products are likely comparable.
\10\ Variable contracts generally are treated as annuity or
insurance contracts under state insurance laws and securities under
the federal securities laws. Although section 3(a)(8) of the
Securities Act exempts from the Act any insurance or endowment
policy or annuity contract issued by a corporation subject to the
supervision of the insurance commissioner of any State or Territory
of the United States or the District of Columbia, we have
determined, and the courts have held, that variable annuities are
securities under the federal securities laws and are not, therefore,
entitled to this exemption. See, e.g., SEC v. Variable Annuity Life
Ins. Co. of Am., 359 U.S. 65 (1959) (variable annuity contracts are
securities, and not insurance policies or annuity contracts within
the meaning of the Act's exemption because the issuer of a variable
annuity contract has no element of fixed return and does not assume
any investment risk, which is inherent in the concepts of insurance
and annuity contracts); see also Adoption of Rule 3c-4 Under the
Investment Company Act of 1940, Investment Company Act Release No.
7644, 1 SEC Docket 17 (Jan. 31, 1973) (because the contract holder
participates directly in the investment experience of the separate
account and bears an investment risk, a variable life insurance
contract is a security, not entitled to the exemption set forth in
section 3(a)(8) of the Securities Act).
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When an investor purchases a variable contract, he or she makes a
purchase payment (in either a lump sum or a series of payments), and in
return, the insurance company promises to pay a stream of periodic
income payments, either immediately or at some future date. 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), and also provide a basic death benefit to
protect the investor's beneficiaries. The investor may allocate the
cash value of the purchase payments to a range of investment options
available under the contract, including to portfolio companies and, in
some cases, to a fixed account option that pays a fixed or minimum rate
of interest. The investor's account value changes depending on the
performance of the investment options the investor has selected.
Similar to variable annuities, variable life insurance contracts
offer a death benefit to the investor, as well as the ability to
accumulate cash value.\11\ Also
[[Page 61733]]
like variable annuities, a variable life insurance contract permits the
investor to allocate insurance premiums to a variety of portfolio
companies, and may also offer a fixed account investment option.
Because an investor will generally allocate the insurance premiums to
portfolio companies, the cash value (and in some cases, the death
benefit \12\) will vary with the performance of these investments.
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\11\ Unlike other types of life insurance, variable life
insurance exposes the investor to greater market risk (the cash
value can decrease), but also offers the potential for long-term
returns that can grow the cash value. An investor may access the
cash value of his or her contract by taking out loans (or
withdrawals), which may be subject to surrender charges and are
taxable under certain circumstances. Taking a loan or withdrawal
reduces the policy's cash value and death benefit, and may require
additional premium payments to keep the policy in force.
\12\ The death benefit can vary based on optional benefit
features that the contract investor selects. See infra paragraph
accompanying note 17.
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Investors bear a number of ongoing fees, expenses, and other
charges when investing in a variable contract, including mortality and
expense risk charges,\13\ administrative fees, fees for optional
benefits selected by the investor, and portfolio company fees and
expenses.\14\ Investors may also bear certain transaction-based
charges, including surrender charges.\15\ Variable life insurance
contracts also impose an additional insurance charge to cover the cost
of the death benefit.\16\
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\13\ The mortality and expense (``M&E'') risk charge, which is
based on an investor's account value, compensates the insurance
company for offering certain contract features (e.g., death benefit
or annuitization) and is sometimes used to pay the insurance
company's costs to sell the contract (e.g., commissions). Typical
M&E charges are approximately 1.25% of account value per year for
variable annuities, and 0.90% for variable life insurance. See IRI
Fact Book, supra note 8, at 55.
\14\ Investors indirectly bear the operating fees and expenses
of the portfolio companies they select as the underlying investments
in their variable contracts.
\15\ See supra note 5.
\16\ These additional insurance charges are determined at the
time of the contract is written and vary based on the insured's
personal characteristics, such as age and health. These charges are
in addition to the M&E risk charge discussed above. See supra note
13.
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Variable contracts commonly offer optional benefit features as
riders to the contract with their own terms and conditions. Riders
commonly provide enhanced death benefits, as well as ``living
benefits'' that may be designed to provide protection against
investment losses or longevity risk, or to cover financial losses that
result from illness, incapacity, or injury. These optional riders have
become increasingly popular with variable contract investors.\17\
Typically, there is a separate charge for each rider.
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\17\ See, e.g., IRI Fact Book, supra note 8, at 83 (``Just under
$2 trillion of VA assets were held by insurance companies as of the
fourth quarter of 2017, with an estimated $800 billion having a
living benefit.''); Gallup Survey, supra note 9, at 21 (stating that
``[n]early eight in ten annuity owners (79%) who own a variable
annuity report that their contract has a guaranteed lifetime
withdrawal benefit.'').
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B. Prospectus Disclosure and Delivery
1. Requirements for Variable Contract Prospectus Disclosure and
Delivery
The prospectus delivery requirements for variable contracts arise
from the legal structure of these products. The ``separate account''
\18\ established by the sponsoring insurance company is the legal
entity that registers its securities. The separate account is an
account that is owned by the insurance company.\19\ Separate accounts
are typically registered as investment companies under the Investment
Company Act \20\ and also register their securities under the
Securities Act by filing a registration statement with the Commission.
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\18\ See section 2(a)(37) of the Investment Company Act
(defining ``separate account'' to mean an account established and
maintained by an insurance company pursuant to state law under which
income, gains and losses from assets allocated to that account are
credited against the account without regard to other income, gains
or losses of the insurance company). In addition to directing all or
part of their purchase payments to the investment options (typically
mutual funds) available under the separate account, investors may
also direct their purchase payments to a fixed account that pays a
fixed, or minimum, rate of interest. The fixed account is part of
the insurance company's general account, which, unlike the separate
account, is subject to the insurance company's claims-paying ability
and creditor reach.
\19\ The assets of the separate account are segregated from the
other assets of the insurance company (such as the insurance
company's general account) and are therefore insulated from the
claims of the insurance company's creditors. See rule 26a-2 under
the Investment Company Act (providing exemptions from certain
provisions of the Act to permit the insurance company that sponsors
a separate account to hold the assets of the separate account).
\20\ In general, an insurance company's separate account is an
investment company under the Investment Company Act. See Prudential
Ins. Co. v. SEC, 326 F.2d 383, 388 (3d Cir. 1964) (concluding that
the insurer's separate account, which was a completely segregated
account devoted to investing in securities, the cash for which was
derived from payments made by the purchaser of the variable annuity
contract, and the proceeds from which were held for the sole benefit
of the annuitant, was separable from the insurance company and
should be deemed the ``investment company'' for purposes of the
Act). Not all variable contract separate accounts are investment
companies; exclusions may apply to certain separate accounts that
rely, for example, on sections 3(c)(1), (7), or (11) of the
Investment Company Act.
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Separate accounts may be organized either as management companies
\21\ or unit investment trusts (``UITs'').\22\ Variable annuity
separate accounts that are management companies file registration
statements on Form N-3,\23\ while those that are UITs file registration
statements on Form N-4. Most variable annuity contracts sold today are
offered by Form N-4 registrants.\24\ Variable life separate accounts,
which also are typically organized as UITs, file registration
statements on Form N-6.\25\
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\21\ See section 4(3) of the Investment Company Act (defining
``management company'' to mean any investment company other than a
face-amount certificate company or a unit investment trust).
\22\ See section 4(2) of the Investment Company Act (defining
``unit investment trust'' to include an investment company that is
organized under a trust indenture, does not have a board of
directors, and only issues redeemable securities, each of which
represents an undivided interest in a unit of specified securities).
\23\ Form N-3 filers register as management investment companies
because the active management of the investment portfolio occurs at
the separate account level. During the early years of variable
product history, this was the predominant type of separate account.
However, by 2017, only five variable annuity separate accounts were
registered as management investment companies on Form N-3.
\24\ In 2017, 435 variable annuity separate accounts registered
as UITs on Form N-4.
\25\ In 2017, 238 variable life insurance separate accounts
registered as UITs on Form N-6.
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Form N-4 (variable annuity) and N-6 (variable life) registrants are
sometimes referred to as ``two-tier'' investment company structures.
The top tier, which is the separate account established by the insurer
and registered with the Commission as a UIT, is itself divided into
``subaccounts,'' each of which invests in the shares of an underlying
portfolio company (e.g., a mutual fund or exchange-traded fund
(``ETF'')) that serves as an investment option under the variable
contract. In this structure, the insurer's separate account, not the
variable contract investor, is the legal owner of the underlying fund
shares.\26\
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\26\ Variable contract investors do not hold legal title to the
assets of the insurance company's separate account. See supra note
19. However, certain legal rights, such as voting rights, generally
pass through to variable contract investors.
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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.\27\ For purposes of
section 5 of the Securities Act, each additional purchase payment under
a variable contract is considered a ``sale'' requiring delivery of a
current prospectus.\28\
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\27\ 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.''
\28\ 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)]
(``Forms N-3 and N-4 Adopting Release'') at n.14 and accompanying
text.
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[[Page 61734]]
Variable contract issuers generally maintain current prospectuses
for their products through the filing of annual post-effective
amendments to their registration statement and, as necessary,
supplementing or ``stickering'' the contract prospectus or statement of
additional information (``SAI'').\29\ Rather than bearing the expense
of sending a prospectus with each confirmation of an investor's
purchase of additional shares, which often occurs on a periodic basis
(e.g., monthly), most registrants instead send copies of the new
prospectus to all investors each time it is updated. It is our
understanding that this practice is similar to that followed by most
mutual funds.
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\29\ In addition to updating the registration statement for the
variable contract annually to include updated financial statements,
variable contract issuers also make amendments to the contract
registration statement (generally as part of this annual update
process), as necessary to reflect material or other changes to the
information disclosed. See section 10(a)(3) of the Securities Act
(requiring, among other things, that a prospectus used more than
nine months after the effective date of a registration statement be
updated so that the information contained therein shall not be more
than 16 months old). But see infra section II.C (discussing
circumstances in which certain variable contract issuers provide
alternative disclosures instead of the contract statutory
prospectus, as described in certain staff no-action letters). See
also section 11 of the Securities Act (providing a civil remedy for
a registration statement that contains ``an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading.''); rule 408 under the Securities Act [17 CFR
230.408(a)] (requiring registrants to include, in addition to the
information expressly required to be included in a registration
statement, such further material information, if any, as may be
necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading.).
Additionally, portfolio companies may supplement or ``sticker''
their prospectus or SAI. See generally rule 497 under the Securities
Act.
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We understand that an insurer or the financial intermediary
distributing the variable contact will typically deliver the variable
contract prospectus upon issuance of the contract, in order to comply
with the requirements of section 5(b)(2).\30\ However, we also
understand that many insurers make it a practice to provide the
variable contract prospectus to potential investors, often as part of
the application package.
---------------------------------------------------------------------------
\30\ Because the requirements of section 5(b)(2) of the
Securities Act are applicable to ``any person,'' its obligations are
applicable to financial intermediaries through whom variable
contracts are sold, as well as variable contract issuers.
---------------------------------------------------------------------------
The Commission has interpreted section 5(b)(2) of the Securities
Act to require delivery of a portfolio company prospectus to an
investor in a variable contract who has allocated his or her purchase
payments to that portfolio company.\31\ We understand that today most
investors receive summary prospectuses (as opposed to statutory
prospectuses) for the underlying portfolio companies at the same time
they receive the statutory prospectus for the variable contract. Since
variable contracts generally offer exchange privileges permitting an
investor to reallocate all or a portion of his or her investment from
one underlying portfolio company to another, many insurance companies
deliver prospectuses for all underlying portfolio companies to simplify
the administrative task of tracking whether it delivered the
appropriate current prospectus. Other insurers have invested in systems
that enable the insurer to customize the delivery of underlying
portfolio company prospectuses such that investors only receive
prospectuses for the portfolio companies to which they have allocated
purchase payments.
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\31\ See Forms N-3 and N-4 Adopting Release, supra note 28, at
n.49 and accompanying text (``Of course, delivery of a prospectus of
an underlying company in which a contractowner actually invests will
be required pursuant to section 5(b)(2) under the 1933 Act (15
U.S.C. 77e(b)(2)).'').
---------------------------------------------------------------------------
Although paper is the default format for delivery of contract
prospectuses, portfolio company prospectuses, and certain other
required disclosures, we understand that most insurers offer investors
the option to elect electronic delivery of these documents. The
Commission has provided guidance noting that electronic delivery may be
used to satisfy prospectus delivery requirements if: (1) The investor
has notice of the availability of the information; (2) the use of the
medium is not so burdensome that intended recipients cannot effectively
access the information being provided; and (3) the issuer has evidence
of delivery.\32\ Issuers relying on this guidance have typically
satisfied the ``evidence of delivery'' requirement by obtaining
informed consent to electronic delivery. Investors that have elected
electronic delivery of materials associated with their variable
contract typically receive an email that contains a link to the website
where the materials are available.
---------------------------------------------------------------------------
\32\ See Use of Electronic Media for Delivery Purposes,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458
(Oct. 13, 1995)] (``1995 Release''); Use of Electronic Media by
Broker-Dealers, Transfer Agents, and Investment Advisers for
Delivery of Information; Additional Examples Under the Securities
Act of 1933, Securities Exchange Act of 1934, and Investment Company
Act of 1940, Investment Company Act Release No. 21945 (May 9, 1996)
([61 FR 24644 (May 15, 1996]) (``1996 Release''); Use of Electronic
Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65
FR 25843 (May 4, 2000)] (``2000 Release'').
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2. Evolution of Layered Disclosure and Delivery of Information to
Investors
Our proposal builds on our experience with both layered disclosure
(under the mutual fund summary prospectus) \33\ and integrated
disclosure (enhanced over a decade ago with securities offering reform
for corporate issuers).\34\ It also draws on more than twenty years of
experience with the use of the internet as a medium to provide
information to investors.\35\
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\33\ 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 4546 (Jan. 26,
2009)] (``2009 Summary Prospectus Adopting Release'') (permitting
the use of a summary prospectus by registered open-end management
investment companies).
\34\ Securities Offering Reform, Securities Act Release No. 8591
(July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering
Reform'') at n.202 and accompanying text (allowing the use of free
writing prospectuses to provide information to investors and stating
that a free writing prospectus is a permitted prospectus for
purposes of section 10(b) of the Securities Act and, as such, can be
used without violating section 5(b)(1) of the Securities Act).
Additionally, Congress recently required the Commission to extend
securities offering reform to closed-end funds (see section 509 of
the Economic Growth, Recovery Relief, and Consumer Protection Act,
S. 2155, 115th Cong. (2017-2018)), and to business development
companies (see section 3 of the Small Business Credit Availability
Act, S. 2324, 115th Cong. (2017-2018)).
\35\ See, e.g., 1995 Release, supra note 32 (providing
Commission views on the use of electronic media to deliver
information to investors, with a focus on electronic delivery of
prospectuses, annual reports, and proxy solicitation materials);
1996 Release, supra note 32 (providing Commission views on
electronic delivery of required information by broker-dealers,
transfer agents, and investment advisers); 2000 Release, supra note
32 (providing updated interpretive guidance on the use of electronic
media to deliver documents on matters such as telephonic and global
consent, issuer liability for website content, and legal principles
that should be considered in conducting online offerings).
See also Securities Offering Reform, supra note 34 (adopting
rule 172 under the Securities Act providing an ``access equals
delivery'' framework under which issuers and intermediaries can
satisfy their final prospectus delivery obligations); Shareholder
Choice Regarding Proxy Materials, Investment Company Act Release No.
27911 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)] (``Shareholder
Choice Regarding Proxy Materials'') (adopting rule amendments
requiring issuers to post their proxy materials on a specified
website and provide shareholders with a notice of internet
availability of the materials).
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Through each of these sets of reforms, ``omitting prospectuses'' as
permitted by section 10(b) of the Securities Act have become a central
feature of various parts of our securities offering and disclosure
regime.\36\ In particular, our proposed approach for satisfying
prospectus
[[Page 61735]]
delivery obligations for variable contract prospectuses is generally
modeled on the Commission's mutual fund summary prospectus framework,
with some modifications that reflect the unique structure, features,
and risks of variable contracts. Likewise, our proposed approach for
satisfying portfolio company prospectus delivery requirements
incorporates aspects of the ``access equals delivery'' framework we
adopted in 2005, in instances where certain information has already
been provided to investors,\37\ as well as certain website posting
requirements from the mutual fund summary prospectus rule.
---------------------------------------------------------------------------
\36\ See infra note 93 and accompanying text (discussing
omitting prospectuses as permitted by section 10(b) of the
Securities Act).
\37\ Securities Offering Reform contemplated delivery of a
preliminary prospectus to investors purchasing during an initial
public offering, while our proposal would require delivery of
variable contract summary prospectuses, which would accompany or
precede delivery of the variable contract security and which would
contain certain key information about portfolio companies. See,
e.g., Securities Offering Reform, supra note 34; infra notes 120 and
192 and accompanying text (outlining certain portfolio company
information which would be disclosed in variable contract summary
prospectuses).
---------------------------------------------------------------------------
Our proposal also draws on the Commission's investor testing
efforts, outreach, and other empirical research concerning investors'
preferences. This included information about summary content and
layered disclosure approaches as well as methods of delivery for
required disclosures and use of the internet for financial and other
purposes generally.\38\ Most recently, the Commission released a
request for comment on many of these same issues.\39\ Certain comments
that the Commission has received on its recent Form CRS Relationship
Summary proposal \40\ also reflect support for a disclosure regime that
leverages the benefits of layered disclosure.\41\
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\38\ For example, in 2007, 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. The consultant's report
concerning the focus group testing and related transcripts are in
the comment file for this rule (available at https://www.sec.gov/comments/s7-08-15/s70815-1.pdf). The consultant's report concerning
the telephone survey is available at http://www.sec.gov/pdf/disclosuredocs.pdf (approximately 60% of investors believed mutual
fund prospectuses contained too much information and 56% of
investors who received mutual fund prospectuses but rarely, very
rarely, or never read them indicated that was because the
prospectuses were too complicated or hard to understand, or too long
and too wordy).
In addition, in 2011, the Commission engaged a consultant to
conduct investor testing regarding shareholder reports. The
consultant's report concerning that testing (``Investor Testing of
Mutual Fund Shareholder Reports'') is in the comment file for this
rule (available at https://www.sec.gov/comments/s7-08-15/s70815-3.pdf). Separately, in 2012, Commission staff prepared a study of
investor financial literacy pursuant to section 917 of the Dodd-
Frank Act. See SEC Staff, Study Regarding Financial Literacy Among
Investors (Aug. 2012) (``2012 Financial Literacy Study''). Materials
relating to this study, including the staff's report, are available
at http://www.investor.gov/publications-research-studies/sec-research.
\39\ See 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)] (``Request for Comment on Fund
Retail Investor Experience''). The comment file for this request for
comment is available at https://www.sec.gov/comments/s7-12-18/s71218.htm. Multiple comment letters that the Commission has
received to date on this request for comment reflect a preference
for shorter summary disclosures, with additional information
available online or upon request. See, e.g., Comment Letter of Carol
Palmer, File No. S7-12-18 (June 5, 2018); Comment Letter of Perry
Balke, File No. S7-12-18 (June 5, 2018); Comment Letter of Sara
Karlidag, File No. S7-12-18 (June 6, 2018); Comment Letter of Harold
Thomas, File No. S7-12-18 (June 8, 2018); Comment Letter of Carla
Rojas, File No. S7-12-18 (June 9, 2018).
\40\ See Form CRS Relationship Summary; Amendments to Form ADV;
Required Disclosures in Retail Communications and Restrictions on
the Use of Certain Names or Titles, Investment Advisers Act Release
No. 4888 (Apr. 18, 2018) [83 FR 21416 (May 9, 2018)]. The comment
file for this proposal is available at https://www.sec.gov/comments/s7-08-18/s70818.htm.
\41\ See, e.g., Comment Letter of the Insured Retirement
Institute, File No. S7-08-18 (Aug. 7, 2018); Comment Letter of
Massachusetts Mutual Life Insurance Company, File No. S7-08-18 (Aug.
7, 2018).
---------------------------------------------------------------------------
Moreover, certain observations by the staff of the Commission's
Office of Investor Education and Advocacy as part of its 2012 Financial
Literacy Study show that investors generally favor a layered approach
to disclosure and, wherever possible, the use of a summary containing
key information about an investment product or service.\42\ Investors
may have a preference for certain efficiencies afforded by more concise
information, as research shows the introduction of a shorter and
simplified summary prospectus may allow investors to spend less time
and effort to arrive at the same portfolio decision they would have
come to after reading the statutory prospectus.\43\ For these same
reasons, we believe that variable contract investors would benefit from
the summary disclosures and layered approach contemplated by our
proposal, especially given the fact that variable contracts are
typically more complex than other types of investment products, in part
due to the two-tier structure that most use.
---------------------------------------------------------------------------
\42\ See 2012 Financial Literacy Study, supra note 38, at v-xix.
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 2012
Financial Literacy Study indicates that investors preferred
disclosures being ``written in clear, concise, understandable
language, using bullet points, tables, charts, and/or graphs.'' See
id. at iv.
\43\ See John Beshears et al., How Does Simplified Disclosure
Affect Individuals' Mutual Funds Choices?, Explorations in the
Economics of Aging, 75, 76 (David A. Wise ed., 2011) (``Beshears
Paper''), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices.
---------------------------------------------------------------------------
Based upon the foregoing, we believe that a summary prospectus
framework for variable contracts would benefit investors. The mutual
fund industry has widely adopted the use of summary prospectuses.\44\
We believe our proposed prospectus delivery approach would be similarly
widely adopted by issuers of variable contracts.\45\
---------------------------------------------------------------------------
\44\ We estimate that as of December 31, 2017, approximately 95%
of mutual funds and ETFs use summary prospectuses. This estimate is
based on EDGAR data for the number of mutual funds and ETFs that
filed a summary prospectus in 2017 (10,686) and the Investment
Company Institute's estimated number of mutual funds and ETFs as of
12/31/2017 (11,253). See Investment Company Institute, 2018
Investment Company Fact Book, at 52, available at https://www.ici.org/pdf/2018_factbook.pdf.
\45\ See infra section III.C (stating that we expect a vast
majority of insurers will choose to use summary prospectuses).
---------------------------------------------------------------------------
C. Rulemaking Proposal Overview
We are proposing a new disclosure framework that, among other
things, would permit the use of summary prospectuses for variable
contracts, with additional information available to investors online.
To help investors make an informed investment decision, this proposal
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 available online, or delivered in paper or
electronic format on request. We anticipate that the proposed framework
would improve investor understanding of variable contracts.
The proposed rule builds upon our experience creating a summary
prospectus option for mutual funds in 2009, but with certain
differences intended to reflect the nature of variable contracts.\46\
Like the Commission's mutual fund summary prospectus rule, the summary
prospectus that the proposed rule contemplates is meant to highlight
key information of variable contracts that we believe would help an
[[Page 61736]]
investor make an informed investment decision.\47\
---------------------------------------------------------------------------
\46\ However, the proposed rule departs from rule 498 in
requiring two separate types of summary prospectuses. See infra
sections II.A.1 and II.A.2. We designed this framework to
distinguish the information we believe new and existing investors
need, and to highlight the particular contract features and risks
that are particularly relevant to these two groups of investors,
taking into account information that we understand these investors
may receive through other channels (e.g., as a result of state
insurance law, other regulatory requirements, and industry
practice).
\47\ The mutual fund summary prospectus rule is designed to
provide investors with ``streamlined and user friendly information
that is key to an investment decision.'' See Enhanced Disclosure and
New Prospectus Delivery Option for Registered Open-End Management
Investment Companies, Investment Company Act Release No. 28064 (Nov.
21, 2007) [72 FR 67790 (Nov. 30, 2007)] (``2007 Summary Prospectus
Proposing Release''), at section I; see also Richard J. Wirth,
What's Puzzling You . . . Is the Nature of Variable Annuity
Prospectuses, 34 Western New England Law Review 127 (2012)
(``Informed decision-making demands that consumers have enough of an
understanding of what's for sale and what trade-offs are being asked
of them in order to make an informed decision about whether or not
to buy a product.'').
---------------------------------------------------------------------------
Because variable contracts typically include a number of optional
benefits and underlying investment options, a summary could not, by its
nature, include all relevant aspects and details regarding each of
these contract features. The variable contract summary prospectus is
designed to be a succinct summary of the contract's key terms and
benefits and most significant risks, making it easier to read and more
understandable for investors. This summary prospectus would serve as
the cornerstone of a layered disclosure framework that would alert
investors to the availability of more detailed information in the
statutory prospectus and in other locations, and would be tailored to
the unique aspects of these products. As a result, investors would have
ready access to key information in connection with an investment
decision.
The main elements of the new disclosure framework include:
Option to use summary prospectus.\48\ Proposed new rule
498A would permit the use of two distinct types of contract summary
prospectuses: (1) Initial summary prospectuses covering variable
contracts currently offered to new investors; and (2) updating
summary prospectuses for existing investors. The initial summary
prospectus would include certain key information about the
contract's most salient features, benefits, and risks, presented in
plain English in a standardized order. 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 be in the initial summary
prospectus. Certain key information about the portfolio companies
would be provided in both the initial summary prospectus and
updating summary prospectus.
---------------------------------------------------------------------------
\48\ See infra section II.A.
---------------------------------------------------------------------------
Availability of variable contract statutory prospectus
and other materials.\49\ The proposed rule would require the
variable contract statutory prospectus, as well as the contract's
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 statutory prospectus and SAI to be sent in
paper or electronically, at no cost to the investor.
---------------------------------------------------------------------------
\49\ See infra section II.A.4.
---------------------------------------------------------------------------
Optional method to satisfy portfolio company prospectus
delivery requirements.\50\ The proposed rule would provide an
optional method for satisfying portfolio company prospectus delivery
obligations by making portfolio company summary and statutory
prospectuses available online at the website address specified on or
hyperlinked in the variable contract summary prospectus, with
certain key information about the portfolio companies provided in
the variable contract's summary prospectus.\51\ Investors would also
be able to request and receive those disclosures in paper or
electronically at no cost. This new option for satisfying portfolio
company prospectus delivery requirements would only be available for
portfolio companies available as investment options through variable
contracts that use contract summary prospectuses.
---------------------------------------------------------------------------
\50\ See infra section II.B.
\51\ This option would not apply to Form N-3 registrants, which
do not have underlying portfolio companies due to a single-tier
investment company structure.
---------------------------------------------------------------------------
Discontinued Variable Contracts.\52\ In proposing the
new variable contract summary prospectus disclosure framework, we
acknowledge the industry practice of providing alternative
disclosures under the specific circumstances described in certain
staff no-action letters. In light of this proposal, we believe that
it is useful to consider the appropriate disclosure framework for
the types of contracts that were the subject of the staff no-action
letters.
---------------------------------------------------------------------------
\52\ See infra section II.C.
---------------------------------------------------------------------------
Form amendments.\53\ We are also proposing to amend
Forms N-3, N-4, and N-6--the registration forms for variable
contracts--to update and enhance the disclosure regime for these
investment products.\54\ The proposed amendments are intended to
consolidate certain summary information in a condensed presentation,
reflect industry developments (e.g., the prevalence of optional
benefits in today's variable contracts), and otherwise improve
disclosures provided to variable contract investors.
---------------------------------------------------------------------------
\53\ See infra section II.D.
\54\ The Commission first adopted the registration form for
variable annuities over 30 years ago, and adopted the registration
form for variable life insurance over 15 years ago. See Forms N-3
and N-4 Adopting Release, supra note 28; 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)] (``Separate Accounts Offering Variable Life Release'').
---------------------------------------------------------------------------
Inline XBRL.\55\ Registrants would be required to use
the Inline XBRL format for the submission of certain variable
contract information. This requirement is intended to harness
technology to 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, as required by their particular needs and
circumstances.
---------------------------------------------------------------------------
\55\ See infra section II.E.
---------------------------------------------------------------------------
Other Amendments.\56\ We are proposing certain
technical and conforming amendments to our rules to reflect the
proposed new regime for variable contract summary prospectuses. We
are also proposing certain technical amendments to rules relating to
variable life insurance contracts, as well as rescission of certain
rules and forms.
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\56\ See infra section II.F.
Table 1 summarizes the various requirements--under the current
prospectus delivery regime, and under the proposed summary prospectus
regime--for information to either be (1) delivered to all investors,
(2) made available online, or (3) delivered to those investors who so
request:
Table 1--Information Available to Variable Contract Investors
------------------------------------------------------------------------
Optional proposed
Current prospectus summary prospectus
delivery regime \57\ regime
------------------------------------------------------------------------
Contract Statutory Delivered to all Required to be
Prospectus. investors. available online
and delivered (in
paper or electronic
format) upon
request.
Contract SAI................ Available upon Required to be
request. available online
and delivered (in
paper or electronic
format) upon
request.
Contract Part C Information. Not delivered to Not delivered to
investors or investors or
required to be required to be
available online, available online,
but is filed with but is filed with
registration registration
statement statement
(available on (available on
EDGAR). EDGAR).
Initial Summary Prospectus.. N/A................. Delivered to new
investors.
Updating Summary Prospectus. N/A................. Delivered to
existing investors.
[[Page 61737]]
Portfolio Company Delivered to all Delivered to
Prospectuses. investors. investors, or, if
the new option to
satisfy portfolio
company prospectus
delivery is
relied[dash]upon,\5
8\ required to be
available online
and delivered (in
paper or electronic
format) upon
request.\59\
------------------------------------------------------------------------
Under proposed rule 498A, use of the summary prospectus to satisfy
a registrant's section 5(b)(2) obligation would be voluntary. We have
designed the proposal to permit, but not require, registrants to use a
summary prospectus coupled with the internet availability of variable
contract disclosures to make the delivery process more convenient and
efficient. While we believe the summary prospectus regime will benefit
investors, we are proposing that the approach be optional in light of
the novel nature of this disclosure approach for variable contracts
(including its use of layered disclosure), and because of the diversity
of variable contracts (and corresponding diversity of disclosure for
variable contracts).
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\57\ This column assumes that the contract at issue is not
providing alternative disclosures to investors in lieu of the
statutory prospectus, as described in certain staff no-action
letters discussed below in section II.C.
\58\ See infra section II.B.2.
\59\ Additionally, summary information about portfolio companies
would be available in the initial summary prospectus and updating
summary prospectus. See infra sections II.A.1.c.ii(i) and
II.A.2.c.ii(c).
---------------------------------------------------------------------------
We believe that optionality not only would give market participants
time to adjust to the new layered disclosure approach, but also give
the Commission and its staff the opportunity to assess the benefits to
investors and insurers. While approximately 95% of mutual funds
currently use a summary prospectus,\60\ it took nearly eight years
after the adoption of the mutual fund summary prospectus framework for
the industry to reach that threshold.\61\
---------------------------------------------------------------------------
\60\ See supra note 44.
\61\ Estimates are based on EDGAR filings.
---------------------------------------------------------------------------
Given the current widespread use of summary prospectuses by mutual
funds, we believe investors and other market participants have
generally become comfortable with the use of a summary prospectus.
However, the proposed variable contract summary prospectus regime would
differ from the mutual fund summary prospectus framework in several key
ways (e.g., the use of an initial and an updating summary prospectus,
and the new layered disclosure approach to satisfying portfolio company
prospectus delivery obligations). Therefore, we intend to review the
use of the summary prospectus by investors in variable contracts that
voluntarily adopt the summary prospectus and then reconsider whether
use of the summary prospectus for variable contracts should be mandated
in the future.\62\
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\62\ See 2009 Summary Prospectus Adopting Release, supra note
33, at 66-67 (similarly noting the Commission's intent to review the
use of the mutual fund summary prospectus by investors in funds that
voluntarily adopt the summary prospectus).
---------------------------------------------------------------------------
We believe that the diversity of variable contracts (and the
corresponding diversity regarding variable contracts' approach to
prospectus disclosure) also supports permitting, but not requiring,
insurers to use the variable contract summary prospectus regime. We
have observed that some variable contracts are fairly basic, offering
few (or no) optional benefits and few investment options. Because these
contracts have fairly straightforward disclosure documents, the summary
prospectus regime may be less compelling for these products, as
compared to more complex variable products with numerous optional
benefits and investment options (which tend to have longer and more
complicated prospectuses). Registrants will likely assess the relative
benefit of using a summary prospectus based on the types of products
they offer and the length of their current prospectuses--as well as the
benefit of more concise disclosure to investors--when evaluating
whether to opt into the new layered disclosure regime.\63\ An optional
approach would also preserve flexibility for registrants that may not
wish to undertake the costs of the transition to a summary prospectus
regime.
---------------------------------------------------------------------------
\63\ See infra section III.C.1.
---------------------------------------------------------------------------
II. Discussion
A. New Option To Use a Summary Prospectus for Variable Contracts
We are proposing new rule 498A, which would provide a new option
for a person to satisfy its prospectus delivery obligations for
variable contracts under section 5(b)(2) of the Securities Act by: (1)
Sending or giving to new investors key information contained in a
variable contract statutory prospectus in the form of an initial
summary prospectus; (2) sending or giving to existing investors each
year a brief description of certain changes to the contract, and a
subset of the information in the initial summary prospectus, in the
form of an updating summary prospectus; and (3) providing the statutory
prospectus and other materials online. In addition, the new rule would
require a registrant (or the financial intermediary distributing the
variable contact) to send the variable contract statutory prospectus
and other materials to the investor in paper or electronic format upon
request.
1. Initial Summary Prospectus
a. Overview
The proposed rule would require a person relying on the rule to
send or give an initial summary prospectus in connection with sales of
variable contracts to new investors.\64\ We have designed the initial
summary prospectus to use a layered disclosure approach that would
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 available online
and electronically or in paper format on request. Simplicity and
clarity are of heightened importance in a prospectus in connection with
an initial purchase decision for a variable contract because of the
long-term nature and complexity of these products. In addition, these
considerations are important because, unlike with other investment
products, typically variable contract investors have a state-mandated
``free look'' opportunity to return the contract for a full refund of
premium within a limited number of days following contract
issuance.\65\
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\64\ Proposed rule 498A(f)(1). For an initial purchase of a
variable contract, the initial summary prospectus must be ``sent or
given no later than the time of the carrying or delivery of the
contract security.'' See infra section II.A.3.
\65\ State insurance law requirements typically require that
variable contracts have free look provisions that permit investors
to return the contract for a refund within a stated number of days
of receiving it (usually between ten and twenty days). The amount of
the refund may differ between variable annuity contracts and
variable life insurance contracts and also may vary among the
states.
See also NAIC, Annuity Disclosure Model Regulations (2nd
Quarter, 2015) (``2015 NAIC Annuity Disclosure Model Regulations''),
available at http://www.naic.org/store/free/MDL-245.pdf (``Where the
Buyer's Guide and disclosure document are not provided at or before
the time of application, a free look period of no less than fifteen
(15) days shall be provided for the applicant to return the annuity
contract without penalty. This free look shall run concurrently with
any other free look provided by state law or regulation.''); NAIC,
Life Insurance Disclosure Model Regulations, (3rd Quarter, 2018),
available at http://www.naic.org/store/free/MDL-580.pdf (``[I]f the
policy for which application is made contains an unconditional
refund provision of at least ten (10) days, the Buyer's Guide may be
delivered with the policy or prior to delivery of the policy.'').
