Several industry groups have voiced support for the SEC’s proposal to permit issuers of variable annuity contracts and variable life insurance contracts (together, VIPs) to use a summary prospectus to satisfy their statutory prospectus delivery obligations. According to the Investment Company Institute (ICI), the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC), and the Independent Directors Council (IDC), the simplified disclosure and delivery requirements would benefit investors by allowing them to receive information in a clearer, more easily understood manner and would reduce costs for VIPs and underlying portfolio companies, namely registered investment companies. The organizations, however, recommended certain changes regarding permitted disclosures to prospective and existing VIP owners to ensure they have the information necessary to make informed decisions.
Disclosure proposal. In October 2018, the SEC proposed new Securities Act Rule 498A, which would permit the satisfaction of prospectus delivery obligations for VIPs by sending a summary prospectus to investors and making the statutory prospectus available online. The proposed rule contemplates an “initial summary prospectus” for new investors and an “updating summary prospectus” for existing investors. The initial summary prospectus would include: an overview of the contract; a table summarizing certain key information about the contract, and more detailed disclosures relating to fees, purchases, withdrawals, and other contract benefits. The updating summary prospectus would include a brief description of certain changes that occurred during the previous year, plus the key information table from the initial summary prospectus.
The proposed rule would also require that the statutory prospectus and the contract's Statement of Additional Information (SAI), to be accessible, for free, online at a website specified in the summary prospectus. Prospectuses for underlying mutual fund investment options may also be available online; this option would only be available for portfolio companies available as investment options through variable contracts that use contract summary prospectuses. An investor may choose to have information delivered in print or electronically at no charge.
ICI. ICI voiced strong support for the proposal, noting that requiring VIP issuers to include certain key information about portfolio companies in an appendix to the summary prospectus and providing an optional online delivery method for portfolio company prospectuses would benefit both customers and firms. The organization did, however, recommend certain enhancements to increase the usefulness of the summary prospectus:
- VIP issuers should be allowed to include a statement informing investors how to obtain more current portfolio company performance information.
- VIP issuers should be permitted to provide performance information for the life of the portfolio company beyond the timeframes provided in the proposal to align portfolio company disclosure requirements with the requirements for mutual funds.
- VIP issuers should be allowed to include a portfolio company’s net expense ratio after any waivers and/or reimbursements and be required to make disclosures regarding only those portfolio company sub-advisers that manage a significant portion of the portfolio instead of all sub-advisers.
CCMC. The CCMC expressed its support for the proposal’s efforts to make prospectuses more transparent for, and easily understood by, customers. A layered approach to disclosures allows for providing key information up front, with additional details available online or in paper format, the organization explained. However, the CCMC noted, the SEC should ensure that disclosure requirements are principles-based and allow for the flexibility necessary to effectively communicate with investors. Further, according to the CCMC, the proposal creates an opportunity to overall improve the language of annuities, and the SEC should take steps to avoid codifying old and confusing annuity language in within the new rule and amendments.
“[M]andating the use of confusing terminology runs counter to the stated goal of helping investors better understand these products,” the organization opined.
To counteract potential issues, the CCMC recommended that the SEC avoid prescriptive wording choices and, instead, outline more general requirements for underlying content so that disclosures can be adjusted to provide consumers with more accurate information regarding VIPs.
IDC. The IDC noted that fund directors are strongly in favor of providing investors with clear and useful information in an accessible format and that a layered approach that allows investors to individually choose the amount of information they receive and how they receive is beneficial for all. A more “user-friendly” approach better reflects the way that consumers make financial decisions in modern times, the organization explained. Further, the IDC applauded the proposal to make funds’ summary and statutory prospectuses available online, noting that this option will produce cost savings for funds and their shareholders. However, the IDC suggested providing flexibility regarding the website on which fund materials will appear and urged the SEC not to require that they be made available at the same website as the VIP materials.