Registration Form for Insurance Company Separate Accounts Registered as Unit Investment Trusts that Offer Variable Life Insurance Policies
Federal RegisterMar 23, 1998
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SUMMARY: The Securities and Exchange Commission is proposing a new Form
N-6 for insurance company separate accounts that are registered as unit
investment trusts and that offer variable life insurance policies. The
form would be used by these separate accounts to register under the
Investment Company Act of 1940 and to offer their securities under the
Securities Act of 1933. For these registrants, the proposed form would
replace Form N-8B-2, currently used by all unit investment trusts to
register under the Investment Company Act, and Form S-6, currently used
by all unit investment trusts to offer their securities under the
Securities Act. The proposed form would focus prospectus disclosure on
essential information that would assist an investor in deciding whether
to invest in a particular variable life insurance policy. The proposed
form also would minimize prospectus disclosure about technical and
legal matters, improve disclosure of fees and charges, and streamline
the registration process by replacing two forms that were not
specifically designed for variable life insurance policies with a
single form tailored to these products.
DATES: Comments must be received on or before July 1, 1998.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-6009. Comments also may be submitted
electronically at the following E-mail address: [email protected].
All comment letters should refer to File No. S7-9-98; this file number
should be included on the subject line if E-mail is used. All comments
received will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549-6009. Electronically submitted comments also will be posted
on the Commission's Internet site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Keith E. Carpenter, Senior Counsel,
Ethan D. Corey, Senior Counsel, Megan L. Dunphy, Attorney, Michael B.
Koffler, Attorney, Susan M. Olson, Attorney, Kevin M. Kirchoff, Branch
Chief, Cindy J. Rose, Chief Financial Analyst, or Susan Nash, Assistant
Director, (202) 942-0670, Office of Insurance Products, Division of
Investment Management, Securities and Exchange Commission, 450 Fifth
Street, N.W., Mail Stop 5-6, Washington, D.C. 20549-6009.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is proposing for comment a new Form N-6 [17 CFR
239.17c; 17 CFR 274.11d] for insurance company separate accounts that
are registered as unit investment trusts and that offer variable life
insurance policies. The form would be used by these separate accounts
to register under the Investment Company Act of 1940 [15 U.S.C. 80a-1
et seq.] (``Investment Company Act'') and to offer their securities
under the Securities Act of 1933 [15 U.S.C. 77a et seq.] (``Securities
Act''). For these registrants, the proposed form would replace Forms N-
8B-2 [17 CFR 274.12] and S-6 [17 CFR 239.16], currently used by all
unit investment trusts to register under the Investment Company Act and
to offer their securities under the Securities Act. The Commission also
is proposing technical amendments to rules 134b, 430, 430A, 495, 496,
and 497 under the Securities Act [17 CFR 230.134b, 230.430, 230.430A,
230.495, 230.496, 230.497]; rules 8b-11 and 8b-12 under the Investment
Company Act [17 CFR 270.8b-11, 270.8b-12]; and Form N-8B-2 [17 CFR
274.12]. Finally, the Commission is requesting comment on whether it
should rescind Form N-1 [17 CFR 274.11], the registration form used by
insurance company separate accounts that are registered as open-end
management investment companies and that offer variable life insurance
policies.
Table of Contents
I. Introduction and Executive Summary
II. Discussion
A. General Instructions
B. Part A--Information in the Prospectus
1. Item 1--Front and Back Cover Pages
2. Item 2--Risk/Benefit Summary: Benefits and Risks
3. Item 3--Risk/Benefit Summary: Fee Table
4. Item 4--General Description of Registrant, Depositor, and
Portfolio Companies
5. Item 5--Charges
6. Item 6--General Description of Contracts
7. Item 7--Premiums
8. Item 8--Death Benefits and Contract Values
9. Item 9--Surrenders, Partial Surrenders, and Partial
Withdrawals
10. Item 10--Loans
11. Item 11--Lapse and Reinstatement
12. Item 12--Taxes
13. Item 13--Legal Proceedings
14. Item 14--Financial Statements
C. Part B--Statement of Additional Information
1. Item 24--Financial Statements
2. Item 25--Performance Data
3. Item 26--Illustrations
D. Part C--Other Information
1. Item 27--Exhibits
2. Item 34--Fee Representation
3. Undertaking to Update Prospectus
E. Technical Rule Amendments
F. Transition Period
G. Form N-1
III. General Request for Comments
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority
Text of Proposed Amendments
I. Introduction and Executive Summary
Variable Life Insurance
Variable life insurance is similar to traditional life insurance,
except that the cash value and/or death benefit vary based on the
investment performance of the assets in which the premium payments are
invested. Under a traditional life insurance policy, premium payments
are allocated to an insurer's general account and invested, consistent
with state law requirements, to enable the insurer to meet its death
benefit and cash value guarantees. The investment return on assets in
the general account has little or no direct effect on the cash value or
the death benefit received.
Premium payments under a variable life policy, in contrast, are
invested in an insurance company separate account, which generally is
not subject to state law investment restrictions. A variable life
policyholder typically is offered a variety of investment options
(e.g., equity, bond, and money market mutual funds). Death benefits and
cash values are directly related to performance of the separate
account, although typically there is a guaranteed minimum death
benefit.
Variable life insurance was introduced in the early 1970s. During
the years from the end of World War II to the late 1960s, there was a
significant decline in the share of savings dollars invested with life
insurance companies. In an effort to counteract this trend, insurers
began to offer a greater variety of products, including equity-based
products such as variable life
[[Page 13989]]
insurance.\1\ In recent years, variable life insurance has become an
increasingly important segment of the insurance industry. By the end of
1996, variable life insurance accounted for almost one quarter of U.S.
life insurance sales, up from 6% four years earlier.\2\ Throughout the
1990s, assets in variable life products have grown steadily, from $4.3
billion in 1990 to more than $33 billion in December 1997.\3\
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\1\ SEC, Division of Investment Management, Variable Life
Insurance and the Petition for the Issuance and Amendment of
Exemptive Rules at 1-2 (Jan. 1973).
\2\ Rybka, The Variable Life Revolution, NAVA Outlook, July/Aug.
1997, at 1.
\3\ Lipper Variable Insurance Products Performance Analysis
Service, Vol. I, at 190-91 (Jan. 1998).
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Current Forms for Variable Life Insurance Registration
A separate account funding a variable life insurance policy most
commonly is registered as a unit investment trust under the Investment
Company Act.\4\ Separate accounts registered as unit investment trusts
are divided into sub-accounts, each of which invests in a different
open-end management investment company, or mutual fund (``Portfolio
Company'').\5\
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\4\ Section 4(2) of the Investment Company Act defines ``unit
investment trust'' as ``an investment company which (A) is organized
under a trust indenture, contract of custodianship or agency, or
similar instrument, (B) does not have a board of directors, and (C)
issues only redeemable securities, each of which represents an
undivided interest in a unit of specified securities, but does not
include a voting trust.'' 15 U.S.C. 80a-4(2).
\5\ An open-end management investment company is an investment
company, other than a unit investment trust or face amount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. Section 4(3) of the
Investment Company Act [15 U.S.C. 80a-4(3)]; Section 5(a)(1) of the
Investment Company Act [15 U.S.C. 80a-5(a)(1)]. As an alternative to
the structure described in the text, a variable life insurance
separate account can be organized in a single-tier structure, as an
open-end management investment company. Today, this structure is
used by few, if any, variable life insurance registrants.
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Both separate account unit investment trusts and the Portfolio
Companies in which they invest are registered as investment companies
under the Investment Company Act, and their securities are registered
under the Securities Act. Investors in variable life insurance policies
receive the prospectuses for both the separate account unit investment
trust and the Portfolio Companies. Portfolio Companies, as mutual
funds, use Form N-1A to register under the Investment Company Act and
to register their shares under the Securities Act.\6\ Variable life
separate accounts, as unit investment trusts, register under the
Investment Company Act on Form N-8B-2 and register their securities
under the Securities Act on Form S-6.
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\6\ 17 CFR 274.11A.
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Forms N-8B-2 and S-6 were designed for non-separate account unit
investment trusts and were adopted before the establishment of the
first separate account to fund variable life insurance policies. While
much of their required disclosure is useful, the forms request some
information that is not typically of consequence to a buyer of variable
life insurance. More importantly, many matters that would be
significant to a buyer of a variable life insurance policy are not
addressed at all by the forms. Over time, the Commission staff has
sought to deal with these shortcomings on a piecemeal basis by
developing disclosure standards that require a description of the
important features of the variable life insurance policy and the
separate account. The Commission believes that these standards should
be codified in a more appropriately designed form.
Another shortcoming of Forms N-8B2 and S-6 is that they do not
reflect fundamental improvements that the Commission has made to other
investment company registration forms, such as Form N-4 for variable
annuities and Form N-1A for mutual funds, which facilitate clearer and
more concise disclosure to investors.\7\ As a result, variable life
insurance prospectuses are often unnecessarily lengthy and complex.
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\7\ Form N-1A [17 CFR 274.11A]; Form N-4 [17 CFR 274.11c];
Investment Company Act Release No. 13689 (Dec. 23, 1983) [49 FR 614]
(``N-4 Proposing Release''); Investment Company Act Release No.
14575 (June 14, 1985) [50 FR 26145] (``N-4 Adopting Release'');
Investment Company Act Release No. 12927 (Dec. 27, 1982) [48 FR 813]
(``1982 N-1A Proposing Release''); Investment Company Act Release
No. 13436 (Aug. 12, 1983) [48 FR 37928] (``1983 N-1A Adopting
Release''); Investment Company Act Release No. 22528 (Feb. 27, 1997)
[62 FR 10898], correction [62 FR 24160] (``1997 N-1A Proposing
Release''); Investment Company Act Release No. 23064 (Mar. 13, 1998)
(``1998 N-1A Adopting Release'').
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When Form N-4 was considered in the 1980s, the Commission indicated
that it did not expect to propose separate registration forms for
variable life insurance registrants until it had acquired more
experience with variable life insurance policies.\8\ The Commission now
believes that the benefits of its prospectus improvement initiatives
should be extended to unit investment trust separate accounts that
offer variable life insurance policies. These benefits include a two-
part registration form, consisting of a simplified prospectus designed
to contain essential information that assists an investor in making an
investment decision, and a ``Statement of Additional Information''
(``SAI''), containing more extensive information and detailed
discussion of matters included in the prospectus that investors could
obtain upon request. They also include the use of a single integrated
form for both Investment Company Act and Securities Act registration,
eliminating unnecessary paperwork and duplicative reporting.\9\
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\8\ N-4 Proposing Release, supra note 7, at 615, note 6.
\9\ See Investment Company Release No. 10378 (Aug. 28, 1978) [43
FR 39548] (integration of Investment Company Act and Securities Act
reporting and disclosure requirements in adoption of Form N-1).
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Improved Communication to Investors
The Commission is committed to improving the disclosure provided to
variable life insurance investors. Toward that end, the Commission has
developed Form N-6, which it proposes today for public comment. Unlike
the current forms, proposed Form N-6 is specifically tailored to
variable life insurance. The proposed requirements of the form focus on
information that is essential to a decision to invest in a particular
variable life insurance policy, and the form is intended to enhance the
comparability of information about variable life insurance policies.
The proposal seeks to promote more effective communication of
information about variable life insurance policies.
Today's proposal is the latest Commission action in its continuing
effort and long-standing commitment to improve the quality of
disclosure available to investment company investors. In 1983, the
Commission introduced the innovative two-part disclosure format for
mutual funds.\10\ This format was extended to variable annuities in
1985.\11\ Subsequently, the Commission adopted a number of other
initiatives to improve investment company disclosure, including uniform
fee tables for mutual funds and variable annuities.\12\
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\10\ 1983 N-1A Adopting Release, supra note 7.
\11\ N-4 Adopting Release, supra note 7.
\12\ Investment Company Act Release No. 16244 (Feb. 1, 1988) [53
FR 3192] (``N-1A Fee Table Adopting Release''); Investment Company
Act Release No. 16766 (Jan. 23, 1989) [54 FR 4772] (``N-4 Fee Table
Adopting Release'').
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In the past few years, the Commission has taken significant steps
to improve investment company disclosure. In 1995, the Commission
issued a release requesting comment on ways to improve risk disclosure
and comparability of mutual fund risk levels.\13\ Today, the Commission
is adopting a comprehensive revision of Form N-1A,
[[Page 13990]]
the mutual fund disclosure form, to provide a standardized risk/return
summary at the beginning of every mutual fund prospectus, require
mutual funds to prepare disclosure documents using plain English, and
eliminate prospectus clutter that obscures information that is helpful
to investors making an investment decision.\14\ The Commission also is
adopting a new rule to permit mutual funds to provide investors with a
``profile,'' a disclosure document summarizing key information about a
fund, including the fund's investment strategies, risks, performance,
and fees, in a concise, standardized format. A fund that makes a
profile available will be able to offer investors a choice of the
amount of information that they wish to consider before making an
investment decision.\15\
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\13\ Investment Company Act Release No. 20974 (Mar. 29, 1995)
[60 FR 17172] (``Risk Concept Release'').
\14\ 1998 N-1A Adopting Release, supra note 7.
\15\ Rule 498 under the Securities Act [17 CFR 230.498];
Investment Company Act Release No. 23065 (Mar. 13, 1998) (``Profile
Adopting Release'').
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The Commission's investment company disclosure initiatives are part
of its broad undertaking to bring sweeping revisions to prospectus
disclosure for all public companies.\16\ The Commission is committed to
making all prospectuses simpler, clearer, and more useful, and to
eliminating jargon and boilerplate. As part of its commitment, the
Commission recently adopted rule amendments to require the use of plain
English principles in drafting prospectuses and to provide other
guidance on improving the readability of prospectuses.\17\ The
Commission's plain English principles reflect fundamentals of clear
communication and contemplate disclosure documents that:
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\16\ See Levitt, Plain English in Prospectuses, N.Y. ST. B.J.,
Nov. 1997, at 36.
\17\ See Securities Act Release No. 7497 (Jan. 28, 1998) [63 FR
6370](''Plain English Adopting Release''). The Commission adopted a
plain English rule that sets out six basic principles of clear
writing. Rule 421(d) under the Securities Act [17 CFR 230.421(d)].
The six principles specified in the rule are: (i) Active voice; (ii)
short sentences; (iii) definite, concrete everyday words; (iv)
tabular presentation or ``bullet'' lists for complex material,
whenever possible; (v) no legal jargon, or highly technical business
terms; and (vi) no multiple negatives. As part of the plain English
initiatives, the Commission plans to issue A Handbook on Plain
English: How to Create Clear SEC Disclosure Documents, prepared by
the Commission's Office of Investor Education and Assistance.