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[[Page 61738]]
One unique aspect of variable contract disclosure practices is the
wide variety of information about the contract that we understand
investors commonly receive throughout the lifecycle of the contract.
During the sales process, potential investors typically receive
informational materials provided by the insurer, such as marketing
brochures, investment option guides, and other explanatory materials
that focus on key features of the particular contract or variable
contracts generally. They may also receive disclosures required under
state law, such as a ``Buyer's Guide'' that generally describes how
variable contracts work.\66\ Each investor also typically completes an
application, along with certain assessment forms, in order to determine
whether a variable contract may be appropriate for the investor.\67\
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\66\ Some states have adopted model regulations that require
insurers to provide certain disclosure documents to annuity
investors either at or before the time of application. For example,
the ``Buyer's Guide'' describes in plain English how variable
contracts work, what certain technical terms mean, tax implications,
and fees. See NAIC, Buyer's Guide for Deferred Annuities Variable
(2013), available at http://www.naic.org/documents/prod_serv_consumer_anb_lv_2013.pdf; NAIC, Life Insurance Buyer's
Guide, (2007), available at http://naic.org/documents/consumer_guide_life.pdf.
\67\ See, e.g., FINRA Rule 2330 (Members' Responsibilities
Regarding Deferred Variable Annuities) (establishing sales practice
standards, including suitability standards, regarding recommended
purchases and exchanges of variable annuities).
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Once the application is approved, the investor receives the
contract, which sets forth in detail the investor-specific contract
terms and is accompanied by the contract statutory prospectus. In
addition to receiving an updated contract statutory prospectus and the
prospectuses of the portfolio companies at least annually,\68\
investors also receive other information during the lifecycle of a
variable contract. This includes, for example, information required
under federal law (such as purchase and sale confirmations, and annual
and semi-annual reports for the portfolio companies to which the
investor has allocated contract value). This also includes notices that
insurers may choose to send to investors alerting them to key events
(such as required minimum distributions, withdrawals, annuitization,
ability to exercise an optional benefit, and loan confirmations).\69\
We have designed the initial summary prospectus to complement current
disclosure practices by not unnecessarily duplicating other
disclosures, and by highlighting aspects of the contract that may not
be described in detail elsewhere.
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\68\ See supra note 31 and accompanying text; see also infra
section II.C (discussing circumstances under which certain variable
contract issuers provide alternative disclosures instead of the
contract statutory prospectus, as described in certain staff no-
action letters).
\69\ Additionally, to the extent that a variable contract
investor meets periodically with a sales agent, the sales agent may
also provide additional supplemental information about the contract
or the portfolio companies.
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b. Scope of Disclosure To Be Included in Initial Summary Prospectus
The proposed rule requires that the initial summary prospectus may
only describe a single contract that the registrant currently offers
for sale.\70\ We understand that industry practice is to combine
multiple contract prospectuses into a single registration statement on
Form N-3, N-4, or N-6 when those prospectuses describe variable
contracts that are ``essentially identical.'' \71\ We also understand
that certain contract prospectuses include disclosure about contract
features and options that the registrant may no longer offer to new
investors.
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\70\ Proposed rule 498A(b)(1).
\71\ See General Guidance to Variable Annuity, Variable Life,
and Other Insurance Company Investment Contract Registrants, SEC
Staff No-Action Letter (Nov. 3, 1995), at section I.4 (discussing
industry practice); see also infra section II.D.1 (discussing our
proposed form instructions that would incorporate this existing
staff guidance).
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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.
Therefore, the proposed rule limits the initial summary prospectus to
describing only a single contract that the registrant offers under the
statutory prospectus to which the initial summary prospectus relates.
While the initial summary prospectus could only describe one contract,
the proposed rule nonetheless would permit it to describe more than one
class of a currently-offered contract.\72\
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\72\ Proposed rule 498A(b)(1). Similarly, a mutual fund summary
prospectus ``may describe only one Fund, but may describe more than
one Class of a Fund.'' See rule 498(b)(4).
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Although the content requirements for the initial summary
prospectus cross-reference items of Forms N-3, N-4, and N-6, we
anticipate that the proposed rule's scope provisions may cause
registrants to vary certain disclosures that appear in the statutory
prospectus when the same disclosure topics appear in the initial
summary prospectus. This may occur even if both disclosures respond to
the same form item requirement.\73\ For example, a registrant that
describes several currently- and previously-offered optional benefits
in response to Item 11 of Form N-4 in its statutory prospectus would
not be permitted to describe optional benefits that it no longer
currently offers in its initial summary prospectus.
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\73\ See infra section II.A.7.c. (discussing potential section
11 liability considerations to the extent that the language in the
summary prospectus is not identical in substance to the same
sections of the statutory prospectus).
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We request comment generally on the proposed scope requirements for
the initial summary prospectus, and specifically on the following
issues:
Should the initial summary prospectus be limited to
describing a single contract that the registrant currently offers
for sale? Would this reduce the initial summary prospectus'
complexity and minimize confusion to investors? Would this
requirement be burdensome in any way for registrants to interpret,
administer, or manage operationally, and if so, how? Should the
proposed rule instead frame this requirement of one summary
prospectus-per-contract in another manner, for clarity or for any
other reason?
Should we allow an initial summary prospectus to
describe multiple contracts if the registrant currently offers
multiple contracts through the related registration statement? Would
the answer change if the multiple contracts were offered on a single
prospectus versus multiple separate prospectuses? Would this make
the initial summary prospectus substantially longer or confusing to
investors, and would it decrease the likelihood that investors would
read an initial summary prospectus?
Should we restrict the number of contract classes that
may be included in an initial summary prospectus?
c. Preparation of the Initial Summary Prospectus
The following chart outlines the information that the proposed rule
would require to appear in an initial summary prospectus. Along with
specifying required introductory disclosures on the outside front cover
page or the beginning of the initial
[[Page 61739]]
summary prospectus, the proposed rule references particular disclosure
items from Forms N-3, N-4, and N-6 (as proposed to be amended).\74\ The
information would be required to appear in the same order, and under
the relevant corresponding headings, as the proposed rule
specifies.\75\ We propose a standardized presentation to require
certain disclosure items that we believe would be most relevant to
investors (such as the proposed contract overview section and proposed
table that includes key information about the contract), to appear at
the beginning of the initial summary prospectus, with supplemental
information appearing further in. The required presentation could also
facilitate comparison of different variable contracts.\76\
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\74\ To the extent we have proposed amendments to Forms N-3, N-
4, and N-6 that would facilitate the proposed summary prospectus
content requirements, as well as amend the content requirements for
the statutory prospectus, we generally discuss these amendments in
more detail in section II.D below. However, in order to better
explain the initial summary prospectus, we have elected to discuss
new or amended items that we propose to include in the statutory
prospectus, to the extent they would also appear in the initial
summary prospectus, in this section II.A.1.
\75\ Proposed rule 498A(b)(5).
\76\ We understand that many investors purchase variable
contracts through an intermediary and often do not directly compare
competing products. A standardized order may nonetheless be useful
for investment professionals to compare the products they ultimately
recommend to investors with other products, as well as investors
considering whether to purchase a new annuity contract to replace an
existing one. See infra note 160 and accompanying text. Having a
more comparable document may ultimately promote greater
comparability across products, registrants, and insurance
institutions, which could lead to better investor understanding and
increased competition.
As discussed below in Section II.E, we are also proposing to
require the use of Inline XBRL format for the submission of certain
required disclosures in the variable contract statutory prospectus.
The structured data format would allow investors, financial
intermediaries, third-party analysts, and others to more efficiently
analyze and compare these products.
Table 2--Outline of the Initial Summary Prospectus
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Heading in initial summary prospectus Proposed item of Form N[dash]3 Proposed item of Form N[dash]4 Proposed item of Form N[dash]6
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Cover Page:
Identifying Information.
Legends.
EDGAR Contract Identifier.
Table of Contents (optional).
Content:
Overview of the [Variable Annuity/Life 2................................ 2............................... 2.
Insurance] Contract.
Important Information You Should Consider 3................................ 3............................... 3.
About the [Contract].
Standard Death Benefit....................... 11(a)............................ 10(a)........................... 10(a).
Other Benefits Available Under the Contract.. 12(a)............................ 11(a)........................... 11(a).
Buying the Contract.......................... 13(a)............................ 12(a)........................... 9(a)-9(e).
How Your Contract Can Lapse.................. ................................. ................................ 14.
Surrendering Your Contract or Making 14(a)............................ 13(a)........................... 12(a).
Withdrawals: Accessing the Money in Your
Contract.
Additional Information About Fees............ 4................................ 4............................... 4.
Appendix: Portfolio Companies Available Under 19 or 20 \77\.................... 18.............................. 18.
the Contract.
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i. Cover Page and Table of Contents
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\77\ Registrants on Form N-3 could omit the appendix specified
by proposed Item 19 of Form N-3, and instead provide the more
detailed disclosures about the investment options offered under the
contract required by proposed Item 20 of Form N-3. See infra note
517 and accompanying text.
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Identifying Information. Under the proposed rule, the following
information would be required to appear on the front cover page or the
beginning of the initial summary prospectus:
The depositor's name;
the registrant's name;
the name of the contract, and the class or classes if any,
to which the initial summary prospectus relates;
a statement identifying the initial summary prospectus as
a ``Summary Prospectus for New Investors''; and
the approximate date of the first use of the initial
summary prospectus.\78\
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\78\ Proposed rule 498A(b)(2)(i) through (v).
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Legends. The cover page or beginning of the initial summary
prospectus would also be required to include the following legends:
This Summary Prospectus summarizes key features of the [name of
Contract]. You should read this Summary Prospectus carefully,
particularly the section titled Important Information You Should
Consider About the [Contract].
Before you invest, you should review the prospectus for the
[name of Contract], which contains more information about the
[Contract], including its features, benefits, and risks. You can
find the 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 [__].\79\
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\79\ The legend would be required to provide an internet
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
information, request other information about the variable contract,
and to make investor inquiries. Proposed rule 498A(b)(2)(vi)(B).
The website address would be required to be specific enough to
lead investors to a direct link to the statutory prospectus and
other required information, rather than to the home page or another
part of the website. The website could host other relevant
disclosure documents with prominent links to each required document.
Id.
The legend could indicate, if applicable, that the statutory
prospectus and other information are available from a financial
intermediary (such as a broker-dealer) through which the contract
may be purchased or sold. Id.
For purposes of this proposed requirement, documents available
on the website address would be required to be publicly accessible
and free of charge. See proposed rule 498A(h)(1); see also infra
section II.A.4.
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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 general information about certain investment
products, including [variable annuities/variable life insurance
contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.\80\
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\80\ Proposed rule 498A(b)(2)(vi).
These proposed legends are designed to provide identifying
information about the variable contract to which the initial
[[Page 61740]]
summary prospectus relates, as well as certain general information that
would be applicable to all variable contracts.\81\ While the proposed
legend describing how to obtain further information about the contract
generally parallels the legend on the cover page of mutual fund summary
prospectuses,\82\ we have proposed several additional legends that we
believe are appropriate in the context of variable contracts. These
additional legends notify investors that: (1) The initial summary
prospectus is a summary that should be read carefully (and that
investors should particularly focus on the ``Important Information You
Should Consider About the [Contract]'' section of the summary
prospectus); (2) they may cancel the variable contract within a limited
amount of time after receiving it (that is, alerting investors to the
existence of the free look period); \83\ and (3) additional general
information about certain investment products, including variable
contracts, is available at Investor.gov.\84\
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\81\ A registrant would be able to modify the proposed legends
so long as the modified statements contain comparable information.
Proposed rule 498A(b)(2)(vi)(A).
\82\ See rule 498(b)(1)(v).
\83\ Many investors may not be familiar with the free look
period, and the proposed legend is intended to alert them of its
existence and explain where they may obtain additional information
about its operation. This is particularly important because the free
look period may be the only time the investor may cancel the
contract without paying significant surrender fees or tax penalties.
\84\ The Commission's Office of Investor Education and Advocacy
maintains the website as an online resource to help investors make
sound investment decisions and avoid fraud. The website includes
investment bulletins, alerts, guidance and tools designed to assist
investors, including those considering variable contracts, in
obtaining additional information and resources on understanding and
managing their investments. See, e.g., Updated Investor Bulletin:
Variable Annuities (Oct. 30, 2018), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/updated-investor-bulletin-variable-annuities; Investor Bulletin:
Variable Life Insurance; Investor Bulletin: Variable Life Insurance
(Oct. 30, 2018), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-variable-life-insurance.
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If any information is incorporated by reference into the initial
summary prospectus, the proposed rule would require that the legend
include certain disclosures related to that information.\85\ These
requirements are described below in section II.A.6. The cover page
would also be required to include a legend indicating that the
Securities and Exchange Commission has not approved or disapproved of
the contract or passed upon the accuracy or adequacy of the disclosure
in the summary prospectus and that any contrary representation is a
criminal offense.\86\
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\85\ Proposed rule 498A(b)(2)(vi)(C).
\86\ Proposed rule 498A(b)(2)(vii); cf. rule 481(b)(1) under the
Securities Act.
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EDGAR Contract Identifier. We are also proposing to require that
the contract's EDGAR contract identifier be included on the bottom of
the back cover page or last page of the initial summary prospectus in a
type size smaller than that generally used in the prospectus (e.g., 8-
point modern type).\87\ This requirement is intended to enable
Commission staff and others to more easily link the initial summary
prospectus with other filings associated with the contract.
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\87\ Proposed rule 498A(b)(3). An EDGAR contract identifier is
issued by the Commission, is ten characters in length (nine numbers
preceded by a ``C''), and uniquely, and persistently, identifies
each contract. These identifiers are available to the public.
Information filed with the Commission containing these identifiers
is searchable by the public and our staff using the contract
identifiers and also using the contract names without the need to
reference the registrant issuing the contract. See Rulemaking for
EDGAR System, Investment Company Act Release No. 26990 (July 18,
2005) [70 FR 43558 (July 27, 2005)] at text following n.29.
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Table of Contents. The proposed rule would permit an initial
summary prospectus to include a table of contents.\88\ 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 prospectus delivered electronically.\89\
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\88\ Proposed rule 498A(b)(4).
\89\ Rule 481(c).
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We request comment generally on the proposed requirements for the
cover page and table of contents of the initial summary prospectus, and
specifically on the following issues:
Should we include any additional information or
eliminate any of the information that we have proposed to include in
these parts of the initial summary prospectus? For example, for
prospectuses filed on Form S-11, which is used for registration
under the Securities Act of securities of certain real estate
companies, the cover page must include a prominent cross-reference
to the risk factors section of the prospectus, including the page
number where it appears, as well as certain disclosures, if
applicable, regarding limitations on transferability of the
securities being registered and the absence of a market for
securities of the same class as those being registered.\90\ Would it
be helpful for the cover page of the initial summary prospectus to
contain similar disclosures relevant to variable contracts? For
example, in addition to stating that investors should particularly
focus on the ``Important Information You Should Consider About the
[Contract]'' section of the initial summary prospectus, should the
cover page include disclosures regarding surrender charges or other
items relating to the contract, a cross-reference to the risk
factors section or other sections of the statutory prospectus, or
other disclosures?
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\90\ See Item 1 of Form S-11 (requiring certain disclosures and
also referencing Item 501 of Regulation S-K); see also Item 501 of
Regulation S-K [17 CFR 229.501].
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Are the proposed legends sufficient to notify investors
of the availability and significance of the contract statutory
prospectus and other information about the variable contract and how
to obtain this information? Should the legends include greater
detail about the information that is available?
Will the proposed legends adequately inform investors
of the various means for obtaining additional information about a
variable contract? Are the proposed requirements for the website
address where additional information is available adequate to ensure
that the website and the additional information will be easy to
locate?
Would the proposed legend on the cover page or
beginning of the initial summary prospectus with information on the
free look period help alert investors that they may cancel their
contracts without fees or penalties within a limited time after the
sale? Should this legend be more prominently displayed (e.g., larger
font size, boxed, or bolded) relative to the other legends?
As proposed, should registrants be permitted to modify
the required legends, provided the modified legends provide
comparable information?
Should the legends include a reference to the
Investor.gov website? Why or why not? If so, what specific
information about variable contracts would be most helpful to
investors for the staff to provide on this website?
Should the proposed requirement to include the
contract's EDGAR contract identifier on the bottom of the back cover
page or last page of the initial summary prospectus instead require
that another identifier be provided? If so, what identifier should
be listed, and why?
Should registrants be permitted to include a table of
contents in the initial summary prospectus? Instead, should a table
of contents be required? Does rule 481(c) under the Securities Act
provide appropriate requirements for a table of contents included in
an initial summary prospectus?
ii. Content of the Initial Summary Prospectus
Proposed rule 498A specifies the content and order thereof required
in an initial summary prospectus.\91\ An initial summary prospectus
must contain the information required by the proposed rule, and only
that information, in the order specified by the rule.\92\ Adhering to
these content requirements is one condition that an initial summary
prospectus must satisfy in order to be deemed to be a prospectus that
is permitted under section 10(b) of the Securities Act and section
24(g) of the
[[Page 61741]]
Investment Company Act for the purposes of section 5(b)(1) of the
Securities Act.\93\ To aid market participants in understanding the
types of disclosures we propose to require, Appendix A to this release
contains a hypothetical initial summary prospectus for a variable
annuity separate account with a registration statement filed on Form N-
4. This hypothetical initial summary prospectus is provided solely for
illustrative purposes and is not intended to imply that it would
reflect a ``typical'' initial summary prospectus.
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\91\ Proposed rule 498A(b)(5).
\92\ Id.
\93\ Proposed rule 498A(b); see also infra section II.A.3.
Section 10(b) of the Securities Act authorizes the Commission to
adopt rules deemed necessary or appropriate in the public interest
or for the protection of investors that permit the use of an
``omitting prospectus'' for the purposes of section 5(b)(1) that
omits or summarizes information contained in the statutory
prospectus. Section 24(g) of the Investment Company Act authorizes
the Commission to permit the use of a prospectus under section 10(b)
of the Securities Act to include information the substance of which
is not included in the statutory prospectus. 15 U.S.C. 77j(b); 15
U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g); see also 2009 Summary
Prospectus Adopting Release, supra note 33, at n.70.
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(a) Overview of the Contract
The initial summary prospectus would begin with a section including
certain basic and introductory information about the contract and its
benefits, under the heading ``Overview of the [Variable Annuity/Life
Insurance] Contract.'' \94\ This section would appear at the beginning
of the initial summary prospectus because it is designed to provide
basic information about how the variable contract functions. We believe
that investors of different levels of financial sophistication may
benefit from receiving this information early in the initial summary
prospectus. This would provide a contextual baseline to help inform
investors' understanding of disclosure about more detailed aspects of
the variable contract that are described later in the initial summary
prospectus.
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\94\ See proposed rule 498A(b)(5)(i); see also proposed Item 2
of Forms N-3, N-4, and N-6; infra section II.D.2.b.
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Specifically, this section would be required to include a concise
description of the following:
Purpose of Contract. The proposed requirement to briefly describe
the purpose(s) of the contract in general terms \95\ is intended to
provide the reader with information on what financial objectives that
contract could help the investor achieve, as well as the profile of an
investor for whom the contract may be appropriate (e.g., by discussing
a representative investor's time horizon, liquidity needs, and
financial goals). This requirement could be satisfied, for example, by
stating that the contract is meant to help the investor accumulate
assets through an investment portfolio, to provide or supplement the
investor's retirement income, or to provide death benefits and/or other
benefits, and that the contract may not be appropriate for an investor
that intends to access his or her invested funds within a short-term
timeframe.
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\95\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(a) of Forms N-3, N-4, and N-6.
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Phases of Contract (for Variable Annuity Contracts). The proposed
requirement to include a brief description of the accumulation
(savings) phase and annuity (income) phases of the contract \96\ is
meant to provide basic information about how the variable annuity
contract functions, which in turn would help highlight how the contract
differs from other types of investment products. It also is designed to
address common areas of confusion among variable annuity investors. For
example, it would highlight the effect of annuitization on the ability
to make withdrawals and the continuation of contract benefits.
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\96\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b) of Forms N-3 and N-4.
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This discussion would require a brief overview of the investment
options available under the contract (that is, portfolio companies and
any general or fixed account option).\97\ The registrant also would be
required to prominently disclose that additional information on the
portfolio companies is provided in an appendix to the summary
prospectus (or elsewhere in the case of registrants on Form N-3 that
chose to omit the appendix from the initial summary prospectus in favor
of more detailed information about investment options as required by
proposed Item 20 of Form N-3),\98\ and provide a cross-reference or
link to the relevant appendix.\99\ Finally, the registrant would be
required to state, if applicable, that if an investor annuitizes, he or
she will receive a stream of income payments, but he or she will be
unable to make withdrawals, and death benefits and living benefits will
terminate.\100\
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\97\ However, a detailed explanation of the separate account,
sub-accounts, and portfolio companies is not required. See
Instruction 2 to proposed Item 2(b)(1) of Forms N-3 and N-4.
The registrant thus would not list the names of each portfolio
company available under the contract, as this would be duplicative
of information available in the appendix that would accompany the
summary prospectus. See infra section II.A.1.c.ii(i).
\98\ See infra note 517 and accompanying text.
\99\ See proposed rule 498A(b)(5)(i); see also Instruction 1 to
proposed Item 2(b)(1) of Forms N-3 and N-4.
\100\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b)(2) of Forms N-3 and N-4.
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Premiums (for Variable Life Insurance Contracts). Instead of
requiring a description of the phases of the contract as with variable
annuities, Form N-6 would require the ``Overview'' section to briefly
describe the payment of premiums under the variable life insurance
contract. This description of premiums would include: (1) Whether
premiums may vary in timing and amount (e.g., flexible premiums); (2)
whether restrictions may be imposed on premium payments (e.g., by age
of insured, or by amount); (3) how premiums may be allocated (this
discussion would include a brief overview of the investment options
available under the contract, as well as any general (fixed) account
options); and (4) a statement that payment of insufficient premiums may
result in a lapse of the contract.\101\
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\101\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b) of Form N-6. The proposed instructions to this requirement
would require the registrant to disclose that additional information
on the portfolio companies is provided in an appendix to the summary
prospectus, and provide a cross-reference to the relevant appendix.
See proposed rule 498A(b)(5)(i); see also Instruction 1 to proposed
Item 2(b)(3) of Form N-6.
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Unlike variable annuities, variable life insurance requires the
investor to make continuous premium payments in order to avoid a lapse
of the contract. We therefore believe the ``Overview'' section should
prominently explain the role of premium payments in the contract, and
highlight for investors a key risk that non-payment (or insufficient
payment) of premiums could result in contract lapse.
Contract Features. Finally, this section would include a summary of
the contract's primary features, including death benefits, withdrawal
options, loan provisions, and any available optional benefits.\102\ If
applicable, the registrant would be required to state that the investor
will incur an additional fee for selecting a particular benefit.\103\
Because registrants would discuss many of these subjects in other
sections of the initial summary prospectus in greater detail (and would
discuss each of these subjects in more detail in the contract statutory
prospectus), this paragraph is intended to be summary in nature.
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\102\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(c) of Forms N-3, N-4, and N-6.
\103\ Id.
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We request comment generally on the ``Overview'' section that we
propose would appear in the initial summary prospectus, and
specifically on the following issues:
[[Page 61742]]
Are the requirements of the proposed section clear and
appropriate in light of the goals of the initial summary prospectus,
and would the information disclosed to investors be helpful to
investors in light of these goals? Is this the most useful
information for the beginning of the initial summary prospectus?
Would it provide investors with context to better understand the
remainder of the initial summary prospectus? Why or why not? Would
the information provided in the proposed section be unnecessarily
duplicative with other information that would appear in the initial
summary prospectus?
Should we impose word or page limits on the proposed
section? If so, what should the word or page limits be (e.g., no
more than one page)?
Are there additional disclosure topics that should be
required to be included in the proposed ``Overview'' section?
Instead, should we provide flexibility to registrants in preparing
this section as to topics, etc.?
(b) Key Information
The initial summary prospectus would next include a table (the
``Key Information Table'') that would provide a brief description of
key facts about the variable contract in a specific sequence and in a
standardized presentation that is designed to be easy to read and
navigate.\104\ Specifically, it would include a summary of five topic
areas: (1) Fees and expenses; (2) risks; (3) restrictions; (4) taxes;
and (5) conflicts of interest. This is intended to highlight, in a
consolidated location, important considerations related to these
products, including certain unique aspects of the variable contract
that might be unfamiliar to investors who have experience with mutual
funds or other types of investment products.\105\
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\104\ See proposed rule 498A(b)(5)(ii); proposed Item 3 of Forms
N-3, N-4, and N-6.
\105\ In determining these proposed topic areas, we considered
investor complaints received by the Commission's Office of Investor
Education and Advocacy and the results of the 2012 Financial
Literacy Study. See text accompanying note 667 (regarding investor
complaints); 2012 Financial Literacy Study, supra note 39. We also
considered various regulatory and industry sources. See, e.g., FINRA
Rule 2330(b)(1)(A)(i) (variable annuity investors must be informed,
``in general terms, of various features of deferred variable
annuities, such as the potential surrender period and surrender
charge; potential tax penalty if consumers sell or redeem deferred
variable annuities before reaching the age of 59\1/2\; mortality and
expense fees; investment advisory fees; potential charges for and
features of riders; the insurance and investment components of
deferred variable annuities; and market risk'').
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The Key Information Table includes a number of prescribed
disclosures and is designed to complement the ``Overview'' section. We
have proposed placing these two disclosure sections at the beginning of
the initial summary prospectus because we believe they contain certain
basic information that is critical for variable contract investors to
read. We are also proposing that this information be provided in a
standardized tabular presentation because we believe that, as compared
to the narrative-type presentation of corresponding disclosures in the
statutory prospectus, a summary tabular presentation would be easier to
read and better convey the importance of the information to
investors.\106\ This presentation may also facilitate comparisons of
certain disclosure topics among variable contract prospectuses.
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\106\ We considered mutual fund disclosure research that
supported the view that a tabular presentation would be an effective
disclosure delivery method. See, e.g., John Kozup, Elizabeth
Howlett, and Michael Pagano, The Effects of Summary Information on
Consumer Perceptions of Mutual Fund Characteristics, The Journal of
Consumer Affairs 42, 37-59 (2008) (concluding that summary
information, particularly using graphical presentation, is an
effective way to facilitate the processing of information for
investors evaluating mutual funds).
Experts in disclosure effectiveness for consumer-facing
communications also have encouraged the use of a ``strong design
grid'' (such as the tabular presentation we propose) to clarify
concepts to consumers and to organize disclosure elements. See,
e.g., 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 (``Kleimann
Presentation'').
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We propose requiring that a registrant provide the Key Information
Table under the heading ``Important Information You Should Consider
About the [Contract].'' \107\ There would be specified headings for
each of the five topic areas that the table would include, and under
each heading would be two columns. The left column would list the
required disclosure line-items for each of the five topic areas, and
the right column would provide a brief description for each
corresponding line-item, according to the respective instructions for
each proposed line-item.\108\
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\107\ Immediately following this heading would be the statement:
``An investment in the Contract is subject to fees, risks, and other
important considerations, some of which are briefly summarized in
the following table. You should review the prospectus for additional
information about these topics.''
\108\ The table also could include a third column, which would
include cross-references to the locations in the statutory
prospectus where the subject matter that each line-item requires is
described in greater detail, or would otherwise cross-reference that
information. See infra note 162 and accompanying text.
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(i) Fees and Expenses
Variable contracts typically have multiple layers of fees,
expenses, and charges that can be confusing to investors. While the Fee
Table currently required in variable contract prospectuses provides
comprehensive fee and expense information,\109\ that information is
frequently presented over a span of two or more pages when a prospectus
is printed on paper. We believe that investors may benefit from a
shorter, more tailored discussion in the Key Information Table that is
intended to convey the importance of a contract's fee and expense
structure. As discussed below, we are proposing to require that the
initial summary prospectus also include the Fee Table from the
statutory prospectus.\110\ This framework would allow an investor to
determine the level of fee information that best suits his or her
informational needs.
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\109\ See Item 3 of current Forms N-3, N-4, and N-6 (``Fee
Table'').
\110\ See infra section II.A.1.c.ii(h).
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Surrender Charges. We believe that it is important that investors
understand that if they make a withdrawal in the first several years of
their contract, they may pay a significant charge that will reduce the
value of their investment. We believe, however, that investors
frequently do not understand, or may be surprised by, surrender charges
associated with early withdrawals.\111\
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\111\ The Commission's Office of Investor Education and Advocacy
frequently receives investor inquiries about variable contract
surrender charges, suggesting that many investors may be confused
about how surrender charges work.
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The proposed Key Information Table would require certain
information intended to alert investors about the potential impact of
surrender charges imposed on early withdrawals. The first line-item in
the proposed table, ``Surrender Charge (charges for early
withdrawals),'' would require a statement that if the investor
withdraws money from the contract within [x] years following his or her
last premium payment, he or she will be assessed a surrender charge.
This statement would include the maximum surrender charge, and the
maximum number of years that a surrender charge may be assessed since
the last payment was made under the contract.\112\
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\112\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(a) to proposed Item 3 of Forms N-3, N-4, and N-6. The maximum
surrender charge would be expressed as a percentage of the
contribution or premium or the amount surrendered, whichever is
applicable.
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In addition, we are proposing to require an example of the maximum
surrender charge an investor could pay (in dollars) under the contract
assuming a $100,000 investment (e.g., ``[i]f you make an early
withdrawal, you could pay a surrender charge of up to $9,000 on a
$100,000 investment.'').\113\ We
[[Page 61743]]
believe that for purposes of the Key Information Table, providing a
dollar figure may better communicate to investors the impact of
surrender charges than a surrender charge schedule that shows the
applicable surrender charge per year as a percentage.\114\
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\113\ We propose to use $100,000 as the basis for the surrender
charge example because the value of the average variable annuity
contract has recently exceeded $100,000. See IRI Fact Book, supra
note 8, at 170. Using this figure would result in cost estimates
that more closely mirror the actual experience of many variable
contract investors. See infra note 130 and accompanying text.
\114\ Registrants would continue to disclose the surrender fee
in the Fee Table as a line-item in the ``Transaction Expenses''
table. They also would continue to reflect the consequence of any
surrender fee in the ``Example'' to the Fee Table that would show
the investor's contract costs if he or she were to surrender the
contract after 1 year, 3 years, 5 years, and 10 years. See Item 3 of
Forms N-3, N-4, and N-6.
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Transaction Charges. The second line-item in the ``Fees and
Expenses'' section of the proposed table, ``Transaction Charges
(charges for certain transactions),'' would require a statement that,
in addition to surrender charges, the investor may also be charged for
other transactions. This statement would be required to include a brief
description of the types of such charges (e.g., front-end loads,
charges for transferring cash value between investment options, charges
for wire transfers, etc.).\115\ We are not proposing to require
registrants to disclose the amount of each transaction charge in the
Key Information Table because we understand the costs associated with
most transaction charges to be relatively small, as a percentage of
average account size (unlike surrender charges). Moreover, the Fee
Table would require more detailed information about each of these
charges (including the amount of each charge).\116\ The line-item for
Transaction Charges in the Key Information Table is designed to provide
a simple narrative description to alert investors that surrender
charges are not the only transaction charges they could pay.
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\115\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(b) to proposed Item 3 of Forms N-3, N-4, and N-6. Although
surrender charges are a type of transaction charge, we are proposing
to require surrender charges be separately disclosed in the Key
Information Table to highlight to investors the significant costs
associated with early withdrawals.
\116\ See proposed Item 4 of Forms N-3, N-4, and N-6 (requiring
disclosure of transaction expenses).
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Ongoing Fees and Expenses. The third line-item in the ``Fees and
Expenses'' section, ``Ongoing Fees and Expenses (annual expenses),'' is
designed to alert investors that they also will bear recurring fees on
an annual basis.\117\ In Form N-3 and N-4, the disclosure in this line-
item would begin with the legend ``The table below describes the fees
and expenses that you may pay each year, depending on the options you
choose.'' \118\
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\117\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c) to proposed Item 3 of Forms N-3, N-4, and N-6.
\118\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(A) to proposed Item 3 of Forms N-3 and N-4.
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Form N-4 registrants would disclose, in a tabular presentation in
the order specified, the minimum and maximum annual fees for: (1) Base
contract expenses; \119\ (2) investment options (e.g., portfolio
company fees and expenses); \120\ and (3) optional benefits.\121\ Since
Form N-3 registrants have a single-tier structure and consolidate fees
and expenses for investment options into base contract expenses, Form
N-3 registrants would disclose the same information as Form N-4
registrants except fees for base contract expenses and investment
options would be consolidated into a single entry labeled ``annual
contract expenses.'' \122\ The minimum annual fee column would show the
lowest available current fee for each annual fee category (i.e., the
least expensive contract class, the lowest total annual portfolio
company operating expense, lowest annual contract expenses, and the
least expensive optional benefit available for an additional
charge).\123\ The maximum annual fee column would show the highest fees
for these categories. Additionally, a legend preceding the minimum and
maximum annual fee table would refer investors to their contract
specifications page for information about the specific fees they would
pay each year based on the options elected.\124\
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\119\ Minimum and maximum annual fees for base contract expenses
would not be required on Form N-6 because life insurance charges are
based on underwriting and can vary significantly from one insured
person to another depending on various demographic characteristics.
This could lead to significant variations between these amounts,
which we do not expect would be helpful, and may be confusing, to
investors.
\120\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(D) to proposed Item 3 of Form N-4. Registrants would use the
gross expense ratio disclosed in the Fee Table of a portfolio
company's current prospectus, which is the same basis for
calculating portfolio company expense ratios as Items 4 (Fee Table)
and 18 ([Portfolio Companies] Available Under the Contract) of Form
N-4.
\121\ The disclosure would also require, in a parenthetical or
footnote to the table or each caption, an explanation of the basis
for each percentage (e.g., as a percentage of separate account value
or benefit base, or % of net asset value). See proposed rule
498A(b)(5)(ii); see also Instruction 2(c)(i)(C) to proposed Item 3
of Form N-4 (% of net asset value).
\122\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(B) to proposed Item 3 of Form N-3.
\123\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i) to proposed Item 3 of Form N-3; Instruction 2(c)(i) to
proposed Item 3 of Form N-4.
Because the table showing minimum and maximum annual fees is
intended to inform investors about the types and ranges of fees
associated with a variable contract, we are excluding certain
assumptions from the calculations. For example, although we know
that some registrants do not charge extra for certain optional
benefits, we want to alert investors to the costs associated with
optional benefits that are available for an additional charge.
Accordingly, the disclosure should reflect the minimum cost
associated with an optional benefit that has a fee.
