# Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-05526 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 1, 2020 - **Citation:** 85 FR 25964 ## Text 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 CFR citation (17 CFR) Organization; Conduct and Ethics; And Information and Requests §§ 200.1 through 200.800. Section 800 § 200.800. Securities Act of 1933 (“Securities Act”): 1 Rule 159A § 230.159A. Rule 431 § 230.431. Rule 482 § 230.482. Rule 485 § 230.485. Rule 496 § 230.496. Rule 497 § 230.497. Rule 498 § 230.498. Form N-14 § 239.23. Regulation S-T §§ 232.10 through 232.501. Rule 11 § 232.11. Rule 405 § 232.405. Securities Exchange Act of 1934 (“Exchange Act”): 2 Rule 14a-16 § 240.14a-16. Rule 14a-101 § 240.14a-101. Investment Company Act of 1940 (“Investment Company Act”): 3 Rule 0-1 § 270.0-1. Rule 6c-7 § 270.6c-7. Rule 6c-8 § 270.6c-8. Rule 6e-2 § 270.6e-2. Rule 6e-3 (former rule 6e-3(T)) § 270.6e-3. Rule 8b-1 § 270.8b-1. Rule 11a-2 § 270.11a-2. Rule 14a-2 § 270.14a-2. Rule 26a-1 § 270.26a-1. Rule 27i-1 (former rule 27c-1) § 270.27i-1. Securities Act and Investment Company Act: Form N-3 §§ 239.17a and 274.11b. Form N-4 §§ 239.17b and 274.11c. Form N-6 §§ 239.17c and 274.11d. 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. 3 15 U.S.C. 80a et seq. Finally, the Commission is rescinding: Commission reference CFR citation (17 CFR) Investment Company Act: Rule 26a-2 § 270.26a-2. Rule 27a-1 § 270.27a-1. Rule 27a-2 § 270.27a-2. Rule 27a-3 § 270.27a-3. Rule 27d-2 § 270.27d-2. Rule 27e-1 § 270.27e-1. Rule 27f-1 § 270.27f-1. Rule 27g-1 § 270.27g-1. Rule 27h-1 § 270.27h-1. Form N-27E-1 § 274.127e-1. Form N-27F-1 § 274.127f-1. Form N-27I-1 § 274.302. Form N-27I-2 § 274.303. Securities Act and Investment Company Act: Form N-1 §§ 239.15 and 274.11. TABLE OF CONTENTS I. Introduction A. Background B. Overview of Final Rule and Rule and Form Amendments II. Discussion A. New Option to Use a Summary Prospectus for Variable Contracts 1. Initial Summary Prospectus 2. Updating Summary Prospectus 3. Interim Amendments to Contract Statutory Prospectuses 4. Legal Effect of Use of Summary Prospectus for Variable Contracts 5. Online Accessibility of Contract Statutory Prospectus and Certain Other Documents Relating to the Contract 6. Other Requirements for Summary Prospectus and Other Contract Documents 7. Incorporation by Reference 8. Filing Requirements for the Summary Prospectus 9. Defined Terms in Final Rule B. Optional Method To Satisfy Portfolio Company Prospectus Delivery Requirements 1. Current Delivery Practices for Portfolio Company Prospectuses 2. New Option To Satisfy Prospectus Delivery Requirements C. Amendments to Registration Forms 1. General Instructions 2. Part A (Information Required in a Prospectus) 3. Part B (Information Required in a Statement of Additional Information) 4. Part C (Other Information) 5. Guidelines D. Inline XBRL E. Discontinued Variable Contracts 1. Background 2. Comments Received on Proposal 3. Commission Position on Existing Contracts Whose Issuers Provide Alternative Disclosures to Investors 4. Commission Declines To Adopt Going-Forward Relief F. Technical and Conforming Amendments to Other Aspects of the Regulatory Framework for Variable Contracts G. Compliance Dates III. Other Matters IV. Economic Analysis A. Introduction B. Economic Baseline 1. Overview of Variable Products Market 2. Statutory and Regulatory Disclosure Requirements C. Benefits and Costs of the Rule and Form Amendments 1. Optional Summary Prospectus Regime 2. Treatment of Discontinued Variable Contracts 3. Changes to Forms N-3, N-4, and N-6 4. Inline XBRL D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives 1. Mandating Summary Prospectuses 2. Summary Prospectuses Delivered with Statutory Prospectuses 3. Contract-Specific Updating Summary Prospectuses 4. Do Not Provide Updating Summary Prospectuses 5. Inline XBRL 6. Alternatives to Form N-3, N-4, and N-6 Amendments 7. Requiring All Variable Contracts (Including Currently Discontinued Contracts) To Prepare Updated Registration Statements and Deliver Statutory or Summary Prospectuses 8. Alternatives to Commission's Position on Alternative Disclosure Contracts V. Paperwork Reduction Act A. Form N-3 B. Form N-4 C. Form N-6 D. Investment Company Interactive Data E. Rule 498A VI. Regulatory Flexibility Act Certification VII. Statutory Authority I. 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. 4 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. 5 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. 6 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”). 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 “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. A. 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: 7 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. • 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 8 For purposes of this release, we refer to these entities as “portfolio companies.” 9 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 10 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. 11 Investors indirectly bear the operating fees and expenses of the portfolio companies they select as the underlying investments in their variable contracts. 12 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. 13 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. • Taxes. Special tax rules apply to variable products, with both tax advantages and potential adverse tax impacts in certain circumstances. 14 14 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 59 1/2 years old. For these and other reasons, a variable contract generally is sold as a long-term investment. 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 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 15 For a discussion of the requirements for variable contract prospectus disclosure and delivery, see Proposing Release, supra note 6, at Section I.B.1. 