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Present information in an easily readable format;
Use everyday language that investors can easily
understand; and
Eliminate repetition of disclosure that lengthens a
document and overwhelms the investor.
Goals of Proposed Form N-6
The proposed Form N-6 is another significant step to improve
disclosure to investment company investors. If adopted, Form N-6 would
have the following benefits.
Tailored Registration Form. Proposed Form N-6 would
eliminate requirements in the current registration forms that are not
relevant to variable life insurance.\18\ Proposed Form N-6 also would
include items that are specifically addressed to variable life
insurance products, such as descriptions of contractual provisions
relating to premiums, death benefits, cash values, surrenders and
withdrawals, and loans.\19\
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\18\ For example, Item 33 of Form N-8B-2 requires extensive
disclosure about compensation of the insurer's employees.
\19\ Proposed Items 7 (premiums), 8 (death benefits and cash
values), 9 (surrenders and withdrawals), and 10 (loans).
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Plain English. The Commission's recently adopted plain
English rule would apply to the front and back cover pages and the
risk/benefit summary in the variable life insurance prospectus.\20\
This should result in better, clearer disclosure to investors.
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\20\ Rule 421(d) under the Securities Act [17 CFR 230.421(d)].
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Reducing Complex and Lengthy Prospectus Disclosure.
Proposed Form N-6 would streamline variable life prospectus disclosure
by adopting a two-part format consisting of a simplified prospectus,
designed to contain essential information that assists an investor in
making an investment decision, and an SAI, containing more extensive
information and detailed discussion of matters included in the
prospectus that investors could obtain upon request.
Standardized Fee Information. Mutual funds and variable
annuities are required to provide a uniform, tabular presentation of
fees and charges that is intended to improve investor understanding of
fees and charges and increase comparability. Proposed Form N-6 would
impose a similar requirement on variable life insurance registrants, in
order to improve the disclosure to investors of the often complex
charges associated with variable life insurance policies and increase,
to the greatest extent possible, the comparability of charges among
policies.
Integrated Disclosure Document. Proposed Form N-6 would
provide variable life insurance registrants with an integrated form for
Investment Company Act and Securities Act registration, eliminating
unnecessary paperwork and duplicative reporting.
Proposed Form N-6 is designed to promote more effective
communication of information about variable life insurance policies.
The proposal would advance Commission efforts to improve investment
company prospectus disclosure beginning with the adoption of the two-
part disclosure format for mutual funds in 1983. Proposed Form N-6, if
adopted, would represent a significant step toward the Commission's
goal of better, clearer, more concise disclosure for all investors.
II. Discussion
To make the requirements of proposed Form N-6 easy to follow, this
release addresses items in the order in which they appear in the form.
A. General Instructions
The proposed General Instructions to Form N-6 provide guidance on
the use and content of the form. They are similar to the General
Instructions to Forms N-4 and N-1A. The General Instructions to Form N-
6 would consist of: (i) Definitions; (ii) Filing and Use of Form N-6;
(iii) Preparation of the Registration Statement; and (iv) Incorporation
by Reference. They reflect the recent amendments to Form N-1A that
updated and reorganized the General Instructions to make them easier to
use.\21\
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\21\ General Instructions to Form N-1A; 1998 N-1A Adopting
Release, supra note 7; 1997 N-1A Proposing Release, supra note 7, at
10919-20.
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Proposed General Instruction A would define certain terms used
throughout Form N-6, providing clarity and avoiding repeated references
throughout the form. Proposed General Instruction B on the filing and
use of Form N-6 would incorporate the user-friendly, question-and-
answer format of Form N-1A.\22\
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\22\ General Instruction B of Form N-1A.
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Proposed General Instruction C would provide streamlined
instructions for preparing the registration statement. Like the
comparable Instructions in Forms N-4 and N-1A, General Instruction C
would emphasize the need to provide clear and concise prospectus
disclosure.\23\ It would permit a registrant to include in its
prospectus or SAI information that is not otherwise required by Form N-
6, as long as the information is not misleading and does not, because
of its nature, quantity, or manner of presentation, obscure required
disclosures.
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\23\ General Instruction C.1(a) of Form N-1A; General
Instruction I of Form N-4.
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Like the comparable instruction in Form N-1A, Proposed General
Instruction C includes a statement of the
[[Page 13991]]
basic disclosure principles that underlie today's proposal.\24\ The
Commission believes that applying these principles consistently when
preparing variable life insurance disclosure documents will result in
high quality documents that effectively communicate information to
investors.
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\24\ 1998 N-1A Adopting Release, supra note 7.
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General Instruction C includes a set of drafting guidelines that
are designed to improve prospectus disclosure. The proposed Instruction
would encourage registrants to avoid cross-references in the prospectus
to the SAI. Repeated cross-references to the SAI add unnecessary length
and complexity to prospectuses and often preclude prospectuses from
disclosing information effectively to investors.
Proposed General Instruction C would clarify that the recently
adopted plain English requirements of rule 421 under the Securities Act
apply to a prospectus prepared on Form N-6.\25\ Rule 421(b) sets out
general requirements that the entire prospectus be clear, concise, and
understandable and provides guidance on how to draft prospectuses that
meet this standard.
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\25\ 17 CFR 230.421; Proposed General Instruction C.1.(e).
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Under proposed Form N-6, a registrant would need to draft the front
and back cover pages and the risk/benefit summary of a variable life
insurance prospectus in accordance with the provisions of rule
421(d).\26\ In meeting these requirements, a registrant would need to
use plain English principles in the organization, language, and design
of these sections of its prospectus. Registrants also would be required
to comply substantially with the following six principles of clear
writing:
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\26\ 17 CFR 230.421(d); Proposed Items 1, 2, and 3.
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Short sentences;
Definite, concrete, everyday language;
Active voice;
Tabular presentation or bullet lists for complex material,
whenever possible;
No legal jargon or highly technical business terms; and
No multiple negatives.
Proposed General Instruction C would address the manner in which
information should be presented when a single prospectus is used for
more than one variable life insurance policy or for a policy that is
sold in both the group and individual markets. Generally, registrants
would be given flexibility to present the information in a format
designed to communicate the information effectively. The Commission
notes, however, that a single prospectus should be used for more than
one variable life insurance policy, or for a policy that is sold in
both the group and individual markets, only when the disclosure can be
presented clearly, concisely, and in a manner that is understandable to
investors.
Proposed General Instruction D would address incorporation by
reference in a manner similar to Form N-1A.\27\ The proposed
Instruction would permit, but not require, a registrant to incorporate
the SAI by reference into the prospectus. The Instruction clarifies
that incorporating information by reference from the SAI is not
permitted as a response to information required to be included in the
prospectus.
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\27\ General Instruction D of Form N-1A.
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Form N-4 contains an instruction permitting the form to be used for
registration under the Securities Act of variable annuity contracts
funded by separate accounts that would be required to be registered
under the Investment Company Act as unit investment trusts except for
the exclusion in Section 3(c)(11) of the Act.\28\ Proposed Form N-6
does not contain a comparable instruction because the Commission is not
aware of any variable life insurance policies that are funded by
separate accounts that are not registered under the Investment Company
Act. Comment is requested on whether such an instruction should be
included in Form N-6.
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\28\ General Instruction A of Form N-4; N-4 Adopting Release,
supra note 7, at 26148; N-4 Proposing Release, supra note 7, at 619.
Section 3(c)(11) of the Investment Company Act excludes from the
definition of investment company ``any separate account the assets
of which are derived solely from (A) contributions under pension or
profit-sharing plans which meet the requirements of section 401 of
the Internal Revenue Code of 1986 or the requirements for deduction
of the employer's contribution under section 404(a)(2) of such Code,
(B) contributions under governmental plans in connection with which
interests, participations, or securities are exempted from the
registration provisions of section 5 of the Securities Act of 1933
by section 3(a)(2)(C) of such Act, and (C) advances made by an
insurance company in connection with the operation of such separate
account.'' 15 U.S.C. 80a-3(c)(11).
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B. Part A--Information in the Prospectus
1. Item 1--Front and Back Cover Pages
Proposed Item 1 contains requirements for the outside front and
back cover pages of the prospectus similar to those in Form N-1A.\29\
The proposed requirements are intended to prevent ``cluttering'' the
prospectus cover page and avoid repeating information contained within
the prospectus.
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\29\ Item 1 of Form N-1A; 1998 N-1A Adopting Release, supra note
7; 1997 N-1A Proposing Release, supra note 7, at 10902.
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The front cover page would be required to include the names of the
registrant and depositor. In addition, the registrant would be required
to indicate the types of variable life insurance policies offered by
the prospectus (e.g., group, individual, scheduled premium, flexible
premium) and the date of the prospectus. Finally, the form would
require the disclaimer pursuant to rule 481 under the Securities Act
that the Commission has not approved the securities being offered or
the accuracy or adequacy of the prospectus.\30\
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\30\ Proposed Item 1(a).
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Unlike Form N-4, the cover page would not be required to state the
names of the Portfolio Companies or to disclose limitations on the
class or classes of purchasers to whom the policy is being offered.\31\
This disclosure would be repetitive because registrants would be
required to provide the same information within the prospectus.\32\
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\31\ Items 1(a) (iv) and (viii) of Form N-4.
\32\ Proposed Items 4(c) and 6(f).
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The proposal would consolidate disclosure about the availability of
additional information on the back cover page of the prospectus. As in
Form N-1A, the back cover page would include a statement that the SAI
is available, without charge, on request and a telephone number that
investors could use to obtain the SAI as well as other information.
Registrants would be required to send the SAI within three days of
receipt of a request. Registrants also would be required to indicate
whether information is incorporated by reference into the prospectus
and, unless the information is delivered with the prospectus, explain
that it will be provided, without charge, on request. Finally, the
proposal would require that the back cover page include disclosure that
information about the registrant is available from the Commission and
how that information may be obtained.\33\
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\33\ Proposed Item 1(b).
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2. Item 2--Risk/Benefit Summary: Benefits and Risks
Proposed Form N-6 would require at the beginning of every
prospectus a risk/benefit summary that would provide key information
about a policy's risks, benefits, and fees. This information would be
required to appear in a specific sequence. The risk/benefit summary is
intended to respond to investors' strong preference for summary
information in a standardized format.\34\ It would provide all
investors
[[Page 13992]]
with key information about a policy in a standardized, easily
accessible place. This would help investors to evaluate and compare
variable life insurance policies. The proposed risk/benefit summary is
consistent with the approach taken in today's amendments to Form N-1A
and the release adopting the plain English rule.\35\ The Commission
requests comment on the sequence requirement and whether any particular
format should be required for the risk/benefit summary.
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\34\ Participants in focus groups conducted on behalf of the
Commission, for example, expressed strong support for summary
information about mutual funds in a standardized format. In
addition, in connection with an initiative to permit mutual funds to
use profiles summarizing key information, many individual investors
have written to the Commission about the need for concise, summary
information relating to a fund. In keeping with the goal of
providing key information in a standardized summary, proposed
General Instruction C.3.(b) would not permit a registrant to include
in the risk/benefit summary information that is not required or
otherwise permitted by the items prescribing the risk/benefit
summary.
\35\ 1998 Form N-1A Adopting Release, supra note 7; Plain
English Adopting Release, supra note 17, at 6373.
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Risks associated with Portfolio Companies would be addressed in the
Portfolio Companies' prospectuses and profiles, not the variable life
insurance prospectus. Policies frequently offer 10 or more Portfolio
Companies, and the Commission believes that a variable life insurance
prospectus may become too long and complex if it includes risk
information specific to each Portfolio Company. The Commission believes
that investors are better served by consulting the Portfolio Company
prospectus or profile for risk information relating to Portfolio
Companies in which they are interested.
The risk/benefit summary, however, would require a registrant to
present narrative information concerning the benefits available under
the policy; the allocation of premium payments to insurance coverage,
investments, and charges; and the risks of purchasing a policy in a
single location in the variable life prospectus. Risks to be covered
would include the risks of poor investment performance, the
unsuitability of variable life insurance policies as short-term savings
vehicles, the risks of policy lapse, limitations on access to cash
value through withdrawals, and the possibility of adverse tax
consequences. Variable life insurance prospectuses generally disclose
this information, particularly risk information, in the context of
long, often complex descriptions of the policy. The Commission believes
that the proposed narrative summary will help achieve more effective
communication of risks.\36\
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\36\ In 1995, the Commission issued a release requesting comment
on ways to improve risk disclosure and comparability of investment
company risk levels. Risk Concept Release, supra note 13. More than
75% of the individual investors commenting on the Risk Concept
Release specifically favored requiring a risk summary in mutual fund
prospectuses.
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The Commission requests comment on the proposed narrative summary
of policy benefits, allocation of premiums, and risks. Is this
narrative summary necessary or helpful for variable life insurance
prospectuses? Are the particular items included useful, and should
other items be included? Should the risks of particular Portfolio
Companies be described in the variable life insurance prospectus?
3. Item 3--Risk/Benefit Summary: Fee Table
Purpose of Fee Table. Along with investment performance, fees and
charges are a crucial element in determining the return that an
investor will realize from any investment company. For that reason, the
Commission has required a fee table in the prospectuses of both mutual
funds and variable annuities.\37\ Through the fee tables, the
Commission has sought to provide uniformity, simplicity, and
comparability in fee disclosure.\38\ The Commission believes that
clear, understandable disclosure of fees and charges is equally
important to investors considering the purchase of variable life
insurance and, for that reason, Item 3 of Proposed Form N-6 would
extend a fee table requirement to variable life insurance.
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\37\ Item 3 of Form N-1A; Item 3 of Form N-4.
\38\ N-1A Fee Table Adopting Release, supra note 12, at 3194;
Investment Company Act Release No. 15932 (Aug. 18, 1987) [52 FR
32018, 32019] (``N-1A Fee Table Proposing Release'').
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The fees and charges associated with variable life insurance
products often are quite complex for several reasons. First, the
structure of fees often differs from one policy to another, making
comparisons among products difficult. Second, fees typically are
imposed at several levels within a variable life insurance policy,
making it difficult to assess the aggregate effect of charges. For
example, management and other expenses may be deducted at the Portfolio
Company level, asset-based charges such as a mortality and expense risk
charge may be deducted against separate account assets, and other
charges, such as cost of insurance, may be assessed against a
policyholder's individual cash value. Third, some variable life
charges, particularly cost of insurance (i.e., the charge imposed for
death benefit coverage), vary based upon the individual characteristics
of the purchaser and change over the life of a policy.
