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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 232, 239, 240, 270, and 274

[Release Nos. 33-10765; 34-88358; IC-33814; File No. S7-23-18]

RIN 3235-AK60

Updated Disclosure Requirements and Summary Prospectus for Variable Annuity

and Variable Life Insurance Contracts

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission is adopting rule and form amendments

intended to help investors make informed investment decisions regarding variable annuity and

variable life insurance contracts. The amendments modernize disclosures by using a layered

disclosure approach designed to provide investors with key information relating to the contract’s

terms, benefits, and risks in a concise and more reader-friendly presentation, with access to more

detailed information available online and electronically or in paper format on request. New rule

498A under the Securities Act of 1933 will permit a person to satisfy its prospectus delivery

obligations under the Securities Act for a variable annuity or variable life insurance contract by

sending or giving a summary prospectus to investors and making the statutory prospectus

available online. The rule also will consider a person to have met its prospectus delivery

obligations for any portfolio companies associated with a variable annuity or variable life

insurance contract if the portfolio company prospectuses are posted online. To implement the

new disclosure framework, we are also amending the registration forms for variable annuity and

variable life insurance contracts to update and enhance the disclosures to investors in these

contracts, and to implement the proposed summary prospectus framework, and adopting

amendments to our rules that will require variable contracts to use the Inline eXtensible Business

Reporting Language (“Inline XBRL”) format for the submission of certain required disclosures

in the variable contract statutory prospectus. The Commission is also taking the position that if

an issuer of a discontinued contract that is discontinued as of July 1, 2020 that provides

alternative disclosures does not file post-effective amendments to update a variable contract

registration statement and does not provide updated prospectuses to existing investors, this

would not provide a basis for enforcement action so long as investors are provided with the

alternative disclosures or modernized alternative disclosures described below. We are also

adopting certain technical and conforming amendments to our rules and forms, including

amendments to rules relating to variable life insurance contracts, and rescinding certain related

rules and forms.

DATES: Effective dates: This rule is effective July 1, 2020, except:

•

Amendatory instructions 12, 46, 48, and 50 to 17 CFR 230.498A, Form N-3 (referenced

in 17 CFR 239.17a and 274.11b), Form N-4 (referenced in 17 CFR 239.17b and 274.11c),

and Form N-6 (referenced in 17 CFR 239.17c and 274.11d), which are effective January

1, 2022; and

•

Effective July 1, 2020, amendatory instructions 20, 22, and 24 to Form N-3 (referenced in

17 CFR 239.17a and 274.11b), Form N-4 (referenced in 17 CFR 239.17b and 274.11c),

and Form N-6 (referenced in 17 CFR 239.17c and 274.11d), published June 22, 2018, at

83 FR 29158, with an effective date of January 1, 2022, are withdrawn.

Compliance dates: See Section II.G.

FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, Pamela K. Ellis,

Bradley Gude, James Maclean, Amy Miller (Senior Counsels) or Michael C. Pawluk (Senior

Special Counsel), Investment Company Regulation Office, at (202) 551-6792; or Harry

Eisenstein or Michael Kosoff (Senior Special Counsels), Disclosure Review and Accounting

Office, at (202) 551-6921, Division of Investment Management, Securities and Exchange

Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission

(“Commission”) is adopting 17 CFR 230.498A (new rule 498A) under the Securities Act. The

Commission is also adopting amendments to the following rules:

Commission Reference

Organization; Conduct and Ethics;

And Information and Requests

Securities Act of 1933 (“Securities

Act”) 1

Section 800

Rule 159A

Rule 431

Rule 482

Rule 485

Rule 496

Rule 497

Rule 498

Form N-14

Rule 11

Rule 405

Rule 14a-16

§ 230.431

§ 230.482

§ 230.485

§ 230.496

§ 230.497

§ 230.498

§ 239.23

§§ 232.10 through

232.501

§ 232.11

§ 232.405

§ 240.14a-16

Rule 14a-101

Rule 0-1

§ 240.14a-101

§ 270.0-1

Regulation S-T

Securities Exchange Act of 1934

(“Exchange Act”) 2

Investment Company Act of 1940

(“Investment Company Act”) 3

15 U.S.C. 77a et seq.

15 U.S.C. 78a et seq.

15 U.S.C. 80a et seq.

CFR Citation

(17 CFR)

§§ 200.1 through

200.800

§ 200.800

§ 230.159A

Securities Act and Investment

Company Act

Rule 6c-7

Rule 6c-8

Rule 6e-2

Rule 6e-3 (former

rule 6e-3(T))

Rule 8b-1

Rule 11a-2

Rule 14a-2

Rule 26a-1

Rule 27i-1 (former

rule 27c-1)

Form N-3

Form N-4

Form N-6

§ 270.6c-7

§ 270.6c-8

§ 270.6e-2

§ 270.6e-3

§ 270.8b-1

§ 270.11a-2

§ 270.14a-2

§ 270.26a-1

§ 270.27i-1

§§ 239.17a and

274.11b

§§ 239.17b and

274.11c

§§ 239.17c and

274.11d

Finally, the Commission is rescinding:

Commission Reference

Investment Company Act

Securities Act and Investment

Company Act

Rule 26a-2

Rule 27a-1

Rule 27a-2

Rule 27a-3

Rule 27d-2

Rule 27e-1

Rule 27f-1

Rule 27g-1

Rule 27h-1

Form N-27E-1

Form N-27F-1

Form N-27I-1

Form N-27I-2

Form N-1

CFR Citation

(17 CFR)

§ 270.26a-2

§ 270.27a-1

§ 270.27a-2

§ 270.27a-3

§ 270.27d-2

§ 270.27e-1

§ 270.27f-1

§ 270.27g-1

§ 270.27h-1

§ 274.127e-1

§ 274.127f-1

§ 274.302

§ 274.303

§§ 239.15 and 274.11

TABLE OF CONTENTS

I. Introduction ................................................................................................................................. 7

A. Background ........................................................................................................................ 8

B. Overview of Final Rule and Rule and Form Amendments.............................................. 13

II. Discussion ................................................................................................................................. 18

A. New Option to Use a Summary Prospectus for Variable Contracts ................................ 19

1. Initial Summary Prospectus............................................................................................ 23

2. Updating Summary Prospectus .................................................................................... 109

3. Interim Amendments to Contract Statutory Prospectuses ............................................ 125

4. Legal Effect of Use of Summary Prospectus for Variable Contracts........................... 126

5. Online Accessibility of Contract Statutory Prospectus and Certain Other Documents

Relating to the Contract ................................................................................................ 132

6. Other Requirements for Summary Prospectus and Other Contract Documents .......... 146

7. Incorporation by Reference .......................................................................................... 154

8. Filing Requirements for the Summary Prospectus ....................................................... 158

9. Defined Terms in Final Rule ........................................................................................ 165

B. Optional Method to Satisfy Portfolio Company Prospectus Delivery Requirements.... 166

1. Current Delivery Practices for Portfolio Company Prospectuses ................................ 166

2. New Option to Satisfy Prospectus Delivery Requirements.......................................... 167

C. Amendments to Registration Forms .............................................................................. 180

1. General Instructions ..................................................................................................... 182

2. Part A (Information Required in a Prospectus) ............................................................ 193

3. Part B (Information Required in a Statement of Additional Information) ................... 252

4. Part C (Other Information) ........................................................................................... 271

5. Guidelines ..................................................................................................................... 280

D. Inline XBRL................................................................................................................... 281

E. Discontinued Variable Contracts ................................................................................... 292

1. Background .................................................................................................................. 293

2. Comments Received on Proposal ................................................................................. 298

3. Commission Position on Existing Contracts Whose Issuers Provide Alternative

Disclosures to Investors................................................................................................ 301

4. Commission Declines to Adopt Going-Forward Relief ............................................... 311

F. Technical and Conforming Amendments to Other Aspects of the Regulatory

Framework for Variable Contracts ................................................................................ 313

G. Compliance Dates .......................................................................................................... 320

III. Other Matters .......................................................................................................................... 326

IV. Economic Analysis ................................................................................................................. 327

A. Introduction .................................................................................................................... 327

B. Economic Baseline......................................................................................................... 329

1. Overview of Variable Products Market........................................................................ 329

2. Statutory and Regulatory Disclosure Requirements .................................................... 330

C. Benefits and Costs of the Rule and Form Amendments ................................................ 332

1. Optional Summary Prospectus Regime ........................................................................ 334

2. Treatment of Discontinued Variable Contracts ............................................................ 361

3. Changes to Forms N-3, N-4, and N-6 .......................................................................... 361

4. Inline XBRL ................................................................................................................. 365

D. Effects on Efficiency, Competition, and Capital Formation.......................................... 372

E. Reasonable Alternatives................................................................................................. 381

1. Mandating Summary Prospectuses .............................................................................. 381

2. Summary Prospectuses Delivered with Statutory Prospectuses................................... 382

3. Contract-Specific Updating Summary Prospectuses .................................................... 383

4. Do Not Provide Updating Summary Prospectuses....................................................... 385

5. Inline XBRL ................................................................................................................. 386

6. Alternatives to Form N-3, N-4, and N-6 Amendments ................................................ 391

7. Requiring All Variable Contracts (Including Currently Discontinued Contracts) to

Prepare Updated Registration Statements and Deliver Statutory or Summary

Prospectuses ................................................................................................................. 393

8. Alternatives to Commission’s Position on Alternative Disclosure Contracts .............. 395

V. Paperwork Reduction Act ....................................................................................................... 400

A. Form N-3 ........................................................................................................................ 403

B. Form N-4 ........................................................................................................................ 410

C. Form N-6 ........................................................................................................................ 416

D. Investment Company Interactive Data........................................................................... 421

E. Rule 498A ...................................................................................................................... 429

VI. Regulatory Flexibility Act Certification ................................................................................. 440

VII. Statutory Authority ........................................................................................................... 443

INTRODUCTION

The Securities and Exchange Commission is adopting rule and form amendments that are

intended to help investors make informed investment decisions regarding variable annuity 4 and

variable life insurance contracts 5 (together, “variable contracts” or “contracts”). 6 To improve the

current disclosure framework and update the manner in which variable contract investors receive

and review prospectuses and related information, we are adopting new rule 498A under the

Securities Act that permits the use of a summary prospectus to satisfy statutory prospectus

delivery obligations, along with other rule and form amendments intended to implement the

summary prospectus framework. Investors will have access to the contract statutory prospectus

and other information about the contract online (and could receive paper or electronic copies

upon request), which will provide more-detailed information about the contract.

