Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities, 71088-71259 [2023-21986]
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
amendment to Form N–6 to correct an
error from a prior Commission
rulemaking. Finally, the Commission
requests comment as to whether to
require the registration of market-value
adjustments associated with certain
annuities on Form N–4 as well.
DATES: Comments should be submitted
on or before November 28, 2023.
ADDRESSES: Comments may be
submitted by any of the following
methods:
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 230, 232, 239, and 274
[Release No. 33–11250; 34–98624; IC–
35028; File No. S7–16–23]
RIN 3235–AN30
Registration for Index-Linked
Annuities; Amendments to Form N–4
for Index-Linked and Variable
Annuities
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
proposing rule and form amendments to
provide a tailored form to register the
offerings of registered index-linked
annuities (‘‘RILAs’’). Specifically, the
Commission is proposing to amend the
form currently used by most variable
annuity separate accounts, Form N–4, to
require issuers of RILAs to register
offerings on that form as well. To
facilitate this amendment, the
Commission is also proposing to amend
certain filing rules and make other
related amendments. These changes
would, if adopted, implement the
requirements relating to RILAs
contained in Division AA, Title I of the
Consolidated Appropriations Act, 2023.
Further, the Commission is proposing
other amendments to Form N–4 that
would apply to all issuers that would
use that form under the proposal. The
Commission is also proposing to apply
to RILA advertisements and sales
literature a current Commission rule
that provides guidance as to when sales
literature is materially misleading under
the Federal securities laws. The
Commission is proposing a technical
SUMMARY:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/2023/09/rila); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
16–23 on the subject line.
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–16–23. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method of submission. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov/rules/2023/09/rila).
Comments are also available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the
Commission’s public reference room. Do
not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. Retail investors seeking to
comment on their experiences with
annuities generally and RILAs in
particular may want to submit a short
Feedback Flyer, available at Appendix
D.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on the Commission’s website. To ensure
direct electronic receipt of such
notifications, sign up through the ‘‘Stay
Connected’’ option at www.sec.gov to
receive notifications by email.
A summary of the proposal of not
more than 100 words is posted on the
Commission’s website (https://
www.sec.gov/rules/2023/09/rila).
FOR FURTHER INFORMATION CONTACT:
Christian Corkery, Michael Khalil,
Rachael Hoffman, James Maclean, Amy
Miller, or Laura Harper Powell, Senior
Counsels; Bradley Gude, Branch Chief;
Amanda Hollander Wagner, Senior
Special Counsel; or Brian McLaughlin
Johnson, Assistant Director, Investment
Company Regulation Office, at (202)
551–6792; Elisabeth Bentzinger or Min
Oh, Senior Counsels; Michael Kosoff,
Senior Special Counsel, Disclosure
Review and Accounting Office, at (202)
551–6921, Division of Investment
Management, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–8549.
The
Commission is proposing amendments
to the following rules and forms:
SUPPLEMENTARY INFORMATION:
CFR citation
(17 CFR)
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Commission reference
Securities Act of 1933 (‘‘Securities Act’’): 1
Rule 156 ................................................................................................................................................................
Rule 172 ................................................................................................................................................................
Rule 405 ................................................................................................................................................................
Rule 415 ................................................................................................................................................................
Rule 424 ................................................................................................................................................................
Rule 456 ................................................................................................................................................................
Rule 457 ................................................................................................................................................................
Rule 485 ................................................................................................................................................................
Rule 497 ................................................................................................................................................................
Rule 498A ..............................................................................................................................................................
Regulation S–T:
Rule 313 of Regulation S–T ..................................................................................................................................
Rule 405 of Regulation S–T ..................................................................................................................................
Forms:
Form N–4 ..............................................................................................................................................................
Form N–6 ..............................................................................................................................................................
1 15
U.S.C. 77a et seq.
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§ 230.156
§ 230.172
§ 230.405
§ 230.415
§ 230.424
§ 230.456
§ 230.457
§ 230.485
§ 230.497
§ 230.498A
§ 232.313
§ 232.405
§ 239.17b and 274.11c
§ 239.17c and 274.11d
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
CFR citation
(17 CFR)
Commission reference
Form 24F–2 ...........................................................................................................................................................
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Table of Contents
I. Introduction and Background
A. Typical RILA Features
B. Current Registration Process
C. Evidence of Investor Views and Areas of
Potential Confusion
D. Overview of Proposal
II. Discussion
A. Use of Form N–4
B. Contents of Form N–4
1. Front and Back Cover Pages (Item 1)
2. Key Information Table (Item 3)
3. Principal Disclosure Regarding RILAs
(Items 2, 6, and 17)
4. Principal Risks of Investing in the
Contract (Item 5)
5. Addition of Contract Adjustments and
Other Amendments to Fee and Expense
Disclosures (Items 4, 7, and 22)
6. Information About Contracts With
Index-Linked Options (Item 31A)
7. Other Amendments and Provisions
8. Remaining Form N–4 Items
9. Inline XBRL
C. Option To Use a Summary Prospectus
D. Accounting (Items 16 and 26)
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and Amendments
to Form 24F–2
2. Post-Effective Amendments and
Prospectus Supplements
3. Prospectus Delivery
F. Materially Misleading Statements in
RILA Sales Literature
G. Existing Commission Letters
H. Registered Market-Value Adjustment
Annuities
I. Technical Amendment to Form N–6
J. Compliance Period
K. General Request for Comment From
Retail Investors
III. Economic Analysis
A. Introduction
B. Baseline
1. Affected Parties
2. Current Regulatory Requirements
3. Market Practice
C. Benefits and Costs
1. Benefits
2. Costs
D. Effects on Efficiency, Competition, and
Capital Formation
E. Reasonable Alternatives
1. Creating an Entirely New Registration
Form for RILAs
2. Alternatives to Specific Form N–4
Amendments
3. Require the Use of Form N–4 for
Registered MVAs
4. Limiting Scope of Structured Data
Requirements
F. Request for Comment
IV. Paperwork Reduction Act
A. Rule 498A
B. Form N–4
C. Form 24F–2
D. Investment Company Interactive Data
E. Request for Comment
V. Regulatory Flexibility Certification
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VI. Consideration of Impact on the Economy
Statutory Authority
I. Introduction and Background
An annuity contract (‘‘annuity’’ or
‘‘contract’’) is a type of insurance
product in which an investor makes a
lump-sum payment or a series of
payments in return for future payments
from the insurance company to meet
retirement and other long-term financial
goals. A RILA is one of several types of
annuity contracts offered by insurance
companies. An investor in a RILA
allocates purchase payments to one or
more investment options under which
the investor’s returns (both gains and
losses) are based at least in part on the
performance of an index or other
benchmark (collectively, ‘‘indexes’’),
over a set period of time (‘‘crediting
period’’).2 In some cases, insurance
companies offer RILAs on a standalone
basis with various index-linked
investment options (‘‘index-linked
options’’) for investors to choose from.
In other cases, insurance companies
offer ‘‘combination’’ annuity contracts
that provide index-linked options
together with other investment options,
such as mutual funds (‘‘portfolio
companies’’) offered as investment
options under a variable annuity
(‘‘variable options’’).3 An investor
2 Insurance companies frequently refer to
crediting periods as ‘‘investment terms’’ or
sometimes simply ‘‘terms.’’ See, e.g., Investor
Testing Report on Registered Index Linked
Annuities, Office of Investor Advocate Division
(‘‘OIAD Report’’) at Section 2, RILAs: Structure of
Contracts and Investment Options, Investment
Terms. As noted in OIAD’s report, investor testing
suggested that investors consistently struggled with
this terminology, and a number of participants
seemed to equate ‘‘investment term’’ or ‘‘term’’ with
the length of the insurance contract rather than the
length of the investment product options within the
RILA contract, leading them to misunderstand the
operation of the RILA. Id. at Section 5, Qualitative
Testing, Results from Round 1. In an effort to
mitigate that confusion, we have opted to use the
term crediting period in this release and in the
proposed amendments to Form N–4. The most
common crediting periods are one, three, and six
years. See id. at Section 3, Overview of the RILA
Market and Simulated Performance over Historical
Periods, RILA Indexes, Investment Terms, and
Insurance Features, Figure 2.
3 Variable annuity contracts and variable life
insurance contracts (together, ‘‘variable contracts’’)
combine both investment and insurance features.
Investors generally allocate their purchase
payments to a range of investment options,
typically mutual funds which are separately
registered and have their own prospectuses. The
investor’s account value changes depending on the
performance of the investment options selected.
Variable annuities allow investors to receive
periodic payments for either a definite period (e.g.,
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§ 239.66 and § 274.24
purchasing a combination contract, for
example, may have the ability to
allocate purchase payments under the
contract to index-linked options;
variable options that pass on the returns
of mutual funds selected by the
investor; and/or fixed account options
for which the insurance company
promises to pay a fixed and stated
minimum rate of interest. The market
for RILAs has grown significantly in
recent years, with annual RILA sales of
$41.1 billion in 2022 alone, more than
tripling since 2017.4 We understand that
RILAs are predominantly sold by
broker-dealers, although investment
advisers may also provide advice on
RILAs, and insurance companies also
may offer RILAs directly.
RILAs are securities for purposes of
the Securities Act of 1933 (‘‘Securities
Act’’).5 Unlike variable annuity
contracts for which the Commission has
adopted a specific registration form
tailored to those products, insurance
companies currently register offerings of
RILAs on Securities Act registration
20 years), or for an indefinite period (e.g., the life
of the investor). See Updated Disclosure
Requirements and Summary Prospectus for Variable
Annuity and Variable Life Insurance Contracts,
Investment Company Act Release No. 33814 (Mar.
11, 2020) [85 FR 25964 (May 1, 2020)] (‘‘VASP
Adopting Release’’) at nn.4–5 and n.8 and
accompanying text.
4 See LIMRA, ‘‘LIMRA: Record Annuity Sales in
2022 Expected to Continue Into First Quarter 2023,’’
news release, Mar. 8, 2023 (reporting 2022 RILA
sales of $41.1 billion), https://www.limra.com/en/
newsroom/news-releases/2023/limra-recordannuity-sales-in-2022-expected-to-continue-intofirst-quarter-2023/ and LIMRA, ‘‘LIMRA Secure
Retirement Institute: Total Annuity Sales Continued
to Decline in 2017,’’ news release, Feb. 21, 2018
(reporting 2017 sales of structured annuity
products, i.e., RILAs, of $9.2 billion), https://
www.limra.com/en/newsroom/news-releases/2018/
limra-secure-retirement-institute-total-annuitysales-continued-to-decline-in-2017/.
5 Depending on the context, ‘‘RILA’’ is also used
in this release to collectively refer to both standalone RILAs and the index-linked options available
in a combination contract. When referring to the
entity registering the RILA, we use the term ‘‘RILA
issuer’’ or ‘‘insurance company.’’ Index annuities
that meet the requirements of section 989J of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Pub. L. 111–203) or section 3(a)(8)
of the Securities Act are treated as exempt securities
for purposes of the Securities Act, but RILAs do not
fall within this exemption due, in large part, to the
shifting of a significant level of investment risk
from the RILA issuer to the investor. RILAs and
index-linked option, as used in this release, refer
only to those index annuities that are securities for
the purposes of the Securities Act. See, e.g.,
sections 101(a)(5) and (6) of Division AA, Title I of
the Consolidated Appropriations Act, 2023.
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Forms S–1 or S–3.6 In 2022, Congress
enacted Division AA, Title I of the
Consolidated Appropriations Act, 2023
(‘‘RILA Act’’), directing the Commission
to adopt a new registration form for
RILAs within 18 months of enactment.7
The RILA Act requires the Commission
to design the form to ensure that a
purchaser using the form receives the
information necessary to make
knowledgeable decisions, taking into
account (1) the availability of
information; (2) the knowledge and
sophistication of that class of
purchasers; (3) the complexity of the
RILA; and (4) any other factor the
Commission determines appropriate.
The RILA Act also requires the
Commission to engage in investor
testing as part of its rulemaking process
and to incorporate the results of the
testing in the design of the form, with
the goal of ensuring that key
information is conveyed in terms that a
purchaser is able to understand. If the
Commission fails to adopt the form
within 18 months of enactment, the
RILA Act provides that RILA issuers can
begin registering RILA offerings on
existing Form N–4.
We are proposing to amend Form N–
4 to require RILA issuers to register
RILA offerings, including associated
features of the RILA such as any
contract adjustments, on that form and
to tailor the form’s requirements
accordingly.8 We also are proposing to
amend other rules related to the
securities offering process to allow these
issuers to conduct RILA offerings in the
same way issuers conduct offerings of
variable annuities. Consistent with the
RILA Act, these proposed amendments
6 The registration forms for variable annuity
contracts are Form N–3 (for variable annuity
separate accounts structured as management
companies) and Form N–4 (for variable annuity
separate accounts structured as unit investment
trusts). The separate account established by the
sponsoring insurance company is the legal entity
that registers its securities. Separate accounts are
typically registered as investment companies under
the Investment Company Act. See section 2(a)(37)
of the Investment Company Act. The Commission
first adopted the registration form for variable
annuities over 30 years ago. See Registration Forms
for Insurance Company Separate Accounts that
Offer Variable Annuity Contracts, Investment
Company Act Release No. 14575 (June 14, 1985) [50
FR 26145] (June 25, 1985)]. In this release, we focus
only on Form N–4, and not Form N–3, because
Form N–4 is the registration form identified in the
RILA Act and the form used to register the majority
of variable annuity contracts.
7 Public Law 117–328; 136 Stat. 4459 (Dec. 29,
2022).
8 Under this proposal, the amended Form N–4
will not register the RILA issuers themselves, only
the offering of RILA securities. Unlike separate
accounts which register variable annuities, RILA
issuers are not investment companies, and thus
need not register with the Commission as an
investment company as separate accounts do.
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collectively are designed to provide
investors disclosures tailored to RILAs
and highlight key information about
these complex products, building on the
Commission’s layered disclosure
framework in place for variable
annuities. We are also proposing certain
amendments to Form N–4 that would
apply to offerings of variable annuities,
based on our experience with the form
since its last amendment and the
investor testing conducted in
connection with this rulemaking.9 In
addition, we are proposing to apply a
current Commission rule that provides
guidance as to when sales literature is
materially misleading under the Federal
securities laws to RILA advertisements
and sales literature. Finally, we are
proposing a technical amendment to
Form N–6 to correct an error from a
prior Commission rulemaking.
A. Typical RILA Features
RILAs are complex financial products
that are sold to retail investors. The
following are some of the most
prevalent features that contribute to this
complexity, and that might make it
challenging for an investor to assess the
features, risks, and possible return
profile of a RILA. These features also are
important ones for financial
professionals to consider when
recommending that an investor
purchase a RILA.
• Bounded Return Structure. Under a
RILA, the insurance company will
credit positive or negative ‘‘interest’’ to
the investor’s contract value at the end
of each crediting period. The amount
credited is based, in part, on the
performance of the specified index (e.g.,
the S&P 500).10 The amount of any
positive interest credited will also
depend on whether the contract
includes provisions such as a ‘‘cap rate’’
or ‘‘participation rate.’’ A cap rate places
an upper limit on an investor’s ability
to participate in the index’s upside
performance directly (e.g., with a
current cap rate of 5%, if the index is
up 10% at the end of the crediting
period, the investor’s contract value will
be credited with only 5% positive
interest). A ‘‘participation rate’’ sets an
investor’s return to some specified
percentage of the index’s return (e.g., an
80% participation rate would result in
an investor receiving positive interest of
80 cents on the dollar of gains in the
index). The contract generally will
include one of these limits on how
much the insurance company will credit
9 See
VASP Adopting Release.
companies typically choose indexes
for the RILA contract where any gains in the value
of the index do not include dividends paid on the
securities that make up the index.
10 Insurance
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the investor if the performance of the
index goes up in value by the end of the
crediting period (collectively ‘‘limits on
gains’’). Similarly, the contract generally
will include terms limiting the
investor’s losses to some extent if the
performance of the index goes down in
value. This might include a ‘‘buffer’’
(which limits the investor’s exposure to
losses up to a fixed percentage), or a
‘‘floor’’ (which places a lower limit on
the investor’s exposure to loss)
(collectively ‘‘limits on losses’’). For
example, with a ‘‘buffer’’ of ¥5%, if the
index is down 2%, that investor will not
lose anything, but if the index is down
7% the investor will lose 2% (the
difference between the loss and the
buffer rate). With a ‘‘floor’’ of ¥5%, if
the index is down 2%, the investor will
lose 2%, but if the index is down 7%,
the investor will only lose 5%. These
limits can be complex and overlapping,
and may change at the beginning of each
new crediting period, subject to certain
minimum guarantees stated in the
contract. Over time, the investor’s
contract value will increase or decrease,
depending on the performance of the
index and the particular contract
provisions (such as the bounded return
structure). Despite the bounded return
structure, a RILA is not necessarily a
low-risk investment product as the
investor could lose a significant amount
of money if the index performs poorly.
• Fees and Expenses. For many
RILAs, the investor pays no direct or
explicit ongoing fees and expenses
under the RILA, and this is sometimes
a feature disclosed in RILA marketing
materials. However, the RILA’s bounded
return structure requires investors to
agree to tradeoffs that come with their
own economic costs. In exchange for
some protection against losses if the
index goes down in value, investors
must also agree to contractual
provisions limiting the amount of gains
they will receive if the index goes up in
value. A RILA’s upside limits on gains
can reduce an investor’s return in the
same way that a direct fee can and can
help make the RILA more profitable to
the insurance company.
• Charges and Penalties for Early
Withdrawals. Investors also can lose
significant money if they withdraw their
money early from an investment option
or from the contract. This can arise in
several circumstances. First, a RILA
typically will specify a period of time
during which a ‘‘surrender charge’’ will
apply, for example nine years following
an investor’s last premium payment.
Typically, this charge is greatest in the
first year of the surrender period,
decreasing each year until the end of the
surrender period. An investor who
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withdraws money during this period
will pay a fee, such as 9% of the amount
withdrawn. Second, an insurance
company may make an adjustment,
either to the investor’s contract value or
to the amount paid to the investor, if
amounts are withdrawn from an indexlinked option before the end of its
crediting period or from the contract
before the end of a specified period. For
example, when an investor in a RILA
chooses a particular index-linked
option, the RILA may provide that the
index-linked option’s crediting period is
one year. If amounts are removed from
that index-linked option before the end
of this one-year crediting period,
typically for any reason, the insurance
company will apply an ‘‘interim value
adjustment’’ or ‘‘IVA.’’ The IVA will
adjust the contract value based,
generally, on a complex formula where
the IVA may change daily and can be
positive or negative.11 As a result, the
investor could lose a significant amount
of money, even if the index has a gain
at the time of the withdrawal.
Similarly, the insurance company
might apply a positive or negative
‘‘market value adjustment’’ or ‘‘MVA’’
(collectively with IVAs, a ‘‘contract
adjustment’’) to the contract value if the
investor partially or fully withdraws
amounts from the contract. Contract
adjustments could be made in response
to a number of contract transactions,
such as a surrender, withdrawal,
payment of the death benefit, or the start
of annuity payments, and an investor
could experience a negative contract
adjustment even when the investor
takes an otherwise permissible
withdrawal, such as under a guaranteed
living benefit.12 These adjustments can
also negatively impact other values
under the contract, such as the
surrender value and death benefit.
Moreover, these fees and adjustments
are not always mutually exclusive.
Indeed, under the terms of certain RILA
11 Common methods of calculating this
adjustment include prorating the crediting method
based on the number of days that have elapsed
since the start of the crediting period, employing a
market-based formula designed to approximate the
present value of the index and/or employing
interest-rate-based MVAs to offset certain insurer
losses and costs, or some combination of these two.
See Clifford E. Kirsch, Variable Annuities and Other
Insurance Investment Products (Third Edition 2022)
at 29–8, available at https://plus.pli.edu/Details/
Details?start=0&rows=50&fq=%7e2B%7etitle_
id%7e3A282B22%7e240085%7e2229%7e&fq=
%7e2B%7eid%7e3A282B22%7e240085-CH29%
7e2229%7e&sort=s_date+desc&origin=title.
12 Id. at 29–13. Under these benefits, RILA
investors are permitted to take a certain amount of
guaranteed withdrawals from their contract each
year without reducing the value of guaranteed
withdrawals for future years. These can be a
standard feature or an optional rider chosen by an
investor. Id. at 29–12.
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contracts, an investor could experience
a decrease in contract value from a
negative interim value adjustment and a
negative market value adjustment,
depending on the timing of the
withdrawal, and also pay a surrender
charge. An investor may also be subject
to income taxes and face a Federal
income tax penalty if the investor
withdraws money before a certain age.13
• Changes by Insurer. Crediting
periods for an index-linked option in a
RILA contract generally range from one
to six years. The insurance company
may change or remove key features of
index-linked options, such as the cap
rates, floors, or even change the index.
These changes may often be made at the
insurance company’s discretion and
renewal provisions can and do change
over time. Also, RILA contracts
typically state that an investor will be
automatically renewed at the end of a
crediting period into the same or
substantially similar index-linked
option, often with a new limit on gains.
If the same index-linked option is
unavailable, the terms of the contract
generally provide that the insurance
company may place the investor into a
more conservative investment option as
a default, such as a fixed account or an
index-linked option with a 0% floor.
• Taxes. Special tax rules generally
apply to RILAs and other annuities,
with both tax advantages and potential
adverse tax impacts in certain
circumstances. For example, assets
within a RILA generally grow taxdeferred. As discussed above, however,
investors may face a Federal income tax
penalty if money is withdrawn before
the investor reaches a certain age.14
Providing investors with key
information is particularly important in
the context of RILAs, since their features
are typically complex and their risks
may not be apparent or easily
understood by prospective investors
absent clear disclosure. Form N–4’s
existing disclosure requirements
regarding features of annuities would
complement the proposed RILA-specific
13 See Updated Investor Bulletin: Indexed
Annuities, SEC’s Office of Investor Education and
Advocacy, July 31, 2020, https://www.sec.gov/oiea/
investor-alerts-and-bulletins/ib_indexedannuities.
Staff reports and other staff documents (including
those cited herein) represent the views of
Commission staff and are not a rule, regulation, or
statement of the Commission. The Commission has
neither approved nor disapproved the content of
these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend
applicable law, and create no new or additional
obligations for any person.
14 For these and other reasons, insurance
companies generally advertise RILAs as a long-term
investment. This is similar to the treatment of
variable annuities. See VASP Adopting Release at
n.14 and accompanying text.
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disclosures, such that the amended
Form N–4 would provide investors with
key information both about the annuity
contract and the associated registered
index-linked or variable investment
options.
B. Current Registration Process
The current requirements for issuers
offering RILAs and variable annuities
differ in many respects, both in terms of
the disclosure issuers must provide, and
with respect to the registration process.
We highlight here some of these key
differences.
On required disclosure, because the
Commission currently does not have a
specific registration form for RILAs,
insurance companies register the
offerings of RILAs on Forms S–1 or S–
3.15 Although specific disclosure
requirements apply for certain securities
such as capital stock or debt, the forms’
disclosure requirements are not
specifically tailored to particular kinds
of securities given the wide range of
securities offerings that can be
registered on the forms.16 Forms S–1
and S–3 thus do not include specific
line-item requirements addressing
disclosures about RILAs and their
complex features, such as how limits on
gains operate or the application of
contract adjustments. These forms also
require issuers to disclose information
about the offering itself as well as
extensive information about the
registrant issuing the securities that may
be less material to a RILA investor than
information about the contract’s
features. Required information about the
registrant includes, for example,
management’s discussion and analysis
of financial condition and results of
operations (‘‘MD&A’’), which requires a
narrative discussion of the registrant’s
financial statements, and disclosure
about executive compensation.
Domestic registrants also must include
financial statements prepared in
accordance with U.S. generally accepted
accounting principles (‘‘GAAP’’).17
15 See, e.g., General Instruction I of Form S–1
(‘‘This Form shall be used for the registration under
the Securities Act of 1933 (‘Securities Act’); of
securities of all registrants for which no other form
is authorized or prescribed’’).
16 See Item 9 of Forms S–1 and S–3 and 17 CFR
229.202 (providing specific disclosure requirements
for certain securities such as capital stock, debt,
warrants or rights, and directing issuers of other
types of securities to include a brief description that
is comparable to that required for the specified
kinds of securities).
17 See 17 CFR 210.4–01(a)(1) (stating that
financial statements filed with the Commission
which are not prepared in accordance with GAAP
will be presumed to be misleading or inaccurate
unless the Commission has otherwise provided).
See also infra footnote 20.
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Most variable annuities, in contrast,
are registered on Form N–4.18 This form
is designed for variable annuities and
has disclosure requirements tailored to
these investments. Providing investors
with key information in a readerfriendly format is particularly important
in the context of variable annuity
contracts because their structure is
complex. Accordingly, Form N–4’s
disclosure requirements are designed to
provide investors with key information
relating to a variable contract’s
provisions, benefits, and risks in a
concise and reader-friendly
presentation, along with targeted
information about the insurance
company and the offering. Form N–4’s
disclosure requirements thus focus more
on the specific features of variable
annuities than on the issuing insurance
company. This presentation is designed
to highlight the most important
information for an investor in a variable
annuity, so that the only matters
included in the prospectus are those for
which there is a substantial likelihood
that a reasonable investor would
consider them important in deciding
whether to invest.19 This focus on the
provisions of the variable contract itself,
rather than certain details about the
operation of the insurance company,
reflects that a variable annuity contract
is not a direct investment in the capital
stock or debt of the insurance company,
but rather a contract with the insurance
company under which the investor’s
exposure to the insurance company
generally is limited to the company’s
ability to honor any guarantees
associated with the contract. In
addition, rule 498A together with Form
N–4 implements a layered disclosure
approach for variable annuities by
18 According to Form N–CEN filings received
through March 23, 2023, there were 419 variable
annuity separate accounts registered as unit
investment trusts (‘‘UITs’’) in 2022.
19 The Commission has long sought to tailor
disclosures for annuity products. See Registration
Forms for Insurance Company Separate Accounts,
Investment Company Act Release No. 13689 (Dec.
23, 1983) [49 FR 614 (Jan. 5, 1984)] (‘‘Form[] N–4
would permit shorter and simpler prospectuses
than are required under current practice, . . . by
incorporating many of the reduced disclosure
requirements of Form N–1A. Separate account
disclosure requirements that experience has shown
are unnecessary also would be eliminated, as well
as certain disclosure requirements that are
holdovers from the requirements applicable to nonseparate account unit investment trust.’’);
Registration Form Used By Open-End Management
Investment Companies, Investment Company Act
Release No. 12927 (Dec. 27, 1982) [48 FR 813 (Jan.
7, 1983)] (‘‘In order to shorten and simplify the
prospectus for mutual funds, the Commission has
concluded that it is necessary to eliminate certain
types of information from the prospectus, so that
only matters of fundamental importance to most
mutual fund investors will be included in the
prospectus’’).
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permitting insurance companies and
others to use a summary prospectus
framework for variable annuities while
making the more-detailed statutory
prospectus, as well as the contract’s
statement of additional information
(‘‘SAI’’), available online. Form N–4 also
provides a limited exception for
insurance companies to file financial
statements prepared in accordance with
statutory accounting principles (‘‘SAP’’),
referred to as ‘‘statutory requirements’’
in the form instructions, rather than
GAAP. Specifically, insurance
companies, which act as the depositors
of variable annuity separate accounts
registered on Form N–4, may use SAP
financials solely when the insurance
company does not otherwise prepare
GAAP financial statements or GAAP
financial information for use by a parent
in the parent’s Securities Exchange Act
of 1934 (‘‘Exchange Act’’) reports or the
parent’s registration statements filed
under the Securities Act.20
With respect to the registration
process, insurance companies
registering an offering of RILA securities
are required under the Securities Act to
pay a registration fee to the Commission
at the time of filing a registration
statement.21 This means that they pay
20 See, e.g., Instruction 1 to Item 31(b) in Form N–
3 and Instruction 1 to Item 26(b) in Form N–4. In
addition, although Form S–1 requires GAAP
financial statements, exemptions have been granted
pursuant to 17 CFR 210.3–13 that permit insurance
companies to substitute SAP financials in lieu of
GAAP financials when registering RILAs on Form
S–1 in circumstances permitted by Form N–4. See,
e.g., Letter from Jenson Wayne, Chief Accountant,
Division of Investment Management, to Stephen E.
Roth, Eversheds Sutherland (US) LLP, regarding
Fidelity & Guaranty Life Insurance Company and
Fidelity & Guaranty Life Insurance Company of
New York (Mar. 17, 2023) (available at https://
www.sec.gov/files/fidelity-guaranty-031723.pdf)
(‘‘F&G Life Letter’’).
21 Section 6(b)(1) of the Securities Act [15 U.S.C.
77f(b)(1)]. Certain ‘‘well-known seasoned issuers’’
or ‘‘WKSIs’’ can use a different registration process
than what is described here. See generally
Securities Offering Reform, Investment Company
Act Release No. 26993 (July 19, 2005) [70 FR 44722
(Aug. 3, 2005)] (‘‘Offering Reform Release’’). None
of the insurance companies offering RILAs are
WKSIs, however, and we generally do not
anticipate that RILA issuers will meet the
conditions to operate as a WKSI. We therefore do
not generally discuss the WKSI registration process
in this release. Even if a RILA issuer were to qualify
as a WKSI, the Securities Act rules that provide a
streamlined offering process for WKSIs generally
would be inapplicable to RILA offerings on Form
N–4, as proposed. For example, although a WKSI
can file an automatic shelf registration statement,
this would not be applicable under the proposal
because Form N–4 does not permit a shelf
registration statement and an automatic shelf
registration statement must be filed on Forms S–3,
F–3, or N–2. See rule 405 (definition of ‘‘automatic
shelf registration statement’’). As another example,
WKSIs are permitted to use the ‘‘pay-as-you-go’’
method of paying securities registration fees, but
the registration fees for RILA offerings would be
paid annually in arrears under the proposal. See 17
CFR 230.456(b).