\124\ Instruction 2(c)(i)(A) to proposed Item 3 of Forms N-3 and
N-4. Many states require a contract specifications page that
contains information about the premiums, fees, annuitization date
and other information specific to an investor's variable annuity
contract. See, e.g., the Insurance Compact's Individual Deferred
Variable Annuity Contract Standards, available at https://www.insurancecompact.org/rulemaking_records/080911_stds_annuity_individual_deferred_variable.pdf.
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This presentation would consolidate the more detailed information
in the Fee Table, in an effort to minimize the need for investors to
perform complex calculations to understand the fees they will pay.\125\
For example, like the proposed ``Ongoing Fees and Expenses'' line-item
in the Key Information Table, the Fee Table would also include
information about the contract's base contract fee, portfolio company
fees and expenses, and optional benefits.\126\ However, the Fee Table
would be required to include a separate response for each contract form
that the prospectus offers that has different fees, and also a separate
response for each contract class.\127\ In order to condense this
information, the parallel disclosure in the Key Information Table would
be presented as fee ranges.
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\125\ This reflects the principle, which experts in disclosure
effectiveness for consumer-facing communications have encouraged, of
``eliminat[ing] most complex calculations'' for consumers. See
Kleimann Presentation, supra note 106.
\126\ See proposed Item 4 of Forms N-3 and N-4.
\127\ See Instructions 6 and 7 to proposed Item 4 of Forms N-3
and N-4.
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We have also designed an example in Forms N-3 and N-4 to provide a
high-level cost illustration that would give an investor a tool to
understand the basic cost framework of the contract. To emphasize that
an investor's choices have a significant impact on the costs associated
with his or her investment, we propose to require a two-column tabular
presentation in the order specified reflecting the lowest and highest
current annual cost estimates for the variable contract.\128\ The
following legend would precede this table: ``Because your contract is
customizable, the choices you make affect how much you will pay. To
help you understand the cost of owning your contract, the
[[Page 61744]]
following table shows the lowest and highest cost you could pay each
year. This estimate assumes that you do not take withdrawals from the
contract, which could add surrender charges that substantially increase
costs.'' \129\
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\128\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(ii) to proposed Item 3 of Forms N-3 and N-4.
\129\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(ii)(A) to proposed Item 3 of Forms N-3 and N-4.
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The lowest and highest annual dollar costs in this table would be
based on certain prescribed assumptions (i.e., a $100,000 investment)
\130\ with no additional contributions, transfers, or withdrawals, no
sales charges, and a 5% annual return over a hypothetical 10-year
period.\131\ The lowest annual cost estimate would be based on the
least expensive combination of contract classes and portfolio company
charges, excluding optional benefits, and the highest annual cost
estimate would reflect the most expensive combination of these
items.\132\ Excluding optional benefits from the lowest annual cost
estimate, and including them in the highest annual cost estimate, would
illustrate the cost impact of adding optional benefits to a
contract.\133\ With this information, the investor would be able to
roughly estimate further costs,\134\ and could obtain additional
information about costs in the statutory prospectus if needed. \135\
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\130\ While the example in the Fee Table in current Forms N-3
and N-4 uses $10,000 as the basis for calculating assumptions
relating to the costs of investing in a contract, we propose to use
$100,000 as the basis for the cost assumption in the ``Key
Information'' table because the value of the average variable
annuity contract has recently exceeded $100,000. See IRI Fact Book,
supra note 8, at 170. Using this figure would result in costs
estimates that more closely mirror the actual experience of many
variable contract investors. For that reason, we are also proposing
to amend the Forms to use $100,000 as the base assumption for
similar examples used in the Forms, as discussed below.
\131\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(ii)(C)(a) to proposed Item 3 of Forms N-3 and N-4.
The prescribed assumptions largely mirror the Fee Table, with
the exception of the sales load, which is not reflected because we
are seeking to highlight the contract's ongoing expenses. Because
registrants may charge different fees in different years (which may
have the effect of making fees appear small under certain
circumstances), we propose to base the cost estimate on the average
cost of a contract over a 10-year period to level-set the
calculation. See Instruction 2(c)(ii)(C)(a) to proposed Item 3 of
Forms N-3 and N-4.
\132\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(ii)(C)(a) to proposed Item 3 of Forms N-3 and N-4. Instruction
2(c)(ii)(C)(e) to proposed Item 3 of Forms N-3 and N-4 would direct
that, unless otherwise stated, the least and most expensive
combination of annual contract expenses and optional benefits
available for an additional charge should be based on the
disclosures provided in the Example in Item 4 (Fee Table), and that
if a different combination of these items would result in different
maximum or minimum fees in different years, the registrant must use
the least or most expensive combination of these items each year.
\133\ While the example in the Fee Table would include a similar
cost estimate, it would reflect the most expensive combination of
portfolio company operating expenses and optional benefits available
for each contract class available under the contract. The Fee Table
example also includes estimated costs for 1-, 3-, 5- and 10-year
periods (not just for one year), and reflects different scenarios
based on whether the contract is surrendered or annuitized. See
proposed Item 4 of Forms N-3 and N-4.
\134\ For example, since he or she would know the range of costs
to be paid over one year, he or she could estimate the costs to be
paid over five years.
\135\ We would also encourage registrants to use design features
(e.g., multiple colors or shading patterns) that visually
distinguish minimum and maximum fees, and lowest and highest annual
cost estimates.
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In Form N-6, we have proposed that registrants provide disclosure
in the ``Ongoing Fees and Expenses'' section of the table that
primarily uses a narrative presentation, rather than the approach taken
in Forms N-3 and N-4, due to the fact that maximum expenses could
potentially exceed 100% of contract value based on the underwriting of
the variable life insurance contract and therefore potentially be
misleading to investors. This section of the table would require: (1) A
brief statement that investment in a variable life insurance contract
is subject to certain ongoing fees and expenses that are set based on
characteristics of the insured; and (2) the minimum and maximum annual
fees for the investment options in a tabular presentation.\136\
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\136\ Instruction 2(c) to proposed Item 3 of Form N-6.
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(ii) Risks
The proposed Key Information Table also would include a condensed
discussion of contract risks. Current risk disclosures in variable
contract statutory prospectuses typically span multiple pages. While
this level of disclosure may be appropriate for a statutory prospectus,
we believe that a more-concise overview presentation of contract risks
is better suited for the Key Information Table in light of the goals of
the summary prospectus. Like the summary of fee and expense information
that would appear in the proposed Key Information Table, these risk
summaries are intended to provide a concise overview, with additional
information available for an investor who desires or requires
additional details.
Specifically, the table would include four line-items under the
heading ``Risks,'' each of which would include disclosure about a risk
that we believe investors should be alerted to: (1) Risk of loss; (2)
risks that could occur if an investor believes a variable annuity is a
short-term investment; (3) risks associated with the contract's
investment options; and (4) insurance company risks.\137\ Each of these
line-items would include succinct descriptions of the respective risk.
---------------------------------------------------------------------------
\137\ See proposed rule 498A(b)(5)(ii); see also Instruction 3
to proposed Item 3 of Forms N-3, N-4, and N-6.
---------------------------------------------------------------------------
The first line-item is intended to convey the concept that although
variable contracts have elements of insurance, unlike most traditional
forms of insurance, these products are subject to the risk of
investment loss.\138\ This could help prevent any misunderstanding if,
for example, an investor confused a variable annuity contract and a
fixed annuity contract and did not understand that the contract value
in a variable annuity could decline.
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\138\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(a) to proposed Item 3 of Forms N-3, N-4, and N-6 (``State that a
contractowner can lose money by investing in the Contract.'').
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The second line-item is intended to emphasize to investors that
variable contracts are generally long-term investments and not
appropriate for an investor who needs ready access to cash,
particularly in view of the impact of surrender charges and/or tax
penalties for early withdrawals.\139\ The third line-item is intended
to focus on the general risk of poor investment performance (as opposed
to the details of the specific risks associated with each of the
particular investment options available under the contract).\140\
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\139\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(b) to proposed Item 3 of Forms N-3, N-4, and N-6 (``State that a
Contract is not a short-term investment vehicle and is not
appropriate for an investor who needs ready access to cash,
accompanied by a brief explanation.'').
\140\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(c) to proposed Item 3 of Forms N-3, N-4, and N-6 (e.g., from Form
N-4, ``State that 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
(e.g., Portfolio Companies and any fixed account investment
options), that each investment option will have its own unique
risks, and that the contractowner should review a Portfolio
Company's prospectus before making an investment decision.'').
Because most variable annuity contracts typically offer fifty or
more portfolio companies to which investors can allocate their
purchase payments, we are not requiring that the Key Information
Table include risk information specific to each portfolio company,
as to do so would undermine the goal of brevity for this disclosure
item.
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The fourth line-item 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 (as
opposed to the separate account, which is insulated from the claims of
the insurance company's creditors) will depend on the financial
[[Page 61745]]
solvency of the insurance company.\141\ As part of these disclosures,
the registrant would be required to state, if applicable, that
additional information about the insurance company, including its
financial strength ratings, may be obtained from the registrant.\142\
In lieu of providing this statement, a registrant could include the
insurance company's financial strength rating(s).\143\
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\141\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(d) to proposed Item 3 of Forms N-3, N-4, and N-6 (e.g., from Form
N-4, ``State that an investment in the Contract is subject to the
risks related to the Depositor, including the extent to which any
obligations, guarantees, or benefits are subject to the claims-
paying ability of the Depositor.'').
\142\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(d) to proposed Item 3 of Forms N-3, N-4, and N-6 (e.g., from Form
N-4, ``If applicable, further state that more information about the
Depositor, including its financial strength ratings, is available
upon request from the Registrant'').
\143\ See Instruction to Instruction 3(d) to proposed Item 3 of
Forms N-3, N-4, and N-6.
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A fifth line-item, which would only appear in the ``Risks'' section
for variable life insurance contracts, is meant to focus on contract
lapse, which is a key risk for variable life insurance investors (but
not relevant to variable annuity contracts).\144\ For example, a
variable life insurance contract may lapse when sufficient premium
payments are not made by the investor. Since inadvertent contract lapse
could negate the insurance benefit of the variable life insurance
contract, we believe this risk should be included in the Key
Information Table.
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\144\ See proposed rule 498A(b)(5)(ii); see also Instruction
3(e) to proposed Item 3 of Form N-6 (``Briefly state (1) the
circumstances under which the Contract may lapse (e.g., insufficient
premium payments, poor investment performance, withdrawals, unpaid
loans or loan interest), (2) whether there is a cost associated with
reinstating a lapsed Contract, and (3) that death benefits will not
be paid if the Contract has lapsed.'').
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Because the registrant may provide additional details about these
and other risks in the statutory prospectus, we are also proposing a
new requirement in Forms N-3 and N-4 that, like the current parallel
requirement in Form N-6, would require the registrant to summarize the
principal risks of purchasing a contract in a consolidated risk section
within the statutory prospectus.\145\ Registrants would have the
flexibility to discuss any principal risks, and would not be limited to
the risk topics, or the level of disclosure, when responding to this
requirement.
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\145\ See proposed rule 498A(b)(5)(ii); see also Instruction
1(c) to proposed Item 3; proposed Item 5 of Forms N-3, N-4, and N-6.
While we understand that variable annuity statutory prospectuses
today commonly discuss contract risks (although Form N-3 and Form N-
4 do not currently require them to do so), this discussion can be
dispersed throughout the prospectus.
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(iii) Restrictions
The proposed Key Information Table also would require registrants
to briefly disclose those features of a variable contract that commonly
include restrictions or limitations, namely the investment options and
optional benefits that the contract offers. We have designed this
section of the table to include separate line-items for each of these
topics under the heading ``Restrictions.'' \146\ For example, many
variable annuity contracts have optional benefits that restrict the
percentage of assets that investors can allocate to certain investment
options, such as more volatile categories of equity funds, in order to
facilitate the insurance company's ability to reserve for the
guarantees under the benefit.
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\146\ See proposed rule 498A(b)(5)(ii); see also Instruction 4
to proposed Item 3 of Forms N-3, N-4, and N-6. We recognize that
there may be overlap between the proposed line-items for
``Investment Options'' and ``Optional Benefits,'' since many
optional benefits limit the investment options available to
investors.
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The ``Investment Options'' line-item would require registrants to
disclose whether there are any restrictions that may limit the
investment options that an investor may choose and/or limitations on
the transfer of contract value among portfolio companies, and if
applicable, that the insurer reserves the right to remove or substitute
portfolio companies as investment options.\147\ The ``Optional
Benefits'' line-item would require registrants to disclose whether
there are any restrictions or limitations relating to optional
benefits, as well as whether the registrant may modify or terminate an
optional benefit.\148\
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\147\ See proposed rule 498A(b)(5)(ii); see also Instruction
4(a) to proposed Item 3 of Forms N-3, N-4, and N-6 (``State whether
there are any restrictions that may limit the investment options
that a contractowner may choose, and/or whether there are any
limitations on the transfer of Contract value among Portfolio
Companies. If applicable, state that the insurer reserves the right
to remove or substitute Portfolio Companies as investment
options'').
\148\ See proposed rule 498A(b)(5)(ii); see also Instruction
4(b) to proposed Item 3 of Forms N-3, N-4, and N-6 (``State whether
there are any restrictions or limitations relating to optional
benefits, and/or whether an optional benefit may be modified or
terminated by the Registrant. If applicable, state that withdrawals
may affect the availability of optional benefits by reducing the
benefit by an amount greater than the value withdrawn, and/or could
terminate a benefit.'').
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We are proposing to include these line-items in the Key Information
Table to put investors on notice of restrictions and limitations
associated with different options that are available under the
contract. We are not proposing to require a description of the specific
restrictions and limitations associated with each of the available
investment options and optional benefits. Doing so would likely add
significant length to the table. Instead, this information will be
provided in other parts of the initial summary prospectus, as well as
the statutory prospectus.\149\
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\149\ See, e.g., proposed rule 498A(b)(5)(iv), proposed Item
12(a) of Form N-3, and proposed Item 11(a) of Forms N-4 and N-6 (all
referencing the requirement that the table summarizing certain
benefits available under the contract, which would appear in both
the initial summary prospectus and the statutory prospectus, would
be required to include a brief description of restrictions/
limitations associated with each benefit); see also proposed rule
498A(b)(5)(ix), proposed Item 19 of Form N-3, and proposed Item 18
of Forms N-4 and N-6 (all referencing the requirement that, if the
availability of one or more portfolio company varies by benefit
offered under the contract, the appendix that would appear in the
initial summary prospectus, updating summary prospectus, and
statutory prospectus would be required to include a separate table
indicating which portfolio companies are available under each of the
benefits offered under the contract).
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(iv) Taxes
Because variable contracts are subject to a special tax regime,
with both tax advantages and potential tax impacts in certain
circumstances, we are proposing to require that the Key Information
Table include tax-related disclosures. The ``Tax Implications'' line-
item of the table, which would appear under the heading ``Taxes,''
would require a statement that investors should consult with a tax
professional to determine the tax implications of an investment in, and
payments received under, the variable contract.\150\ A registrant also
would be required to 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.\151\
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\150\ See proposed rule 498A(b)(5)(ii); see also Instruction 5
to proposed Item 3 of Forms N-3, N-4, and N-6.
\151\ Id.
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The tax disclosure in the proposed Key Information Table is meant
to alert investors to tax implications of their investment in a
location and using a presentation we believe investors are most likely
to see and understand. Similar to the other line-items in the proposed
Key Information Table, additional detail about the tax implications of
an investment in a variable contract would also be available in the
statutory prospectus.\152\
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\152\ See, e.g., proposed Item 16 of Form N-3, proposed Item 15
of Forms N-4 and N-6.
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[[Page 61746]]
(v) Conflicts of Interest
The proposed Key Information Table would also include, if
applicable,\153\ line-items regarding conflicts of interest that may
arise in the context of variable contracts, specifically with regards
to investment professional compensation and exchanges. The ``Investment
Professional Compensation'' line-item would require registrants to
disclose, if applicable, that an investment professional may be paid
for selling the contract to investors.\154\ A registrant would be
required to describe the basis upon which such compensation is
typically paid (e.g., commissions, revenue sharing, compensation from
affiliates and third parties).\155\ A registrant providing the required
disclosure would be required to further state that investment
professionals may have a financial incentive to offer or recommend the
contract over another investment for which the investment professional
is not compensated (or compensated less).\156\ This proposed
requirement reflects analogous disclosure that appears in mutual fund
summary prospectuses \157\ and is designed to address similar concerns,
namely to alert investors to the existence of compensation arrangements
for investment professionals and the potential conflicts of interest
arising from these arrangements.
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\153\ A registrant may omit these line-items if neither the
registrant nor any of its related companies pay financial
intermediaries for the sale of the contract or related services. See
Instruction to Instruction 6 to proposed Item 3 of Forms N-3, N-4,
and N-6.
\154\ See proposed rule 498A(b)(5)(ii); see also Instruction
6(a) to proposed Item 3 of Forms N-3, N-4, and N-6.
\155\ Id.
\156\ Id.
\157\ See Item 8 of Form N-1A (requiring disclosure alerting
investors who purchase a fund through a broker-dealer or other
financial intermediary (such as a bank) that the fund and its
related companies may pay the intermediary for the sale of fund
shares and related services, and such payments may create a conflict
of interest by influencing the broker-dealer or other intermediary
and your salesperson to recommend the fund over another investment).
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The ``Exchanges'' line-item would require the registrant to state,
if applicable, that some investment professionals may have a financial
incentive to offer a new contract in place of the one owned by the
investor.\158\ A registrant would further be required to 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 for them to purchase the new contract rather than continue
to own the existing contract.\159\ When a contract owner purchases a
new annuity contract to replace an existing one, the new contract is
referred to as a replacement contract.\160\ We understand that a
significant proportion of variable contract sales stem from exchanges,
and these disclosures are intended to alert investors to potential
conflicts of interest that may arise in that context.
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\158\ See proposed rule 498A(b)(5)(ii); see also Instruction
6(b) to proposed Item 3 of Forms N-3, N-4, and N-6.
\159\ Id.
\160\ Replacement contracts usually occur in connection with a
tax-free exchange of non-qualified contracts under section 1035 of
the Internal Revenue Code, or because of a rollover or direct
transfer of a qualified plan contract (e.g., an individual
retirement annuity) from one life insurance company to another. See
26 U.S.C. 1035; see also 26 CFR 1.1035-1.
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(vi) General Instructions
In addition to the proposed instructions specific to each line-item
in the Key Information Table, the table would be subject to a set of
general instructions. To streamline the disclosure and encourage
registrants to use plain-English, investor-friendly principles when
drafting the disclosures, the proposed general instructions would
require registrants to disclose the required information in the tabular
presentation reflected in the form, in the order specified. However,
registrants would be permitted to exclude any disclosures that are not
applicable or modify any of the statements that would be required to
appear in the table so long as the modified statement contains
comparable information.\161\
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\161\ See proposed rule 498A(b)(5)(ii); see also Instruction
1(a) to proposed Item 3 of Forms N-3, N-4, and N-6.
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The proposed general instructions would also require registrants to
provide cross-references or links to the location in the statutory
prospectus where the subject matter required by the line-item is
described in greater detail.\162\ The cross-reference or link would not
necessarily need to be a page number or page range; instead, a
registrant could cross-reference or link a particular section or sub-
section, or heading or sub-heading, in the statutory prospectus. As
discussed below, we are separately proposing that any cross-reference
that is included in an electronic version of a summary prospectus must
be an active hyperlink.\163\
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\162\ See proposed rule 498A(b)(5)(ii); see also General
Instruction 1(b) to proposed Item 3 of Forms N-3, N-4, and N-6. The
proposed instruction specifies that the cross-reference should be
adjacent to the relevant disclosure, either within the table row, or
presented in an additional table column.
\163\ See proposed rule 498A(a)(i)(4); see also infra section
II.A.5.
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We believe that providing cross-references and links would help
investors who seek additional information quickly find more detailed
information that may be important to them. We recognize that certain
line-items in the Key Information Table may more readily lend
themselves to the inclusion of a single cross-reference or link because
the information may be found in one location in the statutory
prospectus.\164\ On the other hand, other line-items may aggregate
information that appears in multiple locations in the statutory
prospectus, and therefore a registrant would need to include multiple
cross-references or links as appropriate.\165\
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\164\ For example, a more detailed description of the contract's
fees and expenses would appear in the Fee Table section of the
contract statutory prospectus. See infra section II.D.2.d.
\165\ For example, it may not always be possible to provide a
single cross-reference for the ``Restrictions'' line-items as they
may be discussed in multiple sections of the statutory prospectus.
See supra note 149.
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Finally, in keeping with our goal of providing a brief tabular
presentation of key facts that can be easily digested by investors, the
proposed instructions provide that all disclosures in the Key
Information Table should be short and succinct, consistent with the
limitations of a tabular presentation.\166\
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\166\ See proposed rule 498A(b)(5)(ii); see also Instruction
1(c) to proposed Item 3 of Forms N-3, N-4, and N-6.
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(vii) Requests for Comment on Key Information Table
We request comment generally on the Key Information Table that we
propose would appear in the initial summary prospectus, and
specifically on the following issues. We request specific comment about
the table as it would appear in the updating summary prospectus and the
statutory prospectus later in this release.
Should we require the proposed Key Information Table to
be included in the initial summary prospectus? Would this table
provide a succinct summary of the contract's key terms and benefits
and most significant risks, in a presentation that would improve
readability and increase readership?
Would the topics of the line-items that we propose to
include in the Key Information Table be appropriate or useful for
investors making an initial purchase of a variable contract? If not,
why not? Should we require the table to include additional or
different topics? Should we limit the topics and related disclosures
to those that are required, or should we permit registrants to
include additional topics at their discretion? Could this open the
door to lengthy disclosure that might undermine the goal of a
succinct presentation?
Is the proposed tabular presentation useful and likely
to facilitate investor
[[Page 61747]]
understanding of key information about variable contracts? Would
another presentation be better? If so, why, and what would a better
alternate presentation be? Would the two-column presentation be
effective for investors reading an electronic version of the initial
summary prospectus? Should the form of presentation be required, or
should it be left to the discretion of registrants? Would a
standardized presentation facilitate comparison of different
variable contracts?
Should we require cross-references to the location
(section or sub-section, or heading or sub-heading) in the statutory
prospectus where the information provided in response to each line-
item of the Key Information Table is discussed in greater detail?
Instead of cross-referencing to the relevant location in the
statutory prospectus, should we instead require the cross-reference
to include a specific page number in the statutory prospectus where
an investor could find the information? Would it confuse investors
who receive the summary prospectus to see cross-references to the
statutory prospectus? If so, should the table in the summary
prospectus not include cross-references, or should we consider some
other approach?
If we require cross-references, should electronic
versions of the summary prospectus be required to link directly to
the relevant location in the statutory prospectus, as would be
required by proposed rule 498A? If not, why not? Would requiring a
cross-reference (or link) pose any particular technical, legal, or
other challenges for registrants? If so, what would these challenges
be, and how could we modify the proposed rule or provide guidance to
mitigate these challenges? Instead of hyperlinks, are there other
technological tools that would better help an investor find
information that is cross-referenced in the Key Information Table,
such as QR codes or similar technological tools? \167\
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\167\ A QR code is a two-dimensional barcode capable of encoding
information such as a website address, text information, or contact
information. For example, when included on print materials, these
codes can be read using the camera on a smartphone to take the user
directly to a specific website address.
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Is the level of detail of the disclosure that we
propose in each line-item of the Key Information Table appropriate,
and does it strike the right balance between providing enough
information to alert an investor to the most salient facts
(including fees, expenses, and risks) of the variable annuity
contract, but not too much, or too detailed information? If not, how
should we modify the table?
Should we impose a word or page limit on the proposed
Key Information Table (e.g., no more than two or three pages)? If
so, what should the word limit or page limit be?
Would the disclosure that a registrant 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 and expenses associated with
the variable annuity contract? Are there any additional charges that
should be included in these line-items? For example, we understand
that in some instances an investment professional may charge fees
for providing additional services that are directly deducted from
the value of the investor's contract and which may be treated as a
withdrawal from the contract, reduce the contract's benefits, and be
subject to surrender charges. How common are such arrangements, and
what disclosures, if any, would be appropriate to be included in the
Key Information Table or elsewhere, such as in the fee table?
Would the ``Surrender Charge'' line-item, as proposed,
convey sufficient information for investors to understand the dollar
amount that they could pay as a surrender charge if they make
withdrawals in the first several years of their contract, and if
not, how should we modify this line-item?
Would the Minimum and Maximum Annual Fee and Lowest and
Highest Cost tables convey information in a way that investors are
likely to easily understand? Would these tables assist investors in
understanding the costs of their investment and helping them compare
the costs of investing in the variable annuity with the costs of
investing in another product? Are the assumptions underpinning those
tables appropriate? If not, why not? Are there any revisions that we
should consider? Is $100,000 an appropriate figure to use as the
basis for the cost example in the proposed table? Should we require
that registrants use a different figure instead? If so, why? Should
we require additional information to accompany the tables? For
example, should the legend accompanying the tables inform investors
that it is possible that the total fees associated with the contract
may exceed the accumulated gains from the investment options
selected by the investor? Should the Lowest and Highest Cost table
include additional information such the hypothetical value of the
contract (e.g., in year 1 and year 10), the expenses incurred per
year, and the value of the contract (e.g., in year 1 and year 10)
after expenses?
Should we require registrants creating an electronic
version of the initial summary prospectus to provide an interactive
calculator for investors to determine how fees and expenses would
affect their specific investments? If so, should the calculator
include transaction charges?
Should variable life insurance contracts also be
required to show the lowest and highest possible combination of
charges in the Form N-6 Key Information Table? Cost of insurance is
often an important component of expenses for variable life insurance
contracts (unlike variable annuities), and can vary significantly
from one insured person to another depending on various demographic
characteristics (e.g., age, gender, health, smoking status). If the
lowest and highest possible combinations of charges are shown, how
should variations in cost of insurance be reflected?
Would the disclosure that a registrant would provide in
response to the proposed ``Risks'' line-items adequately convey an
overview of the risks of investing in a variable contract? Are there
other risks that we should require a registrant to disclose in the
proposed Key Information Table? Should we revise or remove any of
the proposed ``Risks'' line-items? For example, is it appropriate to
allow registrants to include the insurance company's financial
strength rating(s) in the line-item regarding the claims-paying
ability of the insurance company? Should we revise the instructions
associated with these proposed line-items to require different
disclosures? Should we require a line-item for ``Other Principal
Risks'' to provide registrants an opportunity to disclose risks
related to investing in the contract that they would not otherwise
be required to disclose in the Key Information Table? Should we
instead provide flexibility by permitting registrants to disclose
other risks at their discretion? Why or why not?
Would the disclosure that a registrant would provide in
response to the proposed ``Restrictions'' line-items appropriately
convey the appropriate amount of information about certain
restrictions that various contract options may entail, in light of
the goals of the proposed Key Information Table? Should a registrant
be required to disclose information about restrictions in the Key
Information Table other than those associated with the contract's
investment options and optional benefits? If so, what? Instead,
should we provide flexibility by permitting registrants to disclose
other restrictions at their discretion?
Is the disclosure that a registrant would be required
to provide in response to the proposed ``Tax Implications'' line-
item appropriate, in light of the goals of the proposed Key
Information Table? Should a registrant 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
variable contract investors 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\)?
Are the disclosures that a registrant would be required
to provide in response to the proposed ``Investment Professional
Compensation'' line-items appropriate, in light of the goals of the
proposed Key Information Table? 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 variable
contract, and are these disclosures appropriately balanced? Should
we revise these proposed disclosure requirements, and if so, how? Is
it appropriate that these line-items appear under the heading
``Conflicts of Interest''? Is there another way that the summary
prospectus could highlight the implications for investors of
exchanges?
Do the instructions associated with each of the
proposed line-items clearly explain what a registrant would be
required to disclose? In keeping with the structured format of a
tabular presentation, we sought to promote concise disclosure by
largely directing registrants to state, rather than to explain,
certain information in response to the required line-items. Should
the
[[Page 61748]]
instructions prescribe specific language or should registrants 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?
(c) Standard Death Benefit
The initial summary prospectus would be required to briefly
describe the standard death benefit that the contract provides, under
the heading ``Standard Death Benefit.'' \168\ It would briefly describe
the operation of the benefit.\169\ Including this disclosure in the
initial summary prospectus would highlight to investors important
information about this benefit, such as information about the potential
limitations on the standard death benefit and the possibility of its
termination, that they might not otherwise receive through marketing
materials and similar channels during the sales process.
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\168\ Proposed rule 498A(b)(5)(iii); see also proposed Item
11(a) of Form N-3; proposed Item 10(a) of Form N-4; proposed Item
10(a) of Form N-6.
\169\ Id. For a discussion of the proposed disclosure
requirements, see infra section II.D.2.j.
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Under the proposed registration form amendments, a registrant would
include in the statutory prospectus these disclosures, as well as
additional disclosures relating to when the death benefit is calculated
and payable or the forms the benefit may take.\170\ While this
additional information provides detail that may help an investor who
wants to understand the mechanics of how the standard death benefit
operates later in the contract lifecycle, we are not requiring that it
be included in the initial summary prospectus because we believe it
would not be as critical to a basic initial understanding of the
benefit, including any risks and limitations.
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\170\ See proposed Items 11(b) and (c) of Form N-3; proposed
Items 10(b) and (c) of Form N-4; proposed Item 10(b) of Form N-6.
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We request comment generally on the disclosure on the standard
death benefit that we propose would appear in the initial summary
prospectus, and specifically on the following issues:
Are the proposed disclosure requirements in the initial
summary prospectus under the ``Standard Death Benefit'' heading clear
and appropriate in light of the goals of the initial summary
prospectus?
Would this disclosure be useful to investors in connection
with an initial purchase of a variable contract? Should this proposed
content requirement include any additional, or any different,
disclosure about the standard death benefit? For example, would
including one or more of the other disclosures required to be included
in the statutory prospectus better assist investors in gaining a basic
initial understanding of the standard death benefit?
(d) Other Benefits Available Under the Contract
Following the discussion of the standard death benefit, the initial
summary prospectus would be required to summarize additional standard
or optional benefits available to the investor under the variable
contract. We understand that insurers commonly consider these types of
benefits to be primary features of variable contracts.\171\ These
benefits are also often key differentiators between competing products,
and we propose requiring specific disclosures in both the statutory
prospectus and the initial summary prospectus. This information would
appear in tabular form, under the heading ``Other Benefits Available
Under the Contract.'' \172\ This summary table would include
information about any optional death benefits, as well as any optional
or standard living benefits, that the contract offers.
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\171\ See supra paragraph accompanying note 17 (regarding the
prevalence of optional benefits).
\172\ See proposed rule 498A(b)(5)(iv); see also proposed Item
12(a) of Form N-3; proposed Item 11(a) of Form N-4; proposed Item
11(a) of Form N-6.
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Specifically, the summary table would include the name of each
benefit, its purpose, whether the benefit is standard or optional,
associated fees (as a stated percentage of contract value, benefit
base, etc.), and a brief description of limitations or
restrictions.\173\ The table items include key factors investors may
wish to consider when assessing these benefits. We also have designed
the proposed table to include information that investors may be less
likely to receive through other channels, such as concise disclosure
about the restrictions and limitations associated with these benefits.
The terms of optional benefits can be complex. Providing the required
information in a uniform tabular presentation is designed to make these
important disclosures easier for investors to read, understand, and
compare.
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\173\ For example, the description of limitations or
restrictions could include statements like ``benefit limits
investment options available'' or ``withdrawals could terminate
benefit.'' See Instruction 6 to proposed Item 12(a) of Form N-3;
Instruction 6 to proposed Item 11(a) of Form N-4; Instruction 6 to
proposed Item 11(a) of Form N-6.
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Under the proposed form amendments, a registrant would include in
the statutory prospectus the summary table, as well as additional
disclosures in narrative form relating to optional benefits, such as
further additional description of each benefit, and descriptions of
benefits' limitations, restrictions and risks, and one or more examples
illustrating the operation of each benefit.\174\ We believe that
requiring the initial summary prospectus to include only the summary
table and not the additional narrative disclosures is appropriate for
the scope of the initial summary prospectus.\175\ Consistent with the
layered disclosure approach, investors who want more information about
optional benefits may refer to the more extensive narrative disclosures
in the contract statutory prospectus.
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\174\ See proposed Item 12(b) and (c) of Form N-3 and
Instruction to proposed Item 12(b) and (c); proposed Item 11(b) and
(c) of Form N-4 and Instruction to proposed Item 11(b) and (c);
proposed Item 11(b) and (c) of Form N-6 and Instruction to proposed
Item 11(b) and (c).
\175\ Registrants may, but would not be required to, provide in
the initial summary prospectus cross-references or links to these
additional narrative disclosures in the contract statutory
prospectus.
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We are also proposing instructions to allow registrants that offer
multiple benefits of the same type (e.g., death benefit, accumulation
benefit, withdrawal benefit, long-term care benefit, etc.) to use
multiple tables to provide the required information, if doing so might
better permit comparisons of those benefits.\176\ Registrants may also
include appropriate titles, headings, or other information that might
promote clarity and facilitate understanding of the table(s).\177\ For
example, if certain optional benefits are only available to certain
investors, or are mutually exclusive, the table could include footnotes
or headings to identify which optional benefits are affected and to
whom they are available.\178\ These instructions are designed to
accommodate the variety of benefits currently offered or that might be
offered in the future, and provide registrants flexibility in
presenting this information.
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\176\ See Instruction 1(b) to proposed Item 12(a) of Form N-3;
Instruction 1(b) to proposed Item 11(a) of Form N-4; Instruction
1(b) to proposed Item 11(a) of Form N-6.
\177\ See Instruction 1(c) to proposed Item 12(a) of Form N-3;
Instruction 1(c) to proposed Item 11(a) of Form N-4; Instruction
1(c) to proposed Item 11(a) of Form N-6.
\178\ Id.
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We request comment generally on the disclosure relating to other
benefits available under the contract that we propose would appear in
the initial summary prospectus, and specifically on the following
issues:
Are the proposed initial summary prospectus disclosure
requirements
[[Page 61749]]
under the heading ``Other Benefits Available Under the Contract'' clear
and appropriate in light of the goals of the initial summary
prospectus?
Are the proposed disclosure items in that table useful and
appropriate for consideration by investors in connection with the
initial purchase of a variable contract, or should we revise,
supplement, or replace those items? Should the proposed summary table
include any additional, or any different, disclosure about the standard
death benefit or any other benefit? For example, should it include one
or more of the other disclosures required to be included in the
statutory prospectus? Or should we require that registrants add links
or cross-references to these other disclosures? For the associated fee
of each optional benefit, should the summary table permit a range of
fees?
Would investors find the proposed tabular presentation
useful? Alternatively, would a different tabular presentation, a
narrative presentation, or no presentation requirement for disclosure
about any optional death benefits, as well as any optional or standard
living benefits, be preferable?
Are the proposed instructions clear, or should we modify
them in any way? For example, should we require specific standardized
disclosures in situations where certain optional benefits are only
available to certain investors (e.g., an additional column indicating
any restrictions related to investors who invested during specific time
periods), as opposed to permitting registrants to address this issue as
they see fit?