16 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. 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 (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 concerning investors' preferences, the Commission proposed a summary prospectus framework for variable contracts using summary and layered disclosure principles. 20 17 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). 18 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”). 19 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 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). 20 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. B. 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 21 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. 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 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 22 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). 23 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.”). 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: • 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. 24 See infra Section II.A. • 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. 25 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. 26 See infra Section II.B. 27 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. • 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 industry developments ( e.g., the prevalence of optional benefits in today's variable contracts), and otherwise improve disclosures provided to variable contract investors. 28 See infra Section II.C. 29 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”). • 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. 30 See infra Section II.D. • 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. 31 See infra Section II.E. • Other Amendments. 32 We are adopting certain technical and conforming amendments to our rules to reflect the proposed new regime for variable contract 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. 32 See infra Section II.F. 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: ER01MY20.000 II. Discussion A. 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 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 33 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) (“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. 34 See CAI Comment Letter. 35 See ACLI Comment Letter. 36 See Brighthouse Comment Letter. 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 variable contract works, and recommended that we engage in investor testing to validate our assumptions. 38 37 See Comment Letter of Mark Bowler (Feb. 11, 2019) (“M. Bowler Comment Letter”). 38 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). 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 39 Proposing Release, supra note 6, at Section I.B.2. 40 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 41 See ACLI Comment Letter. 42 See AARP Comment Letter; Comment Letter of Better Markets (Feb. 14, 2019) (“Better Markets Comment Letter”). 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). 43 See supra note 21. 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 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. 44 See infra Section IV.C.1. 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 45 See 2009 Summary Prospectus Adopting Release, supra note 17, at 66-67. 1. 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 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 46 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. 47 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. 48 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. 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 49 Rule 498A(b)(1). 50 Id. 51 See rule 498A(a). The Commission proposed these requirements for the initial summary prospectus because aggregating disclosures for multiple contracts, or currently offered and no-longer-offered 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. 52 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”). 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 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. 53 See AARP Comment Letter. 54 See Transamerica Comment Letter; ACLI Comment Letter; CAI Comment Letter. 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 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 55 Id. 56 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.”). 57 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. 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 58 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. 59 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 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. 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. 60 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. 61 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). 62 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). 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 63 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”). 64 General Instruction C.3.(g) to Forms N-3, N-4, and N-6. 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 65 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. 66 See General Instruction C.3.(b) to amended Forms N-3, N-4, and N-6. 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 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 67 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. 68 See CAI Comment Letter. 69 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. 70 See ACLI Comment Letter. 71 See CAI Comment Letter; Pacific Life Comment Letter; Brighthouse Comment Letter; Jackson Comment Letter. 