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registration fees at the time they register
the offer and sale of the securities,
regardless of when (or if) they sell them.
The registration statement for the RILA
offering also must include current
financial information, including any
annual update required by section
10(a)(3) of the Securities Act.22 An
insurance company registering a RILA
offering on Form S–1 must provide any
section 10(a)(3) update to the
registration statement by filing a posteffective amendment which must be
declared effective, typically by the staff
acting pursuant to delegated authority.23
If the offering is registered on Form S–
3, the insurance company’s annual
report on Form 10–K containing audited
financial statements will operate as a
post-effective amendment to the
registration statement for purposes of
section 10(a)(3).24 The insurance
company is required to provide a
complete set of its financial statements,
certain schedules, and executive
compensation disclosures in a
structured data format using Inline
XRBL, but is not otherwise required to
provide other information in the
registration statement as structured
data.25 Insurance companies offering
RILAs also are not required to deliver
prospectuses to investors because they
can rely on the Commission’s ‘‘access
equals delivery’’ framework in rule 172,
although in practice we understand that
insurance companies typically deliver
prospectuses to accompany or precede
other communications.
When an insurance company registers
a variable annuity separate account on
Form N–4, in contrast, it pays
registration fees based on the net
issuance of securities, no later than 90
days after each fiscal year end.26 The
insurance company can update its
registration statement to include
updated financial information required
by section 10(a)(3) by filing an
immediately effective post-effective
amendment under rule 485. These
22 Section 10(a)(3) of the Securities Act provides
that when a prospectus is used more than nine
months after the effective date of the registration
statement, the information contained therein shall
be as of a date not more than sixteen months prior
to such use. 15 U.S.C. 77j.
23 See Section 8(c) of the Securities Act [15 U.S.C.
77h(c)] and 17 CFR 230.462 (‘‘rule 462’’).
24 An issuer filing a registration statement on
Form S–3 will incorporate by reference information
in reports under the Exchange Act filed after the
registration statement has become effective,
including the issuer’s annual report on Form 10–
K. Accordingly, certain information required to be
included in the prospectus may be included
directly in the prospectus or included in an
Exchange Act report that is incorporated by
reference into the prospectus.
25 See rule 405(b) of Regulation S–T.
26 See 17 CFR 270.24f–2 (‘‘rule 24f–2’’).
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provisions together are designed to
allow insurance companies to efficiently
conduct continuous offerings of variable
annuities. The insurance company also
must structure certain key information
in Inline XBRL to enhance the utility of
that information to investors and must
deliver a prospectus to investors
because the ‘‘access equals delivery’’
framework in rule 172 is not available
for variable annuities.
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C. Evidence of Investor Views and Areas
of Potential Confusion
Consistent with the RILA Act, the
Commission received feedback on
individuals’ comprehension and views
on RILA disclosure through investor
testing. Specifically, we received
feedback through qualitative investor
testing interviews, as well as
quantitative testing designed to assess
whether the design of certain
hypothetical RILA disclosure provided
to participants affects their
comprehension of the disclosed
information. Each of these aspects of
investor testing was designed by the
Commission’s Office of the Investor
Advocate (‘‘OIAD’’). As described in
more detail in section II.B below, this
feedback helped us to identify areas of
Form N–4 that we propose to amend to
help ensure that a RILA purchaser
receives key information that the
purchaser is able to understand.
OIAD conducted two rounds of
qualitative interviews with a mix of
investors across demographic
characteristics, locations, and levels of
financial literacy who either already
owned annuities or had expressed
interest in investing in an annuity
product.27 These interviews aimed to
generate hypotheses about certain
content areas in RILA disclosure—
specifically, disclosure that could
appear in select rows of the ‘‘Key
Information Table’’ (or ‘‘KIT’’) in RILA
registration statements, as discussed
below—that may cause confusion and
lead to impediments to investor
understanding of key information.28
These interviews concentrated on
assessing: (1) potential RILA disclosure,
focusing on a hypothetical KIT, for areas
of confusion or misunderstanding; and
(2) participants’ mental models
27 OIAD’s qualitative testing consisted of two
rounds of in-depth hour-long interviews with
twenty participants, using a semi-structured, openended format so that participants could express
their reactions and beliefs, regardless of whether
they are accurate, in order to assess the reasoning
of a sampling of investors regarding RILA products,
and their reactions to potential RILA disclosures.
See OIAD Report at Section 5, Qualitative Testing,
Methods.
28 OIAD Report at Section 1, Introduction and
Executive Summary.
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regarding the way RILA products
function, including potential benefits,
drawbacks, and risks of a RILA
investment. The interviews also
included hypothetical scenarios.29
Feedback from both rounds of
qualitative interviews generally showed
that the interview participants did not
have much, if any, familiarity with
RILAs. Furthermore, interviews in both
rounds illustrated that many
participants struggled to understand the
details of the RILA contract presented in
sample KIT disclosure.30
With regard to the first round
specifically, participants indicated
significant confusion about the features
and fees associated with RILAs, and
often cited certain specific terminology,
such as ‘‘index option,’’ ‘‘interim value
adjustment,’’ ‘‘buffer,’’ and ‘‘investment
term,’’ as confusing to them.31 For
example, many participants mistakenly
conflated ‘‘investment term’’ with the
length of the entire insurance contract,
leading them incorrectly to conclude
that they could avoid any fees or
charges if they liquidated their
investment at the end of an initial oneyear investment period.32 Participants
often did not appear to understand that
there are multiple aspects of a typical
RILA contract that could negatively
affect an investor’s contract value or the
amounts an investor could withdraw
from the contract (e.g., the fact that a
withdrawal could be subject to a
surrender charge, interim value
adjustment, and tax penalty).33 Some
participants expressed that a chart or
graph would be useful to help them
understand certain information
presented about a RILA contract, such
as surrender periods or how the
contract’s bounded return structure
would function.34 Additionally, some
participants indicated they would need
more specific information—besides the
information in the hypothetical KIT
29 See OIAD Report at Section 5, Qualitative
Testing, Methods.
30 Several participants in Round 2 were
‘‘significantly more sophisticated than the average
investor,’’ with some having worked in a financial
field or had over $1 million in retirement assets,
and these participants also ‘‘struggled to correctly
apply the concepts discussed in the KIT.’’ OIAD
Report at Section 5, Qualitative Testing, Results
from Round 2.
31 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 1. As noted above,
supra footnote 2, to alleviate the confusion
generated by ‘‘investment term,’’ we use the term
‘‘crediting period’’ in this release and in the
proposed amendments to Form N–4.
32 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Results from Round 1.
33 See OIAD at Section 5, Qualitative Testing,
Results from Round 1.
34 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
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rows shared with them—to evaluate the
appropriateness of a RILA.35
While first-round interview
participants may not have been able to
understand RILA features and economic
tradeoffs fully after reviewing sample
KIT disclosure, some were able to
identify certain potential drawbacks and
explain certain aspects of RILA
contracts following their review of this
sample disclosure. This was
demonstrated in participants’ responses
to sample scenarios, where the
interview facilitator presented facts
about a hypothetical investor’s
background, and participants were
asked to provide their opinions about
whether a RILA contract would be an
appropriate investment option for those
investors and discuss their reasoning.
For instance, participants in the firstround interviews could generally
identify that a RILA contract could
present particular risks for individuals
without a long time horizon.36 On the
other hand, as noted above, these
participants often identified only a
single charge or penalty that would
apply even in scenarios where, for
example, a surrender charge, early
withdrawal tax penalty, and interim
value adjustment might all apply.37
Some participants were able to identify
that a RILA contract could be
appropriate for an individual in light of
factors such as desire to protect against
losses in the stock market, taking into
account considerations such as age,
investment time horizon, and other
sources of liquid funds.38 Some
interview participants also
demonstrated that they could use the
KIT disclosure to discern quickly that
they would not be interested in
purchasing a RILA contract, for example
because of liquidity needs or relatively
short investment time horizons.39
Commission staff used this feedback
to update sample KIT disclosure in
between qualitative interview rounds. In
particular, in the second round, sample
35 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
36 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1. However, OIAD’s report also
notes that in the second round of testing, many
participants did not understand that RILAs are
intended as a retirement savings vehicle, and that
there may be tax penalties for withdrawal prior to
age 591⁄2. See id., Results from Round 2. Similarly,
only 12.6% of participants in the quantitative
testing correctly identified that RILAs are investing
vehicles that are intended purely as retirement
savings vehicles. Id., Section 6, Quantitative
Testing, Results, Summary of Quantitative Testing.
37 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
38 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
39 OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
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KITs were modified to include: (1) the
phrase ‘‘investment term’’ rather than
‘‘term,’’ (2) a table to show how
investment term interacts with contract
length, (3) graphics to provide more
information about RILA loss limitation
features such as floors and buffers, and
(4) expanded links to additional
information to indicate that more
information could be available.40
Following these changes, participants
demonstrated modestly improved
comprehension in certain limited areas.
For example, the sample KIT disclosure
used in the second-round of qualitative
testing emphasized that contract
adjustments can substantially reduce
the value of an investment if investors
withdraw money before the end of an
investment term. Participants who
viewed this modified disclosure had
greater success in identifying the
potential financial impact of this
feature, with some expressing concern
about the potential magnitude of the
contract adjustment.41 Additionally,
some second-round participants who
viewed the KIT contract adjustment
disclosure also asked for more specific
information about how the adjustment
is calculated, which suggests that
layered disclosure might be useful for
these concepts.42 Even though these
participants were unable to define
certain terms relevant to contract
adjustments (e.g., interim value
adjustment), most second-round
participants seemed to understand that
RILAs are not a short-term investment
and should only be used if an investor
will not need to make early
withdrawals.43
The second round of testing also
introduced a table in the sample KIT
disclosure that attempted to help
illustrate how fees were charged over
the surrender period of the contract, the
difference between the investment term
(i.e., the crediting period) and the
contract length, and how the surrender
charge and potential contract
adjustments could vary over different
time frames.44 Nonetheless, participants
in the second round of testing still had
difficulty distinguishing between
surrender charges and contract
adjustments or understanding that both
can apply cumulatively to reduce an
40 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 1, and Appendix C.
41 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
42 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
43 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
44 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 1, and Results from
Round 2.
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investor’s contract value in cases of
early withdrawal.45 Most participants in
the second round of testing also
continued to struggle with the
mechanics of ‘‘buffers,’’ despite the
inclusion of graphics in the hypothetical
KITs designed to illustrate how buffers
work.46 There were a number of areas
where participants wanted information
that was not part of the KIT rows being
tested, such as the specific index-linked
options available under the contract,
and some participants with more
investing experience wanted
information about past returns on the
RILA, as well as additional information
on fees and charges—particularly
regarding caps on gains and other
bounded return features—in order to
understand the ways in which
insurance companies profit from
RILAs.47
Following the qualitative interviews,
OIAD conducted quantitative testing
designed to assess comprehension of
key concepts about RILAs and the
extent to which the organization of
disclosures affected participants’
comprehension of the disclosed
information.48 Approximately 2,500
participants completed OIAD’s
quantitative testing study, which was
fielded over an eight-day period and
targeted groups who were more likely to
have some experience with financial
products.49 Participants received
focused portions of a hypothetical KIT
to test disclosures. For example,
participants were randomly assigned to
one of two formats for the sample KIT
disclosure, one with a Q&A format and
one with a statement-based format.50
Overall, the results of OIAD’s
quantitative testing suggest that most
investors experience challenges in
understanding RILAs.51 This round of
testing reviewed overall comprehension
of participants as well as whether
participants were able to assess four
sub-scores: (1) appropriateness of RILAs
for investors based on their
characteristics, (2) how a RILA works,
(3) how the charges and penalties
associated with RILAs affect liquidity,
and (4) the insurance protections offered
45 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
46 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
47 See OIAD Report at Section 5, Qualitative
Testing, Results from Round 2.
48 OIAD Report at Section 6, Quantitative Testing.
49 OIAD Report at Section 6, Quantitative Testing,
Methods.
50 OIAD Report at Section 6, Quantitative Testing,
Study Design and Overview.
51 OIAD Report at Section 6, Quantitative Testing,
Summary of Quantitative Testing.
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by RILAs.52 Across all participants, the
average percentage of questions scored
correct was 58%, which, while higher
than the expected score for people
randomly guessing (50%), was lower
relative to what might be considered a
well-informed purchaser of a RILA
product.53 However, the results of the
sub-scores varied, specifically 57% for
appropriateness, 49% for how a RILA
works, 57% for insurance, and 62% for
liquidity.54 Comprehension varied
depending on the particular concept
tested. For example, 80.7% of
participants were able to correctly
identify that RILA investors cannot
access their money whenever they need
it at no cost, suggesting that the tested
disclosures were sufficient to put
participants on notice to the potential
for contract adjustments and surrender
charges.55 Conversely, only 12.6% of
participants correctly identified that
RILAs are intended purely as retirement
savings vehicles, rather than a product
appropriate for other, shorter-term
investing goals (e.g., education and
home purchasing), suggesting continued
investor confusion on this topic.56
Additionally, participants in the
quantitative testing were classified into
three groups based on their experience
with investing. Not surprisingly,
increased investment experience
correlated with greater overall
comprehension, with non-investors
(those with no existing investments)
averaging slightly less than 50% correct,
11.7 percentage points lower than the
average for the group with the most
investment experience.57 The Q&A KIT
format demonstrated a statistically
significant, albeit quantitatively small,
improvement over the non-Q&A KIT
format, particularly with regard to the
non-investor group, who saw a 5.7
percentage points increase in
comprehension in connection with the
Q&A format with regard to overall
comprehension.58
Overall, investor testing successfully
identified a range of barriers to investor
understanding of RILAs and associated
disclosures. However, with the few
52 OIAD Report at Section 6, Quantitative Testing,
Comprehension Measures.
53 OIAD Report at Section 6, Quantitative Testing,
Results.
54 OIAD Report at Section 6, Quantitative Testing,
Results, Table 6.
55 OIAD Report at Section 6, Quantitative Testing,
Results.
56 OIAD Report at Section 6, Quantitative Testing,
Results.
57 See OAID Report at Section 6, Quantitative
Testing, Results, Subgroup Analysis, Investor
Status.
58 See OIAD Report at Section 6, Quantitative
Testing, Results, Subgroup Analysis, Investor
Status.
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exceptions noted above, variations in
disclosures did not result in significant
improvements in investor
comprehension in the investor testing.
Accordingly, while OIAD’s investor
testing has been successful in
identifying specific areas of investor
confusion regarding RILAs, those results
were largely inconclusive in terms of
determining specific disclosures that are
relatively more successful in addressing
the identified confusion.
We have incorporated those results in
our design of the proposed Form N–4
amendments, endeavoring to give
particular attention to areas of identified
investor confusion while leveraging
existing disclosure requirements.
Because investor testing did not, for the
most part, provide persuasive evidence
of superior disclosures, we are
proposing to largely utilize the existing
Form N–4 disclosures which have been
developed over time, and with which
staff, investors, and RILA issuers are
already familiar. Building upon these
existing disclosures has additional
benefits, because combination contracts
offering both variable and index-linked
options will be required to comply with
Form N–4, making it more efficient to
build on the form’s requirements for
both types of investment options. We
seek comment throughout this release
on specific areas for improvement that
can aid investor comprehension.
Further, we are requesting specific input
from the retail investor community,
through a short Feedback Flyer, relating
to their experiences with annuities
generally and RILAs specifically.59
Further, in addition to investor testing
focused specifically on sample RILA
disclosure, our proposal—and the
current disclosure requirements in Form
N–4 that we are building upon—also
draw on the Commission’s past investor
testing efforts, outreach, and other
empirical research concerning investors’
preferences. This includes, for example,
information about summary content and
layered disclosure approaches.60 The
Commission has historically received
feedback showing that investors
generally prefer concise, layered
disclosure.61 Investors participating in
59 See
infra section II.K; Appendix D.
Updated Disclosure Requirements and
Summary Prospectus for Variable Annuity and
Variable Life Insurance Contracts, Investment
Company Act Release No. 33286 (Oct. 30, 2018) [83
FR 61730 (Nov. 30, 2018)] (VASP Proposing
Release) at paragraphs accompanying nn.38–43.
61 See, e.g., Request for Comment on Fund Retail
Investor Experience and Disclosure, Investment
Company Act Release No. 33113 (June 5, 2018) [83
FR 26891] (June 11, 2018] (‘‘Investor Experience
RFC’’). Feedback in comment letters generally
showed that retail investors prefer concise, layered
disclosure and feel overwhelmed by the volume of
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60 See
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certain past quantitative and qualitative
investor testing initiatives on the
Commission’s behalf have also
expressed preferences for, wherever
possible, the use of a summary
containing key information about an
investment product or service written in
clear, concise, and understandable
language and presented in an accessible
format.62 Each of these sources of
evidence of investor preferences,
understanding, and behaviors in
response to disclosures specific to
RILAs and other investment products
more generally has provided important
context and support for our proposal’s
approach to RILA disclosure.
D. Overview of Proposal
We are proposing to modernize and
enhance the registration and disclosure
framework for RILAs by adapting the
existing registration and disclosure
framework that is familiar to investors
and issuers for variable annuity separate
accounts to accommodate RILAs.
• Use of Form N–4. We are proposing
to amend Form N–4 so that issuers
seeking to register the offering of RILAs
must use that form. To accommodate
this, we are also proposing amendments
to that form that specifically address the
features and risks of RILAs. For
example, we are proposing amendments
to the form’s ‘‘Key Information Table’’
that highlight key features of RILAs that
should be disclosed so that investors
may determine whether a RILA is an
appropriate investment for them. In
particular, the KIT highlights key
features of a RILA contract that may be
substantially different from the features
of investment products investors may be
more familiar with, and that investor
information they currently receive. Multiple
comment letters reflected a preference for shorter
summary disclosures, with additional information
available online or upon request. See, e.g.,
Comment Letter of C. Scott (July 26, 2018)
(expressing preference for shorter summary
disclosures, and suggesting disclosures ‘‘trim the fat
and replace the text-heavy disclosures with
something that is clear, succinct, and transparent’’);
Comment Letter of Helena Krus (July 29, 2018)
(noting a preference to receive shorter summary
disclosures, with additional information available
online or upon request, and suggesting that the
option should be available for all documents over
5 pages).
62 See supra footnote 61; see also, e.g., SEC Staff,
Study Regarding Financial Literacy Among
Investors (Aug. 2012). The key information that
investors found useful and relevant before
purchasing an investment product includes
information on fees and expenses, investment
performance, principal risks, and investment
objectives. With respect to the presentation of
disclosure, the study indicates that investors
preferred disclosures being ‘‘written in clear,
concise, understandable language, using bullet
points, tables, charts, and/or graphs.’’ Materials
relating to this study, including the staff’s report,
are available at https://www.investor.gov/
publications-research-studies/sec-research.
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testing suggests may not be readily
apparent to investors. Further, because
the insurance company would register
the offering of a RILA on Form N–4
under the proposal, it would be subject
to the requirements in the form related
to financial statements, including the
form instruction that currently permits
variable annuity issuers to file insurance
company SAP financial statements in
certain circumstances.
• Form N–4 Amendments for All
Issuers. In addition to adding RILAs to
Form N–4, we are also proposing
amendments to the form that would be
applicable to offerings of variable
annuities. These proposed amendments
are informed by the staff’s historical
experience in administering the form
and respond to observations from
investor testing relevant to variable
annuity offerings. For example, one
takeaway from investor testing was that
the complicated jargon of RILA
contracts was a consistent impediment
to investor comprehension of KIT
disclosures.63 To address this
confusion, we are proposing to switch
the order of the Key Information Table
and Overview of the Contract items to
introduce investors earlier to the
terminology and concepts underlying
annuity contracts, in the hopes that this
context will improve investor
comprehension of KIT disclosures.
Because variable annuities are also
complicated investment products, we
are proposing to switch the order for
these products as well, so that variable
annuity investors also have the benefit
of this additional context.
• Summary Prospectus. Consistent
with the inclusion of RILAs on Form N–
4, we are proposing to permit RILA
issuers to make use of the summary
prospectus framework available to
variable annuity registrants on Form N–
4.
• Updates to the Filing Rules. To
accommodate RILA registrations on
Form N–4, we are proposing to require
RILA issuers to pay fees in arrears on
Form 24F–2 and we are proposing
amendments to address RILAs in the
rules that variable annuities use to file
post-effective amendments and to
update prospectuses.
• Materially Misleading Statements in
Sales Literature. The proposed
amendments would require RILA
issuers to comply with rule 156, which
provides guidance as to when sales
literature is materially misleading under
the Federal securities laws.
Our proposal, if adopted, would
implement the RILA Act’s mandate.
63 See OIAD Report at Section 6, Quantitative
Testing, Summary of Quantitative Testing.
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II. Discussion
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A. Use of Form N–4
We propose to require insurance
companies to use Form N–4 to register
the offering of RILAs, as well as
amendments to the form to require
disclosures specific for these
securities.64 As discussed above, the
registration forms currently used by
RILA issuers do not include line-item
disclosure requirements addressing the
unique aspects of RILAs, like limits on
gains or the application of contract
adjustments. They also require
information about the issuer, such as
MD&A, that may be less important to
annuity investors, given that they are
not making a direct investment in the
insurance company, and that the
Commission has not determined to
require for variable annuities.
Conversely, most variable annuity
issuers already use Form N–4 to register
their securities and the form is designed
to provide investors with productspecific information about annuity
contracts.65 Requiring insurance
companies to register RILA offerings on
Form N–4 therefore leverages the form’s
existing insurance-product specific
disclosure requirements, including
disclosure requirements that help
effectuate the relatively new summary
prospectus layered disclosure
framework the Commission adopted in
2020 for variable contracts. With the
RILA-specific disclosures we are
proposing to add to Form N–4, we
intend that the form will provide
investors with the information
necessary to make informed decisions
about RILAs.
Including RILAs on Form N–4 also
could provide further benefits to
investors by facilitating not only
investor comparison among RILAs, but
also the comparison of index-linked
options to variable options in the same
annuity contract. For example, investors
would be able to review summary
information of all the available
investment options of an annuity
contract—index-linked options, variable
options, and fixed options—and
compare these options in one place in
64 See proposed General Instruction B.1 of Form
N–4. Form N–4, as we propose to amend it, would
provide that Form N–4 is ‘‘to be used by insurance
companies to register index-linked annuity
contracts under the Securities Act of 1933.’’
Insurance companies therefore would not be
permitted to register RILA offerings on Forms S–1
or S–3, as they do today.
65 Variable annuities register on Form N–3 if they
are issued by separate accounts that are organized
as management investment companies. However,
most variable annuities are issued by separate
accounts that are organized as unit investment
trusts and therefore use Form N–4. See supra
footnote 6.
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the prospectus appendix required by
Form N–4.66 Currently, we understand
that approximately 44% of the RILAs
offered in the marketplace are offered as
index-linked options through
combination products.67 Registering the
offerings of RILAs on Form N–4, rather
than a new or different form, also would
be more efficient for insurance
companies and Commission staff. In this
regard, insurance companies would
benefit from using a single form, with
tailored disclosure requirements, to
register the offerings of both RILAs and
combination contracts with indexlinked options. In addition, many of the
insurance companies issuing RILAs also
issue variable annuity contracts and
therefore are familiar with the
requirements of Form N–4. Using Form
N–4 for RILAs also would be efficient
for our staff because the disclosure
requirements for variable contracts and
RILAs would be consolidated in one
place. Further, because Congress has
authorized RILA issuers to use Form N–
4 if the Commission fails to adopt a
registration form for RILAs within 18
months of the RILA Act’s enactment, we
believe that requiring insurance
companies to use the form is consistent
with congressional intent.
Requiring insurance companies to
register RILA offerings on Form N–4
under the proposal would result in
changes to RILA disclosure, in that they
would have to comply with the current
Form N–4 disclosure requirements in
addition to the proposed new RILAspecific disclosure requirements. While
Form N–4 contains some of the issuerand offering-specific disclosures
required by Forms S–1 and S–3, it does
not contain them all. Specifically, Form
N–4 does not include many of the
disclosures relating to the mechanics of
the offering (e.g., use of proceeds,
dilution, etc.); offering participants
other than the issuer, such as selling
securities holders; and certain details of
the issuer (e.g., descriptions of property,
executive compensation, etc.). These
disclosures may be more useful to an
investor considering an investment in
the capital stock or debt securities of the
insurance company rather than an
investment in a RILA issued by the
insurance company. Unlike an investor
in the insurance company itself, a RILA
investor’s direct investment exposure to
the insurance company is limited to the
insurance company’s claims-paying
ability, which also is supported by State
insurance regulations and supervision
infra section II.B.3(c).
on an informal Commission staff review
of RILA filings on the EDGAR system as of May 2,
2023.
designed to ensure that insurance
companies are able to satisfy their
obligations under their insurance
contracts. Requiring insurance
companies to register RILA offerings on
Form N–4 would leverage that form’s
annuity-focused requirements to ensure
that investors receive those disclosures
that would be the most important in the
RILA context.
To accommodate the offering of RILAs
on Form N–4 and to provide a
consistent framework for all offerings
registered on the form, we are
proposing, as discussed in more detail
below, changes to certain rules and
requirements such that RILA issuers
would be subject to the same process
requirements as variable annuities.68
For example, similar to the current
offering processes for issuers of variable
annuities, insurance companies
registering RILA offerings would be
permitted to use a streamlined summary
prospectus and required to pay fees to
register their securities annually rather
than at the time of filing a registration
statement.69 These changes would
provide efficiencies for insurance
companies and Commission staff in
establishing consistent requirements for
offerings registered on Form N–4. It
would, however, result in some tradeoffs for RILA issuers. For example,
insurance companies currently
registering RILA offerings on Form S–3
would lose the ability to update their
registration statement by incorporating
by reference their annual report but
would be able to update their
registration statement annually with an
immediately effective amendment. On
balance, and as discussed in more detail
throughout this release, requiring
insurance companies registering RILA
offerings to follow the offering processes
proposed in this release should result in
efficiencies for insurance companies
and our staff. We anticipate that
requiring RILA offerings to be registered
on Form N–4 will also benefit investors
by leveraging the form’s annuityspecific disclosure requirements and
extending the variable annuity summary
prospectus to RILAs. Having a common
registration form also should make it
easier for investors deciding between an
investment in a RILA or a variable
annuity to compare the offerings.
We request comment on the proposed
requirement to register RILA offerings
on Form N–4.
1. As proposed, should we require
RILA issuers to use Form N–4? Is
another existing registration form more
66 See
67 Based
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68 See
infra sections I.C and II.E.
also infra section II.E.3 (discussing
proposed changes to rule 172).
69 See
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appropriate for RILAs? If so, which
registration form and why?
2. Given that any existing registration
form would require RILA-specific
amendments, should the Commission
instead develop a new form specifically
for RILAs?
3. Is it appropriate to require an
annuity that offers different types of
investment options (e.g., variable
options as well as index-linked options)
to address these different types of
investment options on the same
registration form? Would requiring
different registration forms for annuities
offering different types of investment
options be more or less efficient for
insurance companies that offer variable
annuities, RILAs, and combination
contracts?
4. Is there any information currently
required by Forms S–1 or S–3 that we
should also require RILA issuers to
disclose?
5. Would requiring RILAs to follow
the same filing and other process
requirements as variable annuities (such
as requirements for paying registration
fees, and the ability to use a summary
prospectus) be efficient for insurance
companies because they could use the
same processes to pay registration fees
and update registration statements for
variable annuities, RILAs, and
combination contracts?
6. Do commenters believe that there
are any disclosures from Forms S–1 and
S–3 we are not including in the
proposed Form N–4, particularly the
MD&A and executive compensation
disclosures, that could be of material
relevance to RILA investors? If so,
please explain their relevance to RILA
investors.
7. Do commenters agree with our
estimate that approximately 44% of
RILA securities offered in the
marketplace are offered as index-linked
options through combination products?
If not, what percentage do commenters
think more accurately reflects RILA
securities offered as index-linked
options through combination products,
and what is the basis for this estimate?
8. Should Form N–4, as amended, be
the only form that insurance companies
could use to register RILA offerings?
Should we permit the continued use of
Forms S–1 and S–3 in addition to the
amended Form N–4? Would this be
appropriate, given that RILA issuers can
already use those forms? How would we
ensure that investors receive the
information necessary to make informed
decisions through use of those forms,
including the benefit of the proposed
RILA-specific disclosure requirements
informed by investor testing?
9. Do commenters expect that any
RILA issuers will meet the conditions to
operate as a WKSI, and if so, what is the
basis for this expectation?
10. Do commenters agree that
leveraging Form N–4’s annuity specific
disclosure requirements and summary
prospectus regime would benefit
investors? Would registering RILA
offerings on Form N–4 make it easier for
RILA investors to compare RILA
offering with variable annuity offerings?
Are there any other potential benefits or
disadvantages to investors in registering
RILA offerings on Form N–4 as
compared to other forms?
B. Contents of Form N–4
As proposed, many items of current
Form N–4 would apply to RILAs. We
are also proposing updates to Form N–
4 to include disclosures specific to
RILAs. In certain circumstances, we
propose changing the disclosures
provided on the form that would apply
to both RILAs and variable annuities.
The chart in Table 1 below outlines
these items and any substantive changes
we are proposing.70 We discuss these
changes in more detail in the sections
that follow.