Specifically, the approach under the new rule contemplates the use of two types of

summary prospectuses: an “initial summary prospectus” to be provided to new investors, and an

Variable annuities allow investors to receive periodic payments for either a definite period (e.g.,

20 years), or for an indefinite period (e.g., the life of the investor), and also provide a basic death

benefit to protect the investor’s beneficiaries. The investor may allocate the cash value of the

purchase payments to a range of investment options available under the contract, including in

some cases, to a fixed account option that pays a fixed or minimum rate of interest. The

investor’s account value changes depending on the performance of the investment options the

investor has selected.

Variable life insurance contracts offer a death benefit to the investor that may be significantly

larger than the amount of premiums paid, as well as the ability to accumulate cash value. Like

variable annuities, a variable life insurance contract permits the investor to allocate their cash

value to a variety of investment options. Because an investor will generally allocate the insurance

premiums to the investment options, the investor is exposed to market risk and the cash value

(and in some cases, the death benefit) will vary with the performance of these investments.

The Commission proposed these rule and form amendments in October 2018. See Updating

Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life

Insurance Contracts, Investment Company Release No. 33286 (Oct. 30, 2018) [83 FR 61730

(Nov. 30, 2018)] (“Proposing Release”).

“updating summary prospectus” to be provided to existing investors. To help investors make an

informed investment decision, each type of summary prospectus uses a layered disclosure

approach designed to provide investors with key information relating to the contract’s terms,

benefits, and risks in a concise and more reader-friendly presentation, with website addresses or

hyperlinks to more detailed information posted online and delivered electronically or in paper

format on request.

To implement this new disclosure framework, we are also amending the registration

forms for variable annuity and variable life insurance contracts to update and enhance the

disclosures to investors in these contracts, and requiring variable contracts to use the Inline

eXtensible Business Reporting Language (“Inline XBRL”) format for the submission of certain

required disclosures in the variable contract statutory prospectus.

In proposing new rule 498A, the Commission discussed and solicited comment on

approaches it was considering that could affect, and raise the possibility of future amendments to,

certain parallel provisions of rule 498 and certain of our registration forms applicable to other

types of registered investment companies. While we are not taking any such parallel actions in

this document, Commission staff is currently considering the comments received and reviewing

the disclosure regime for investment companies as to these and other potential amendments as

part of a broader modernization initiative.

Background

To meet life insurance needs and retirement or other financial goals, investors may

consider variable contracts as a way of combining insurance guarantees with the potential for

long-term investment appreciation. 7 Variable contracts are generally more complex than other

retail investment products, such as mutual funds, in a variety of ways:

•

Structure. Variable contracts combine both investment and insurance features.

Investors generally allocate their purchase payments to a range of investment options,

and the investor’s account value changes depending on the performance of the

investment options selected. For most variable contracts, these investment options

typically are mutual funds, which are separately registered and have their own

prospectuses. 8 In addition, variable contracts frequently offer a menu of optional

benefits that an investor may select to customize the contract to meet his or her

individual needs. 9

For an overview of variable annuities and variable life insurance contracts, see Proposing

Release, supra note 6, at Section I.A.

The average contract value for individual variable annuities is approximately $106,187. See

Insured Retirement Institute, IRI Fact Book 2019 (“IRI Fact Book”), at 167. Americans who own

annuities have a median annual household income of $64,000 (80% have total annual household

incomes below $100,000). Most individual annuity owners are retired. Although the average age

of an annuity owner is 70, the average age at which owners purchased their first annuity is 51.

See The Gallup Organization and Mathew Greenwald & Associates for The Committee of

Annuity Insurers, Survey of Owners of Individual Annuity Contracts (2013) (“Gallup Survey”), at

8-9. There is limited data available regarding variable life insurance contracts, but based upon

the data that is available, the Commission believes that the demographics of investors for those

products are likely comparable.

For purposes of this release, we refer to these entities as “portfolio companies.”

Variable contracts commonly offer optional benefit features as riders to the contract with their

own terms and conditions, and typically for a separate charge. Riders commonly provide

enhanced death benefits, as well as “living benefits” that may be designed to provide protection

against declines in account value, longevity risk, or other risks, or to cover financial losses that

result from illness, incapacity, or injury. These optional riders have become increasingly popular

with variable contract investors. See, e.g., IRI Fact Book, supra note 7, at 70 (“Approximately

$1.8 trillion of VA assets were held by insurance companies as of the end of the fourth quarter of

2018, with an estimated $800 billion in assets under a guaranteed income benefit.”); Gallup

Survey, supra note 7, at 21 (stating that “[n]early eight in ten annuity owners (79%) who own a

variable annuity report that their contract has a guaranteed lifetime withdrawal benefit.”).

•

Fees and Expenses. Most variable contracts have two-level fee structures, where fees

are assessed at both the contract level by the issuer (including mortality and expense

risk charges, 10 administrative fees, and fees for optional benefits selected by the

investor) and at the portfolio company level. 11 Transactional charges may also apply,

some of which could be substantial, for example, in the case of withdrawals made

from a contract prior to a specified number of years. 12 Variable life insurance

contracts also impose an additional insurance charge to cover the cost of the death

benefit. 13

•

Taxes. Special tax rules apply to variable products, with both tax advantages and

potential adverse tax impacts in certain circumstances. 14

Investors should understand the features, risks, and charges associated with any potential

investment. Providing investors with key information is particularly important in the context of

The mortality and expense (“M&E”) risk charge, which is based on an investor’s account value,

compensates the insurance company for offering certain contract features (e.g., death benefit or

annuitization) and is sometimes used to pay some or all of the insurance company’s costs to sell

the contract (e.g., commissions). Typical M&E charges are approximately 1.25% of account

value per year for variable annuities, and 0.90% for variable life insurance. See Morningstar

M&E Risk definition, available at

https://awgmain.morningstar.com/webhelp/glossary_definitions/va_vl/pol_M_E_Risk.html.

Investors indirectly bear the operating fees and expenses of the portfolio companies they select as

the underlying investments in their variable contracts.

A contract may impose a “surrender charge” if, after purchase payments are made, an investor

withdraws money from the contract during a stated period typically ranging from six to ten (or

even more) years.

These additional insurance charges are determined at the time the contract is written and vary

based on the insured’s personal characteristics, such as age and health. These charges are in

addition to the M&E risk charge discussed above. See supra note 10.

For example, assets within a variable contract grow tax-deferred, and transfers between

investment options under the contract are not taxable events. However, investors may face a 10%

federal income tax penalty if money is withdrawn before the investor reaches 59½ years old. For

these and other reasons, a variable contract generally is sold as a long-term investment.

variable contracts, since their structure is typically more complex than other types of investment

products. The operation of and terminology associated with these products can be difficult for

investors to understand. Moreover, variable contract prospectuses are often quite lengthy

(frequently more than one hundred pages), particularly in the case of products that include

optional benefits. It is also common for insurers to describe different versions of the contract in

one prospectus, some of which may no longer be available to new investors, leaving investors to

wade through a lengthy document to find disclosures relevant to the particular contract that they

purchased or are considering purchasing. 15 Because insurers issuing variable contracts typically

bundle prospectuses for the underlying portfolio companies together with the variable contract

prospectus, the disclosures that investors receive at the time of the initial purchase and on an

annual basis thereafter can be voluminous. 16

We are concerned that the volume, format, and content of disclosures in the variable

contract context may make it difficult for some investors to find and understand key information

that they need to make an informed investment decision. Based on our experience with both

layered disclosure (under the mutual fund summary prospectus) 17 and integrated disclosure

For a discussion of the requirements for variable contract prospectus disclosure and delivery, see

Proposing Release, supra note 6, at Section I.B.1.

For example, variable annuity contracts offer an average of 60 investment options, with some

contracts offering more than 250 investment options. See IRI Fact Book, supra note 7, at 167.

Furthermore, variable life insurance contracts offer an average of 65 investment options, with

some contracts offering more than 300 investment options. These variable life figures are based

on September 2019 data obtained from Morningstar Direct.

Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End

Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13,

2009) [74 FR 4546 (Jan. 26, 2009)] (“2009 Summary Prospectus Adopting Release”) (permitting

the use of a summary prospectus by registered open-end management investment companies).

(enhanced over a decade ago with securities offering reform for corporate issuers), 18 our more

than twenty years of experience with the use of the internet as a medium to provide information

to investors, 19 and on our investor testing efforts, outreach, and other empirical research

Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005) [70 FR 44722 (Aug.

3, 2005)] (“Securities Offering Reform”) at n.202 and accompanying text (allowing the use of

free writing prospectuses to provide information to investors and stating that a free writing

prospectus is a permitted prospectus for purposes of Section 10(b) of the Securities Act and, as

such, can be used without violating Section 5(b)(1) of the Securities Act).

Additionally, Congress recently required the Commission to extend securities offering reform to

closed-end funds (see Section 509 of the Economic Growth, Recovery Relief, and Consumer

Protection Act, Pub. L. 115–174, 132 Stat. 1296 (2018)), and to business development companies

(see Section 803 of the Small Business Credit Availability Act, Pub. L. 115–141, 132 Stat. 348

(2018)). The Commission proposed such rules in 2019. See Securities Offering Reform for

Closed-End Investment Companies, Investment Company Act Release No. 33427 (Mar. 20,

2019) [84 FR 14448 (Apr. 10, 2019)] (“Closed-End Offering Reform Release”).

See, e.g., Use of Electronic Media for Delivery Purposes, Investment Company Act Release No.