72 See Brighthouse Comment Letter; Transamerica Comment Letter; ACLI Comment Letter; CAI Comment Letter. 73 See ACLI Comment Letter. 74 See CAI Comment Letter; Pacific Life Comment Letter; Jackson Comment Letter; Brighthouse Comment Letter. 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 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. 75 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). 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 sub-headings specified by the form. 77 76 See General Instruction C.3.(d)(ii) of Forms N-3, N-4, and N-6. See also infra note 598 and accompanying text. 77 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). Because the initial summary prospectus (and as discussed below, the updating summary prospectus) draw from disclosures in the statutory prospectus, insurers will similarly have 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. 78 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). 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” 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. 79 See Jackson Comment Letter; CCMC Comment Letter. 80 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 N-3, N-4, and N-6. We discuss the Key Information Table below in Section II.A.1.c.ii.(a). 81 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” under the contract and could use the term “legacy benefits” in providing the disclosures required under that heading. See rule 498A(b)(5)(iii). Table 2—Outline of the Initial Summary Prospectus Heading in initial summary prospectus Item of amended Form N-3 Item of amended Form N-4 Item of amended Form N-6 Cover Page: Identifying Information Legends EDGAR Contract Identifier Table of Contents (optional) Content: Important Information You Should Consider About the [Contract] 2 2 2 Overview of the [Contract] 3 3 3 Standard Death Benefits 10(a) [Other] Benefits Available Under the [Contract] 11(a) 10(a) 11(a) Buying the [Contract] 12(a) 11(a) 9(a)-9(c) How Your [Contract] Can Lapse 14(a)-14(c) Making Withdrawals: Accessing the Money in Your [Contract] 13(a) 12(a) 12(a) Additional Information About Fees 4 4 4 Appendix: [Investment Options/Portfolio Companies] Available Under the [Contract] 82 18 or 19 17 18 i. Cover Page and Table of Contents 82 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. 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 83 Rule 498A(b)(2)(i) through (iv). 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 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. 84 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”). 85 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. 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 86 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. 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 87 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 88 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/additional-resources/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-bulletin-variable-life-insurance . 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 89 A registrant will be able to modify the legends so long as the modified statements contain comparable information. Rule 498A(b)(2)(v)(A). 90 Rule 30e-3; see also Investment Company Shareholder Reports Release, supra note 19. This rule became effective January 1, 2019. 91 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 30e-3 will be removed from variable contract registration forms on January 1, 2022. 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 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. 92 See WFA Comment Letter. 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. 93 See AARP Comment Letter. 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 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 94 Rule 498A(2)(v)(C). 95 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). 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 96 Proposed rule 498A(b)(2)(vi)(C). 97 Rule 498A(b)(3)(i). 98 See, e.g., 17 CFR 230.411(e) (rule 411(e) under the Securities Act); 17 CFR 270.0-4(e) (rule 0-4(e) under the Investment Company Act). We are also eliminating the proposed legend stating “You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider 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 99 See text following note 121. 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. 100 See Breacher Comment Letter. 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. 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. 102 Rule 498A(b)(4). 103 17 CFR 230.481(c) (Rule 481(c)). 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. 106 104 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. 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 59 1/2 ; 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”). 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, particularly if standardized to compare annuities, 110 while another noted approvingly that it broke the information down in a simplified way. 111 109 See, e.g., ACLI Comment Letter; CAI Comment Letter. 110 See Comment Letter of Christopher Viscomi (Dec. 4, 2018). 111 See Comment Letter of Anthony Harrison (Dec. 7, 2018). 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 presentation may also facilitate comparisons of certain disclosure topics among variable contract prospectuses. 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 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-committee-2012/iac061418-slides-by-susan-kleimann.pdf (“Kleimann Presentation”). 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. 113 113 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). 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 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: 114 See infra text following note 201. 