TABLE 1—OVERVIEW OF PROPOSED FORM N–4
Item
Description
Substantive changes
Discussion
Prospectus (Part A)
1 .......................
Front and Back Cover Pages
2 .......................
Overview of the Contract .......
3 .......................
Key Information ......................
4 .......................
5 .......................
Fee Table ...............................
Principal Risks of Investing in
the Contract.
Description of the Insurance
Company, Registered Separate Account, and Investment Options.
Charges ..................................
General Description of Contracts.
Annuity Period ........................
Benefits Available Under the
Contract.
Purchases and Contract
Value.
Surrenders and Withdrawals ..
Loans ......................................
Taxes ......................................
Legal Proceedings ..................
Financial Statements ..............
6 .......................
7 .......................
8 .......................
9 .......................
10 .....................
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11 .....................
12
13
14
15
16
.....................
.....................
.....................
.....................
.....................
70 Some proposed changes entail a nonsubstantive change such as a change to a defined
term or specifying that the provision would
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Adding new legends and other standardized disclosures applicable to all issuers.
New RILA-specific disclosures; moving order of appearance
up.
New RILA-specific disclosures; changing to a question-andanswer format; moving order of appearance down; change
discussion of restrictions on optional benefits to cover all
benefits.
New contract adjustment disclosure .......................................
Providing more detailed disclosures applicable to all issuers
Section II.B.3(a).
Section II.B.2.
Section II.B.5.
Section II.B.4.
New RILA-specific disclosures and one new item regarding
variable options.
Section II.B.3(a).
New disclosures related to contract adjustments ...................
No substantive change ............................................................
Section II.B.5.
Section II.B.8(b).
No substantive change ............................................................
No substantive change ............................................................
Section II.B.8(b).
Section II.B.8(b).
No substantive change ............................................................
Section II.B.8(b).
No
No
No
No
No
Section
Section
Section
Section
Section
substantive
substantive
substantive
substantive
substantive
change
change
change
change
change
............................................................
............................................................
............................................................
............................................................
(but see Item 26) ...............................
continue to be applicable only to a registered
separate account or variable option. These are not
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II.B.8(b).
II.B.8(b).
II.B.8(b).
II.B.8(c).
II.D.
flagged in the following table but are instead
discussed in section II.B.7 supra.
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
TABLE 1—OVERVIEW OF PROPOSED FORM N–4—Continued
Item
Description
17 .....................
Substantive changes
Investment Options Available
Under the Contract.
Discussion
New RILA-specific disclosures ................................................
Section II.B.3(b).
Statement of Additional Information (Part B)
18 .....................
19 .....................
20 .....................
21 .....................
22 .....................
23 .....................
24 .....................
25 .....................
26 .....................
Cover Page and Table of
Contents.
General Information and History.
Non-Principal Risks of Investing in the Contract.
Services ..................................
Purchase of Securities Being
Offered.
Underwriters ...........................
Calculation of Performance
Data.
Annuity Payments ..................
Financial Statements ..............
No substantive change ............................................................
Section II.B.8(b).
No substantive change ............................................................
Section II.B.8(c).
No substantive change ............................................................
Section II.B.8(b).
No substantive change ............................................................
New disclosure of specific contract adjustment information ...
Section II.B.8(b).
Section II.B.5.
No substantive change ............................................................
Clarifying only applies to variable options ..............................
Section II.B.8(c).
Section II.B.7.
No substantive change ............................................................
Providing that RILA issuers can use the relevant instructions
and adding requirements relating to changes in and disagreements with accountants for RILAs.
Section II.B.8(b).
Section II.D.
Other Information (Part C)
27 .....................
Exhibits ...................................
28 .....................
Directors and Officers of the
Insurance Company.
Persons Controlled or Under
Common Control with the
Insurance Company or the
Registrant.
Indemnification .......................
Principal Underwriters ............
Information about contracts
with Index-Linked Options.
Location of Accounts and
Records.
Management Services ............
Fee Representation and Undertakings.
29 .....................
30 .....................
31 .....................
31A ...................
32 .....................
33 .....................
34 .....................
1. Front and Back Cover Pages (Item 1)
We propose to require RILA issuers to
include the information Form N–4
currently requires on the front and back
cover pages of the prospectus.
Currently, issuers are required to
Adding power of attorney for all issuers and accountant letters for RILA issuers as exhibits.
No substantive change ............................................................
Section II.B.7(d).
No substantive change ............................................................
Section II.B.8(c).
No substantive change ............................................................
No substantive change ............................................................
New disclosure of RILA specific information ..........................
Section II.B.8(c).
Section II.B.8(c).
Section II.B.6.
No substantive change ............................................................
Section II.B.7.
No substantive change ............................................................
Adding new RILA undertakings ...............................................
Section II.B.8(b).
Section II.B.7(d).
include on the front and back cover
pages basic identifying information
about the issuer and the contract,
information on how to review the
document (e.g., what the SAI is and
where to find it), as well as certain
Section II.B.8(c).
legends, for example, one relating to the
ability for an investor to cancel the
contract within 10 days.71 The table
below outlines these existing
disclosures that RILAs would be
required to include if applicable.
TABLE 2—EXISTING INFORMATION REQUIRED BY ITEM 1 OF FORM N–4
[With proposed adjustments]
Item No.
Disclosure
Cover
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Identifying Information
Item
Item
Item
Item
Item
1(a)(2)
1(a)(3)
1(a)(4)
1(a)(9)
1(b)(4)
.....................................
.....................................
.....................................
.....................................
.....................................
Insurance company’s name ...................................................................
Types of contracts offered (e.g., group, individual, etc.) .......................
Name and class of contract ...................................................................
Date of prospectus ................................................................................
EDGAR identifier number ......................................................................
71 One change specific to this legend would be to
indicate whether the insurance company will apply
a contract adjustment on any money returned
during this period. Contract adjustments are a
defining element of a RILA, but can apply in other
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circumstances. Nonetheless, given the context of
this legend, we believe that it is important for
investors to know whether they will be subject to
this charge if they elect to have their money
returned. See supra sections II.B.5 (discussing
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Front.
Front.
Front.
Front.
Back.
contract adjustments generally) and II.F (discussing
that it could be materially misleading to advertise
that investors can receive their money back during
a period of time without indicating that a contract
adjustment could apply).
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TABLE 2—EXISTING INFORMATION REQUIRED BY ITEM 1 OF FORM N–4—Continued
[With proposed adjustments]
Item No.
Disclosure
Cover
Legends
Item 1(a)(10) ...................................
Item 1(a)(11) ...................................
Item 1(a)(12) ...................................
Statement that the Commission has not approved or disapproved of
the securities or passed upon the accuracy or adequacy of the disclosure in the prospectus and that any contrary representation is a
criminal offense (as required in 17 CFR 230.481(b)(1)).
Statement that additional information about the contract is available
on Investor.gov.
A legend that states that if you are a new investor, you may cancel
your contract within 10 days of receiving it with some details about
the operation of this process.
Front.
Front.
Front.
Other Information
Item 1(b)(1) .....................................
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Item 1(b)(2) .....................................
Statement that the SAI contains additional information, that it is available to investors, and how investors may obtain the SAI or make
inquiries about their contracts.
Statement about whether and from where information is incorporated
by reference.
In addition, we are proposing to add
several new disclosures to the cover
page to accommodate RILAs. The first
proposed amendment would require the
insurance company to identify the types
of investment options offered under the
contract and cross-reference the
prospectus appendix that provides
additional information about each
option.72 Given the addition of
investment options beyond variable
options to the form, this would help
investors better understand what
investment options are available under
the contract.
The other proposed amendments to
the cover page would require additional
new disclosures that highlight RILAs’
complexities and certain associated
risks. These include RILA’s limitation
on gains and potential for loss, that they
are not short-term investments, and that
payments under the contract are subject
to the insurance company’s financial
strength and claims-paying ability. The
proposed legends would require issuers
to include statements on the front cover
disclosing the following:
(1) The contract is a complex
investment and involves risks,
including the potential loss of principal;
(2) For contracts that include indexlinked options, a prominent statement
that the insurance company limits the
amount the investor can earn, the
potential for investment loss could be
significantly greater than the potential
for investment gain, an investor could
lose a significant amount of money if
the index declines in value, and a
72 See
proposed Item 1(a)(5) of Form N–4.
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prominent statement disclosing as a
percentage the maximum amount of loss
from negative index performance that an
investor could experience after taking
into account the minimum guaranteed
limit on index loss provided under the
contract;
(3) The contract is not a short-term
investment and is not appropriate for an
investor who needs ready access to
cash, and withdrawals could result in
surrender charges, negative contract
adjustments, taxes, and tax penalties as
applicable with a prominent statement
of the maximum potential loss resulting
from a contract adjustment, if
applicable; and
(4) The insurance company’s
obligations under the contract are
subject to its financial strength and
claims paying ability.73
This cover page disclosure is designed
to put an investor on notice of these key
considerations to help the investor make
informed decisions.
While these proposed additional
disclosures are important for investors
in RILAs, they are also relevant in many
cases to investors in variable annuities.
For example, while RILAs are complex
investments, variable annuities are
complex as well. Variable annuities, like
RILAs, also are not short-term
investments. As a result, we are
proposing to apply the proposed new
disclosures to all Form N–4 issuers to
ensure that investors in both RILAs and
variable annuities receive appropriate
disclosures.
73 See
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Back.
Back.
We request comment on the
requirement of RILAs to include the
information in Item 1 of Form N–4 on
their registration statement and the
inclusion of new legends for all Form
N–4 filers, as applicable, on the front
cover of the registration statement.
11. Would the new legends be
effective in helping investors make
informed decisions with regards to
RILAs? Do commenters agree that it is
appropriate to require the legends for
variable annuities? Are the disclosures
in the Overview of the Contract, Key
Information Table, and elsewhere in the
prospectus—as discussed later in this
release—sufficient such that these
legends are not necessary? Conversely,
are legends effective in alerting
investors to key concepts for a RILA or
variable annuity on the cover page of
the prospectus? Are there additional
legends that are appropriate in light of
the complexity of RILAs and variable
annuities? For example, should a legend
be required that specifically discloses a
contract’s upside limitation, such as due
to a participation rate or cap rate?
12. Are there any examples or
illustrations of how RILAs operate that
we should require on the front or back
cover pages? Are examples or
illustrations more effective
communication tools than legends on
the cover page of the prospectus?
Should examples or illustrations be
provided in addition to legends?
13. Is there any other information we
should require on the front or back
cover pages?
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2. Key Information Table (Item 3)
RILA issuers, like variable annuities
issuers currently, would be required to
provide a Key Information Table in their
registration statements under the
proposal. We also are proposing
amendments to the KIT’s disclosure
requirements to address key RILA
features, as well as other amendments
that would apply to all Form N–4
issuers.
The KIT provides summary
prospectus disclosure, including a brief
description of key facts about a variable
annuity in a specific sequence and in a
standardized presentation.74
Specifically, the KIT currently includes
a summary of five topic areas: (1) fees
and expenses; (2) risks; (3) restrictions;
(4) taxes; and (5) conflicts of interest.
The KIT functions as an integral part of
the layered disclosure approach in Form
N–4 by identifying key considerations
upfront, with more detail to follow later
in the prospectus. The proposed
amendments to the KIT, which are
informed by investor testing, are
intended to build on this framework and
highlight important considerations
related to RILAs, including certain
aspects of RILAs that our investor
testing observed are difficult for
investors to understand and thus require
clear disclosure in order to help
investors make informed investment
decisions.75
Form N–4 currently prescribes format
requirements for the KIT to enhance the
readability and comparability of the
disclosure that also would apply to
RILA offerings under the proposal.76
Specifically, RILA issuers would be
required to disclose the required
information in the tabular presentation
reflected in the instructions, in the order
specified, without any modification or
substitution with alternate terminology
of the title, headings, and sub-headings
for the tabular presentation, unless
otherwise provided. Consistent with the
form’s current requirements, RILA
issuers, however, would be permitted to
exclude any disclosures (other than the
74 See VASP Adopting Release at section
II.A.1.c.ii; see also infra section II.C.
75 See, e.g., OIAD Report at Section 5, Qualitative
Testing (following two rounds of in-depth
interviews to assess potential RILA KIT disclosure
for areas of confusion or misunderstanding,
qualitative interviews suggested confusion with
RILA terms and concepts relating to, for example,
contract adjustments such as interim value
adjustments and loss limiting features such as
buffers); OIAD Report at Section 6, Quantitative
Testing, Results, Subgroup Analysis (noting 5.7
percentage point effect of the Q&A KIT structure on
overall comprehension for ‘‘non-investors’’ during
quantitative testing).
76 See proposed instruction 1 to Item 3 of Form
N–4.
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title, headings, and sub-headings for this
tabular presentation) in the KIT that are
not applicable, or modify any of the
statements required to be included, so
long as the modified statement contains
comparable information. RILA issuers
also would be required to provide crossreferences to the location in the
statutory prospectus where the subject
matter is described in greater detail,
either accessed by direct electronic link
or through equivalent methods or
technologies, as required for variable
annuity KIT disclosure. Consistent with
current requirements, RILA issuers
would include these cross-references
adjacent to the relevant disclosure,
either within the table row, or presented
in an additional table column. As
currently is required, all disclosures for
the KIT should be short and succinct,
consistent with the limitations of a
tabular presentation.
We are proposing three modifications
that would apply to registration
statements both for RILAs and for
variable annuities. These changes are
designed to provide investors with a
better understanding of these products,
and are informed in part by the results
of investor testing. First, we are
proposing to require issuers to present
the information in the KIT in a questionand-answer (‘‘Q&A’’) format.77 As a
result of this change, the various line
items of the KIT would be rephrased as
questions (e.g., ‘‘Are there charges for
early withdrawals?’’ instead of ‘‘Charges
for Early Withdrawals’’). The
instructions would further require that,
unless the context otherwise requires,
issuers should begin the response with
a ‘‘Yes’’ or ‘‘No’’ in bold text when
answering a question presented in a
given row of the KIT. Consistent with
the directional results of the
quantitative investor testing, we
anticipate that the Q&A format may
improve investor comprehension of
RILA-specific topics. Because the effect
of the Q&A KIT structure on overall
comprehension was larger for noninvestors than independent investors,
this format may particularly improve
comprehension for less-experienced
investors.78 We also expect that
77 Proposed
instruction 1(d) to Item 3 of Form N–
4.
78 For purposes of investor testing, participants
were classified into three groups: those with no
investments in stocks, bonds, mutual funds, or
other securities (non-investors); those with
investments exclusively in retirement savings
accounts (retirement only); and those with
investments outside of retirement accounts
(independent investors). See OIAD Report at
Section 6, Quantitative Testing, Subgroup Analysis,
Investor Status. The report noted a 5.7 percentage
point effect of the Q&A KIT structure on overall
comprehension for ‘‘non-investors’’. Id.
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rephrasing the current line items in a
Q&A format would more clearly convey
the importance of the KIT information
to help RILA and variable annuity
investors make informed investment
decisions.79
Second, we propose to change the
order in which the KIT (current Item 2)
appears relative to the Overview of the
Contract (current Item 3) disclosures.80
The Overview of the Contract
disclosures provide general information
about the contract and important
context about the information
summarized in the KIT. Based on our
observations of investor testing, we
believe RILA investors may generally
benefit from more context to understand
79 The Commission’s proposed Q&A format is
consistent with previous rulemaking experience.
See Form CRS Relationship Summary;
Amendments to Form ADV, Investor Act Release
No. 5247 (June 5, 2019) [84 FR 33492 (June 12,
2019)] (adopting question-and-answer format in
response to feedback from surveys and studies and
commenters who noted that ‘‘the question-andanswer format is a more effective design for
consumer disclosures because it focuses on
questions to which a consumer wants answers and
allows a consumer to skim quickly and understand
where to get more information.’’). The proposed
format is also supported by prior surveys and
studies to help design effective disclosures to retail
investors. See, e.g., Angela A. Hung, et al., RAND
Corporation, Investor Testing of Form CRS
Relationship Study (2018), available at https://
www.sec.gov/about/offices/investorad/investortesting-form-crs-relationship-summary.pdf, at p. 23
(reporting that about 60% of respondents favored a
question-and-answer format over the sample
relationship summary format presented in the
survey); Kleimann Communication Group, Inc.,
Report on Development and Testing of Model Client
Relationship Summary, Presented to AARP and
Certified Financial Planner Board of Standards, Inc.
(Dec. 5, 2018), available at https://www.sec.gov/
comments/s7-07-18/s70718-4729850-176771.pdf, at
p. 4 (‘‘Readers ask questions when they read,
especially of functional documents. . . . For good
design, we want to build upon this tendency by
identifying key questions investors should or are
likely to ask and featuring them prominently in the
text, thus easing the cognitive task for readers. As
a result, we used questions in the headings to
introduce each section’s major topic.’’); Susan
Kleimann, Making Disclosures Work for Consumers,
Presentation to the SEC’s Investor Advisory
Committee (June 14, 2018), available at https://
www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061418-slides-by-susankleimann.pdf (encouraging the use of question-andanswer format, the use of headings to make
structure clear, and a strong design grid to organize
elements, among other disclosure design principles,
to promote readability), cited in VASP Adopting
Release at n.112 and accompanying text. See also
Office of Investor Education and Assistance, U.S.
Securities and Exchange Commission, A Plain
English Handbook (Aug. 1998) (‘‘You can make
complex information more understandable by
giving your readers an example using one investor.
This technique explains why ‘question and answer’
formats often succeed when a narrative abstraction
fails.’’).
80 The current instructions to Form N–4 require
that, notwithstanding 17 CFR 230.421(a), the KIT,
Overview, and Fee Table must be disclosed in
numerical order. General instruction C.3(a) of Form
N–4. The proposal would change this instruction to
reflect the change in order.
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the KIT disclosures. For example,
interview participants generally found
certain RILA-specific terminology
confusing, such as ‘‘index,’’ ‘‘investment
term,’’ ‘‘interim value adjustment,’’ and
‘‘buffer.’’ 81 Further, investor testing
indicated that investors had difficulty in
understanding the basic features and
concepts of RILA contracts.82 The
proposed Overview of the Contract
disclosures would require descriptions
and examples to help investors
understand these RILA features and
provide a basis for better understanding
the issues flagged by the KIT
disclosures.83 Thus, based on investor
testing, we propose to change the
location of the KIT so that it appears
after (rather than before) the Overview
of the Contract section. Placing the
Overview of the Contract section first
may similarly provide context of the
issues flagged in variable annuity KITs.
Third, we propose to delete Form N–
4’s general instruction stating that
where the discussion of information
required by the Overview of the
Contract (currently Item 3) or KIT
(currently Item 2) also responds to the
disclosure requirements in other items
of the prospectus, registrants need not
include additional disclosure in the
prospectus that repeats the information
disclosed in the Overview of the
Contract or the KIT.84 In administering
Form N–4, we have observed that this
instruction has led to confusion on the
part of registrants. For example, while
both the KIT and Item 5 require
disclosures about principal risks, the
KIT expressly contemplates that more
detailed information will be repeated
later in the prospectus, specifically
requiring registrants to provide crossreferences to the more detailed
prospectus discussion.85 Item 5 requires
71101
registrants to summarize the principal
risks of the contract in one place, and
was not intended to permit an insurance
company to omit principal risks from
that section if those risks were also
disclosed in the KIT.86 Moreover, the
layered disclosure framework requires a
degree of repetition to ensure both that
the KIT contains key disclosures and
that the detailed sections that follow
contain all of the key information about
the given topic. We believe this is
particularly important for RILAs in light
of the challenges our investor testing
suggests investors have in
understanding these products. This
way, investors will see the key risks
regardless of whether they review
targeted sections of the prospectus.
The proposed overall format of the
KIT is depicted below:
TABLE 3—PROPOSED KEY INFORMATION TABLE
Fees and Expenses:
Are There Charges for Early Withdrawals?
Are There Transaction Charges?
Are There Ongoing Fees and Expenses?
Risks:
Is There a Risk of Loss From Poor Performance?
Is this a Short-Term Investment?
What are the Risks Associated with the Investment Options?
Is There Any Chance the Insurance Company Won’t Pay Amounts
Due to Me Under the Contract?
Restrictions:
Are There Restrictions on the Investment Options?
Are there any Restrictions on Contract Benefits?
Taxes:
What are the Contract’s Tax Implications?
Conflicts of Interest:
How are Investment Professionals Compensated?
Should I Exchange My Contract?
(a) Fees and Expenses
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RILA contracts typically have implicit
fees, expenses, and charges for early or
mid-term withdrawals that can be
confusing or surprising to investors, as
observed in our investor testing.87 We
anticipate that investors would benefit
from tailored disclosure about certain
unique features of a RILA contract’s fee
and expense structure as described
below to help them make informed
decisions.
Early Withdrawal Charges. As RILAs
may have surrender charges, we propose
to require RILA issuers to provide the
81 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Results from Round 1, Summary of
Qualitative Testing, Section 6, Quantitative Testing,
Summary of Quantitative Testing.
82 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Summary of Qualitative Testing, Section 6
and 7 Quantitative Testing, Summary of
Quantitative Testing, Section 7, Conclusions,
Summary of Findings.
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existing KIT surrender charge disclosure
in this first line item under the ‘‘Fees
and Expenses’’ heading so that RILA
investors understand how surrender
charges are assessed (e.g., that if they
make a withdrawal within a specified
period after their last premium
payment, they may pay a significant
surrender charge that will reduce the
value of their investment).88 This
disclosure must include the maximum
surrender charge, the maximum number
of years that a surrender charge may be
assessed, and an example of the
maximum surrender charge an investor
83 See,
e.g., proposed Item 2(b)(2) of Form N–4.
Instruction C.3.(a) of Form N–4.
85 See instruction 1(b) to Item 2 of Form N–4.
86 See Item 5 of Form N–4; VASP Adopting
Release at text following n.689 (‘‘The principal risks
section is designed to provide a consolidated
presentation of principal risks which can be crossreferenced by registrants to reduce repetition that
84 General
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could pay in dollars based on a
$100,000 investment. In a change to the
current form requirements, we also are
proposing to require that offerings of
both variable annuities and RILAs
disclose that this loss will be greater if
there is a negative contract adjustment,
taxes, or tax penalties, to make clear that
an investor may lose more than just the
surrender charge upon an early
withdrawal.
We also are proposing to require
specific disclosure on contract
adjustments, which can result in
investor losses if the investor withdraws
might otherwise occur if the same principal risks
are repeated in different sections of the
prospectus.’’).
87 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Results from Round 1, Results from Round
2.
88 Proposed instruction 2(a) to Item 3 of Form N–
4.
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money from an index-linked option, or
withdraws money from the RILA
entirely before the end of a specified
period.89 Specifically, if the contract
includes contract adjustments, the
insurance company would be required
to include a statement that if all or a
portion of account value is removed
from an index-linked option or from the
contract before the expiration of a
specified period, the insurance
company will apply a contract
adjustment, which may be negative.
Similar to the disclosures relating to
surrender charges, this statement would
include the maximum potential loss (as
a percentage of the investment) resulting
from a negative adjustment (e.g., ‘‘[y]ou
could lose up to XX% of your
investment due to the contract
adjustment’’). The insurance company
also would be required to provide an
example of the maximum negative
adjustment that could be applied (in
dollars) assuming a $100,000
investment (e.g., ‘‘[i]f you allocate
$100,000 to an investment option with
a 3-year crediting period and later
withdraw the entire amount before the
3 years have ended, you could lose up
to $90,000 of your investment. This loss
will be greater if you also have to pay
a surrender charge, taxes, and tax
penalties.’’). We also propose to require
the insurance company to provide a
brief narrative description of the
contract transactions subject to a
contract adjustment (e.g., withdrawals,
surrender, annuitization, etc.) as part of
the response to this item to make clear
to investors the range of transactions
that could result in a contract
adjustment.
Transaction Charges. The second line
item in the ‘‘Fees and Expenses’’ section
of the proposed amended KIT, ‘‘Are
there transaction charges?,’’ would
require registrants to disclose that the
investor may also be charged for other
transactions in addition to surrender
charges (and now contract adjustments),
along with a brief narrative description
of the types of such charges (e.g., front
loads, charges for transferring cash
value between investment options,
etc.).90 This line item is designed to
89 As noted above, contract adjustments include
adjustments made when amounts are removed
prematurely from an index-linked option, often
referred to as interim value adjustments, as well as
adjustments made when amounts are removed
prematurely from the contract, often referred to as
market value adjustments. Thus, a specified period
would include index-linked option crediting
periods (which again, are typically referred to by
insurance companies as ‘‘investment terms’’ or
‘‘terms’’), as well as any specified period relating to
a market value adjustment.
90 Proposed instruction 2(b) to Item 3 of Form N–
4.
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provide a simple narrative description
to alert investors that surrender charges
and contract adjustments are not the
only transaction charges they could pay.
We are proposing to require RILA
issuers to provide this disclosure.
Ongoing Fees and Expenses. The third
line item in the ‘‘Fees and Expenses’’
section, ‘‘Are there ongoing fees and
expenses?,’’ is designed to alert
investors that they also will bear
recurring fees on an annual basis. This
item currently requires the insurance
company to disclose (1) a minimum and
maximum annual fee table and (2) a
lowest and highest annual cost table,
both along with applicable legends.91
The minimum and maximum annual fee
table is designed to consolidate the
more detailed information in the Fee
Table that appears later in the
prospectus, in order to minimize the
need for investors to perform complex
calculations to understand the fees they
will pay.92 The lowest and highest
annual cost table is designed to provide
investors with a high-level cost
illustration that will give investors a
tool to understand the basic cost
framework of the contract.93 We are
proposing to require RILA issuers to
provide this disclosure.94
We also are proposing to require that
where a contract imposes limits on
gains on the amount an investor can
earn on an index-linked option,
insurance companies disclose that they
impose these limits on gains and that
they serve as an implicit ongoing fee.95
In other words, as a result of limits on
gains imposed under a contract, an
investor is sacrificing the potential for
investment gains that exceed the cap or
other limit on upside performance.
Specifically, insurance companies
would prominently state that they
impose an implicit ongoing fee on
index-linked options by limiting,
through the use of a cap, participation
rate, or some other rate or measure, the
91 See instruction 2(c) to Item 2 of Form N–4. The
minimum and maximum annual fee table requires
a tabular description of the fees and expenses that
an investor may pay each year, depending on the
investment options chosen. This includes minimum
and maximum percentages for: base contract fees;
portfolio company fees and expenses; and optional
benefits available for an additional charge. The
lowest and highest annual cost table requires a
tabular description of the lowest and highest cost
an investor could pay each year, based on current
charges and a set of standardized assumptions (e.g.,
$100,000 investment and 5% annual appreciation).
92 See VASP Adopting Release at section
II.A.1.c.ii.(i), n.144 and accompanying text; see also
Item 4 of Form N–4.
93 See VASP Adopting Release at section
II.A.1.c.ii.(i), n.147 and accompanying text.
94 See proposed instruction 2(c) to Item 3 of Form
N–4.
95 See proposed instruction 2(c)(i)(G) to Item 3 of
Form N–4.
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amount an investor can earn on an
index-linked option. Further, insurance
companies would state that imposing
this limit helps the insurance company
make a profit on the index-linked
option, and that, in return for accepting
this limit on index gains, an investor
will receive some protection from index
losses. This disclosure would be
required to precede the minimum and
maximum annual fee table. If the
contract offers an index-linked option
subject to limits on gains but does not
impose any explicit ongoing fees or
expenses under the contract, and thus
there would be no need to include the
minimum and maximum annual fee and
lowest and highest cost tables, the
insurance company would include this
disclosure in lieu of such tables.96
Where there are no explicit ongoing
fees, minimum and maximum annual
fee and cost tables showing zero fees
could mislead investors because an
index-linked option imposing limits on
gains has implicit fees inherent in
limiting upside index participation.
Lastly in this line item, we propose to
revise the last sentence in the required
legend in the lowest and highest annual
cost table to include the underlined
language: ‘‘This estimate assumes that
you do not take withdrawals from the
Contract, which could add surrender
charges and negative Contract
Adjustments that substantially increase
costs.’’ 97 This would further alert
investors to the cost impact of a contract
adjustment if they withdraw money
early.
(b) Risks
Risk of Loss. Under the first line item
in the amended KIT under the heading
‘‘Risks,’’ ‘‘Is there a risk of loss from
poor performance?,’’ we would, as
required by an existing instruction in
the form, require RILA issuers to state
that an investor can lose money by
investing in the contract. RILAs, like
variable annuities, are subject to the risk
of investment loss. We also are
proposing to amend this instruction to
provide that, if an annuity contract
offers an index-linked option, the
insurance company must disclose, as a
percentage, the maximum amount of
loss an investor could experience from
negative index performance, after taking
into account the minimum guaranteed
limit on index loss provided under the
96 Proposed instruction 2(c)(iii) to Item 3 of Form
N–4.
97 See proposed Instruction 2(c)(ii)(A) to Item 3 of
Form N–4. Currently, this legend only refers to
surrender charges, not negative contract
adjustments.
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contract.98 For example, with a
guaranteed buffer of ¥10%, a registrant
would disclose that investors could lose
up to 90% of their investment in an
index-linked option due to poor index
performance even with the loss
limitation feature. This amendment is
designed to make clear to investors
investing in an index-linked option that
they can still lose money even though
index-linked options typically include
features designed to limit investment
loss.