21399 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (“1995 Release”) (providing Commission

views on the use of electronic media to deliver information to investors, with a focus on

electronic delivery of prospectuses, annual reports, and proxy solicitation materials); Use of

Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of

Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of

1934, and Investment Company Act of 1940, Investment Company Act Release No. 21945 (May

9, 1996) [61 FR 24644 (May 15, 1996)] (“1996 Release”) (providing Commission views on

electronic delivery of required information by broker-dealers, transfer agents, and investment

advisers); Use of Electronic Media, Investment Company Act Release No. 24426 (Apr. 28, 2000)

[65 FR 25843 (May 4, 2000)] (“2000 Release”) (providing updated interpretive guidance on the

use of electronic media to deliver documents on matters such as telephonic and global consent,

issuer liability for website content, and legal principles that should be considered in conducting

online offerings).

See also Securities Offering Reform, supra note 18 (adopting rule 172 under the Securities Act

providing an “access equals delivery” framework under which issuers and intermediaries can

satisfy their final prospectus delivery obligations); Shareholder Choice Regarding Proxy

Materials, Investment Company Act Release No. 27911 (July 26, 2007) [72 FR 42222 (Aug. 1,

2007)] (“Shareholder Choice Regarding Proxy Materials”) (adopting rule amendments requiring

issuers to post their proxy materials on a specified website and provide shareholders with a notice

of internet availability of the materials); Optional Internet Availability of Investment Company

Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018) [83 FR 29158

(June 22, 2018)] (“Investment Company Shareholder Reports Release”) (adopting 17 CFR

270.30e-3 (new rule 30e-3 under the Investment Company Act) and related rule amendments that,

subject to conditions, provide certain registered investment companies, including registrants on

concerning investors’ preferences, the Commission proposed a summary prospectus framework

for variable contracts using summary and layered disclosure principles. 20

Overview of Final Rule and Rule and Form Amendments

We are adopting a new disclosure framework that, among other things, permits the use of

summary prospectuses for variable contracts, with additional information available to investors

online. To help investors make an informed investment decision, the new framework uses a

layered disclosure approach designed to provide investors with key information relating to the

contract’s terms, benefits, and risks in a concise and more reader-friendly presentation, with

access to more detailed information available online, or delivered in paper or electronic format

on request. We anticipate that the framework will improve investor understanding of variable

contracts. The mutual fund industry has widely adopted the use of summary prospectuses, and

we expect our proposed prospectus delivery approach similarly will be widely adopted by issuers

of variable contracts. 21

New rule 498A builds upon our experience creating a summary prospectus option for

mutual funds in 2009, but with certain differences intended to reflect the nature of variable

Forms N-3, N-4, and N-6, with an optional method to transmit shareholder reports by making

such reports and other materials accessible at a website address specified in a notice to investors).

For a discussion of the evolution of layered disclosure and the delivery of information to

investors, including the Commission’s and the staff’s investor testing efforts, outreach, and other

empirical research concerning investor preferences, see Proposing Release, supra note 6, at

Section I.B.2.

We estimate that as of December 31, 2018, approximately 93% of mutual funds and ETFs use

summary prospectuses. This estimate is based on EDGAR data for the number of mutual funds

and ETFs that filed a summary prospectus in 2018 (10,808) and the Investment Company

Institute’s estimated number of mutual funds and ETFs as of December 31, 2018 (11,656). See

Investment Company Institute, 2019 Investment Company Fact Book (2019), at 50, available at

https://www.ici.org/pdf/2019_factbook.pdf.

contracts. 22 Like the Commission’s mutual fund summary prospectus rule, the summary

prospectus under rule 498A is meant to highlight key information of variable contracts that we

believe will help an investor make an informed investment decision. 23

Because variable contracts typically include a number of optional benefits and underlying

investment options, a summary could not, by its nature, include all relevant aspects and details

regarding each of these contract features. The variable contract summary prospectus is designed

to be a succinct summary of the contract’s key terms and benefits and most significant risks,

making it easier to read and more understandable for investors. This summary prospectus will

serve as the cornerstone of a layered disclosure framework that alerts investors to the availability

of more detailed information in the statutory prospectus and in other locations, and will be

tailored to the unique aspects of these products. As a result, investors will have ready access to

key information in connection with an investment decision.

The main elements of the new disclosure framework include:

However, the final rule departs from rule 498 in requiring two separate types of summary

prospectuses. See infra Sections II.A.1 and II.A.2. We designed this framework to distinguish

the information we believe new and existing investors need, and to highlight the contract features

and risks that are particularly relevant to these two groups of investors, taking into account

information that we understand these investors may receive through other channels (e.g., as a

result of state insurance law, other regulatory requirements, and industry practice).

The mutual fund summary prospectus rule is designed to provide investors with “streamlined and

user friendly information that is key to an investment decision.” See Enhanced Disclosure and

New Prospectus Delivery Option for Registered Open-End Management Investment Companies,

Investment Company Act Release No. 28064 (Nov. 21, 2007) [72 FR 67790 (Nov. 30, 2007)]

(“2007 Summary Prospectus Proposing Release”), at Section I; see also Richard J. Wirth, What’s

Puzzling You…Is the Nature of Variable Annuity Prospectuses, 34 Western New England Law

Review 127 (2012) (“Informed decision-making demands that consumers have enough of an

understanding of what’s for sale and what trade-offs are being asked of them in order to make an

informed decision about whether or not to buy a product.”).

•

Option to use summary prospectus. 24 New rule 498A permits the use of two

distinct types of contract summary prospectuses: (1) initial summary prospectuses

covering variable contracts currently offered to new investors; and (2) updating

summary prospectuses for existing investors. The initial summary prospectus will

include certain key information about the contract’s most salient features,

benefits, and risks, presented in plain English in a standardized order. The

updating summary prospectus will include a brief description of certain changes

to the contract that occurred during the previous year, as well as a subset of the

information required to be in the initial summary prospectus. Certain key

information about the portfolio companies will be provided in both the initial

summary prospectus and updating summary prospectus.

•

Availability of variable contract statutory prospectus and other materials. 25 New

rule 498A requires the variable contract statutory prospectus, as well as the

contract’s statement of additional information (“SAI”), to be publicly accessible,

free of charge, at a website address specified on or hyperlinked in the cover of the

summary prospectus. An investor who receives a contract summary prospectus

may request the contract statutory prospectus and SAI to be sent in paper or

electronically, at no cost to the investor.

See infra Section II.A.

See infra Section II.A.5.

•

Optional method to satisfy portfolio company prospectus delivery requirements. 26

New rule 498A provides an optional method for satisfying portfolio company

prospectus delivery obligations by making portfolio company summary and

statutory prospectuses available online at the website address specified on or

hyperlinked in the variable contract summary prospectus, with certain key

information about the portfolio companies provided in the variable contract’s

summary prospectus. 27 Investors may request and receive those disclosures in

paper or electronically at no cost. This new option for satisfying portfolio

company prospectus delivery requirements is only available for portfolio

companies available as investment options through variable contracts that use

contract summary prospectuses.

•

Form amendments. 28 We are amending Forms N-3, N-4, and N-6—the

registration forms for variable contracts—to update and enhance the disclosure

regime for these investment products. 29 The amendments are intended to

consolidate certain summary information in a condensed presentation, reflect

See infra Section II.B.

This option will not apply to Form N-3 registrants, which do not have underlying portfolio

companies due to their single-tier investment company structure.

See infra Section II.C.

The Commission first adopted the registration form for variable annuities over 30 years ago, and

adopted the registration form for variable life insurance over 15 years ago. See Registration

Forms for Insurance Company Separate Accounts that Offer Variable Annuity Contracts,

Investment Company Act Release No. 14575 (June 14, 1985) [50 FR 26145 (June 25, 1985)]

(“Forms N-3 and N-4 Adopting Release”); Registration Form for Insurance Company Separate

Accounts Registered as Unit Investment Trusts That Offer Variable Life Insurance Policies,

Investment Company Act Release No. 25522 (Apr. 12, 2002) [67 FR 19848 (Apr. 23, 2002)]

(“Separate Accounts Offering Variable Life Release”).

industry developments (e.g., the prevalence of optional benefits in today’s

variable contracts), and otherwise improve disclosures provided to variable

contract investors.

Inline XBRL. 30 With respect to contracts currently offered to new investors,

•

registrants will be required to use the Inline XBRL format for the submission of

certain information. This requirement is intended to harness technology to

provide a mechanism for allowing investors, Commission staff, data aggregators,

financial analysts, and other data users to efficiently analyze and compare the

available information about variable contracts, as required by their particular

needs and circumstances.

•

Discontinued Variable Contracts. 31 We are taking the position that if an issuer of

a discontinued contract that is discontinued as of July 1, 2020 that provides

alternative disclosures does not file post-effective amendments to update a

variable contract registration statement and does not provide updated

prospectuses to existing investors, this would not provide a basis for enforcement

action so long as investors are provided with the alternative disclosures or

modernized alternative disclosures described below.

•

Other Amendments. 32 We are adopting certain technical and conforming

amendments to our rules to reflect the proposed new regime for variable contract

See infra Section II.D.

See infra Section II.E.

See infra Section II.F.

summary prospectuses. We are also adopting certain technical amendments to

rules relating to variable life insurance contracts, as well as rescinding certain

rules and forms.

Table 1 summarizes the various requirements—under the current prospectus delivery

regime, and under the new optional summary prospectus regime—for information to either be (1)

delivered to all investors, (2) made available online, or (3) delivered to those investors who so

request:

TABLE 1.

INFORMATION AVAILABLE TO VARIABLE CONTRACT INVESTORS

Contract Statutory

Prospectus

CURRENT PROSPECTUS

DELIVERY REGIME *

Delivered to all investors

Contract SAI

Available upon request

Contract Part C

Information

Not delivered to investors or

required to be available online, but is

filed with registration statement

(available on EDGAR)

Initial Summary

Prospectus

Updating Summary

Prospectus

Portfolio Company

Prospectuses

OPTIONAL SUMMARY PROSPECTUS

REGIME

Required to be available online and delivered (in

paper or electronic format) upon request

Required to be available online and delivered (in

paper or electronic format) upon request

Not delivered to investors or required to be available

online, but is filed with registration statement

(available on EDGAR)

N/A

Delivered to new investors

N/A

Delivered to existing investors

Delivered to all investors

Delivered to investors, or, if the new option to satisfy

portfolio company prospectus delivery is

relied-upon,** required to be available online and

delivered (in paper or electronic format) upon

request***

This column assumes that the contract at issue is not providing alternative disclosures to investors

in lieu of the statutory prospectus, as described in certain staff no action letters discussed below in

Section II.E.