(e) Buying the Contract (for Variable Annuity Contracts) and Premiums
(for Variable Life Insurance Contracts)
The initial summary prospectus would be required to include a brief
description of the procedures for purchasing the variable contract (and
premiums, in the case of variable life insurance contracts), under the
heading ``Buying the Contract'' for variable annuity contracts and
``Premiums'' for variable life insurance contracts.\179\ For variable
annuity contracts, this would include a concise explanation of the
minimum initial and subsequent purchase payments required, any
limitations on the amount of purchase payments (such as when the
selection of certain optional benefits may limit additional purchase
payments), as well as a statement of when such payments are
credited.\180\ For variable life insurance contracts this would include
a description of the purchase procedures (including, among other
things, the minimum initial and subsequent premium payments required,
any limitations on the amount of such premium payments, and how to
avoid contract lapse), premium amount, premium payment plans, premium
due dates, and automatic premium loans.\181\
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\179\ See proposed rule 498A(b)(5)(v); see also Item 11(a)(i)
and (ii) of current Form N-3; proposed Item 13(a) of Form N-3; Item
10(a)(i) and (ii) of current Form N-4; proposed Item 12(a) of Form
N-4. Although we have proposed renumbering certain provisions of
this item, we have not proposed any substantive changes to this item
in Forms N-3 and N-4.
\180\ Id.
\181\ See proposed rule 498A(b)(5)(v); see also Item 7(a)
through (e) of current Form N-6; proposed Item 9(a) through (e) of
Form N-6. We have not proposed any changes to this item in Form N-6.
Sub-accounts refer to the investment options, such as portfolio
companies, available under the contract.
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We believe this information should be included in the initial
summary prospectus so investors have a clear understanding of how they
can purchase the variable contract.\182\ Additional information on
purchases and premiums would appear in the statutory prospectus. For
example, the statutory prospectus would also include information on the
manner in which purchase or premium payments are credited, and the
identity of each principal underwriter.\183\
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\182\ This section of the summary prospectus for variable
contracts is similar to the disclosure on purchasing fund shares
that appears in mutual fund summary prospectuses. See rule
498(b)(2); Item 6 of Form N-1A.
\183\ See proposed Item 13(b) through (f) of Form N-3; proposed
Item 12(b) through (e) of Form N-4.
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We request comment generally on the disclosure on contract
purchases that we propose would appear in the initial summary
prospectus, and specifically on the following issues:
Are the proposed disclosure requirements in the initial
summary prospectus under the headings ``Buying the Contract'' (for
variable annuity contracts) and ``Premiums'' (for variable life
insurance contracts) clear and appropriate in light of the goals of the
initial summary prospectus?
Would this disclosure be useful to investors in connection
with an initial purchase of a variable contract? Should this
requirement include any additional, or any different, disclosure about
purchases of variable contracts? For example, should it include one or
more of the other disclosures required to be included in the statutory
prospectus (e.g., in the case of variable annuity contracts,
explanations of the manner in which purchase payments are credited and
how accumulation unit value is determined, or in the case of variable
life insurance contracts, sub-account valuation and determination of
risk classification)?
(f) Contract Lapse (for Variable Life Insurance Contracts)
The initial summary prospectus for a variable life insurance
contract would be required to include certain information about the
possibility of contract lapse, under the heading ``How Your Contract
Can Lapse.'' \184\ Specifically, the initial summary prospectus would
briefly describe when and under what circumstances a variable life
insurance contract will lapse, any lapse options, the effect of the
lapse and under what circumstances such a contract may be reinstated.
Because inadvertent contract lapse could negate the insurance benefit
of a policy to an investor, possibly at significant cost,\185\
understanding the risk of contract lapse is important when deciding to
invest in a variable life insurance contract. This disclosure would
include the same information on contract lapse that would appear in the
contract statutory prospectus.
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\184\ See proposed rule 498A(b)(5)(vi); see also Item 11 of
current Form N-6; proposed Item 14 of Form N-6. We have not proposed
any changes to this item in Form N-6.
\185\ For example, costs could occur in the form of premium
payments that the investor previously paid into the policy, and
which the investor cannot retrieve following contract lapse.
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We request comment generally on the disclosure on contract lapse
that we propose would appear in the initial summary prospectus, and
specifically on the following issues:
Are the proposed requirements in the initial summary
prospectus under the heading ``How Your Contract Can Lapse'' clear and
appropriate in light of the goals of the initial summary prospectus?
Would this disclosure be useful to investors in connection
with an initial purchase of a variable life insurance contract? Should
this proposed content requirement include any additional, or any
different, disclosure about the possibility of contract lapse?
(g) Surrenders or Withdrawals
The initial summary prospectus would be required to include certain
information about contract surrenders or withdrawals, under the heading
``Surrendering Your Contract or Making Withdrawals: Accessing the Money
in Your Contract.'' \186\ This would include
[[Page 61750]]
a brief summary on how to surrender (or partially surrender or make
withdrawals from) a variable contract, including any limits on the
ability to surrender, how withdrawal and surrender proceeds are
calculated, and when they are payable. Given that variable contracts
are long-term investments that may entail high surrender fees, it is
important to clearly explain the withdrawal and surrender terms to new
variable contract investors. Additional information on surrenders and
withdrawals would appear in the statutory prospectus. For example, the
statutory prospectus would also include more detailed information on
partial surrenders and withdrawals, sub-account allocation, involuntary
redemptions, and revocation rights (free look period).\187\
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\186\ See proposed rule 498A(b)(5)(vii); see also Item 12 of
current Form N-3; proposed Item 14(a) of Form N-3; Item 11 of
current Form N-4; proposed Item 13(a) of Form N-4; Item 9 of current
Form N-6; proposed Item 12(a) of Form N-6. We have proposed certain
changes to this item in Forms N-3 and N-4 to harmonize the
requirements with those of Form N-6. We have not proposed any
changes to this item in Form N-6.
This proposed requirement is similar to the requirement for
mutual fund summary prospectuses to include disclosure on procedures
for redeeming shares. See rule 498(b)(2); Item 6 of Form N-1A.
\187\ See proposed Item 14(b) through (f) of Form N-3; proposed
Item 13(b) through (f) of Form N-4; proposed Item 12(b) through (e)
of Form N-6.
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We request comment generally on the disclosure on surrenders and
withdrawals that we propose would appear in the initial summary
prospectus, and specifically on the following issues:
Are the proposed requirements in the initial summary
prospectus under the heading ``Surrendering Your Contract or Making
Withdrawals: Accessing the Money in Your Contract'' clear and
appropriate in light of the goals of the initial summary prospectus?
Would this disclosure be useful to investors in connection
with an initial purchase of a variable contract? Should this proposed
content requirement include any additional, or any different,
disclosure about making contract surrenders and withdrawals? For
example, should it include one or more of the other disclosures
required to be included in the statutory prospectus (e.g., information
on partial surrenders and withdrawals and revocation rights)?
(h) Additional Information About Fees
The proposed rule would require the initial summary prospectus to
include the full Fee Table (including, for variable annuity contracts,
the expense example), that would appear in the statutory prospectus,
under the heading ``Additional Information About Fees.'' \188\ The Fee
Table provides detailed information on the fees and expenses investors
will pay when buying, owning, and surrendering the contract, as well as
those paid each year during the time the investor owns the
contract.\189\ We are proposing certain amendments to the Fee Table for
each type of variable contract as discussed below in section II.D.2.d.
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\188\ See proposed rule 498A(b)(5)(viii); see also Item 3 of
Forms N-3, N-4, and N-6; proposed Item 4 of Forms N-3, N-4, and N-6.
The initial summary prospectus fee information would be the same
as the Fee Table included in the contract statutory prospectus,
modified as necessary to describe only a single contract that the
registrant currently offers for sale. See infra section II.A.1.b.
\189\ In addition, the Fee Table details the minimum and maximum
total operating expenses the portfolio companies charge
periodically, as well as an example intended to help the investor
compare the cost of investing in different variable contracts.
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We are proposing to include the Fee Table in both the statutory
prospectus and the initial summary prospectus because investor
understanding of variable contract fees is particularly important given
these products' layered fee structure and typically higher costs
relative to other investment products. The Fee Table is intended to
complement and build upon the high-level summary of contract fees and
expenses in the Key Information Table by providing additional detail
for those investors who may wish to review more comprehensive fee and
expense information.\190\
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\190\ See supra section II.A.1.c.ii(b).
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We understand that some registrants currently prepare supplements
to the contract prospectus that detail and modify certain fees and
rates under the variable contract applicable to new investors (``rate
sheets''). Current fees, withdrawal rates, and crediting rates
associated with various contract benefits (for new sales) can change so
frequently as to make filing of post-effective amendments to the
registration statement with each change impractical. Instead, updated
disclosure of current levels of these fees and rates is accomplished by
filing a rate sheet as a supplement under rule 497 under the Securities
Act. We do not believe that the proposed summary prospectus framework
will affect the current practice of using rate sheets.\191\
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\191\ For example, if the rate sheet is updating information in
a summary prospectus or the statutory prospectus, the document
should describe how the rate sheet works and the rate sheet itself
should be affixed to the front of the document. The current rates
should also be readily available on the website as part of the
documents required to be posted online under proposed rule 498A and,
as a best practice, separately on the website.
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We request comment generally on the Fee Table that we propose would
appear in the initial summary prospectus, and specifically on the
following issues:
Are the proposed requirements in the initial summary
prospectus under the heading ``Additional Information About Fees''
clear and appropriate in light of the goals of the initial summary
prospectus?
Would this disclosure be useful to investors in connection
with an initial purchase of a variable contract? Would including the
full Fee Table be consistent with the goal of providing a succinct
summary of the contract's key terms and benefits and most significant
risks, in a presentation that would improve readability and increase
readership? Are there any particular line-items of the Fee Table, for
either variable annuities or variable life insurance that could be
omitted? Would only including summary information of the type that we
propose to appear in the Key Information Table, either with or without
a cross-reference or link to the full Fee Table, be more useful or
appropriate for investors? Alternatively, would including only the full
Fee Table, and not also the summary fee information in the Key
Information Table, be more useful or appropriate for investors?
Would registrants who elect to use the initial summary
prospectus continue to prepare rate sheets? Would there be any
additional burdens preparing rate sheets in this context? Should the
staff guidance be modified in any way to accommodate the summary
prospectus framework?
(i) Appendix: Portfolio Companies/Investment Options Available Under
the Contract
Finally, an initial summary prospectus would be required to include
an appendix, under the heading ``Appendix: [Portfolio Companies/
Investment Options] Available Under the [Contract],'' that provides
summary information in a tabular form about the portfolio companies or
investment options offered under the contract.\192\
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\192\ See proposed rule 498A(b)(5)(ix); see also proposed Item
19 of Form N-3; proposed Item 18 of Form N-4; proposed Item 18 of
Form N-6. Although these proposed Items would be new to Forms N-3,
N-4, and N-6, each form currently requires disclosure of similar
information.
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The appendix would include separate columns for each portfolio
company's type (e.g., money market fund, bond fund, balanced fund,
etc.) or investment objective, the name of the portfolio company and
its adviser or subadviser (as applicable), the portfolio company's
expense ratio (expenses/average assets and, in the case of Form N-3,
explicitly excluding optional benefit expenses), and its average annual
total returns over the past 1-year, 5-year, and 10-year periods (in the
case of Form N-3, explicitly excluding optional benefit
[[Page 61751]]
expenses).\193\ Registrants would be instructed to only include
portfolio companies that are currently offered under the contract.\194\
Additionally, if the availability of one or more portfolio companies
varies by benefit offered under the contract, registrants would be
required to include as another appendix a separate table indicating
which portfolio companies were available under each of those
benefits.\195\
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\193\ See Instructions 2-5 to proposed Item 19 of Form N-3;
Instructions 2-5 to proposed Item 18 of Form N-4; Instructions 2-5
to proposed Item 18 of Form N-6.
For purposes of this discussion, we use the term ``portfolio
company'' throughout, even though the appendix for Form N-3
registrants would use the term ``investment option.''
\194\ See Instruction 1(b) to proposed Item 19 of Form N-3;
Instruction 1(a) to proposed Item 18 of Form N-4; Instruction 1(a)
to proposed Item 18 of Form N-6.
\195\ See Instruction 1(c) to proposed Item 19 of Form N-3;
Instruction 1(c) to proposed Item 18 of Form N-4; Instruction 1(c)
to proposed Item 18 of Form N-6.
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A legend would precede the table. The first paragraph of the legend
would state: ``The following is a list of [Investment Options/Portfolio
Companies] currently available under the [Contract], which is subject
to change as discussed in the [Statutory Prospectus for the
Contract].'' \196\ For registrants on Forms N-4 and N-6, the legend
would also provide an internet address to a landing page, toll-free
telephone number, and email address that investors could use to obtain
portfolio company statutory and summary prospectuses.\197\ For
registrants on Form N-3, the legend would direct investors to the cover
page of the initial summary prospectus to request the statutory
prospectus for the registrant containing more information about the
investment options.\198\ The legend also could indicate, if applicable,
that prospectuses and other information are available from a financial
intermediary (such as an insurance agent or broker-dealer) distributing
the contract.\199\
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\196\ See proposed Item 19 of Form N-3; proposed Item 18 of Form
N-4; proposed Item 18 of Form N-6; proposed rule 498A(b)(5)(ix).
\197\ For registrants on Forms N-4 and N-6, the legend would
read as follows:
``Before you invest, you should review the prospectuses for the
[Portfolio Companies]. These prospectuses contain more information
about the [Portfolio Companies] and their risks and may be amended
from time to time. You can find the prospectuses and other
information about the [Portfolio Companies] online at [__]. You can
request this information at no cost by calling [__] or by sending an
email request to [__].''
See Instruction 1(b) to proposed Item 18 of Forms N-4 and N-6.
Registrants on Forms N-4 and N-6 not relying upon rule 498A(j) with
respect to the portfolio companies that are offered under the
contract may, but would not be required to, provide the next-to-last
sentence of the first paragraph of the introductory legend to the
table regarding online availability of the prospectuses.
\198\ For registrants on Form N-3, the legend would read as
follows:
``More information about the [Investment Options] is available
in [the Statutory Prospectus for the Contract], which can be
requested at no cost by following the instructions on [the front
cover page or beginning of the Summary Prospectus].''
See proposed rule 498A(b)(5)(ix).
\199\ See Instruction 1(b) to proposed Item 18 of Forms N-4 and
N-6; proposed rule 498A(b)(5)(ix).
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The second paragraph of the legend for variable contracts
registered on Forms N-4 and N-6 would read as follows:
The performance information below reflects fees and expenses of
the [Portfolio Companies], but does not reflect the other fees and
expenses that your contract may charge. Performance would be lower
if these charges were included. Each [Portfolio Company's] past
performance is not necessarily an indication of future
performance.\200\
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\200\ See proposed Item 18 of Form N-4; proposed Item 18 of Form
N-6.
In contrast, because insurance charges are already reflected in the
performance of the investment options for contracts registered on Form
N-3, the second paragraph of the legend for variable annuities
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registered on Form N-3 would state:
The performance information below reflects contract fees and
expenses that are paid by each investor. Each [Investment Option's]
past performance is not necessarily an indication of future
performance. \201\
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\201\ See proposed Item 19 of Form N-3.
Because the investment experience of a variable contract investor
will largely depend on his or her selection of portfolio companies (or
investment options in the case of a variable annuity registered on Form
N-3), we believe it is important for investors to receive an overview
of the portfolio companies and investment options available under the
contract in a uniform tabular presentation that promotes
comparison.\202\
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\202\ In the context of participant-directed individual account
plans under the Employee Retirement Income Security Act of 1974
(which, similar to variable contracts, are long-term, tax-advantaged
investment vehicles whereby the investor may direct his or her
investment among investment alternatives), a similar disclosure
requirement applies. See 29 CFR 2550.404a 5(d).
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Investors in contracts registered on Forms N-4 and N-6 currently
receive portfolio company prospectuses at or shortly after the point of
sale, as well as each portfolio company's updated prospectus each year.
As discussed below, we are proposing an optional delivery method, which
would permit satisfaction of any portfolio company prospectus delivery
obligations if the portfolio company summary and statutory prospectuses
are posted at the website address specified on the variable contract
summary prospectus.\203\ The appendix is designed to complement the
portfolio company prospectuses in a layered disclosure approach to
provide the investor with an ability to choose the amount and type of
information he or she prefers to review.
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\203\ See infra section II.B.
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Alternatively, for variable contracts registered on Form N-3,
registrants could omit the required appendix and instead provide more
detailed disclosures for the investment options offered under the
contract that would be required by proposed Item 20 of Form N-3.\204\
Proposed Item 20 would require narrative disclosure for each investment
option regarding its investment objectives and principal investment
strategies, principal risks of investing in the investment option, and
a bar chart and table showing the performance of the investment option
modeled after the risk/return bar chart and table that Form N-1A
currently requires.\205\
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\204\ See proposed rule 498A(b)(5)(ix).
\205\ See text following note 525 (discussing proposed Item 20
of Form N-3); see also Item 4(b)(2) of Form N-1A.
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We request comment generally on the appendix that we propose would
appear in the initial summary prospectus, and specifically on the
following issues:
Are the requirements of the proposed appendix, and the
associated proposed instructions, clear and appropriate in light of the
goals of the initial summary prospectus? Should we modify them in any
way?
Would the information included in the appendix and its
proposed tabular presentation be useful to investors in connection with
the initial purchase of a variable contract? Would other or additional
information, or a different presentation, be more useful to investors?
Are the particular disclosure items that we have proposed
for inclusion in the appendix useful and appropriate for consideration
by investors, or should we revise, supplement, or replace those items?
Alternatively, or in addition, should we require any other disclosures
contemplated by rule 482 (e.g., a legend providing certain statements
about the performance data and certain information about sales loads or
performance fees)? \206\
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\206\ See rule 482(b)(3) (requiring, among other things: (1) A
legend disclosing that the performance data quoted represents past
performance; that past performance does not guarantee future
results; that the investment return and principal value of an
investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost; that
current performance may be lower or higher than the performance data
quoted; and (2) if a sales load or any other nonrecurring fee is
charged, the maximum amount of the load or fee, and if the sales
load or fee is not reflected, a statement that the performance data
does not reflect the deduction of the sales load or fee, and that,
if reflected, the load or fee would reduce the performance quoted).
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[[Page 61752]]
The proposed instructions would provide that if the
availability of one or more portfolio companies varies by benefit
offered under the contract, registrants must include as another
appendix a separate table indicating which portfolio companies were
available under each of those benefits. Should this information be
provided in a separate table? Why or why not? Are there ways to present
this information in a more streamlined and comprehensible manner for
investors? If so, how?
Under our proposal, an initial summary prospectus for a
contract registered on Form N-3 could omit the appendix and instead
include the more detailed disclosures about the investment options
offered under the contract that would be required by proposed Item 20
of Form N-3. Alternatively, in order to increase comparability between
initial summary prospectuses, should the appendix be required to be
included in all initial summary prospectuses for contracts registered
on Form N-3? Conversely, should the initial summary prospectus be
required to contain the more detailed disclosures that would be
required by proposed Item 20 of Form N-3?
d. General Requests for Comment on the Initial Summary Prospectus
In addition to the specific requests for comment above on the
proposed scope and content requirements of the initial summary
prospectus, we also request comment generally on the initial summary
prospectus, and specifically on the following issues:
Is an initial summary prospectus an appropriate vehicle to
highlight the importance of key terms, benefits, and risks of a
variable contract? What are the key considerations for an initial
investment in the contract? Does the proposed initial summary
prospectus 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? Would this defeat our goal of providing investors a succinct
summary?
Should we exclude any of the proposed initial summary
prospectus disclosure? Should we require any additional information to
appear in the initial summary prospectus, such as from the contract's
statutory prospectus, SAI, or Part C (``Other Information'') of the
registration statement?
We are proposing to require an initial summary prospectus
to contain the information required by the proposed rule, and only that
information, in a specified order to facilitate comparability (similar
to the mutual fund summary prospectus model). Should all items in the
initial summary prospectus be presented in the same order, under the
headings that the proposed rule specifies? Would this promote
comparability across products, and is comparability as feasible for
variable products as it is mutual funds? Why or why not? If the items
are not listed in the same order, could investors or investment
professionals still easily compare different variable contracts? Is the
proposed order appropriate, or should we consider a different order?
Should the rule require ordered navigation links for electronic
versions of the summary prospectus?
Should we, as proposed, limit the information to be
included in the initial summary prospectus, or should we allow
registrants to include other information that is not specifically
called for? We recognize that variable contracts are complex investment
products, and some may have product features that are not contemplated
by the current disclosure items. Should we permit registrants to
disclose information not specifically required by the proposed rule to
provide sufficient flexibility for the disclosure of future product
developments or otherwise enhance disclosures to investors? Would that
undermine the goal of comparability, or contribute to investor
confusion? Are there other ways we could provide this flexibility?
Should we impose any page or word limits on the initial
summary prospectus (e.g., 10 pages or 2,500 words)? If so, what should
the page or word limits be (e.g., how many pages or words, and should
these limits apply to the whole initial summary prospectus or include
or exclude certain sections of it)? Would page or word limits
disadvantage certain types of registrants (e.g., variable contracts
that offer a relatively high number of optional benefits) over others,
or unduly limit investors' ability to receive important disclosure
information? Are there other ways we could encourage concise and
investor-friendly disclosure?
Is the information that we propose to require in the body
or appendix of the initial summary prospectus appropriate? Should we
include any additional information or eliminate any of the information
that we have proposed to include? Should any information in the body
(e.g., the ``Additional Information About Fees'' section) be moved from
the body to an appendix or vice versa?
Would investors be more likely to read an initial summary
prospectus if we required the use of certain design elements--such as
larger font sizes or greater use of white space, colors, or visuals--or
provided additional guidance on such design elements? If so, what
should this disclosure requirement be? Would any of the proposed
content requirements particularly benefit from the use of such design
elements?
Should registrants creating electronic versions of the
initial summary prospectus be required to include active hyperlinks for
website addresses referenced in the electronic version, as would be
required under our proposal? What concerns would be raised, if any, if
those website addresses were third-party websites? Should registrants
creating electronic versions of the initial summary prospectus be
required to include active hyperlinks for any cross-references, as
would be required under our proposal?
Should registrants creating electronic versions of the
initial summary prospectus be allowed to use alternatives to any
tabular presentations, such as the table(s) included in Appendix:
Portfolio Companies/Investment Options Available Under the Contract,
provided the information is presented in an easy to read and comparable
manner? If so, should there be additional conditions on the use of
these alternatives? What should those conditions be?
Should we offer registrants greater flexibility to design
summary prospectuses that can be viewed on mobile devices, are
interactive, have audio or video features, or otherwise make use of
technology and research about effective disclosure methods? If so, how
can we allow flexibility while ensuring that investors receive the
information they need to make their investment decisions?
To what extent is the information proposed to be required
in the initial summary prospectus duplicative of information provided
in other point-of-sale disclosure documents (including those required
under other regulatory regimes)?
Would the initial summary prospectus, as proposed,
appropriately complement current disclosure practices by not
unnecessarily duplicating disclosure topics investors receive through
other channels, and
[[Page 61753]]
highlighting key risks that investors may not learn about through other
channels?
Are there any aspects of the initial summary prospectus
that should be made to conform to parallel provisions in the updating
summary prospectus or potential changes to those proposed parallel
provisions? Conversely, are there any potential changes to the proposed
updating summary prospectus that should not be made to the proposed
initial summary prospectus?
Is the hypothetical initial summary prospectus in Appendix
A useful and illustrative of the proposed requirements? Does it
appropriately show the level of detail that firms might provide, and
are any of the design elements that the hypothetical initial summary
prospectus uses particularly effective (or if they could be made more
effective, how so)?
2. Updating Summary Prospectus
a. Overview
Today, variable contract investors are typically sent a copy of the
updated current contract statutory prospectus each year.\207\ Proposed
rule 498A would permit a person to satisfy contract prospectus delivery
obligations with respect to existing investors by sending or giving an
updating summary prospectus in lieu of the statutory prospectus.\208\
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\207\ As discussed above, investors generally must be provided
with a prospectus when they make additional purchase payments or
reallocate variable contract value. See supra notes 27 through 29
and accompanying text. We are proposing to provide that an updating
summary prospectus that complies with the rule will be deemed to be
a prospectus that is permitted under section 10(b) of the Securities
Act and section 24(g) of the Investment Company Act for the purposes
of section 5(b)(1) of the Securities Act.
\208\ Proposed rule 498A(c).
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We are not proposing that registrants send an updated initial
summary prospectus to investors each year, due in part to the cost to
maintain and update separate initial summary prospectuses for
currently-offered variable contracts and those no longer offered.
Additionally, we believe that existing investors would benefit more
from a brief summary of the changes to the contract reflected in the
statutory prospectus than to the disclosures in the initial summary
prospectus, which is designed for someone making an initial investment
decision.
We have therefore designed the updating summary prospectus to
provide a brief description of any important changes with respect to
the contract that occurred within the prior year, which will allow
investors to better focus their attention on new or updated information
relating to the contract. Additionally, the updating summary prospectus
would include certain of the information required in the initial
summary prospectus that we consider most relevant to investors when
making additional investment decisions or otherwise monitoring their
contract.
Finally, a registrant may 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.\209\ We believe that making the
use of the updating summary prospectus contingent on use of the initial
summary prospectus for each currently offered contract will encourage
registrants to utilize the summary prospectus framework and provide a
more consistent disclosure experience to investors.
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\209\ Proposed rule 498A(c)(1).
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b. Scope of Disclosure To Be Included in Updating Summary Prospectus
The proposed rule would permit the updating summary prospectus to
describe one or more contracts covered in the statutory prospectus to
which the updating summary prospectus relates.\210\ This scope is
different than the initial summary prospectus, which the proposed rule
would limit to only describing a single contract that the registrant
currently offers for sale.\211\ Similar to the initial summary
prospectus, however, the proposed rule also would permit an updating
summary prospectus to describe more than one class of a contract.\212\
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\210\ Proposed rule 498A(c)(2).
\211\ See supra section II.A.1.b.
\212\ Proposed rule 498A(c)(2); see also supra section II.A.1.b
(an initial summary prospectus also can describe more than one class
of a currently-offered contract).
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Given the limited subset of information provided in the updating
summary prospectus, we believe permitting registrants to combine
multiple contracts would not cause investor confusion in the same way
that combining disclosure about multiple contracts in the initial
summary prospectus might. Furthermore, we understand that there are
generally not a significant number of changes that occur to an
individual contract year-over-year, and many of those changes (such as
changes to the available portfolio companies or the addition of new
optional benefits) typically apply across multiple contracts described
in the same prospectus. We therefore believe the section describing
contract changes, even if changes to multiple contracts are included,
would not be overly lengthy, and would not prevent investors from
reading or understanding the applicable disclosures.\213\ Finally,
combining multiple contracts could make the updating summary prospectus
significantly more efficient for registrants to produce and
distribute.\214\
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\213\ A registrant generally should indicate in this section, to
the extent appropriate, whether certain described contract changes
are only applicable to certain contracts in the statutory
prospectus.
\214\ Multiple updating summary prospectuses (with very similar
sounding names) could also make it difficult for investors to locate
their specific updating summary prospectus on the insurer's website.
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We request comment generally on the proposed scope requirements for
the updating summary prospectus, and specifically on the following
issues:
Is it appropriate to permit the updating summary
prospectus to include multiple contracts under the statutory
prospectus to which the updating summary prospectus relates? Would
this approach promote operational efficiency? What other benefits
would this approach entail? What drawbacks would this approach
entail? Would this approach discourage investors from reading the
updating summary prospectus? Would it confuse investors, and if so,
should the proposed rule incorporate any additional provisions (or
should we issue guidance) to help mitigate potential confusion?
Would it prevent investors from reading or understanding the
disclosures, and if so, what additional rule provisions or guidance
could help mitigate this? Would the proposed disclosure requirement
make clear to an investor whether a particular disclosure about
year-over-year changes applies to that investor's contract? Should
we require that an updating summary prospectus that includes
disclosure about multiple contracts be formatted or presented in a
certain way to help promote clarity to investors regarding whether a
particular disclosure in the document concerns an investor's
particular contract? Are there any other additions to the updating
summary prospectus that would help promote clarity to investors on
this point?
Alternatively, what would be the benefits of requiring
registrants to create a separate updating summary prospectus for
each contract, similar to the requirement for the initial summary
prospectus? Would this alternate approach be operationally
burdensome, and if so, why? Would it enhance investor understanding?
Would it reduce investor confusion?
Should we restrict the number of contract classes that
may be described in an updating summary prospectus? Why or why not?
c. Preparation of the Updating Summary Prospectus
The following chart outlines the information that would be required
in an updating summary prospectus under proposed rule 498A. Along with
specifying required cover page
[[Page 61754]]
disclosures, the proposed rule references particular disclosure items
from Forms N-3, N-4, and N-6 (as proposed to be amended). The
information would be required to appear in the same order, and under
the relevant corresponding headings, as the proposed rule
specifies.\215\
Table 3--Outline of the Updating Summary Prospectus
----------------------------------------------------------------------------------------------------------------
Proposed item of Proposed item of
Heading in updating Summary prospectus Proposed item of Form N-3 Form N-4 Form N-6
----------------------------------------------------------------------------------------------------------------
Cover Page:
Identifying Information................ ........................... .................. ..................
Legends................................ ........................... .................. ..................
EDGAR Contract Identifier.............. ........................... .................. ..................
Table of Contents (optional)........... ........................... .................. ..................
Content:
Updated Information About Your Contract ........................... .................. ..................
Important Information You Should 3.......................... 3 3
Consider About the [Contract].
Appendix: Portfolio Companies Available 19 or 20 \216\............. 18 18
Under the Contract.
----------------------------------------------------------------------------------------------------------------
i. Cover Page and Table of Contents
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\215\ Proposed rule 498A(c)(6).
\216\ Registrants on Form N-3 could omit the appendix specified
by proposed Item 19 of Form N-3, and instead provide the more
detailed disclosures about the investment options offered under the
contract required by proposed Item 20 of Form N-3. See infra note
517 and accompanying text.
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Identifying Information. Under the proposed rule, the following
information would be required to appear on the front cover page or at
the beginning of the updating summary prospectus:
The depositor's name;
the registrant's name;
the name of the contract(s), and the class or classes,
if any, to which the updating summary prospectus relates;
a statement identifying the document as an ``Updating
Summary Prospectus''; and
the approximate date of the first use of the updating
summary prospectus.\217\
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\217\ Proposed rule 498A(c)(3)(i) through (v).
Legend. The cover page or beginning of the updating summary
---------------------------------------------------------------------------
prospectus would be required to include the following legend:
You should read this Summary Prospectus carefully, particularly
the section titled Important Information You Should Consider About
the [Contract].
An updated prospectus for the [name of Contract] is currently
available online, which contains more information about the
[Contract], including its features, benefits, and risks. You can
find the 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 [__].\218\
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\218\ See supra note 79 (discussing requirements of the
registrant's internet address and contact information).
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Additional general information about certain investment
products, including [variable annuities/variable life insurance
contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.\219\
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\219\ Proposed rule 498A(c)(3)(vi).
Like the cover page or beginning of the initial summary prospectus,
the cover page or beginning of the updating summary prospectus would be
required to include identifying information about the variable
contract, as well as a legend including certain general information
that would be applicable to all variable contracts. The portions of the
proposed legend that describe how to obtain further information about
the contract, as well as the Investor.gov website, are identical to the
parallel portions of the legend that would appear on the cover page or
beginning of the initial summary prospectus.\220\ As with the initial
summary prospectus, a registrant could modify this required legend so
long as the modified legend includes comparable information.\221\
Similar to the initial summary prospectus, if a registrant incorporates
any information by reference into the updating summary prospectus, the
proposed rule would require the registrant to include in the legend
certain information about the document(s) from which the information
was incorporated.\222\ Like the initial summary prospectus, the cover
page for the updating summary prospectus would also be required to
include a legend indicating that the Securities and Exchange Commission
has not approved or disapproved of the contract or the summary
prospectus.\223\
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\220\ Proposed rule 498A(b)(2)(vi); see also supra note 79. The
legend in the updating summary prospectus would note that ``an
updated prospectus'' is available online, whereas the initial
summary prospectus would note that it summarizes key features of the
contract.
\221\ Proposed rule 498A(c)(3)(vi); see also proposed rule
498A(b)(2)(vi)(A).
\222\ See infra section II.A.6.
\223\ Proposed rule 498A(c)(3)(vii); see also supra note 86.
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We do not believe that the free look period legend that would
appear on the cover page or beginning of the initial summary prospectus
would be appropriate in the context of the updating summary prospectus,
because the free look period is not applicable to additional
investments after the initial purchase.
EDGAR Contract Identifier. We are also proposing to require that
the EDGAR contract identifier for each contract covered by the updating
summary prospectus be included on the bottom of the back cover page or
last page of the updating summary prospectus in a type size smaller
than that generally used in the prospectus (e.g., 8-point modern
type).\224\
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\224\ Proposed rule 498A(c)(4). As in the case of the initial
summary prospectus, this requirement is intended to enable
Commission staff and others to more easily link the updating summary
prospectus with other filings associated with the contract.
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Table of Contents. The proposed rule would permit an updating
summary prospectus, like the initial summary prospectus, to include a
table of contents.\225\ A table of contents must show the page number
of the various sections or subdivisions of the prospectus and must
immediately follow the cover page in any prospectus delivered
electronically.\226\
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\225\ Proposed rule 498A(c)(5).
\226\ Rule 481(c).
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We request comment generally on the proposed requirements for the
cover page of the updating summary prospectus, and specifically on the
following issues:
Is the information that we propose to require on the
cover page or beginning of the updating summary prospectus
appropriate? Should we include any additional information or
eliminate any of the information that we have proposed to include in
these parts of the updating summary prospectus?
Is the proposed legend sufficient to notify investors
of the availability and significance of the contract statutory
prospectus and other information about the variable contract and how
to obtain this information? For example, should the legend
[[Page 61755]]
include greater detail about the information that is available?
Does the proposed legend adequately inform investors of
the various means for obtaining additional information about a
variable contract? For example, are the proposed requirements for
the website address where additional information is available
adequate to ensure that the website and the additional information
will be easy to locate?
As proposed, should we permit registrants to modify the
required legend, provided the modified legend includes comparable
information?
Should the requirement in proposed rule 498A to include
the EDGAR contract identifier for each contract covered by the
updating summary prospectus on the bottom of the back cover page or
last page of the updating summary prospectus be revised to list
another identifier? If so, what identifier should be listed, and
why?