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.”). 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 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 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. 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 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). 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. 122 120 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. 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. 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 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.” 126 124 See VIP Working Group Comment Letter; NAIFA Comment Letter. 125 See AARP Comment Letter. 126 See supra note 79. 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. 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. 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 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. 130 128 Id. 129 S ee also IRI Fact Book, supra note 7. 130 Registrants will continue to disclose the surrender fee as a percentage in the “Transaction Expenses” section of the Fee Table. See Item 4 of amended Forms N-3, N-4, and N-6. 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. 134 131 See ACLI Comment Letter (“The assumed $100,000 average for variable contracts overstates the impact of surrender charges for contracts that are below that average.”). 132 See CAI Comment Letter; Lincoln Comment Letter; Transamerica Comment Letter; ACLI Comment Letter. 133 See Proposing Release, supra note 6, at n.9. 134 See infra Section II.C.2.d.iv; see also Item 4 of amended Forms N-3, N-4, and N-6 (requiring registrants to reflect the consequence of any surrender fee in the “Example” to the Fee Table, which, based on a $100,000 assumed investment, shows in dollar figures how much an investor would pay if the contract were surrendered after 1 year, 3 years, 5 years, and 10 years). Transaction Charges. As proposed, the second line-item in the “Fees and Expenses” section of the table, “Transaction Charges,” requires a statement explaining that in addition to surrender charges, the investor may also be charged for other transactions, accompanied by a brief description of the types of such charges ( e.g., front-end loads, charges for transferring cash value between investment options, charges for wire transfers, etc.). 135 This requirement is designed to provide a simple narrative description to alert investors that surrender charges are not the only transaction charges they could pay. We received no comments regarding this line-item. 135 See rule 498A(b)(5)(i); see also Instruction 2(b) to Item 2 of Forms N-3, N-4, and N-6. Although surrender charges are a type of transaction charge, we are requiring surrender charges be separately disclosed in the Key Information Table to highlight to investors the significant costs associated with early withdrawals. Ongoing Fees and Expenses. We are adopting, largely as proposed, the third line-item in the “Fees and Expenses” section of the Key Information Table, “Ongoing Fees and Expenses (annual expenses),” which is designed to alert investors that they also will bear recurring fees on an annual basis. 136 In Forms N-3 and N-4, the disclosure in this line-item will begin with the legend: “The table below describes the fees and expenses that you may pay each year, depending on the options you choose.” 137 136 See rule 498A(b)(5)(i); see also Instruction 2(c) to Item 2 of amended Forms N-3, N-4, and N-6. 137 See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(A) to Item 2 of amended Forms N-3and N-4. Largely as proposed, Form N-4 registrants will disclose, in a tabular presentation in the order specified, the minimum and maximum annual fees for: (1) Base contract expenses; 138 (2) investment options ( e.g., portfolio company fees and expenses); 139 and (3) optional benefits available for an additional charge (for a single optional benefit, if elected). 140 Since Form N-3 registrants have a single-tier structure and consolidate fees and expenses for investment options into base contract expenses, they will disclose the same information as Form N-4 registrants, except fees for base contract expenses and investment options will be consolidated into a single entry labeled “annual contract expenses.” 141 138 The Commission did not propose to require and we are not adopting minimum and maximum annual fees for base contract expenses for Form N-6 registrants because life insurance charges are based on underwriting and can vary significantly from one insured person to another depending on various demographic characteristics. This could lead to significant variations between these amounts, which may be confusing to investors. 139 See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(D) to Item 2 of amended Form N-4. Registrants will use the gross expense ratio disclosed in the Fee Table of a portfolio company's current prospectus, which is the same basis for calculating portfolio company expense ratios as Items 4 (Fee Table) and 17 (Portfolio Companies Available Under the Contract) of Form N-4. 140 The disclosure will also require, in a parenthetical or footnote to the table or each caption, an explanation of the basis for each percentage ( e.g., as a percentage of separate account value or benefit base, or percentage of net asset value). See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(C) to Item 3 of amended Form N-4 (percentage of net asset value). In a change from the proposal, we are revising the line-item heading for optional benefits available for an additional charge to clarify that the minimum and maximum fees disclosed for that line-item relate to a single optional benefit, if elected. 