The complexity of variable life insurance fees and charges makes it
more difficult to prescribe a standardized disclosure format than for
mutual funds or variable annuities. The Commission believes, however,
that this complexity also makes it particularly important that
investors receive clear, understandable disclosure about this essential
aspect of the investment decision. The importance of this disclosure
has been heightened since the passage of the National Securities
Markets Improvement Act of 1996 (``NSMIA''). NSMIA amended Sections 26
and 27 of the Investment Company Act to replace specific limits on the
amount, type, and timing of charges that applied to variable insurance
contracts with a requirement that aggregate charges be reasonable in
relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the insurance company.\39\ The
increased flexibility to structure variable life insurance charges
given to insurers by NSMIA increases the need for clear, understandable
disclosure of charges.\40\ Proposed Item 3 is intended to facilitate
uniformity, simplicity, and comparability of variable life insurance
fees and charges, while permitting flexibility when the nature of the
product requires it.
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\39\ 15 U.S.C. 80a-26; 15 U.S.C. 80a-27; National Securities
Markets Improvement Act of 1996, Pub. L. No. 104-290 (1996), Section
205; S. Rep. No. 293, 104th Cong., 2d Sess. 22 (1996) (``Senate
Report''); H. Rep. No. 622, 104th Cong., 2d Sess. 45-46 (1996)
(``House Report'').
\40\ In addition, in light of NSMIA, the National Association of
Securities Dealers, Inc. (``NASD'') recently filed with the
Commission a proposed rule change that would eliminate the maximum
sales charge limitations applicable to variable insurance contracts.
SR-NASD-98-14 (filed Feb. 17, 1998) (available in the Commission's
Public Reference Room).
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Variable life insurance prospectuses typically have included
hypothetical illustrations that reflect the effect of charges under
specified assumptions and thereby serve some of the purposes of a fee
table.\41\ The Commission is concerned, however, that the illustration
of one or a limited number of scenarios that demonstrate the effect of
policy charges on particular policyholders with particular premium
payment patterns is not an adequate substitute for clear, tabular
disclosure of
[[Page 13993]]
the level of each charge imposed by a policy.\42\
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\41\ See N-1A Fee Table Adopting Release, supra note 12, at
3194; N-4 Fee Table Adopting Release, supra note 12, at 4775.
\42\ See discussion of illustrations infra Section II.C.3.
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Further, in recent years, the Commission has observed that a number
of variable life insurance registrants, on their own initiative, have
added relatively simple, tabular presentations of fees and charges to
their prospectuses. The Commission believes that these efforts
represent a significant step toward enhanced communication with
investors about fees and charges and that it is appropriate, at this
time, to extend these voluntary efforts to the industry as a whole.
Commenters are requested to discuss the relative merits of hypothetical
illustrations and fee tables in communicating charges to investors in a
manner that is clear and understandable and that facilitates
comparisons from one policy to another.
Fee Table Format. The proposed fee table consists of three separate
sections. The first section shows policyholder transaction fees, such
as sales loads, surrender charges, and transfer fees. The second
section shows annual charges, excluding annual Portfolio Company
operating expenses. The third section shows annual Portfolio Company
operating expenses, including management fees, distribution fees, and
other expenses. Comment is requested on the proposed organization of
the fee table and whether it would facilitate investor understanding of
fees and charges. Is some other organization preferable? Should
registrants have greater flexibility to organize the presentation of
charges?
For each charge, the proposed table would use a four-column format
to require a registrant to identify the charge, when the charge is
deducted, the amount of the charge, and whether the charge is deducted
from all policies or only certain policies. This format differs from
that of the fee tables in Form N-1A and Form N-4, which simply require
identification of the charge, with a parenthetical statement of the
basis on which it is imposed, and specification of the amount of the
charge.
The proposed format is intended to recognize the complexity of
variable life insurance charges, help investors to locate information
about charges readily, and provide flexibility to registrants to
describe policy charges completely. The ``Amount Deducted'' column, for
example, will provide an opportunity for registrants to describe the
level of a particular charge and the basis on which it is deducted,
e.g., percentage of premiums, cost per $1,000 of face amount,
percentage of average daily net assets. The ``Policies from Which
Charge is Deducted'' column will permit registrants to identify clearly
charges that apply to all policies and those that do not, e.g., charges
that apply only to policyholders with a certain account value or that
elect a particular death benefit option or optional rider.
The Commission requests comment on the four-column format of the
table. Should the information required by each of the columns be
included in a variable life fee table? Is the four-column format the
best means for providing this information or are there better ways for
communicating this information to investors?
Fee Table Requirements. The proposed fee table would require
registrants to disclose all fees and charges, whether or not a specific
caption is provided for a charge in the proposed fee table.\43\ The
Commission believes that complete disclosure of fees and charges is
appropriate. At the same time, the Commission is concerned that
disclosure of fees and charges that apply to a very small proportion of
policyholders could potentially overwhelm investors with information of
limited relevance. The Commission therefore requests comment on whether
there should be any limitations on the charges required to be disclosed
in the fee table. For example, should charges be disclosed only if they
apply to some minimum number or percentage of policyholders? Should all
charges for optional riders, e.g., accidental death benefit, children's
insurance, or guaranteed insurability, be disclosed? Should the
instructions provide additional guidance on the fees that are required
to be disclosed?
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\43\ Instructions 2(c) and 3(e) to proposed Item 3.
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Disclosure of the maximum charge for each item is required unless a
specific instruction directs otherwise.\44\ For cost of insurance,
registrants are required to disclose the minimum and maximum charges.
Cost of insurance generally is a significant expense item for variable
life insurance policyholders.\45\ For that reason, the Commission
believes that it is important for investors to receive information
about the level of this charge. The Commission recognizes, however,
that this charge varies from policyholder to policyholder, based on
individual characteristics such as age, sex, and risk classification,
so that the charge does not readily lend itself to quantification in a
table that applies to all policyholders. The Commission has proposed
disclosure of the range of this charge, which could be accompanied by
brief explanatory material, such as the factors that affect the level
of the charge.
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\44\ Instruction 1(e) to proposed Item 3.
\45\ See Blease, Costs Count: A Best's Policy Reports Survey
Examines the Costs Incurred with the Life Insurance Portion of
Variable Universal Life Policies, BEST'S REVIEW--LIFE-HEALTH
INSURANCE EDITION, Jan. 1997, at 37.
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The Commission requests comment on the possible approaches to
disclosure of the cost of insurance, including the range of the charge,
the maximum charge, the average charge for existing policyholders, the
level of the charge for a policyholder with characteristics that are
fairly representative of purchasers of the policy, and line item
narrative disclosure that the charge is imposed and the factors on
which it is based. Commenters also are requested to address whether
charges other than the cost of insurance may be quantified in the
manner that would be required by the proposed fee table.
If a registrant invests in multiple Portfolio Companies, the
proposed fee table would require disclosure of the range of expenses
for all of the Portfolio Companies.\46\ This approach is different from
Form N-4, which requires separate disclosure of the expenses of each
Portfolio Company.\47\ Because variable life fees and charges are
complex, and because policies frequently offer 10 or more Portfolio
Companies, the Commission believes that investors could be overwhelmed
by information of limited relevance if the fees and charges for each
Portfolio Company were separately stated in the fee table.\48\ The
Commission requests comment on how Portfolio Company fees and charges
should be disclosed in Form N-6. Should a range be used, as proposed;
should the fees and charges for each
[[Page 13994]]
Portfolio Company be separately stated; or should some other approach
be adopted?
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\46\ Instruction 4(b) to proposed Item 3. Portfolio Company
operating expenses would be required to be disclosed before expense
reimbursements and fee waiver arrangements. Registrants would be
permitted to disclose expenses after reimbursement or waiver in a
footnote. See Instructions 4(f)(i) and (g) to proposed Item 3. This
approach mirrors the approach recently adopted by the Commission in
Form N-1A. Item 3 of Form N-1A; 1998 Form N-1A Adopting Release,
supra note 7; 1997 Form N-1A Proposing Release, supra note 7, at
10908.
\47\ Item 3 of Form N-4; Investment Company Act Release No.
16482 (July 15, 1988) [53 FR 27872, 27873-74] (``N-4 Fee Table
Proposing Release'').
\48\ This is less of a concern in the case of Form N-4 because
the simpler, more uniform nature of variable annuity charges results
in a less complex fee table. The Commission notes, however, that, in
recent years, the number of investment options that is typically
available in variable annuity contracts has expanded. See O'Brian
and Fitzsimmons, Variable Annuities Put More Eggs In The Basket, THE
WALL STREET JOURNAL, Sept. 29, 1997, at C22. For that reason, the
Commission expects to reconsider the appropriate disclosure of
Portfolio Company fees and charges in a variable annuity prospectus
as part of a broader consideration of ways to improve communication
of information to variable annuity investors.
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Form N-1A does not require a mutual fund that offers its shares
exclusively as investment options for variable annuity and variable
life insurance contracts to include the fee table in its
prospectus.\49\ The Commission intends to amend Form N-1A to require
the prospectus of a mutual fund that offers its shares as investment
options for variable life insurance policies to include a fee table if
the Form N-6, as adopted, does not require separate disclosure of the
operating expenses of each Portfolio Company. This would ensure that
variable life insurance investors have access to complete information
about Portfolio Company fees and expenses. The Commission requests
comment on whether the exemption from the fee table requirement in Form
N-1A should be eliminated for mutual funds that offer their shares as
investment options for variable life insurance policies. The Commission
also requests comment on whether the exemption from the fee table
requirement in Form N-1A should be eliminated for mutual funds that
offer their shares as investment options for variable annuity contracts
if the exemption is eliminated for mutual funds that offer their shares
as investment options for variable life insurance policies.
---------------------------------------------------------------------------
\49\ Item 3 of Form N-1A.
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Fee Table Example. Proposed Item 3 would not require an example of
the expenses that would be incurred by an investor over specified
periods. This is different from the fee tables of Form N-1A and Form N-
4, both of which require such an example.\50\ Because of the
individualized nature of fees and charges associated with variable life
insurance, particularly the cost of insurance, the Commission believes
that it would be difficult to design a single example or small number
of examples that would provide a useful comparison tool for investors
considering different variable life insurance policies.
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\50\ Item 3 of Form N-1A; Item 3(a) of Form N-4.
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In amending Form N-1A, the Commission today is reiterating its
belief that the fee table example provides useful information that
helps a typical mutual fund investor understand and compare the
expenses of different funds.\51\ The Commission concluded that
expressing expense amounts solely as a percentage, as is done in the
fee table, may not give the average mutual fund investor enough
information to assess the likely effect of a fund's expenses on an
investment in the fund. Mutual fund fees, which typically are less
individualized than the fees of variable life insurance policies, may
be easier to reflect in an example that has broad application. The
Commission requests comment on whether a fee table example should be
required by Form N-6 and, if so, what should be required by the
example.
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\51\ 1998 Form N-1A Adopting Release, supra note 7.
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4. Item 4--General Description of Registrant, Depositor, and Portfolio
Companies
Proposed Item 4 would require a concise discussion of the
organization and operation of the registrant, including the name and
address of the depositor and a brief description of the registrant.
This requirement is similar to, but more streamlined than, Item 5 of
Form N-4. For example, Item 5 of Form N-4 requires registrants to
disclose the general nature of the depositor's business, the date and
form of organization of the depositor and the state in which it is
organized, the name of any ultimate controlling person of the depositor
and the general nature of its business, and the date and form of
organization of the registrant and its classification under the
Investment Company Act. Proposed Form N-6 would include this
information in the SAI because it is technical information that does
not appear to be essential to an investor when evaluating a particular
variable life insurance policy or comparing different variable life
insurance policies.\52\ The Commission requests comment on appropriate
disclosure of matters relating to the general description of the
registrant and depositor. For example, is any information omitted from
proposed Item 4 that is essential to an investment decision? Is any
information included in Item 4 that is not essential to an investment
decision?
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\52\ Proposed Item 16. Cf. 1998 Form N-1A Adopting Release,
supra note 7 (moves to SAI disclosure about a fund's form and date
of organization and state of incorporation).
---------------------------------------------------------------------------
Proposed Item 4 also would require that the prospectus briefly
describe each Portfolio Company, including (i) its name; (ii) its type
(e.g., money market fund, bond fund, balanced fund) or a brief
statement concerning its investment objectives; and (iii) its
investment adviser and any sub-adviser. Registrants would be required
to state how investors may obtain a prospectus and, if available, a
profile for the Portfolio Companies. Item 4 also would require a
discussion of the rights of policyholders to instruct the depositor on
the voting of Portfolio Company shares.
Over time, many registrants have included the investment objectives
of Portfolio Companies along with additional information about the
investment advisers and the risks associated with the Portfolio
Companies in variable life prospectuses, as well as in the Portfolio
Company prospectuses. The Commission believes that including detailed
information about Portfolio Companies in a variable life prospectus is
redundant and conflicts with the Commission's efforts to eliminate
prospectus clutter that tends to obscure information that could help an
investor make a decision about purchasing a variable life insurance
policy.\53\ Instruction 2 therefore would clarify that detailed
Portfolio Company information is not required in the variable life
insurance prospectus. In addition, if a Portfolio Company's name
describes its type, the prospectus would not be required to include the
Portfolio Company's type or a statement concerning its investment
objectives.\54\ Commenters are asked to address whether proposed Item 4
requires sufficient information about Portfolio Companies or whether
additional information should be included.
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\53\ See, e.g., 1998 Form N-1A Adopting Release, supra note 7;
1997 Form N-1A Proposing Release, supra note 7, at 10900.
\54\ Cf. Cova Financial Services Life Ins. Co. (pub. avail. Apr.
15, 1996) (clarifying that variable annuity separate account
prospectuses need not include detailed information about Portfolio
Companies).
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5. Item 5--Charges
Proposed Item 5 would require registrants to describe briefly all
charges deducted from premiums, cash value, assets of the registrant,
or any other source. These charges include sales loads, premium and
other taxes, administrative and transaction charges, risk charges,
contract loan charges, cost of insurance, and rider charges.
Registrants would be required to indicate the source from which each
charge will be deducted, and specify the amount of the charge as a
percentage or dollar figure and the frequency of its deduction.
Registrants also would be required to identify the recipient of any
amount deducted and the consideration provided for any charge, and
explain the extent to which the charge can be modified.