See infra Section II.B.2.

***

Additionally, summary information about portfolio companies is available in the initial summary

prospectus and updating summary prospectus. See infra Sections II.A.1.c.ii(i) and II.A.2.c.ii(c).

II.

DISCUSSION

New Option to Use a Summary Prospectus for Variable Contracts

We are adopting, substantially as proposed, new rule 498A, which provides a new option

for a person to satisfy its prospectus delivery obligations for variable contracts under Section

5(b)(2) of the Securities Act by: (1) sending or giving to new investors key information

contained in a variable contract statutory prospectus in the form of an initial summary

prospectus; (2) sending or giving to existing investors each year a brief description of certain

changes to the contract, and a subset of the information in the initial summary prospectus, in the

form of an updating summary prospectus; and (3) providing the statutory prospectus and other

materials online. Under the new rule, a registrant (or the financial intermediary distributing the

variable contract) relying on the rule must send the variable contract statutory prospectus and

other materials to an investor in paper or electronic format upon request.

Commenters broadly supported our proposed layered disclosure approach. 33 One

commenter stated that “a layered disclosure approach, as set forth in proposed Rule 498A, will

See, e.g., Comment Letter of Brighthouse Financial (Feb. 15, 2019) (“Brighthouse Comment

Letter”); Comment Letter of the American Council of Life Insurers (Feb. 15, 2019) (“ACLI

Comment Letter”); Comment Letter of the Committee of Annuity Insurers (Feb. 14, 2019) (“CAI

Comment Letter”); Comment Letter of the Investment Company Institute (Feb. 15, 2019) (“ICI

Comment Letter”); Comment Letter of the Independent Directors Council (Feb. 15, 2019) (“IDC

Comment Letter”); Comment Letter of the Center for Capital Markets Competitiveness (Feb. 15,

2019) (“CCMC Comment Letter”); Comment Letter of Pacific Life Insurance Company (Feb. 15,

2019) (“Pacific Life Comment Letter”); Comment Letter of Jackson National Life (Feb. 15,

2019) (“Jackson Comment Letter”); Comment Letter of Donnelly Financial Solutions (Mar. 12,

2019) (“Donnelly Financial Comment Letter I”); Comment Letter of Donnelly Financial

Solutions (Oct. 24, 2019); Comment Letter of Capital Research and Management Company (Mar.

14, 2019) (“Capital Group Comment Letter”); Comment Letter of Transamerica (Mar. 15, 2019)

(“Transamerica Comment Letter”); Comment Letter of Lincoln Financial Group (Feb. 13, 2019)

(“Lincoln Comment Letter”); Comment Letter of the National Association of Insurance and

Financial Advisors (Feb. 14, 2019) (“NAIFA Comment Letter”); Comment Letter of TIAA (Feb.

15, 2019) (“TIAA Comment Letter”); Comment Letter of Wells Fargo Advisors (Mar. 14, 2019)

vastly improve investors’ experiences with respect to purchasing and owning variable

products.” 34 Another commenter observed that “the parallel approaches proposed in the rule

properly mirror the sensible, constructive approaches adopted in the mutual fund summary

disclosure initiative,” and predicted that such approach “can be expected to work equally well in

the context of variable contracts.” 35 A third commenter, finding that the proposal “appropriately

balances the goals of investor protection with a better investor experience,” endorsed the use of

variable contract summary prospectuses “as the lynchpin of a new variable contract disclosure

framework.” 36

Some commenters expressed reservations about key aspects of the proposal. One

commenter stated that the initial summary prospectus should provide the information needed to

make an investment decision without having to refer to other documents, 37 essentially rejecting

the layered disclosure framework. Three commenters were skeptical that certain aspects of the

proposed initial summary prospectus would result in better investor comprehension of how a

(“WFA Comment Letter”); Comment Letter of the Financial Services Institute (Mar. 15, 2019)

(“FSI Comment Letter”); Comment Letter of the Association for Advanced Life Underwriting

(Mar. 15, 2019) (“AALU Comment Letter”); Comment Letter of the Insured Retirement Institute

(Mar. 15, 2019) (“IRI Comment Letter I”).

One commenter asked us to clarify that all insurance products where the value of the contract will

vary depending on investment performance are included within the scope of this proposal. See

Comment Letter of the AARP (Mar. 15, 2019) (“AARP Comment Letter”). Because the scope of

our proposal was limited to variable contracts registered on Forms N-3, N-4, and N-6, it does not

extend to indexed annuities that register securities on Forms S-1 and S-3.

See CAI Comment Letter.

See ACLI Comment Letter.

See Brighthouse Comment Letter.

See Comment Letter of Mark Bowler (Feb. 11, 2019) (“M. Bowler Comment Letter”).

variable contract works, and recommended that we engage in investor testing to validate our

assumptions. 38

After considering the comments received on the proposal, we are adopting rule 498A and

the general summary prospectus framework substantially as proposed, with several modifications

reflecting considerations raised by commenters. As discussed in the Proposing Release, our

proposal built on our experience with both layered disclosure (under the mutual fund summary

prospectus) and integrated disclosure (enhanced over a decade ago with securities offering

reform for corporate issuers), as well as more than 20 years of experience with the use of the

internet as a medium to provide information to investors. 39 We drew on our investor testing

efforts in developing the proposed summary prospectus framework, and specifically solicited

feedback from investors and other market participants on hypothetical initial and updating

summary prospectuses, which we received in response to our “feedback form” and in numerous

comment letters. 40

See Comment Letter of the Consumer Federation of America (Feb. 27, 2019) (“CFA Comment

Letter”) (stating that the Commission should test the summary prospectuses to determine whether

the proposed disclosure effectively conveys key information to investors before finalizing the

rule); NAIFA Comment Letter; AARP Comment Letter. See also Comment Letter of Miles

Brooks (Nov. 28, 2019) (asserting the Commission should not regulate a disclosure regime on

variable contracts).

Proposing Release, supra note 6, at Section I.B.2.

See supra note 33. The Proposing Release was accompanied by a “Feedback Flier” that solicited

investor feedback about the primary components of the initial summary prospectus, which was

also generally supported by respondents. See, e.g., Comment Letter of Betsy Nedar (“Nedar

Comment Letter”) (Nov. 6, 2018); J. Topolski Comment Letter (Nov. 16, 2018); Anonymous

Comment Letter (Nov. 11, 2018) (“Anonymous Comment Letter I”); Anonymous Comment

Letter (Dec. 26, 2018) (“Anonymous Comment Letter II”); Velazquez Comment Letter (Feb. 8,

2019); Comment Letter of Bernard Mihayo (Nov. 5, 2019); Yinan Ying Comment Letter (Dec.

10, 2019).

We also received comments on whether the use of the summary prospectus should be

mandatory instead of voluntary as proposed. One commenter stated that the use of the summary

prospectus should be voluntary to give insurers the flexibility to tailor their disclosure practices

to best fit their situations. 41 Two commenters supported mandatory compliance to ensure that

variable contract investors receive summary disclosures to aid their investment decisions. 42

After considering such comments and evaluating our prior experience with the mutual

fund summary prospectus, we continue to believe that reliance on rule 498A should be optional.

This will give insurers the opportunity to gradually transition to the new summary prospectus

regime while minimizing disruption to their current registration and business processes.

Although approximately 93% of mutual funds currently use a summary prospectus, it took nearly

eight years after the adoption of the mutual fund summary prospectus framework for the industry

to reach that threshold. 43 We believe that insurers may similarly need a period of time to

transition to the new regime given the diversity of variable contracts (and corresponding

diversity of disclosure for variable contracts) and the fact that the variable contract summary

prospectus regime will differ from the mutual fund summary prospectus framework in several

key ways (e.g., the use of an initial and an updating summary prospectus, and the new layered

disclosure approach to satisfying portfolio company prospectus delivery obligations).

Some variable contracts offer few (or no) optional benefits and few investment options.

Because these contracts have fairly straightforward disclosure documents, the advantages of the

See ACLI Comment Letter.

See AARP Comment Letter; Comment Letter of Better Markets (Feb. 14, 2019) (“Better Markets

Comment Letter”).

See supra note 21.

summary prospectus regime may be less compelling for these products, as compared to more

complex variable products with numerous optional benefits and investment options (which tend

to have longer and more complicated prospectuses). Registrants will likely assess the relative

benefit of using a summary prospectus based on the types of products they offer and the length

of their current prospectuses—as well as the benefit of more concise disclosure to investors—

when evaluating whether to opt into the new layered disclosure regime. 44 An optional approach

also preserves flexibility for registrants that may not wish to undertake the costs of the transition

to a summary prospectus regime.

Given the almost universal adoption of the summary prospectus regime by mutual funds,

and the anticipated cost-savings and other efficiencies available to insurers that rely on the rule,

we do not at this time believe a mandatory approach is necessary to achieve the goals of the

variable contract summary prospectus regime. We intend to review the voluntary use of the

summary prospectus and to assess whether benefits to investors warrant a future mandate. 45

Initial Summary Prospectus

a. Overview

The new rule requires a person relying on the rule to send or give an initial summary

prospectus in connection with sales of variable contracts to new investors. 46 The initial summary

prospectus uses a layered disclosure approach that provides investors with key information

relating to the contract’s terms, benefits, and risks in a concise and more reader-friendly

See infra Section IV.C.1.

See 2009 Summary Prospectus Adopting Release, supra note 17, at 66-67.

Rule 498A(f)(1). For an initial purchase of a variable contract, the initial summary prospectus

must be “sent or given no later than the time of the carrying or delivery of the contract security.”

See infra Section II.A.4.

presentation, with access to more detailed information available online and electronically or in

paper format on request. 47 We designed the initial summary prospectus to simplify and

consolidate lengthy and complex disclosures, and to highlight aspects of the contract that may

not be emphasized in marketing materials and other disclosures. 48

b. Contracts That May Be Included in the Initial Summary Prospectus

As proposed, we are requiring the initial summary prospectus to only describe a single

contract that the registrant currently offers for sale. 49 Also as proposed, an initial summary

prospectus may describe more than one class of a currently offered contract. 50 For purposes of

the rule, we are adopting, as proposed, a definition of “class” to be a class of a contract that

varies principally with respect to distribution-related fees and expenses. 51

The Commission proposed these requirements for the initial summary prospectus because

aggregating disclosures for multiple contracts, or currently offered and no-longer-offered

One commenter, citing academic research, stated that to the extent summary disclosure reduces

information overload, it could, in turn, increase financial literacy. See ACLI Comment Letter.