Short-Term Investment. The second
line item under the Risks heading, ‘‘Is
this a short-term investment?,’’
currently requires a statement that the
contract is not a short-term investment
and is not appropriate for an investor
who needs ready access to cash along
with a brief explanation. This statement
and an accompanying brief explanation
is equally applicable to RILAs and we
therefore would require RILA issuers to
make the same disclosure.99 We also are
proposing to amend this item to require
issuers of RILAs and variable annuities
to state that (1) amounts withdrawn
from the contract may result in
surrender charges, taxes, and tax
penalties; and (2) if applicable, that
amounts removed from an index-linked
option or the contract before a specified
period may also result in a negative
contract adjustment and loss of positive
index performance. These disclosures
are designed to make clear to investors
some of the key reasons why these
investments are not short-term
investments. These disclosures are
particularly important for an investor
considering a RILA in light of the
potential negative consequences if the
investor withdraws money early from a
particular index-linked option or the
contract. We are not limiting these
disclosures to contracts with indexlinked options, however, because these
disclosures may be equally material for
a variable annuity. To further illustrate
that index-linked options are not shortterm investments even though they may
have a short crediting period, we also
propose new risk disclosure for indexlinked options that would require
issuers offering such investment options
to state that contract value will be
reallocated at the end of the crediting
period according to the investor’s
instructions, and to disclose the default
reallocation in the absence of such
instructions.
Risks Associated with Investment
Options. The third line item under the
98 See proposed Instruction 3(a) to Item 3 of Form
N–4.
99 See proposed instruction 3(b) to Item 3 of Form
N–4.
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Risk heading, ‘‘What are the risks
associated with the investment
options?,’’ is intended to focus on the
general risk of poor investment
performance.100 Currently, the KIT
therefore requires the insurance
company to state that: (1) an investment
in the contract is subject to the risk of
poor investment performance and can
vary depending on the performance of
the investment options available under
the contract; (2) each investment option
will have unique risks; and (3) the
investor should review these investment
options before making an investment
decision. We are proposing conforming
changes to the required statement to
refer to index-linked options now that
RILAs are included on Form N–4.101
We also are proposing to require the
insurance company to provide
additional information about any indexlinked options offered under the
contract to highlight how the insurance
company limits the investor’s
participation in gains and losses of the
index. For the risk of limited upside, the
insurance company would be required
to (1) state that the cap, participation
rate, or some other rate or measure, as
applicable, will limit positive index
returns (e.g., limited upside), (2) provide
an example for each type of limit
imposed under the contract (e.g., if the
index return is 12% and the cap rate is
4%, the insurance company will credit
the investor 4% in interest at the end of
the term), and (3) prominently state that
this may result in the investor earning
less than the index’s return.102
For the risk of limited protection in
the case of market decline, the
insurance company would be required
to (1) state that the floor, buffer, or some
other rate or measure, as applicable, will
limit negative index returns (e.g.,
limited protection in the case of market
decline), (2) provide an example for
each type of limit imposed under the
contract (e.g., ‘‘if the Index return is
–25% and the buffer rate is –10%, we
will credit –15% (the amount that
exceeds the buffer rate) at the end of the
crediting period’’), and (3) prominently
state that even after limiting a negative
index return, investors could still lose
up to XX% of their investment.103 The
disclosure in this row of the KIT is
designed to highlight that each
investment option, including an indexlinked option, will have unique risks.
100 VASP Adopting Release at the text
accompanying n.170.
101 See proposed instruction 3(c) to Item 3 of
Form N–4.
102 See proposed instruction 3(c)(A) to Item 3 of
Form N–4.
103 See proposed instruction 3(c)(B) to Item 3 of
Form N–4.
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71103
The proposed disclosure on indexlinked options would highlight one of
the central economic tradeoffs indexlinked options present: that an investor
will sacrifice the potential for returns if
the index goes up in exchange for some
protection from loss if the index goes
down.
Insurance Company Risks. The fourth
line item under the Risk heading, ‘‘Is
there any chance the insurance
company won’t pay amounts due to me
under the contract?,’’ is meant to alert
investors that any obligations,
guarantees, or benefits under the
contract that may be subject to the
claims-paying ability of the insurance
company will depend on the financial
solvency of the insurance company.104
Form N–4 therefore currently requires
the insurance company to include a
statement to this effect in this row of the
KIT and either to provide the insurance
company’s financial strength ratings or
state, if applicable, that they are
available upon request. We propose to
require a RILA issuer to provide the
same statement, with a conforming
change to include index-linked options
as an obligation of the insurance
company.105
(c) Restrictions
Investments. We propose to require
RILA issuers to include the disclosure
required by the first line item under the
heading ‘‘Restrictions,’’ ‘‘Are there
limits on the Investment Options?’’ This
current item would be modified to
require the insurance company to state
whether there are any restrictions that
may limit the investment options that
an investor may choose, as well as any
limitations on the transfer of contract
value among investment options.106 As
these limitations can exist for RILAs, we
propose to require RILA issuers to make
104 See VASP Adopting Release at section
II.A.1.c.ii.(ii); see also proposed Instruction 3(d) to
Item 2 of Form N–4 (‘‘State that an investment in
the Contract is subject to the risks related to the
Insurance Company, including that any obligations
(including under any Fixed Options and IndexLinked Options), guarantees, or benefits are subject
to the claims-paying ability of the Insurance
Company.’’).
105 See proposed instruction 3(d); see also infra
section II.B.7(b) (discussing changes of Form N–4’s
defined terms, including replacing ‘‘depositor’’ with
‘‘insurance company,’’ to facilitate inclusion of
RILAs on the form).
106 See proposed instruction 4(a) to Item 3 of
Form N–4. The current item requires the insurance
company to state whether there are any restrictions
that may limit the investments that an investor may
choose, as well as any limitations on the transfer
of contract value among portfolio companies.
Consistent with the corresponding changes made to
defined terms, we would also clarify that this item
applies to any investment option, not just the
portfolio companies available as investment options
under a variable option. See infra section II.B.7.
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this disclosure so that investors can
assess that disclosure in determining
whether the RILA is an appropriate
investment for them.
Currently, the form also generally
requires the insurance company to state
that it reserves the right to remove or
substitute portfolio companies as
investment options, if applicable.
Insurance companies typically reserve
the right to change the index-linked
options that are available under a
contract as well as key features of
available index-linked options. To alert
investors that the available index-linked
options and key terms of those indexlinked options may change in the future
we are proposing to require the
insurance company to state any
reservation of its rights under the
contract, including, if applicable, the
right to (1) add or remove index-linked
options, (2) change the features of an
index-linked option from one crediting
period to the next, including the
changes to the index and the current
limits on gains and limits on index
losses (subject to contractual minimum
guarantees), and (3) substitute the index
of an index-linked option during its
crediting period. We are also proposing
to require that insurance companies
disclose any right to stop accepting
additional purchase payments, which
may be significant to investors given the
impact this reservation can have on
investors’ ability to accumulate contract
value for retirement, grow the death
benefit, and increase optional benefit
values.
Contract Benefits. The second line
item under ‘‘Restrictions,’’ ‘‘Are there
any restrictions on contract benefits?’’
requires a statement about whether
there are any restrictions or limitations
relating to benefits offered under the
contract, and/or whether a benefit may
be modified or terminated by the
insurance company. It also requires a
statement that withdrawals that exceed
limits specified by the terms of a
contract benefit may affect the
availability of the benefit by reducing
the benefit by an amount greater than
the value withdrawn and/or could
terminate the benefit. We are proposing
that this item be broadened to include
disclosure on restrictions or limitations
relating to any benefit under the
contract, not just optional benefits (as
currently required). While a benefit
under the contract might be
characterized as standard, it could have
restrictions that should be disclosed in
the KIT because of the benefit’s
importance to the investor’s rights
under the contract, such as a
proportionate withdrawal calculation
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under a standard death benefit.107 We
propose to require RILA issuers to
include this disclosure, as such
disclosure is equally applicable to
RILAs as it is to variable annuities.
(d) Taxes
We also propose to require RILA
issuers to include the line item under
the heading ‘‘Taxes,’’ ‘‘What are the
Contract’s tax implications?’’ 108 This
line item is designed to alert investors
to the tax implications of variable
contracts and, as we propose to amend
this item, of RILAs. It currently requires
a statement that an investor should
consult with a tax professional to
determine the tax implications of an
investment in, and purchase payments
received under, the contract. The
insurance company must also state that
there is no additional tax benefit to the
investor if the contract is purchased
through a tax-qualified plan or
individual retirement account (‘‘IRA’’),
and that withdrawals will be subject to
ordinary income tax and may be subject
to tax penalties. We propose to subject
RILAs to this requirement because the
same tax considerations apply.
(e) Conflicts of Interest
Investment Professional
Compensation. We propose to require
RILA issuers to include the first line
item under the heading ‘‘Conflicts of
Interest,’’ ‘‘How are investment
professionals compensated?’’ 109 This
current line item for variable contracts
is designed to alert investors to the
existence of compensation arrangements
for investment professionals and the
potential conflicts of interest arising
from these arrangements.110 It requires
issuers to disclose that an investment
professional may be paid for selling the
contract to investors. An issuer must
describe the basis upon which such
compensation is typically paid (e.g.,
commissions, revenue sharing,
compensation from affiliates and third
parties). An issuer providing the
required disclosure also must state that
investment professionals may have a
financial incentive to offer or
recommend the contract over another
investment. The same compensation
107 See proposed instruction 4(b) to Item 3 of
Form N–4. Similarly, we are proposing a change to
the discussion in the overview of the contract item
about contract features that would broaden that
discussion to cover both optional and standard
contract benefits. See proposed Item 2(c) of Form
N–4.
108 See proposed instruction 5 to Item 3 of Form
N–4.
109 See proposed instruction 6(a) to Item 3 of
Form N–4.
110 See VASP Adopting Release at section
II.A.1.c.ii.(v).
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arrangements and potential conflicts are
relevant for RILAs, and we therefore are
proposing to require an insurance
company registering a RILA to provide
the same disclosure.
Exchanges. We propose to require
RILA issuers to include the second line
item under the heading ‘‘Conflicts of
Interest,’’ ‘‘Should I exchange my
Contract?,’’ with conforming changes.111
This current line item for variable
contracts is designed to alert investors
to potential conflicts of interest that may
arise from contract sales that stem from
exchanges.112 It requires issuers to state
that some investment professionals may
have a financial incentive to offer a new
contract in place of the one owned by
the investor. An issuer must further
state that investors should only
exchange their contract if they
determine, after comparing the features,
fees, and risks of both contracts, that it
is preferable to purchase the new
contract rather than continue to own the
existing contract. These same
considerations apply to an investor
considering an exchange involving a
RILA. In a change that would apply to
variable annuities and RILAs, and to put
investors on notice that there may also
be costs or charges associated with
terminating an existing contract, we are
also proposing that issuers disclose in
this legend that investors should
consider any fees or penalties to
terminate the existing contract in
considering whether to exchange a
contract.
(f) Requests for Comment on Key
Information Table
We request comment generally on the
proposed amendments to the KIT, and
specifically on the following issues.
14. Should we require all issuers to
provide the ‘‘Overview of the Contract’’
disclosure before the KIT, as proposed?
Would this provide relevant context for
an investor to help understand the KIT
disclosure or, conversely, would it
detract from the KIT’s efficacy in
conveying key information about the
contract up front in a consistent format?
Are there other reasons to precede the
KIT disclosure with the current
‘‘Overview of the Contract’’ disclosure?
Alternatively, should we allow issuers
to maintain the current order of
disclosure and include new rows in the
KIT to provide contract overview
disclosure to investors? Would this be a
more effective way to provide context
for investor to understand the KIT, or
111 See proposed instruction 6(b) to Item 3 of
Form N–4; see also infra section II.B.7.
112 See VASP Adopting Release at section
II.A.1.c.ii.(v).
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would it lead to disclosure that is too
lengthy for the KIT format and
potentially duplicate disclosure in the
Overview of the Contract section of the
prospectus? Alternatively, should we
require the Overview of the Contract to
precede the KIT only in prospectuses
offering annuity contracts with indexlinked options, rather than for all
issuers?
15. Should we add disclosure to the
KIT regarding whether index-linked
options offered under the contract are
based on a price return index (i.e., an
index that only reflects price
movements of the security) or a total
return index (i.e., one that includes
additionally factors like dividends), so
that, where appropriate, investors
understand whether or not they can
expect their account value to increase as
a result of dividends?
16. Should we add any additional
headings and sub-headings to the KIT,
for example, a new heading ‘‘Contract
Overview,’’ with related line items or
sub-headings ‘‘What is the purpose of
the contract?,’’ ‘‘What is the time period
for measuring growth (or loss) on my
contract value?,’’ and/or ‘‘Who may the
contract be appropriate for?’’? Would
this information be helpful to an
investor in providing context for the KIT
disclosure or, conversely, would these
requirements lead to lengthy disclosure
that makes the KIT less investor
friendly?
17. Would rephrasing the topics of the
KIT line items in a question format and
requiring the descriptions in the righthand column of the KIT to be presented
in an answer format, as proposed, be
helpful for investors making an initial
purchase of an annuity contract? Should
we make the Q&A format mandatory for
all issuers that use Form N–4? Or
should we instead require that issuers
state the line items in the left-hand
column as brief descriptions of the
topics to be detailed in the right-hand
column of the KIT, as is currently
required? Should any of the required
line items or sub-headings be worded in
a different way, or using different
terminology, than the proposal would
require?
18. Should we allow issuers to change
the wording of the line item questions
in circumstances where the changes
would not impede investor
comprehension and clear, consistent
disclosure? Could this undermine
standardized disclosures and investors’
ability to make comparisons of certain
disclosure topics among RILA and
variable annuity prospectuses, or would
issuers’ ability to customize the
disclosure lead to more informed
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investor decisions about that particular
RILA?
19. Should we require issuers to add
a new column in the KIT labeled
‘‘Location in the Prospectus’’ or similar
caption, and place it next to the relevant
disclosure presented in the table to
provide hyperlinked cross-references
directly to the location in the statutory
prospectus where the investor can find
more detailed information about the
subject matter or should we, as
proposed, continue to permit issuers to
provide cross-references either within
the table row or presented as an
additional column? Are there any
particular sub-headings or captions that
would help investors identify where to
find information?
20. Should we mandate particular
examples or illustrations in the KIT? For
example, should we require a chart of
historical index performance with the
guaranteed minimum cap overlaid?
Should we require a table showing
examples of the dollar amounts of losses
and gains, without fees, an investor
would face in a variable annuity as
compared to RILAs with various floors,
buffers, and caps over a four-year period
assuming various index movements? 113
Are there other useful examples or
illustrations currently provided by
RILAs that help to illustrate their
structure effectively to investors that we
should include in the KIT? For example,
should we require a graphic in the KIT
to illustrate surrender charges and
contract adjustments during different
time periods of the contract? If so, what
should the requirements for these
graphics or illustrations be? Should we
require illustrations in the KIT showing
how caps, floors, and/or buffers could
affect an investor’s returns across
different market scenarios? If so, what
should these scenarios be? As another
example, we request comment below on
requiring insurance companies to
disclose the difference between a
hypothetical $100,000 investment in an
index-linked option and the value, or
the cost to assemble, the economic
components underlying the indexlinked option.114 Should that disclosure
be required in the KIT?
21. We have proposed that insurance
companies include disclosures in the
KIT regarding any limits on gains the
RILA imposes, including an illustrative
example demonstrating the operation of
those limits. Would this disclosure be
improved by requiring that the example
conform to any specific parameters?
Would other examples be helpful? For
113 See N.Y. Comp. Codes R. & Regs. tit. 11, App.
28.8 (2023).
114 See Section II.B.3.b.
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example, should we require that the
example use the most common limit on
gains offered under the RILA for the
previous year? Should we require that
the example disclose the amount of
gains an investor would have given up
due to the limit over the prior ten years,
based on the index’s performance
during that time and assuming the limit
on gains discussed in the example
applied during each of those ten years?
Should we require that the example use
only round numbers?
22. Should we allow or require issuers
to provide cross-references to charts or
other graphics designed to facilitate
investor understanding of RILAs,
including, e.g., educational resources
designed by the Commission staff?
Should we require issuers to provide
these hyperlinked cross-references in
the current right-hand column of the
KIT directly after the relevant sentence
of disclosure? Would the KIT be more
succinct and easier to read if the
hyperlinked cross-references were
placed on the cover page of the
prospectus instead of the KIT? Would
requiring the registrant to state ‘‘More
information can be found at:’’ before or
after these cross-references help
investors easily find the information
they may need to make an informed
investment decision? Should we require
cross-references to other prospectus
sections to include a specific page
number in the prospectus where an
investor could find the information?
23. Besides hyperlinks, are there other
technological tools that would help an
investor find information that is crossreferenced in the KIT or on the cover
page of the prospectus, such as QR
codes or other technological tools?
24. Is the level of detail of the
disclosure that we propose in each line
item of the KIT appropriate? Does it
strike the right balance between
providing enough information to alert
an investor to the most salient facts
(including ongoing implicit fees,
expenses, risks, and conflicts) of the
RILA contract, but not too much, or too
detailed information? If not, how should
we modify the table and/or the
instructions? Are there other key
features of RILA contracts that RILA
issuers should disclose in the KIT to
help investors make an informed
investment decision?
25. RILAs are frequently marketed as
a way to protect against investment
losses through loss-limiting features
such as buffers and floors. Should we
require RILA issuers to provide more
detailed disclosures about how these
loss-limiting features have affected RILA
investors historically? For example,
would investors be better positioned to
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make informed decisions if we were to
require RILA issuers to disclose: (a) the
total number of investor crediting
periods (across all investors and indexlinked options) that utilized a losslimiting feature for a certain historical
period (e.g., the past five years); (b) the
percentage of those investor crediting
periods where an investor’s contract
value benefited from a loss-limiting
feature (because the feature eliminated
or reduced a negative credit resulting
from the performance of the indexlinked option); and (c) the percentage of
those investor crediting periods where
an investor’s contract value was not
impacted by a loss-limiting feature.
Should a RILA issuer have experience
with a certain minimum number of
crediting periods in order to be subject
to this disclosure? What should a RILA
issuer disclose if their experience with
loss-limiting features does not meet the
minimum threshold? Where in the
prospectus would be the appropriate
location for this information? For
example, if we require this disclosure,
do commenters feel it would be best
positioned as part of the KIT, in Item 6
(in the Limits on Index Losses section),
or in the Contract Overview? Are there
other disclosures that commenters
would recommend in the alternative as
a way to increase investor knowledge
about the utility of loss-limiting features
and their ability to positively affect
investors’ contract values? Whether or
not we require more detailed
disclosures about the historical effects
of loss-limiting features, should we
require similar disclosure about the
historical effects of limits on gains (i.e.,
upper limits on an investor’s ability to
participate in an index-linked option’s
upside performance)? Should we
require disclosure comparing the
economic effects of the limits on gains
to the limits on losses? For example,
should we require disclosure of the
number of periods in which each limit
would have actually limited an
investor’s losses or capped an investor’s
gains? Should we require disclosure of
the dollar value of losses an investor
would be protected against compared to
gains an investor would give up over a
prescribed period of time, such as the
past 10 years?
26. Are there any particular legends
that should be included in the KIT, e.g.,
‘‘We will not return your money at the
end of the crediting period unless you
tell us to,’’ ‘‘The contract adjustment
applies in addition to any surrender
charge,’’ ‘‘You may earn less than the
index’s return,’’ and/or ‘‘You may lose
up to [X]% of your investment if you
withdraw your money before the end of
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a crediting period. This loss can be
greater if there is a surrender charge,
taxes, and/or tax penalties’’? If so, what
legends and why?
27. Is the process of what happens at
the end of the crediting period
adequately highlighted in the proposed
KIT? Should insurance companies be
required to provide more specific
details, either in the KIT or elsewhere in
the prospectus, about how investors can
choose an investment option at the end
of the crediting period and the
limitations on those choices?
28. Would the disclosure that a RILA
issuer would provide in response to the
proposed ‘‘Fees and Expenses’’ line
items convey the appropriate amount of
information to investors and concisely
alert investors to the most important
fees, charges, penalties, and expenses
associated with the RILA contract?
29. Should the proposed ‘‘Fees and
Expenses’’ line item, ‘‘Are there charges
for early withdrawals?,’’ include
disclosure both about the surrender
charges and contract adjustments, as
proposed? Would this disclosure
sufficiently alert investors to the typical
contract adjustment of a contract and its
impact in reducing contract value (in
addition to any surrender charge) if the
investor withdraws money before the
expiration of a specified period?
Alternatively, should we sub-divide this
line item into two line items, with the
one focused on surrender charges and
the other titled (for example) ‘‘Are there
penalties for mid-term withdrawals?,’’
focused on contract adjustments? Would
this help an investor to understand both
concepts better? Or would sub-dividing
the line item cause confusion, for
example by making it seem as if a
surrender charge and a contract
adjustment could not apply
simultaneously? If so, should we require
an explicit disclosure that they could
apply simultaneously?
30. Would the Minimum and
Maximum Annual Fee and Lowest and
Highest Cost tables assist investors in
understanding the costs of their
investment and help them compare the
costs of different investment options
and optional benefits in the RILA
context? Should we modify the
proposed disclosure or require other
additional information to accompany
the tables?
31. Would the proposed disclosure
that an issuer would provide about
contracts that do not impose ongoing
fees and expenses adequately convey
the implicit ongoing fees of contracts
with index-linked options that have
features that limit positive index return?
If not, should we modify the proposed
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disclosure or require additional
information from issuers?
32. Would the disclosure that a RILA
issuer would provide in response to the
proposed ‘‘Risks’’ line items adequately
convey an overview of the risks of
investing in a contract with an indexlinked option? Are there other risks of
investing in these contracts that we
should require a registrant to disclose in
the proposed KIT? For example, should
we require RILA issuers to state that an
investor can lose money by investing in
these contracts including a loss of
principal? Alternatively, should we
require all issuers to state this, not just
RILA issuers?
33. Would the disclosure that a RILA
issuer would provide in response to the
proposed ‘‘Restrictions’’ line items
convey the appropriate amount of
information about certain restrictions
that various contract options may entail,
in light of the goals of the proposed KIT
and the unique nature of a RILA?
Should an issuer be required to disclose
information about restrictions in the KIT
other than those associated with the
contract’s investment options and
benefits? If so, what? Instead, should we
provide flexibility by permitting issuers
to disclose other restrictions at their
discretion? Do commenters agree that
our proposal to require disclosure about
restrictions on contract benefits
generally (as opposed to the current
requirement which is limited to
optional benefits) is appropriate?
34. Is the disclosure that a RILA issuer
(along with other issuers that use Form
N–4) would be required to provide in
response to the proposed ‘‘Taxes’’ line
item appropriate, in light of the goals of
the proposed KIT? Given that some
investors in these products may not
have the means or ability to consult a
tax professional, should we require
additional disclosures in addition to the
required statement that investors should
consult a tax professional? For example,
should a RILA issuer be required to
consider which tax consequences are
most likely be faced by retail investors
and to provide general information
regarding those consequences? For
example, should an issuer be required to
emphasize more prominently that
withdrawals will be subject to ordinary
income tax, and not the capital gains
rates? Should the line item require
disclosure of the specific tax penalties
and requirements that investors in
annuity contracts may incur (e.g.,
penalties for withdrawal before age
591⁄2, or that purchases through a taxqualified plan may be subject to
required minimum distribution each
year beginning at age 701⁄2)?
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35. Are the disclosures that a RILA
issuer (along with other issuers that use
Form N–4) would be required to provide
in response to the proposed ‘‘Conflicts
of Interest’’ line items appropriate, in
light of the goals of the proposed KIT?
Would these disclosures adequately
apprise investors of the potential
conflicts that arise when their
investment professional is compensated
for recommending an investment into a
new, or an exchange from, an existing
RILA contract or variable annuity
contract? Should we revise these
proposed disclosure requirements, and
if so, how?
36. Do the instructions associated
with each of the proposed line items
clearly explain what an issuer would be
required to disclose? In keeping with
the structured format of a tabular
presentation, we sought to promote
concise disclosure by largely directing
issuers to state, rather than to explain,
certain information in response to the
required line items. Should the
instructions prescribe specific language
or should issuers have flexibility in
drafting their responses? Are there any
particular instructions that we should
include or modify in any way, for clarity
or for any other reason?
37. Should we require particular
terms in the KIT (e.g., those that are
defined in a related glossary or list of
definitions that the insurance company
chooses to include) to be formatted in a
way that will emphasize them, or
indicate that they are defined elsewhere
in the prospectus, for example by using
bold and/or italic font?
38. Should we apply the structural
changes we are proposing to the KIT in
other variable insurance contract
registration forms, that is, Forms N–3
and N–6? The principles we outlined
above regarding the potential efficacy of
these changes could be just as
applicable in the context of those forms
as in the context of Form N–4. For
example, should we apply the proposed
requirements for Forms N–3 and N–6
issuers to present all disclosures in the
KIT in a Q&A format and to begin each
response with a ‘‘yes’’ or ‘‘no’’ in bold
text when answering a question
presented in a given row of the KIT,
unless the context otherwise requires?
Similarly, should we require in those
forms that issuers include in their
required legends on contract exchanges
that investors consider any fees or
penalties to terminate the existing
contract before exchanging their
contracts?
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3. Principal Disclosure Regarding RILAs
(Items 2, 6, and 17)
We are proposing amendments to
Form N–4 to provide investors with the
principal disclosures regarding RILAs
and the index-linked options available
under the contract in three items of the
form. First, investors would receive a
concise description of the basic
information about any index-linked
option available under the contract as
well as any contract adjustments in Item
2 (Overview of the Contract), which, as
discussed above, would appear before
the KIT.115 Second, investors would be
provided with detailed information
about the index-linked options available
under the contract in Item 6
(Description of the Insurance Company,
Registered Separate Account, and
Investment Options). Lastly, investors
would be provided with a summary
information table, with legends
highlighting risks, that outlines the
available index-linked options in Item
17 (Investment Options Available Under
the Contract). These amendments build
on the existing disclosure requirements
in each item to help ensure that
investors have key information about
the annuity contract and available
investment options, regardless of
whether the contract is a variable
annuity, a RILA, or combination
contract offering both variable and
index-linked options.
(a) Overview of the Contract (Item 2)
We are proposing to amend Item 2
(Overview of the Contract) to include
information about RILAs generally and
require the insurance company to
provide an overview of certain key
elements of any index-linked options
offered under the contract and to
highlight any contract adjustments. This
item is designed to describe certain
basic and introductory information
about the contract and its benefits.116 It
currently requires a concise description
of the contract. This description must
include information about (1) the
contract’s purpose (e.g., to help the
investor accumulate assets through an
investment portfolio), (2) the phases of
the contract (the accumulation (savings)
and annuity (income) phases) including
a discussion of the investment options
available under the contract, and (3) the
primary features of the contract (such as
death benefits).
115 Because we propose to require the KIT to
appear before the Overview of the Contract, current
Item 3 (Overview of the Contract) would be
renumbered as Item 2.
116 See VASP Adopting Release at text
accompanying n.207.
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We would require insurance
companies to provide this existing
disclosure when registering RILA
offerings, adjusted to account for the
specifics of RILAs, because it is equally
relevant for these types of annuity
contracts. In particular, in addition to
the general information about the
contract already required by Form N–4,
the following information would be
required with respect to any indexlinked option offered under the
contract:
• A statement that the insurance
company will credit positive or negative
interest at the end of a crediting period
to amounts allocated to an index-linked
option based, in part, on the
performance of the index;
• A statement that an investor could
lose a significant amount of money if
the index declines in value and
prominent disclosure of the maximum
amount of loss (as a percentage) an
investor could experience from negative
index performance, after taking into
account the minimum guaranteed limit
on index loss provided under the
contract; and
• An explanation that the insurance
company limits the negative or positive
index returns used in calculating
interest credited to an index-linked
option at the end of its crediting period,
accompanied by a brief description of
the manner in which such returns may
be limited, along with an example and
disclosure of the minimum limit on
index losses guaranteed for the life of
the contract for any index-linked
option.117
We also are proposing to require the
insurance company to state, if
applicable, that an investor could lose a
significant amount of money due to the
contract adjustment if amounts are
removed from an index-linked option or
from the contract prior to the end of a
specified period.118 The issuer would
also provide a brief description of the
transactions subject to a contract
adjustment. We would require a
prominent statement, as a percentage, of
the maximum amount of loss an
investor could experience from a
negative contract adjustment and that
this loss could be greater due to
surrender charges and tax
consequences.
These disclosures, together, are
designed to highlight upfront some of
the key elements of a RILA. The
required disclosure about any indexlinked option offered under the contract
would highlight for investors the key
117 See proposed Item 2(b)(2)(i) through(iv) of
Form N–4.
118 See proposed Item 2(d) of Form N–4.
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features of these investment options in
general: that returns are based in part on
an index, that investors could still lose
a significant amount of money under the
contract, and that there are limits on
both positive and negative index
performance. The required disclosure
on contract adjustments would highlight
a separate but important consideration
for an investor considering investing in
a RILA: that in addition to any losses
from poor index performance, the
investor also can lose a significant
amount of money if the investor takes
money out of an index-linked option or
the contract early. These disclosures
collectively also would provide context
for the KIT, which immediately follows
this item under the proposal, as well as
context for more detailed disclosures
that would appear elsewhere in the
prospectus.
In addition to these items that are
specific to RILAs, we also are proposing
to expand the current requirements for
disclosures regarding optional benefits
in Form N–4. Currently, when
summarizing a contract’s primary
features, the form requires a discussion
of any optional benefits.119 A benefit
under the contract, such as a nonoptional guaranteed living benefit,
might be characterized as a standard
(i.e., not optional) benefit but
nonetheless be a key feature of the
contract that should be highlighted for
investors in the overview section of the
prospectus. We are therefore proposing
to require that the discussion of benefits
cover all of the primary contract
benefits, not just optional benefits.120
This requirement would apply to all
contracts registered on the form.