The cost of insurance charge represents a significant expense
associated with a variable life insurance policy. Instruction 2 to Item
5(a) would require a registrant to identify the factors upon which the
cost of insurance
[[Page 13995]]
charge will be based, including the insurer's amount at risk and the
expected longevity of the insureds. A registrant would be required to
identify the factors reflected in the rate scale, and specify whether
the mortality charges guaranteed in the contracts differ from the
current charges. A registrant also would be required to identify the
factors that affect the amount at risk, including investment
performance, payment of premiums, and charges. If the insurer intends
to use simplified underwriting or other underwriting methods that would
cause healthy individuals to pay higher cost of insurance charges than
they would pay if the insurance company used conventional underwriting
methods, a registrant would be required to state that the cost of
insurance charges are higher for healthy individuals when this method
of underwriting is used.
Proposed Item 5 also would require registrants to state that there
are charges deducted from and expenses paid out of the assets of the
Portfolio Companies that are described in the prospectuses for those
companies and to disclose, if applicable, that charges will be deducted
for incidental insurance benefits offered with the policy. The item
also would require a statement about the registrant's expenses. If the
organizational expenses of the registrant are to be paid out of its
assets, the registrant would be required to disclose, if applicable,
how the expenses will be amortized and the period of amortization.
6. Item 6--General Description of Contracts
Proposed Item 6 would require registrants to identify all persons
who have material rights under the variable life insurance policies and
the nature of those rights. The item also would require a brief
description of any provisions for allocation of premiums among sub-
accounts of the registrant, transfer of cash value between sub-
accounts, and conversion or exchange of policies for other life
insurance or annuity contracts.
The item also would require a brief description of the changes that
can be made in the policies or the operations of the registrant by the
registrant or its depositor, including (i) why a change may be made,
(ii) who must approve any change, and (iii) who must be notified of any
change. The instruction to Proposed Item 6(c) specifically restricts
the information that must be provided to changes that would be material
to a purchaser of the policies, such as a reservation of the right to
deregister the registrant under the Investment Company Act. The item
would require a registrant to identify any other material incidental
benefits in the policies. Finally, the item would require disclosure of
any limitations on the class of purchasers to whom the policies are
being offered.
7. Item 7--Premiums
Proposed Item 7 would require registrants to describe how to
purchase a variable life insurance policy and the provisions of the
policy relating to premiums. Registrants would be required to disclose
the minimum initial and subsequent premiums required, any limits on the
amount and frequency of premiums that will be accepted, how long
investors must continue to pay premiums, and whether investors can
prevent a policy from lapsing by paying a certain level of premiums.
The item also would require registrants to discuss any circumstances in
which (i) premiums may be required to prevent lapse and how the amount
of additional premiums will be determined; (ii) a policy will not lapse
if an investor does not pay a required premium; (iii) an investor may
pay more in premiums than the policy requires; and (iv) the level of a
policy's required premiums may change, and, if so, how the amount of
the change will be determined. The item also would require disclosure
of the factors that determine the amount of any required premiums, such
as face amount, death benefit option, and charges and expenses.
The item would require registrants to identify the premium payment
plans available. Registrants would be required to include the available
payment frequencies, payment mechanisms such as payroll deduction plans
and preauthorized checking arrangements, and any special billing
arrangements. Registrants would be required to indicate whether the
premium payment plan or schedule may be changed.
Registrants also would be required to explain the policy's
provisions regarding premium due dates and how any grace period
operates. The item would require registrants to describe any
circumstances under which required premiums may be paid by means of an
automatic premium loan.
Finally, proposed Item 7 would require registrants to describe when
sub-account assets are valued and when required premiums and additional
premiums are credited to cash value. Registrants would be required to
explain the basis on which premiums are credited. Registrants would be
instructed to describe where premiums are held during any time period
(e.g., a ``free-look'' period) in which the crediting of premiums to
sub-accounts is delayed.
8. Item 8--Death Benefits and Contract Values
Proposed Item 8 would require registrants to describe briefly the
death benefits available under the variable life insurance policy. The
prospectus would be required to disclose when insurance coverage is
effective, when the death benefit is calculated and payable, how the
death benefit is calculated, what forms of death benefit are available,
who may choose the form of death benefit and how, what the default
death benefit is, and whether the policy guarantees a minimum death
benefit. Registrants also would be required to describe if and how a
policyholder may increase or decrease the face amount. The item also
would require registrants to explain how the investment performance of
the Portfolio Companies and expenses and charges affect policy values
and death benefits.
9. Item 9--Surrenders, Partial Surrenders, and Partial Withdrawals
Proposed Item 9 would require registrants to describe briefly how a
policyholder may surrender a policy. Registrants would be required to
disclose any limits on the ability to surrender, how surrender proceeds
are calculated, and when proceeds are payable. The item also would
require registrants to disclose whether and under what circumstances
partial surrenders and partial withdrawals are available under a
policy, including the minimum and maximum amounts that may be
surrendered or withdrawn and any limits on the availability of partial
surrenders or partial withdrawals. The item also would require
registrants to describe whether partial surrenders or partial
withdrawals will affect a policy's cash value or death benefit, whether
any charges will apply, and the manner in which partial surrenders and
partial withdrawals will be allocated among sub-accounts.
Finally, the item would require registrants to describe briefly any
revocation rights (e.g., free-look provisions). Registrants would be
required to describe how the amount refunded is determined, the method
for crediting earnings to premiums during the free-look period, and
whether investment options are limited during the free-look period
(e.g., premiums must be allocated to the money market sub-account).
10. Item 10--Loans
Proposed Item 10 would require registrants to describe the policy
[[Page 13996]]
provisions governing loans of a policy's cash value and any limits on
loan availability. Registrants would be required to state the amount of
interest charged on a loan and the amount of interest credited to the
policy in connection with the loan. A description of loan procedures
would be required, including how and when amounts borrowed are
transferred out of the registrant and how and when amounts repaid are
credited to the registrant. A registrant would be required to explain
briefly that amounts borrowed do not participate in the registrant's
investment experience and that loans can affect the policy's cash value
and death benefit regardless of whether the loan is repaid. Registrants
also would be required to explain that the cash surrender value and the
proceeds payable on death will be reduced by the amount of any
outstanding loan plus accrued interest.
11. Item 11--Lapse and Reinstatement
Proposed Item 11 would require registrants to state when a policy
will lapse and under what circumstances a lapsed policy may be
reinstated. Registrants would be required to explain any requirements
for reinstatement, including payments of charges and outstanding loans
and presentation of evidence of insurability. Registrants also would be
required to describe briefly any lapse options available, indicate
whether any of those options is subject to limits on availability, and
indicate which options will not apply unless elected and which options
are default options. Registrants would be required to describe briefly
the factors that will determine the amount of insurance coverage
provided under the available lapse options. Registrants would be
required to describe concisely how the cash value, surrender value, and
death benefit will be determined upon lapse.
12. Item 12--Taxes
Proposed Item 12 would require registrants to describe the material
tax consequences to the policyholder and beneficiary of buying,
holding, exchanging, or exercising rights under the policy. Registrants
would be required to discuss the taxation of death benefit proceeds,
periodic and non-periodic withdrawals, loans, and any other
distribution that may be received under the policy, as well as tax
benefits accorded the policy.
Proposed Item 12 is intended to focus tax disclosure on the likely
tax consequences to policyholders of purchasing a variable life
insurance policy. The proposal is intended to elicit disclosure that is
not overly lengthy or technical and that does not use jargon that is
difficult for the average or typical investor to understand.
13. Item 13--Legal Proceedings
Proposed Item 13 would require a registrant to describe any
material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the registrant, the
registrant's principal underwriter, or the depositor is a party.
Registrants also would be required to include information as to legal
proceedings contemplated by a governmental authority. For purposes of
this item, legal proceedings are material only to the extent that they
are likely to have a material adverse effect on the registrant, the
ability of the principal underwriter to perform its contract with the
registrant, or the ability of the depositor to perform its obligations
under the policies. Proposed Item 13 would require information
comparable to that required by Form N-1A and Commission forms that
apply to other issuers.\55\
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\55\ See Item 6(a)(3) of Form N-1A; Item 12 of Form N-2 [17 CFR
274.11a-1] (closed-end investment companies); Item 103 of Regulation
S-K [17 CFR 229.103] (non-investment company issuers). See also
Investment Company Act Release No. 19155 (Nov. 30, 1992) [57 FR
56862] (modifying Form N-2 to conform to Item 103).
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14. Item 14--Financial Statements
Proposed Form N-6, like Form N-4, would not require financial
statements of the registrant and the depositor to be included in the
prospectus. Item 14, however, would require the registrant to state in
the prospectus where the financial statements may be found and explain
how any financial statements not in the SAI may be obtained. This
requirement is similar to Item 4(c) of Form N-4.
Unlike Form N-4 and Form N-1A, proposed Form N-6 would not require
a registrant to include summary financial information in its
prospectus.\56\ Form N-4 requires a registrant to disclose, for the
last ten fiscal years and for each sub-account, the accumulation unit
value at the beginning and end of each period and the number of
accumulation units outstanding at the end of each period. For variable
annuity contracts, the change in accumulation unit value provides a
measure of performance of the registrant's sub-accounts. Because of the
individual nature of variable life insurance charges, such as the cost
of insurance, there does not appear to be a comparable measure of
performance that is applicable to all holders of a particular variable
life insurance policy.\57\ Each Portfolio Company, however, would
continue to provide its own summary financial information in its
prospectus.\58\
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\56\ See Item 4(a) of Form N-4; Item 9 of Form N-1A.
\57\ See discussion of performance data infra Section II.C.2.
\58\ See Item 9 of Form N-1A.
---------------------------------------------------------------------------
The Commission requests comment on the appropriate location for
registrant and depositor financial statements. The Commission also
requests comment on whether variable life insurance registrants should
be required to include summary financial information in their
prospectuses. Can sub-account performance be meaningfully measured in a
manner that is applicable to all holders of a particular variable life
insurance policy, e.g., by reflecting Portfolio Company fees and
expenses and any other charges that are uniformly applied to all
policyholders? Should summary financial information of the Portfolio
Companies be required to be included in the Form N-6 prospectus?
C. Part B--Statement of Additional Information
The SAI would provide a more detailed discussion of matters
described in the prospectus as well as additional information about a
fund.\59\ Many of the items are similar to the items in Part B of Forms
N-4 and N-1A and therefore are not discussed in this release. Three
items, however, merit separate attention.
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\59\ See proposed General Instruction C.2.(b).
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1. Item 24--Financial Statements
The financial statements of the registrant required by proposed
Item 24 are the same as the financial statements required by Item 23 of
Form N-4. The full financial statements of the registrant would be in
the SAI. The only financial information for the depositor required to
be in the SAI would be comparative balance sheets for the last two
fiscal years and, in certain cases, a more current interim balance
sheet. As with Form N-4, the other financial statements of the
depositor (e.g., statement of operations and statement of changes)
would be required to be included in the registration statement, but
could be included in Part C rather than the SAI. These financial
statements would be required to be made available to investors upon
request, free of charge. The Commission believes that this would allow
a shorter SAI, while still providing investors with adequate
information about the solvency of the depositor.
[[Page 13997]]
Instruction 1 to proposed Item 24, like Instruction 1 to Item 23 of
Form N-4, would provide that a depositor's financial statements may be
prepared in accordance with statutory requirements if the depositor
would not have to prepare financial statements in accordance with
generally accepted accounting principles (``GAAP'') except for use in a
registration statement filed on Form N-3, N-4, or N-6.\60\ In recent
years, increasing numbers of depositors have elected to prepare
financial statements in accordance with GAAP for use in business
transactions.\61\ In addition, when a depositor's parent company
prepares financial statements on a GAAP basis, the depositor typically
prepares either partial GAAP financial statements or a GAAP reporting
package to be used by the parent in its consolidated financial
statements. In these circumstances, Form N-6 would require full GAAP
financial statements of the depositor. In those limited circumstances
when GAAP financial statements are not prepared for either the
depositor or its parent, or the depositor's accounts are immaterial to
its parent's consolidated financial statements and, therefore, neither
partial GAAP financial statements nor a GAAP reporting package is
prepared by the depositor, statutory financial statements could be used
in Form N-6.
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\60\ GAAP is an accounting term that encompasses the
conventions, rules, and practices that define accepted accounting at
a particular time issued by various authoritative bodies including
the Financial Accounting Standards Board (``FASB'') and the American
Institute of Certified Public Accountants (``AICPA''). See
Codification of Financial Reporting Policies of the SEC, Section
101. Financial statements prepared in accordance with statutory
requirements, which may vary from state to state, differ from those
prepared in accordance with GAAP. Statutory requirements are the
basis of accounting that insurance companies use to comply with the
financial reporting requirements of state insurance regulations.
Regulation S-X permits financial statements for mutual life
insurance companies and wholly owned stock insurance company
subsidiaries of mutual life insurance companies to be prepared in
accordance with statutory requirements, except when the applicable
registration forms specifically provide otherwise. 17 CFR 210.1-
01(a); 17 CFR 210.7-02(b).
\61\ Prior to the 1993 issuance of Interpretation 40 (``IN 40'')
by FASB, many mutual life insurance companies prepared financial
statements solely on a statutory basis. The FASB became aware that
financial statements prepared in accordance with statutory
accounting practices were often described as having been prepared in
accordance with GAAP. IN 40 clarified that companies, including
mutual life insurance companies, that issue financial statements
described as prepared in conformity with GAAP must apply all
applicable authoritative accounting pronouncements in preparing
those statements. FASB Interpretation No. 40, Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance
and Other Enterprises (Apr. 1993). See also Financial Accounting
Standards Board, Statement on Financial Accounting Standards No.
120, Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long-Duration Participation
Contracts (Jan. 1995) (``SFAS 120'') (deferring the effective date
of IN 40 and stating that mutual life insurance companies that
prepare financial statements based on statutory accounting practices
that differ from GAAP and distribute those financial statements to
regulators should not describe the financial statements as prepared
in accordance with GAAP). As a result of SFAS 120, if insurance
company financial statements are not prepared in accordance with
GAAP, the financial statements must include either an adverse or
qualified audit opinion as to conformity with GAAP. Codification on
Statements on Auditing Standards, AU Section 544 (AICPA).
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Instruction 3 to proposed Item 24, like Instruction 3 to Item 23 of
Form N-4, would provide that the financial statements of the depositor
need not be more current than as of the end of the most recent fiscal
year of the depositor. In addition, Instruction 3 would provide that if
the anticipated effective date of a registration statement is within 90
days of the end of the depositor's fiscal year and audited financial
statements for the fiscal year are unavailable, the financial
statements of the depositor need not be more current than the close of
the third quarter of the previous fiscal year.\62\ This instruction
would extend to depositors of variable life insurance separate accounts
the relief that is generally provided by Regulation S-X when the
anticipated effective date of a filing falls within 46 to 90 days of
the end of a registrant's fiscal year.\63\ The instruction codifies
relief that the Commission staff has informally provided to variable
annuity and variable life insurance registrants.