This comment letter, together with other similar comment letters discussing the costs and benefits

of the proposed rulemaking, are discussed in greater detail in Section IV. See infra note 1038 and

accompanying and following text.

We believe simplicity and clarity are of heightened importance in a prospectus in connection with

an initial purchase decision for a variable contract because of the long-term nature and

complexity of these products. We also note that, unlike other investment products, variable

contract investors typically have a state-mandated “free look” opportunity to return the contract

for a full refund of premiums or purchase payments within a limited number of days following

contract issuance. See Proposing Release, supra note 6, at nn.65 and accompanying text.

Another unique aspect of variable contract disclosure practices is the wide variety of information

about the contract that we understand investors commonly receive throughout the lifecycle of the

contract. See Proposing Release, supra note 6, at nn.66-69 and accompanying text.

Rule 498A(b)(1).

Id.

See rule 498A(a).

features and options of a single contract, can hinder investors from distinguishing between

contract features and options that apply to them and those that do not. Currently, and under our

amendments to the registration forms, it is industry practice for registrants to describe multiple

contracts in a single prospectus (or multiple versions of a particular contract in a prospectus), or

include multiple prospectuses in a single registration statement. 52 We also understand that

certain contract prospectuses include disclosure about contract features and options that the

registrant may no longer offer to new investors.

We received mixed comments regarding this aspect of the proposal. One commenter

supported limiting the initial summary prospectus to a single contract currently offered for sale,

but to facilitate reader comprehension, urged us to further limit the initial summary prospectus to

only one class of a currently offered contract. 53 In contrast, three commenters urged us to allow

an initial summary prospectus to describe multiple variable contracts that differed in ways other

than distribution-related fees and expenses. 54 Their suggested approach would permit an initial

summary prospectus to describe all contracts currently offered for sale, regardless of how they

differed, including with respect to fees and expenses beyond traditional distribution-related fees

and expenses (e.g., administrative, insurance, and benefit charges), optional benefits, and other

See General Guidance to Variable Annuity, Variable Life, and Other Insurance Company

Investment Contract Registrants, SEC Staff No-Action Letter (Nov. 3, 1995), at Section I.4

(discussing industry practice). As discussed below, we are amending the registration forms to

permit insurers to include multiple contracts (or versions thereof) in a single statutory prospectus

and multiple prospectuses in a single registration statement subject to certain restrictions. See

infra text following note 598 (discussing the amended form instructions that provide a prospectus

may describe multiple contracts that are “essentially identical,” while a registration statement

may include multiple prospectuses if the contracts described in those prospectuses are

“substantially similar”).

See AARP Comment Letter.

See Transamerica Comment Letter; ACLI Comment Letter; CAI Comment Letter.

features. These commenters asserted that our proposal would require investors to review

multiple initial summary prospectuses to choose between different variable contracts, and

suggested that instead permitting multiple contracts to be described in a single document would

make it easier for investors to choose between contracts.

We are adopting this aspect of the rule as proposed. The initial summary prospectus is

designed to provide investors key information to facilitate an initial investment decision. If we

were to expand its scope as suggested by commenters, it could result in initial summary

prospectuses that disclose information about contracts and contract features and options not

available to the prospective investor. We continue to believe that requiring an initial summary

prospectus to describe only one contract will provide more effective disclosure by omitting

information that is not relevant to an investor’s investment decision.

Commenters raised the concern that our approach could result in investors reviewing

multiple initial summary prospectuses. 55 We believe, however, that an approach that results in

multiple initial summary prospectuses—where each is tailored to present key information about a

single contract—will more effectively facilitate an investment decision than a longer or more

complex document that may overwhelm investors with information that is not relevant to the

investment decision. 56 The summary prospectus regime is designed to reduce the volume and

content of variable contract disclosures that may make it difficult for some investors to find and

understand key information they need to make an investment decision. Describing multiple

Id.

See, e.g., AARP Comment Letter (“By permitting the disclosures to discuss more than one

contract and, indeed, even more than one class per contract, the information becomes

unorganized, unfocused, and difficult to understand.”).

contracts in a single initial summary prospectus, as some commenters suggest, conflicts with this

goal. Our approach also is consistent with requirements for mutual fund and exchange-traded

fund (“ETF”) summary prospectuses, where summary prospectuses may only present key

information as to a single fund. 57

c. Preparation of the Initial Summary Prospectus

The chart at the end of this section outlines the information required to appear in an initial

summary prospectus. Along with specifying required introductory disclosures on the outside

front cover page or the beginning of the initial summary prospectus, the new rule references

particular disclosure items from Forms N-3, N-4, and N-6 (as amended). 58 We are adopting,

largely as proposed, a standardized presentation to require certain disclosure items that we

believe will be most relevant to investors (such as the table that includes key information about

the contract and the contract overview section), to appear at the beginning of the initial summary

prospectus, followed by supplemental information. The required presentation could also

facilitate comparison of different variable contracts. 59

For example, a mutual fund may offer a suite of equity funds that share the same statutory

prospectus, but must provide a separate summary prospectus for each fund that has different

investment objectives, strategies and risks (e.g., large-cap, mid-cap, small-cap, emerging markets,

etc.). This reduces complexity and minimizes the likelihood of overwhelming investors with too

much information in a single document.

The amendments to Forms N-3, N-4, and N-6 that facilitate the summary prospectus content

requirements, as well as amend the content requirements for the statutory prospectus, are

generally discussed in more detail in Section II.C below. However, in order to better explain the

initial summary prospectus, we discuss new or amended items in the statutory prospectus, to the

extent they will also appear in the initial summary prospectus, in this Section II.A.1.

We understand that many investors purchase variable contracts through an intermediary and may

not directly compare competing products. A standardized order may nonetheless be useful for

investment professionals to compare the products they ultimately recommend to investors with

other products, as well as investors considering whether to purchase a new annuity contract to

replace an existing one. See infra note 194 and accompanying text. Having a more standardized

Largely as proposed, we are requiring an initial summary prospectus to only contain the

information specifically required, which must appear in the same order, and under the relevant

corresponding headings, as the rule specifies. 60 While we did not receive any comments

regarding the proposed order of the substantive contents of the initial summary prospectus, in a

change from the proposal, and as discussed below, we are reversing the order of the first two

sections, 61 and, for Forms N-3 and N-4 only, merging two sections together. 62 These changes

are designed to facilitate investor readership and to streamline the document.

Use of Illustrations and Examples

While not proposed, three commenters suggested that we permit the use of illustrations or

examples in summary prospectuses. 63 Illustrations and examples are frequently presented in

variable contract sales materials, and may be included in the statutory prospectus. 64

document may ultimately promote greater comparability across products, registrants, and

insurance institutions, which could lead to better investor understanding and increased

competition.

As discussed below in Section II.D, we are also adopting, as proposed, the requirement to use

Inline XBRL format for the submission of certain required disclosures in the variable contract

statutory prospectus with respect to contracts currently offered to new investors. The structured

data format will allow investors, Commission staff, data aggregators, financial analysts, and other

data users to more efficiently analyze and compare these products.

Rule 498A(b)(5). While the Commission did not propose (and we are not adopting) page limits

for the initial summary prospectus, these provisions are designed to require registrants to produce

a document that will present key information in a concise and clear way.

See infra Section II.A.1.c.ii.(a) (relocating “Important Information You Should Consider About

the Contract” before “Overview of the Variable Contract”); see also rule 498A(b)(5)(i) through

(ii).

See infra Section II.A.1.c.ii.(c) through (d) (merging the “Standard Death Benefit” into “Benefits

Under the Contract”); see also rule 498A(b)(5)(iv).

See Lincoln Comment Letter; Comment Letter of Cardozo School of Law Securities Arbitration

Clinic (Mar. 14, 2019) (“Cardozo Clinic Comment Letter”); Comment Letter of Benjamin G.

Baldwin, Jr. (Feb. 13, 2019) (“Baldwin Comment Letter”).

We are persuaded that illustrations and examples could assist investors in more readily

understanding potentially complex or lengthy narrative disclosures. Consequently, the final rule

and forms permit the inclusion of illustrations or examples in a summary prospectus to the extent

that they are responsive and limited to the particular statutory prospectus items required to be

included in the summary prospectus. 65 However, such illustrations and examples generally

should not, by their nature, quantity, or manner of presentation, obscure or impede understanding

of the information that is required to be included in the summary prospectus. 66

Terminology

Commenters broadly objected to the requirement to use only the headings and terms

specified in the proposed rule (and forms). 67 One commenter stated because the industry uses a

wide variety of terminology in contract prospectuses, marketing materials, and the contracts

themselves, investors may be confused by receiving an initial summary prospectus that uses

different terminology than related contract documents. 68 Several commenters identified specific

General Instruction C.3.(g) to Forms N-3, N-4, and N-6.

As guidance, we generally do not believe that illustrations or examples regarding the operation of

optional benefits should be included in the initial summary prospectus because the summary

prospectus disclosure requirements regarding those benefits are generally limited to a tabular

summary of those benefits. See rule 498A(b)(5)(iv) (providing initial summary prospectus

disclosure requirements for “(Other) Benefits Available Under the Contract” by referencing the

relevant item requirements from the particular registration statement forms). See also Item 11(a)

of amended Form N-3; Item 10(a) of amended Form N-4; and Item 11(a) of amended Form N-6.

See General Instruction C.3.(b) to amended Forms N-3, N-4, and N-6.

See CAI Comment Letter; Pacific Life Comment Letter; ACLI Comment Letter; Brighthouse

Comment Letter; Jackson Comment Letter; CCMC Comment Letter; ACLI Comment Letter;

Transamerica Comment Letter.

