Monday, March 16. 2020
SEC Adopts Investor Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts
The new rules builds on the SEC’s experience with a similar layered disclosure approach for mutual funds, which was enacted in 2009. Prospectus delivery obligations under the Securities Act for a variable contract can be satisfied by providing a summary prospectus to investors and making the statutory prospectus available online. The summary prospectus offers a concise, reader-friendly summary of key facts about the contract. More detailed information about the variable annuity or variable life insurance contract will be available online. An investor can opt to have that information delivered in paper or electronic format at no charge.
Specifically, the following changes have been approved:
New Option to Use a Summary Prospectus for Variable Contracts
New Rule 498A under the Securities Act will permit the use of two distinct types of contract summary prospectuses: initial summary prospectuses covering variable contracts currently offered to new investors and updating summary prospectuses for existing investors. The initial summary prospectus includes:
- an overview of the contract
- a table summarizing certain key information about the contract’s fees, risks, and other important considerations
- and more detailed disclosures relating to fees, purchases, withdrawals, and other contract benefits
The updating summary prospectus includes a brief description of certain changes to the contract that occurred during the previous year, as well as the key information table from the initial summary prospectus. In certain types of variable contracts, investors allocate their investment to one or more underlying options (which are typically mutual funds). Both the initial summary prospectus and the updating summary prospectus provide certain key information about those underlying investment options.
Availability of Variable Contract Statutory Prospectus and Other Materials
Rule 498A requires that the variable contract’s statutory prospectus and the contract’s Statement of Additional Information (SAI) be publicly and freely accessible at a website. The website address must be specified on, or hyperlinked in, the cover of the summary prospectus. An investor who receives a contract summary prospectus can request paper forms of the contract’s statutory prospectus and SAI also at no cost.
Optional Method to Satisfy Prospectus Delivery Requirements for Underlying Mutual Funds
The new rule also permits variable contracts to make the prospectuses available online for underlying mutual fund investment options and other documents relating to those mutual funds. The variable contract’s summary prospectus must provide certain key information about those mutual funds. Investors will be able to request and receive these mutual funds’ prospectuses (and the other related documents that are available online) in paper or electronically at no cost.
Updates to Variable Contract Registration Forms
Amendments to Forms N-3, N-4, and N-6 (the registration forms for variable contracts) are designed to update and enhance the disclosure regime for those investment products. These amendments are also intended to improve the content, format, and presentation of information to investors. This includes updating the required disclosures to reflect industry developments (for example, the prevalence of optional insurance benefits in today’s variable contracts). In addition, the SEC has adopted amendments to require the use of the Inline XBRL format for the submission of certain required disclosures in the variable contract statutory prospectus.
Discontinued Variable Contracts
The issuers of some variable contracts which have been discontinued by July 1, 2020 will not have to update the variable contracts’ registration statements or provide updated prospectuses to existing investors. The SEC is stating that this would not provide a basis for enforcement action under specified conditions, such as where the investors are provided with certain alternative disclosures as described in the adopting release. In taking this position, certain SEC staff no-action letters relating to discontinued contracts will be withdrawn.
Lastly, the SEC has adopted certain technical and conforming amendments to its rules that reflect the new framework for variable contract summary prospectuses. The SEC also made other changes and rescinded certain rules and forms that were rendered moot by legislative actions or are otherwise no longer necessary.
The new rule and related rule and form amendments will become effective on July 1, 2020. They will be published on the SEC’s website and in the Federal Register. To provide a transition period after this July 1st date, the SEC has enacted the following compliance and other dates:
July 1, 2020 – A registrant can rely on Rule 498A to satisfy its obligations to deliver a variable contract’s statutory prospectus by delivering a summary prospectus if the registrant is also in compliance with the amendments to Forms N‑3, N‑4, or N‑6 (as applicable). The SEC no-action letters relating to discontinued contracts providing alternative disclosures will be withdrawn, and the SEC position for eligible discontinued contracts will take effect.
January 1, 2022 – All initial registration statements on Forms N‑3, N‑4, and N‑6, and all post‑effective amendments that are annual updates to effective registration statements on these forms must comply with the rule and form amendments.
January 1, 2023 – Registrants must submit specified disclosures in Inline XBRL.