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\62\ Third quarter financial statements would not need to be
audited in these circumstances. Rule 10-01(a)(1) of Regulation S-X
[17 CFR 210.10-01].
\63\ See Rule 3-12(b) of Regulation S-X [17 CFR 210.3-12] (when
anticipated effective date of filing falls within 90 days subsequent
to the fiscal year, the filing need not include financial statements
more current than as of the end of the third fiscal quarter, unless
the audited financial statements of such fiscal year are available,
or the anticipated effective date falls after 45 days subsequent to
the end of the fiscal year and the registrant does not meet the
conditions of Rule 3-01(c)). The relief provided in Rule 3-12(b) is
not available to mutual insurance companies, when the anticipated
effective date falls within 46 to 90 days subsequent to the fiscal
year end, because those companies do not file reports pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934, which is
a condition of Rule 3-01(c).
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The Commission requests comment on the requirements concerning the
use of financial statements prepared in accordance with GAAP and
financial statements prepared in accordance with statutory
requirements. The Commission also requests comment on the requirements
concerning the age of financial statements.
2. Item 25--Performance Data
Proposed Item 25 would require the registrant to include in the SAI
an explanation of how it calculates performance data used in
advertising, including how charges are reflected in the data.
Registrants also would be required to provide a quotation of
performance for each sub-account for which performance data is
advertised.
Proposed Form N-6 would not require disclosure of any historical
performance information. The Commission believes that, at the present
time, no method of measuring variable life insurance performance has
been devised that is useful enough that its disclosure should be
required.
Variable life insurance performance is difficult to measure because
of the complexity of the product and because policy charges and values
are linked to individual characteristics of a particular investor. In
addition, variable life policies provide cash value and death benefits,
and both of these may be affected over time, in different ways, by
policy charges and earnings.
Three types of performance information are sometimes included in
variable life insurance registration statements, but each has the
limitations noted.
Portfolio Company performance. This measure is net of
investment management fees and other Portfolio Company fees and
expenses, but unadjusted for fees and expenses imposed on the separate
account or individual policyholders. It may be useful as a measure of
Portfolio Company performance, but it significantly overstates the
performance policyholders will receive after deductions for all
charges.
Portfolio Company performance adjusted for separate
account asset-based charges. This is a hybrid measure that is net of
investment management fees, other Portfolio Company fees and expenses,
and separate account asset-based charges. This form of performance does
not measure either Portfolio Company performance (because of the
deduction of separate account asset-based charges) or the performance a
policyholder will receive (because of the failure to deduct charges
imposed on the individual policyholder).
Illustrations of cash values and death benefits. These
illustrations are based on actual investment performance of a Portfolio
Company and specified assumptions about premiums and the insured
individual (e.g., sex, age, rating classification). This form of
performance does not have the defects of the other two, because it
reflects all of the fees and charges at the Portfolio Company, separate
account, and individual policyholder levels. It has very limited
usefulness, however, to the many prospective investors whose proposed
[[Page 13998]]
premium payment patterns and individual characteristics diverge from
those assumed.
Proposed Form N-6 would not require performance information in the
prospectus. Nothing in the proposal, however, would preclude the
inclusion of historical performance information, including Portfolio
Company performance information, provided that the information is not
incomplete, inaccurate, or misleading and does not obscure or impede
understanding of the information that is required to be included.\64\
The Commission believes, however, that Portfolio Company performance
information is most appropriately included in the Portfolio Company's
prospectus, where it can be considered along with the risks of
investing in the Portfolio Company.\65\ Registrants should bear this in
mind in determining whether it is appropriate to include Portfolio
Company performance information in a Form N-6 prospectus.
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\64\ Proposed General Instruction C.3.(b).
\65\ See 1998 Form N-1A Adopting Release, supra note 7; 1997
Form N-1A Proposing Release, supra note 7, at 10902.
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The Commission requests that commenters discuss the advantages and
disadvantages of various forms of variable life insurance performance
information. Should any form of historical performance information be
required by Form N-6? What forms of performance information should be
permitted by Form N-6? Should any types of performance information be
prohibited by Form N-6?
3. Item 26--Illustrations
Permitted Use of Hypothetical Illustrations. Proposed Item 26 would
permit, but not require, registrants to include hypothetical
illustrations of a variable life insurance policy in either the
prospectus or the SAI. These are tabular presentations of numbers that
demonstrate how the cash value, cash surrender value, and death benefit
under a policy change over time based on (i) assumed gross rates of
return of the Portfolio Companies; and (ii) deduction of fees and
charges for a hypothetical policyholder (e.g., a 40-year old, non-
smoking male) with a specified policy face amount and premium payment
pattern. Currently, variable life insurance prospectuses commonly
include hypothetical illustrations using several different gross rates
of return (e.g., 0%, 6%, and 12%), two different expense levels
(current charges and guaranteed maximum charges), and multiple death
benefit options.
The Commission believes that hypothetical illustrations can enhance
an investor's understanding of the mechanics of a variable life
insurance policy. Illustrations of varying rates of investment return,
with other elements (e.g., policy face amount, premium payment pattern,
expenses, rating classification) held constant, can provide general
information about the relationship among death benefits, cash values,
and investment returns. Similarly, illustrations reflecting varying
expense levels, with other elements held constant, can provide general
information about how a policy would perform under different expense
scenarios.
The Commission believes, however, that there are some limits on the
usefulness of hypothetical illustrations. Any particular illustration
has limited relevance for most investors, because it is based on a
hypothetical investor with unique characteristics of age, sex, rating
classification, policy face amount, and premium payments that is
different from most investors. Further, it is probably impractical to
provide enough hypothetical illustrations in a variable life insurance
prospectus to permit comparison shopping among variable life insurance
policies by a broad range of investors, each with unique
characteristics. Because of the individualized nature of variable life
insurance policies and associated charges, comparison of illustrations
could show one product to be more advantageous than another, but a
change in the assumptions used in the illustrations could have the
opposite result. Finally, hypothetical illustrations are fairly
extensive tables of numbers that add complexity to a prospectus and can
be difficult to understand.
In light of the limited nature of hypothetical illustrations and
the complexity that they can add to variable life insurance
prospectuses, proposed Form N-6 would not require hypothetical
illustrations. The Commission believes, however, that hypothetical
illustrations can be useful tools to improve investor understanding of
a variable life insurance policy when they are presented clearly and in
a manner designed to help investors understand both the information
presented and the limited nature of that information. For that reason,
proposed Form N-6 would give a registrant the flexibility to include
hypothetical illustrations in the prospectus or SAI when it believes
that they would be helpful to investors. The Commission requests
comment on whether hypothetical illustrations should be permitted,
required, or prohibited in a variable life insurance prospectus or SAI.
Requirements for Hypothetical Illustrations. Proposed Item 26 would
impose requirements for any hypothetical illustrations included in the
prospectus or SAI. The proposed requirements are not intended to
standardize illustrations in order to permit comparison shopping
because, as noted above, the Commission believes that this goal may be
impractical within the bounds of a prospectus. Rather, the requirements
are intended to place reasonable limits on the assumptions that may be
used and discourage the presentation of misleading illustrations.
Registrants would, however, remain responsible for ensuring that the
illustrations are not incomplete, inaccurate, or misleading and do not,
because of their nature, quantity, or manner of presentation, obscure
or impede understanding of information required to be included.\66\
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\66\ Proposed General Instruction C.3.(b).
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Consistent with the Commission's commitment to the principles of
plain English, illustrations would be required to be preceded by a
clear and concise explanation.\67\ Similarly, headings for the
illustrations would be required to contain the information necessary to
identify clearly the scenario illustrated, including sex, age, rating
classification, premium amount and payment schedule, face amount, and
death benefit option.\68\
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\67\ Proposed Item 26(a).
\68\ Proposed Item 26(b).
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Premium amounts used in the illustrations should not be unduly
larger or smaller than the actual or expected average policy size, and
ages used should be representative of actual or expected policy
sales.\69\ The proposal would require that illustrations be shown for
the rating classification with the greatest number of outstanding
policies.\70\
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\69\ Proposed Item 26(c).
\70\ Proposed Item 26(d).
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Proposed Item 26 would require illustrated values to be provided
for policy years one through ten, for every five years beyond the tenth
policy year, and for the year of policy maturity.\71\ Registrants using
illustrations would be required to illustrate death benefits and cash
surrender values and could also illustrate cash values. Illustrated
values would be determined as of the end of the policy year.\72\
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\71\ Proposed Item 26(e).
\72\ Proposed Item 26(f).
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Proposed Item 26 would require registrants to use gross rates of
return of 0% and one other rate not exceeding
[[Page 13999]]
10%. Additional gross rates of return not greater than 10% would be
permitted.\73\ Currently, variable life insurance prospectuses
typically use rates of 0%, 6%, and 12% in illustrations.\74\ The
Commission believes that the use of two rates of return is necessary to
fulfill a basic purpose of illustrations, demonstrating the effect of
changing investment returns. The Commission does not believe, however,
that it would be helpful to require registrants using illustrations to
use more than two rates of return because of the potential for
overwhelming investors with excessive quantitative information that is
of limited relevance to their particular circumstances. Notwithstanding
current practice, which permits illustrations at rates up to 12%, the
proposal would cap the maximum permissible rate at 10%. This reflects
the Commission's concern that rates above 10% may have a significant
tendency to invite unrealistic investor expectations because long-term
stock market returns have averaged approximately 10-11% per year and
long-term returns on other asset classes have been lower. Moreover,
investors may give undue weight to a 12% illustration because they may
discount a 0% illustration as unrealistically low.
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\73\ Proposed Item 26(g).
\74\ The Commission staff has required registrants using
illustrations to include a 0% illustration and has prohibited rates
greater than 12%. See also NASD Conduct Rules, ``Communications with
the Public About Variable Life Insurance and Variable Annuities,''
IM-2210-2(b)(5)(A)(ii) (requiring variable life insurance
illustrations used for advertising and sales literature to use a
rate of 0% and any other rates not greater than 12%).
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The Commission invites comment on the number of rates of return
that should be required for registrants using illustrations. The
Commission also invites comment on the appropriate minimum and maximum
rates to be used for hypothetical illustrations.
Proposed Item 26 would require that Portfolio Company management
fees and other Portfolio Company charges and expenses be reflected
using the arithmetic average of those charges and expenses for all
available Portfolio Companies. The average would be based on Portfolio
Company charges and expenses incurred during the most recent fiscal
year or any materially greater amount expected to be incurred during
the current fiscal year.\75\ The Commission requests comment on how
Portfolio Company charges and expenses should be reflected in
illustrations.
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\75\ Proposed Item 26(h).
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Proposed Item 26 would require that illustrations reflect both
current and guaranteed maximum charges for charges not attributable to
the Portfolio Companies. The proposal would require that illustrations
reflect all charges deducted under the policy, as well as the timing of
those charges.\76\ The Commission believes that requiring illustrations
of both current and maximum guaranteed charges would be useful to
investors in comparing the interaction of different rates of return and
different charge levels. Commenters are requested to address how
charges not attributable to the Portfolio Companies should be reflected
in illustrations, including whether both current and guaranteed maximum
charges should be required.
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\76\ Proposed Item 26(i)
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Finally, proposed Item 26 would permit additional information to be
included in illustrations, provided that it is consistent with the
standards of Item 26.\77\ The Commission believes this flexibility is
important to permit registrants to design illustrations that are useful
to investors. Comment is requested on this approach.
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\77\ Proposed Item 26(j).
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Commenters are requested to address the proposed requirements for
the optional hypothetical illustrations. Is each of these requirements
appropriate and, if not, how should it be modified? Should any of the
requirements be eliminated or should others be added? Is it possible to
standardize hypothetical illustrations in a manner that would
facilitate comparison shopping among variable life insurance policies?
Commenters who believe that hypothetical illustrations should be
required, rather than permitted, also should address the criteria that
they believe would be appropriate for required hypothetical
illustrations.
Hypothetical Illustrations Based on Historical Rates of Return. The
Commission also is seeking comment on the use of hypothetical
illustrations constructed using historical rates of return for the
Portfolio Companies (``hypothetical historical illustrations'') rather
than assumed rates of return (e.g., 0% and 10%). Some variable life
insurance registrants currently include these illustrations in their
prospectuses, although this practice is not widespread. Proposed Form
N-6 does not specifically address hypothetical historical
illustrations.
The Commission has some concerns about the use of hypothetical
historical illustrations. Hypothetical historical illustrations share
all of the limitations of other hypothetical illustrations. They are of
limited relevance to investors having characteristics other than those
illustrated, they are not useful for comparison shopping, and they add
complexity to the prospectus. Further, hypothetical illustrations that
show a pattern of assumed returns, e.g., 0%, 5%, and 10%, can help
investors understand how different rates of return affect policy
performance. The actual historical rates of return illustrated in
hypothetical historical illustrations, however, will not have a pattern
and therefore are not useful to an investor attempting to understand
how a particular change in rates might affect policy values.
In addition, hypothetical historical illustrations are not a useful
means for presenting past performance because they depend on the
particular hypothetical policyholder, face amount, and premium payment
pattern selected.\78\ Hypothetical historical illustrations also tend
to invite prospective investors to assume that the cash values and
death benefits presented represent the values that they can expect and
may be misconstrued as projections. Finally, if a prospectus were to
include a hypothetical historical illustration for each Portfolio
Company, this could entail many pages of complex data. On the other
hand, creating a single hypothetical historical illustration with a
composite rate of return earned by all available Portfolio Companies
would render the illustration of still more limited relevance to an
investor who did not intend to allocate his or her investment in the
manner used to determine the composite rate of return.
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\78\ See discussion of performance data supra Section II.C.2.
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The Commission requests comment on hypothetical historical
illustrations and whether they should be required, permitted, or
prohibited by Form N-6. If hypothetical historical illustrations should
be required or permitted, should the Commission specify any standards
for their use?
Personalized Illustrations. Personalized illustrations are
frequently provided by insurers to prospective variable life insurance
investors at the point of sale. These illustrations reflect the
investor's particular circumstances, including age, sex, risk
classification, proposed face amount, and expected premium payment
pattern. The Commission believes that such illustrations can be a
highly useful tool for investors. Unlike hypothetical prospectus
illustrations, they reflect policy values based on an individual's
unique characteristics and therefore can provide more relevant
information for a particular investor. Further, personalized
illustrations are a
[[Page 14000]]
potentially useful comparison shopping tool, enabling a particular
investor to compare how different variable life insurance policies
would operate in the investor's particular circumstances.
