The SEC is proposing amendments to rules and Form N-4 to enhance the registration, disclosure, and advertising framework for registered index-linked annuities (RILAs). The proposal is intended to align the RILA offering process with other insurance investment products and implement a recent Congressional mandate to the SEC (Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities, Release No. 33-11250, September 29, 2023).
“Given the complexity and growing popularity of RILAs, it is important that investors receive the information they need—in plain English—to make informed investment decisions,” said SEC Chair Gary Gensler. “Implementing Congress’s mandate, today’s proposal would require RILAs to use a registration form tailored to their characteristics. This would improve the disclosure process for these complex products.”
The comment period will be open for 30 days following publication in the Federal Register.
RILAs. As Gensler explained, RILAs are a type of annuity product sold mainly to retail investors.
RILA investors’ returns are linked partly to the performance of a market index like the S&P 500. However, their performance is separate from the performance of the underlying index. Insurance companies often subject investor returns to caps and floors, which can change over time. Investors can experience losses if they withdraw money early.
RILA sales have more than tripled in the last five years, reaching approximately $41 billion in 2022, said Gensler.
Proposed changes. As explained in a fact sheet, the proposal would:
- Require insurance companies to register RILA offerings on Form N-4, the form currently applicable to most variable annuities;
- Amend Form N-4 to specifically address the features and risks of RILAs, including changes to the form’s “Key Information Table” (KIT) to highlight key features of RILAs;
- Permit RILA issuers to use the summary prospectus framework applicable to variable annuities;
- Require RILA issuers to pay fees in arrears on Form 24F-2 to accommodate RILA registrations on Form N-4;
- Apply Rule 156 under the Securities Act of 1933, relating to when sales literature is materially misleading under the Federal securities laws, to RILA issuers;
- Enhance disclosure for variable annuities registering on Form N-4.
Investor feedback. As noted by Commissioner Mark Uyeda, the law required the SEC to conduct investor testing relating to RILAs. The Office of the Investor Advocate has issued its Investor Testing Report on RILAs, which describes the Office’s qualitative and quantitative analysis regarding RILA disclosures.
The report found that the number and complexity of RILA investment options could “easily be overwhelming” even for sophisticated retail investors. The OIA recommended further research to continue to promote investor welfare in the RILA market.
The SEC released a flyer asking retail investors for input.
“I encourage the public to comment on the proposal and to offer their views on how key information about RILAs can be conveyed in an understandable way,” said Uyeda.