141 See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(B) to Item 2 of amended Form N-3. In a conforming change, we are revising the instructions to this item to clarify that optional benefits charges should not be included in the calculation of annual contract expenses, because optional benefits charges are separately displayed in a line-item titled “optional benefits available for an additional charge (if elected).” See Instruction 2(c)(i)(D) to Item 2 of amended Form N-3. The minimum annual fee column will show the lowest fee for each annual fee category ( i.e., the least expensive contract class, the lowest annual portfolio company expense or management fee, and the single least expensive optional benefit that is available for an additional charge). 142 The maximum annual fee column will show the highest fees for these categories (and will reflect the single most expensive optional benefit). Additionally, a legend preceding the minimum and maximum annual fee table will refer investors to their contract specifications page for information about the specific fees they would pay each year based on the options elected. 143 142 See rule 498A(b)(5)(i); see also Instruction 2(c)(i) to Item 2 of amended Form N-3; Instruction 2(c)(i) to Item 2 of amended Form N-4. In a conforming change, we are revising this instruction in amended Form N-3 to mirror the parallel instruction in amended Form N-4 in order to identify the specific categories for which lowest and highest fees should be shown, as opposed to simply stating that the lowest and highest contract fees should be shown. Because the table showing minimum and maximum annual fees is intended to inform investors about the types and ranges of fees associated with a variable contract, we are excluding certain assumptions from the calculations. For example, although some registrants do not charge extra for certain optional benefits ( e.g., portfolio rebalancing and dollar-cost averaging), we believe investors should be alerted to the costs associated with optional benefits that are available for an additional charge. See Instruction 2(c)(i)(B) to Item 2 of amended FormN-3 (stating that disclosures should be provided for optional benefits available for an additional charge); Instruction 2(c)(i)(B) to Item 2 of amended FormN-4 (same). Accordingly, the disclosure should reflect the minimum cost associated with an optional benefit that has a fee. If the registrant offers any optional benefits for an additional charge, the minimum fee should not be zero. For example, if the registrant offers three optional benefits, with additional charges of 0%, 0.50%, and 1.50%, then the minimum and maximum annual fees reflected in the table would be 0.50% and 1.50%. 143 Instruction 2(c)(i)(A) to Item 2 of amended Forms N-3 and N-4. Many states require a contract specifications page that contains information about the purchase payments, fees, annuitization date and other information specific to an investor's variable annuity contract. See, e.g., the Insurance Compact's Individual Deferred Variable Annuity Contract Standards, available at https://www.insurancecompact.org/rulemaking_records/080911_stds_annuity_individual_deferred_variable.pdf . This presentation will consolidate the more detailed information in the Fee Table, in an effort to minimize the need for investors to perform complex calculations to understand the fees they will pay. 144 For example, like the “Ongoing Fees and Expenses” line-item in the Key Information Table, the Fee Table will also include information about the contract's base contract fee, portfolio company fees and expenses, and optional benefits. 145 However, the Fee Table will include a separate response for each contract class. 146 In order to condense this information, the parallel disclosure in the Key Information Table will be presented as fee ranges. 144 This reflects the principle, which experts in disclosure effectiveness for consumer-facing communications have encouraged, of “eliminat[ing] most complex calculations” for consumers. See Kleimann Presentation, supra note 112. 145 See Item 4 of amended Forms N-3 and N-4. 146 See Instruction 7 to Item 4 of amended Forms N-3 and N-4. As described in the Proposing Release, we also designed an example in Forms N-3 and N-4 to provide a high-level cost illustration that will give an investor a tool to understand the basic cost framework of the contract. To emphasize that an investor's choices have a significant impact on the costs associated with his or her investment, we are requiring a two-column tabular presentation in the order specified reflecting the lowest and highest annual cost estimates for the variable contract. 147 The following legend will precede this table: “Because your contract is customizable, the choices you make affect how much you will pay. To help you understand the cost of owning your contract, the following table shows the lowest and highest cost you could pay each year. This estimate assumes that you do not take withdrawals from the contract, which could add surrender charges that substantially increase costs.” 148 147 See rule 498A(b)(5)(i); see also Instruction 2(c)(ii) to Item 3 of Forms N-3 and N-4. 148 See rule 498A(b)(5)(i); see also Instruction 2(c)(ii)(A) to Item 3 of Forms N-3 and N-4. As proposed, the lowest and highest annual dollar costs in this table are based on certain prescribed assumptions ( i.e., a $100,000 investment) with no additional contributions, transfers, or withdrawals, no sales charges, and a 5% annual return over a hypothetical 10-year period. 149 The lowest annual cost estimate is based on the least expensive combination of contract classes and portfolio company charges or management fees, and excludes optional benefits. The highest annual cost estimate reflects the most expensive combination of contract classes, portfolio company charges or management fees, and optional benefits. 