We request comment on the proposed
summary disclosures contained in Item
2.
39. Is the proposed information on
index-linked options and contract
adjustments appropriate? Is there other
or different information we should
require? For example, we are proposing
to require RILA issuers to include
examples of how limits on gains and
downside protection operate but do not
mandate a form of presentation. Should
we require these examples be provided
in a graphical presentation, or require
only a narrative example? Should we
require the examples be converted into
a dollar amount? Would investors
understand the examples more readily if
we did this? As another example,
should we require RILA issuers to
briefly summarize the index crediting
119 See
current Item 3(c) of Form N–4.
proposed Item 2(c) of Form N–4; see also
supra footnote 107 and accompanying text.
120 See
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methodologies available under the
contract?
40. Should we require the proposed
disclosures for index-linked options and
contract adjustments in Item 2,
including the existing disclosure to be
provided in the context of a RILA? Is
this information necessary for investors
to understand the other disclosures in
the prospectus?
41. Should we, as proposed, broaden
the current discussion of the primary
contract features to include a discussion
of contract benefits generally, not just
optional benefits (the current focus of
the disclosure requirement)?
(b) Description of Insurance Company,
Registered Separate Account, and
Investment Options (Item 6)
We propose to amend Item 6 of Form
N–4 to modify certain existing
disclosure requirements and to expand
the item to include new disclosures for
RILAs. Proposed Item 6(d), discussed
further below, would set forth most of
the substantive new disclosure
requirements for contracts that include
index-linked options. We would also
include new disclosures for any fixed
options provided as part of the contract.
The information that would be required
by the proposed amendments is
designed to convey key aspects of each
index-linked option offered under the
contract to investors.
As an initial matter, the proposed
amendments to Item 6 would largely
retain the existing requirement to
provide a concise discussion about the
insurance company, registered separate
account, and variable options, subject to
certain modifications in nomenclature
to implement definitional changes and
minor restructuring to accommodate the
addition of RILAs to the form.121
Specifically, these changes would
incorporate the proposed changes to
certain defined terms and revise existing
disclosures to clarify the entities that
should be associated with certain
disclosures (e.g., because the insurance
company would be obligated to pay all
amounts promised to investors under
the contracts subject to its financial
strength and claims-paying ability, we
would require disclosure about this
topic to be framed in terms of the
insurance company, not the registered
separate account, as the requirement is
currently worded).122
121 See
proposed Item 6(a) through (c) of Form N–
4.
122 We also propose to add an instruction
requiring the insurance company to indicate
whether it is relying upon the exemption provided
by 17 CFR 240.12h–7 (‘‘rule 12h–7’’), consistent
with the requirements of that rule. See proposed
Instruction to Item 6(a) of Form N–4; see also rule
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We are proposing to require one new
disclosure item for contracts that offer
variable options, which would be
similar to a proposed disclosure for
index-linked options, discussed below.
Specifically, the prospectus for such
contracts would be required to include
a statement indicating that ‘‘contract
value allocated to a Variable Option will
vary based on the investment
experience of the corresponding
Portfolio Company in which the
Variable Option invests,’’ and ‘‘there is
a risk of loss of the entire amount
invested.’’ 123 The risk of loss inherent
in a variable annuity is currently
disclosed in the form’s ‘‘Key
Information Table,’’ and we are
proposing to mandate this disclosure in
Item 6 as well to warn that an investor
can lose the entire amount invested in
a variable option. In addition to
informing investors about investment
risks in a variable option generally,
where an annuity contract offers both
variable and index-linked options, this
disclosure also would help to explain
the different nature of the investment
risks posed by each kind of investment
option. In that case the prospectus
would disclose the maximum loss
associated with the index-linked
options while also disclosing that, for
the variable options, the investor could
lose the entire amount invested.
Description of Index-Linked Options
We are proposing to require the
insurance company to disclose
information about the key features of the
index-linked options currently offered
under the contract.124 These proposed
disclosures are designed to complement
other proposed disclosures in the
prospectus about index-linked options
generally by providing investors specific
information about each index-linked
option’s features and risks, akin to the
information that is currently available to
investors about variable options in the
prospectuses for the mutual funds
underlying those options. Specifically,
the insurance company would be
required to describe the index-linked
options currently offered under the
contract as well as information about
how interest is calculated and credited
for each index-linked option,
specifically: (1) limits on index losses;
(2) limits on index gains; (3) crediting
period; (4) crediting methodology and
12h–7(f) (requiring issuers of securities subject to
insurance regulation that rely on the exemption
from the duty to file section 13(a) reports with
respect to securities registered under the Securities
Act to provide a statement indicating that fact in the
relevant prospectus).
123 See proposed Item 6(c)(1) of Form N–4.
124 See proposed Item 6(d) of Form N–4.
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examples; (5) relevant indexes; (6)
maturity; and (7) other material features
of the index-linked option. These
disclosures are intended in part to
address points that investors found to be
confusing in investor testing.125 Further,
some investors in the qualitative
interviews indicated that they would
prefer more information about these
points relative to the KIT disclosures.126
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Description of the Index-Linked Options
Currently Offered
Under the proposed amendments,
RILA issuers would be required to
describe the index-linked options
currently offered under the contract,
including statements indicating that the
insurance company will credit positive
or negative interest at the end of a
crediting period to amounts allocated to
an index-linked option based, in part,
on the performance of the index.127 To
dispel potential investor confusion
relating to the reference to an index, we
are proposing to require RILA issuers to
state that an investment in an indexlinked option is not an investment in
the index or in any index fund.
Other cautionary statements regarding
the index-linked options offered would
include that the potential for investment
loss could be significantly greater than
the potential for investment gain, and
that an investor could lose a significant
amount of money if the index declines
in value. To illustrate the potential
scope of such a loss, RILA issuers would
have to prominently state (as a
percentage) the maximum amount of
loss an investor could experience from
negative index performance over a
crediting period, after taking into
account the minimum guaranteed limit
on index loss provided under the
contract. Because index-linked options
are often marketed as a way to limit
investment losses, this disclosure is
designed to convey to investors that
they could still lose a significant
amount on an index-linked option,
despite having a floor or buffer.
To emphasize the substantial risks
associated with an early withdrawal
from an index-linked option, RILA
issuers would be required to state that
an investor could lose a significant
amount of money due to the contract
adjustment if amounts are removed from
an index-linked option prior to the end
of its crediting period. To further
underscore the risk, RILA issuers would
also prominently state (as a percentage)
the maximum amount of loss an
investor could experience from a
negative contract adjustment, and that
this loss could be greater due to
surrender charges and tax
consequences.
To inform investors of the possibility
that their investment options could be
unilaterally changed without action on
their part, the insurance company
would be required to state, if applicable,
that it can add or remove index-linked
options and change the features of an
index-linked options from one crediting
period to the next, including the index
and current limits on gains and limits
on index losses, subject to contractual
minimum guarantees.
Similar to the current requirement for
prospectuses for contracts that offer
variable options, the insurance company
would be required to state that certain
information regarding the features of
each currently offered index-linked
option is available in an appendix to the
prospectus,128 and to provide a crossreference to that appendix. An
instruction would permit this statement
to be modified if needed to conform to
the corresponding table in the
appendix.129 As described further
below, the appendix would also be
amended to include a table listing the
index-linked options currently available
under the contract.130
How Interest Is Calculated and Credited
To aid investors in making informed
investment decisions, we propose to
require RILA issuers to describe how
interest is calculated and credited for
each index-linked option.131 As part of
this description, the insurance company
would be required to disclose any limits
on index losses and/or index gains, the
crediting periods available under the
contract (e.g., 1, 3, and 6 years), a
description of an index-linked option’s
index crediting methodology,
information about each index, what
happens when an index-linked option
matures, and any other material features
associated with index-linked options.
We discuss each of these requirements
in turn.
How Interest Is Calculated and
Credited—Limits on Index Losses and
Gains
We are proposing to require the
insurance company to describe, as a
primary element of a RILA contract, the
128 See
proposed Item 17 of Form N–4.
infra footnote 164 and accompanying text.
130 See infra at section II.B.3(b) (describing
proposed amendments to Item 17 (Portfolio
Companies Available Under the Contract) to
include parallel provisions for RILAs).
131 See proposed Item 6(d)(2) of Form N–4.
129 See
125 See OIAD Study at Section 7, Conclusions,
Summary of Findings and Discussion.
126 See OIAD Study at Section 5, Qualitative
Testing, Summary of Qualitative Testing.
127 See proposed Item 6(d)(1) of Form N–4.
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limits on index losses and gains for each
index-linked option.132 In each case,
and as applicable, the insurance
company would be required to state that
such limits apply and describe how
index losses and gains would be limited
(for example, through the use of a floor
or buffer to limit losses, or a cap or
participation rate to limit gains). We
also are proposing to require the
insurance company to provide examples
to help investors understand how these
limits work in practice. To illustrate the
limits on index losses, the prospectus
would include an example showing
how the limit on index losses could
operate to limit a negative return (e.g.,
if the index return is ¥25% and the
buffer is ¥10%, the insurance company
will credit ¥15% (the amount that
exceeds the buffer) at the end of the
term, meaning the investor’s contract
value will decrease by 15%). The
prospectus similarly would include an
example of how the limit on gains could
operate to limit a positive return (e.g., if
the index return is 12% and the cap rate
is 4%, the insurance company will
credit 4% in interest at the end of the
term, meaning the investor’s contract
value will increase by 4%).
We also propose to require the
insurance company to disclose, for each
index-linked option, current limits on
index losses and gains, as well as the
minimum limits on losses and gains that
are guaranteed for the life of the
contract.133 The guaranteed minimum
limits tend to be lower than those
currently provided for in the contract
but will not change for the life of the
contract, whereas the actual limits for
an index-linked option will vary from
crediting period to crediting period.
However, at no point will these limits
be lower than the guaranteed
minimums. Both pieces of information
are important to understanding the
potential returns of an index-linked
option because one of the central
economic tradeoffs a RILA presents is
an investor’s consideration of whether
to sacrifice potential gains in exchange
for protection against potential losses.
An investor therefore will not only need
to consider the guaranteed limits, but
also understand that the actual limits
can vary over the life of the contract.134
132 See
proposed Item 6(d)(2)(i) and (ii) of Form
N–4.
133 Proposed Items 6(d)(2)(i)(B) and 6(d)(2)(ii)(B)
of Form N–4.
134 This information about minimum guaranteed
index gain limits is also set forth in the appendix,
which is part of the summary prospectus. See
proposed Instruction 7 to Item 17(b); proposed rule
498A(b)(5)(ix). We are also proposing to require
RILAs to publish online limits on gains. See infra
section II.B.3.c. Although changes to an index-
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We also propose to require the
insurance company to state that current
limits on gains and limits on index
losses will not change during the indexlinked option’s crediting period. This
would help investors understand that
although the current limits on gains and
limits on losses—unlike the minimum
guaranteed limits—can change from
crediting period to crediting period,
they will not change during any given
crediting period.
Because an insurer can generally set
rates at its discretion and may take into
account a number of factors in setting
those rates, we are proposing that the
insurance company explain how it
selects rates for limiting index losses
and gains to help investors understand
how the features of a particular indexlinked option will impact that option’s
risk/return profile. In particular, we are
proposing to require the insurance
company to describe the factors it
considers in determining the current
limits on losses and gains for an indexlinked option (e.g., long-term interest
rates, market volatility, the cost of
option contracts supporting the indexlinked option guarantees, etc.),135 and
how that choice may impact other
features of the option set by the
insurance company.
Giving investors information about
the factors the insurer considers in
determining current limits—which are
key features of an index-linked option—
may help manage their expectations
regarding how the product operates. If
an investor sees that last year’s cap on
an index-linked option was 22% and
this year the cap is 17%, the proposed
disclosure may help them understand
why the insurer’s rates have changed.136
If an insurer discloses that it takes
various specified factors into
consideration, but ultimately sets rates
at its own discretion, the investor
should know that as well.
The proposed disclosure about how
the current limits on index gains or
losses may impact other aspects of the
linked option, including current limits on gains, are
material, we recognize that these limits in particular
can change from time to time. Therefore, insurance
companies may update current limits on gains
using a prospectus supplement filed pursuant to
rule 497 under the Securities Act. See infra section
II.E.2.
135 Similar disclosure has been required in other
contexts. See, e.g., Item 9(a) of Form N–4 (requiring
disclosure of material factors that determine the
level of annuity benefits); see also Instruction 2 to
Item 7(a) of Form N–6 (requiring the identification
of factors that determine the applicable cost of
insurance rate).
136 For example, an insurer might disclose that
caps and participation rates may vary depending on
factors such as market volatility, hedging strategies
and investment performance, the investor’s index
effective date, or interest rates, among others.
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index-linked option is designed to
explain the inverse relationship
between various features of the indexlinked option. For example, the
insurance company could include an
explanation regarding how the limit on
index losses for an index-linked option
could impact the current limit on index
gains. This could help an investor
understand, for example, that if the
insurance company determines to
increase the extent to which the indexlinked option will protect against loss,
the insurance company may then reduce
the amount of upside index
participation the investor could receive.
The prospectus would also require an
explanation of the factors an investor
should consider regarding limits on
index losses or gains before selecting an
index-linked option for investment.
This disclosure should assist an investor
in choosing among the index-linked
options available under the contract,
such as by explaining the difference
between a floor and a buffer, or by
highlighting index-linked options with
features that assume more risk in return
for higher potential return, or vice versa.
How Interest Is Calculated and
Credited—Crediting Period
We are proposing to require the
insurance company to generally
describe the crediting periods of the
index-linked options available under
the contract (e.g., 1, 3, and 6 years),
along with the factors an investor
should consider regarding different
crediting period lengths before selecting
an index-linked option.137 An example
of one such factor an insurance
company could include as part of this
disclosure would be that crediting
periods introduce timing risk that forces
investors to take losses at the end of a
crediting period, and shorter crediting
periods might increase this risk.138 The
insurance company also would be
required to prominently state that
amounts must remain in an indexlinked option until the end of its
crediting period to be credited with all
or partial interest, as applicable, and to
avoid a possible contract adjustment in
addition to potential surrender charges
and tax consequences. This discussion
137 See
proposed Item 6(d)(2)(iii) of Form N–4.
OIAD Report at Section 2, RILAs:
Structure of Contracts and Investment Options,
Investment Terms (‘‘The role of [crediting periods]
also creates a situation that may be unique for RILA
purchasers relative to other investments they hold.
In particular, RILA investors periodically realize
gains or losses at the end of each [crediting period].
In contrast, a mutual fund investor (for example)
could wait to sell the fund during down markets,
avoiding realizing those losses. Thus, the [crediting
period] feature adds a ’timing risk‘ for RILA
investors relative to certain other investments.’’).
138 See
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would also include a description of the
transactions subject to a contract
adjustment (e.g., living benefits), with
appropriate cross-references to related
disclosures in the prospectus. These
disclosures collectively are designed to
help an investor make an informed
investment decision when selecting an
index-linked option, taking into account
that withdrawing money before the end
of the applicable crediting period can
have adverse consequences.
How Interest Is Calculated and
Credited—Methodology and Examples
Each index-linked option has an
‘‘index crediting methodology’’ that
explains how interest is calculated and
credited to the contract. For example,
one index crediting methodology is
‘‘point-to-point,’’ that is, the amount
credited to the contract is based upon a
comparison of the index’s performance
at two points in time (such as at the
beginning and end of the crediting
period). We- propose to require
insurance companies to explain the
index crediting methodologies used in
the index-linked options available
under the RILA contract, along with
numerical examples about how these
methodologies work. We further
propose to require insurance companies
to provide a bar chart that illustrates the
annual total return of each index along
with hypothetical examples of index
return after applying standardized
limitations on index gains and losses.
Specifically, insurance companies
would be required to describe, for each
index crediting methodology,139 how
interest is calculated and credited at the
end of a crediting period based on the
interest crediting formula or
performance measure.140 Form N–4, as
we propose to amend it, would provide
examples of common crediting methods
that the insurance company would
describe if applicable, such as point-topoint, step-up calculations, and
enhanced performance.141 To help
139 We understand that many index-linked
options use the same crediting methodology. If all
index-linked options offered by a RILA contract use
the same crediting methodology, the prospectus
would only include one example of that crediting
methodology. If, however, the index-linked options
in a RILA contract offer more than one crediting
method, or if different index-linked options in a
RILA contract offer different crediting methods, this
would affect the number of examples to be
provided. The number of examples to be provided
depends on the number of crediting methodologies,
not the number of index-linked options.
140 See proposed Item 6(d)(2)(iv)(A) of Form N–
4.
141 As noted above, a point-to-point crediting
methodology compares the index’s performance at
two points in time (such as at the beginning and
end of the crediting period). Step-up calculations
guarantee a given rate if the index’s returns are
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investors understand how these
crediting methods work, we also are
proposing to require the insurance
company to include a numeric example
to illustrate the mechanics of each index
crediting methodology.142 The examples
would be required to show, in a clear,
concise, and understandable manner,
how each crediting method functions
when the index has positive returns as
well as negative returns to help
investors understand how the crediting
method functions in both
circumstances.
Specifically, we would require
numeric examples that reflect a positive
return above the limit on index gains,
and a negative return below the limit on
index losses for each methodology. The
examples also would be required to
assume hypothetical returns and limits
that are reasonable based on current and
anticipated market conditions and sales
of the contract, and to reflect any
charges subtracted from interest
credited to or deducted from contract
value in the index-linked option to
allow investors to understand the
impact of these charges on their return.
Additional examples, charts, graphs, or
other presentations would be permitted
if they are clear, concise,
understandable. Any additional
presentations that assume hypothetical
returns and limits also should assume
hypothetical returns and limits that are
reasonable based on current and
anticipated market conditions and sales
of the contract. We would also require
insurance companies to include a
legend, in the format specified in the
form, that (1) these examples illustrate
how the insurance company calculates
and credits interest under each index
crediting methodology assuming
hypothetical index returns and
hypothetical limits on index gains and
losses and (2) the examples assume no
withdrawals.
We also are proposing to require a bar
chart for each index available under the
currently-offered index-linked options
showing the index’s annual return for
the last 10 calendar years (or for the life
of the index, if less than 10 years), with
the corresponding numerical
performance adjacent to each bar.143
Further, insurance companies would be
required to provide a hypothetical
example alongside each index return
that reflects the return after applying a
5% cap and a ¥10% buffer. If there are
positive, regardless of the index’s actual
performance, subject to certain conditions.
‘‘Enhanced performance’’ increases a positive index
return, such as by offering a participation rate of
more than 100%.
142 See proposed Item 6(d)(2)(iv)(C) of Form N–4.
143 See proposed Item 6(d)(2)(iv)(B) of Form N–4.
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no caps or buffers offered under the
contract (if, for example, the contract
includes a floor rather than a buffer),
insurance companies would be
permitted to reflect a rate or measure
used to limit index gains or losses under
the contract that is comparable.
Insurance companies would not be
permitted to include additional
performance presentations, or historical
index performance that precedes the
inception of the index. Further,
insurance companies would be required
to provide two footnotes to this table, if
applicable, that disclose (1) that the
index return does not reflect dividends
paid on the assets in the index, and (2)
that the index provider deducts fees and
costs when calculating index return.
These bar charts would also be
accompanied by the following legend in
the format specified in the form:
The bar chart shown below provides the
Index’s annual returns for the last 10
calendar years (or for the life of the Index if
less than 10 years), as well as the Index
returns after applying a hypothetical 5% cap
and a hypothetical ¥10% buffer. The chart
illustrates the variability of the returns from
year to year and shows how hypothetical
limits on Index gains and losses may affect
these returns. Past performance is not
necessarily an indication of future
performance.
The performance below is NOT the
performance of any Index-Linked Option.
Your performance under the Contract will
differ, perhaps significantly. The
performance below may reflect a different
return calculation, time period, and limit on
Index gains and losses than the Index-Linked
Options, and does not reflect Contract fees
and charges, including surrender charges and
the Contract Adjustment, which reduce
performance.
This information is intended to
provide context for the index-linked
options that the RILA contract offers
and would better inform an investor
when deciding whether to invest in a
RILA. For example, if an index-linked
option provides that the investor will
experience at least 5% of the upside
performance of an index, investors may
view the tradeoffs of this investment
differently if the index historically has
returned, for example, 10% per year
(thus capping gains at 5% during those
past periods) or 1% per year. Similarly,
if an index-linked option offers a ¥10%
buffer, the investor could compare that
against the index performance in the bar
chart and assess the extent to which the
buffer would have provided downside
protection against market losses in
negative return years.
We appreciate, however, that
historical index presentation alone,
without the addition of hypothetical
caps and buffers, may mislead investors
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71111
into thinking that these historical rates
of index performance are what investors
would have received under the contract
if they invested in a particular indexlinked option. As we discuss in more
detail below, we are concerned that
presenting historical RILA performance
without additional context can be
potentially misleading given that
investors cannot access the same RILA
terms as were available historically.
Relatedly, we are concerned that
statements in RILA advertisements are
being made without sufficient context
so that investors can understand the
qualifications to those statements.144 As
an example of how historical index
performance could confuse investors,
consider an investor who has selected
an index-linked option with
performance based on the performance
of XYZ Index and a one-year crediting
period, and this investor has allocated
contract value to that index-linked
option over 10 consecutive crediting
periods. This investor’s RILA contract
value after 10 years likely will differ
from the XYZ Index’s 10-year
performance. Reasons for this likely
difference include, for example, that the
index-linked option only provides a
portion of the performance of the index
because of a cap rate, buffer, or floor.
Accordingly, we are proposing to
require insurance companies to provide
historical index information to
investors, but with important
qualifications so that investors will not
confuse this index information for the
historical performance of the RILA
itself. In particular, the overlay of
hypothetical caps and buffers is
designed to help investors understand
better how those limits can cause RILA
performance to differ from that of the
index. Further, the legends we are
proposing also are designed to put
investors on notice that the presented
performance is not the RILA’s
performance.
The proposed bar chart, including the
proposed 10-calendar-year period, is
modeled on the risk/return bar chart in
Item 4(b)(2) of Form N–1A. Form N–4
also currently requires variable annuity
issuers to show 10-years of performance
in the portfolio company appendix. We
preliminarily believe that 10 calendar
years is an appropriate time to illustrate
the performance of the index over the
long term to help guide investors. We
are proposing to require a 5% cap rate
and ¥10% buffer rate to help investors
understand how caps and buffers affect
the index return, but without using
values that are so high or so low that
they will bear no resemblance to the
144 See
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level of gains and losses that is being
offered. The illustrative rates are
designed to achieve this effect because
they are higher than typical guaranteed
levels of caps and floors, but lower than
typical currently offered levels.
How Interest Is Calculated and
Credited—Indexes
The index underlying an index-linked
option is a central feature of the
investment, as the investor’s return will
be based on the index’s performance,
subject to applicable limits on gains and
losses. We therefore are proposing to
require the insurance company to
provide for each index a brief
description of the types of investments
that compose the index and where the
investor can find more information
about the index.145 Where there is more
than one version of an index (for
example a total return version and a
price return version), the disclosure
would clearly state which version of the
index relates to the index-linked option.
If the index is an exchange-traded fund
(‘‘ETF’’), the disclosure would have to
clarify whether the index’s performance
for purposes of determining the
amounts credited in the index-linked
option is based on the ETF’s net asset
or closing value and, if the performance
is based on the ETF’s share price, the
impact of using the share price as
opposed to total return. These
disclosures collectively are designed to
help ensure that investors understand
the applicable indexes. The disclosure
would also state, if applicable, that the
index does not reflect dividends paid on
its underlying securities, or that the
index deducts fees and costs when
calculating index performance, which
will reduce index performance. This is
important disclosure because an index
that does not reflect dividends paid on
underlying securities, or that deducts
fees and costs, will have a lower return,
all else equal, than an index that
includes dividends and does not deduct
fees and costs.
We also propose to require the
insurance company to state that it
reserves the right to substitute an index
prior to the end of the crediting
period.146 This would put investors on
notice that the index associated with a
particular index-linked option—which
is a key driver of the investor’s return—
could change in the middle of a
crediting period. The insurance
145 See
proposed Item 6(d)(2)(v)(A) of Form N–4.
proposed Item 6(d)(2)(v)(B) of Form N–4.
Insurers generally reserve the right to change the
index in the middle of the crediting period if the
index is discontinued or there is a substantial
change in the calculation of the index. Based on
staff experience, such changes are exceedingly rare.
146 See
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company also would be required to
disclose all circumstances that could
necessitate a substitution, how the
insurance company would choose a
replacement index, when and how
investors would be notified of this
change, how index return will be
calculated at the end of the crediting
period, and what would happen if a
suitable replacement index were not
found, including whether the indexlinked option will be discontinued prior
to the end of the crediting period. This
information would allow an investor to
better understand the likelihood of the
insurance company making a
substitution and its potential effects.
How Interest Is Calculated and
Credited—Maturity and Other Material
Features
To help investors anticipate what may
happen at the end of an index-linked
option’s crediting period, the insurance
company also would be required to state
whether an investor would receive
advanced notice of a maturing indexlinked option, how an investor might
provide instructions regarding the
reallocation of the contract value rate at
the end of the crediting period, and any
automatic default allocation in the
absence of such instructions.147 In
describing these matters, the prospectus
must also explain how investors will be
informed of the index-linked option
available for allocation at the end of a
crediting period, including any changes
to the currently-offered index-linked
options and the discontinuance or
addition of index-linked options.
Finally, we propose to require the
insurance company to describe any
other material aspects of the indexlinked option to ensure that any other
item not discussed above that could
affect an investment decision is
disclosed.148 This would include
disclosure related to limitations on
transfers to or from index-linked
options, rate holds, ‘‘bail-out’’
provisions, start dates, and holding
accounts.149 We would also require a
147 See
proposed Item 6(d)(2)(vi) of Form N–4.
proposed Item 6(d)(2)(vii) of Form N–4.
149 A ‘‘rate hold’’ locks in interest at the current
cap (or other rate limiting index gains) for the
period between which the insurance company
receives the investor’s annuity application and the
time the investor’s premium payment is allocated
to the index-linked option. A bail-out provision is
a contract provision that provides if a current cap
(or other rate limiting index gains) is set below a
specified value, the investor may withdraw value
from that index-linked option or RILA without a
contract adjustment (and in some cases without a
surrender charge) during a specified period after the
start of the crediting period. A holding account is
typically a conservative investment option
(typically a money market fund or a fixed option)
where amounts allocated to the index-linked option
148 See
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brief description of how charges may
impact the index-linked option’s value
if applicable as part of this discussion.
Fixed Options
In addition to variable options and
index-linked options, annuity contracts
commonly include fixed investment
options, such as traditional,
unregistered fixed options and
unregistered index options.150 In the
variable annuity context, a fixed option
provides an alternative for investors
who wish to avoid the market risk of
investing in a variable option. A fixed
option can also serve as the holding
account for amounts that are pending
allocation to a particular investment
option. In addition, a fixed option may
be the default allocation vehicle at the
end of an index-linked option’s
crediting period.
Form N–4 generally requires
registrants to describe the fundamental
features and risks of an annuity
contract, including those, like fixed
options, that are distinct from the
variable options offered through the
registered separate account.151 The form
also currently requires specific
disclosure about fixed options in the
KIT and the Contract Overview.152
Because we are proposing to include
disclosures relating to index-linked
options in Item 6, we are also proposing
to require disclosures on this other type
of investment option available to
annuity contract investors so that they
have a complete understanding of what
they may invest in through that
contract, either actively, or by default.
This approach is designed to increase
investor comprehension by ensuring
that substantive information about all of
the available investment options is
presented in the same location in the
prospectus.
The proposed disclosures for fixed
options would be similar to those
provided for index-linked options,
tailored for the specifics of a fixed
option. Specifically, registrants would
be required to describe the fixed options
currently offered under the contract and
state that information regarding the
features of each currently-offered fixed
option, including its name, term, and
are held until the next index-linked option start
date. This is used for index-linked options that start
on a particular day each month (e.g., the 15th of the
month).
150 See proposed Item 6(e) of Form N–4. Interests
in fixed account options are exempt securities
under Section 3(a)(8) of the Securities Act.
151 General Instruction C.1.(a) of Form N–4
(stating that ‘‘[a] Registrant’s prospectus should
clearly disclose the fundamental features and risks
of the [Contracts], using concise, straightforward,
and easy to understand language.’’).
152 Items 2 and 3 of Form N–4.
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minimum guaranteed interest rate is
available in an appendix with crossreferences.153 Further, registrants would
be required to describe how interest is
calculated and when it is credited for
each fixed option as well as the length
of the term and minimum guaranteed
interest rate (stated as a numeric rate,
rather than referring to any minimums
permitted under State law). As with
index-linked options, the registrant also
would be required to state whether an
investor would receive advance notice
of a maturing fixed option, including
what steps an investor might take to
provide instructions regarding the
reallocation of contract value at the end
of the term, and any automatic default
allocation in the absence of such
instructions. In describing these matters,
the registrant must also explain how
investors will be informed of the fixed
options available for allocation at the
end of a term, including any changes to
the currently offered fixed options and
the discontinuance or addition of fixed
options. Also as with index-linked
options, we would require disclosure of
any other material aspect of the fixed
options, including limitations on
transfers to or from the fixed options,
rate holds, start dates and holding
accounts.
Request for Comment
We request comment generally on the
proposed amendments to Item 6 of Form
N–4, and specifically on the following
issues:
42. Should we require each of the
specific disclosures (e.g., disclosures
relating to limits on index losses and
gains, crediting period, etc.) relating to
the RILAs and index-linked options as
proposed? Would all of these proposed
amendments provide information that
would be important to investors?