See CAI Comment Letter.

terms they believed should not be required. 69 Another commenter asked that we permit

registrants reasonable flexibility to use alternative terms that reflect the substance of the defined

terms in the proposed rule, noting that readability should be the top priority. 70 Commenters also

stated that providing flexibility in terminology would allow the industry to simplify the complex

language commonly used in variable product disclosures, 71 facilitate product evolution and

innovation, 72 and be consistent with current practice as permitted by the staff. 73 Instead of

prescribing specific terminology, four commenters asked that we prescribe only the content of

the disclosures, giving industry the flexibility to modify headings and terms to better convey

certain aspects of a variable contract and make them easier to understand, as long as such terms

are substantially similar in meaning to the terms used in the rule and forms and are clearly

defined in the prospectuses in which they appear. 74

We recognize that variable contract and other issuers may use terminology in their

disclosure documents other than that used in our rules and forms, and that in many instances, our

Several commenters objected to the terms “death benefit,” “mortality and expense risk charges,”

and “surrender charge.” See Comment Letter of Jackson National Life (Feb. 15, 2019) (“Jackson

Comment Letter”); CCMC Comment Letter. Others did not want to use “contract” on the

grounds that investors are used to “policy.” See Comment Letter of Ameritas Life Insurance

Corp. (Mar. 12, 2019) (“Ameritas Comment Letter”); ACLI Comment Letter. One insurer

objected to “living benefit rider” because “protected lifetime income benefit” resonates more with

investors. See Lincoln Comment Letter.

See ACLI Comment Letter.

See CAI Comment Letter; Pacific Life Comment Letter; Brighthouse Comment Letter; Jackson

Comment Letter.

See Brighthouse Comment Letter; Transamerica Comment Letter; ACLI Comment Letter; CAI

Comment Letter.

See ACLI Comment Letter.

See CAI Comment Letter; Pacific Life Comment Letter; Jackson Comment Letter; Brighthouse

Comment Letter.

rules and forms do not prescribe terminology. 75 After considering comments, we are modifying

the proposed rule and form requirements to give insurers the flexibility to describe their variable

contracts in a manner best suited to their products and business practices, while still requiring the

use of certain standardized headings in initial summary prospectuses to allow investors to easily

compare the features of different products.

The proposed amendments to the forms would have defined and used certain

terminology. However, contrary to certain commenters’ concerns, the forms, as proposed, would

not have required that registrants use the specific terminology in the forms in preparing a

registration statement, other than in certain legends. To respond to these commenters’ concerns,

we are adding a clarifying instruction to the forms that explicitly and broadly permits registrants

to use alternate terminology in preparing registration statements pursuant to the forms’ disclosure

requirements, so long as the alternate terminology clearly conveys the meaning of, or provides

comparable information as, the terms used in the forms. 76 Notwithstanding this instruction, we

are adding an additional instruction, which was not included in the proposed amendments to the

forms, that a registrant must prepare the Key Information Table using the headings and subheadings specified by the form. 77

Because the initial summary prospectus (and as discussed below, the updating summary

prospectus) draw from disclosures in the statutory prospectus, insurers will similarly have

However, in certain instances our rules and forms do prescribe specific terminology. See, e.g.,

Form CRS (generally requiring that investment advisers and broker-dealers use specific headings

when responding to each item).

See General Instruction C.3.(d)(ii) of Forms N-3, N-4, and N-6. See also infra note 598 and

accompanying text.

See General Instruction 1(a) to Item 2 of Forms N-3, N-4, and N-6. We discuss the Key

Information Table below in Section II.A.1.c.ii.(a).

flexibility in preparing those documents with one exception. With respect to the initial summary

prospectus, we are generally requiring, as proposed, that the initial summary prospectus use the

standardized headings required by the rule. 78 We believe that the use of standardized headings

will provide a consistent framework to allow investors to more easily navigate through variable

product summary prospectuses and also facilitate the ability of investors to compare information

across different variable contract products.

Commenters generally objected to the proposed use of “surrender charges” and “death

benefits” in the initial summary prospectus headings. 79 Regarding “surrender charges,” we

believe that the term “withdrawal” both sufficiently encompasses surrenders and other types of

withdrawals and is a more intuitive term for investors, and have modified the heading regarding

surrenders and withdrawals to no longer require the term “surrender.” 80 We decline, however, to

permit the use of alternate terms for “death benefits” in the case of initial summary prospectuses

for variable life insurance, because we believe that “death benefits” is a more intuitive term than

“legacy benefits” or other terms. 81 Additionally, the terms “mortality and expense risk charges”

However, registrants are provided with limited flexibility as to certain bracketed terms. For

example, information about buying a contract must be disclosed under the heading “Buying the

[Contract].” Registrants could substitute “Policy” for the bracketed term “Contract.” See rule

498A(b)(5)(v).

See Jackson Comment Letter; CCMC Comment Letter.

See rule 498A(b)(5)(vii) (requiring the heading “Making Withdrawals: Accessing the Money in

Your [Contract]” when disclosing the information required by Item 13(a) of Form N-3, Item

12(a) of Form N-4, or Item 12(a) of Form N-6).

Similarly, we are modifying the sub-heading in the Key Information Table regarding surrenders

and withdrawals to eliminate the proposed use of the term “surrenders.” See Item 2 of Forms N3, N-4, and N-6. We discuss the Key Information Table below in Section II.A.1.c.ii.(a).

Although information about standard death benefits offered by variable life insurance contracts

must be disclosed under the heading “Standard Death Benefits,” the disclosures provided under

that heading could, for example, explain that “death benefits” are referred to as “legacy benefits”

and “living benefit rider” do not appear in the standardized headings required by the rule, so

insurers will have flexibility with respect to those terms.

TABLE 2. OUTLINE OF THE INITIAL SUMMARY PROSPECTUS

Heading in Initial Summary

Prospectus

Cover

Page

Content

Identifying Information

Item of

Amended

Form N-3

Item of

Amended

Form N-4

Item of

Amended

Form N-6

Legends

EDGAR Contract Identifier

Table of Contents (optional)

Important Information You

Should Consider About the

[Contract]

Overview of the [Contract]

Standard Death Benefits

10(a)

[Other] Benefits Available

Under the [Contract]

Buying the [Contract]

How Your [Contract] Can

Lapse

Making Withdrawals:

Accessing the Money in Your

[Contract]

Additional Information About

Fees

Appendix: [Investment

Options/Portfolio Companies]

Available Under the [Contract]

11(a)

10(a)

11(a)

12(a)

11(a)

9(a)-9(c)

14(a)-14(c)

13(a)

12(a)

18 or 19 82

under the contract and could use the term “legacy benefits” in providing the disclosures required

under that heading. See rule 498A(b)(5)(iii).

Registrants on Form N-3 may omit the Appendix specified by Item 18 of amended Form N-3, and

instead provide the more detailed disclosures about the investment options offered under the

contract required by Item 19 of amended Form N-3. See infra note 788 and accompanying text.

Cover Page and Table of Contents

Identifying Information. We are adopting, largely as proposed, the requirement that the

following information appear on the front cover page or the beginning of the initial summary

prospectus:

•

The depositor’s name;

•

The name of the contract, and the class or classes if any, to which the initial summary

prospectus relates;

•

A statement identifying the initial summary prospectus as a “Summary Prospectus for

New Investors”; and

•

The approximate date of the first use of the initial summary prospectus. 83

Several commenters suggested that instead of requiring the document to be identified as a

“Summary Prospectus,” we should permit different titles, such as “Key Information Document”

or “Summary Information.” 84 A prospectus, however, is a legal term with specific legal

implications. It is also a term that is understood in the marketplace. We believe it is important

that investors understand that an initial summary prospectus is, in fact, a prospectus, and that it

therefore contains important required regulatory disclosures. However, in a change from the

proposal, the cover page will not be required to include the registrant’s name. We agree with a

commenter’s suggestion that the registrant’s name is of limited value to investors because it is

Rule 498A(b)(2)(i) through (iv).

See, e.g., NAIFA Comment Letter; Comment Letter of VIP Working Group (Dec. 4, 2018) (“VIP

Working Group Comment Letter”); Comment Letter of Jack Breacher (Jan. 27, 2019) (“Breacher

Comment Letter”).

largely a legal convention, 85 and believe investors are more likely to be interested in the names

of the depositor (or insurer) and the variable contract.

Legends. We are requiring, largely as proposed, the cover page or beginning of the initial

summary prospectus to include the following legends:

This Summary Prospectus summarizes key features of the [Contract]. Before you invest,

you should also review the prospectus for the [Contract], which contains more

information about the [Contract’s] features, benefits, and risks. You can find this

document and other information about the [Contract] online at [___]. You can also

obtain this information at no cost by calling [____] or by sending an email request to

[___]. 86

You may cancel your [Contract] within 10 days of receiving it without paying fees or

penalties. In some states, this cancellation period may be longer. Upon cancellation, you

will receive either a full refund of the amount you paid with your application or your total

contract value. You should review the prospectus, or consult with your investment

professional, for additional information about the specific cancellation terms that apply. 87

See VIP Working Group Comment Letter (stating that the separate account name “is jargon and

an accounting fiction”). In addition, mutual funds are not required to include the registrant’s

name on the summary prospectus cover page.

We are making a conforming change to the cover page requirements for the updating summary

prospectus. See infra Section II.A.2.c.i.

The legend is required to provide an internet address, other than the address of the Commission’s

electronic filing system, toll-free telephone number, and email address that investors can use to

obtain the statutory prospectus and other materials, request other information about the variable

contract, and make investor inquiries. Rule 498A(b)(2)(v)(B).

The website address must be specific enough to lead investors to a direct link to the statutory

prospectus and other required information, rather than to the home page or another part of the

website. The website could host other relevant disclosure documents with prominent links to

each required document. Id.

The legend could indicate, if applicable, that the statutory prospectus and other information are

available from a financial intermediary (such as a broker-dealer) through which the contract may

be purchased or sold. Id.

For purposes of this requirement, documents available on the website address must be publicly

accessible and free of charge. Rule 498A(h)(1); see also infra Section II.A.5.

The paragraph of the legend regarding cancellation of the contract may be omitted if not

applicable. If this paragraph is included in the legend, the paragraph must be presented in a

manner reasonably calculated to draw investor attention to that paragraph. See infra note 95.