150 Excluding optional benefits from the lowest annual cost estimate, and including them in the highest annual cost estimate, is intended to illustrate the cost impact of adding optional benefits to a contract. 151 With this information, the investor will be able to roughly estimate further costs, 152 and may be able to obtain additional information about costs in the statutory prospectus if needed. 153 149 See rule 498A(b)(5)(i); see also Instruction 2(c)(ii)(C)(a) to Item 3 of Forms N-3 and N-4. The prescribed assumptions largely mirror the Fee Table, with the exception of the sales load, which is not reflected because we are seeking to highlight the contract's ongoing expenses. Because registrants may charge different fees in different years (which may have the effect of making fees appear small under certain circumstances), we are basing the cost estimate on the average cost of a contract over a 10-year period to level-set the calculation. See Instruction 2(c)(ii)(C)(a) to Item 3 of Forms N-3 and N-4. 150 See rule 498A(b)(5)(i); see also Instruction 2(c)(ii)(C)(a) to Item 2 of amended Forms N-3 and N-4. In a conforming change, we are revising this instruction in amended Form N-3 to mirror the parallel instruction in amended Form N-4 in order to identify the specific categories for which lowest and highest fees should be shown, as opposed to simply stating that the lowest and highest contract fees should be shown. Instruction 2(c)(ii)(C)(e) to Item 3 of amended Forms N-3 and N-4 direct that, unless otherwise stated, the least and most expensive combination of annual contract expenses and optional benefits available for an additional charge should be based on the disclosures provided in the Example in Item 4 (Fee Table), and that if a different combination of these items would result in different maximum or minimum fees in different years, the registrant must use the least or most expensive combination of these items each year. 151 While the example in the Fee Table would include a similar cost estimate, it would reflect the most expensive combination of annual portfolio company expenses and optional benefits available for each contract class available under the contract. The Fee Table example also includes estimated costs for 1-, 3-, 5- and 10-year periods (not just for one year), and reflects different scenarios based on whether the contract is surrendered or annuitized. See Item 4 of amended Forms N-3 and N-4. 152 For example, since he or she would know the range of costs to be paid over one year, he or she could estimate the costs to be paid over five years. 153 We also encourage registrants to use design features ( e.g., multiple colors or shading patterns) that visually distinguish minimum and maximum fees, and lowest and highest annual cost estimates. Despite advocating for the removal of numerical fee information in other sections of the Key Information Table, one commenter stated that “[a]n investor would benefit from the proposed annual cost estimates, which are easy for an investor to understand and would not be repeated elsewhere in the [Initial Summary Prospectus]” and supported including the cost estimates in this Key Information Table fee table. 154 We received two comments reiterating concerns with the $100,000 assumed investment amount, 155 but as previously discussed, we are requiring this amount for all examples in variable contract summary and statutory prospectuses because $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. 156 We received no other comments on the cost estimate in the Key Information Table, and are adopting it as proposed. 154 See CAI Comment Letter. 155 See CAI Comment Letter; ACLI Comment Letter. 156 See supra note 133 and accompanying text. For Form N-6, the Commission proposed a variation of the “Ongoing Fees and Expenses” section of the Key Information Table that was proposed for Forms N-3 and N-4. Because the costs associated with variable life insurance contracts are largely based on the personal characteristics of the insured ( e.g., age, sex, health history), the Commission did not propose to require specific numeric information about the fees covering the cost of insurance and optional benefits, 157 but instead proposed to require this section of the Key Information Table to include: (1) A brief statement that investment in a variable life insurance contract is subject to certain ongoing fees and expenses that are set based on characteristics of the insured; and (2) the minimum and maximum annual fees for the investment options in a tabular presentation. 158 One commenter who addressed this aspect of the proposal supported our approach, 159 and we are adopting this requirement as proposed. 157 In addition, maximum expenses for a variable life insurance contract could potentially exceed 100% of contract value based on the underwriting of the variable life insurance contract, which could potentially confuse investors. 158 Instruction 2(c) to proposed Item 3 of FormN-6. 159 See ACLI Comment Letter. Fund Facilitation Fees. Two commenters asked how fund facilitation fees would be presented for purposes of the “Ongoing Fees and Expenses” section of the Key Information Table. 