Should we modify or expand any of
these proposed disclosure
requirements?
43. Should we make any other
changes to the required prospectus
disclosures addressing index-linked
options? For example, we are proposing
to require numeric examples, charts,
graphs, or other presentations, as
appropriate, to illustrate the mechanics
of each type of index crediting
methodology.154 Would the proposed
requirement be likely to provide useful
information for investors? If not, why
not? Would the inclusion of such
examples, charts, and graphs be likely to
confuse investors about how index153 As discussed below, we are also proposing to
require disclosure relating to any fixed options
currently offered under the contract in the Item 17
appendix.
154 Proposed Item 6(d)(2)(iv) of Form N–4.
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linked options work? Is there a concern
that insurance companies would utilize
these examples to over-emphasize the
benefits of RILAs relative to their risks?
If so, how could this be remedied?
Should such examples be included in
the prospectus in response to Item 6, or
would they be better located elsewhere
in the prospectus, for example, in Items
3 or 17? Given the potential length of
such examples, should they be included
in an appendix to the prospectus?
44. Should the current limits on gains
and losses be required in the statutory
prospectus, as proposed? If not, where
should such disclosure be located?
Should insurance companies update
current limits on gains as they change
from time to time by filing a rule 497
prospectus supplement, or should a rule
485 post-effective amendment be
required?
45. Should we require the proposed
disclosures relating to the risks of
investing in variable options?
46. Should we require that the
historical performance of indexes be
disclosed as proposed? Is the proposed
bar chart an effective or appropriate
presentation approach, or should we
instead require another presentation
approach, such as a line graph or the
1-, 5-, and 10 year table required in the
Form N–1A? If so, why? Are there any
concerns that investors would confuse
the inclusion of historical index
information with the performance of the
index-linked option itself? If so, are our
proposed requirements to provide a
hypothetical example of a 5% cap and
¥10% buffer and a legend sufficient to
make clear that the performance
illustrated by the bar chart does not
show or suggest how an investment in
the contract will perform for the
investor? Are the 5% cap and ¥10%
buffer appropriate limits to use in the
hypothetical examples? Instead of
prescribing a specific cap and buffer,
should we require or permit issuers to
include the current and/or guaranteed
limits as an overlay to the bar chart, or
would this provide too much visual
clutter for investors, or be misleading in
any way? Is 10 calendar years of index
performance the right amount of time to
present?
47. Should we require discussion of
fixed investment options currently
offered under the contract? Are the
proposed disclosure items appropriate
for these types of investment options?
48. Is there other information we
should require insurance companies to
disclose to help investors better
understand the economic tradeoffs
associated with an index-linked option?
For example, issuers of structured notes
that offer bounded returns similar to
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RILAs disclose the issuer’s valuation of
the note, based on the value of (1) the
embedded derivatives; and (2) a fixedincome bond. This disclosure allows
investors to understand the difference
between the issuer’s valuation and the
original issue price that they are paying
for the structured note. Would a similar
disclosure for RILAs, provided with
respect to each permutation of an indexlinked option, be helpful to investors?
Would the difference between a
hypothetical $100,000 investment in an
index-linked option and the value, or
the cost to assemble, the economic
components underlying the indexlinked option be informative to
investors? Would it appropriately reflect
the implied cost the investor is paying
when investing in that index-linked
option? If we were to require this
disclosure, should it be expressed in
dollars, as a percentage of a hypothetical
$100,000 investment, or both? Should
we require the insurance company to
annualize the costs over a stated period
of time to express the cost as more akin
to an annual expense? Recognizing that
RILAs are intended to be long-term
investments, what would be an
appropriate period of time (e.g., 10, 20,
or 30 years)?
49. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
should we require the insurance
company to compare a hypothetical
$100,000 investment in the index-linked
option to the value, or cost, of the
following components: derivatives that
would provide the index-linked option’s
investment exposure; a fixed-income
component; and the standard insurance
features offered with the index-linked
option?
50. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
should we require that the insurance
company value or price the derivatives
using exchange-listed derivatives, such
as exchange-traded options, and based
on prices on the exchange, except in
cases where exchange-listed derivatives
could not efficiently provide the indexlinked option’s investment exposure?
Would that approach provide for
consistent and reliable pricing? In
practice are insurance companies
typically constructing and hedging
index-linked options’ investment
exposure using exchange-listed options
or other derivatives where feasible?
51. If we were to require insurance
companies to provide the disclosure
described in request for comment 48, in
determining the value of the derivatives
underlying an index-linked option,
should we require insurance companies
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to use a collection of hypothetical index
options with an expiration equal to the
crediting period, consistent with our
analysis in section III.B.3? 155
52. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
what calculation would be appropriate
for the fixed-income component of an
index-linked option? Should we, for
example, provide that the insurance
company should use the $100,000
hypothetical investment discounted by
the rate of interest the insurance
company is crediting, or would credit,
on fixed annuities with a term equal to
the duration of the crediting periods of
the index-linked option? Conversely,
should we require the insurance
company to use the value of a risk-free
zero-coupon bond with a time to
maturity equal to the crediting period of
the index-linked option, consistent with
our analysis in section III.B.3?
53. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
how should the insurance company
value, or determine the cost of
purchasing separately, the standard
insurance features? Do insurance
companies maintain internal pricing
information that could be used for this
purpose where those features are not
offered separately rather than in
connection with annuities or other
financial products sold by the insurance
company? Should the cost or value of
insurance be based on amounts
insurance companies are required to
reserve in connection with those
insurance obligations? Should we
require additional disclosure related to
early withdrawal charges, fees, or
penalties? For example, should we
require more prominent placement of
these features on marketing or other
materials, or should we require a
comparison of these features to potential
benefits of the RILA to clarify for
investors possible trade-offs?
54. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
should we, in addition to requiring the
disclosure of this cost figure, also
require the insurance company
separately to disclose the costs or values
associated with each component
underlying the index-linked option?
55. If we were to require insurance
companies to provide the disclosure
described in request for comment 48,
where should insurance companies
place it in the registration statement?
Would this information be most helpful
to investors if it were included in the
155 See
infra footnote 429 and accompanying text.
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disclosure required by Item 6, which
provides more detailed information on
each index-linked option, or in the
summary prospectus appendix
identifying the RILA’s investment
options? Alternatively, should it be
disclosed the KIT as a range based on
the available index-linked options? If
this information were in the summary
prospectus, would it change frequently
and result in a high number of
prospectus supplements delivered to
investors? If we were to further require
the disclosure of the underlying
components and pricing assumptions
used to determine the cost to investors
disclosure, would the SAI be an
appropriate place for that disclosure?
Should these disclosures be structured
using inline XBRL as proposed for other
additional disclosures?
(c) Appendix: Investment Options
Available Under the Contract (Item 17)
We propose to amend Item 17 to
include a discussion of the index-linked
options and fixed options available
under the contract. This item currently
requires a variable annuity issuer to
include in an appendix to the
prospectus a table that consolidates
certain summary information about each
portfolio company offered under the
contract. The current appendix is
designed to provide investors with an
overview of variable options available
under the contract in a uniform, tabular
presentation that promotes comparison,
because the investment experience of an
investor in a variable annuity will
largely depend on the underlying
investments available under the
contract.156 Similarly, we anticipate that
an overview of the index-linked options
available to investors in a RILA, as well
as any fixed option currently available
under the contract, would help
investors understand and compare the
various investment options offered
under the contract. Consolidating this
summary information about the
contract’s investment options—
equivalent to what is currently provided
for variable options—into a concise,
easy to read tabular presentation should
enhance the ability of investors to
understand, evaluate, and compare all
the investment options available under
the contract.
To reflect the expanded scope of the
appendix, we would amend the current
heading to ‘‘Investment Options
Available Under the Contract.’’ 157 We
156 VASP Adopting Release at n.267 and
accompanying text.
157 ‘‘Investment options’’ are defined as any
variable option, index-linked option, or fixed
option available under the contract. See infra
section II.B.7(b).
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would provide a new instruction that
explains that issuers may modify this
new heading as appropriate under the
contract. For example, if there are only
variable options offered under the
contract, an issuer could change the
heading to ‘‘Portfolio Companies
Available Under the Contract,’’
consistent with the current
requirements of the form. Because
variable options, fixed options, and
index-linked options can vary by benefit
offered under the contract, we also
propose to move the restrictions table
currently required for variable annuities
by instruction 1(f) of Item 17 to be a
separate requirement for all investment
options, with no other changes.158
Index-Linked Options
To accommodate the inclusion of
index-linked options in the appendix,
we propose to add a new table titled
‘‘Index-Linked Options.’’ 159 As part of
our approach to layered disclosure, the
information to be supplied in the table
for index-linked options would
summarize certain prospectus
disclosures required elsewhere in the
prospectus.160
Legends
Similar to the requirements for
variable annuities, the table for indexlinked options would be prefaced with
a legend. Specifically, the legend would
state that the table lists index-linked
options currently available under the
contract. Further, because insurance
companies typically change the indexlinked options available over time, we
would require the legend to specify that
the insurance company may change the
features of the index-linked options in
the table (including the index and the
current limits on gains and limits on
losses), offer new index-linked options,
or terminate existing index-linked
options, and that the insurance
company will provide the investor with
written notice before making any of
these changes.
As discussed above, current limits on
index gains for index-linked options
would be disclosed in the prospectus in
response to Item 6, and changes to
current limits on index gains would be
disclosed in prospectus supplements.161
However, to avoid frequent updates to
the summary prospectus, insurance
companies would not be required to
include current limits on index gains for
index-linked options in the appendix as
158 Proposed
Item 17(d) of Form N–4.
proposed Item 17(b) of Form N–4.
160 See, e.g., proposed Item 6(d) of Form N–4.
161 See proposed Item 6(d)(2)(i)(B) of Form N–4
and supra footnote 134.
159 See
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those limits can change frequently.162
Instead, and in addition to the
disclosure in Item 6, to ensure that
investors have convenient access to
changes in current limits on index
gains, which can significantly affect an
investor’s returns on an index-linked
option, the proposed legend would
require insurance companies to state
that current limits on gains are available
at a website address.163 This website
address must be specific enough to lead
investors directly to current rates, rather
than to the home page or other section
of the website on which the rates are
posted. Requiring RILA issuers
separately to include information about
current limits on gains on their websites
would benefit investors by making this
information easier to find and
understand. Furthermore, because
websites may be updated quickly,
website disclosure would be efficient for
compiling index-linked options’ current
limits on gains, given our understanding
that these rates can change often and
that insurance companies currently
disclose current rates on their websites.
Lastly, set off from the rest of the
legend and with emphasis, we would
require a notation that if amounts are
withdrawn from an index-linked option
before the end of its crediting period,
the insurance company may apply a
contract adjustment and that this may
result in a significant reduction in the
investor’s contract value that could
exceed any protection from the index’s
loss that would be in place if an investor
held the option until the end of the
term. We are proposing this notation
given the potential impact on an
investor’s returns if amounts are
withdrawn prior to the end of a
crediting period.
We propose to require the legend to
include appropriate cross-references to
the section(s) of the prospectus that
describe the features of the index-linked
options as well as the contract
adjustment. This approach is designed
to help investors that are interested in
more detail about key aspects of the
index-linked options to locate that
information quickly.
162 As discussed below, the proposed appendix
would appear in the summary prospectus, but Item
6 would not. See infra section II.C; see also infra
section II.E.1 (discussing proposal to amend rules
485 and 497 for RILAs).
163 Consistent with the current instructions to the
form, any website address, including this one, that
is included in an electronic version of the statutory
prospectus would be required to include an active
hyperlink or other means of facilitating access that
leads directly to the relevant website address.
However, this requirement would not apply to an
electronic summary prospectus that is filed on
EDGAR. See proposed General Instruction C.3.i of
Form N–4.
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Table
The legend would be followed by a
table that lists and highlights key
elements of each index-linked option
available under the contract.
Specifically, the table would require, in
sequential columns, the identification of
(1) each index by name; (2) type of
index; (3) crediting period, indicating
the duration of the index-linked option
in years; (4) index crediting
methodology; (5) limits on index loss if
held to the end of the crediting period;
and (6) guaranteed minimum limit on
index gain.
The description of the type of index
would be a brief statement of which
type of index it is (e.g., market index,
exchange-traded fund, etc.), or a brief
statement describing the assets that the
index seeks to track (e.g., U.S. large-cap
equities). The column indicating the
type of index crediting methodology
used for each index-linked option
would only be required if the RILA
utilizes multiple index crediting
methodologies under the contract (e.g.,
point-to-point, step-up, enhanced
upside, etc.).164 The disclosures
regarding limits on index loss would
require an issuer to state the current
percentage used in the insurance
company’s interest credit methodology
to limit the amount of negative index
return credited to the index-linked
option and to identify in the table
whether this limit is a buffer, floor, or
some other rate or measure.165 In the
last column, issuers would be required
to state the guaranteed minimum
percentage that may be used to limit the
amount of positive index return credited
to the index-linked option and to
identify in the table whether this limit
is a cap, participation rate, or some
other rate or measure.166
To ensure investors only receive
disclosure relevant to them, RILAs
would only be permitted to include in
the table those index-linked options that
are available under the contract.
Further, to promote disclosure in a
consistent format to facilitate
comparisons, issuers would be allowed
to add, modify, or exclude table
headings only as necessary to describe
the material features of an index-linked
164 If all index-linked options offered by a RILA
contract used the same crediting methodology, the
table would not include the column. See, e.g., supra
footnote 139.
165 In contrast to current limits on index gain, we
understand that the current limits on index loss
typically do not change frequently.
166 As discussed above, instead of also requiring
a column for current limits on index gains (in
addition to the column for guaranteed minimum
limit on index gains), the legend would state that
information about current limits on index gains is
available at a specified website address.
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option. Insurance companies would also
be required to indicate if any of the
index-linked options are restricted (e.g.,
because of a ‘‘hard’’ or ‘‘soft’’ close),
consistent with the current disclosure
requirements for variable options. The
proposed instructions also would state
that if an index provider calculates the
index’s return in a manner that does not
reflect the full investment performance
of the assets tracked by the index (e.g.,
the return does not reflect dividends
paid on the assets composing the index,
the return reflects a fee or cost, etc.), a
footnote to the table must, if applicable,
be included stating that the index’s
return does not reflect the full
investment performance of the assets it
tracks, which will reduce the index’s
performance. An investor evaluating
index-linked options may be more
familiar with a version of a given index
that reflects the full performance of the
index constituents, and this disclosure
would alert investors that the index
associated with a particular indexlinked option will have relatively lower
returns.
Fixed Options
Consistent with our proposed
approach to the Item 6 disclosure
requirements, we are proposing to
require in the appendix summary
information about fixed options
currently available under the contract.
These disclosure requirements would be
similar to the legend and table for
index-linked options discussed above,
adjusted to reflect fixed option details.
The fixed option legend, in addition to
identifying that what follows is a list of
fixed options currently available under
the contract, would indicate that the
insurance company (1) may change the
features of the fixed options identified,
offer new ones, and terminate existing
ones and (2) will provide the investor
written notice before doing so. The fixed
option table would include columns
identifying (1) the name of the fixed
option, (2) the term, and (3) the
minimum guaranteed interest rate.167
Insurance companies would be
instructed to include appropriate crossreferences in the legend to the sections
of the prospectus that describe the
features of fixed options. As with indexlinked options, insurance companies
could add, modify, or exclude table
heading only as necessary to describe
material features of a fixed option.
167 Consistent with the approach in Item 6, the
minimum guaranteed interest rate would be
required to be stated as a numeric rate rather than
referring to any minimums permitted under State
law.
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Request for Comment
4. Principal Risks of Investing in the
Contract (Item 5)
We request comment generally on the
proposed inclusion of index-linked
option summary information in the
appendix, and specifically on the
following issues:
56. Should we require these new
disclosures to be included in the
appendix? Are the proposed appendix
disclosures for index-linked options
appropriate? Would they help investors
to compare information among indexlinked options and generally understand
the index-linked options available? Is
this information likely to be relevant
and useful to investors? Is there more or
different information that we should
require? Should any of the information
not be included? For example, should
we require current limits on gains to be
disclosed in the appendix, rather than
requiring the appendix to include a
website address where information
about current limits is available (as well
as requiring this information in the
statutory prospectus)? Would investors
find it useful to have online access to
information about current limits on
gains? Will investors find current limits
on index loss in the summary
prospectus useful even if the current
limits on index gains are not included?
57. We are proposing to require in the
statutory prospectus numeric examples,
charts, graphs or other presentations to
illustrate the mechanics of each type of
index crediting methodology.168 Should
we permit or require some or all of these
examples for index-linked options to be
included in the appendix? Would the
inclusion of these examples add undue
length or complexity to the appendix, or
overwhelm the disclosure for other
investment options? Could these
concerns be ameliorated by only
permitting or requiring a limited
number of examples (e.g., no more than
4), or by placing certain other
limitations on the inclusion of such
examples? If so, how? If we were to
require examples for index-linked
options to be included in the appendix,
should we also require the examples to
be included in the Item 6 disclosures, or
should such disclosures only be
required in a single location (and if so,
which one)?
58. Should we include the proposed
disclosure in the appendix relating to
fixed options currently available under
the contract? Are there any changes we
should make to the specific proposed
disclosure requirements?
An investment in a contract offering
index-linked options exposes investors
to unique risks that may be different
from those that are common to other
investment products, including
contracts that solely offer variable
options. We propose to amend Item 5 to
address certain principal risks that are
particularly relevant to investors in
RILAs. In addition to restructuring the
current item to incorporate the proposed
risk disclosure requirements addressing
index-linked options, we propose
certain structural changes that are
designed to clarify existing
requirements but are not anticipated to
result in substantively different
disclosure requirements for contracts
offering variable options. These
proposed changes also would
consolidate certain risk disclosures
insurance companies currently provide
for variable annuities in other sections
of the prospectus. We are proposing to
require these disclosures in a single
location to more consistently and
effectively communicate risks to
investors. As the Commission has
previously explained, the principal risk
disclosure in the prospectus is designed
to provide a consolidated presentation
of principal risks, which registrants can
cross-reference to reduce repetition that
might otherwise occur if the same
principal risks were repeated in
different sections of the prospectus.169
The principal risk disclosure item of
Form N–4 currently consists of a single
paragraph requiring a registrant to
summarize in the prospectus the
principal risks of purchasing a contract,
including the following risks: (1) poor
investment performance, (2) that
contracts are unsuitable as short-term
savings vehicles, (3) limitations on
access to cash value through
withdrawals, and (4) the possibility of
adverse tax consequences. We propose
to retain these substantive risk
disclosure requirements but would
restructure the current single paragraph
into separate sub-items while also
making certain minor changes designed
to clarify existing obligations.170 The
proposed sub-items are designed to be
non-exclusive examples of the principal
risks of investing in the contract being
registered. In addition to existing
disclosure requirements, these subitems would also include new risk
disclosures specific to index-linked
168 Proposed Item 6(d)(2)(iv) (Methodology and
Examples) of Form N–4. We are proposing to permit
this information to be included in an appendix. See
supra section II.B.3(a).
169 See VASP Adopting Release at n. 690 and
accompanying text.
170 See proposed Item 5(a)-(b), (d)-f) of Form N–
4.
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options, as applicable.171 We are making
parallel changes to the risk disclosures
most applicable to variable annuities to
avoid any implication that risk
disclosure should be provided at a
different level of detail than the
disclosures for RILAs. Most contracts
offering variable options that are
currently registered on Form N–4 likely
would not need to revise their risk
disclosure in response to the proposed
amendments to the risk disclosure
requirements. In our experience, it is
common practice for these registrants
currently to include the disclosures that
the proposal would require in their
prospectuses as principal risk disclosure
(or elsewhere in their prospectuses).
The proposed approach would retain
the current requirement for registrants
to explain the principal risks of
purchasing a contract, but would also
require an explanation of the principal
risks of investing in an investment
option, including the risks of poor
investment performance.172
Additionally, for index-linked options, a
registrant would disclose the maximum
potential loss from negative index
performance over the crediting period,
as a percentage. Although disclosures
that address certain risks of indexlinked options would be required in
other locations in the prospectus, we are
proposing that RILA issuers include
certain risk factors, such as this one, in
the consolidated summary of principal
risks associated with the contract.173
The maximum potential loss resulting
from negative index performance is a
salient way to quantify potential returns
for particular investment options. For
example, absent this disclosure, it may
not be apparent to investors that an
index-linked option that offers a –10%
buffer still has the potential for 90%
loss.174 This statement would help
171 See
proposed Item 5(c) of Form N–4.
proposed Item 5(a) of Form N–4.
173 See proposed Item 1(a)(6) (Outside Front
Cover Page) (‘‘Prominently disclose as a percentage
the maximum amount of loss from negative Index
performance that an investor could experience after
taking into account the minimum guaranteed limit
on Index loss provided under the Contract.’’);
proposed Item 2(b)(ii) (Overview of the Contract)
(‘‘[P]rominently state as a percentage the maximum
amount of loss an investor could experience from
negative Index performance, after taking into
account the minimum guaranteed limit on Index
loss provided under the Contract.’’); proposed Item
6(d)(1)(ii) (Investment Options) (‘‘Prominently state
as a percentage the maximum amount of loss an
investor could experience from negative Index
performance, after taking into account the
minimum guaranteed limit on Index loss provided
under the Contract.’’).
174 We recognize that this example may suggest to
some investors that an option with a buffer is riskier
than one with a floor. In fact, the protection offered
by a buffer is more likely to be triggered than the
protection offered by a floor. In general, a buffer
172 See
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investors assess the particular risks
associated with RILAs in the context of
the other required principal risk
disclosures. The potential risk of loss is
particularly important for investors to
understand because RILAs are often
presented to investors as having the
benefit of offering a balance between the
opportunity for growth and the reduced
risk of loss relative to savings alone or
more conservative investments.175
The next proposed sub-item, which
concerns the risks of early withdrawal,
would retain the current requirement for
registrants to disclose that contracts are
unsuitable as short-term savings
vehicles and to summarize the
limitations on access to cash value
through withdrawals, including the
possibility of adverse tax
consequences.176 We propose to expand
this disclosure requirement to specify
that a summary of the limitations on
access to cash value through
withdrawals may also include, if
applicable, surrender charges, as well as
negative contract adjustments and loss
of interest. These are features of RILAs
that implicate why they are not shortterm saving vehicles. In addition,
insurance companies that offer indexlinked options would be required to
state the maximum potential loss
resulting from a negative contract
adjustment, as a percentage. Although
this last statement would be required to
be provided in other locations in the
prospectus, we are proposing to include
this risk disclosure in the consolidated
summary of principal risks because
contract adjustments can significantly
affect contract value.177 Also, contract
adjustments are a distinctive feature of
contracts with index-linked options that
we recognize (based on results of
protects the investor from experiencing smaller,
more common losses on an index (as well a portion
of any larger loses), while a floor protects the
investor from larger, less-common losses (but does
not protect against smaller losses). Insurers that
offer both buffers and floors should generally make
this distinction clear to investors in their Item 5 risk
disclosures, as well as in response to proposed
Items 2(b)(2) and 6(d) of Form N–4.
175 See OIAD Report at Section 4, Review of RILA
Marketing.
176 See proposed Item 5(b) of Form N–4.
177 See proposed Item 1(a)(7) (Outside Front
Cover Page) (‘‘Prominently state as a percentage the
maximum potential loss resulting from a negative
Contract Adjustment, if applicable.’’); proposed
Instruction 2(a) to Item 3 (Key Information Table)
(‘‘Include in this statement the maximum potential
loss (as a percentage of the investment) resulting
from a negative adjustment. . . .’’); proposed Item
4 (Fee Table—Transaction Expenses) (‘‘Contract
Adjustment Maximum Potential Loss (as a
percentage of Contract value at the start of the
Crediting Period or amount withdrawn, as
applicable)’’); and proposed Instruction 1 to Item
7(e) (Contract Adjustment) (‘‘State the maximum
potential loss, as a percentage, that could result
from a negative Contract Adjustment.’’).
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qualitative investors interviews)
investors can find difficult to
understand. Quantifying maximum
potential loss resulting from a negative
contract adjustment is intended to
illustrate the possible effects of these
adjustments. Further, unlike other types
of losses, contract adjustments are
typically avoidable by investors. As a
result, we anticipate that showing the
maximum loss possible would help
investors evaluate whether to take an
action that would result in a contract
adjustment. It also would help investors
understand the potentially significant
risks that they could face in a RILA,
regardless of a RILA’s bounded return
structure. Therefore, this statement
would assist investors in assessing
unique risks associated with indexlinked options in the context of the
other required principal risk
disclosures.
The next proposed sub-item, which
concerns the principal risks associated
with index-linked options, would
include new risk disclosure
requirements tailored to address unique
risks associated with these investment
options.178 Under these proposed
requirements, a registrant would have to
describe the principal risks of investing
in any index-linked options offered
under the contract (in addition to the
risks of potential loss from negative
index performance, as discussed above).
The proposed sub-item would require
the prospectus to include a statement
that an investor in an index-linked
options is not invested in the index or
in the securities tracked by the index.
This reflects our concern, based on the
results of qualitative investor
interviews, that investors may be
confused about whether an investment
in an index-linked option is a direct
investment in the index.
To help ensure that RILA
prospectuses address certain key risks,
the proposed instructions to this
disclosure requirement would specify
that discussion of the principal risks
related to index-linked options would
be required to include the principal
risks relating to, as applicable: (1)
limiting positive index returns; (2) the
possibility of losses despite limits on
negative index returns; (3) interest
crediting methodologies; (4) the impact
of contract fees on the amount of
interest credited; and (5) the
reallocation of contract value at the end
of an index-linked option’s crediting
period. We are also proposing
instructions specifying that this
discussion would be required to
include, as applicable, principal index
178 See
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71117
risks relating to: (1) the type of index
(e.g., market risk, small-cap risk, foreign
securities risk, emerging market risk,
etc.); (2) the exclusion of dividends from
index return; and (3) market volatility.
These instructions would require RILA
issuers to specify which risks relate to
each index offered under the contract,
and to describe the principal risks
related to the possible substitution of
the index before the end of an indexlinked option’s term.
An additional proposed new sub-item
would require a description of the
principal risks associated with any
contract benefits (e.g., death benefits,
living benefits), including the impact of
excess withdrawals, if applicable. These
risks include, for example, investment
restrictions associated with a living
benefit, which may limit investment
performance.179 As an additional
example, there are risks that
withdrawals may substantially reduce
the benefit, that some guaranteed
benefits are based on a contingency that
may never occur (e.g., the contract value
falling to zero), that the rates for
contract benefits may change over time,
and that certain benefits may be
discontinued prior to election. Because
these risks could impact the expected
performance of the annuity, or in some
cases could even terminate the annuity,
we are proposing to require issuers to
disclose them to in the prospectus.
Another proposed new sub-item
would require an explanation of the
principal risks associated with the
insurance company’s ability to meet its
guarantees under the contract, including
risks relating to its financial strength
and claims-paying ability, which as
described below may be of particular
concern for investors who allocate
contract value to index-linked
options.180 We recognize that a
summary of certain insurance company
risks is currently required to be
disclosed in the KIT.181 Moreover,
although there is no corresponding
disclosure requirement that mandates
the inclusion of insurance-companyrelated risks in the principal risk
disclosure in contract prospectuses,
most Form N–4 registrants already
provide this disclosure. We therefore do
not expect that current Form N–4
registrants likely would have to modify
their disclosures to comply with the
proposed requirement. Nevertheless, we
propose to require this disclosure to be
included in the consolidated principal
risks section of the prospectus for
179 See
proposed Item 5(d) of Form N–4.
proposed Item 5(e) of Form N–4.
181 See current Instruction 3(d) to Item 2 of Form
N–4.
180 See
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completeness, and to help ensure that a
prospectus for a contract that offers
fixed options and index-linked options
discloses the insurance company’s
claims-paying ability with regard to its
contractual guarantees. In contrast to
variable options, where amounts
invested are held in a separate account
insulated from the insurance company’s
general account and protected from
general account creditors, assets
invested in an index-linked option are
subject to the insurance company’s
claims-paying ability for most RILAs.
Lastly, we propose a final new subitem, which would require a description
of the principal risks relating to any
material reservation of rights under the
contract, including if applicable, (1) the
right to remove or substitute portfolio
companies; (2) add or remove indexlinked options and change the features
of an index-linked option from one
crediting period to the next; (3) stop
accepting additional purchase
payments; and (4) impose investment
restrictions or limitations on
transfers.182 We propose to require this
disclosure because the ability to
discontinue contract features, alter an
investor’s ability to participate in an
index’s upside performance, and
otherwise change features is important
information for investors when making
an investment decision.
We request comment generally on the
proposed amendments to Item 5 of Form
N–4, and specifically on the following
issues:
59. Do the proposed amendments to
Item 5 appropriately describe the types
of principal risks that are typically
associated with investing in a contract
that offers variable options and/or
index-linked options? Should different
or additional principal risks be required
to be summarized in the prospectus?
60. Do commenters agree with the
proposed approach of amending Item 5
to restructure the current item into
separate sub-items? For contracts
offering variable options, do
commenters agree that the proposed
changes would clarify existing
requirements, but would not generally
result in substantively different
principal risk disclosure requirements?
Would the proposed changes to Item 5
require contracts offering variable
options that are currently registered on
Form N–4 to revise their current risk
disclosure, or could they continue to
use their existing disclosures? Why or
why not? To the extent that Form N–4
registrants are currently disclosing risks
on topics that the proposed changes
address in other parts of the prospectus,
182 See
proposed Item 5(f) of Form N–4.