Should registrants be permitted to include a table of
contents in the updating summary prospectus? Instead, should a table
of contents be required for any updating summary prospectus? Does
rule 481(c) under the Securities Act provide appropriate
requirements for a table of contents included in an updating summary
prospectus?
ii. Content of the Updating Summary Prospectus
Proposed rule 498A specifies the content and order thereof required
in an updating summary prospectus.\227\ An updating summary prospectus
must contain the information required by the proposed rule in the
specific order detailed in section II.A.2.c. Similar to the initial
summary prospectus and the summary prospectus for mutual funds,
adhering to these content requirements is one condition that an
updating summary prospectus must satisfy in order to be deemed to be a
prospectus that is permitted under section 10(b) of the Securities Act
and section 24(g) of the Investment Company Act for the purposes of
section 5(b)(1) of the Securities Act.\228\ To aid market participants
in understanding the types of disclosures we propose to require,
Appendix B to this release contains a hypothetical updating summary
prospectus for a variable annuity separate account with a registration
statement filed on Form N-4. This hypothetical updating summary
prospectus is provided solely for illustrative purposes and is not
intended to imply that it reflects a ``typical'' updating summary
prospectus.
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\227\ Proposed rule 498A(c)(6).
\228\ See supra note 93.
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(a) Description of Changes to the Contract
The updating summary prospectus would be required to include a
concise description of any change with respect to the contract made
after the most recent updating summary prospectus or statutory
prospectus was sent or given to investors that has affected the
availability of portfolio companies (or investment options under a
variable annuity registered on Form N-3) under the contract,\229\ or
the statutory prospectus disclosure relating to the Fee Table,\230\ the
standard death benefit,\231\ and the other benefits available under the
contract.\232\ The updating summary prospectus also could include a
concise description of any other changes to the contract that the
registrant wishes to disclose, provided they occurred within the same
time period.\233\
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\229\ Proposed rule 498A(c)(6)(i). A change that has affected
availability of portfolio companies (or investment options) would
include changes in the portfolio companies (or investment options)
offered under the contract or available in connection with any
optional benefit. See also proposed Item 19 of Form N-3, and
proposed Item 18 of Forms N-4 and N-6.
\230\ Proposed rule 498A(c)(6)(i); see also proposed Item 4 of
Forms N-3, N-4, and N-6.
\231\ Proposed rule 498A(c)(6)(i); see also proposed Item 11 of
Forms N-3; proposed Item 10 of Forms N-4 and N-6.
\232\ Proposed rule 498A(c)(6)(i); see also proposed Item 12 of
Forms N-3; proposed Item 11 of Forms N-4 and N-6.
\233\ Proposed rule 498A(c)(6)(ii). Any additional information
included should not, by its nature, quantity, or manner of
presentation, obscure or impede understanding of the information
that the proposed rule would require.
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These contract changes would be described under the heading
``Updated Information About Your [Contract].'' \234\ This legend would
be required to follow the heading:
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\234\ Proposed rule 498A(c)(6)(i).
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.\235\
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\235\ Proposed rule 498A(c)(6)(i)(A).
We designed this disclosure requirement in light of the fact that
disclosures in a contract statutory prospectus do not change
frequently, and we believe providing investors with notice and a brief
description of any changes that do occur may be more informative than
repeating all the disclosures year-over-year. We believe that notice of
these changes is particularly helpful, given that currently investors
must determine which, if any, disclosures relevant to their particular
contract have changed each year they receive the contract statutory
prospectus. After receiving notice and a brief description of certain
changes, an investor who then wishes to obtain more information on
specific changes can consult the contract statutory prospectus to
review related disclosures in more detail. We believe that highlighting
certain key changes with respect to the contract in the updating
summary prospectus will provide important information to investors that
they can use in considering whether to continue making additional
purchase payments or reallocate contract value.
We would require the disclosure of changes with respect to these
particular disclosure topics (Fee Table, the standard death benefit,
other benefits available under the contract, and portfolio companies
available under the contract) because these are the areas where we
understand contract-related changes are most likely to occur, and that
may be of most interest to investors. We believe that permitting--but
not requiring--a concise description of any additional changes will
provide flexibility to registrants to highlight for investors any
additional changes. The requirement to disclose contract-related
changes to investors is particularly relevant for variable contracts,
since the length of statutory prospectus disclosure may hinder
investors in identifying important year-over-year changes to contract
features.
In providing a concise description of a contract-related change in
the updating summary prospectus, registrants must provide enough detail
to allow investors to understand the change and how it will affect
them.\236\ For example, this could include stating that a fee has
changed from 1.5% to 1.7%, rather than stating that the fee has changed
or increased, or specifically identifying each optional benefit that
has changed (with a brief explanation of how), rather than generically
stating that certain optional benefits are new or no longer available.
As another example, if a portfolio company's expense ratio has changed,
a registrant generally should describe this in the body of the updating
summary prospectus even though expense ratio information would also
appear in the required appendix to the updating summary prospectus, in
order to highlight this change to investors.
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\236\ Proposed rule 498A(c)(6)(i)(B).
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We request comment generally on the brief description of certain
contract-related changes that we propose would appear in the updating
summary prospectus, and specifically on the following issues:
Would this proposed disclosure requirement be useful to
investors? Would understanding the information that would appear in
an updating summary prospectus in response to the proposed
requirement be
[[Page 61756]]
relevant and helpful to an investor who is considering whether to
continue making additional purchase payments, or reallocate contract
value? Would disclosure of changes to multiple contracts confuse the
reader or discourage reading the document, and if so, what
additional rule provisions or guidance could help mitigate this?
Is the scope of changes that a registrant may discuss
in the updating summary prospectus appropriate? Are there other
topics that should be described in the updating summary prospectus
(e.g., changes that affect the contract's risks or potential
conflicts of interest)? Should the proposed rule instead require a
registrant to provide a concise description of ``significant
changes,'' ``material changes,'' or some other standard instead of
prescribing specific disclosure topics? Is there a better way of
identifying these specific disclosure topics, and if so, what would
this be?
Is it appropriate to allow registrants to discuss any
other changes that have been made to the contract during the same
time period in this section? Should registrants also be allowed to
discuss matters that do not directly involve the contract (e.g.,
upcoming tax law changes or merger and acquisition activity
involving the registrant)? Why or why not?
Is the proposed requirement that a registrant include a
``concise description'' of each change clear and appropriate? Would
registrants understand what level of disclosure they should include?
Would any additional clarification in the rule text or Commission
guidance be helpful?
(b) Key Information
The updating summary prospectus also would be required to include
the same Key Information Table that would appear in the initial summary
prospectus.\237\ As discussed above, this table would streamline
certain important concepts about the variable contract in a
presentation that is designed to be easy to read and navigate.\238\
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\237\ Proposed rule 498A(c)(6)(iii). This disclosure would be
the same information required by Item 3 of Forms N-3, N-4, and N-6.
\238\ See supra section II.A.1.c.ii.(b).
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Because investors may make additional investments in the variable
contract, we propose to require this disclosure in the updating summary
prospectus to remind them of the contract's fees and expenses, risks,
restrictions, tax implications, and investment professional
compensation. Furthermore, we believe that an investor who continues to
make investments in the variable contract (or to reallocate contract
value)--not just an initial investor in the contract--should receive
the benefit of this disclosure in a presentation that is intended to
improve readability and readership.
Besides the brief description of contract-related changes and
portfolio company/investment option appendix discussed below, an
updating summary prospectus would include only this Key Information
Table as summary disclosure about the contract's key information, and
would not also include the additional disclosure that the initial
summary prospectus would include (for example, additional information
about standard and optional contract benefits, or the contract Fee
Table). We believe this is appropriate in the context of an updating
summary prospectus for several reasons.
First, unless the investor invested prior to the registrant relying
on rule 498A, the investor already will have received the initial
summary prospectus (and have had access to the statutory prospectus),
which includes this extra detail. Additionally, the updating summary
prospectus draws on layered disclosure concepts, where the investor can
access the more detailed statutory prospectus electronically (or in
paper format on request) to complement the disclosure included in the
updating summary prospectus.
An updating summary prospectus that describes multiple contracts
could contain a separate Key Information Table for each of the
contracts, or use a different presentation approach that consistently
discloses the required information for each contract in the required
order. For example, if the only Key Information Table disclosure that
would vary by contract were the fee information, a prospectus that
describes multiple contracts could include a single Key Information
Table that discloses separate fee information in the ``Fees and
Expenses'' line-items for each contract.
We request comment generally on including the Key Information Table
in the updating summary prospectus, and specifically on the following
issues:
Should we require including the proposed Key
Information Table in the updating summary prospectus? Would this
table provide a succinct summary of the contract's key information
for investors who make ongoing purchase payments, or who reallocate
contract value? If not, why not?
Is the location of the proposed Key Information Table
within the updating summary prospectus appropriate? If not, where
should it be located?
Should the table include, as proposed, the same line-
items as the Key Information Table that would appear in the initial
summary prospectus? Instead should we require a modified version of
the table in the updating summary prospectus, and if so, how should
we modify the table? For example, is it appropriate or necessary for
the table that appears in the updating summary prospectus to include
a line-item on investment professional compensation? Is it important
to require the disclosure that investors should only exchange their
contract if they determine, after comparing the features, fees, and
risks of both contracts, that it is preferable for them to purchase
the new contract rather than continue to own the existing contract?
Should the presentation of the proposed table in the
updating summary prospectus differ from the proposed presentation
for the initial updating prospectus? If so, why, and what would be a
better alternate presentation?
Should we mirror the approach taken with the initial
summary prospectus where cross-references in the Key Information
Table for electronic versions of the updating summary prospectus
would link directly to the location in the statutory prospectus
where the subject matter is discussed in greater detail? If so, why?
What would be a better approach?
Are there any particular instructions for the Key
Information Table that we should modify for the updating summary
prospectus?
(c) Appendix: Portfolio Companies Available Under the Contract
Finally, the updating summary prospectus would be required to
include an appendix, under the heading ``Appendix: [Portfolio
Companies/Investment Options] Available Under the [Contract],'' that
provides summary information about the portfolio companies offered
under the contract.\239\ This requirement for the appendix would be
identical to the requirement for the appendix in the initial summary
prospectus.\240\ Like the proposed requirement for the initial summary
prospectus appendix, Form N-3 registrants could omit this appendix and
instead provide the more detailed disclosures about the investment
options offered under the contract that would be required by proposed
Item 20 of Form N-3.\241\
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\239\ Proposed rule 498A(c)(6)(iv). This information on
portfolio companies or investment options would be the same
information required by proposed Item 19 of Form N-3 and proposed
Item 18 of Forms N-4 and N-6.
\240\ Paralleling a similar requirement for the initial summary
prospectus, if the appendix includes the information required by
Item 19 of Form N-3, the appendix would also include the following
introductory legend: ``The following is a list of [Investment
Options] currently available under the [Contract], which is subject
to change as discussed in the [Statutory Prospectus for the
Contract]. More information about the [Investment Options] is
available in [the Contract Statutory Prospectus], which can be
requested at no cost by following the instructions on [the front
cover page or beginning of the Summary Prospectus].'' See proposed
Item 19 of Form N-3; proposed rule 498A(c)(6)(iv).
\241\ See proposed rule 498A(c)(6)(iv); see also text following
note 525 (discussing proposed Item 20 of Form N-3).
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Because the selection of portfolio companies or investment options
will directly affect the performance, and
[[Page 61757]]
often the available optional benefits, of the contract, we believe that
it is necessary to provide basic information about the portfolio
companies to ongoing investors in variable contracts. This disclosure
is intended to remind investors of one of the most important decisions
they face during the life cycle of a contract--that is, whether and
where to allocate additional purchase payments and reallocate contract
value among the portfolio companies or investment options available to
them.
We request comment generally on the appendix that we propose to
require in the updating summary prospectus, and specifically on the
following issues:
Are the requirements of the proposed appendix clear and
appropriate in light of the goals of the updating summary
prospectus?
Would the information that would be included in this
appendix be useful to an investor who is considering whether to
continue making additional purchase payments, or reallocate contract
value? Would other or additional information be more useful to
investors? For example, should the appendix identify portfolio
companies that have been added, or portfolio companies that have
been removed or closed to additional investment, during the period
covered by the update?
Should we, as proposed, permit a Form N-3 registrant to
omit the appendix and instead include the more detailed disclosures
about the investment options offered under the contract that would
be required by proposed Item 20 of Form N-3? Are the considerations
regarding the inclusion of the appendix in a Form N-3 registrant's
updating summary prospectus the same or different as in the context
of the initial summary prospectus?
d. General Requests for Comment on the Updating Summary Prospectus
In addition to the specific requests for comment above on the
proposed content requirements and scope of the updating summary
prospectus, we also request comment generally on the updating summary
prospectus, and specifically on the following issues:
Should we consider any alternative approaches to the
proposed framework of two distinct summary prospectuses (the initial
summary prospectus and the updating summary prospectus)? For
example, should all variable contract investors receive a summary
prospectus with identical content? As another example, should the
proposed rule provide that only initial contract purchasers would
receive a summary prospectus, and afterwards, investors who make
additional purchase payments, or who reallocate contract value,
would receive no summary prospectus (or receive only a notice that
the statutory prospectus is available online)?
Should we permit the use of an updating summary
prospectus if a registrant does not use an initial summary
prospectus for each currently offered contract described under the
contract statutory prospectus to which the updating summary
prospectus relates?
Does the information in the proposed updating summary
prospectus capture the information that is most likely to change
from year to year, and that is most important for investors when
considering whether to make additional purchase payments, or
reallocate contract value? Should any of the information that we
propose to require in the updating summary prospectus not be
required? Should we require disclosure of any additional information
(such as additional information that we propose to include in the
initial summary prospectus) in the updating summary prospectus?
Should we consider changing the proposed order in which
the disclosure items would appear in the updating summary
prospectus?
Should we impose any page or word limits on the
updating summary prospectus (e.g., 10 pages or 2,500 words)? If so,
what should the page or word limits be (e.g., how many pages or
words, and should these limits be on the whole updating summary
prospectus or certain sections of it)? Are there other ways we could
encourage concise and investor-friendly disclosure?
Is the information that we propose to require in the
body and appendix of the updating summary prospectus appropriate?
Should we include any additional content requirements or modify or
eliminate any of the content requirements? Should any information in
the body be moved to an appendix, or vice versa?
Would investors be more likely to read an updating
summary prospectus if we required the use of certain design
elements--such as larger font sizes or greater use of white space,
colors, or visuals--or provided additional guidance on such design
elements? Would any of the proposed content requirements
particularly benefit from the use of such design elements?
Would the updating summary prospectus, as proposed,
appropriately complement current disclosure practices by not
unnecessarily duplicating disclosure topics investors receive
through other channels, and highlighting key risks that investors
may not learn about through other channels?
Should registrants creating electronic versions of the
updating summary prospectus be required to include active hyperlinks
for website addresses referenced in the electronic version, as would
be required under our proposal? What concerns would be raised, if
any, if those website addresses were third-party websites? Should
registrants creating electronic versions of the initial summary
prospectus be required to include active hyperlinks for any cross-
references, as would be required under our proposal?
Should we offer registrants greater flexibility to
design summary prospectuses that can be viewed on mobile devices,
are interactive, have audio or video features, or otherwise make use
of technology and research about effective disclosure methods? If
so, how can we allow such flexibility while still ensuring that
investors receive the information they need to make their investment
decisions?
Are there any aspects of the updating summary
prospectus that should be made to conform to parallel provisions in
the initial summary prospectus or potential changes to those
proposed parallel provisions? Conversely, are there any potential
changes to the proposed initial summary prospectus that should not
be made to the proposed updating summary prospectus?
Is the hypothetical updating summary prospectus in
Appendix B useful and illustrative of the proposed requirements?
Does it appropriately show the level of detail that firms might
provide?
3. Legal Effect of Use of Summary Prospectus for Variable Contracts
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 statutory
prospectus.\242\ Proposed rule 498A would provide that, for variable
contract securities in an offering registered on Forms N-3, N-4, or N-
6, the use of a summary prospectus could satisfy this section 5(b)(2)
obligation under certain conditions. As under rule 498, use of the
summary prospectus to satisfy a registrant's section 5(b) obligation
would be voluntary.\243\
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\242\ 15 U.S.C. 77e(b)(2) (stating that it shall be unlawful for
any person to carry or cause to be carried through the mails or in
interstate commerce any such security for the purpose of sale or for
delivery after sale, unless accompanied or preceded by a prospectus
that meets the requirements of Securities Act section 10(a)); see
also supra note 27 (noting that the term ``statutory prospectus''
means a prospectus that meets the requirements of section 10(a) of
the Securities Act).
Because the requirements of section 5(b)(2) of the Securities
Act are applicable to ``any person,'' its obligations are applicable
to financial intermediaries through whom variable contracts are
sold, as well as variable contract issuers.
\243\ See supra notes 60 through 63 and accompanying text.
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First, a person relying on the proposed rule would be required to
send or give a summary prospectus to an investor no later than the time
of the ``carrying or delivery'' of the contract security.\244\ This
summary prospectus would be an initial summary prospectus in the case
of an initial purchase of a variable contract, or an updating summary
prospectus in the case of additional investments in a variable contract
previously purchased.\245\
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\244\ See supra note 242 (discussing the prohibition against
carrying or delivering a security without otherwise accompanying it
or preceding it with a statutory prospectus).
\245\ Proposed rule 498A(f)(1); see also supra note 207 and
accompanying text.
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Second, the summary prospectus could not be bound together with any
other materials, except that we are permitting portfolio company
summary and statutory prospectuses to be bound together with the
contract summary
[[Page 61758]]
prospectus,\246\ subject to certain conditions.\247\ Third, the summary
prospectus also would be required to meet the proposed rule's content
requirements for an initial summary prospectus or updating summary
prospectus (as appropriate).\248\ Finally, the initial summary
prospectus, updating summary prospectus, contract statutory prospectus,
and contract SAI must be publicly accessible, free of charge, on a
website in the manner that the proposed rule specifies.\249\ Failure to
comply with any of these requirements would prevent a person from
relying upon the proposed rule to meet its section 5(b)(2) prospectus
delivery obligations. Absent satisfaction of the section 5(b)(2)
obligation by other available means, a section 5(b)(2) violation would
result.\250\
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\246\ Proposed rule 498A(f)(2).
\247\ Proposed rule 498A(f)(2)(i) and (ii). The rule would
permit binding these materials together so long as: (1) All of the
underlying portfolio companies whose prospectuses are bundled
together are available to the investor to whom they are sent or
given; and (2) a table of contents identifying each portfolio
company summary and/or statutory 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.
\248\ Proposed rule 498A(f)(3).
\249\ Proposed rule 498A(f)(4) (in addition, a Form N-3
registrant would also be required to post its most recent annual and
semi-annual reports to shareholders to the website); see also infra
section II.A.4.
\250\ As discussed below, the proposed rule also includes
additional requirements (such as the requirement to send a copy of
the contract statutory prospectus upon request) whose violation
would result in a violation of the proposed rule, but would not
result in a violation of section 5(b)(2). See infra note 298 and
accompanying text.
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The proposed rule also would provide that a communication relating
to an offering registered on Forms N-3, N-4, or N-6 that a person sends
or gives after the effective date of a variable contract's registration
statement (other than a prospectus that section 10 of the Securities
Act permits or requires) would not be deemed a prospectus under section
2(a)(10) of the Securities Act 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 meets the same binding requirements
that we discuss in the immediately-preceding paragraph;
(3) the summary prospectus that was sent or given satisfies the
requirements for the initial summary prospectus or the updating
summary prospectus, as applicable; and
(4) the initial summary prospectus, updating summary prospectus,
contract statutory prospectus, and contract SAI are publicly
accessible, free of charge, on a website in the manner that the
proposed rule specifies.\251\
\251\ Proposed rule 498A(g).
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Section 2(a)(10) of the Securities Act provides that certain
communications accompanied or preceded by a statutory prospectus are
not deemed to be ``prospectuses'' for purposes of the Securities
Act.\252\ This provision of the proposed rule, which is modeled on a
corresponding provision of rule 498,\253\ extends similar treatment to
communications accompanied or preceded by a summary prospectus if all
the provision's conditions are met. These communications remain subject
to the general antifraud provisions of the federal securities
laws.\254\
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\252\ Section 2(a)(10) of the Securities Act [15 U.S.C.
77b(a)(10)(a)] provides that a communication sent or given after the
effective date of the registration statement (other than a
prospectus permitted under subsection (b) of section 10) shall not
be deemed a prospectus if it is proved that prior to or at the same
time with the communication a written prospectus meeting the
requirements for a statutory prospectus at the time of the
communication was sent or given to the person to whom the
communication was made.
\253\ See rule 498(d).
\254\ See, e.g., section 17(a) of the Securities Act [15 U.S.C.
77q(a)]; section 10(b) of the Exchange Act [15 U.S.C. 78j(b)];
section 34(b) of the Investment Company Act [15 U.S.C. 80a-33(b)].
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Because we believe that all investors should receive the benefit of
the succinct, investor-friendly disclosure that is included in the
variable contract summary prospectus, all of the disclosure items that
would appear in the summary prospectus also would be required to appear
in the statutory prospectus. In that respect, all variable contract
investors, regardless of whether the product they choose has a summary
prospectus, would have the benefit of improved disclosures in the
statutory prospectus.
We request comment generally on the proposal to permit a new option
for prospectus delivery for variable contracts, and specifically on the
following issues (in addition, we are requesting comment on certain
parallel provisions of rule 498):
Should we permit a person to satisfy its prospectus
delivery obligations under the Securities Act with respect to
variable contracts in the manner provided in the proposed rule?
Would this approach provide investors with material information
about the variable contract while providing adequate protections?
Are there other delivery approaches that would be more
effective than the proposed approach? For example, should we permit
a person to satisfy its prospectus delivery obligations by filing a
statutory prospectus with the Commission and by posting it online
without using a summary prospectus?
Is the proposed approach appropriate given the current
demographics of variable contract investors? For example, does the
proposed approach adequately protect investors who have no internet
access or limited internet access or who prefer not to receive
information about their variable contract investments over the
internet? As another example, given the high percentage of investors
who use an investment professional when purchasing a variable
contract (and who might learn about the contract through discussions
with investment professionals), is there another approach that would
be more effective? Should we make any other changes with respect to
prospectus delivery obligations? Does the proposed approach
appropriately balance the objectives of the proposed summary
prospectus framework with protecting investors who have no or
limited access to the internet?
Should investors have the ability to opt out of the
rule permanently and thereafter receive a paper copy of any
statutory prospectus? How could this be implemented in practice? For
example, how would a registrant that had no prior relationship with
an investor be apprised of the investor's decision to opt out?
The proposed rule would not permit the summary
prospectus to be bound together with any materials other than
prospectuses for the portfolio companies that are available under
the contract. This approach is modeled on rule 498(c). Do
registrants currently rely on rule 498(c) to bind the variable
contract's statutory prospectus with the prospectuses or summary
prospectuses for the underlying portfolio companies? Since reliance
on the proposed rule would be optional, should we continue to permit
binding to be consistent with rule 498(c)? Since we anticipate that
most registrants will rely on the optional delivery method for
portfolio company prospectuses as described in section II.B below,
should the rule permit a variable contract summary prospectus to be
bound with prospectuses and summary prospectuses of portfolio
companies, or is such a provision unnecessary?
Under proposed rule 498A, use of the summary prospectus
would be voluntary. Should we make use of the summary prospectus
regime mandatory for all variable contract registrants? If so, why?
Would inconsistent use of the summary prospectus create confusion,
or make comparison of variable contract products more difficult for
investors? Would a mandatory approach adequately protect investors
who have no or limited internet access or who prefer not to receive
information about their investments over the internet? Should we
first adopt the voluntary summary prospectus regime and consider
whether the summary prospectus should be mandated in the future, and
if so, what methods or approaches should we consider? What would be
registrants' primary considerations in determining whether to adopt
the proposed voluntary summary prospectus regime? Would registrants
be more likely to adopt the regime if the portions of the statutory
prospectus that are also summary prospectus disclosures were
segregated and placed at the beginning of the statutory prospectus?
If we were to adopt a summary prospectus framework for
variable contracts,
[[Page 61759]]
how should we evaluate the effectiveness of the new framework? What
methods or approaches should we use to evaluate the rule, and what
areas of the new framework should we focus on in any such review?
Should registrants that elect to rely on rule 498A be
required to send current investors a notice explaining the new
delivery approach before sending the first updating summary
prospectus? Would investors benefit from receiving such a notice? If
so, should investors receive a separate notice about the transition,
or should different methods of notifying investors be permitted? For
example, should registrants be permitted to add the notice as an
insert or legend to other documents they are already sending
investors?
4. Online Accessibility of Contract Statutory Prospectus and Certain
Other Documents Relating to the Contract
The proposed rule would permit investors who receive a succinct,
user-friendly initial or updating summary prospectus to access more
detailed information about the variable contract, either by reviewing
the information online, or by requesting the information to be sent in
paper or electronically. These provisions parallel provisions in the
rule governing the use of mutual fund summary prospectuses.\255\ In our
experience, layered disclosure for mutual funds has benefitted both
investors and registrants, and we are proposing a similar framework for
variable contracts. We believe that permitting variable contract
investors to access the contract statutory prospectus in several ways
(online and by physical or electronic delivery) maximizes the
accessibility and usability of the information, as indicated by
investors' preference for access to both online and paper
resources.\256\
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\255\ See rule 498(c)(4), (d)(4), (e), and (f).
\256\ See 2012 Financial Literacy Study, supra note 39, at iv,
xix.
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a. Required Online Contract Documents
Under the proposal, a variable contract's current initial summary
prospectus, updating summary prospectus, statutory prospectus, and SAI,
and, in the case of a registrant on Form N-3, the registrant's most
recent annual and semi-annual reports to shareholders under rule 30e-1
under the Investment Company Act (together, the ``required online
contract documents''), would be required to be available online. This
approach operationalizes the layered disclosure framework that
undergirds the proposed rule, with the summary prospectus provided in
paper (or electronically) to investors, and additional information
about the contract securities available online. The required online
contract documents generally comprise the same set of documents that
the mutual fund summary prospectus rules require to be posted online,
and provide additional important detail about the contract that
investors can access if they wish. The required online contract
documents only reference the registrant's annual and semi-annual
shareholder reports for Form N-3 registrants because Form N-4 and Form
N-6 registrants do not have their own shareholder reports, but instead
transmit the portfolio companies' annual and semi-annual shareholder
reports to the investors in their trust accounts.
As with similar provisions in the mutual fund summary prospectus
rule, 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 proposed rule provides the summary
prospectus to investors.\257\ Moreover, a current version of each of
the required online contract documents would be required to remain on
that website for at least 90 days following either:
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\257\ Proposed rule 498A(h)(1); see also rule 498(e)(1).
The time of the ``carrying or delivery'' of the
contract security if a person is relying on the proposed rule to
satisfy its section 5(b)(2) prospectus delivery obligations; or
If a person is relying on the proposed rule to send
communications that will not be deemed to be prospectuses, the time
that the person sends or gives the communication to investors.\258\
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\258\ Proposed rule 498A(h)(1).
This requirement is designed to provide continuous access to the
information from the time the summary prospectus is sent or given until
at least 90 days after the date of delivery of a security or
communication in reliance on the proposed rule. This is the timeframe
for the availability of online information under the mutual fund
summary prospectus rule, and we are proposing that it be the same in
the proposed rule because of market participants' familiarity with this
timeframe, and because there may be operational efficiencies for
certain registrants in having the timeframe be the same under both
summary prospectus frameworks. Moreover, we believe this proposed
timeframe appropriately balances the costs of maintaining information
online with investors' interests in having the flexibility to access
this online information after receiving the summary prospectus (for
example, if they would like to review a topic presented therein in more
detail in the statutory prospectus that is available online, after they
have had the opportunity to read and digest the summary prospectus).
b. Formatting Requirements for Required Online Contract Documents
The proposed rule would direct that the required online contract
documents be presented in a manner that is human-readable and capable
of being printed on paper in human-readable format.\259\ This
formatting requirement is a condition to reliance on the rule to
satisfy a person's delivery obligations under section 5(b)(2) of the
Securities Act and the provision that a communication shall not be
deemed a prospectus under section 2(a)(1) of the Securities Act. The
rule governing mutual fund summary prospectuses also requires this
formatting approach.\260\ The ``human-readable'' presentation
requirement is designed to impose a minimum standard of usability
comparable to that of a paper document, although we understand that the
electronic version could include additional features that might enhance
the usability of the electronic version relative to the paper
version.\261\ For example, regarding usability, all portions of the
document should be human-readable such that when an investor views the
document on an internet browser, the text does not get cut off based on
the screen size.
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\259\ Proposed rule 498A(h)(2)(i).
\260\ Rule 498(e)(2)(i).
\261\ As in the parallel provisions of the rule governing mutual
fund summary prospectuses, the ``human-readable'' condition is
intended to make clear that posted information must be presented in
human-readable text, rather than machine-readable software code,
when accessed through an internet browser and that it must be
printable in human-readable text. This condition does not impose any
further requirements relating to user-friendliness of the
presentation. See 2009 Summary Prospectus Adopting Release, supra
note 33, at 85; see also infra note 274 and accompanying and
following text (discussing provisions that are meant to enhance
investors' understanding of special terms when they view the summary
prospectus online, as well as other technological tools associated
with online disclosure (e.g., fee calculators, pop-up explanations)
that would present further opportunities to promote investor
understanding).
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In addition, the proposed rule would mandate that the online
materials be presented in a format that is convenient for both reading
online and printing on paper.\262\ The failure to comply with these
``convenient for reading and printing'' formatting requirements would
not, however, be a condition of reliance on the rule, because whether a
particular format is convenient for
[[Page 61760]]
reading online and printing depends on a number of factors and must be
decided on a case-by-case basis.\263\ In order to provide certainty to
market participants, we are therefore not proposing that this
requirement be a condition of reliance on the rule, and thus the
failure to comply with this requirement would not negate a person's
ability to rely on the rule in order to satisfy a person's delivery
obligations under section 5(b)(2) of the Securities Act.\264\ Such a
failure could, however, constitute a violation of Commission rules.
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\262\ Proposed rule 498A(i)(3); see also rule 498(f)(3)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses).
\263\ See 2009 Summary Prospectus Adopting Release, supra note
33, at nn.272 and 273 and accompanying text (relevant factors
include the manner in which the online version renders charts,
tables, and other graphics; the extent to which the online materials
include search and other capabilities of the internet to enhance
investors' access to information and include access to any software
necessary to view the online version; and the time required to
download the online materials).
\264\ Proposed rule 498A(i)(4); see also rule 498(f)(5)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses).
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c. Linking Within and Between Documents
The proposed rule also includes 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.\265\ The proposed requirements, which are substantively
identical to parallel provisions in the rule governing mutual fund
summary prospectuses,\266\ are designed to promote the usability of the
information that appears in these documents.
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\265\ Proposed rule 498A(h)(2)(ii) and (iii).
\266\ See rule 498(e)(2)(ii) and (iii). As discussed below, the
parallel provisions of proposed rule 498A also include similar
linking requirements for the portfolio company documents that the
proposed rule would require to appear online if a person were to
rely on the rule's new delivery option for portfolio company
prospectuses.
In this release, the term ``substantively identical'' is meant
to refer to sets of provisions that do not include the same words
verbatim, but where the only differences between the provisions are
those that do not affect the substance of the requirement at issue.
For example, parallel provisions in rule 498 and 498A where only the
internal cross-references differ.
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The first linking requirement would allow the reader to move
directly between a table of contents of the contract statutory
prospectus or SAI and the related sections of that document, by a
single mouse click or mobile-device tap.\267\ The second 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 contract SAI that provides additional
detail.\268\ 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, in which
case two mouse clicks or mobile-device taps would be required.\269\
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\267\ Proposed rule 498A(h)(2)(ii). The linked table of contents
may be outside the document (e.g., in a separate section or panel of
the screen), and need not be the table of contents that is contained
within the document itself, as long as the linked table of contents
for the statutory prospectus conforms to our rules' requirements for
the table of contents that would be required to appear within the
document). See rule 481(c) under the Securities Act.
Mutual funds commonly implement this feature using a left
navigation or ``bookmark'' design style. While such design styles
continue to be popular (and we anticipate that some insurers relying
on proposed rule 498A might also employ this design style), the
increased use of mobile devices and applications has led to the
development of new and evolving design styles. Any navigation style
should provide the functionality that is required by the rule.
\268\ Proposed rule 498A(h)(2)(iii).
\269\ Id. Under the latter option, links would either have to be
available at both the beginning and end of the summary prospectus,
or would be required to remain continuously visible to persons
accessing the summary prospectus. This requirement is designed to
promote the links' prominence and accessibility to investors.
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d. Definitions of Special Terms, and Online Viewing of Special Terms
The summary prospectus content requirements reference information
that is required to appear in the contract statutory prospectus, which
in turn must be written using plain English principles.\270\ We
recognize, however, that it may be particularly challenging to
accurately describe a variable contract without using certain terms
that, while technically accurate, may be confusing or unfamiliar to
retail investors.
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\270\ Rule 421(d) of the Securities Act; see also proposed
General Instruction B.4(c) to Form N-3; proposed General Instruction
B.4(c) to Form N-4; proposed General Instruction B.4(c) of Form N-6.
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Accordingly, the proposed rule would require a summary prospectus
to define any ``special terms'' elected by the registrant, using any
presentation that clearly conveys their meaning to investors.\271\ This
requirement reflects the proposed instructions in Forms N-3, N-4, and
N-6 (as well as current, similar instructions in these forms to define
``special terms'' in a glossary or index).\272\ The registrant would
determine which terms would constitute special terms. We generally
believe that a special term is a term with which a new contract
investor typically may not be familiar, and that would be important for
the investor to understand key features of the contract.
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\271\ Proposed rule 498A(e). For example, the summary prospectus
could include a glossary or a list of definitions of special terms
that appear throughout the document. Or, as another example, if a
special term appears in only one section of the summary prospectus,
the summary prospectus could include a definition for this term on
the page, or in the section, where this term appear (for example, in
a box to the side of the main text, or at the bottom of the page).
Additionally, there are certain technological solutions that are
available for electronic versions of the summary prospectus, such as
moving or ``hovering'' the computer's pointer or mouse over the
term, or linking directly back and forth between each special term
and the corresponding entry in a glossary or list of definitions.
See infra note 274 and accompanying and following text.
\272\ See proposed General Instruction C.3(d) to Form N-3;
proposed General Instruction C.3(d) of Form N-4; proposed General
Instruction C.3(d) to Form N-6; see also Item 2 of current Forms N-3
and N-4.
---------------------------------------------------------------------------
We believe the proposed requirement for special terms in the
contract summary prospectus, like the current and proposed requirements
for special terms in the contract statutory prospectus, is appropriate
in the context of variable contracts, as variable contract disclosure
documents tend to include industry-specific language in order to
describe the sometimes complex features of these products.\273\
Glossaries or other means of defining these terms could help a retail
investor better understand these products' terms and features, as
discussed further below.
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\273\ Because variable contract prospectuses must describe the
products' insurance and investment features, they generally contain
more technical terms than mutual fund disclosure documents, which
only describe investment features.
---------------------------------------------------------------------------
In order to leverage technology to help investors understand the
variable contract, the proposed rule includes provisions that are meant
to enhance investors' understanding of special terms when they view the
summary prospectus online. Specifically, the proposed rule would
require that investors either be able to view the definition of each
special term used in an online summary prospectus upon command,\274\ 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.\275\ This approach, which today is a
common convention for many electronically-available documents, is an
example of how technology can enhance our layered approach to
disclosure and help investors who access the document online grasp the
complexities of variable contract features. Registrants may wish
[[Page 61761]]
to consider whether other technological tools associated with their
online disclosure (e.g., fee calculators, pop-up explanations) would
present further opportunities to promote investor understanding.