Proposed Form N-6 does not address personalized illustrations
because these are customized for individual investors, delivered at the
point of sale, and not susceptible to inclusion in a prospectus. Absent
Commission action, insurers may use personalized illustrations in sales
literature subject to the antifraud provisions of the federal
securities laws and rule 156 under the Securities Act, as long as the
sales literature is preceded or accompanied by the prospectus.\79\ The
antifraud provisions make it unlawful to use materially misleading
sales literature in connection with the purchase or sale of investment
company securities.
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\79\ Section 17(a) of the Securities Act [15 U.S.C. 77q(a)];
Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C.
78j(b)] and Rule 10b-5 thereunder [17 CFR 240.10b-5]; Rule 156 under
the Securities Act [17 CFR 230.156]; Section 34(b) of the Investment
Company Act [15 U.S.C. 80a-33(b)]; Section 2(a)(10)(a) of the
Securities Act [15 U.S.C. 77b(a)(10)(a)].
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Although personalized illustrations do not appear in a variable
life insurance prospectus, these illustrations can be a very important
part of the information communicated to prospective variable life
insurance investors. For that reason, the Commission is requesting
comment on personalized illustrations. Should the prospectus be
required to state whether or not personalized illustrations are
available? Should the Commission require variable life insurance
registrants to deliver personalized illustrations to prospective
investors? If not, should the Commission nonetheless prescribe
requirements governing personalized illustrations for registrants that
elect to use them? What, if any, requirements should the Commission
prescribe for registrants using personalized illustrations? Should they
be the same criteria as those that apply to hypothetical illustrations
in proposed Form N-6, or should there be other requirements? The
Commission also seeks comment regarding the use of Portfolio Company
historical rates of return in personalized illustrations. Should the
Commission address this area and, if so, how?
The Commission understands that some insurers are using
personalized illustrations that reflect assumed rates of return,
together with the fees and charges of a single Portfolio Company rather
than the arithmetic average of fees and charges for all available
Portfolio Companies. In some cases, the chosen Portfolio Company may
have fees and charges that are lower than the arithmetic average for
all available Portfolio Companies. For example, personalized
illustrations might be based on the relatively low expenses of a money
market fund.
As discussed above, proposed Form N-6 would require that
hypothetical prospectus illustrations reflect the arithmetic average of
fees and charges for all available Portfolio Companies. The proposal
incorporates the Commission's view that it may be misleading to market
a variable life insurance policy based on illustrations that reflect
assumed rates of return and the fees and charges of a single Portfolio
Company when those fees and charges are less than the arithmetic
average of fees and charges for all available Portfolio Companies. For
that reason, the Commission is concerned about the practice of using a
single Portfolio Company's fees and charges in personalized
illustrations. The Commission has directed its examinations staff to
give heightened scrutiny to this issue in inspections of variable life
insurance registrants. The Commission also has discussed this matter
with the staff of the National Association of Securities Dealers
Regulation, Inc., (``NASD Regulation'') and requested that the NASD
Regulation staff consider this issue in its review of variable life
insurance sales literature. Comment is requested on whether Form N-6
should address the use of personalized illustrations that reflect the
fees and charges of a single available Portfolio Company.
D. Part C--Other Information
Part C of proposed Form N-6 would contain information in support of
a variable life insurance registration statement that is not included
in the prospectus or the SAI. Part C of proposed Form N-6 is based on
Part C of Form N-4 and Form N-1A, modified as appropriate to variable
life insurance. Certain exhibits required under proposed Item 27;
proposed Item 34, the fee representation; and an undertaking required
by Form N-4 but not proposed Form N-6 merit separate attention.
1. Item 27--Exhibits
If illustrations are included in the registration statement as
permitted by proposed Item 26, an opinion of an actuarial officer of
the depositor would be required by Item 27(l). The actuarial opinion
would be required to indicate that: (i) The values illustrated are
consistent with the provisions of the policy and the depositor's
administrative procedures; (ii) the rate structure of the policy, and
the assumptions selected for the illustrations, do not result in an
illustration of the relationship between premiums and benefits that is
materially more favorable than for a substantial majority of other
prospective policyholders; and (iii) the illustrations are based on a
commonly used rating classification and premium amounts and ages
appropriate for the markets in which the policy is sold.
Proposed Item 27(l) would require the opinion to indicate that the
rate structure and selected assumptions do not, in fact, have certain
results. As an alternative, the Commission considered whether the
actuary should be required to opine only that the rate structure and
the selected assumptions were not intended or designed to have certain
results. The Commission rejected the ``intent or design'' test because
it would permit illustrations that, in fact, distort the relationship
between premiums and benefits for a policy. Comment is requested on the
actuarial opinion requirement, including the ``in fact'' and ``intent
or design'' tests and other tests that could be used. Commenters are
requested to address the ``substantial majority of other prospective
policyholders'' standard in the second prong of the opinion. Should
this standard be stricter (e.g., all policyholders) or less strict
(e.g., majority of policyholders)?
Proposed Item 27(m) would require registrants that include
illustrations in their registration statements to provide one sample
calculation for each item illustrated, showing how the illustrated
values for the fifth policy year have been calculated. The calculation
would be required to demonstrate how the annual investment returns of
the sub-accounts were derived from the hypothetical gross rates of
return, how charges against sub-account assets were deducted from the
returns of the sub-accounts, and how the periodic deductions for policy
charges were made. Finally, the exhibit would be required to describe
how the calculation would differ for other years.
Consistent with the approach previously announced by the Commission
staff in connection with Form N-4, proposed Form N-6 would not require
submission of a financial data schedule meeting the requirements of
rule 483 under the Securities Act.\80\ In addition, the staff currently
does not require financial data schedules in connection with filings on
Form S-6 by
[[Page 14001]]
separate accounts offering variable life insurance policies.
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\80\ Sec Edgar News, Third Quarter 1996, at 3.
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2. Item 34--Fee Representation
NSMIA amended Sections 26 and 27 of the Investment Company Act,
replacing specific limits on the amount, type, and timing of charges
that applied to variable insurance contracts with a requirement that
aggregate charges be reasonable.\81\ Section 26(e) of the Investment
Company Act, added by NSMIA, requires that fees and charges deducted
under variable insurance contracts, in the aggregate, be reasonable in
relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the insurance company. Section 26(e)
also requires insurance companies to represent in variable insurance
registration statements that the reasonableness standard of Section
26(e) is satisfied. Proposed Item 34 requests the representation
required by Section 26(e).
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\81\ See Senate Report, supra note 39, at 22; House Report,
supra note 39, at 12, 17.
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3. Undertaking to Update Prospectus
Section 10(a)(3) of the Securities Act requires an issuer that is
engaging in a continuous offering to update the information in its
registration statement, so that the information is not more than 16
months old.\82\ Form N-4 requires a separate account registered as a
unit investment trust that offers variable annuity contracts to include
in Part C of its registration statement an undertaking to maintain a
current prospectus for so long as payments may be accepted under the
contracts.\83\ Proposed Form N-6 would not require a similar
undertaking. This reflects the Commission's view that issuers of
variable life insurance policies, like issuers of variable annuity
contracts, are required by Section 10(a)(3) of the Securities Act to
maintain a current prospectus for so long as payments may be accepted
under the policies, regardless of whether new policies are being sold.
The Commission believes that it is unnecessary to include in proposed
Form N-6 a requirement for an undertaking similar to that in Form N-4,
because this undertaking simply restates an issuer's obligation under
the Securities Act.
---------------------------------------------------------------------------
\82\ 15 U.S.C. 77j(a)(3).
\83\ Item 32(a) of Form N-4. See also N-4 Adopting Release,
supra note 7, at 26155.
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E. Technical Rule Amendments
The Commission is proposing technical amendments to several rules
under the Securities Act and Investment Company Act to accommodate
proposed Form N-6. The Commission is proposing to amend rules 134b,
430, 430A, 495, 496, and 497 under the Securities Act and rules 8b-11
and 8b-12 under the Investment Company Act to add Form N-6 to the list
of forms referenced in those rules.\84\ The Commission also is
proposing new rules prescribing the use of Form N-6 to register
insurance company separate accounts that are registered as unit
investment trusts and that offer variable life insurance policies under
the Investment Company Act and to register their securities under the
Securities Act.\85\ Finally, the Commission proposes to amend Form N-
8B-2 to clarify that Form N-8B-2 is not the proper form for Investment
Company Act registration of insurance company separate accounts
registered as unit investment trusts.\86\
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\84\ 17 CFR 230.134b, 230.430, 230.430A, 230.495, 230.496, and
230.497; 17 CFR 270.8b-11 and 270.8b-12.
\85\ Proposed 17 CFR 239.17c; Proposed 17 CFR 274.11d.
\86\ See proposed amendments to Form N-8B-2 and 17 CFR 274.12
(prescribing Form N-8B-2). The Commission is not proposing to amend
Form S-6 or 17 CFR 239.16 (prescribing Form S-6) because the form
and the rule state that Form S-6 is to be used to register the
securities of unit investment trusts registered on Form N-8B-2.
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F. Transition Period
If the Commission adopts proposed Form N-6, it would replace
current Forms S-6 and N-8B-2 for registration of unit investment trust
separate accounts funding variable life insurance policies. The
Commission expects to provide for a transition period after the
effective date of Form N-6 to give registrants sufficient time to
update their registration statements or to prepare new registration
statements on Form N-6. All new registration statements and post-
effective amendments that are annual updates to effective registration
statements filed 6 months after the effective date of Form N-6 would be
required to comply with its requirements. The final compliance date for
filing amendments to effective registration statements to conform with
the Form N-6 requirements would be 18 months after the effective date
of the form. At its option, a registrant could comply with the
requirements of Form N-6 at any time after the effective date of the
form. The Commission requests comment on the proposed transition
period.
G. Form N-1
The Commission previously prescribed Form N-1 as the registration
form to be used by open-end management investment companies that are
separate accounts of insurance companies for registering under the
Investment Company Act and for registering their securities under the
Securities Act.\87\ In 1985, Form N-1 was superseded by Form N-3 for
open-end management investment companies that are separate accounts of
insurance companies issuing variable annuity contracts.\88\ Currently,
Form N-1 would be used only by an open-end management investment
company that is a separate account of an insurance company offering
variable life insurance policies.\89\ Today, virtually all separate
accounts issuing variable life insurance policies are organized as unit
investment trusts. For that reason, few, if any, registrants continue
to use Form N-1.
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\87\ 17 CFR 274.11; General Instruction A of Form N-1;
Investment Company Act Release No. 14084 [49 FR 32058] (Aug. 7,
1984).
\88\ 17 CFR 274.11b; N-4 Adopting Release, supra note 7, at
26156; N-4 Proposing Release, supra note 7, at 620.
\89\ When Form N-3 was implemented, separate accounts funding
variable annuity contracts were permitted to continue to use Form N-
1 if they no longer offered the contracts to new purchasers. N-4
Adopting Release, supra note 7 , at 26156. The Commission is not
aware of any such variable annuity registrants that continue to use
Form N-1.
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The Commission requests comment on whether Form N-1 should be
rescinded as obsolete and whether there is any continuing need for the
form. Would any registrants, including any variable annuity or variable
life registrants no longer offering contracts to new purchasers and
using Form N-1, be affected by the rescission of Form N-1? If Form N-1
is rescinded, should the Commission prescribe another registration form
for use by open-end management investment companies that are separate
accounts of insurance companies issuing variable life insurance
policies? If so, what form should be used for this purpose and what
changes should be made to the suggested form to adapt it for this
category of registrants?
III. General Request for Comments
The Commission requests that any interested persons submit comments
on the proposed Form N-6, suggest changes (including changes to related
provisions of rules and forms that the Commission is not proposing to
amend), or submit comments on other matters that might affect the
proposed form. Commenters suggesting alternative approaches are
encouraged to submit proposed rule or form text. For purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996 [5 U.S.C.
801 et seq.], the Commission also is requesting information regarding
the
[[Page 14002]]
potential effect of proposed Form N-6 on the economy on an annual
basis. Commenters should provide empirical data to support their views.
IV. Paperwork Reduction Act
Proposed Form N-6 contains ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``Paperwork Reduction Act'') [44 U.S.C. 3501 et seq.], and the
Commission has submitted the amendments to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The title for the collection of information is ``Form N-6
Under the Investment Company Act of 1940 and the Securities Act of
1933, Registration Statement of Variable Life Insurance Separate
Accounts Registered as Unit Investment Trusts.''
A registration statement on proposed Form N-6 would be required to
contain information the Commission has determined to be necessary or
appropriate in the public interest or for the protection of investors.
Forms S-6 and N-8B-2 were not designed for variable life insurance
registrants and do not reflect fundamental improvements that the
Commission has made to other investment company registration forms,
including Forms N-1A and N-4, which facilitate clearer and more concise
disclosure. If adopted, proposed Form N-6 would:
Eliminate requirements in the current registration forms
that are not relevant to variable life insurance and include items that
are specifically addressed to variable life insurance;
Streamline variable life prospectus disclosure by adopting
a two-part format consisting of a simplified prospectus, designed to
contain essential information, and an SAI, containing more extensive
information that investors could obtain upon request; and
Provide variable life insurance separate accounts a
single, integrated form for Investment Company Act and Securities Act
registration, eliminating unnecessary paperwork and duplicative
reporting.\90\
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\90\ See supra Section I.
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For purposes of the Paperwork Reduction Act, the Commission has
estimated the hour burden and the cost burden that proposed Form N-6
would impose on variable life insurance registrants. The hour burden is
the number of hours of staff time a variable life insurance registrant
will use annually to comply with the requirements of proposed Form N-6.
The cost burden is the annual cost of services purchased to prepare and
update proposed Form N-6, such as the cost of independent auditors and
outside counsel. The cost burden does not include the wages, salaries,
or fees paid for the hour burden. Each of the hour burden and the cost
burden are calculated for both initial registration statements on
proposed Form N-6 and post-effective amendments to the form.
The Commission estimates that there are approximately 200 separate
accounts registered as unit investment trusts and offering variable
life insurance policies that would file registration statements on
proposed Form N-6. The Commission estimates that there will be as many
as 50 initial registration statements on proposed Form N-6 filed
annually. The Commission estimates, therefore, that approximately 250
registration statements (200 post-effective amendments plus 50 initial
registration statements) will be filed on Form N-6 annually.
