Variable annuities and variable life insurance contracts combine both traditional investment and insurance features, provide a menu of different benefits to choose from, can charge an array of fees, and are subject to special tax rules that could adversely impact some investors. Under the current statutory regime, insurers that offer these products are required to send prospective purchasers a prospectus to facilitate an understanding of the information purchasers need in order to make an informed decision about whether to purchase the contract.
The Securities and Exchange Commission has proposed a new rule (17 CFR §230.498A), and amendments to existing rules and forms, designed to help retail investors receive information regarding variable annuity and variable life insurance products in a concise and reader-friendly format. The proposed new rule would give issuers of variable contracts the option of satisfying their statutory prospectus delivery obligations by sending prospective purchasers a summary prospectus that provides key information about the product’s features, while making the full statutory prospectus available online. Purchasers would also have the option of requesting delivery of a paper copy of the full statutory prospectus at no additional cost. This layered approach to disclosure is similar to the approach the SEC has permitted mutual funds to use since 2009.
The proposed new rule would permit the use of two summary prospectuses: an “initial summary prospectus” for new proposed purchasers and an “updating summary prospectus” for existing investors. The “initial summary prospectus” must contain certain information outlined in the rule, including an overview of the contract designed to provide basic information about how variable contracts function; a table containing key information about the contract’s fees and expenses, risks, applicable taxes, and conflicts of interest; and sections that describe the standard death benefit, additional standard or optional benefits, and the consequences of surrender or withdrawal, among other things. In addition, the rule would require the “initial summary prospectus” to include an appendix with a table that summarizes the different investment options offered under the contract and provides links to prospectuses for these underlying investments. Similarly, the “updating summary prospectus” must include a subset of the information provided in the “initial summary prospectus,” as well as a brief description of changes to the contract that occurred during the previous year.
The proposed new rule provides detailed, mandatory guidelines regarding the content, formatting, and even the order of disclosures in the summary prospectus. These guidelines must be followed closely in order for the summary prospectus to satisfy the statutory prospectus delivery requirements. The SEC believes that this standardization will help investors and investment professionals compare and contrast different variable contracts, and more easily understand their features.
In addition, the SEC has proposed amendments to Forms N-3, N-4, and N-6, the registration forms for variable contracts, to implement the proposed summary prospectus framework and update and enhance disclosures to investors. Finally, the SEC’s proposed amendments would also require issuers of variable contracts to use Inline eXtensible Business Reporting Language (Inline XBRL) format for certain disclosures in their prospectuses. Inline XBRL format, which is already required for operating companies, mutual funds and ETFs, provides a mechanism for the public to aggregate and analyze data, and is in keeping with the SEC’s ongoing efforts to take advantage of the benefits of advanced technology.