---------------------------------------------------------------------------
\274\ For example, investors could view the definitions of
special terms by moving or ``hovering'' the computer's pointer or
mouse over the term, or selecting the term on a mobile device.
\275\ Proposed rule 498A(h)(2)(iv).
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e. Ability To Retain Documents
The proposed rule also would require that persons accessing the
website that appears on the summary prospectus cover page be able to
permanently retain, free of charge, an electronic version of each of
the required online contract documents. Like the online version of
these documents, the retainable version of the documents must be in a
format that is: (1) Human-readable and capable of being printed on
paper in human-readable format; and (2) permits persons accessing the
downloaded documents to move directly back and forth between each
section heading in a table of contents of that document and the section
of the document referenced in that section heading.\276\ The
permanently retained document does not have to be in a format that
allows an investor to move back and forth between the summary
prospectus and the statutory prospectus and SAI, because of possible
technical difficulties associated with maintaining links between
multiple downloaded documents. These proposed conditions are
substantively identical to parallel provisions in the rule governing
mutual fund summary prospectuses.\277\
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\276\ Proposed rule 498A(h)(3).
\277\ See rule 498(e)(3).
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In addition, the proposed rule would mandate that the electronic
versions of the documents that may be permanently retained must be in a
format that is convenient for both reading online and printing on
paper.\278\ Like the ``convenient for reading and printing'' online
formatting requirements,\279\ the failure to comply with these
formatting requirements for retained electronic documents would not be
a condition for reliance on the rule.\280\ Since the convenience of
these formatting requirements must be decided on a case-by-case basis,
we believe this proposed approach would help provide certainty to
market participants who seek to rely on the proposed rule to satisfy
prospectus delivery obligations.\281\
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\278\ Proposed rule 498A(i)(3).
\279\ See supra note 262 and accompanying text.
\280\ Proposed rule 498A(i)(4).
\281\ See supra notes 263 and 264 and accompanying text.
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f. Safe Harbor for Temporary Noncompliance
Compliance with the conditions in the proposed rule regarding the
online availability of the required online contract documents
(including the formatting and linking requirements for these documents,
the requirements associated with the use of special terms in these
documents, and the ability to retain these documents permanently) is
generally required in order to rely on the proposed rule to meet
prospectus delivery obligations under section 5(b)(2) of the Securities
Act.\282\ Such a 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.
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\282\ Proposed rule 498A(f)(4) (section 5(b)(2) transfer of the
contract security is satisfied if, among other things, the
conditions in proposed rule 498A(h) are satisfied).
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We recognize, however, that there may be times when, due to events
beyond a person's control, the person may temporarily not be in
compliance with the proposed rule's conditions regarding the
availability of the required online contract documents.\283\ The
proposed rule therefore contains a safe harbor provision for temporary
noncompliance, which is substantively identical to a parallel provision
in the rule governing mutual fund summary prospectuses.\284\
---------------------------------------------------------------------------
\283\ Such events might, for example, include system outages or
other technological issues, natural disasters, acts of terrorism, or
pandemic illnesses.
\284\ Proposed rule 498A(h)(4); see also rule 498(e)(4).
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This provision 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 proposed rule to satisfy
prospectus delivery obligations would be 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.\285\
---------------------------------------------------------------------------
\285\ Id.; see also 2009 Summary Prospectus Adopting Release,
supra note 33, at nn.92 and 93. This safe harbor generally would not
be available to a registrant that repeatedly fails to comply with
the rule's website posting requirements or that is not in compliance
with the requirements over a prolonged period. Id. at n.293.
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We request comment generally on the conditions in the proposed rule
regarding the availability of the required online contract documents,
and specifically on the following issues:
Should we require the online posting of the required
online contract documents in the manner that the proposed rule
specifies? Should we require that the required online contract
documents be available on the insurance company's website as opposed
to a third-party website? Should the website include an archive of
older versions of these documents (not just the current versions)?
If so, what information should be in the archive, and how long
should such materials be required to be archived online?
Should we require, as proposed, that persons accessing
this website be able to permanently retain, through downloading or
otherwise, free of charge, an electronic version of such documents?
Should we require that downloaded documents retain links that enable
a user to move readily between related passages of multiple
documents? Would these requirements pose any technological,
financial, or other challenges for persons relying on the proposed
rule?
Does the proposed 90-day timeframe for the availability
of online information appropriately balance the costs of maintaining
information online with investors' interests in having the
flexibility to access this online information after receiving the
summary prospectus? Would there be operational efficiencies for
certain registrants in having the timeframe be the same under the
variable contract summary prospectus framework and the mutual fund
summary prospectus framework? How long do registrants typically
maintain information online that is required under the mutual fund
summary prospectus rules? As a matter of practice, is information
generally maintained for a full year from the date of the summary
prospectus?
Should we provide additional guidance regarding what
might constitute a ``human-readable'' format for providing the
required online contract documents, as well as a ``convenient''
format for both reading these documents online and printing them on
paper? \286\ Or should persons relying on the proposed rule have the
flexibility to determine how best to comply with this or other
technological requirements that the proposed rule contemplates? Is
it necessary for the proposed rule to include separate provisions
regarding the ``human-readable'' website presentation of the
required online contract documents, as well as the ``convenient for
reading and printing'' presentation? Is it appropriate that, of
these two provisions, the former should be a condition to relying on
the rule to satisfy section 5(b)(2) prospectus delivery
requirements, whereas the latter should not? If we were to modify
these provisions, should we also propose to modify the parallel
provisions in the rule governing mutual fund summary prospectuses?
Should we instead retain one of these provisions, and if so which?
If the final rule retains only one of these provisions, should we
propose to modify rule 498 to similarly only retain just that
provision?
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\286\ See supra notes 261 and 263 and accompanying text.
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Although the proposed rule specifies that the materials
posted online must be in
[[Page 61762]]
a human-readable format, should we also require that the materials
be posted online in a machine-readable format to promote the
gathering and dissemination of information by data aggregators, or
to facilitate the review, analysis, and comparison by investors and
other data users? For example, should we require the materials to be
posted online to use Inline XBRL, as we are proposing to require for
certain disclosures in statutory prospectuses that are filed with
the Commission? \287\ Why or why not?
---------------------------------------------------------------------------
\287\ See infra section II.E.
---------------------------------------------------------------------------
Are the proposed linking requirements appropriate and
useful? Will these requirements help investors to navigate
effectively within and between these documents? If not, why not? Are
there other ways we can improve the usability of these documents?
What are some options for enabling the linking requirements? Are the
proposed linking requirements sufficiently technology-neutral and
flexible enough to accommodate future technological developments?
Should persons accessing the summary prospectus be able
to view the definition of special terms upon command? Is the term
``special terms'' sufficiently clear, and is the proposed
requirement that the document permit a person to ``view the
definition of each special term . . . upon command'' sufficiently
clear? Are the examples in the proposed rule text of what it means
to view a term 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) helpful? What are some options for enabling the
`upon command' features? Are there other examples we should include?
Should we require both the initial summary prospectus
and the updating summary prospectus to define special terms? Should
the updating summary prospectus, for example, be exempt from this
requirement given that such documents are likely to be relatively
brief and may only include a few defined terms? Are there other
considerations that would create operational complications to
requiring the updating summary prospectus to define special terms,
such as any burden associated with updating definitions from year to
year?
Should we require registrants to electronically format
the summary prospectus to allow investors to move directly back and
forth between each defined term and the corresponding entry in a
``glossary'' section, if any? Should we extend this requirement to
the contract statutory prospectus, or other required online contract
documents? Is this functionality appropriate and useful? Is there a
reason we should permit this capability, but not require it? What
are some technology options that would enable investors to move
directly back and forth between each term and the glossary?
How can we encourage insurers to make fuller use of
innovative technology to enable more interactive, user-friendly
summary prospectus disclosure, while still creating a short, easy-
to-read document that includes the proposed content? Are there
potential tools that we should encourage or require insurers to use
in order to make their disclosures more interactive and
understandable? Should the proposed rule incorporate any additional
requirements for technological tools to promote further investor
understanding? For example, should we require that the required
online contract documents be accompanied with any other
technological tools (e.g., additional embedded hyperlinks, fee
calculators, pop-up explanations, tools to sort or compare optional
benefits or portfolio companies) that encourage interactivity and
could help investors understand the features and risks of their
contracts?
Should we mandate that the required online contract
documents be available in formats that are compatible with mobile
devices such as smartphones and tablets, or that are optimized for
use with these types of technology platforms? Is the language of the
proposed rule broad enough to contemplate current and future
technology platforms? Should we incorporate any special provisions
in the proposed rule, or provide guidance, regarding design features
that could promote investor understanding of information that
investors view on smartphones and tablets--for example, placement
and prominence of certain disclosure (e.g., in terms of size, color,
and graphic treatment), designing disclosure so that ``scrolling''
is not necessary in order to find certain disclosure elements, and
including certain explicit instructions on disclosure that appears
online and on mobile device platforms (e.g., ``click here'' or ``see
below'') to assist investors in navigating the required online
contract documents? Should we require persons relying on the
proposed rule to make available the information in formats that
serve individuals that may be visually impaired, or other formats
that promote accessibility, including alternatives that use
languages other than English? Should we consider other ways to
provide for greater accessibility, portability, and utility of the
required online contract documents?
Does the proposed rule appropriately provide a safe
harbor to address the possibility of inadvertent technological
problems? Should persons relying on the proposed rule who have
technological issues that prevent them from complying with the
online posting requirements of the rule for a period of time be
required to disclose on the website that the information was not
available for a time in the manner required and explain the reasons
for the failure to comply? If not, why not?
Are those aspects of the proposed rule that mirror the
approaches taken in the rule governing the use of mutual fund
summary prospectuses (e.g., required online documents, formatting
requirements, linking, ability to retain online documents, safe
harbor for temporary noncompliance) appropriate in the context of
variable contract disclosure? Are there differences between the
respective disclosure frameworks for mutual funds versus variable
contracts, or operational aspects associated with these different
types of investment products, that warrant a different approach? If
so, what modifications should we consider?
How else could we modify the proposed summary
prospectus regime to take greater advantage of modern technology to
modernize current disclosure practices for variable contracts? For
example, should insurers consider employing technology to require a
retail investor to scroll through the entirety of the summary
prospectus before entering the next stage in the sales process,
accessing a different part of the insurer's website to obtain more
information, or checking a box to submit the application to purchase
a variable contract? Are there other ways that technology could be
used to encourage investors to read the summary prospectus?
Does the proposal sufficiently encourage electronic
design and delivery? Are there other ways we can modify the
requirements to make clear that paper-based delivery is not the only
permissible or desired delivery format?
Are there other requirements that we should consider
for insurers that are offering variable contracts to retail
investors? Should we require that certain disclosures be presented
in a manner reasonably calculated to draw retail investor attention
to it? Are there other ways to ensure that retail investors receive
the information they need to clearly understand the features, costs
and risks of the variable contract they are considering?
5. Other Requirements for Summary Prospectus and Other Contract
Documents
Under the proposed rule, an investor who receives a contract
summary prospectus and who would also like to review the required
online contract documents would be able to choose whether to review
these documents online or to receive that information directly, in
paper or electronic format as requested by the investor. Accordingly,
the proposed rule would require a registrant (or financial intermediary
distributing the contract) to send a paper or electronic copy of the
required online contract documents to any person requesting such a
copy.\288\ The person must send requested paper documents at no cost to
the requestor, by U.S. first class mail or other reasonably prompt
means, within three business days after receiving the request. The
proposed rule also would require a registrant or intermediary to send
electronic copies of these documents upon request within three business
days.\289\ The proposed rule
[[Page 61763]]
would also provide that 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.\290\
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\288\ Proposed rule 498A(i)(1) (permitting an investor to
request either a paper copy of the required online contract
documents, or an electronic copy of such documents); see also rule
498(f)(1) (parallel provision in the rule governing the use of
mutual fund summary prospectuses); proposed Item 1(b)(1) of Forms N-
3, N-4, and N-6 (requiring the prospectus to provide a toll-free
telephone number for investors to call to request the SAI, to
request other information about the contract, and to make investor
inquiries).
\289\ Proposed rule 498A(i)(1).
\290\ Id.
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Collectively, these requirements are intended to ensure that an
investor has prompt access to the required information in a format that
he or she prefers. The three-business-day time period for sending the
required online contract documents mirrors the parallel provision of
the mutual fund summary prospectus rule.\291\
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\291\ See rule 498(f)(1). We understand that persons relying on
rule 498 have effective processes in place to handle requests for
paper or electronic delivery of mutual fund materials that are
available online, within the three-business-day time period that the
rule specifies. See Comment Letter of the Investment Company
Institute on Investment Company Reporting Modernization, File No.
S7-08-15 (Mar. 14, 2016) (stating that fund firms have ``specific,
highly effective processes in place to handle requests under Rule
498''); see also Investment Company Reporting Modernization,
Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590
(June 12, 2015)] (``Investment Company Reporting Modernization
Proposing Release'').
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Under the proposed approach, investors who prefer paper copies of
prospectuses but do not have ready access to the internet (or the
ability to print out the statutory prospectus that is made available
online) would not be able to elect in advance to receive paper copies
of all future statutory prospectuses unless a registrant chose to give
investors that option. Assuming no such accommodation, investors would
need to follow the summary prospectus legend's instruction on how to
request paper delivery each time a summary prospectus is available.
Those that do not take the additional step of requesting paper delivery
would not receive the statutory prospectus in their preferred format.
While we recognize that this could provide a challenge for these
investors, we nonetheless believe that the proposed approach
appropriately balances the interests of the number of variable contract
investors whom we believe would benefit from the convenience of online
documents against the number of those whom we believe prefer paper.
In addition to the requirement to provide certain documents upon
request in paper or electronically, the proposed rule also requires
that a contract summary prospectus must be given greater prominence
than any materials that accompany the summary prospectus.\292\ We
believe that this requirement is important to prevent any accompanying
sales or other materials from obscuring the contract summary
prospectus, and to highlight for investors the concise presentation of
the summary prospectus, and the salience of the information included
therein.\293\ Generally, we believe that the greater prominence
requirement would be satisfied if the placement of the contract summary
prospectus makes it more conspicuous than any accompanying materials
(e.g., the summary prospectus is on top of a group of papers that are
provided together, or listed first if presented on a website together
with other materials related to the contract).\294\
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\292\ Proposed rule 498A(i)(2); see also rule 498(f)(2)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses).
\293\ The Commission's rationale was similar for the parallel
provision in the rule governing mutual fund summary prospectuses.
See 2009 Summary Prospectus Adopting Release, supra note 33, at
n.217 and accompanying text.
\294\ See similar discussion in 2009 Summary Prospectus Adopting
Release, supra note 33, at n.220 and accompanying text.
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The proposed rule would also require any website address or cross-
reference that is included in an electronic version of the summary
prospectus (i.e., electronic versions sent to investors or available
online) to be an active hyperlink.\295\ This instruction is intended to
ensure that investors viewing electronic versions of the prospectus are
able to easily access website addresses and cross-referenced materials
that are referenced in the prospectus. This requirement would not apply
to summary prospectuses that are filed on the EDGAR system.\296\
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\295\ See proposed rule 498A(i)(4). A parallel requirement would
also apply to statutory prospectuses. See proposed General
Instruction C.3.(i) to Forms N-3, N-4, and N-6.
\296\ Id.; see also rule 105 of Regulation S-T [17 CFR 232.105]
(prohibiting hyperlinking to websites, locations, or other documents
that are outside of the EDGAR system).
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The failure to comply with each of these additional requirements
would not be a condition of reliance on the rule, in order to provide
greater certainty to market participants who seek to rely on the rule.
For example, market participants could be concerned that the three-
business-day requirement could be violated on account of weather issues
or other forces outside of the control of a person seeking to rely on
the rule. Similarly, market participants could be concerned if
compliance with the greater prominence requirement were a condition to
rely on the proposed rule, because whether one is in compliance with
this requirement could entail a certain degree of subjectivity.\297\
Thus, we are proposing that the failure to comply with either
requirement would not negate a person's ability to rely on the rule to
satisfy a person's delivery obligations under section 5(b)(2) of the
Securities Act.\298\ This failure would, however, constitute a
violation of Commission rules.
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\297\ Commenters expressed this concern about the parallel
requirement in the rule governing mutual fund summary prospectuses,
when it was proposed. See Comment Letter of the Investment Company
Institute on Enhanced Disclosure and New Prospectus Delivery Option
for Registered Open-End Management Investment Companies, File No.
S7-28-07 (Feb. 28, 2008).
\298\ Proposed rule 498A(i)(5); see also rule 498(f)(5)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses). The proposed rule's requirements would
mandate 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, also are not conditions
to relying on the rule to satisfy prospectus delivery obligations.
See supra notes 262 and 278 and accompanying text.
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We request comment generally on the requirements we discuss in this
section, and specifically on the following issues:
Should persons relying on the proposed rule be required
to send the required online contract documents to any person
requesting such documents within three business days after receiving
such a request? Would a different period be appropriate? Should
compliance with this requirement be a condition to reliance on the
proposed rule? If not, why not?
Does the proposed rule effectively promote investors'
ability to request paper copies of the required online contract
documents? Are there any changes to the proposed rule that we should
consider to make the process for requesting paper copies of such
documents more convenient for investors? Should we require
registrants to make available to investors a way to opt into the
automatic annual delivery of future statutory prospectuses in a
paper format without having to specifically request the documents
each year? What would be the operational challenges of this approach
to registrants? Should we allow registrants to give investors the
option of automatic delivery of future statutory prospectuses in
paper?
Should the rule require that the summary prospectus be
given greater prominence that any materials that accompany the
summary prospectus? If not, why not? Does this requirement pose any
challenges to registrants? How might a summary prospectus be given
greater prominence than any materials that accompany the summary
prospectus when being delivered or made available electronically?
Should compliance with any or all of the proposed
requirements discussed in this
[[Page 61764]]
section be a condition of reliance on the rule? That is, should
failure to comply with these requirements result in a violation of
section 5(b)(2) of the Securities Act? Alternatively, should the
failure to comply with these requirements be a violation of
Commission rules that does not result in an inability to rely on the
rule or a violation of section 5(b)(2)?
The proposed rule would require any website address or
cross-reference that is included in an electronic version of the
summary prospectus (i.e., electronic versions sent to investors or
available online) to be an active hyperlink. To what extent, if any,
would this requirement present challenges or add costs or burdens
with respect to the use of summary prospectuses, given that active
links are not required in EDGAR filings (and active links to
websites, locations, and documents outside of the EDGAR system are
expressly prohibited pursuant to rule 105 of Regulation S-T [17 CFR
232.105])?
6. Incorporation by Reference
a. Permissible Incorporation by Reference
The proposed rule would permit a registrant to incorporate by
reference into the summary prospectus information contained in the
contract statutory prospectus and SAI, subject to certain
conditions.\299\ Much like with the mutual fund summary prospectus, we
do not intend the variable contract summary prospectus to be a self-
contained disclosure vehicle, but rather one element in a layered
disclosure regime.\300\ Any information incorporated by reference would
be separately made available to investors, either electronically or in
paper. A Form N-3 registrant also could incorporate by reference into
the summary prospectus information from its reports to shareholders
that the registrant has incorporated by reference into its statutory
prospectus.\301\ A registrant would not be permitted to incorporate by
reference into the summary prospectus information from any other
source. Moreover, a registrant could not incorporate by reference any
information that would be required to appear in the contents of the
initial summary prospectus or the updating summary prospectus.\302\
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\299\ Proposed rule 498A(d)(2); see also rule 498(b)(3)(ii).
\300\ See 2009 Summary Prospectus Adopting Release, supra note
33, at paragraph accompanying n.327.
\301\ Proposed rule 498A(d)(2) references rule 30e-1, which
applies only to management companies (Form N-3 registrants). While
Form N-4 and Form N-6 registrants must transmit the portfolio
companies' annual and semi-annual shareholder reports to the
investors in their trust accounts (see rule 30e-2 under the
Investment Company Act), we would not expect a registrant would wish
to incorporate by reference information from a portfolio company
shareholder report into the contract prospectus even if such
information by reference was permissible. Accordingly, we do not
reference rule 30e-2 in the proposed rule.
\302\ Proposed rule 498A(d)(2)(ii); see also supra sections
II.A.1 (describing proposed content requirements for the initial
summary prospectus) and II.A.2 (describing proposed content
requirements for the updating summary prospectus).
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Information could be incorporated by reference into the summary
prospectus only by reference to the specific document that contains the
information, and not by reference to another document that incorporates
the information by reference.\303\ For example, if a contract statutory
prospectus were to incorporate the contract SAI by reference, the
summary prospectus could not incorporate information in the SAI simply
by referencing the statutory prospectus but would be required to
reference the SAI directly.\304\
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\303\ Proposed rule 498A(d)(2)(iii).
\304\ Cf. Item 10(d) of Reg. S-K [17 CFR 229.10(d)] (``Except
where a registrant or issuer is expressly required to incorporate a
document or documents by reference . . . reference may not be made
to any document which incorporates another document by reference if
the pertinent portion of the document containing the information or
financial statements to be incorporated by reference includes an
incorporation by reference to another document.''). General
Instruction D.2 to current Form N-6 makes Item 10(d) of Regulation
S-K applicable to incorporation by reference into a variable life
insurance contract's statutory prospectus.
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The proposed rule would permit incorporation by reference only if
the registrant satisfies the rule's conditions that prescribe the means
by which the required online contract documents must be made available
to investors.\305\ In addition, if a registrant incorporates
information by reference into a summary prospectus, the summary
prospectus legend must specify the type of document (e.g., statutory
prospectus) that contains the incorporated information and the date of
the document.\306\ If a registrant incorporates a part of a document by
reference into the summary prospectus, the summary prospectus legend
must clearly identify the part by page, paragraph, caption, or
otherwise.\307\ The legend would also explain that the incorporated
information may be obtained, free of charge, in the same manner as the
contract statutory prospectus.\308\
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\305\ Proposed rule 498A(d)(2)(i) (referencing proposed rule
498A(h), among other paragraphs in the proposed rule); see also
supra section II.A.4.
\306\ Proposed rule 498A(b)(2)(vi)(C) and 498A(c)(3)(vi).
\307\ Id. This requirement mirrors the requirements of rule
498(b)(1)(v)(B), and is similar to the requirements of rule 411(d)
under the Securities Act [17 CFR 230.411(d)], which requires that
information incorporated by reference ``be clearly identified in the
reference by page, paragraph, caption or otherwise.'' Rule 411 is
also subject to the 2017 FAST Act Modernization rulemaking proposal
(which includes proposed amendments to the Commission's rules on
incorporation by reference). See FAST Act Modernization and
Simplification of Regulation S-K, Securities Act Release No. 10425
(Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)] (``2017 FAST Act
Proposal''). We requested that comments on the 2017 FAST Act
Proposal be submitted by January 2, 2018.
\308\ Id.; see also supra discussion in section II.A.4 and 5.
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The conditions on the availability of information that is
incorporated by reference into the contract summary prospectus, and on
identifying the information that is incorporated by reference, are
intended to facilitate access to this information. Parallel conditions
exist in the rule governing mutual fund summary prospectuses. Based on
our experience, we believe that investors have found this approach to
be useful. Therefore, we are proposing similar conditions for
incorporation by reference for variable contract summary
prospectuses.\309\
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\309\ See supra note 300 and accompanying text.
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A registrant that fails to comply with any of the above conditions
is not permitted to incorporate information by reference into its
summary prospectus. A registrant that does comply with these
conditions, however, including the conditions for providing the
documents that include the incorporated information online, would not
also be required to send or give the incorporated information to
investors together with the summary prospectus.\310\ The contract
summary prospectus, together with information incorporated therein by
reference, would be subject to liability under sections 12(a)(2) and
17(a)(2) of the Securities Act.
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\310\ Proposed rule 498A(d)(1); see also rule 498(b)(3)(i)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses); General Instruction G of current Forms N-3
and N-4; General Instruction D of current Form N-6 (permitting a
registrant to incorporate by reference all or part of the SAI into
the prospectus without delivering the SAI with the prospectus).
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[[Page 61765]]
b. Effect of Incorporation by Reference
Rule 159 under the Securities Act provides that any information
``conveyed'' to a purchaser after the time of sale will not be taken
into account, for purposes of determining whether a prospectus or oral
statement included an untrue statement of material fact at the time of
sale for purposes of sections 12(a)(2) and 17(a)(2) of the Act.\311\
The proposed rule would provide that, for purposes of rule 159,
information is conveyed to a person not later than the time the person
receives a summary prospectus, if that information is incorporated by
reference into the summary prospectus in accordance with the proposed
rule's conditions.\312\ This addresses the question of when information
that is incorporated by reference into the contract summary prospectus
is conveyed for purposes of liability under sections 12(a)(2) and
17(a)(2) of the Securities Act.\313\
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\311\ See rule 159 under the Securities Act.
Under section 12(a)(2) of the Securities Act, sellers have
liability to purchasers for offers or sales by means of a prospectus
or oral communication that includes an untrue statement of material
fact or omits to state a material fact that makes the statements
made, based on the circumstances under which they were made, not
misleading. Section 17(a)(2) of the Securities Act is a general
antifraud provision, which makes it unlawful for any person in the
offer and sale of a security to obtain money or property by means of
any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading.
\312\ Proposed rule 498A(d)(3); see also rule 498(b)(3)(iii)
(parallel provision in the rule governing the use of mutual fund
summary prospectuses); 2009 Summary Prospectus Adopting Release,
supra note 33, at nn.106 through 110.
\313\ See 2009 Summary Prospectus Adopting Release, supra note
33, at nn.109 and 110 (discussing further considerations of
liability under sections 12(a)(2) and 17(a)(2) of the Securities
Act, as well as reliance under section 19(a) of the Securities Act).
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We request comment generally on the proposal to permit
incorporation by reference into the summary prospectus and specifically
on the following issues:
Should we permit the contract statutory prospectus,
SAI, and shareholder reports to be incorporated by reference into
the summary prospectus? Are there special considerations in the case
of variable contracts that warrant different incorporation by
reference provisions than those under rule 498? For example, is
there any other information we should permit registrants to
incorporate by reference into the proposed contract summary
prospectuses? Should we permit a registrant to incorporate by
reference any information that is required to be included in the
summary prospectuses? If so, should this approach vary based on the
type of summary prospectus (initial summary prospectus versus
updating summary prospectus)?
Should we require, as proposed, that materials
incorporated by reference into the summary prospectuses be available
online? Are there additional or different conditions we should
impose on the ability to incorporate by reference into the summary
prospectus?
The proposed rule would provide that, for purposes of
rule 159, information is conveyed to a person not later than the
time the person receives a summary prospectus, if that information
is incorporated by reference into the summary prospectus in
accordance with the proposed rule's conditions. Is this proposed
provision, which mirrors the approach taken in the rule governing
mutual fund summary prospectuses, also appropriate for variable
contracts? Are there differences between mutual funds and variable
contracts that warrant an alternative approach? If so, what
modifications should be considered? Should the proposed provision
apply to both types of summary prospectus (initial and updating)?
Are there any modifications that would be appropriate depending on
the type of summary prospectus?
7. Filing Requirements for the Summary Prospectus
a. Preliminary Form of Summary Prospectus
We are proposing to require that registrants file a preliminary
form of any contract summary prospectus (initial or updating summary
prospectus) that the registrant intends to use on or after the
effective date of the registration statement as an exhibit to the
registration statement (``preliminary summary prospectus'').\314\
Registrants would only be required to provide the preliminary summary
prospectus exhibit in connection with the filing of an initial
registration statement, or in connection with a pre-effective amendment
or a post-effective amendment filed in accordance with paragraph (a) of
rule 485 under the Securities Act.
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\314\ See proposed Item 34(r) of Form N-3; proposed Item 28(o)
of Form N-4; proposed Item 29(r) of Form N-6. The filing process and
format of these documents would be dictated by current Commission
rules, including its rules on electronic submissions and exceptions.
See, e.g., rule 101 of Regulation S-T [17 CFR 232.101] (providing,
among other things, that registration statements and prospectuses
filed pursuant to the Securities Act shall be submitted in
electronic format).
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We believe that it is important that Commission staff have the
opportunity to review a variable contract's summary prospectus for
compliance with the proposed rule and the relevant form requirements
prior to its first use. However, we note that this approach differs
from the approach regarding mutual fund summary prospectuses. The
Commission elected not to require the filing of a mutual fund summary
prospectus prior to first use because the content of the summary
prospectus would be essentially identical to the content of the summary
section of the statutory prospectus, which is filed prior to its first
use.\315\
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\315\ See 2009 Summary Prospectus Adopting Release, supra note
33, at n.73. The contents of a mutual fund summary prospectus
consist of the information required or permitted by Items 2-8 of
Form N-1A, which constitutes the summary section of the statutory
prospectus. See rule 498(b)(2).
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In contrast, the proposed rule does not require the variable
contract statutory prospectus to contain a stand-alone summary section
from which a summary prospectus is created. In addition, while some
variable contract summary prospectus disclosures would be identical to
those in the statutory prospectus,\316\ others would include only part
of the information required in the statutory prospectus.\317\ For
example, the proposed rule would require an initial summary prospectus
only to describe the features and options of the contract that the
registrant currently offers, while the statutory prospectus could
include information regarding contracts that the registrant no longer
sells to new investors.
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\316\ See, e.g., Items 2 and 3 of Forms N-3, N-4, and N-6.
\317\ See, e.g., proposed Item 11(a) of Form N-3; proposed Item
10(a) of Form N-4; proposed Item 10(a) of Form N-6; proposed Item
12(a) of Form N-3; proposed Item 11(a) of Form N-4; proposed Item
11(a) of Form N-6. (These are the proposed ``Standard Death
Benefit'' and ``Other Benefits Available Under the Contract''
disclosure items for Forms N-3, N-4, and N-6.). While only certain
information of the statutory prospectus is required to be included
in the summary prospectus, proposed rule 498A permits the summary
prospectus to incorporate by reference some or all of the
information contained in the statutory prospectus or SAI.
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The initial summary prospectus and updating summary prospectus
would also present certain information in a different order than might
appear in the contract statutory prospectus.\318\ Furthermore, certain
disclosure requirements differ depending on whether the summary
prospectus is an initial summary prospectus or an updating summary
prospectus. We do not believe that registrants would need to visually
identify or otherwise segregate those portions of the statutory
prospectus that are also summary prospectus disclosures, and we
recognize that doing so could impede the effective presentation of
information in a contract statutory prospectus to investors.
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\318\ For example, in the initial summary prospectus, the Fee
Table would be located towards the end of the prospectus, with more
summary type of fee information would be provided earlier in the
summary prospectus as part of the Key Information Table. In
contrast, the Fee Table in the statutory prospectus is closer to the
front of the document, where it has been traditionally located.
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[[Page 61766]]
b. Definitive Form of Summary Prospectus
In addition to requiring registrants to file a preliminary summary
prospectus with the Commission prior to use, we are also proposing
amendments to rule 497 under the Securities Act that would require a
registrant to file a definitive form of summary prospectus after it is
first used.\319\ This would ensure that the Commission receives a copy
of every summary prospectus in use.\320\ This is consistent with the
filing requirement for mutual fund summary prospectuses under rule
497.\321\
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\319\ Proposed amended rule 497(k).
\320\ A summary prospectus filed with the Commission would be
publicly available; however, a registrant could not rely on this
availability to satisfy the requirements to post the document
online. See supra section II.A.4.
\321\ See rule 497(k).
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c. Investor Protection and Liability Under Section 11 of the Securities
Act
Section 10(b) of the Securities Act provides that a prospectus
permitted under that section must, unless Commission rules provide
otherwise, be filed as part of the registration statement but would not
be deemed a part of the registration statement for purposes of section
11 of the Securities Act.\322\ Accordingly, a summary prospectus that
is filed as part of the registration statement (e.g., as an exhibit or
otherwise) would not be deemed a part of the registration statement for
purposes of section 11 of the Securities Act.\323\
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\322\ 15 U.S.C. 77j(b) and 77k. Under section 11 of the
Securities Act [15 U.S.C. 77k], purchasers of an issuer's securities
have private rights of action for untrue statements of material
facts or omissions of material facts required to be included in the
registration statement or necessary to make the statements in the
registration statement not misleading. Congress provided a specific
exception from liability under section 11 for summary prospectuses
under section 10(b) of the Securities Act in order to encourage the
use of summary prospectuses. L. Loss & J. Seligman, Securities
Regulation, Sec. 2-b-5 (3d ed. 2006) (citing S. Rep. 1036, 83d
Cong., 2d Sess. 17-18 (1954) and H.R. Rep. 1542, 83d Cong., 2d Sess.
26 (1954)).
\323\ Section 10(b) of the Securities Act (``A prospectus
permitted under this subsection shall, except to the extent the
Commission by rules or regulations deems necessary or appropriate in
the public interest or for the protection of investors otherwise
provides, be filed as part of the registration statement but shall
not be deemed a part of such registration statement for purposes of
section 11.'').
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Some commenters in connection with the mutual fund summary
prospectus proposal expressed concerns that the mutual fund summary
prospectus would not be subject to section 11 liability, suggesting
that this would result in a diminution of funds' liability under that
section.\324\ The Commission stated in response that while section 11
prescribes that the mutual fund summary prospectus will not itself be
deemed a part of the registration statement for purposes of section 11,
all of the information in the summary prospectus will be subject to
liability under section 11, either because the information is the same
as information contained in the statutory prospectus or because the
information is incorporated by reference from the registration
statement. The Commission noted that: (1) The final rule required the
information contained in a summary prospectus that is used to satisfy
prospectus delivery obligations must be the same as the information
contained in the summary section of the fund's statutory prospectus;
\325\ and (2) information may be incorporated by reference into a
summary prospectus only if it is contained in the fund's statutory
prospectus, SAI, or has been incorporated into the statutory prospectus
from the shareholder report.\326\
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\324\ See 2009 Summary Prospectus Adopting Release, supra note
33, at n.344 and accompanying text.
\325\ Id. at nn.111 and 112; see also rule 498(f)(4).
\326\ See rule 498(b)(3).
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For similar reasons, it is our view that while a variable contract
summary prospectus under the proposed rule would not itself be deemed a
part of the registration statement for purposes of section 11, the
information in the summary prospectus will generally be subject to
liability under section 11. While proposed rule 498A would not have a
comparable provision to that in rule 498 requiring that the information
in the summary prospectus must be the same as in the statutory
prospectus, we believe that the substance of the information itself
would be the same, even though the language in both documents relating
to the information may not be identical. For example, the language of
the initial summary prospectus could differ from the language used in
the statutory prospectus because proposed rule 498A requires that the
initial summary prospectus may only describe a single contract that the
registrant currently offers for sale, whereas we understand that
certain contract statutory prospectuses include disclosure about
contract features and options that the registrant may no longer offer
to new investors. Nevertheless, the substance of the information for
any currently-offered features and options would be the same.\327\ In
addition, proposed rule 498A would have the same provisions regarding
information permitted to be incorporated into the summary prospectus as
those in rule 498.\328\
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\327\ See supra section II.A.1.b.