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would this current risk disclosure be
considered to be ‘‘principal’’ risk
disclosure?
61. Although we are proposing to
require disclosure of specified indexlinked option-related principal risks to
be provided in response to the Item 5
disclosure requirements, we also
propose to require aspects of these risks
to be disclosed in response to certain
other prospectus disclosure
requirements, facilitating a layered
disclosure approach. Is this appropriate?
What ‘‘layers’’ of risk disclosure are
appropriate for the summary
prospectus, statutory prospectus, and
SAI?
62. Are the proposed additions to the
current principal risk disclosures
appropriate? If not, why not? Should
we, for example, require a registrant
specifically to disclose principal risks
associated with index-linked options,
contract benefits, the insurance
company, and any material reservation
of rights under the contract, as
proposed? If not, why not? Is an
insurer’s ability to discontinue contract
features, reduce index limits on gains
and otherwise change features likely to
be inconsistent with an investor’s
reasonable expectations, as we state
above? Should we modify any of the
aspects of these proposed principal risk
disclosure requirements?
5. Addition of Contract Adjustments
and Other Amendments to Fee and
Expense Disclosures (Items 4, 7, and 22)
We are proposing amendments to
Form N–4 to require specific disclosures
regarding contract adjustments and
other implicit RILA-specific costs that
can result in a significant erosion of
investment principal. The proposed
disclosures are designed to provide
investors with a better understanding of
the mechanics of these costs and the
associated potential for loss. Under the
proposed approach, these disclosure
requirements would be set forth in Items
4, 7, and 22(d) of Form N–4. We are also
proposing revisions to the existing
provisions of these Items, applicable to
all Form N–4 issuers, to clarify certain
terminology.
(a) Amendments to Fee Table Disclosure
Requirements (Item 4)
We propose amending Item 4 to
require specific disclosures regarding
contract adjustments and other costs
specific to RILAs. Item 4 currently
requires variable annuity registrants to
provide comprehensive information on
the fees and expenses investors will pay
when buying, owning, and surrendering
or making withdrawals from a contract,
as well as expenses paid each year
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during the time the investor owns the
contract. While RILAs typically do not
charge the explicit ongoing fees and
expenses common to variable annuities,
investors do experience an implicit
ongoing fee to the extent the insurer
limits, through the use of a cap,
participation rate, or some other rate or
measure, index gains. Moreover, RILA
issuers typically utilize contract
adjustments, which can result in a
significant charge to investors who
make withdrawals from an index-linked
option or from the contract before the
end of a specified period. Further,
investor testing suggested that most
participants struggled to fully
comprehend the costs to investors of
these products.183 These costs include
contract adjustments because they can
negatively affect an investor’s contract
value or the amounts an investor could
withdraw from the contract.184
Accordingly, we are proposing to
include a detailed description of
contract adjustments in the prospectus,
and that this disclosure be proximate
and similar to other disclosures
regarding fees and expenses. Thus, we
are proposing several amendments to
incorporate the concept of contract
adjustments as well as implicit ongoing
fees and expenses into the current Item
4 disclosure requirements. We propose
generally expanding the tabular
disclosures that Item 4 requires to
address contract adjustment costs that
investors will pay when buying,
owning, and surrendering or making
withdrawals from an investment option,
and as noted below, requiring
disclosures about the maximum
potential loss that an investor could
experience in connection with a
contract adjustment. We are also
proposing to expand the tabular
disclosures with respect to annual
contract expenses, to alert investors to
the implicit ongoing costs associated
with limiting positive index returns. In
addition, we are proposing certain nonsubstantive changes to the fee table
disclosures and instructions that would
be applicable to all issuers.185
183 See OIAD Report at Section 6, Quantitative
Testing, Testing Impacts, Table 9 (noting that 16.2
percent of participants understood that a
participation rate reduces potential gains from the
market and 52.1 percent of participants understood
that a cap reduces potential gains from the market).
184 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Results From Round 2.
185 In order to eliminate unnecessary information
in the prospectus, we propose amending the general
instructions to clarify that registrants may omit a
narrative explanation that is not applicable under
the contract. See proposed instruction 1 to Item 4
of Form N–4. We also are proposing an amendment
to general instruction 5 regarding the preparation of
the Transaction Expenses and Annual Contract
Expenses tables, clarifying that the instruction to
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Particularized changes we propose to
the fee table disclosures are discussed
below.
Transaction Expenses Table
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Form N–4 issuers currently must
include a transaction expenses table in
their prospectuses, describing fees and
expenses investors must pay when
buying, owning, and surrendering or
making withdrawals in connection with
a contract. This requires a description of
the sales load imposed on purchases (as
a percentage of purchase payments), the
deferred sales load (as a percentage of
purchase payments or amount
surrendered, as applicable), and transfer
fees. To provide proximate and similar
disclosure for RILA-specific costs, we
propose to require that insurance
companies additionally include the
maximum negative contract adjustment
that may be imposed, to be expressed as
a percentage of contract value at the
start of the crediting period or the
amount withdrawn, as applicable. To
provide investors notice of the
circumstances where they might be
subject to this cost, we also propose that
insurance companies include a footnote
describing all transactions potentially
subject to a contract adjustment.186
Currently this table also requires
registrants to describe the maximum
exchange fee that investors could incur
for any exchange or transfer of contract
value from the registrant to another
investment company, or between subaccounts or to the insurance company’s
general account. In a change relevant to
all Form N–4 issuers, we are proposing
a terminology change, replacing the
term ‘‘exchange fee’’ with ‘‘transfer fee,’’
as this term better reflects our
experience, namely that the vast
majority of such fees are those imposed
on transfers of account value among
investment options under the
contract.187
disclose the maximum guaranteed charge as a single
number where a fee is calculated based on a
benchmark does not apply to a contract adjustment.
See proposed instruction 5 to Item 4 of Form N–
4.
186 See proposed instruction 11 to Item 4 of Form
N–4.
187 See proposed Instruction 10 to Item 4 of Form
N–4. Under the proposed definition, ‘‘transfer fee’’
would encompass both the maximum fee charged
for any exchange or transfer of contract value
between investment options as well as the
maximum fee charged for any exchange or transfer
of contract value from the registered separate
account to another investment company or from the
registered separate account to the insurance
company’s general account. Thus, the proposed
amendments regarding the definition and
terminology surrounding transfer fees would not
result in any substantive change for existing Form
N–4 issuers.
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Annual Contract Expenses
Form N–4 issuers currently must
include an annual contract expenses
table in their prospectuses, detailing the
fees and expenses that investors pay
each year in administrative expenses,
base contract expenses, and optional
benefit expenses. Currently, base
contract expenses must be expressed as
a percentage of average account value.
In a change relevant to all Form N–4
issuers, we propose an amendment that
would also allow base contract expenses
to be expressed as a percentage of
average account value or contract value.
We do not expect that this change will
substantively affect variable annuities’
existing disclosure. We are proposing
this expansion to describe expenses
deducted where index-linked options or
fixed options are implicated, as those
options do not generally use the concept
of average account value.188
Additionally, to place investors on
notice of the unique and ongoing tradeoff costs associated with RILAs that may
not be captured by this table, we are
proposing to require registrants to
include the following statement in the
table:
In addition to the fees described above, we
limit the amount you can earn on an IndexLinked Option. Imposing this limit helps us
make a profit on the Index-Linked Option. In
return for accepting this limit on Index gains,
you will receive some protection from Index
losses.
Annual Portfolio Company Expenses
Form N–4 currently requires issuers
to include in the prospectus an annual
portfolio company expenses table,
disclosing the minimum and maximum
total operating expenses charged by the
portfolio companies offered by variable
annuity contracts that may be
periodically charged to investors during
the time they own the contract. This
includes costs incurred by portfolio
companies directly and, if the portfolio
company invests in other mutual funds,
the fees and expenses the portfolio
company indirectly incurs from these
188 We are also proposing two related, nonsubstantive amendments to the instructions relating
to annual contract expenses relevant to all issuers.
These changes are to broaden terminology given the
expanded scope of issuers that under the proposal
could file on Form N–4. Currently the instruction
for describing administrative expenses references
‘‘any Contract, account, or similar fee on all Investor
Accounts;’’ however, as noted below, we propose
deleting the term ‘‘Investor Account,’’ and
accordingly also propose amending this instruction
to conform to that change. Relatedly we are
proposing to amend the instruction regarding base
contract expenses to remove a reference to fees and
expenses deducted ‘‘from separate account assets or
charged to all Investor Accounts,’’ replacing it with
an instruction to consider fees and expenses
‘‘charged to any Investment Option.’’
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investments. In a change that also
would apply to variable annuities
prospectuses, we are proposing that
registrants disclose that expenses shown
in this table may change over time and
may be higher or lower in future. We
propose this change for two reasons.
First, this modification would help to
ensure that investors understand that
these charges may increase over time,
notwithstanding that these charges are
described as maximum expenses.
Second, given that we are proposing
similar disclosures with regard to
features of RILA offerings that are
subject to change, we propose to require
a similar level of disclosure with regard
to variable annuity offerings where
appropriate.
Example
Form N–4 issuers currently must
provide an example in their
prospectuses that is designed to allow
variable annuity investors to compare
the cost of investing in the contract with
the cost of investing in other variable
annuity contracts. We propose
amending the example requirements to
clarify, for variable annuity and RILA
issuers, that the example is designed to
permit investors to compare costs of
investing solely in variable options
under the contract with costs associated
with variable options offered under
other annuity contracts. Under the
proposal, the example would be
preceded with a legend specifically
stating that: the example assumes that
all contract value is allocated to variable
options; the example does not reflect
contract adjustments; and costs would
likely differ if an investor selects indexlinked options or fixed options.
(b) Charges (Item 7)
Currently, Item 7 requires registrants
to provide a brief description in their
prospectuses of all current charges
deducted from purchase payments,
investor accounts, or assets of the
registrant. Consistent with the proposed
changes to Item 4, we also are proposing
a change in terminology that would
affect all Form N–4 issuers, replacing
references in Item 7 to ‘‘investor
accounts’’ and the assets of ‘‘registrants’’
with the terms ‘‘contract value’’ and
‘‘investment option’’ assets,
respectively. Therefore, in responding to
Item 7, variable annuity and RILA
issuers would describe charges
deducted from purchase payments,
contract value, or investment option
assets.189
189 Additionally, we are proposing two nonsubstantive terminology changes in Instruction 3 to
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For the reasons described above and
given the potentially significant
economic consequences contract
adjustments can have on RILA
investors, we are also proposing
additional specific requirements to
incorporate contract adjustments into
the prospectus’s disclosure of charges,
which would entail detailed
descriptions of any contract adjustments
under the contract. These disclosures
are designed to be comparable in scope
and proximate to existing disclosures
about contract charges applicable to
variable annuities.190
Specifically, we are proposing that
insurance companies would have to: (1)
disclose (as a percentage) the maximum
potential loss that could result from a
negative contract adjustment; (2) define
the period during which any contract
adjustment would apply; and (3)
describe all transactions subject to a
contract adjustment.191 Insurance
companies also would have to include
a description of how the contract
adjustment will affect the contract
value, surrender value, death benefit,
and any living benefits, and disclose
that a negative adjustment could reduce
the value under the contract in an
amount greater than the value
withdrawn.192 They would also need to
describe, in simple terms, how the
contract adjustment is determined
under the contract, and the relationship
between the contract adjustment and
any other charges or fees applied under
Item 7(a) regarding how registrants must describe
the sources that will be used to cover shortfalls
where proceeds from sales load will not cover
expected costs. First, we propose replacing the term
‘‘depositor’’ with the term ‘‘insurance company.’’
Second, where shortfalls are to be made from an
insurance company’s general account, this
instruction requires a disclosure that amounts paid
by the insurance company may consist of proceeds
derived from base contract expenses deducted from
the registered separate account. We propose
striking this italicized language referring to assets
of the registered separate account because it is
superfluous given the definition of ‘‘base contract
expenses’’ in proposed Instruction 14 to Item 5,
discussed above.
190 See instructions (a) through (d) to Item 7 of
Form N–4.
191 See proposed instructions (e)(1) through (e)(3)
to Item 7 of Form N–4. In describing the
transactions subject to a contract adjustment, the
insurance company would need to describe, for
example, whether adjustments apply if amounts are
transferred or withdrawn from an index-linked
option or from the contract due to a partial
withdrawal, surrender, election of an annuity
option, or payment of death benefit proceeds, or
where a particular optional benefit (e.g., a
withdrawal under a guaranteed living benefit) is
utilized, and to describe any circumstances under
which the adjustment will be waived.
192 See proposed instruction (e)(5) to Item 7 of
Form N–4. If applicable, the insurance company
would also be required to state the impact of the
contract adjustment on interest to be credited to an
index-linked option at the end of its crediting
period.
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the contract, including, for example, the
sequence in which charges and
adjustments are applied.193 The
required disclosure would also require
the issuer to briefly describe the
purpose of the contract adjustment,
including, for example, that the contract
adjustment transfers risk from the
insurance company to the investor to
protect the insurance company from
losses on its own investments
supporting contract guarantees if
amounts are withdrawn prematurely.194
Finally, issuers would be required to
disclose how an investor can obtain
information about the current value of
the contract adjustment, while stating
that this value can fluctuate daily, and
that the quoted value may differ from
the actual value at the time of
adjustment.195
These proposed disclosures are
intended to provide investors with the
necessary scope and level of detail of
the contract adjustments that could
negatively affect an investor’s contract
value or the amounts an investor could
withdraw from the contract. These
disclosures are further justified given
the RILA Act’s requirement that the
Commission use the results of investor
testing in designing a registration form
for RILAs. That mandated investor
testing showed that participants were
confused about contract adjustments,
their purpose, the situations in which
they could arise, their potential
magnitude, and their relationship to
other fees and charges (e.g., surrender
fees).196 These disclosures are designed
to address these areas of identified
confusion.
To simplify this disclosure, we
propose specifying that detailed
disclosure on the method of calculating
the contract adjustment appear in the
SAI, as opposed to the prospectus.197
We also propose requiring that Item 7(e)
include a cross-reference to Item 22 of
193 See proposed instructions (e)(4) and (e)(6) to
Item 7 of Form N–4. The description of how the
contract adjustment is determined would have to
provide a meaningful explanation of all the material
features of the contract adjustment’s application,
including: (1) information about any formula
applied (e.g., a change in value of hypothetical
derivative instruments); (2) the factors that may
cause an adjustment (e.g., timing of withdrawal,
index volatility, increase in external interest rates);
(3) a description of any proportionate withdrawal
calculations; and (4) how adjustments are applied
(e.g., allocated among the investment options,
applied to a withdrawal amount).
194 See proposed instruction (e)(7) to Item 7 of
Form N–4.
195 See proposed instruction (e)(8) to Item 7 of
Form N–4.
196 See, e.g., OIAD Report at Section 5, Qualitative
Testing, Results From Round 2 and Section 7,
Conclusions.
197 See proposed instruction (e)(4) to Item 7 of
Form N–4.
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Form N–4, which would require moredetailed disclosure on the contract
adjustment’s calculation (including
illustrative examples as to adjustment’s
operation) to appear in the SAI. The
more detailed SAI discussion is not,
however, a substitute for the Item 7
requirements. Thus, for example, an
insurance company could not include
the formula underlying the contract
adjustment calculation in the SAI in
lieu of the required discussion of the
formula in the prospectus. Rather, in
addition to stating the formula in the
SAI, the insurance company would
need to include in the prospectus a brief
description, in simple terms, of the
manner in which contract adjustment is
determined.
Further, while the proposed
disclosures are tailored to the
mechanics of contract adjustments, they
are also designed to be, where possible,
consistent with existing requirements
regarding disclosure of current charges
deducted from purchase payments,
investor accounts, or assets of the
registrant. For example, Form N–4
currently requires disclosure of current
fees and charges, which are typically
expressed as a percentage. Because the
value of a given contract adjustment can
change daily, we are proposing that
insurance companies disclose the
maximum potential loss, as a
percentage, that could result from a
negative contract adjustment (rather
than mandate a disclosure of a current
contract adjustment value that could
quickly become outdated).198
(c) Purchase of Securities Being Offered
(Item 22)
We are proposing to amend Item 22,
which addresses the purchase of
securities being offered, to require
specific, detailed contract adjustment
disclosures to appear in RILA issuers’
SAIs. As discussed above, issuers would
be required to provide a simple
explanation of the underlying
mechanics of contract adjustments in
their prospectuses, while noting that
further detail is available in the SAI and
providing a cross reference to that
information. Under the proposal, in
addition to the discussion required in
the prospectus by Item 7, Item 22 would
require issuers to explain fully the
operation of any contract adjustment
that can be applied under the contract.
This more detailed explanation would
not take the place of the prospectus
discussion and would need to address
all the material features of the
adjustment and include an explanation
198 See proposed instruction (e)(1) to Item 7 of
Form N–4.
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of any formulas used to calculate the
adjustment, and at least one numeric
example to illustrate the application of
the contract adjustment. This numeric
example would have to include a
negative adjustment, reflect surrender
charges (if applicable), and disclose the
percentage change in contract value as
a result of the adjustment.
The mechanics of contract
adjustments under a RILA contract are
typically complex, often implicating the
application of factors or formulas that
can be difficult for many investors to
understand. Because the application of
a negative contract adjustment can
substantially affect an investor’s
contract value, however, we propose to
require the inclusion of information on
negative contract adjustment in the SAI,
so that investors who wish to learn more
about the calculation may do so. In
addition to promoting transparency
generally, this proposed disclosure
would ensure that liability attaches
under section 11 of the Securities Act
for any material misrepresentations
regarding the application of a contract
adjustment.
We are also proposing to make
applicable to RILA issuers certain
existing SAI disclosure requirements
about the purchase of securities being
offered. Specifically, we are proposing
revisions to the instructions to the
existing requirement to describe the
manner in which the securities are
offered to the public, which would
instruct RILA issuers to respond by
addressing any exchange privileges
between investment options.199
Additionally, we propose to make the
existing requirement to describe the
method used to determine the sales load
applicable to RILA issuers.200 We do not
propose applying the existing disclosure
requirement dealing with frequent
transfer arrangements to RILA issuers,
as its provisions are relevant only to
variable annuity contracts.201
(d) Request for Comment
We request comment on these
proposed amendments.
63. Do commenters agree that it is
appropriate to include a discussion of
contract adjustments in Items 4, 7, and
22 as proposed? If not, how would
commenters suggest issuers disclose
contract adjustments to ensure that
investors have sufficient information to
make an informed investment decision
regarding RILAs?
64. Is it appropriate to require the
disclosure of the contract adjustment
199 See
proposed Item 22(a) of Form N–4.
200 See proposed Item 22(b) of Form N–4.
201 See proposed Item 22(c) of Form N–4.
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maximum potential loss in the
transaction expense table? Do
commenters agree that is appropriate to
require that issuers express the contract
adjustment maximum potential loss as a
percentage? If not, what alternative
measure would commenters suggest?
65. Do commenters agree that the
proposal strikes the proper balance in
the location of the proposed contract
adjustment disclosures? Are there any
contract adjustment disclosures we
propose including in the SAI that
commenters believe would be more
appropriately located in the prospectus?
Are there any contract adjustment
disclosures we propose including in the
prospectus that commenters believe
would be better situated in the SAI?
66. Do commenters agree with our
proposal that issuers be required to
include, in the annual contract expenses
table, a statement disclosing that, in
addition to the expenses described in
the table, investors will be subject to
limits on the amounts they can earn in
connection with index-linked options?
Do commenters agree that it is
appropriate to include a statement
addressing current limits on gains in
conjunction with the annual contract
expenses table? Do commenters agree
the proposed statement captures the
most salient concerns to investors of
these kinds of limits on gains? Do
commenters have any suggestions for
alternate wording or placement of the
statement?
67. Do commenters have any
suggestions about additional or
alternative disclosures that would
address the areas of confusion regarding
contract adjustments that this release
describes as being identified in investor
testing?
68. Are there any concerns with our
proposal to use the term ‘‘contract
adjustment’’ when referring to MVAs
(market value adjustments) and IVAs
(interim value adjustments)? Is there an
alternative term that we should use to
describe these kinds of adjustments?
69. Does our proposal to replace the
term ‘‘exchange fee’’ with ‘‘transfer fee’’
in Item 4 raise any concerns?
70. With regard to the numeric
examples we propose requiring in the
SAI, should there be any additional
requirements for what those examples
would need to include? For example,
should we require that the example
utilize the average negative contract
adjustment in operation for the
preceding year, or the negative contract
adjustment expected over the next year?
Should we also (or instead) require an
example of a contract adjustment in the
prospectus? If so, why, and what
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71121
particular assumptions should we
require in the example?
71. Do commenters agree with our
recommendation to place the more
detailed disclosures associated with the
mechanics of contract adjustments (such
as applicable formulas) in the SAI as
opposed to the prospectus? Why or why
not?
72. In addition to the contract
adjustment disclosures we have
proposed, should we also require
issuers to provide a graphic illustrating
the operation of a contract adjustment?
If so, where should we require that
graphic illustration be presented, and
what particular circumstances should it
illustrate? For example, would it be
helpful to require issuers to include a
graphic illustration demonstrating how
a contract adjustment works when
investors withdraw amounts from their
contract prior to the end of a crediting
period? Should we require illustrations
that demonstrate the operation of a
contract adjustment for investors in
circumstances where they change to a
different index-linked option before the
end of a crediting period, and
demonstrating how they can change
investment options to minimize the
financial impact to their contract value?
6. Information About Contracts With
Index-Linked Options (Item 31A)
We are proposing new Item 31A of
Form N–4 to require census-type
information regarding RILAs offered in
connection with the applicable
registration statement. Specifically,
under proposed Item 31A, an insurance
company would be required to provide
the following information regarding any
RILA offered through the registration
statement, as of the most recent calendar
year-end: (1) the name of each contract;
(2) the number of contracts outstanding;
(3) the total value of investor allocations
attributable to index-linked options; (4)
the number of contracts sold during the
prior calendar year; (5) the gross
premiums received during the prior
calendar year; (6) the amount of contract
value redeemed during the prior
calendar year; and (7) whether the
contract is a ‘‘combination contract,’’
that is, a contract that offers variable
options in addition to index-linked
options. This information would be
required as of the most recent calendar
year-end and, accordingly, would
generally be updated through a posteffective amendment to a registration
statement on Form N–4.202
202 See proposed Item 31A of Form N–4. An
issuer transitioning from an existing registration
statement on Form S–1 or S–3 to Form N–4 through
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This information is census-type data
that would provide contract-level
disclosures designed to assist the
Commission and staff in identifying
trends in insurance companies’ offerings
of RILAs. This information would also
provide improved transparency to
investors by supplementing the
information available about the
marketplace for the contracts offered in
connection with a registration
statement. These items are relatively
limited in scope and primarily consist
of information that should generally be
readily available to issuers. The
particular data required is similar to that
provided by registered separate
accounts that likewise assist the
Commission and staff in identifying
trends in variable annuities.203
We are proposing to require
information to be presented as of the
most recent calendar year-end to
provide the Commission and its staff
with information that will be updated
with an annual frequency for offerings
of RILAs. We anticipate that this
information would typically be updated
as part of an issuer’s annual update to
its registration statements for such
contracts.204 This approach would
result in information provided as of a
uniform date for all offerings of RILAs,
regardless of the issuer’s filing date,
and, in turn, would provide for
increased comparability across issuers
and contracts.205 Requiring this
information to be updated annually is
intended to achieve an appropriate
balance between providing the
Commission and its staff with current
information while avoiding
overburdening issuers. An annual
snapshot should be sufficient for the
census-type nature of the information
and would provide Commission staff
with appropriate intervals of data points
over time in which to identify trends in
insurance companies’ offerings of
RILAs. Requiring these issuers to report
such census information semi-annually
or more frequently would place an
increased burden on issuers that may
not be justified by a commensurate
a post-effective amendment would be required to
report this information as of the most recently
completed calendar year in its first post-effective
amendment transitioning onto Form N–4.
203 See Item F.14 of Form N–CEN; see also
Investment Company Reporting Modernization,
Investment Company Act Release No. 32314 (Oct.
13, 2016) [81 FR 81870 (Nov. 18, 2016)] at the
sentences following n.1142.
204 See 15 U.S.C. 77j(a)(3).
205 We understand that insurance companies
offering RILAs have a December 31 fiscal year end
which, in practice, means a distinction between
calendar year and fiscal year would result in
limited effect on the reporting.
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increase in the value of the information
received by the Commission.
This reporting would provide the
Commission with additional
transparency into the RILA market
segment, which would in turn improve
the effectiveness of the Commission’s
oversight of offerings on Form N–4.
Requiring this high-level reporting
would permit the Commission to
identify trends occurring in this market
segment over time and assist with
allocating the Commission’s resources
in administering the form. This reported
information on index-linked options
would complement parallel census-type
information that is currently required to
be reported annually on Form N–CEN
by registered unit investment trusts
offering variable annuities.206 The new
census-type information therefore
would help provide the Commission
with a more complete picture of the
marketplace for insurance products
offered through registration statements
on Form N–4. In addition, this
information may benefit the public in
supplementing the information
available about RILAs.
We request comment on these
proposed amendments.
73. Are the required reporting
elements in Item 31A of proposed Form
N–4 appropriate and clear? If not, what
elements require additional instruction?
74. Do commenters agree that it is
appropriate to require reporting under
Item 31A to be provided as of calendar
year-end? Do commenters agree that
there is limited practical difference
between requiring a fiscal year-end and
calendar year-end requirement in light
of investment company practices?
75. Should we require additional or
different reporting of census-type
reporting regarding RILAs? If so, should
we also amend the requirements of
Form N–CEN to ensure parallel
reporting by registered unit investment
trusts offering variable annuities
registered on Form N–4?
76. Would RILA issuers face any
significant challenges in providing the
required reporting elements? If so, why?
77. Do commenters agree that it
would be appropriate for issuers with
existing contracts to report information
required by proposed Item 31A for the
calendar year prior to the calendar year
the issuer first transitions its registration
statement onto Form N–4?
206 Issuers registering combination contracts on
Form N–4 would be required to exclude amounts
allocated to a variable option when providing
information in response to Item 31A as these
allocations would be separately reported by
registered separate accounts on Form N–CEN.
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7. Other Amendments and Provisions
Our proposed amendments also
include certain other amendments to
Form N–4 and related rules designed to
accommodate the inclusion of RILA
issuers on that form. These include
amendments to Form N–4’s facing sheet,
definitions, exhibit list, and required
representations, as well as amendments
to certain Securities Act rules that help
to implement the proposal. These
proposed amendments are discussed
below.
(a) Facing Sheet
We are proposing amendments to
include a new checkbox section on the
facing sheet. Specifically, an issuer
would be required to identify in this
new section: (1) if it is a new registrant,
defined as, as applicable, a registered
separate account or insurance company
that has not filed a Securities Act
registration statement or amendment
thereto within 3 years preceding this
filing; 207 (2) if it is an emerging growth
company (‘‘EGC’’), as defined by Rule
12b–2 under the Exchange Act; (3) if it
is an EGC, whether it has elected not to
use the extended transition period for
complying with any new or revised
financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the
Securities Act; and (4) if it is relying on
an exemption from Exchange Act
reporting requirements in reliance on
rule 12h–7.208 These changes would
help the Commission better understand
the types of registration statements
being filed on Form N–4 and, in the case
of the EGC information, mirrors similar
facing sheet requirements found in
Form S–1. In addition, we are proposing
amendments to the description of the
types of entities that use Form N–4 to
include insurance companies that offer
index-linked options, either as standalone or combination products.209
(b) Definitions (General Instruction A)
We are proposing amendments to
General Instruction A to update the
207 For example, a variable annuity separate
account that has not previously filed a Securities
Act registration statement would identify itself as
a new registrant, regardless of whether the
sponsoring insurance company has filed a recent
Securities Act registration statement or amendment
thereto as the proposed requirements request
information on the registrant. In the same manner,
an insurance company filing on Form N–4 would
determine whether it is a new registrant solely with
respect to its own Securities Act registration
statement filings.
208 In addition to this checkbox, we are proposing
an instruction that implements the requirements of
rule 12h–7 to indicate that the insurance company
is relying upon the exemption provided by that rule
in the relevant prospectus. See supra section
II.B.3.b.
209 See supra section II.A.
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existing definitions in Form N–4, add
new definitions to accommodate the
inclusion of RILAs on Form N–4, and
implement these proposed definitions
throughout the form. However, unless
otherwise stated, the proposed
amendments to the definitions in
General Instruction A would not alter
the existing obligations under Form N–
4 for current issuers on Form N–4.
These changes should provide a
standard set of definitions to convey
form provisions in a consistent and
efficient manner without the need for
lengthy descriptions in each instance
and clarify which form provisions apply
to which categories of issuers and
investment products.210
Specifically, we propose to add a new
definition for ‘‘index-linked option.’’
The proposed definition covers RILAs
and index-linked options offered in
combination contracts, as an investment
option offered under any contract,
pursuant to which the value of the
contract, either during an accumulation
period or after annuitization, or both,
will earn positive or negative interest
based, in part, on the performance of a
specified index.211 This is a functional
definition focused on the key features of
a RILA and would cover RILAs as
defined in the RILA Act. We also
propose to define ‘‘fixed option’’ as an
investment option under the contract
pursuant to which the value of the
contract, either during an accumulation
period or after annuitization, or both,
will earn interest at a rate specified by
the insurance company, subject to a
minimum guaranteed rate under the
contract. Further, we would change the
existing definition of ‘‘variable annuity
contract’’ to ‘‘variable option’’ and move
the parts of that definition that refer to
annuity contracts generally to a new
definition for ‘‘contract.’’ In connection
with the addition of other types of
investment options on Form N–4, we
are proposing to amend ‘‘portfolio
company’’ to clarify that this term
relates to the investment companies
offered as investment options in
contracts containing variable options.