160 Currently, although our registration forms do not specifically reference fund facilitation fees, insurers that charge the fees disclose them in the prospectus. In our staff's experience, however, such practices vary. 161 160 See VIP Working Group Comment Letter; Comment Letter of Lisa LeRoy (Nov. 9, 2018). We understand that some contracts registered on Forms N-4 and N-6 charge a fee, often referred to as “fund facilitation fees,” to make portfolio companies available as investment options under the contract. This fee varies solely on the basis of the portfolio company selected, and offsets the lack of distribution fees provided by certain low or no-cost portfolio companies, or provides revenue sharing from portfolio companies that wish to be included in the investment options under the variable contract. Because registrants on Form N-3 have a single tier structure and do not offer third-party portfolio companies as investment options, registrants on Form N-3 do not charge fund facilitation fees. 161 As reflected by recent registration statement filings, insurers reflect fund facilitation fees in a number of ways, including as a separate account expense, as optional expenses, or under their own expense heading. Insurers typically include fund facilitation fees when calculating the Example to the Fee Table (some provide explanation in the footnotes) and the accumulation unit value tables. Insurers may also describe fund facilitation fees in the general description of the contract. To ensure that registrants disclose these fees in a consistent manner, in a change from the proposal, the final rules and forms include provisions in the registration forms covering such fees. First, consistent with our understanding of these fees, the forms define “platform charge” as any fee charged by the registrant to make a portfolio company available as an investment option under the contract, and that varies solely on the basis of the portfolio company selected. 162 To allow investors to see the lowest and highest charges associated with the range of available portfolio company options, we are modifying the proposed instructions to the Key Information Table to require the minimum (or maximum, if applicable) portfolio company expense ratio reflected in the table to include any platform fee charges to invest in that option. 163 The final rule and forms also require certain additional disclosures regarding platform charges in the Fee Table and in the portfolio company/investment option Appendix as described below. 164 162 See General Instruction A of amended Forms N-4 and N-6. 163 See rule new 498A(b)(5)(i); see also Instruction 2(c)(i)(E) to Item 2 of amended FormN-4; Instruction 2(c)(i)(E) to Item 2 of amended Form N-6. Because we understand that Form N-3 registrants do not charge fund facilitation fees, we are not including this instruction in Form N-3. 164 See, e.g., infra notes 300 (discussing platform charges in the context of the portfolio company/investment option Appendix) and 661 (discussing platform charges in the context of the Fee Table). (ii) Risks As proposed, the Key Information Table includes a condensed discussion of contract risks. Current risk disclosures in variable contract statutory prospectuses typically span multiple pages. While this level of disclosure may be appropriate for a statutory prospectus, we believe that a more-concise overview presentation of contract risks is better suited for the Key Information Table in light of the goals of the summary prospectus. Like the summary of fee and expense information that will appear in the Key Information Table, these risk summaries are intended to provide a concise overview, with additional information available for an investor who desires or requires additional details. Specifically, the table will include four line-items under the heading “Risks,” each of which includes disclosure about a risk that we believe investors should be alerted to: (1) Risk of loss; (2) risks that could occur if an investor believes a variable annuity is a short-term investment; (3) risks associated with the contract's investment options; and (4) insurance company risks. 165 Each of these line-items will include succinct descriptions of the respective risk. 165 See rule 498A(b)(5)(ii); see also Instruction 3 to Item 3 of amended Forms N-3, N-4, and N-6. The first line-item is intended to convey that although variable contracts have elements of insurance, unlike most traditional forms of insurance, these products are subject to the risk of loss. 166 This could help prevent any misunderstanding if, for example, an investor confused a variable annuity contract and a fixed annuity contract and did not understand that the contract value in a variable annuity could decline. 166 See rule 498A(b)(5)(ii); see also Instruction 3(a) to Item 3 of amended Forms N-3, N-4, andN-6 (“State that an investor can lose money by investing in the Contract.”). One commenter thought the “risk of loss” disclosure might be confusing because variable contracts should be held for the long term and that it would be more appropriate to state that the contract may be subject to market fluctuations or risks. 167 Another commenter stated that the disclosure should include the fact that high fees increase the risk of loss. 168 While risk of loss manifests in many different ways, we believe the proposed language serves its intended purpose of putting investors on notice that they can lose money by investing in the contract, and therefore we are adopting the requirement as proposed. 167 See ACLI Comment Letter. 168 See AARP Comment Letter. The second line-item is intended to emphasize to investors that variable contracts are generally long-term investments and not appropriate for an investor who needs ready access to cash, particularly in view of the impact of surrender charges and/or tax penalties for early withdrawals. 169 The third line-item is intended to focus on the general risk of poor investment performance (as opposed to the details of the specific risks associated with each of the particular investment options available under the contract). 170 We received no comments on these line-items and are adopting them largely as proposed, although we have added a reference related to general or “fixed account” investment options to clarify for inve [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-05526. Public record. Not legal advice.