Additional general information about certain investment products, including [variable

annuities/variable life insurance contracts], has been prepared by the Securities and

Exchange Commission’s staff and is available at Investor.gov. 88

These legends are designed to provide identifying information about the variable contract

to which the initial summary prospectus relates, as well as certain general information applicable

to all variable contracts. 89 Pursuant to the requirements of new rule 30e-3, 90 the initial summary

prospectus may include the legend designed to alert investors that beginning on a specified date,

shareholder reports for Form N-3 variable annuities and for portfolio companies available under

Form N-4 variable annuity and Form N-6 variable life insurance contracts will no longer be sent

by mail (unless paper copies are specifically requested), and will instead be posted on a website,

subject to notification by mail of their location and availability. 91

One commenter stated that the initial summary prospectus would be more approachable if

the cover page had more white space with fewer legal disclaimers and suggested that we

Rule 498A(b)(2)(v). The Commission’s Office of Investor Education and Advocacy maintains

the website as an online resource to help investors make sound investment decisions and avoid

fraud. The website includes investor bulletins, alerts, guidance and tools designed to assist

investors, including those considering variable contracts, in obtaining additional information and

resources on understanding and managing their investments. See, e.g., Updated Investor Bulletin:

Variable Annuities (Oct. 30, 2018), available at https://www.investor.gov/additionalresources/news-alerts/alerts-bulletins/updated-investor-bulletin-variable-annuities; Investor

Bulletin: Variable Life Insurance (Oct. 30, 2018), available at

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletinvariable-life-insurance.

A registrant will be able to modify the legends so long as the modified statements contain

comparable information. Rule 498A(b)(2)(v)(A).

Rule 30e-3; see also Investment Company Shareholder Reports Release, supra note 19. This rule

became effective January 1, 2019.

Rule 498A(b)(2)(v)(E) through (F); see also rule 498A(b)(2)(v)(B) (requiring, if applicable, cover

page legend to include the website address required by rule 30e-3, if different from the website

address provided for variable contract and related documents). The legends required by rule 30e3 will be removed from variable contract registration forms on January 1, 2022.

eliminate the legend urging investors to review the statutory prospectus before investing and

describing how to obtain further information about the contract. 92 We are retaining the legend

and have streamlined it in consideration of this comment, but are otherwise adopting the legend

largely as proposed because we believe that it concisely informs investors that the statutory

prospectus is available and how to obtain it. Providing investors information about the statutory

prospectus and where to find it will facilitate the layered disclosure approach we are adopting in

this document.

Another commenter stated that because the free look period is one of the most crucial

rights available to variable contract purchasers, investors should receive a separate, one-page

disclosure describing this unique, time-limited revocation right. 93 The commenter also

suggested that we require insurers to draw more attention to free look disclosure by requiring it

to be in a larger font size, bolded, and boxed.

We are not requiring insurers to provide a stand-alone document describing the free look

period, but rather are requiring, as proposed, that the legend on the cover page or beginning of

the summary prospectus retain all disclosures of key information in one document. We also

understand that state laws typically mandate free look disclosures in the variable contract

application, investor education materials (e.g., the NAIC Buyer’s Guide), and the variable

contract itself, and investors therefore already receive multiple notices regarding this unique

revocation right. We agree, however, that this is important information that should be

highlighted to investors because it is unique to variable contracts and time limited. We are

See WFA Comment Letter.

See AARP Comment Letter.

therefore revising the rule to require that insurers present the “free-look” legend in a manner

reasonably calculated to draw an investor’s attention. 94 In response to comments, the new rule

also clarifies that this legend is required only if applicable. 95

Taking into account the comments urging that we streamline the legends where possible,

we are relocating one legend and eliminating two others. Specifically, the Commission proposed

that, if any information is incorporated by reference into the initial summary prospectus, the front

cover page would include a legend with certain disclosures related to that information. 96

Incorporation by reference is a technical legal doctrine that may not be understandable to many

investors. To reduce the length of the legends on the cover page of the initial summary

prospectus, we are relocating this legend to the back cover page or last page of the initial

summary prospectus. 97 However, we are not eliminating the legend because our rules on

incorporation by reference require registrants to provide disclosure about what information is

incorporated into a document. 98

We are also eliminating the proposed legend stating “You should read this Summary

Prospectus carefully, particularly the section titled Important Information You Should Consider

Rule 498A(2)(v)(C).

See rule 498A(b)(2)(v)(C); see also ACLI Comment Letter (stating that some types of group

annuity contracts, such as those used to fund Section 403(b) retirement plans, are not required to

have a free look provision under state law).

Proposed rule 498A(b)(2)(vi)(C).

Rule 498A(b)(3)(i).

See, e.g., 17 CFR 230.411(e) (rule 411(e) under the Securities Act); 17 CFR 270.0-4(e) (rule 04(e) under the Investment Company Act).

About the Contract.” We believe that legend is no longer necessary because the section

referenced by that legend is now the first item in the initial summary prospectus. 99

One commenter suggested that we remove the proposed legend stating that the Securities

and Exchange Commission has not approved or disapproved of the contract or passed upon the

accuracy or adequacy of the disclosure in the summary prospectus and that any contrary

representation is a criminal offense, on the basis that this legend was “legalese.” 100 We agree

that this legend may not communicate as effectively as the other legends and that removing it

will streamline the cover page, potentially increasing the likelihood that investors will read the

remaining legends. Removing the requirement to include that legend also treats variable contract

summary prospectuses similarly to mutual fund summary prospectuses, which are permitted, but

not required, to include that legend on their cover page.

EDGAR Contract Identifier. We are adopting, as proposed, the requirement to include

the contract’s EDGAR contract identifier on the bottom of the back cover page or last page of

the initial summary prospectus in a type size smaller than that generally used in the prospectus

(e.g., 8-point modern type). 101 This requirement is intended to enable Commission staff and

others to more easily link the initial summary prospectus with other filings associated with the

contract. We received no comments regarding the EDGAR contract identifier.

See text following note 121.

100

See Breacher Comment Letter.

101

Rule 498A(b)(3)(ii); see also Proposing Release, supra note 6, at n.87 (describing an EDGAR

contract identifier).

Table of Contents. Likewise, we are adopting, as proposed, the rule provision permitting

an initial summary prospectus to include a table of contents. 102 A table of contents must show

the page number of the various sections or subdivisions of the summary prospectus, and

immediately follow the cover page in any initial summary prospectus delivered electronically. 103

We received no comments on this aspect of the proposal.

ii.

Content of the Initial Summary Prospectus

We are adopting, generally as proposed but with some modifications, specifications in the

rule regarding the content and order required in an initial summary prospectus. 104 An initial

summary prospectus must contain the information required by the rule, and only that

information, in the order specified by the rule. 105 Adhering to these content requirements is one

condition that an initial summary prospectus must satisfy in order to be deemed to be a

prospectus that is permitted under Section 10(b) of the Securities Act and Section 24(g) of the

Investment Company Act for the purposes of Section 5(b)(1) of the Securities Act. 106

102

Rule 498A(b)(4).

103

17 CFR 230.481(c) (Rule 481(c)).

104

Rule 498A(b)(5); see also Section II.A.1.c.

105

Id.

106

Rule 498A(b); see also infra Section II.A.4.

Section 10(b) of the Securities Act authorizes the Commission to adopt rules deemed necessary or

appropriate in the public interest or for the protection of investors that permit the use of an

“omitting prospectus” for the purposes of Section 5(b)(1) that omits or summarizes information

contained in the statutory prospectus. Section 24(g) of the Investment Company Act authorizes

the Commission to permit the use of a prospectus under Section 10(b) of the Securities Act to

include information the substance of which is not included in the statutory prospectus. 15 U.S.C.

77j(b); 15 U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g); see also 2009 Summary Prospectus Adopting

Release, supra note 17, at n.70.

Key Information Table

The initial summary prospectus will include a table (the “Key Information Table”) that

will provide a brief description of key facts about the variable contract in a specific sequence and

in a standardized presentation that is designed to be easy to read and navigate. 107 Specifically, it

will include a summary of five topic areas: (1) fees and expenses; (2) risks; (3) restrictions; (4)

taxes; and (5) conflicts of interest. This is intended to highlight, in a consolidated location,

important considerations related to these products, including certain unique aspects of the

variable contract that might be unfamiliar to investors who have experience with mutual funds or

other types of investment products. 108 We are adopting the Key Information Table substantially

as proposed, with some modifications made in response to comments.

Commenters were broadly supportive of the proposed Key Information Table, 109 which

was identified by respondents to the Feedback Flier as the “most useful” section in the

hypothetical initial summary prospectus that accompanied the Proposing Release. One

commenter said the information in the Key Information Table was most relevant to investors,

107

See rule 498A(b)(5)(i); Item 2 of Forms N-3, N-4, and N-6.

108

As discussed in the Proposing Release, we considered investor complaints received by the

Commission’s Office of Investor Education and Advocacy and the results of the 2012 Financial

Literacy Study. See text accompanying note 1041 (regarding investor complaints). Office of

Investor Education and Advocacy of the U.S. Securities and Exchange Commission, Study

Regarding Financial Literacy Among Investors (Aug. 2012), available at

https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (“2012 Financial

Literacy Study”). We also considered various regulatory and industry sources. See, e.g., FINRA

Rule 2330(b)(1)(A)(i) (variable annuity investors must be informed, “in general terms, of various

features of deferred variable annuities, such as the potential surrender period and surrender charge;

potential tax penalty if consumers sell or redeem deferred variable annuities before reaching the

age of 59½; mortality and expense fees; investment advisory fees; potential charges for and

features of riders; the insurance and investment components of deferred variable annuities; and

market risk”).

109

See, e.g., ACLI Comment Letter; CAI Comment Letter.

particularly if standardized to compare annuities, 110 while another noted approvingly that it

broke the information down in a simplified way. 111

Given the positive response to the Key Information Table, in a change from the proposal,

we are relocating it so it will be the first substantive section of the initial summary prospectus,

followed by the Overview of the Contract instead of the second section following Overview of

the Contract, as proposed. We believe that investors of different levels of financial

sophistication may benefit from receiving this information early in the initial summary

prospectus, as it was designed to provide a contextual baseline to help inform investors’

understanding of disclosure about more detailed aspects of the variable contract that are

described later on.