The Commission estimates that the hour burden for preparing and
filing a post-effective amendment on proposed Form N-6 will be 100
hours. Thus, the total annual hour burden for preparing and filing
post-effective amendments would be 20,000 hours (200 post-effective
amendments annually times 100 hours per amendment). The Commission
estimates that the hour burden for preparing and filing an initial
registration statement on proposed Form N-6 will be 800 hours. Thus,
the annual hour burden for preparing and filing initial registration
statements would be 40,000 hours (50 initial registration statements
annually times 800 hours per registration statement). The total annual
hour burden for proposed Form N-6, therefore, is estimated to be 60,000
hours (20,000 hours for post-effective amendments plus 40,000 hours for
initial registration statements).
The Commission estimates that the cost burden for preparing and
filing a post-effective amendment on proposed Form N-6 will be $7,500.
Thus, the total annual cost burden for preparing and filing post-
effective amendments would be $1,500,000 (200 post-effective amendments
annually times $7,500 per amendment). The Commission estimates that the
cost burden for preparing and filing an initial registration statement
on proposed Form N-6 will be $20,000. Thus, the annual cost burden for
preparing and filing initial registration statements would be
$1,000,000 (50 initial registration statements annually times $20,000
per registration statement). The total annual cost burden for proposed
Form N-6, therefore, is estimated to be $2,500,000 ($1,500,000 for
post-effective amendments plus $1,000,000 for initial registration
statements).
The number of post-effective amendments is estimated based on the
Commission's records and industry statistics. The number of initial
registration statements is estimated based on the Commission's records
for the past year. The hour and cost burdens are estimated on the basis
of comparison of proposed Form N-6 with other forms that are used for
registration under both the Investment Company Act and the Securities
Act.
The hour and cost burdens would be offset by a decrease in the
burdens attributable to Forms N-8B-2 and S-6 because separate accounts
registering on Form N-6 would no longer be required to register on
Forms N-8B-2 and S-6. The Commission expects that the aggregate burden
imposed by Forms N-6, S-6, and N-8B-2 after Form N-6 is adopted will be
no greater, and may be less, than the burden currently imposed by Forms
S-6 and N-8B-2.
The information collection requirements that would be imposed by
Form N-6 are mandatory. Responses to the collection of information will
not be kept confidential. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
Under 44 U.S.C. 3506(c)(2)(B), the Commission solicits comment to:
(i) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information shall have practical
utility; (ii) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (iii) enhance the
quality, utility, and clarity of the information to be collected; and
(iv) minimize the burden of collection of information on those who are
to respond, including through the use of automated collection
techniques or other forms of information technology. The Commission
also requests comment on whether the burden imposed on registrants
using proposed Form N-6 will be less than that currently imposed on
these registrants by Forms S-6 and N-8B-2
Those who want to submit comments on the collection of information
requirements should direct their comments to OMB, Attention: Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Washington, D.C. 20503, and also
should send a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange
[[Page 14003]]
Commission, 450 5th Street, N.W., Washington, D.C. 20549-6009 with
reference to File No. S7-9-98. OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication, so a comment to OMB is best assured of having its full
effect if OMB receives it within 30 days of publication.
V. Cost/Benefit Analysis
The Commission believes that proposed Form N-6 would facilitate
improved disclosure to investors; be simpler to use than the
registration forms that it would replace, Forms S-6 and N-8B-2; and
eliminate unnecessary paperwork and reporting. Specifically, proposed
Form N-6, if adopted, would:
Eliminate requirements in the current registration forms
that are not relevant to variable life insurance and include items that
are specifically addressed to variable life insurance products;
Streamline variable life prospectus disclosure by adopting
a two-part format consisting of a simplified prospectus, designed to
contain essential information, and an SAI, containing more extensive
information; and
Provide an integrated form for Investment Company Act and
Securities Act registration, eliminating unnecessary paperwork and
duplicative reporting.\91\
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\91\ See supra Section I.
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The Commission believes that proposed Form N-6 would not impose
greater costs on variable life insurance registrants than the forms
that it would replace, Forms S-6 and N-8B-2. The Commission believes
that proposed Form N-6 may impose lesser costs on variable life
insurance registrants than Forms S-6 and N-8B-2. The Commission
requests comment on this cost/benefit analysis. Commenters are
requested to provide views and empirical data relating to any costs and
benefits associated with the proposed form.
VI. Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act [5
U.S.C. 605(b)], the Chairman of the Commission has certified that
proposed Form N-6 would not, if adopted, have a significant economic
impact on a substantial number of small entities. Few, if any, small
entities would be affected by Form N-6. The Chairman's certification is
attached to this release as Appendix A. The Commission encourages
written comment on the certification. Commenters are asked to describe
the nature of any impact on small entities and provide empirical data
to support the extent of the impact.
VII. Statutory Authority
The amendments to the Commission's rules and forms are being
proposed pursuant to sections 5, 7, 8, 10, and 19(a) of the Securities
Act [15 U.S.C. 77e, 77g, 77h, 77j, and 77s(a)] and sections 8, 22,
24(g), 26(e), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-
8, 80a-22, 80a-24(g), 80a-26(e), 80a-29, and 80a-37]. The authority
citations for the amendments to the rules and forms precede the text of
the amendments.
Text of Proposed Amendments
List of Subjects in 17 CFR Parts 230, 239, 270, and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Chapter II, Title 17 of the Code of Federal Regulations as
follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. Revise Sec. 230.134b to read as follows:
Sec. 230.134b Statements of additional information.
For the purpose only of Section 5(b) of the Act (15 U.S.C. 77e(b)),
the term ``prospectus'' as defined in Section 2(a)(10) of the Act (15
U.S.C. 77b(a)(10)) does not include a Statement of Additional
Information filed as part of a registration statement on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter) transmitted prior to the effective date of the registration
statement if it is accompanied or preceded by a preliminary prospectus
meeting the requirements of Sec. 230.430.
3. Amend Sec. 230.430 to revise the introductory text of paragraph
(b) to read as follows:
Sec. 230.430 Prospectus for use prior to effective date.
* * * * *
(b) A form of prospectus filed as part of a registration statement
on Form N-1A (Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2
(Sec. 239.14 and Sec. 274.11a-1 of this chapter), Form N-3
(Sec. 239.17a and Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b
and Sec. 274.11c of this chapter), or Form N-6 (Sec. 239.17c and
Sec. 274.11d of this chapter) shall be deemed to meet the requirements
of Section 10 of the Act (15 U.S.C. 77j) for the purpose of Section
5(b)(1) thereof (15 U.S.C. 77e(b)(1)) prior to the effective date of
the registration statement, provided that:
* * * * *
4. Amend Sec. 230.430A to revise paragraph (e) before the Note to
read as follows:
Sec. 230.430A Prospectus in a registration statement at the time of
effectiveness.
* * * * *
(e) In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), the references to ``form of prospectus'' in paragraphs (a)
and (b) of this section and the accompanying Note shall be deemed also
to refer to the form of Statement of Additional Information filed as
part of such a registration statement.
* * * * *
5. Amend Sec. 230.495 to revise paragraphs (a), (c), and (d) to
read as follows:
Sec. 230.495 Preparation of registration statement.
(a) A registration statement on Form N-1A (Sec. 239.15A and
Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14 and Sec. 274.11a-1
of this chapter), Form N-3 (Sec. 239.17a and Sec. 274.11b of this
chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c of this chapter), or
Form N-6 (Sec. 239.17c and Sec. 274.11d of this chapter), shall consist
of the facing sheet of the applicable form; a prospectus containing the
information called for by such form; the information, list of exhibits,
undertakings and signatures required to be set forth in such form;
financial statements and schedules; exhibits; and other information or
documents filed as part of the registration statement; and all
documents or information incorporated
[[Page 14004]]
by reference in the foregoing (whether or not required to be filed).
* * * * *
(c) In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), Parts A and B shall contain the information called for by
each of the items of the applicable Part, except that unless otherwise
specified, no reference need be made to inapplicable items, and
negative answers to any item may be omitted. Copies of Parts A and B
may be filed as part of the registration statement in lieu of
furnishing the information in item-and-answer form. Wherever such
copies are filed in lieu of information in item-and-answer form, the
text of the items of the form is to be omitted from the registration
statement, as well as from Parts A and B, except to the extent provided
in paragraph (d) of the section.
(d) In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), where any item of those forms calls for information not
required to be included in Parts A and B (generally Part C of such
form), the text of such items, including the numbers and captions
thereof, together with the answers thereto, shall be filed with Parts A
or B under cover of the facing sheet of the form as part of the
registration statement. However, the text of such items may be omitted,
provided the answers are so prepared as to indicate the coverage of the
item without the necessity of reference to the text of the item. If any
such item is inapplicable, or the answer thereto is in the negative, a
statement to that effect shall be made. Any financial statements not
required to be included in Parts A and B shall also be filed as part of
the registration statement proper, unless incorporated by reference
pursuant to Sec. 230.411.
* * * * *
6. Revise Sec. 230.496 to read as follows:
Sec. 230.496 Contents of prospectus and statement of additional
information used after nine months.
In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), there may be omitted from any prospectus or Statement of
Additional Information used more than 9 months after the effective date
of the registration statement any information previously required to be
contained in the prospectus or the Statement of Additional Information
insofar as later information covering the same subjects, including the
latest available certified financial statements, as of a date not more
than 16 months prior to the use of the prospectus or the Statement of
Additional Information is contained therein.
7. Amend Sec. 230.497 to revise paragraphs (c) and (e) to read as
follows:
Sec. 230.497 Filing of investment company prospectuses--number of
copies.
* * * * *
(c) For investment companies filing on Form N-1A (Sec. 239.15A and
Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14 and Sec. 274.11a-1
of this chapter), Form N-3 (Sec. 239.17a and Sec. 274.11b of this
chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c of this chapter), or
Form N-6 (Sec. 239.17c and Sec. 274.11d of this chapter), within five
days after the effective date of a registration statement or the
commencement of a public offering after the effective date of a
registration statement, whichever occurs later, ten copies of each form
of prospectus and form of Statement of Additional Information used
after the effective date in connection with such offering shall be
filed with the Commission in the exact form in which it was used.
* * * * *
(e) For investment companies filing on Form N-1A (Sec. 239.15A and
Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14 and Sec. 274.11a-1
of this chapter), Form N-3 (Sec. 239.17a and Sec. 274.11b of this
chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c of this chapter), or
Form N-6 (Sec. 239.17c and Sec. 274.11d of this chapter), after the
effective date of a registration statement, no prospectus that purports
to comply with Section 10 of the Act (15 U.S.C. 77j) or Statement of
Additional Information that varies from any form of prospectus or form
of Statement of Additional Information filed pursuant to paragraph (c)
of this section shall be used until five copies thereof have been filed
with, or mailed for filing to the Commission.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
8. The general authority citation for Part 239 is revised to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and
80a-37, unless otherwise noted.
9. Add Sec. 239.17c to read as follows:
Sec. 239.17c Form N-6, registration statement for separate accounts
organized as unit investment trusts that offer variable life insurance
policies.
Form N-6 shall be used for registration under the Securities Act of
1933 of securities of separate accounts that offer variable life
insurance policies and that register under the Investment Company Act
of 1940 as unit investment trusts. This form is also to be used for the
registration statement of such separate accounts pursuant to section
8(b) of the Investment Company Act of 1940 (Sec. 274.11d of this
chapter).
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
10. The authority citation for part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1, et seq., 80a-34(d), 80a-37, 80a-39
unless otherwise noted;
* * * * *
11. Amend Sec. 270.8b-11 to revise paragraph (b) to read as
follows:
Sec. 270.8b-11 Number of copies; signatures; binding.
* * * * *
(b) In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), three complete copies of each part of the registration
statement (including, if applicable, exhibits and all other papers and
documents filed as part of Part C of the registration statement) shall
be filed with the Commission.
* * * * *
12. Amend Sec. 270.8b-12 to revise paragraph (b) to read as
follows:
Sec. 270.8b-12 Requirements as to paper, printing and language.
* * * * *
(b) In the case of a registration statement filed on Form N-1A
(Sec. 239.15A and Sec. 274.11A of this chapter), Form N-2 (Sec. 239.14
and
[[Page 14005]]
Sec. 274.11a-1 of this chapter), Form N-3 (Sec. 239.17a and
Sec. 274.11b of this chapter), Form N-4 (Sec. 239.17b and Sec. 274.11c
of this chapter), or Form N-6 (Sec. 239.17c and Sec. 274.11d of this
chapter), Part C of the registration statement shall be filed on good
quality, unglazed, white paper, no larger than 8 1/2 x 11 inches in
size, insofar as practicable. The prospectus and, if applicable, the
Statement of Additional Information, however, may be filed on smaller-
sized paper provided that the size of paper used in each document is
uniform.
* * * * *
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
13. The general authority citation for Part 274 is revised to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
14. Add Sec. 274.11d to read as follows:
Sec. 274.11d Form N-6, registration statement of separate accounts
organized as unit investment trusts that offer variable life insurance
policies.
Form N-6 shall be used as the registration statement to be filed
pursuant to section 8(b) of the Investment Company Act of 1940 by
separate accounts that offer variable life insurance policies to
register as unit investment trusts. This form shall also be used for
registration under the Securities Act of 1933 of the securities of such
separate accounts (Sec. 239.17c of this chapter).
15. Revise Sec. 274.12 to read as follows:
Sec. 274.12 Form N-8B-2, registration statement of unit investment
trusts that are currently issuing securities.
This form shall be used as the registration statement to be filed,
pursuant to section 8(b) of the Investment Company Act of 1940, by unit
investment trusts other than separate accounts that are currently
issuing securities, including unit investment trusts that are issuers
of periodic payment plan certificates.
16. Revise General Instruction 1 of Form N-8B-2 (referenced in
Sec. 274.12) to read as follows:
Note: The text of Form N-8B-2 does not and this amendment will
not appear in the Code of Federal Regulations.
Form N-8B-2
* * * * *
General Instructions for Form N-8B-2.
* * * * *
1. Rule as to Use of Form
This form shall be used as the form for registration statements
to be filed, pursuant to Section 8(b) of the Investment Company Act
of 1940, by unit investment trusts other than separate accounts that
are currently issuing securities, including unit investment trusts
that are issuers of periodic payment plan certificates and unit
investment trusts of which a management investment company is the
sponsor or depositor.
* * * * *
17. Add Form N-6 (referenced in Sec. 239.17c and Sec. 274.11d) to
read as follows:
Note: The text of Form N-6 will not appear in the Code of
Federal Regulations.
