Thursday, March 12, 2020

SEC adopts disclosure improvements for variable products

By Amy Leisinger, J.D.

The SEC has approved a new rule and related form and rule amendments to streamline and improve disclosures regarding variable annuities and variable life insurance contracts. The changes would allow the use of a summary prospectus for these contracts, providing investors with a concise summary of key information regarding contract terms, features, benefits, and risks, with more detailed information being available online and paper or electronic copies available upon request. According to the Commission, the changes leverage both technology and a layered disclosure approach to improve the ability of investors to understand and evaluate variable contracts and make informed decisions (Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Release No. 33-10765, March 11, 2020).

"With today's technology and the benefits of layered disclosure, investors should not have to work through hundreds of pages of disclosure to understand these products’ risks, fees, and features in order to make informed investment decisions," said SEC Chairman Jay Clayton.

New Rule 498A. New Securities Act Rule 498A will permit satisfaction of prospectus delivery obligations for a variable annuity or variable life insurance contract by sending or giving a summary prospectus to investors and making the full statutory prospectus separately available. Specifically, the new rule permits the use of two distinct types of contract summary prospectuses: (1) an "initial summary prospectus" to be provided to new investors; and (2) 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; as well as detailed disclosures relating to fees, withdrawals, and other contract terms. The updating summary prospectus will include a description of changes to the contract occurring during the previous year, plus the key information table from the initial summary prospectus. Both the initial and updating summary prospectuses will provide information regarding underlying investment options.

The new rule requires that the statutory prospectus and the contract’s Statement of Additional Information (SAI) to be publicly, freely accessible at a website address provided in the cover of the summary prospectus. An investor who receives a contract summary prospectus will be able to request the contract's statutory prospectus and SAI to be sent in paper or electronically, at no cost. In addition, prospectuses for underlying mutual fund investment options also may be made available online, and investors may choose to have this information and other related documents delivered in print or electronically at no charge.

Forms. To implement the new framework, the SEC also amended the registration forms for variable products to enhance the disclosures to investors in these contracts and made changes to require variable contracts to use In line XBRL format for the submission of certain required disclosures. The amendments to revise the registration forms for variable contracts (Forms N-3, N-4, and N-6) are intended to improve the content, format, and presentation of information to investors, including by updating required disclosures to reflect industry developments—in particular, the prevalence of optional insurance benefits offered under variable contracts.

Other changes. In the release, the SEC noted that it is taking the position that there would not be a basis for an enforcement action if an issuer of a variable contract that is discontinued as of July 1, 2020, provides alternative disclosures and does not file updates to the registration statement or prospectus to existing investors.

The Commission also adopted several technical and conforming amendments to implement the new framework.

Variable annuities and variable life insurance contracts may begin using the modernized layered disclosure approach as early as July 1, 2020. As of January 1, 2022, all initial registration statements on Forms N-3, N-4, and N-6, as well as all post-effective-amendment annual updates, must comply with the rule and form amendments. By January 1, 2023, registrants must submit all specified disclosures in Inline XBRL.

The release is No. 33-10765.