The updating summary prospectus could include information that
does not appear in the related contract statutory prospectus if the
updating summary prospectus discloses changes to the contract that
the issuer has made after the most recent updating summary
prospectus or statutory prospectus was sent or given to investors.
See supra section II.A.2.b.ii(a); see also proposed rule
498A(c)(6)(i) and (ii). This information that only appears in the
updating summary prospectus therefore would not be deemed a part of
the registration statement for purposes of section 11 of the
Securities Act.
For example, if a particular fee has changed from x% to y%,
while the disclosure of the current fee rate (y%) would appear in
both the updating summary prospectus and the related statutory
prospectus, the earlier fee rate (x%) and the fact that the fee was
changed would likely not be disclosed in the statutory prospectus.
\328\ See proposed rule 498A(d); see also rule 498(b)(3)
(parallel provisions in the rule governing the use of mutual fund
summary prospectuses).
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The summary prospectus would be subject to liability under section
12(a)(2) of the Securities Act \329\ and the general antifraud
provisions of the federal securities laws.\330\ In addition, a summary
prospectus would be subject to the stop order and other administrative
provisions of section 8 of the Securities Act.\331\ This is in addition
to the Commission's power under section 10(b) of the Securities Act to
prevent or suspend the use of the summary prospectus, regardless of
whether or not it has been filed.\332\
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\329\ See section 12(a)(2) of the Securities Act; see also
discussion supra note 311.
\330\ See, e.g., section 17(a) of the Securities Act; section
10(b) of the Exchange Act; section 34(b) of the Investment Company
Act.
\331\ 15 U.S.C. 77h; H.R. Rep. 1542, 83d Cong., 2d Sess., 1954
U.S.C.C.A.N. 2973, 2982 (1954) (noting that the Commission's
authority to suspend the use of a defective summary prospectus under
section 10(b) ``is intended to supplement the stop-order powers of
the Commission under [S]ection 8'').
\332\ 15 U.S.C. 77j(b).
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We request comment generally on the proposed filing requirements
for the variable contract summary prospectus and specifically on the
following issues:
Should we require filing of the preliminary form of any
contract summary prospectuses? If not, what alternatives should we
consider to facilitate staff review of the summary prospectus
disclosures, and would investors be adequately protected if staff
did not have the opportunity to review a summary prospectus pre-use?
Should we only require the initial summary prospectus (or updating
summary prospectus) to be filed prior to first use?
Should we require post-use filing of the summary
prospectus? Should only the initial summary prospectus (or updating
summary prospectus) be filed after use?
If the updating summary prospectus includes a
description of a contract change that is not similarly described in
the related
[[Page 61767]]
statutory prospectus (for example, the updating summary prospectus
describes the fact that there was a change and the nature of the
change), or otherwise includes content or wording differences
compared to the statutory prospectus, would this adversely affect
investor protection (for example, if certain information were not
deemed to be part of the registration statement for purposes of
section 11 of the Securities Act), and if so, how? Should we require
the statutory prospectus to include the same description of contract
changes contained in the related updating summary prospectus? Why or
why not?
Should the summary prospectus be subject to the stop
order and other administrative provisions of section 8 of the
Securities Act? Why or why not?
Should the contract summary prospectus be deemed a part
of the registration statement for purposes of section 11 of the
Securities Act? Why or why not?
8. Definitions in the Proposed Rule
Proposed rule 498A includes a section of definitions for certain
terms used throughout the rule.\333\ These definitions generally: (1)
Identify specific prospectuses described in the proposed rule (e.g.,
``initial summary prospectus''); (2) mirror the existing definitions
used in Forms N-3, N-4, and N-6 (e.g., ``variable annuity contract'' as
used in Forms N-3 and N-4) or other rules (e.g., ``statement of
additional information'' as used in rule 498); or (3) combine other
defined terms in the proposed rule (e.g., ``summary prospectus''). In
addition, in recognition that today a variable contract may offer
classes with the same currently-available features and options but
different characteristics (e.g., differences in the length of the
surrender periods) and/or different pricing structures, we are also
proposing to define ``class'' to mean a class of a contract that varies
principally with respect to distribution-related fees and
expenses.\334\
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\333\ Proposed rule 498A(a).
\334\ Proposed rule 498A(a)(1). We understand that this is how
the term is commonly used in industry practice. See also rule 18f-3
(permitting registered investment companies to issue multiple
classes of voting stock); Part A (``Definitions'') of the General
Instructions to Form N-1A (defining ``class'' as ``a class of shares
issued by a Multiple Class Fund that represents interests in the
same portfolio of securities under rule 18f-3 [17 CFR 270.18f-3] or
under an order exempting the Multiple Class Fund from sections
18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 18(g), and 18(i)]'').
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We request comment generally on the definitions used in the
proposed rule and specifically on the following issues:
Should we include any additional, or exclude any
proposed, defined terms?
Should we modify the definitions of any defined terms?
For example, does the proposed definition of ``class'' adequately
distinguish among classes of a variable contract?
B. Optional Method To Satisfy Portfolio Company Prospectus Delivery
Requirements
1. Current Delivery Practices for Portfolio Company Prospectuses
The Commission has interpreted section 5(b)(2) of the Securities
Act to require the delivery of a portfolio company prospectus to any
variable contract investor that allocates his or her purchase payments
to that portfolio company, including on any exchange of contract value
from one portfolio company to another.\335\ Since variable contracts
generally offer exchange privileges permitting an investor to
reallocate his or her investment from one underlying portfolio company
to another, we understand that, typically, prospectuses for all
underlying portfolio companies are delivered to investors to avoid the
administrative burden of tracking whether an investor has already
received the current prospectus.\336\ We also understand that summary
prospectuses, as opposed to statutory prospectuses, for the underlying
portfolio companies are typically delivered. As with contract
prospectuses, portfolio company prospectuses may be delivered
electronically pursuant to the Commission's guidance.\337\
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\335\ See Forms N-3 and N-4 Adopting Release, supra note 28, at
n.49 and accompanying text (``Of course, delivery of a prospectus of
an underlying company in which a contractowner actually invests will
be required pursuant to section 5(b)(2) of the 1933 Act'').
\336\ We understand that while some insurers have invested in
infrastructure to deliver only those prospectuses to which an
investor allocates contract value, most insurers have not.
\337\ See supra note 32 and accompanying text.
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Because the identity of investors is known by the insurance company
and not the underlying portfolio companies, delivery of prospectuses
for underlying portfolio companies is typically effected by the
insurance company rather than the portfolio company.\338\ Based on a
staff review of participation agreements between insurance companies
and underlying portfolio companies, we understand that there is
diversity in practice as to whether the insurance company or portfolio
company bears the printing and mailing costs associated with portfolio
company prospectus deliveries.
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\338\ See, e.g., Forms N-3 and N-4 Adopting Release, supra note
28, at n.48 and accompanying text (suggesting that under certain
circumstances, the prospectus delivery obligation for underlying
portfolio companies would rest with the insurance company); see also
rule 22c-2(c)(1) under the Investment Company Act (defining a
``financial intermediary'' for purposes of the rule to include a UIT
that invests in a fund in reliance on section 12(d)(1)(E) under the
Investment Company Act) [17 CFR 270.22c-2(c)(1)].
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2. New Option To Satisfy Prospectus Delivery Requirements
a. Overview
The proposed rule would provide an optional method for satisfying
portfolio company prospectus delivery obligations by making portfolio
company summary and statutory prospectuses available online, with
certain key information about the portfolio companies provided in the
contract's summary prospectus.\339\ This new option would be available
to Form N-4 and Form N-6 registrants, but would not be available to
Form N-3 registrants because they do not have underlying portfolio
companies.
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\339\ Proposed rule 498A(j).
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As proposed, this option would allow satisfaction of prospectus
delivery obligations with respect to a portfolio company, if: (1) An
initial summary prospectus is used for each currently offered contract
described under the related registration statement; \340\ (2) a summary
prospectus is used for the portfolio company (only if the portfolio
company is registered on Form N-1A); \341\ and (3) the portfolio
company's current summary prospectus, statutory prospectus, SAI, and
most recent shareholder reports are posted online under similar posting
requirements for the variable contract's summary prospectuses and other
documents.\342\ In addition, the proposed rule would provide that any
communication related to a portfolio company, other than a prospectus
permitted or required under section 10 of the Securities Act, would not
be deemed a prospectus if the above conditions are satisfied.\343\
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\340\ Proposed rule 498A(j)(1)(i).
\341\ Proposed rule 498A(j)(1)(ii).
\342\ Proposed rule 498A(j)(1)(iii).
\343\ Proposed rule 498A(j)(2).
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As discussed above, we are concerned that the volume of disclosure
materials variable contract investors currently receive may prevent
them from reading the materials or fully understanding these products.
While the proposed variable contract summary prospectus framework is
intended to provide investors with key information relating to the
contract's terms, benefits, and risks in a concise and more reader-
friendly format, we are concerned that investors may not read or
understand information if the variable contract summary prospectus is
accompanied by hundreds of pages of underlying
[[Page 61768]]
portfolio company prospectuses.\344\ To address this issue, the
proposed option for satisfying portfolio company prospectus delivery
requirements would provide investors with certain key summary
information about underlying portfolio companies in an appendix to the
contract summary prospectus.\345\ If an investor desires more detailed
information about a particular portfolio company, prospectuses and
other documents relating to the portfolio company would be available
online and in paper or electronically upon request.
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\344\ Variable annuity contracts offer an average of 59
portfolio companies as investment options. See supra note 8. While
we intended mutual fund summary prospectuses to be three to four
pages in length, rule 498 does not provide page length or similar
restrictions and some summary prospectuses have been as long as 19
pages. See Request for Comment on Fund Retail Investor Experience,
supra note 39, at n. 27 and accompanying text. If we conservatively
estimate that each portfolio company summary prospectus is four
pages in length, an investor who purchases a variable contract that
offers 59 portfolio companies would receive 236 pages of portfolio
company disclosure materials, in addition to the contract
prospectus.
\345\ A contract summary prospectus would include an appendix
that would provide for each portfolio company its name, type or
investment objective, adviser and subadviser, expense ratio, and
average annual returns for the past year, five years, and ten years.
See supra discussion at section II.A.1.c.ii(i); see also infra
section II.D.2.r (discussing our proposal to include this appendix
also in variable contracts' statutory prospectuses). Registrants on
Form N-3, who would not be relying upon this optional method to
satisfy portfolio company prospectus delivery obligations, would
have the option of omitting the appendix and instead providing more
detailed disclosures for the investment options offered under the
contract that would be required by proposed Item 20 of Form N-3. See
supra note 204 and accompanying text.
In addition, each summary prospectus would also include a Key
Information Table that would provide certain disclosures about
portfolio company risks and investment restrictions. See supra
discussion at section II.A.1.c.ii(b)(ii); see also infra section
II.D.2.c (discussing the Key Information Table in proposed Forms N-
3, N-4, and N-6).
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The vast majority of investors purchase variable contracts from
sales persons, as opposed to purchasing directly from insurance
companies.\346\ We understand these sales agents assist investors in
many ways, including providing information about underlying portfolio
companies and sometimes recommending that investors allocate their
contract value into specific portfolio companies. We anticipate that
this would continue following our proposal, and that sales agents would
assist investors in understanding key facts about the portfolio
companies, obtaining portfolio company prospectuses, and understanding
the proposed portfolio company prospectus delivery framework. For this
reason, we believe that sales agents would play a significant role in
continuing to provide information about portfolio companies to
investors, even if investors were to no longer receive paper copies of
portfolio company prospectuses.
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\346\ Approximately 97% of sales of variable annuities are made
through sales agents. See IRI Fact Book, supra note 8, at 168. Only
a small percentage of investors purchase their variable contracts
directly from the issuing insurance company. See Insurance
Information Institute, Facts + Statistics: Distribution Channels,
available at https://www.iii.org/fact-statistic/facts-statistics-distribution-channels (in 2013, 4% of new individual life insurance
sales were directly sold). In comparison, only 50% of households
owning mutual funds purchased their funds through sales agents. See
Investment Company Institute, Profile of Mutual Fund Shareholders,
2017 (Oct. 2017), at Fig. 3.1, available at https://www.ici.org/pdf/rpt_17_profiles17.pdf.
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b. Conditions
As a condition to relying on the new option, we would require the
related variable contract to use an initial summary prospectus for each
currently offered contract described under the related registration
statement.\347\ We believe that this condition would help promote the
use of contract summary prospectuses. Also, the initial summary
prospectus content requirements (as well as the requirements for the
updating summary prospectus) would ensure that investors receive
disclosure regarding: (1) The online availability of the portfolio
company prospectuses; \348\ and (2) key summary information about each
of the portfolio companies.\349\
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\347\ Proposed rule 498A(j)(1)(i).
\348\ See supra note 198 and accompanying text.
\349\ See supra section II.A.1.c.(ii)(i).
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As a second condition, a portfolio company that is registered on
Form N-1A must use a summary prospectus.\350\ If we were to permit the
satisfaction of delivery obligations by making portfolio company
prospectuses (and other documents) available online, portfolio
companies that are mutual funds and ETFs would have less incentive to
use a summary prospectus.\351\ We believe it is important to make
available both a summary prospectus and the statutory prospectus for a
portfolio company to continue the current layered disclosure approach
for portfolio companies whereby investors have the option to choose the
amount and type of information to review. This condition also would
continue to provide investors with summary information about the
portfolio company that we believe they are more likely to use and
understand.\352\
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\350\ Proposed rule 498A(j)(1)(ii).
\351\ For example, this online option would reduce--or fully
eliminate--the cost savings associated with printing and mailing a
summary prospectus as opposed to the statutory prospectus, since
those summary prospectuses would be posted online instead of being
printed and mailed.
\352\ See 2009 Summary Prospectus Adopting Release, supra note
33, at paragraph accompanying n.195.
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Finally, to rely on the new option, the portfolio company's current
summary and statutory prospectus, SAI, and most recent annual and semi-
annual shareholder reports would be required to be posted online under
similar conditions for the posting of variable contract materials:
The materials are publicly accessible, free of charge,
at the website address specified on the cover page or beginning of
the summary prospectuses for the variable contract, for the time
period specified in proposed rule 498A(h)(1); \353\
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\353\ Proposed rule 498A(j)(1)(iii).
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The materials are presented on the website in a format,
or formats, that are human-readable and capable of being printed on
paper in human-readable format,\354\ and permit persons accessing
the materials to move directly back and forth between each section
heading in a table of contents and the corresponding section of the
document; \355\
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\354\ Proposed rule 498A(h)(2)(i); proposed rule
498A(j)(1)(iii). In addition, the materials must be presented on the
website in a format or formats that are convenient for reading
online and printing on paper. Proposed rule 498A(i)(3)(i); proposed
rule 498A(j)(1)(iii).
\355\ Proposed rule 498A(h)(2)(ii).
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Persons accessing the materials must be able to
permanently retain, free of charge, an electronic version of such
materials in a format, or formats, that is human-readable and
permits persons accessing the materials to move directly back and
forth between each section heading in a table of contents and the
corresponding section of the document; \356\
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\356\ Proposed rule 498A(j)(1)(iii); proposed rule 498A(h)(3).
In addition, persons must be able to permanently retain these
materials in a format or formats that are convenient for reading
online and printed on paper. Proposed rule 498A(j)(1)(iii); proposed
rule 498A(i)(3)(ii).
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Requested materials must be sent in paper or
electronically upon request within three business days after
receiving a request; \357\ and
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\357\ Proposed rule 498A(j)(1)(iii); proposed rule 498A(i)(1).
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The safe harbor specified in paragraph (h)(4) of the
proposed rule would be available if the required materials are
temporarily unavailable at the specified website.\358\
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\358\ Proposed rule 498A(j)(1)(iii); proposed rule 498A(h)(4).
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c. Interim Amendments to Portfolio Company Prospectuses
When a portfolio company supplements or otherwise amends its
summary or statutory prospectus between annual updates, the amendment
is typically filed with the Commission pursuant to rule 497 under the
Securities Act.\359\ In addition, we understand that the amendment is
typically delivered to investors, either
[[Page 61769]]
by special mailing or by including it with another mailing, such as
with the account statement or confirmation.\360\
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\359\ Rule 497 under the Securities Act.
\360\ For investors who received a summary prospectus for a
portfolio company, we understand that amendments are typically
delivered to investors only if the amendments relate to the summary
prospectus and summary section portion of the statutory prospectus.
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As discussed above, the proposed new option for satisfying
portfolio company prospectus delivery requirements would require that
current portfolio company summary prospectuses and statutory
prospectuses be posted online. If a portfolio company amends its
prospectus between annual updates, the updated prospectus must be
posted online.
The proposed rule would not, however, include any separate
requirement to deliver portfolio company prospectus amendments to
investors. We believe that requiring delivery of prospectus amendments
to investors who had not been delivered the prospectus itself could
cause investor confusion. Instead, the proposed legend to the summary
prospectus appendix listing all the portfolio companies available under
the contract would include a statement that investors should review the
prospectuses before making an investment decision and that they may be
amended from time to time.\361\ In addition, we note that if an interim
amendment to a portfolio company prospectus affects the information
provided in the variable contract summary prospectus (e.g., a change to
the type/investment objective or expense ratio of the portfolio company
provided in the required appendix to the contract summary prospectus),
then investors would receive notice of the change through an amendment
to the contract summary prospectus which would be delivered to
investors.\362\
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\361\ The appendix would include the following legend: ``The
following is a list of [Portfolio Companies] currently available
under the [Contract], which is subject to change as discussed in
[the Statutory Prospectus for the Contract]. Before you invest, you
should review the prospectuses for the [Portfolio Companies]. These
prospectuses contain more information about the [Portfolio
Companies] and their risks and may be amended from time to time. You
can find the prospectuses and other information about the [Portfolio
Companies] online at [____]. You can also request this information
at no cost by calling [____] or by sending an email request to
[____].'' See proposed Item 18 of Forms N-4 and N-6.
\362\ The proposed rule would not affect the requirements to
deliver other materials specified under other rules or terms of
exemptive orders. See, e.g., rule 35d-1 under the Investment Company
Act (requiring a registered investment company with a name
suggesting investment in certain investments or industries, or
investment in countries or geographic regions, to adopt a policy to
invest at least 80% of its net assets (plus the amount of any
borrowings for investment purposes) in investments suggested by its
name, and if not a fundamental policy, to provide investors with at
least 60 days prior notice of any change in that investment policy.
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We request comment generally on the proposal to permit a new option
for satisfying portfolio company prospectus delivery requirements, and
specifically on the following issues (in addition, we are requesting
comment on certain parallel provisions of rule 498):
Should the rule permit the use of the new option for
satisfying portfolio company prospectus delivery requirements?
Should this aspect of the proposed rule be optional as proposed or
required if the variable contract uses a summary prospectus?
The rule as proposed would only permit the use of the new
option for portfolio company prospectuses if the related variable
contract uses an initial summary prospectus for each currently
offered contract described under the related registration statement.
Should we permit the use of the new option even if the related
variable contract does not use a summary prospectus? Why or why not?
The rule as proposed would only permit the use of the new
option if the portfolio company uses a summary prospectus. This
would effectively require a portfolio company to use a summary
prospectus if it does not already do so. If we were to permit the
satisfaction of delivery obligations by making portfolio company
prospectuses (and other documents) available online, would portfolio
companies still have an incentive to use a summary prospectus?
Should we permit the use of the new option even if the portfolio
company does not otherwise use a summary prospectus? Why or why not?
Should we modify any of the proposed conditions related to
the new option for satisfying portfolio company prospectus delivery
requirements, or add any additional conditions? For example, should
we--as proposed--specify that these materials must be available at
the same website address as the variable contract materials that
appear online, or should there be flexibility regarding the website
address on which the portfolio company materials appear? As another
example, although the proposed rule specifies that the materials
posted online must be in human-readable format, should we also
require that the materials be posted online in machine-readable
format to promote the gathering and dissemination of information by
data aggregators?
If we change any of the proposed conditions related to the
new option, should we make parallel changes regarding the use of
contract summary prospectuses? Should we similarly make any changes
to rule 498 under the Securities Act governing mutual fund summary
prospectuses for consistency or other reasons?
Should we modify the proposed linking requirements in any
way with respect to portfolio company documents encompassed by the
online accessibility and delivery upon demand requirements of the
proposed rule?
Do the separate requirements of rule 498 regarding mutual
fund summary prospectus documents create any confusion that should
be addressed by proposed rule 498A?
Under the rule as proposed, persons relying on the new
delivery option would not be required to deliver interim prospectus
supplements to investors. Should we instead require that interim
prospectus supplements be delivered? Would confusion result if
investors were to receive prospectus supplements when they had not
previously received portfolio company prospectuses? Are there ways
to mitigate any such confusion?
Would the proposed legend on the initial and updating
summary prospectuses provide sufficient notice to investors that
portfolio company prospectuses may be amended from time to time? Why
or why not? Should we revise the legend to include alternate or
additional information? Should a similar legend also appear on the
cover page of the contract summary prospectus, as well as in the
appendix to the summary prospectus as proposed? Alternatively,
should we require that a separate notice be given to investors to
alert them of the online availability of prospectus supplements? If
so, what information should that notice contain? Should that notice
be filed with the Commission?
Should the final rules provide that a communication
relating to a portfolio company (other than a prospectus permitted
or required under section 10 of the Securities Act) is not deemed to
be a prospectus under section 2(a)(10) of the Securities Act under
the conditions specified by the rule? Should we amend any of the
conditions related to this provision?
C. Discontinued Variable Contracts
An insurance company may choose to stop offering a variable
contract to new investors while continuing to accept additional
payments from existing investors. Each additional purchase payment
under a variable contract is considered a ``sale'' under section 5 of
the Securities Act requiring delivery of a current prospectus, and
variable contract issuers generally maintain current prospectuses for
their products through the filing of annual post-effective amendments
to the registration statements.\363\
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\363\ See supra note 28 and accompanying text.
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As the number of contracts outstanding declines over time, the
proportion of fixed costs per contract and other burdens associated
with maintaining a current registration statement and mailing
prospectuses increase over a diminishing asset base. Unlike other types
of registered investment companies that can liquidate
[[Page 61770]]
when assets are reduced to such a level that continuing the fund is not
viable, an insurance company is unable to liquidate or otherwise
terminate a variable contract. We understand that an insurance company
may sometimes seek to encourage investors to exchange into new
contracts or make buyout offers, but it cannot unilaterally terminate
an investor's contract.
Staff No-Action Letters
Beginning in 1977, the staff of the Division of Investment
Management issued a series of no-action letters stating that the staff
would not recommend enforcement action if issuers did not update the
variable contract registration statement and deliver updated
prospectuses to existing investors, so long as certain conditions were
met, including sending alternative disclosures to investors (each, a
``Staff Letter,'' and collectively, the ``Staff Letters'').\364\ The
last Staff Letter was issued in 1995.\365\
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\364\ See, e.g., Great-West Life and Annuity Insurance Company,
SEC Staff No-Action Letter (pub. avail. Oct. 23, 1990) (``1990
Letter''); MML Bay State Life Ins. Co., SEC Staff No-Action Letter
(pub. avail. Apr. 12, 1990); Transamerica Occidental Life Insurance
Co., SEC Staff No-Action Letter (pub. avail. Mar. 16, 1990);
Connecticut Mutual Life Insurance Company, SEC Staff No-Action
Letter (pub. avail. Mar. 7, 1990).
The staff declined to extend its no-action position to variable
annuities funded by managed separate accounts. See Provident
National Assurance Company, SEC Staff No-Action Letter (pub. avail.
June 2, 1987); Great-West Life Assurance Company, SEC Staff No-
Action Letter (pub. avail. June 4, 1987).
\365\ See Metropolitan Life Insurance Co., SEC Staff No-Action
Letter (pub. avail. Apr. 26, 1995) (``Metropolitan Letter'').
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The Staff Letters generally were limited to Securities Act
registration statements for contracts that are no longer offered to new
purchasers and that have fewer than 5,000 investors (or participants in
the case of group contracts).\366\ The Staff Letters also identified a
set of circumstances in which the staff would not recommend enforcement
action once the registration statement is no longer updated: \367\
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\366\ In the 1990 Letter, the staff stated that it would no
longer respond to no-action requests ``in this area unless they
raise novel issues or involve more than 5,000 variable annuity or
variable life insurance contracts.'' However, there are four Staff
Letters concerning contracts where the number of investors exceeded
5,000. See Metropolitan Letter (42,910 investors); Monarch Life
Insurance Co., SEC Staff No-Action Letter (pub. avail. June 9, 1992)
(``Monarch Letter'') (5,900 investors); New York Life Insurance and
Annuity Corp., SEC Staff No-Action Letter (pub. avail. Nov. 15,
1989) (13,713 investors); Security Benefit Life Insurance Company,
SEC Staff No-Action Letter (pub. avail. July 2, 1987) (28,019
investors).
\367\ Some of the circumstances identified in which the staff
would not recommend enforcement action varied slightly across the
Staff Letters over time, specifically with respect to the delivery
and availability of the insurance company's audited financial
statements. The circumstances discussed below reflect those
identified in the most recent Staff Letters.
There are no material changes made to the contract;
Investors are provided the following disclosures:
[cir] The portfolio companies' current prospectuses (or summary
prospectuses) and any updates thereto, annual and semi-annual
reports, proxy materials, and any other periodic reports or other
shareholder materials for the portfolio companies;
[cir] Confirmations of transactions in accordance with rule 10b-
10 under the Exchange Act;
[cir] Within 120 days after the close of the fiscal year,
updated audited financial statements of the registrant, and in the
case of variable life insurance contracts, the depositor's updated
audited financial statements; \368\ and
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\368\ With respect to variable annuities, the depositor's
updated audited financial statements would be available upon
request. See, e.g., Metropolitan Letter; Monarch Letter.
---------------------------------------------------------------------------
[cir] At least once a year, a statement of the number of units
and values in each investor's account.
The registrant files periodic reports with the
Commission pursuant to section 30 of the Investment Company Act
(i.e., reports on Form N-CEN); \369\ and
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\369\ The Staff Letters specifically identified a registrant's
filing of reports on Form N-SAR as one of the set of applicable
circumstances. Form N-SAR was recently rescinded and succeeded by
Form N-CEN. See Investment Company Reporting Modernization,
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR
81870 (Nov. 18, 2016)] (``Investment Company Reporting Modernization
Adopting Release''), at n.744 and accompanying text.
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New contracts are not offered to the public, and the
registrant does not contemplate such an offering in the future.
Liability
As of the end of calendar year 2017, we understand that more than
half of variable contract Securities Act registration statements may
provide the alternative disclosures that the Staff Letters describe:
\370\
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\370\ Our understanding is based on staff review of filings with
the Commission and discussions with industry participants.
\371\ The number of registration statements is based on a count
of unique Securities Act registration statements and amendments
filed on EDGAR. The number of registration statements representing
contracts that provide alternative disclosures instead of the
contract statutory prospectus, as described in the Staff Letters,
was based on the number of Form N-4 and Form N-6 filers that did not
file a registration statement or amendment in 2017, but made other
regulatory filings, such as filings on Form 24f-2 (the form used by
variable insurance contracts to pay registration fees to the
Commission).
----------------------------------------------------------------------------------------------------------------
Variable Variable life
Status \371\ annuity insurance Grand total
----------------------------------------------------------------------------------------------------------------
Registration Statements That Are Updated Annually............... 500 221 721
Registration Statements Operating Under Staff Letters........... 521 334 855
-----------------------------------------------
Total Number of Registration Statements..................... 1,021 555 1,576
----------------------------------------------------------------------------------------------------------------
Providing the alternative disclosures described in the Staff
Letters may have the effect of potentially limiting issuers' liability
under certain provisions of the federal securities laws requiring a
registration statement or prospectus to contain whatever information
may be necessary or appropriate to avoid material misstatements or
omissions.\372\ Although these alternative disclosures may not be
subject to liability under sections 11 or 12 of the Securities Act, or
section 34(b) of the Investment Company Act, they are subject to
provisions prohibiting material misstatements in the offer or sale of a
security.\373\
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\372\ Sections 11 and 12(a)(2) of the Securities Act and section
34(b) of the Investment Company Act. See supra discussion at notes
311 (discussing section 12(a)(2) liability) and 322 (discussing
section 11 liability). In addition, section 34(b) of the Investment
Company Act also imposes liability for misstatements in a
registration statement, however, unlike sections 11 and 12(a)(2),
there is no private right of action available to aggrieved
investors. See Bellikoff v. Eaton Vance Corp., 481 F.3d 110 (2d Cir.
2007).
\373\ See, e.g., section 17(a) of the Securities Act; section
10(b) and rule 10b-5 under the Exchange Act. There may also be
additional remedies for investors, for example, under state
insurance law, state securities law, and contract law.
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Commission Position on Existing Contracts Whose Issuers Provide
Alternative Disclosures to Investors
In proposing the new variable contract summary prospectus
disclosure framework, we acknowledge the industry practice of providing
alternative disclosures (which are
[[Page 61771]]
significantly different from the requirements of the proposed summary
prospectus regime) under specific circumstances that the Staff Letters
identify. In light of this proposal as well as other developments with
respect to layered disclosure, we believe that it is useful to consider
the appropriate disclosure framework for the types of contracts that
have historically relied on the alternative disclosures.
If the proposed summary prospectus framework is adopted, the
Commission would take the position that if an issuer of an existing
contract that provides alternative disclosures does not file post-
effective amendments to update a variable contract registration
statement and does not provide updated prospectuses to existing
investors, this would not provide a basis for enforcement action so
long as investors receive the alternative disclosures. The Commission
would take this position in recognition of the industry's practice that
has developed in light of the Staff Letters, the costs and burdens that
issuers of contracts operating in accordance with the Staff Letters
currently incur, and the costs and burdens that issuers would incur
under the proposed summary prospectus framework. Therefore, under the
Commission's position, the Commission would permit contracts operating
in the manner that the Staff Letters describe as of the effective date
of any final summary prospectus rules (hereinafter referred to as the
``Alternative Disclosure Contracts'') to continue to operate in such
manner.\374\ For all other contracts, the Commission's position would
not be applicable, and therefore variable contract issuers would be
required to file post-effective amendments to update their registration
statements and provide updated prospectuses under current regulatory
requirements, and could avail themselves of the summary prospectus
framework as adopted.
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\374\ The Commission's position on Alternative Disclosure
Contracts would be an agency statement of general applicability with
future effect designed to implement, interpret, or prescribe law or
policy. This position would be consistent with the Staff Letters up
to the effective date of any final rule and effectively would moot
those letters. The Commission's longstanding position is that all
staff statements are nonbinding and create no enforceable legal
rights or obligations of the Commission or other parties. See, e.g.,
Statement by Chairman Jay Clayton Regarding Staff Views. Securities
and Exchange Commission (Sept. 13, 2018), available at https://www.sec.gov/news/public-statement/statement-clayton-091318.
We note, however, that if a material change is made with respect
to an Alternative Disclosure Contract, the registration statement
for that contract would be required to be updated, and the contract
would no longer be permitted to operate as an Alternative Disclosure
Contract.
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As a general matter, we believe that all variable contract
investors should receive the same information. In this regard, our
position with respect to Alternative Disclosure Contracts would be
limited to the current universe of Alternative Disclosure Contracts,
which will diminish in number over time. Our position is also based on
our belief that the proposed summary prospectus framework could give
investors more pertinent information to monitor their contract
investment than the alternative disclosures. For example, the updating
summary prospectus would include a brief description of certain changes
to the contract that occurred during the previous year, as well as
certain key information about the contract. We believe that investors
could find this document to be more useful and user-friendly than the
separate account financial statements that investors receive under the
alternative disclosures.
Additionally, under the proposed summary prospectus regime,
investors would receive key summary information about the portfolio
companies (with the portfolio company prospectuses available online)
instead of receiving the portfolio company prospectuses as they do
currently.\375\ This proposed layered disclosure approach could provide
an additional tool to investors to access the level of information
about portfolio companies that best serves their information needs.
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\375\ Under proposed rule 498A, investors would not receive the
portfolio company prospectuses if the registrant were to elect to
rely on the new optional method to satisfy portfolio company
prospectus delivery requirements. See supra section II.B.2.
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We solicit comment on the following issues regarding the
Alternative Disclosure Contracts:
Would adoption of a summary prospectus framework and
related form amendments effectively relieve some of the current
burdens and costs on variable contract issuers of updating
registration statements, and delivering updated prospectuses, such
that the Commission's position on Alternative Disclosure Contracts
would not be necessary? If not, to what extent would the burdens and
costs of maintaining an updated registration statement and
compliance with the proposed summary prospectus regime (to the
extent that a registrant chooses to rely on proposed rule 498A)
exceed that of providing the disclosure related to the Alternative
Disclosure Contracts?
Does the proposed summary prospectus regime give
investors more pertinent information to use to help them make
informed investment decisions, compared to the information investors
holding Alternative Disclosure Contracts would receive?
Are fees and charges for variable contracts currently
established based on an expectation that the insurer will be able to
provide alternative disclosures at some point, such as if a product
launch is unsuccessful or if the insurer stops selling new contracts
so that the number of investors diminishes over time? Would the
Commission's position on Alternative Disclosure Contracts have other
effects relating to new variable contracts? For example, would it
cause insurers to be less willing to introduce new products?
Would the Commission's position on Alternative
Disclosure Contracts result in any variable contract design changes?
Would the length of registration statements or prospectuses increase
or decrease? If so, why? What would be the effect, if any, on
contract disclosure?
Under the Commission's position on Alternative
Disclosure Contracts, which contracts should be able to provide
alternative disclosures? For example, should the Commission's
position be limited to Alternative Disclosure (i.e., contracts
operating in the manner that the Staff Letters describe) as of the
effective date of the adoption of final variable contract summary
prospectus rules? Should the ability to provide alternative
disclosures be limited to contracts with a maximum of 5,000
investors (or participants in the case of group contracts)? \376\
Instead of limiting the number of investors, should a different
approach be considered, such as limiting relief based on aggregate
contract value, the length of time since a contract was last offered
to new investors, the costs of updating a registration statement per
contract, or the expected cost of updating a registration statement
per $1,000 of contract value? If so, what limits should be imposed
and why, and what is the benefit of these alternatives over using
the number of investors? Alternatively, should the ability to
provide alternative disclosures apply to all contracts outstanding
at (1) the time of adoption, (2) the effective date, or (3) the
compliance date, for final variable contract summary prospectus
rules? Why?
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\376\ See supra note 366.
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What percentage of insurers currently delivers the
alternative disclosures for at least one contract? What percentage
of the variable contract business (in terms of number of contact
owners and aggregate contract value) provides alternative
disclosures? What are the size ranges of registration statements for
those contracts that deliver alternative disclosures (both in terms
of number of investors and in terms of aggregate contract value)?
What number of investors, or aggregate contract value,
would make providing alternative disclosures more cost-effective
than annually updating a registration statement under the current
variable contract prospectus delivery regime?