OMB Approval
OMB Number:
Expires:
Estimated average burden hours per response
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-6
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____________ [ ]
Post-Effective Amendment No. ____________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. ____________ [ ]
(Check appropriate box or boxes)
----------------------------------------------------------------------
(Exact Name of Registrant)
----------------------------------------------------------------------
(Name of Depositor)
----------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices)
----------------------------------------------------------------------
(Zip Code)
Depositor's Telephone Number, including Area Code----------------------
----------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering---------------------------
It is proposed that this filing will become effective (check
appropriate box)
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Omit from the facing sheet reference to the other Act if the
registration statement or amendment is filed under only one of the
Acts. Include the ``Approximate Date of Proposed Public Offering''
only where securities are being registered under the Securities Act
of 1933.
Form N-6 is to be used by separate accounts that are unit
investment trusts that offer variable life insurance contracts to
register under the Investment Company Act of 1940 and to offer their
securities under the Securities Act of 1933. The Commission has
designed Form N-6 to provide investors with information that will
assist them in making a decision about investing in a variable life
insurance contract. The Commission also may use the information
provided in Form N-6 in its regulatory, disclosure review,
inspection, and policy making roles.
[[Page 14006]]
A Registrant is required to disclose the information specified
by Form N-6, and the Commission will make this information public. A
Registrant is not required to respond to the collection of
information contained in Form N-6 unless the Form displays a
currently valid Office of Management and Budget (``OMB'') control
number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for
reducing the burden to Secretary, Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549-6009. The
OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. 3507.
Contents of Form N-6
General Instructions
A. Definitions
B. Filing and Use of Form N-6
C. Preparation of the Registration Statement
D. Incorporation by Reference
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
Item 2. Risk/Benefit Summary: Benefits and Risks
Item 3. Risk/Benefit Summary: Fee Table
Item 4. General Description of Registrant, Depositor, and Portfolio
Companies
Item 5. Charges
Item 6. General Description of Contracts
Item 7. Premiums
Item 8. Death Benefits and Contract Values
Item 9. Surrenders, Partial Surrenders, and Partial Withdrawals
Item 10. Loans
Item 11. Lapse and Reinstatement
Item 12. Taxes
Item 13. Legal Proceedings
Item 14. Financial Statements
Part B: Information Required in a Statement of Additional Information
Item 15. Cover Page and Table of Contents
Item 16. General Information and History
Item 17. Services
Item 18. Premiums
Item 19. Additional Information About Operation of Contracts and
Registrant
Item 20. Underwriters
Item 21. Additional Information About Charges
Item 22. Lapse and Reinstatement
Item 23. Loans
Item 24. Financial Statements
Item 25. Performance Data
Item 26. Illustrations
Part C: Other Information
Item 27. Exhibits
Item 28. Directors and Officers of the Depositor
Item 29. Persons Controlled by or Under Common Control with the
Depositor or the Registrant
Item 30. Indemnification
Item 31. Principal Underwriters
Item 32. Location of Accounts and Records
Item 33. Management Services
Item 34. Fee Representation
Signatures
General Instructions
A. Definitions
References to sections and rules in this Form N-6 are to the
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (the
``Investment Company Act''), unless otherwise indicated. Terms used
in this Form N-6 have the same meaning as in the Investment Company
Act or the related rules, unless otherwise indicated. As used in
this Form N-6, the terms set out below have the following meanings:
``Depositor'' means the person primarily responsible for the
organization of the Registrant and the person, other than the
trustee or custodian, who has continuing functions or
responsibilities for the administration of the affairs of the
Registrant. ``Depositor'' includes the sponsoring insurance company
that establishes and maintains the Registrant. If there is more than
one Depositor, the information called for in this Form about the
Depositor must be provided for each Depositor.
``Portfolio Company'' means any company in which the Registrant
invests.
``Registrant'' means the separate account (as defined in section
2(a)(37) of the Investment Company Act [15 U.S.C. 80a-2(a)(37)])
that offers the Variable Life Insurance Contracts.
``SAI'' means the Statement of Additional Information required
by Part B of this Form.
``Securities Act'' means the Securities Act of 1933 [15 U.S.C.
77a et seq.].
``Securities Exchange Act'' means the Securities Exchange Act of
1934 [15 U.S.C. 78a et seq.].
``Variable Life Insurance Contract'' or ``Contract'' means a
life insurance contract that provides for death benefits and cash
values that may vary with the investment experience of any separate
account. Unless the context otherwise requires, ``Variable Life
Insurance Contract'' or ``Contract'' refers to the Variable Life
Insurance Contracts being offered pursuant to the registration
statement prepared on this Form.
B. Filing and Use of Form N-6
1. What is Form N-6 Used for?
Form N-6 is used by all separate accounts that are registered
under the Investment Company Act as unit investment trusts and
offering Variable Life Insurance Contracts to file:
[[Page 14007]]
(a) An initial registration statement under the Investment
Company Act and amendments to the registration statement;
(b) An initial registration statement under the Securities Act
and amendments to the registration statement, including amendments
required by section 10(a)(3) of the Securities Act [15 U.S.C.
77j(a)(3)]; or
(c) Any combination of the filings in paragraph (a) or (b).
2. What is Included in the Registration Statement?
(a) For registration statements or amendments filed under both
the Investment Company Act and the Securities Act or only under the
Securities Act, include the facing sheet of the Form, Parts A, B,
and C, and the required signatures.
(b) For registration statements or amendments filed only under
the Investment Company Act, include the facing sheet of the Form,
responses to all Items of Parts A (except Items 1, 2, 3, and 14), B,
and C (except Items 27 (c), (k), (l), (n), and (o)), and the
required signatures.
3. What Are the Fees for Form N-6?
No registration fees are required with the filing of Form N-6 to
register as an investment company under the Investment Company Act
or to register securities under the Securities Act. If Form N-6 is
filed to register securities under the Securities Act and securities
are sold to the public, registration fees must be paid on an ongoing
basis after the end of the Registrant's fiscal year. See section
24(f) [15 U.S.C. 80a-24f-2] and related rule 24f-2 [17 CFR 270.24f-
2].
4. What Rules Apply to the Filing of a Registration Statement on Form
N-6?
(a) For registration statements and amendments filed under both
the Investment Company Act and the Securities Act or only under the
Securities Act, the general rules regarding the filing of
registration statements in Regulation C under the Securities Act [17
CFR 230.400-230.497] apply to the filing of Form N-6. Specific
requirements concerning investment companies appear in rules 480-485
and 495-497 of Regulation C.
(b) For registration statements and amendments filed only under
the Investment Company Act, the general provisions in rules 8b-1-8b-
32 [17 CFR 270.8b-1-270.8b-32] apply to the filing of Form N-6.
(c) The plain English requirements of rule 421 under the
Securities Act [17 CFR 230.421] apply to prospectus disclosure in
Part A of Form N-6.
(d) Regulation S-T [17 CFR 232.10-232.903] applies to all
filings on the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (``EDGAR'').
C. Preparation of the Registration Statement
1. Administration of the Form N-6 Requirements
(a) The requirements of Form N-6 are intended to promote
effective communication between the Registrant and prospective
investors. A Registrant's prospectus should clearly disclose the
fundamental features and risks of the Variable Life Insurance
Contracts, using concise, straightforward, and easy to understand
language. A Registrant should use document design techniques that
promote effective communication.
(b) The prospectus disclosure requirements in Form N-6 are
intended to elicit information for an average or typical investor
who may not be sophisticated in legal or financial matters. The
prospectus should help investors to evaluate the risks of an
investment and to decide whether to invest in a Variable Life
Insurance Contract by providing a balanced disclosure of positive
and negative factors. Disclosure in the prospectus should be
designed to assist an investor in comparing and contrasting a
Variable Life Insurance Contract with other Contracts.
(c) Responses to the Items in Form N-6 should be as simple and
direct as reasonably possible and should include only as much
information as is necessary to enable an average or typical investor
to understand the particular characteristics of the Variable Life
Insurance Contracts. The prospectus should avoid including lengthy
legal and technical discussions and simply restating legal or
regulatory requirements to which Contracts generally are subject.
Brevity is especially important in describing the practices or
aspects of the Registrant's operations that do not differ materially
from those of other separate accounts. Avoid excessive detail,
technical or legal terminology, and complex language. Also avoid
lengthy sentences and paragraphs that may make the prospectus
difficult for many investors to understand and detract from its
usefulness.
(d) The requirements for prospectuses included in Form N-6 will
be administered by the Commission in a way that will allow variances
in disclosure or presentation if appropriate for the circumstances
involved while remaining consistent with the objectives of Form N-6.
2. Form N-6 is Divided Into Three Parts:
(a) Part A. Part A includes the information required in a
Registrant's prospectus under section 10(a) of the Securities Act.
The purpose of the prospectus is to provide essential information
about the Registrant and the Variable Life Insurance Contracts in a
way that will help investors to make informed decisions about
whether to purchase the securities described in the prospectus. In
responding to the Items in Part A, avoid cross-references to the
SAI. Cross-references within the prospectus are most useful when
their use assists investors in understanding the information
presented and does not add complexity to the prospectus.
(b) Part B. Part B includes the information required in a
Registrant's SAI. The purpose of the SAI is to provide additional
information about the Registrant and the Variable Life Insurance
Contracts that the Commission has concluded is not necessary or
appropriate in the public interest or for the protection of
investors to be in the prospectus, but that some investors may find
useful. Part B affords the Registrant an opportunity to expand
discussions of the matters described in the prospectus by including
additional information that the Registrant believes may be of
interest to some investors. The Registrant should not duplicate in
the SAI information that is provided in the prospectus, unless
necessary to make the SAI comprehensible as a document independent
of the prospectus.
(c) Part C. Part C includes other information required in a
Registrant's registration statement.
3. Additional Matters
(a) Organization of Information. Organize the information in the
prospectus and SAI to make it easy for investors to understand.
Disclose the information required by Items 2 and 3 (the Risk/Benefit
Summary) in numerical order at the front of the prospectus. Do not
precede these Items with any other Item except the Cover Page (Item
1) or a table of contents meeting the requirements of rule 481(c)
under the Securities Act [17 CFR 230.481(c)].
(b) Other Information. A Registrant may include, except in the
Risk/Benefit Summary, information in the prospectus or the SAI that
is not otherwise required. For example, a Registrant may include
charts, graphs, or tables so long as the information is not
incomplete, inaccurate, or misleading and does not, because of its
nature, quantity, or manner of presentation, obscure or impede
understanding of the information that is required to be included.
Specifically, Registrants are free to include in the prospectus
financial statements required to be in the SAI, and may include in
the SAI financial statements that may be placed in Part C. The Risk/
Benefit Summary may not include disclosure other than that required
or permitted by Items 2 and 3.
(c) Use of Form N-6 to Register Multiple Contracts or Contracts
Sold in Both the Group and Individual Markets.
[[Page 14008]]
(i) When disclosure is provided in a single prospectus for more
than one Variable Life Insurance Contract, or for a Contract that is
sold in both the group and individual markets, the disclosure should
be presented in a format designed to communicate the information
effectively. Registrants may order or group the response to any Item
in any manner that organizes the information into readable and
comprehensible segments and is consistent with the intent of the
prospectus to provide clear and concise information about the
Registrants or Variable Life Insurance Contracts. Registrants are
encouraged to use, as appropriate, tables, side-by-side comparisons,
captions, bullet points, or other organizational techniques when
presenting disclosure for multiple Variable Life Insurance Contracts
or for Contracts sold in both the group and individual markets.
(ii) Paragraph (a) requires Registrants to disclose the
information required by Items 2 and 3 in numerical order at the
front of the prospectus and not to precede the Items with other
information. As a general matter, Registrants providing disclosure
in a single prospectus for more than one Variable Life Insurance
Contract, or for Contracts sold in both the group and individual
markets, may depart from the requirement of paragraph (a) as
necessary to present the required information clearly and
effectively (although the order of information required by each Item
must remain the same). For example, the prospectus may present all
of the Item 2 information for several Variable Life Insurance
Contracts followed by all of the Item 3 information for the
Contracts, or may present Items 2 and 3 for each of several
Contracts sequentially. Other presentations also would be acceptable
if they are consistent with the Form's intent to disclose the
information required by Items 2 and 3 in a standard order at the
beginning of the prospectus.
(d) Dates. Rule 423 under the Securities Act [17 CFR 230.423]
applies to the dates of the prospectus and the SAI. The SAI should
be made available at the same time that the prospectus becomes
available for purposes of rules 430 and 460 under the Securities Act
[17 CFR 230.430 and 230.460].
(e) Sales Literature. A Registrant may include sales literature
in the prospectus so long as the amount of this information does not
add substantial length to the prospectus and its placement does not
obscure essential disclosure.
D. Incorporation by Reference
1. Specific Rules for Incorporation by Reference in Form N-6
(a) A Registrant may not incorporate by reference into a
prospectus information that Part A of this Form requires to be
included in a prospectus, except as specifically permitted by Part A
of the Form.
(b) A Registrant may incorporate by reference any or all of the
SAI into the prospectus (but not to provide any information required
by Part A to be included in the prospectus) without delivering the
SAI with the prospectus.
(c) A Registrant may incorporate by reference into the SAI or
its response to Part C information that Parts B and C require to be
included in the Registrant's registration statement.
2. General Requirements
All incorporation by reference must comply with the requirements
of this Form and the following rules on incorporation by reference:
rule 10(d) of Regulation S-K under the Securities Act [17 CFR
229.10(d)] (general rules on incorporation by reference, which,
among other things, prohibit, unless specifically required by this
Form, incorporating by reference a document that includes
incorporation by reference to another document, and limits
incorporation to documents filed within the last 5 years, with
certain exceptions); rule 411 under the Securities Act [17 CFR
230.411] (general rules on incorporation by reference in a
prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific
requirements for electronically filed documents); and rules 0-4, 8b-
23, and 8b-32 [17 CFR 270.0-4, 270.8b-23, and 270.8b-32] (additional
rules on incorporation by reference for investment companies).
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
(a) Front Cover Page. Include the following information, in
plain English under rule 421(d) under the Securities Act [17 CFR
230.421(d)], on the outside front cover page of the prospectus:
(1) The Registrant's name.
(2) The Depositor's name.
(3) The types of Variable Life Insurance Contracts offered by
the prospectus (e.g., group, individual, scheduled premium, flexible
premium).
(4) The date of the prospectus.
(5) The statement required by rule 481(b)(1) under the
Securities Act.
Instruction. A Registrant may include on the front cover page
any additional information, subject to the requirement set out in
General Instruction C.3.(b).
(b) Back Cover Page. Include the following information, in plain
English under rule 421(d) under the Securities Act [17 CFR
230.421(d)], on the outside back cover page of the prospectus:
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