The Key Information Table includes a number of prescribed disclosures and is designed

to complement the “Overview” section, discussed below. As proposed, we are placing these two

disclosure sections at the beginning of the initial summary prospectus because we believe they

contain certain basic information that is critical for variable contract investors to read. We are

also requiring, as proposed, that this information be provided in a standardized tabular

presentation because we believe that, as compared to the narrative-type presentation of

corresponding disclosures in the statutory prospectus, a summary tabular presentation will be

easier to read and better convey the importance of the information to investors. 112 This

110

See Comment Letter of Christopher Viscomi (Dec. 4, 2018).

111

See Comment Letter of Anthony Harrison (Dec. 7, 2018).

112

As discussed in the Proposing Release, we considered mutual fund disclosure research that

supported the view that a tabular presentation would be an effective disclosure delivery method.

See, e.g., John Kozup, Elizabeth Howlett, & Michael Pagano, The Effects of Summary

Information on Consumer Perceptions of Mutual Fund Characteristics, The Journal of Consumer

presentation may also facilitate comparisons of certain disclosure topics among variable contract

prospectuses.

We are requiring, as proposed, that a registrant provide the Key Information Table under

the heading “Important Information You Should Consider About the [Contract].” We are not

requiring the proposed legend that would have followed this heading, because we believe that

legend is largely redundant with similar language on the cover page or beginning of the summary

prospectus. 113

As proposed, specified headings are required for each of the five topic areas included in

the table, and under each heading will be two columns. The left column lists the required

disclosure line-items for each of the five topic areas, and the right column provides a brief

description for each corresponding line-item, according to the respective instructions for each

proposed line-item. Registrants will also provide a cross-reference to the location in the

statutory prospectus where further information can be found for each line-item. 114 One

commenter expressed a preference for allowing registrants the discretion to use a one or two

Affairs 42, 37-59 (2008) (concluding that summary information, particularly using graphical

presentation, is an effective way to facilitate the processing of information for investors

evaluating mutual funds).

Experts in disclosure effectiveness for consumer-facing communications also have encouraged

the use of a “strong design grid” (such as the tabular presentation we propose) to clarify concepts

to consumers and to organize disclosure elements. See, e.g., Susan Kleimann, Making

Disclosures Work for Consumers, Presentation to the SEC’s Investor Advisory Committee (June

14, 2018), available at https://www.sec.gov/spotlight/investor-advisory-committee2012/iac061418-slides-by-susan-kleimann.pdf (“Kleimann Presentation”).

113

We proposed that the following legend would precede the Key Information Table: “An

investment in the Contract is subject to fees, risks, and other important considerations, some of

which are briefly summarized in the following table. You should review the prospectus for

additional information about these topics.” See also text following supra note 85 (discussing the

legend that appears on the cover page or beginning of the summary prospectus).

114

See infra text following note 201.

column format based on specific formatting and design preferences. 115 While we recognize there

are many ways to effectively provide the required information, requiring all registrants to adhere

to the same presentation standards facilitates comparability. The overall format of the Key

Information Table is depicted below:

FEES AND EXPENSES

Charges for Early

Withdrawals

Transaction

Charges

Ongoing Fees and

Expenses (annual

charges)

RISKS

Risk of Loss

Not a Short-Term

Investment

Risks Associated

with Investment

Options

Insurance

Company Risks

RESTRICTIONS

Investment

Options

115

See ACLI Comment Letter (stating that “[t]he priority should emphasize readability and clarity of

presentation, rather than stipulating the number of appropriate columns.”).

Optional Benefits

TAXES

Tax Implications

CONFLICTS OF INTEREST

Investment

Professional

Compensation

Exchanges

(i) Fees and Expenses

Variable contracts typically have multiple layers of fees, expenses, and charges that can

be confusing to investors. While the Fee Table currently required in variable contract

prospectuses provides comprehensive fee and expense information, 116 that information is

frequently presented over a span of two or more pages when a prospectus is printed on paper. 117

We believe that investors may benefit from a shorter, more tailored discussion in the Key

Information Table that is intended to convey how an investor’s elections under the contract (e.g.,

as to classes, optional benefits, portfolio companies, etc.) will impact the fees and expenses he or

she will experience under his or her contract. 118 As discussed below, we are requiring, as

116

See Item 3 of current Forms N-3, N-4, and N-6 (“Fee Table”).

117

See VIP Working Group Comment Letter (observing that the Fee Tables in some statutory

prospectuses “[a]re quite long (pushing 7 pages) . . . [one] has a fee table with its own table of

contents.”).

118

Although the presentation of fees and expenses in the Key Information Table is shorter and more

tailored relative to what is included in the Fee Table, many of the calculations and instructions in

the Key Information Table directly reference parallel provisions in the Fee Table. This should

proposed, that the initial summary prospectus also include the Fee Table from the statutory

prospectus. 119 This framework will allow an investor to determine the level of fee information

that best suits his or her informational needs.

We received mixed comments regarding the proposed Key Information fee tables. One

commenter approved of the summary fee tables, stating “they are well‐conceived.” 120 Two

commenters opposed presenting fee information in the Key Information Table (and certain other

sections of the initial summary prospectus) as repetitive and potentially confusing to investors,

and instead recommended that all fee and expense information be disclosed in a single location

in the initial summary prospectus (i.e., the full Fee Table, described in the section titled

“Additional Information About Fees.”). 121 One commenter stated that numerical fee information

should not be in the Key Information Table because the investor would not have sufficient

context to understand specific dollar figures or percentages at that point of the document, and

that a narrative explanation of the types of fees and expenses associated with the investment,

accompanied by a cross-reference to the Fee Table, would be most useful to investors. 122

increase efficiency and comparability between the disclosures, and also help ensure that updates

and amendments to the calculations and instructions in the Fee Table are appropriately reflected

in the Key Information Table.

119

See infra Section II.A.1.c.ii.(h).

120

See VIP Working Group Comment Letter. In addition, almost all of the respondents to our

Feedback Flier agreed that the examples reflecting how much an investor would pay for a

variable annuity, including upfront fees and future costs were clear.

121

See CAI Comment Letter; Lincoln Comment Letter; see also CFA Comment Letter (expressing

skepticism that most investors would be able to pull together disparate information about the

contract features and fees that is scattered throughout the initial summary prospectus to make an

informed choice).

122

See CAI Comment Letter.

While we acknowledge that some fee information presented in the Key Information Table

may be duplicative of information in the Fee Table, we believe that this is consistent with our

general layered disclosure approach. Investors can receive preliminary fee-related information in

the Key Information Table, and more detailed information in the Fee Table later in the

document. Moreover, we are not persuaded, as one commenter suggests, that providing only a

narrative description of the charges, without corresponding numerical costs, would as effectively

communicate to new investors the costs associated with a variable product as a presentation that

includes numeric information. Accordingly, we are adopting, as proposed, the requirement to

include specific dollar figures and percentages in the Key Information Table.

Charges for Early Withdrawals. It is important that investors understand that if they

make a withdrawal in the first several years following an investment in their contract, they may

pay a significant charge that will reduce the value of their investment. We believe, however, that

investors frequently do not understand, or may be surprised by, surrender charges associated

with early withdrawals. 123 For that reason, the Commission proposed that the Key Information

Table require information intended to alert investors about the potential impact of surrender

charges imposed on early withdrawals.

Comments were mixed on this issue. Two commenters urged us to de-emphasize the

surrender charges in the summary prospectus, suggesting that their prominence overemphasizes

the risk they present. 124 However, another commenter stressed the need for prominent disclosure

123

The Commission’s Office of Investor Education and Advocacy frequently receives investor

inquiries about variable contract surrender charges, suggesting that many investors may be

confused about how surrender charges work.

124

See VIP Working Group Comment Letter; NAIFA Comment Letter.

of surrender charges, stating that older investors might not understand that long surrender periods

may limit their ability to access money in their account. 125 Other commenters requested more

flexibility in the terminology used for this heading, and objected to the use of the term “surrender

charges.” 126

Given the consequences of misunderstanding the impact of a surrender charge for early

withdrawals, we are requiring, largely as proposed, the first line-item in the table, “Charges for

Early Withdrawals,” to state that if the investor withdraws money from the contract within [x]

years following his or her last premium payment, he or she will be assessed a surrender charge.

This statement will include the maximum surrender charge, and the maximum number of years

that a surrender charge may be assessed since the last payment was made under the contract. 127

In response to commenters’ concerns regarding the term “surrender charges,” we believe that the

term “withdrawal” both sufficiently encompasses surrenders and other types of withdrawals and

is a more intuitive term for investors, and have modified the heading accordingly.

In addition, we are requiring, as proposed, an example of the maximum surrender charge

an investor could pay (in dollars) under the contract assuming a $100,000 investment (e.g., “[i]f

you make an early withdrawal, you could pay a surrender charge of up to $9,000 on a $100,000

investment.”). 128 The Commission proposed to use $100,000 as the basis for the surrender

125

See AARP Comment Letter.

126

See supra note 79.

127

See rule 498A(b)(5)(i); see also Instruction 2(a) to Item 2 of Forms N-3, N-4, and N-6. The

maximum surrender charge must be expressed as a percentage of the purchase payment or

premium or the amount surrendered, whichever is applicable.

128

Id.

charge example because the value of the average variable annuity contract exceeds $100,000. 129

For purposes of the Key Information Table, we believe that providing a dollar figure may better

communicate to investors the impact of surrender charges than a surrender charge schedule that

shows the applicable surrender charge per year as a percentage, as reflected elsewhere in the

document. 130

One commenter objected to a surrender charge example in the Key Information Table

based on an assumed investment of $100,000, 131 while several others generally opposed using

$100,000 as the basis for any fee examples in the initial summary prospectus, preferring the

current $10,000 assumed investment level. 132 As we noted in the Proposing Release, $100,000

more closely approximates the current average value of a variable annuity, and therefore we

continue to believe that figure is more likely to result in cost projections that align with actual

investor expectations and experience. 133 For this reason, and as discussed in more detail below,

we are requiring $100,000 as the baseline investment assumption for all fee examples in a

variable contract prospectus, including the Key Information Table’s surrender charge

example. 134

129