What are the cost savings, if any, associated with
providing alternative disclosures? What are the sources of the cost
savings?
Which current items of variable annuity and variable
life insurance registration
[[Page 61772]]
statements are the most difficult or time-consuming for variable
contract issuers to update? Why are these items difficult or time-
consuming to update?
How frequently do material changes to the variable
contract occur that would require an issuer that is delivering
alternative disclosures to update its registration statement? What
specific types of contract changes are considered to be material?
What types of contract changes are considered to be non-material,
such that the issuer would not update its registration statement in
response to this condition? How are investors notified of any non-
material changes? Are there types of contract changes where it is
difficult to determine whether an issuer should update its
registration statement? If so, please identify those types of
changes.
Do insurers currently host on their websites the
alternative disclosure documents that are delivered to investors?
Why or why not?
Do investors that receive alternative disclosures
contact their insurance company looking for information at a greater
frequency than investors who receive a prospectus annually? What
information are these investors looking for?
Some of the circumstances that the Staff Letters
identify vary depending on the no-action letter.\377\ Under which
circumstances are issuers providing alternative disclosures?
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\377\ See supra note 367.
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We request comment generally on how investors and financial
professionals view the alternative disclosures, and specifically on
the following issues:
Investors that have variable contracts with registrants
that provide alternative disclosures would receive different
disclosure documents, and hence different sets of information, than
they would receive under the proposed summary prospectus regime.
Which approach do you believe is most beneficial for investors and
why?
To the extent that there are no material changes to a
variable contract, what information about the contract--if any--do
investors need to receive on an ongoing basis to monitor their
investments in the contract and understand how the contract
operates? If there are no material changes, would it be useful to
investors to receive disclosure repeating key information of the
contract each year, and/or to receive summary information about the
portfolio companies each year?
Are investors able to effectively understand financial
statements that are provided as alternative disclosures, and are
they useful in helping investors monitor their investments?
An updated contract statutory prospectus, which
investors typically receive annually, describes the variable
contract but does not include insurance company or separate account
financial statements. Investors holding contracts whose issuers
provide alternative disclosures, however, receive the separate
account financial statements annually, and in some cases the
insurance company's financials. Assuming there are no changes to the
contract in a given year, do investors have a preference as to which
information they would rather receive? Is there other information
that investors would like to receive?
Other Approaches to the Framework for Discontinued Contracts
If the Commission takes the position described in the prior
subsection with respect to Alternative Disclosure Contracts, it would
permit continued operation of Alternative Disclosure Contracts (i.e.,
issuers with contracts that are operating as described in the Staff
Letters on the effective date of the final rules permitting use of a
variable contract summary prospectus). All other variable contract
issuers would operate under the new summary prospectus framework. That
is, they would be required to file post-effective amendments to update
their registration statements and provide updated prospectuses under
current regulatory requirements, and could avail themselves of the
summary prospectus framework as adopted.
We are also considering two alternative approaches for discontinued
contracts. Each of these alternative approaches would involve
modifying, and codifying by rule, the disclosure framework the Staff
Letters identify. Each of these alternative approaches could be
implemented in two different ways:
Method One (Apply New Approach Only to Discontinued
Contracts Going Forward): Permit Alternative Disclosure Contracts to
continue operating as they currently do under the Commission
position described above. For future discontinued contracts, adopt
final rules codifying certain practices the Staff Letters identify
and apply those rules on a going forward basis.
Method Two (Apply New Approach to All Discontinued
Contracts): Adopt final rules codifying certain practices the Staff
Letters identify and apply those rules to all discontinued contracts
(including Alternative Disclosure Contracts).
We request comment on the Commission position described above, as
well as the proposed approaches described below. We also request
comment on whether an alternative approach should be implemented using
method one or method two.
Approach 1 (Codification of Practices under Staff Letters with
Modifications): Under Approach 1, the Commission would adopt final
rules providing that a registrant would not have to comply with certain
requirements to update the variable contract registration statement and
deliver updated contract prospectuses to existing investors, so long as
the registrant complies with the following conditions:
Investors would receive an annual notice that includes
information that is comparable to that which would be provided in an
updating summary prospectus. Specifically, this notice would
include: (1) The Key Information Table that would appear in an
updating summary prospectus; (2) a brief description of any material
\378\ changes to the offering relating to fees, the standard death
benefits, other benefits available under the contract, and portfolio
companies available under the contract; \379\ (3) a table that would
include the same information about portfolio companies that would
appear in the proposed appendix to the updating summary prospectus;
and (4) legends informing investors that additional information
about their contract--including the registrant's financial
statements (the depositor's financial statements in the case of
variable life insurance contracts) and portfolio company
prospectuses and periodic reports to shareholders--is available
online. Because this notice would not be a section 10(b) prospectus,
it (unlike a summary prospectus under proposed rule 498A) would not
be subject to liability under section 12(a)(2) of the Securities
Act, although it would remain subject to the general antifraud
provisions of the federal securities laws.\380\ The notice would be
posted to the insurance company's website.
---------------------------------------------------------------------------
\378\ The changes that would necessitate disclosure under this
alternative are broader than one of the circumstances that the Staff
Letters identify--that there be no material changes to the contract.
With respect to the annual notice, even if there are no changes to
the contract between the insurance company and the investor, there
may still be material changes to the offering that must be
disclosed, such as changes in investment options, investment
restrictions, fees, and other matters.
\379\ As under proposed rule 498A, a registrant also could
provide a concise description of any other change that has been made
to the contract, in addition to the changes that the proposed rule
would require be described. See proposed rule 498A(c)(6)(ii); see
also supra note 233 and accompanying text.
\380\ See supra note 329 and accompanying text (discussing the
liability provisions applicable to summary prospectuses under
proposed rule 498A).
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The financial statements provided to investors under
the alternative disclosures in the Staff Letters would be filed with
the Commission, posted to the insurance company's website, and
delivered to an investor upon request;
Registrants would be permitted to use the optional
method to satisfy portfolio company prospectus delivery requirements
as provided under proposed rule 498A; and
Investors would continue to receive portfolio company
shareholder reports and proxy materials.
Issuers would be able to rely on Approach 1 if the contract is no
longer offered to new purchasers, there are under 5,000 investors, and
there have been no material changes during the period since the most
recent update. Approach 1 reflects our belief that the proposed summary
prospectus framework could give investors more pertinent information to
use to help them make informed investment decisions, compared to the
information
[[Page 61773]]
under the circumstances that the Staff Letters identify.\381\ This
approach seeks to provide many of the benefits to investors associated
with the summary prospectus framework while limiting the burden of
updating registration statements relating to contracts that are only
offered to a limited number of investors.
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\381\ See supra paragraph following note 374.
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Approach 2 (Permit Registration Statements to be Updated via
Forward Incorporation by Reference). As a variation on the framework
for Approach 1, we also request comment on whether the Commission
should adopt final rules that would:
Permit the registrant to rely on a modified version of
rule 498A that would:
[cir] Require that investors receive an annual notice that
includes information that is comparable to that which would be
provided in an updating summary prospectus, as described in Approach
1;
[cir] Require that the contract statutory prospectus and SAI be
made available online and delivered to an investor upon request; and
[cir] Permit registrants to use the proposed rule's optional
method to satisfy portfolio company prospectus delivery
requirements;
Require the filing of separate account (including
accumulation unit values for variable annuities) and depositor
financials with the Commission, permit issuers to incorporate these
documents by reference into the registration statement (even if they
are filed after the effective date of the registration
statement),\382\ and require these financial statements to be posted
to the insurance company's website, and delivered to an investor
upon request; and
---------------------------------------------------------------------------
\382\ See, e.g., supra note 364. Certain registrants that file
on Forms S-1 or S-3 are permitted to update their registration
statements by reference to Exchange Act reports filed after the
effective date of the registration statement (``forward
incorporation by reference'').
---------------------------------------------------------------------------
Require that investors receive portfolio company
shareholder reports and proxy materials.
As with Approach 1, issuers would be able to rely on Approach 2 if
the contract is no longer offered to new purchasers, there are under
5,000 investors, and there are no material changes to the contract.
Also, like Approach 1, Approach 2 reflects our belief that the proposed
summary prospectus framework could give investors more pertinent
information to use to help them make informed investment decisions,
compared to the alternative disclosures received by investors under the
circumstances that the Staff Letters identify.\383\
---------------------------------------------------------------------------
\383\ See supra paragraph following note 374.
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However, Approach 2 would be more similar to the proposed summary
prospectus regime in certain respects, in terms of the requirements for
the information that is (1) delivered to all investors (with the annual
notice under Approach 2 substituting for the summary prospectus), (2)
made available online, and (3) delivered to those investors who so
request.\384\ This approach seeks to provide many of the benefits to
investors associated with the summary prospectus framework and reduce
the burden of updating registration statements for contracts that are
only offered to a limited number of investors.
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\384\ See supra sections II.A.4 through 6. We assume for
purposes of this discussion that the relevant requirements in these
sections--for example, the formatting requirements and relevant
linking requirements discussed in these sections--would be
requirements under Approach 2.
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Approach 2 differs from Approach 1 chiefly in that Approach 2 would
require a registrant to maintain a current registration statement and
make the statutory prospectus and SAI available online. However, under
Approach 2, the registrant would only update the registration statement
when there are material changes to the offering, since updated
financial statements would be permitted to be forward incorporated by
reference into the registration statement.\385\ Approach 2 therefore
could reduce some of the burdens associated with maintaining a current
registration statement.
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\385\ One important distinction is that, under the Staff
Letters, one of the set of circumstances in which the staff has
stated that it would not recommend enforcement action is if there
are no material changes to the contract between the investor and
insurance company. However, even if there are no material changes to
the contract, there may still be material changes to the offering
that is described in the registration statement. See supra note 378.
These material changes to the offering generally should be described
in any updating summary prospectus or similar notice.
See supra note 29 (discussing current requirements for updating
variable contract registration statements).
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Since Approach 2 would entail the maintenance of a current
registration statement, the liability provisions available under the
federal securities laws would apply to Approach 2 to the same extent as
under the current variable contract prospectus delivery regime \386\
and under the proposed summary prospectus regime for registrants that
choose to rely on proposed rule 498A.\387\ While the disclosures
required under Approaches 1 and 2 are similar and both include certain
protections under the federal securities laws against material
misstatements or omissions, disclosures under Approach 2 may not limit
potential issuer liability to investors.
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\386\ See supra note 372 and accompanying text (noting that
providing the alternative disclosures described in the Staff Letters
may have the effect of potentially limiting issuers' liability under
certain provisions available under the federal securities laws).
\387\ See supra section II.A.3.
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The following Table 4 summarizes the frameworks under the Staff
Letters, Approaches 1 and 2, and the proposed summary prospectus
framework under proposed rule 498A for certain documents to either be:
(1) Delivered to all investors; (2) made available online; or (3)
delivered to those investors who so request.
Table 4--Documents Available to Variable Contract Investors
----------------------------------------------------------------------------------------------------------------
Staff letters and Summary prospectus
commission Approach 1 Approach 2 framework under
position proposed rule 498A
----------------------------------------------------------------------------------------------------------------
Contract Statutory Prospectus *. N/A \388\
Required to be available online and
delivered (in paper or electronic
format) upon request.
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Contract SAI *.................. N/A
Required to be available online and
delivered (in paper or electronic
format) upon request.
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Contract Part C Information *... N/A
Filed with registration statement
(available on EDGAR).
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Initial Summary Prospectus...... N/A Delivered to all
new investors.
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[[Page 61774]]
Updating Summary Prospectus *... N/A Delivered to all
existing
investors.
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Alternative Notice to Investors N/A............... Delivered to all investors (would N/A.
*. include information that is
comparable to that which would be
included in the updating summary
prospectus).
-------------------------------------------------------------------------------
Financial Statements * \389\.... Delivered to all Required to be available online and delivered (in paper or
investors. electronic format) upon request, and also available on
EDGAR.\390\
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Portfolio Company Prospectuses * Delivered to all Delivered to investors, or, if the new option to satisfy
investors. portfolio company prospectus delivery is
relied[dash]upon,\391\ required to be available online
and delivered (in paper or electronic format) upon
request.
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Portfolio Company Shareholder Delivered to all Delivered to all investors, or, if the new option to
Reports. investors. satisfy portfolio company prospectus delivery is
relied[dash]upon,\392\ required to be available online
and delivered (in paper or electronic format) upon
request.
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Portfolio Company Proxy Delivered to all investors.
Materials.
----------------------------------------------------------------------------------------------------------------
* Updated at least annually.
We request comments on the framework for discontinued
contracts:388 389 390 391 392
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\388\ While the contract prospectus (and SAI and Part C
information) would have been filed with the Commission earlier in
the contract's life cycle, under the Staff Letters' framework and
Approach 1, these documents are not updated annually, and
registrants would not make these documents available to investors
either online or in paper format.
\389\ These include updated audited financial statements of the
registrant, and in the case of variable life insurance contracts,
the depositor's updated audited financial statements. See supra note
368 and accompanying text.
\390\ The financial statements are part of the contract SAI, and
proposed rule 498A would require a registrant relying on the rule to
make the SAI available online. See proposed rule 498A(h)(1);
proposed Item 26 of Form N-4; proposed Item 27 of Form N-6.
Approaches 1 and 2 separately would require financial statements
to be filed with the Commission, posted to the insurance company's
website, and delivered to an investor upon request. See supra text
following note 380; supra note 382 and accompanying text.
\391\ See supra section II.B.2; see also supra bullets
accompanying notes 378-382.
\392\ See id.
Should the Commission codify either Approach 1 or
Approach 2? Why or why not? If so, which approach should the
Commission codify? Would either of Approach 1 or Approach 2
facilitate the disclosure of useful information to investors in a
better way than the information they would receive under the
proposed summary prospectus regime? What are the benefits and
drawbacks for investors of permitting Approach 1 or Approach 2,
instead of requiring issuers to update the registration statement
consistent with the proposed summary prospectus regime?
Would either of Approach 1 or Approach 2 provide more
useful information to investors than the information investors
holding Alternative Disclosure Contracts would receive? If so, how?
What number of investors or aggregate contract value
would make reliance on Approach 1 or Approach 2 more cost-effective
than annually updating a registration statement, both under current
disclosure requirements and under the proposed summary prospectus
regime?
What are the expected cost savings, if any, associated
with reliance on Approach 1 or Approach 2 as compared to: (1) The
current disclosure regime; (2) the disclosures provided with respect
to Alternative Disclosure Contracts; and (3) the proposed summary
prospectus regime? What are the anticipated sources of the cost
savings? Are there challenges that issuers would face in preparing
and providing the information to investors that each alternative
would require, and if so, what would these challenges (and any
associated costs) be? Are there changes to the alternatives that we
should consider in order to address those challenges? If so, what
changes, and how would those changes affect investors' ability to
make informed decisions?
Under Approach 1 and Approach 2, investors would
annually receive a notice that is substantially similar to the
proposed updating summary prospectus. Should this notice be modified
in any way? If so, how?
Under Approach 1 and Approach 2, should the conditions
incorporate a more precise definition of material changes that would
require a registration statement to be updated? If so, what should
the definition of material changes be? For changes to a registration
statement that are not a material change to the contract, should we
include a condition that the changes be posted on the insurance
company's website and filed with the Commission? If so, what would
be the costs associated with this condition? If not, why not?
Under Approach 1, should the most-recently-updated
prospectus and registration statement be made available to investors
either by request or online? If not, why not? If we did require
these documents to be made available online or by request, what kind
of legend should appear on the cover page of these documents to make
it clear to investors that these documents have not been updated,
and that the contract has undergone no material changes, since the
date of the document? Is there other information we should also
require to be made available online (such as current investment
restrictions associated with optional benefits, or a current Fee
Table that shows both maximum and current contract fees)?
Under Approach 1, certain materials would be required
to be made available online. Should the web posting requirements be
the same as those that proposed rule 498A would prescribe? Are there
modifications that should be considered with respect to contracts
relying on Approach 1? If so, what are those modifications and why
are they necessary?
Should a condition of Approach 1 be that audited
financial statements of the registrant (and in the case of variable
life insurance contracts, the depositor's audited financial
statements) be filed with the Commission? If not, why not? What
would be the additional costs associated with this condition?
The approach in Approach 2, where a registration
statement can refer to financial information that may be filed in
the future avoiding the need to annually file a post-effective
amendment to a registration statement, is permitted by other SEC
registration forms, such as Form S-3. However, Securities Act rules
still require that an updated registration statement be filed with
the Commission once every three years.\393\ Should such a
requirement apply under Approach 2? Why? Instead, should we require
a new prospectus to be filed every
[[Page 61775]]
three years? If not, why not? In between updates to a registration
statement, issuers typically file stickers reflecting certain
changes.\394\ Instead of requiring updated registration statements
or prospectuses after a certain period of time, should we limit the
number of stickers before an updated registration statement or
prospectus must be filed? If so, what should be the limit?
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\393\ See rule 415(a)(5) under the Securities Act.
\394\ See supra note 29 and accompanying text.
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Should Approach 2 be permitted for all registration
statements even if the contract is still offered to new purchasers,
has over 5,000 investors, or may have had material changes since the
most recent prospectus update? What would be the benefits to
registrants and investors of permitting forward incorporation by
reference, as under Approach 2, for all variable contract
registration statements? Or, would this result in changes to
variable contract disclosure practices that would impede investors'
ability to understand their variable contracts in any way?
Other Considerations
How do Approach 1 and Approach 2 compare to the
requirement to update a registration statement, and to the
circumstances that the Staff Letters identify, with respect to the
liability provisions available to investors under the federal
securities laws? Are there changes to Approach 1 and Approach 2 that
should be considered to further protect investors?
Approaches 1 and 2 contemplate that the codified relief
would be available only to Form N-4 and Form N-6 registrants (as the
conditions associated with portfolio company disclosure would be
applicable only to Form N-4 and Form N-6 registrants, and not also
Form N-3 registrants).\395\ Should the Commission's position on
Alternative Disclosure Contracts or Approaches 1 or 2 be extended to
managed separate accounts? If yes, how should the conditions be
modified to accommodate managed separate accounts? For example,
should we consider an approach similar to rule 8b-16(a) under the
Investment Company Act where updated information about the contract
(including audited financial statements for the insurance company)
and the investment options are included in the separate account's
annual shareholder report?
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\395\ Under the Staff Letters, one of the set of circumstances
under which the staff has stated that it would not recommend
enforcement action is that investors are provided prospectuses for
the underlying portfolio companies. However, because a managed
separate account prospectus describes both the offering of the
contract and the investment options, it is not possible to provide
the investment option prospectuses separate from the separate
account prospectus.
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Should the Commission's position on Alternative
Disclosure Contracts or Approaches 1 or 2 be extended to annuity
contracts registered with the Commission under the Securities Act
only and filed on Forms S-1 and S-3? If yes, how should the
conditions be modified to accommodate these contracts?
If the Commission were to codify Approach 1 or Approach
2, should issuers that are operating in the manner described in the
Staff Letters, as of the effective date of the adoption of final
variable contract summary prospectus rules, be permitted to continue
operating in this manner? Or should the Commission instead require
all issuers--including those that are operating in the manner
described in the Staff Letters as of the effective date of the
adoption of final variable contract summary prospectus rules--to
satisfy the conditions under Approach 1 or Approach 2? If commenters
believe that the latter approach is appropriate, should Approach 1
or Approach 2 be available to only those contracts that are no
longer offered to new purchasers, make no material changes, for
contracts with fewer than a certain number of investors, or for some
other group of contracts? Why?
D. Proposed Amendments to Registration Forms
We are proposing amendments to Forms N-3, N-4, and N-6 to update
and enhance the disclosures to investors in variable contracts, and to
implement the proposed summary prospectus framework. These proposed
amendments include new disclosure requirements to reflect the evolution
of variable contract features, including, in particular, the prevalence
of optional benefits that insurers offer under these contracts. In
addition, we are proposing amendments to provide greater consistency
among the registration forms for variable contracts. Form N-6, which
was adopted in 2002 and is the newest variable contract form, served as
a model for many of the proposed revisions to Forms N-3 and N-4.
Accordingly, we are proposing fewer changes to Form N-6 than the other
forms.
Certain investors who are considering variable annuities may also
be considering variable life insurance (and vice versa). We believe a
consistent presentation could reduce investor confusion and promote
investor understanding through common disclosure across types of
variable products on elements that we consider useful in explaining
variable contracts' features and risks. Also, we believe that more
uniformity of disclosures across variable contract types may make it
easier for investors to compare similar products. Similarly, we believe
that increasing consistency of disclosure requirements among
registration forms could increase efficiencies among sponsors of
variable contracts that register on multiple of these registration form
types, and other market participants.
1. General Instructions
We are proposing amendments to the General Instructions of Forms N-
3, N-4, and N-6 regarding the preparation and filing of registration
statements. The proposed General Instructions would, like the General
Instructions in current Form N-6,\396\ be structured to include four
parts: (A) Definitions; (B) Filing and Use of Form; (C) Preparation of
the Registration Statement; and (D) Incorporation by Reference.\397\
With the exception of General Instruction C.3, these amendments are
organizational in nature and incorporate minor changes that are not
intended to significantly alter the content of the current General
Instructions for these forms.
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\396\ While the proposed General Instructions in Forms N-3 and
N-4 would be structured like the General Instructions in current
Form N-6, there are certain new instructions that we are proposing
to add to each of the forms. See, e.g., proposed General
Instructions C.3.(a), C.3.(b), C.3.(c), C.3.(e), and C.3.(h) to
Forms N-3, N-4, and N-6, each described infra.
\397\ In 2017, the Commission proposed amendments to its rules
on incorporation by reference as part of a broader proposal to
modernize and simplify certain disclosure requirements in Regulation
S-K (and related rules and forms) to implement Section 72003 of the
Fixing America's Surface Transportation Act. See 2017 FAST Act
Proposal, supra note 307. We would amend any references to these
rules in the General Instructions to Forms N-3, N-4, and N-6 to
reflect any rules that the Commission may adopt based on that
proposal.
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Proposed General Instruction C.3 would provide 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
instruction would parallel Instruction C.3 of current Form N-6 in
substance, except as described below.
Proposed General Instruction C.3.(a) would require that the
disclosures in response to Item 2, Item 3, and Item 4 of the
registration forms appear in numerical order at the front of the
prospectus, and not be preceded by anything other than a cover page
(Item 1), a glossary, or a table of contents. We believe that these
disclosures should appear at the beginning of the prospectus because
they contain the most salient information about a variable contract's
key features, costs, and risks.\398\ Additionally, the instruction
would provide that, if the discussion of the information that Items 2
or 3 requires also responds to disclosure requirements in other items
of the prospectus, a registrant need not include additional disclosure
that repeats this information.
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\398\ The disclosure that proposed Items 2 and 3 would require
also would appear at the beginning of the initial summary
prospectus. See supra note 75 and accompanying text.
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Proposed General Instruction C.3.(b) would provide that, except in
response to Items 2 and 3, a registrant would be
[[Page 61776]]
permitted to include information in the prospectus or SAI that is not
otherwise required, so long as it 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 to be included. This instruction is intended to provide
flexibility to registrants to include contextual and other information
that could aid investors' understanding of variable contracts and
assist them in making informed investment decisions.
Proposed General Instruction C.3.(c) would encourage registrants to
use, as appropriate, question-and-answer presentations, tables, side-
by-side comparisons, captions, bullet points, numeric examples,
illustrations or similar presentation methods.\399\ We believe that
these alternative ways of presenting information could increase
readability and that this proposed instruction could encourage
registrants to use these presentation options, where appropriate.
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\399\ See, e.g., Kleimann Presentation, supra note 106
(encouraging, for example, the use of question-and-answer format,
the use of headings to make structure clear, using a strong design
grid to organize elements, making line length readable, and using
common words and sentence constructions as ways of designing
disclosure to promote readability).
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Proposed General Instruction C.3.(d) includes in substance the
requirements of Item 2 (Definitions) of current Forms N-3 and N-4. The
changes conform this instruction to the language in the parallel
current General Instruction of Form N-6, which we believe will improve
readability and consistency across form types.
Proposed General Instruction C.3.(e) would provide new guidance in
each of the forms addressing when a registrant may describe multiple
contracts in a single prospectus, and include multiple prospectuses in
a single registration statement. First, proposed General Instruction
C.3.(e)(i) would provide that registrants may describe multiple
contracts in a single prospectus when the contracts are ``essentially
identical.'' Whether the contracts are essentially identical would
depend on the facts and circumstances. The proposed instruction
includes examples to provide guidance on this point.\400\ Similarly,
proposed General Instruction C.3.(e)(ii) would further provide that a
registrant may combine multiple prospectuses in a single registration
statement when the prospectuses describe contracts that are essentially
identical. The proposed instruction also includes examples to provide
guidance on this point.\401\ We believe these examples are generally
consistent with current industry practice.
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\400\ The examples clarify that a contract that does not offer
optional benefits would not be essentially identical to one that
does. Similarly, group and individual contracts would not be
essentially identical. However, contracts that vary only due to
state regulatory requirements would be essentially identical.
\401\ The examples clarify that a registrant could determine it
is appropriate to include multiple prospectuses in a registration
statement in the following situations: (1) The prospectuses describe
the same contract that is sold through different distribution
channels; (2) the prospectuses describe contracts that differ only
with respect to underlying funds offered; or (3) the prospectuses
describe both the original and an ``enhanced'' version of the same
contract (where the ``enhanced'' version modifies the features or
options that the registrant offers under that contract).
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While proposed paragraph (a) of General Instruction C.3 requires
registrants to disclose the information required by Items 2, 3, and 4
in numerical order at the front of the prospectus and generally not to
precede the items with other information, proposed General Instruction
C.3.(e)(iii) would provide that, as a general matter, registrants
providing disclosure in a single prospectus for more than one contract,
or for contracts sold in both the group and individual markets, may
depart from this requirement as necessary to present the required
information clearly and effectively (although the order of information
required by each item must remain the same). The proposed instruction
would include examples to provide guidance on this point.\402\
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\402\ The examples clarify that a prospectus may present all of
the Item 2 information for several contracts, followed by all of the
Item 3 information for the contracts, and followed by all of the
Item 4 information for the contracts. Alternatively, the prospectus
may present Items 2, 3, and 4 for each of several contracts
sequentially. Other presentations also could be acceptable if they
are consistent with the form's intent to disclose the information
required by Items 2, 3, and 4 in a standard order at the beginning
of the prospectus. As guidance, we believe that regardless of the
presentation method chosen, when disclosing information relating to
one of several contracts, registrants should clearly identify to
which contract the information relates.
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Proposed paragraph (h) of General Instruction C.3, which would
require variable contracts to use the Inline XBRL format for the
submission of certain required disclosures in the variable contract
statutory prospectus,\403\ is discussed in more detail in Section II.E
below.
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\403\ See proposed General Instruction C.3.(h) to Forms N-3, N-
4, and N-6; see also proposed Items 3, 4, 5, 12, 19, and 20 of Form
N-3; proposed Items 3, 4, 5, 11, and 18 of Form N-4; proposed Items
3, 4, 5, 11, and 18 of Form N-6.
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Proposed paragraph (i) of General Instruction C.3 would require any
website address or cross-reference that is included in an electronic
version of the statutory prospectus (i.e., electronic versions sent to
investors or available online) to be an active hyperlink.\404\ This
instruction is intended to ensure that investors viewing electronic
versions of the prospectus are able to easily access website addresses
and cross-referenced materials that are referenced in the prospectus.
This requirement would not apply to statutory prospectuses that are
filed on the EDGAR system.\405\
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\404\ See proposed General Instruction C.3.(i) to Forms N-3, N-
4, and N-6.
\405\ Id.; see also rule 105 of Regulation S-T [17 CFR 232.105]
(prohibiting hyperlinking to websites, locations, or other documents
that are outside of the EDGAR system).
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We request comment generally on the proposed amendments to the
General Instructions of Forms N-3, N-4, and N-6 and specifically on the
following issues:
Would the proposed instructions provide clear guidance
to registrants when preparing or amending a registration statement?
Should any of the proposed instructions be modified or not be
included? For example, proposed paragraph (i) of General Instruction
C.3 would require any website address or cross-reference that is
included in an electronic version of the statutory prospectus to be
an active hyperlink. Should we broaden that requirement to also
apply to the SAI and Part C of the registration statement? Would
broadening the requirement in this manner result in any synergies or
redundancies with the requirements of proposed rule 498A(h)(2)(iii)?
\406\ Additionally, to what extent, if any, would the proposed
requirement regarding active hyperlinks present challenges or add
costs or burdens with respect to the use of statutory prospectuses,
given that active links are not required in EDGAR filings (and
active links to websites, locations, and documents outside of the
EDGAR system are expressly prohibited pursuant to rule 105 of
Regulation S-T [17 CFR 232.105])? Are there additional instructions
that we should include? Should any current instructions not be
included in the revised forms?
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\406\ See supra section II.A.5.
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Are the proposed definitions listed as Part A of the
General Instructions clear, or should they be modified? Are there
additional definitions that we should include in proposed Part A of
the General Instructions?
Are the proposed instructions in Part B of the General
Instructions relating to the filing and use of the registration
forms clear, or should they be modified? For example, proposed
General Instruction B.2.(b) to Forms N-3, N-4, and N-6 provides that
for registration statements or amendments filed only under the
Investment Company Act, registrants need not respond to certain
items of the forms. Those registration statements generally relate
to contracts offered to institutional investors who are seeking to
provide coverage for their key personnel, and
[[Page 61777]]
therefore certain disclosures that would be relevant to retail
investors are less significant.\407\ Should that instruction in each
of the forms be updated to either add any additional items to, or
remove any of the items from, this proposed list of exclusions?
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\407\ For example, institutional investors generally negotiate
benefits coverage on a custom basis, and therefore prospectuses
regarding contracts offered to institutional investors may not
include any discussion regarding death benefits.
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Would the proposed instructions in Part C of the
General Instructions result in clearer and more concise disclosure
to investors? Are there other instructions that we should include to
encourage registrants to use plain English principles or otherwise
promote clear and concise disclosure?
Would other requirements improve the utility and
accessibility of the statutory prospectus for retail investors? Are
there any areas in the document where requiring the use of a
specific check-the-box approach, bullet points, tables, charts,
graphs or other graphics or text features would be helpful in
presenting any of the information or making it more engaging to
retail investors? Should we include requirements for font size,
margins and paper size? Should we restrict certain types or sizes of
font, color choices or the use of footnotes?
Is the requirement of proposed General Instruction
C.3.(a) that Items 2, 3, and 4 appear in numerical order at the
front of the prospectus appropriate? Should we specify that any
other items appear at the front of the prospectus? Should all of the
portions of the statutory prospectus that are also summary
prospectus disclosures be segregated and placed at the beginning of
the statutory prospectus to aid in the effective presentation of
information for investors in contracts whose issuers choose not to
rely on proposed rule 498A?
Are the instructions in proposed General Instruction
C.3.(e) on when registrants may describe multiple contracts in a
single prospectus, and include multiple prospectuses in a single
registration statement, clear and appropriate? Is it clear when
contracts are ``essentially identical,'' or would additional
clarification (either in the form text, or provided as Commission
guidance) be helpful? Are the examples that the proposed form
instructions include useful and appropriate? Are they generally
consistent with current industry practice? Should we modify or
expand these examples in any way? Would some alternative standard
for when a single prospectus may describe multiple contracts, or for
when a single registration statement may include multiple
prospectuses, be more appropriate than the proposed ``essentially
identical'' standard?
Should a registrant only be permitted to describe a
single contract in a prospectus, and if so, what parameters should
dictate what a single contract is? Likewise, should a registrant
only be permitted to include one prospectus in a registration
statement? What is industry practice in terms of describing multiple
contracts in a single prospectus, and combining multiple
prospectuses into a single registration statement? What are the
benefits and costs of this practice, both to members of the industry
as well as to investors?
Should we, as proposed, permit registrants that are
providing disclosure for more than one contract in a single
prospectus, or for contracts sold in both the group and individual
markets, to depart from the instruction to disclose the information
required by Items 2, 3, and 4 in numerical order to present the
required information clearly and effectively (provided the order of
information required by each item remains the same)? Should this
instruction be modified in any way?
Should the instructions in proposed Part D of the
General Instructions regarding the use of incorporation by reference
be modified in any way?
2. Part A (Information Required in a Prospectus)
Table 5 shows how our proposed amendments would amend the item
requirements of Part A of the variable contract registration forms.
Table 5--Proposed Amendments to Part A of Forms N-3, N-4, and N-6
----------------------------------------------------------------------------------------------------------------
Form N-3: Proposed Form N-4: Proposed Form N-6: Proposed
Item description Proposed item No. treatment treatment treatment
----------------------------------------------------------------------------------------------------------------
Front and Back Cover Pages (in Form N-3: Revised........... Revised........... Revised.
Forms N-3 and N-4, currently Item 1 (currently
``Cover Page''). Item 1).
Form N-4:
Item 1 (currently
Item 1).
Form N-6:
Item 1 (currently
Item 1).
Overview of the Contract........ Form N-3: New Item (also in New Item (also in New Item (also in
Item 2. ISP). ISP). ISP).
Form N-4:
Item 2.
Form N-6:
Item 2.
Definitions..................... N/A (currently, Revised Revised N/A (incorporated
Item 2 in Forms N- (incorporated in (incorporated in in General
3 and N-4). General General Instructions).
Instructions). Instructions).
Key Information................. Form N-3: New Item (also in New Item (also in New Item (also in
Item 3. ISP, USP). ISP, USP). ISP, USP).
Form N-4:
Item 3.
Form N-6:
Item 3.
Fee Table (in Form N-3, Form N-3: Revised (also in Revised (also in Revised (also in
currently ``Synopsis or Item 4 (currently ISP). ISP). ISP).
Highlights,'' in Form N-4, Item 3).
currently ``Synopsis,'' and in Form N-4:
Form N-6, currently ``Risk/ Item 4 (currently
Benefit Summary: Fee Table''). Item 3).
Form N-6:
Item 4 (currently
Item 3).
Condensed Financial Information. Form N-3: Revised and moved Revised and moved N/A.
Item 33 to SAI. to SAI.
(currently Item
4).
Form N-4:
Item 27
(currently Item
4).
Principal Risks of Investing in Form N-3: New Item.......... New Item.......... Revised Item.
the Contract (in Form N-6, Item 5.
currently ``Risk/Benefit Form N-4:
Summary: Benefits and Risks''). Item 5.
Form N-6:
Item 5 (currently
Item 2).
In Form N-3: General Description Form N-3: Revised........... Revised........... Revised.
of Registrant, Insurance Item 6 (currently
Company, and Investment Options Item 5).
(currently ``General Form N-4:
Description of Registrant and Item 6 (currently
Insurance Company''). Item 5).
In Forms N-4 and N-6: General Form N-6:
Description of Registrant, Item 6 (currently
Depositor, and Portfolio Item 4).
Companies.
[[Page 61778]]
Management...................... Form N-3: Revised........... N/A............... N/A.
Item 7 (currently
Item 6).
Charges (in Form N-3, currently