We also propose to add a new defined
term ‘‘investment option’’ to refer
collectively to any index-linked,
variable, or fixed option. We propose to
add these items to help clarify which
provisions of amended Form N–4 apply
210 We are also proposing to amend Form N–4
throughout to use the gender-neutral reference of
‘‘investor’’ where appropriate. See, e.g., proposed
Instruction 6 to Item 2 of Form N–4.
211 Because RILA returns may not be one for one
with the index, we propose to indicate that positive
or negative interest is only based ‘‘in part’’ on the
index’s performance.
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to which types of annuities or
investment options.
Because an insurance company
issuing a RILA is not acting as a
depositor, we propose to change the
definition of ‘‘depositor’’ to ‘‘insurance
company.’’ The proposed definition
refers to the insurance company that
issues the contract, which company is
subject to state supervision, and that the
insurance company may also be the
depositor or sponsor for a variable
annuity separate account. We would
also add a new definition of ‘‘registered
separate account’’ defined as the
separate account in which the contract
participates with regard to any variable
option offered under the contract, and
refine the definition of ‘‘registrant’’ to
mean either the registered separate
account or insurance company, as
applicable. These changes further help
to clarify which provisions of the form
apply to variable annuities and RILAs.
We also propose to add definitions of
‘‘index,’’ 212 ‘‘contract adjustment,’’ 213
and ‘‘crediting period’’ 214 to refer to
these RILA-centric concepts in the form
and, in the case of ‘‘contract
adjustment’’ and ‘‘crediting period,’’
help clarify when the relevant
disclosures would be required. Lastly,
we propose to eliminate the currently
defined term ‘‘investor account.’’
Insurance companies typically do not
use this term in their disclosure, and the
more generalized concept of contract
value, which also is designed to address
the value of an investor’s investment, is
intended to convey the characteristics of
the broader scope of annuities that
insurance companies could register on
Form N–4 under the proposal.
We also are proposing related
amendments throughout Form N–4 to
help implement the proposed new
definitions. For example, we are
proposing to clarify the applicability of
certain variable annuity or Investment
Company Act-specific disclosure to
limit those requirements to ‘‘registered
212 As proposed, ‘‘index’’ means any index, rate,
or benchmark (such as a registered exchange-traded
fund that tracks an index) used in the calculation
of positive or negative interest credited to an indexlinked option. See proposed General Instruction A
to Form N–4.
213 As proposed, ‘‘contract adjustment’’ means a
positive or negative adjustment made to the value
of the contract by the insurance company if
amounts are withdrawn from an index-linked
option or from the contract before the end of a
specified period. This adjustment may be based on
calculations using a predetermined formula, or a
change in interest rates, or some other factor or
benchmark. See id.
214 As proposed, ‘‘crediting period’’ means the
period of time over which an index’s performance
is measured, subject to applicable limits on index
gains and losses, to determine the amount of
positive or negative interest that will be credited to
an index-linked option at the end of the period.
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separate accounts’’ or ‘‘variable options’’
when appropriate.215 As another
example, the form requires disclosure of
the procedures to purchase an annuity
contract including certain particularized
information.216 We would apply this
provision generally to all annuities
including RILAs, but are only requiring
certain disclosures relating to the
operation of accumulation units and
sub-accounts to contracts with variable
options as those elements are not
utilized by RILAs.
(c) Rules 405, 480, 481, 483, and 484
We are proposing amendments to rule
405 under the Securities Act to add the
new defined terms ‘‘Form available
solely to investment companies
registered under the Investment
Company Act of 1940’’ and ‘‘registered
index-linked annuity’’ for purposes of
Securities Act rules.
Certain Securities Act rules apply
only to registration statements that are
prepared on a form available solely to a
registered investment company or a
business development company. These
rules are 17 CFR 230.480 (‘‘rule 480’’),
17 CFR 230.481 (‘‘rule 481’’), 17 CFR
230.483 (‘‘rule 483’’), and 17 CFR
230.484 (‘‘rule 484’’) under the
Securities Act, and include forms such
as Forms N–1A, N–2, N–3, N–4, N–5,
and N–6. These rules prescribe
requirements relating to: information
given with the title of securities;
information contained in registration
statements; exhibits filed as part of the
registration statement; and undertakings
required with respect to requests for
acceleration.
By virtue of moving RILAs, which are
not issued by a registered investment
company, onto Form N–4, Form N–4
would be outside the scope of this
description absent the proposed
amendments. As such, the proposed
new defined term ‘‘form available solely
to investment companies registered
under the Investment Company Act of
1940’’ would specify that these rules
would continue to apply to registration
statements filed on Form N–4.
Specifically, we are proposing to amend
rule 405 to state that ‘‘a form available
solely to investment companies
registered under the Investment
Company Act of 1940’’ includes the
form used to register the offering of
securities of a registered index-linked
annuity for purposes of the Securities
Act of 1933. By operation of this new
215 See, e.g., proposed Items 3, 7, 8, 24, 32, and
34(a) of Form N–4; see also proposed definitions for
‘‘class’’ (clarifying applies to all contracts) and
‘‘platform charge’’ (clarifying only applies if there
is a variable option).
216 See Item 11 of Form N–4.
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term, RILA registration statements on
Form N–4 would be subject to rules 480,
481, 483, and 484.217 We propose to
subject RILA registration statements to
these rules to help facilitate a consistent
application of Form N–4 requirements.
We are also proposing to add a
definition of ‘‘registered index-linked
annuity’’ to rule 405, which provides
consistent definitions for select terms
used throughout the Securities Act
rules, to simplify references to RILAs in
the proposed Securities Act rule
amendments. Specifically, we would
define ‘‘registered index-linked
annuity’’ as an annuity or an option
available under an annuity (1) that is
deemed a security; (2) that is offered or
sold in a registered offering; (3) that is
issued by an insurance company that is
the subject to the supervision of either
the insurance commissioner or bank
commissioner of any state or any agency
or officer performing like functions as
such commissioner; (4) that is not
issued by an investment company; and
(5) whose value, either during the
accumulation period or after
annuitization or both, will earn positive
or negative interest based, in part, on
the performance of any index, rate, or
benchmark.
Under the RILA Act, the term
‘‘registered index-linked annuity’’
means an annuity (A) that is deemed to
be a security, (B) that is registered with
the Commission in accordance with
section 5 of the Securities Act, (C) that
is issued by an insurance company that
is subject to the supervision of the
insurance commissioner or bank
commissioner of any State or any
agency or officer performing like
functions as such commission, (D) that
is not issued by an investment
company, and (E) the returns of which
are based on the performance of a
specified benchmark index or rate (or a
registered exchange traded fund that
seeks to track the performance of a
specified benchmark index or rate) and
may be subject to a market value
adjustment if amounts are withdrawn
before the end of the period during
which that market value adjustment
217 These rules currently apply to registration
statements on Form N–4. Rule 480 prescribes
requirements relating to information given with the
title of securities. Rule 481 prescribes certain
information to be required in the registration
statement (e.g., certain legends to appear on the
front and back cover pages of prospectuses). Rule
483 prescribes certain requirements relating to
exhibits filed as part of the registration statement.
Rule 484 prescribes certain required undertakings
with respect to requests for acceleration under 17
CFR 230.461 when certain arrangements exist with
respect to indemnification of specified persons
against liability under the Securities Act.
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applies.218 The proposed definition in
rule 405 differs in certain respects from
this definition, but covers all offerings
that would be included in the RILA
Act’s definition. These differences are
intended to simplify the definition and
use terminology that is consistent with
other rules under the Securities Act. For
example, the proposed definition
clarifies that the insurance company is
registering the offering of a RILA, rather
than the RILA itself, with the
Commission.219 As another example,
the proposed definition in rule 405 does
not include a reference to a ‘‘market
value adjustment,’’ as the RILA Act’s
definition does, because the RILA Act
did not require that feature as a
predicate for being a ‘‘RILA.’’ 220 Since
the presence of a market value
adjustment does not factor into the
assessment of whether a security is a
RILA under the RILA Act’s definition, it
is unnecessary to refer to this feature in
the proposed definition in rule 405. The
proposed definition, however, continues
to encompass the full scope of the RILA
Act’s definition.
(d) Exhibits and Undertakings (Items 27
and 34)
As a function of moving RILAs onto
Form N–4 and subjecting them to the
requirements of rule 483, RILA issuers
would be required to file various
exhibits as part of a registration
statement, similar to the requirements
these issuers are subject to when
registering RILA offerings on Forms S–
1 and S–3 currently.221 Further, in
addition to the requirements of rule 484,
we are proposing to amend Item 34 of
Form N–4 to include certain
undertakings currently required of
RILAs as part of their Form S–1 and S–
3 registration statements.222
218 See Public Law 117–328; 136 Stat. 4459 (Dec.
29, 2022).
219 This is functionally the same as the
requirement of the RILA Act that the RILA ‘‘be
registered with the Commission in accordance with
section 5 of the Securities Act of 1933.’’ See section
101(a)(5) of Division AA, Title I of the Consolidated
Appropriations Act, 2023.
220 See Public Law 117–328; 136 Stat. 4459 (Dec.
29, 2022) (defining RILA as an annuity, among
other things, the returns of which may be subject
to a market value adjustment if amounts are
withdrawn before the end of a period in which that
market value adjustment is applied) (emphasis
added).
221 See Item 16 of Form S–1; Item 16 of Form S–
3; Item 601 of Regulation S–K.
222 The disclosure currently required in Item 34,
the fee representation mandated of registered
separate accounts under the Investment Company
Act, would be retained as paragraph (a) of this item,
limited in application to variable options, and the
new undertakings added as new paragraph (b) and
limited to index-linked options. See also 15 U.S.C.
80a–26(f)(2)(A). We would also rename this item
‘‘Fee Representation and Undertakings.’’
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Item 27—Exhibits
RILA issuers are currently subject to
the integrated disclosure requirements
of Regulation S–K when registering their
offerings, which provide requirements
for exhibits that must be filed as part of
the registration statement.223
Conversely, issuers on Form N–4 are
required to file the exhibits required by
rule 483 and Item 27 of Form N–4. To
provide consistent requirements for
Form N–4 issuers, we are proposing
amendments to require RILA issuers to
adhere to the same requirements as
current issuers on Form N–4. RILA
issuers and current Form N–4 issuers
are subject to somewhat different
provisions for filing exhibits to a
registration statement. However, there
are significant similarities between the
types of the exhibits that each type of
issuer is required to file, and thus we
generally are not proposing to change
those requirements. RILA registration
statements will therefore continue to
include the types of exhibits currently
included in their registration statements
on Forms S–1 and S–3. For example,
RILA issuers filing on Form N–4 would
continue to be required to file such
exhibits as the insurance company’s
certificate of incorporation and by-laws,
forms of contracts offered in connection
with the registration statement,
underwriting agreements, legal
opinions, and other material contracts,
as applicable.224
We are not, however, proposing to
amend Item 27 of Form N–4 to include
required exhibits under Regulation S–K
that are generally not applicable to
RILAs or would no longer be relevant in
light of the proposed amendments.225
For example, RILA registration
statements are currently required to
include a filing fee exhibit. Under the
proposed amendments, RILA issuers
would no longer include registration fee
payments as part a registration
statement or post-effective amendment
filing. Therefore, the proposed
amendments to Item 27 of Form N–4
omit this existing exhibit requirement
for RILAs.226
We are, however, proposing to amend
Form N–4’s required exhibits list to add
new Item 27(p) for all issuers, which
would require the filing of any power of
223 See
224 See
17 CFR 229.601.
17 CFR 229.601; proposed Item 27 of Form
N–4.
225 See 17 CFR 229.601; proposed Item 27 of Form
N–4. For example, some items, like Item 601(b)(96)
of Regulation S–K which requires a technical report
summary to be filed as an exhibit to a registration
statement on Form S–1 when a registrant discloses
information concerning its mineral resources, are
wholly inapplicable to RILAs.
226 See 17 CFR 229.601(b)(107).
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attorney included pursuant to rule
483(b).227 While this exhibit is already
required to be filed with a Form N–4
registration statement under rule 483(b),
practices differ in regards to the
placement of a required power of
attorney exhibit within the exhibit list.
This amendment is designed to assist
the public in comparing these exhibits
by standardizing their location in the
registration statement. In addition, we
are proposing conforming changes in
Item 27 to reflect the proposed
amendments to the definitions in Form
N–4.
Item 34—Fee Representation and
Undertakings
We are also proposing amendments to
Item 34 of Form N–4 to require RILA
issuers to include specific undertakings
in their registration statements on Form
N–4. Under the proposed amendments,
a RILA issuer would be required to
furnish two undertakings as part of the
registration statement on Form N–4.
These undertakings are (1) to file,
during any period in which offers or
sales are being made, through a posteffective amendment to its registration
statement, any prospectus required by
section 10(a)(3) of the Securities Act and
(2) that, for the purposes of determining
liability under the Securities Act, each
post-effective amendment shall be
deemed to be a new registration
statement relating to the securities
offered therein, and the offering of such
securities at that time shall be deemed
to be the initial bona fide offering
thereof. These proposed undertakings
are the same as two undertakings RILA
issuers currently provide in registration
statements,228 and mirror the effect of
similar provisions of section 24(e) of the
Investment Company Act, which
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227 RILA
registration statements on Forms S–1
and S–3 similarly include a power of attorney,
when applicable, to be filed as part of the
registrations statement. See 17 CFR 229.601(b)(24).
See also supra section II.D (discussing the addition
of a new exhibit relating to changes in accountants).
228 See rule 415(a)(3) and 17 CFR 229.512(a).
Under the proposed amendments, RILAs would be
exempt from the conditions of rule 415, including
furnishing the required undertakings pursuant to
Item 512(a) of Regulation S–K. See infra footnote
331. For example, RILA registration statements
would no longer be required to include a statement
that the issuer undertakes to file a post-effective
amendment to reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent posteffective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. We preliminarily believe this
requirement is not necessary for RILA registration
statements on Form N–4 in light of the other
amendments we are making to the prospectus and
registration statement filing process for RILAs. See
infra section II.E (discussing proposed amendments
to rules 485 and 497 under the Securities Act).
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applies to amendments to Form N–4
registration statements by registered
separate accounts.229 We are proposing
that RILA issuers continue to furnish
these representations concerning posteffective amendments to a registration
statement as, under the proposed
amendments, RILAs may be
continuously offered on a registration
statement for an indefinite amount of
time. In that time, a RILA registration
statement may be subject to a number of
various post-effective amendments.
Conversely, the proposed amendments
do not include other undertakings
which may be currently required in
RILA registration statements. These
undertakings relate to the process for
conducting continuous offerings under
rule 415, which RILAs will no longer be
subject to under the proposed
amendments. In addition, we are not
including other undertakings that are
unnecessary in light of the proposed
amendments as a whole.230 For
example, RILA issuers currently are
required to include an undertaking to
remove from registration any of the
securities being registered that remain
unsold at the termination of an offering
through a post-effective amendment.231
However, under the proposed
amendments, RILA issuers will be
registering an indeterminate amount of
securities and paying registration fee
payments in arrears on amended Form
24F–2 for the life of an offering. Under
this approach, a RILA issuer would only
pay registration fees on the exact
amount of net issuance of securities
relating to an offering and therefore, it
is unnecessary to additionally require
an undertaking that relates to a surplus
registration of securities during an
offering.
(e) Request for Comment
We request comment on these
proposed amendments.
78. Are the instructions for the
proposed new section on the facing
sheet appropriate? Should there be
additional or different options for the
proposed new section on the facing
sheet?
79. Are the definitions in Part A of the
General Instructions of Form N–4
appropriate? If not, which definitions
229 See Section 24(e) of the Investment Company
Act [15 U.S.C. 80a–24(e)]. Section 24(e) generally
requires a registered separate account to amend its
registration statement annually to update its
prospectus for the purposes of section 10(a)(3).
Section 24(e) also provides that, for the purposes of
liability under Securities Act, the effective date of
the latest amendment is deemed to be the effective
date of the registration statement with respect to
securities sold after the effectiveness of amendment.
230 See 17 CFR 229.512(a).
231 See 17 CFR 229.512(a)(3).
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71125
require additional clarity or
modifications? For example, do
commenters believe it is appropriate to
use the collective term ‘‘registrant’’ to
include insurance companies that may
not be registered entities under the
Securities Act? Do the definitions
effectively convey which provisions
apply to which type of annuity contract?
80. Do commenters agree with the
statement that ‘‘investor account’’ is not
generally used in insurance company
disclosures to investors relating to
annuity contracts?
81. Did we appropriately scope those
provisions that practically only apply to
variable options to those types of
investment options? Are there any other
disclosures we should limit to variable
options? Conversely, are there
provisions we limited to variable
options that we should also apply to
index-linked options?
82. Should we add any additional
definitions to Part A of the General
Instructions to Form N–4? Should we
retain the term ‘‘investor account’’?
83. Is the definition of ‘‘Index-Linked
Option’’ appropriate? Should we revise
the definition in any way? Does this
definition encompass all potential
RILAs and index-linked options offered
in combination contracts as proposed as
required by the RILA Act?
84. Do commenters agree that the
proposed definition of ‘‘registered
index-linked annuity’’ in rule 405 is
appropriate? Do commenters agree that
the proposed definition is inclusive of
the types of RILAs encompassed in the
definition of ‘‘registered index-linked
annuity’’ in the RILA Act?
85. Do commenters agree that with the
proposed definition of ‘‘Form available
solely to investment companies
registered under the Investment
Company Act of 1940?’’ Do commenters
think this may cause confusion as RILA
issuers are not investment companies
registered under the Investment
Company Act?
86. Should we require RILA issuers to
adhere to rules 480, 481, 483, and 484
when registering RILAs on Form N–4?
87. Do commenters agree that the
Exhibit List for proposed Form N–4
encompasses the types of exhibits that
RILA issuers currently include in
registration statements and is
appropriate for RILAs? If not, what
exhibit requirements should govern
RILAs registered on Form N–4? Are
there additional exhibits that RILA
issuers should be required to file as part
of their registration statements on Form
N–4? Are there any exhibits that the
integrated disclosure requirements of
Regulation S–K currently include that
we should require on Form N–4?
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88. Is it appropriate to require RILA
issuers to furnish the undertakings in
Item 34 of proposed Form N–4? Are
there different or additional
undertakings that should be required for
these issuers?
8. Remaining Form N–4 Items
We propose to make applicable to
RILAs the remaining requirements and
disclosure items on the existing Form
N–4 discussed below, which we do not
propose to substantively change.232 The
general instructions to the proposed
form include both organizational
requirements along with substantive
requirements for the preparation of the
registration statement, including
instructions relating to the organization,
presentation, and prospectuses
permitted to be included in a
registration statement. The remaining
disclosure items principally provide
investors with information about the
annuity contract and how it operates. In
addition, these items provide basic
information about the insurance
company or the securities offering itself,
consistent with some of the disclosures
provided currently in Forms S–1 or S–
3.
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(a) General Instructions
RILAs offerings registered on Form N–
4 will need to comply with the general
instructions of that form. These general
instructions are structured to include
four parts: (A) Definitions; 233 (B) Filing
and Use of Form; (C) Preparation of the
Registration Statement; and (D)
Incorporation by Reference.234 This
would result in a number of substantive
outcomes for those issuers.235
Specifically:
232 As noted above, some of these items would be
amended to account for changes in defined terms
and to use gender-neutral terminology. See supra
section II.B.7.
233 See supra section II.B.7(b) (discussing
proposed amendments to the definitions used in the
form).
234 The items described in this section can
generally be found in proposed General Instruction
C of Form N–4. See also supra section II.B. [Other
Amendments] (discussing definitional updates).
EDGAR permits registrants to file required financial
statements separately under a specific submission
type. Thus, registrants may incorporate by reference
into their post-effective amendment and other
filings the financial statements filed under this
EDGAR submission type. See VASP Adopting
Release at n.592.
235 We are also proposing to correct a
typographical error in General Instruction B.2(b)
regarding items that can be omitted for registration
statements or amendments filed only under the
Investment Company Act. Currently, the
instructions state that issuers can omit from Part C
Items 26(c), (k), (l), and (m), but those items do not
exist in the form and Item 26 (Financial Statements)
is in the SAI, not Part C. This is supposed to refer
to Item 27 (Exhibits), which do exist, are in Part C,
and are more Securities Act in nature. This
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• Plain English. The instructions
provide a number of points to issuers on
how best to promote effective
communication between issuers and
prospective investors. For example,
issuers are directed to use document
design techniques that promote effective
communication and to respond to the
items in the form as simply and directly
as reasonably possible and avoid the use
of formulas as the primary means of
communicating certain terms or features
of a contract.236 Issuers are also
encouraged to use, as appropriate, Q&A
formats beyond the KIT, tables, and
other presentation methods in the form
generally.237
• Organization. Issuers are directed to
organize information in the prospectus
and SAI to make it easy for investors to
understand, with some limitations on
the order of presentation.238
• Other Information. Issuers are
permitted to include (other than in
Items 2 or 3) information in the
prospectus or SAI not otherwise
required as long as the additional
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.239 In
similar circumstances, issuers may
include sales literature in the
prospectus.240
• Terminology. Issuers are required to
define special terms used in the
prospectus in any presentation that
clearly conveys meaning to investors.241
Only these special terms must be
defined or listed in any glossary or list
of definitions elected to be used.242
Registrants are not required to use the
same terminology as that used in the
form as long as the registrant clearly
conveys the meaning of, or provides
instruction would be updated to refer instead to
Item 27 as a result.
236 See proposed General Instructions C.1.(a) and
(c) to Form N–4. This specific text is not intended
to discourage use of a formula, but rather, to clarify
that if a formula is used in connection with a term
or feature, investors are first provided appropriate
plain English disclosure regarding the operation of
the term or feature. See VASP Adopting Release at
n.591.
237 See proposed General Instruction C.3.(c) to
Form N–4. As discussed above, we are proposing
to require Q&A formatted responses to the Key
Information Table. See supra section II.B.2.
238 See proposed General Instruction C.3.(b) to
Form N–4.
239 See proposed General Instruction C.3.(b) to
Form N–4.
240 See proposed General Instruction C.3.(g) to
Form N–4.
241 See proposed General Instruction C.3.(d) to
Form N–4.
242 Registrants are also permitted to define
terminology only used in one section in such
section.
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comparable information as, the form’s
terminology.
• Multiple Contracts. Issuers are
permitted to describe multiple contracts
that are essentially identical in a single
prospectus, and the instructions discuss
the presentation of information
regarding multiple contracts in these
circumstances.243 Further, issuers are
permitted to combine multiple
prospectuses into a single registration
statement where the contracts are
substantially similar.
• Timing. The instructions state that,
consistent with Securities Act rules, in
most circumstances prospectuses and
SAIs used after the effective date of the
registration statement shall be dated
approximately as of such effective date,
but that a revised or amended
prospectus or SAI used thereafter need
only bear the approximate date of its
issuance. Each supplement to the
prospectus or SAI shall be dated
separately the approximate date of its
first use.244
• Provision of Websites. Any websites
included in an electronic version of the
prospectus must include active
hyperlinks or other means of facilitating
access that leads directly to the relevant
website address, though this
requirement does not apply to a
prospectus filed on EDGAR.245
• Incorporation by Reference. In
addition to the general requirements of
the Commission rules on incorporation
by reference, issuers are not permitted
to incorporate by reference information
required to be in the prospectus unless
otherwise permitted by the form, but
may incorporate by reference the SAI
into the prospectus without delivering
the SAI and incorporate by reference
information required to be included in
the SAI or Part C.246
Collectively, these general
instructions are designed to require
clear disclosure to investors about the
variable annuity contracts currently
registered on the form and to make clear
how issuers must prepare and file their
registration statements. Requiring RILA
issuers to prepare their registration
statements in accordance with these
instructions would likewise facilitate
the provision of clear disclosure to
243 See proposed General Instruction C.3.(e) to
Form N–4. The instructions state that ‘‘essentially
identical’’ is a facts and circumstances-based
determination but that contracts that differ in
providing optional benefits or being group or
individual contracts are not essentially identical
whereas variances due only to State regulatory
requirements would be.
244 See proposed General Instruction C.3.(f) to
Form N–4; 17 CFR 230.423.
245 See proposed General Instruction C.3.(i) to
Form N–4.
246 Proposed General Instruction D of Form N–4.
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investors and provide clear direction to
these issuers on how to prepare and file
their registration statements. Further,
applying these requirements to RILAs as
proposed would help ensure the
comparability of different annuity
offerings, for example, by ensuring that
the filings are held to the same plain
English, multiple contract disclosure,
timing, website, and incorporation by
reference standards.
(b) Contract Disclosures
The table below summarizes
disclosures in the existing Form N–4
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about the annuity contract, how it
operates, and how it is serviced by the
insurance company, that we propose
making applicable to RILA issuers
without substantive change.
TABLE 4—CONTRACT DISCLOSURES
Item
Description
Prospectus (Part A)
General Description of the Contracts (Item 8) ...
Annuity Period (Item 9) .......................................
Benefits Available Under the Contract (Item 10)
Purchases and Contract Value (Item 11) ...........
Surrenders and Withdrawals (Item 12) ..............
Loans (Item 13) ..................................................
Taxes (Item 14) ..................................................
A general description of the contract, including disclosure of the parties’ material rights under
the contract; relevant contract provisions and limitations; contract obligations funded by the
insurance company’s general account; class of purchasers, and material changes that can
be made to the contract by the insurance company.
A description of the annuity options available, including a discussion of material factors that
determine the benefits; annuity commencement date; frequency and duration of annuity payments; the effect of assumed investment return; any minimum amount necessary for an annuity option and the consequences of an insufficient amount; rights to change annuity options; and, if applicable, a disclosure that the investor will be unable to withdraw any contract value amounts after the annuity commencement date.
A tabular summary overview of the benefits available under the contract (e.g., standard or optional death benefits, standard or optional living benefits, etc.), briefly discussing, among
other things: whether the benefit is optional; current and maximum fees associated with the
benefit; how the benefit amount is calculated; and any associated restrictions or limitations.
A description of the procedures for purchasing a contract, including concise explanations of
minimum initial and subsequent purchase payment required, when these payments are
credited, and how they are allocated to investment options. Also an identification of the principal underwriters (other than the insurance company) of the contracts and other information
about that underwriter such as any affiliations.
A description of how surrenders and withdrawals can be made from a contract, including limits
on the ability to surrender, how proceeds are calculated, and when surrenders and withdrawals are payable. Issuers must also describe potential effect of surrenders and withdrawals, including how they could affect a contract’s value or benefits, and whether any
charges or contract adjustments will apply. Issuers should also describe any involuntary redemption provisions and any revocation rights, disclosing the calculation methodology and
any associated limitations to investment options.
A description of the loan provisions of the contract, including, for example, loan availability and
related restrictions, interest mechanics, the effect of a loan on the contract’s value and
death benefit, other effects that a loan could have on a contract; and loan procedures.
A description of the material tax consequences to the investor and beneficiary of buying, holding, exchanging, or exercising rights under the contract. The description should include a
discussion of the taxation of annuity payments, death benefit proceeds, periodic and nonperiodic withdrawals, loans, and any other distribution that may be received under the contact, as well as the tax benefits accorded the contract and other material tax consequences.
Issuers must identify the types of qualified plans for which the contracts are intended to be
used and describe any effect of taxation on the determination of contract values.
Statement of Additional Information (Part B)
Cover Page and Table of Contents (Item 18) ....
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Non-principal Risks of Investing in the Contract
(Item 20).
Services (Item 21) ..............................................
Annuity Payments (Item 25) ...............................
A statement of the name of the insurance company, the contract, and related class or classes.
This item also requires a table of contents, a statement that the SAI is not a prospectus, information about how to obtain the prospectus, and a discussion of information the SAI incorporates by reference.
A summary of the non-principal risks of purchasing a contract not otherwise disclosed in the
prospectus.
Information on services provided to the registrant in connection with the contract. If not disclosed elsewhere, this requires a summary of the substantive provisions of certain management-related service contracts. The registrant must also provide the name and address of its
independent public accountant. Where affiliates of the insurance company act as agents for
the registrant in connection with the contract, issuers are required to provide specific information about the services performed and remuneration paid for the services. Issuers must
also disclose if the insurance company is the principal underwriter of the contract.
A description of the method for determining the amount of annuity payments if not described in
the prospectus and how any change in the amount of a payment after the first payment is
determined.
Other Information (Part C)
Management Services (Item 33) ........................
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A summary of the substantive provisions of any management-related service contracts not discussed in Parts A or B, including the last three years’ payment history.
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These requirements apply to existing
Form N–4 issuers because these
disclosures provide investors in these
products with a concise presentation of
material information about the annuity
contract they would be purchasing, as
well as other information that provides
necessary context about the contracts
such as management service
disclosures.247 Because disclosure of
this information is equally fundamental
to the ability of investors to make
informed investment decisions about
RILA contracts, we are proposing to
apply these requirements to RILAs. For
example, existing Form N–4 issuers are
required to summarize standard and
optional benefits available to the
investor under the contract because
these benefits are primary features of
variable contracts and are also often key
differentiators between competing
products.248 Insurance companies also
offer these benefits in connection with
RILAs.
(c) Issuer and Offering Disclosures
In addition to disclosures about the
contract, the proposed amendments to
Form N–4 would require that RILA
issuers make certain disclosures relating
to the issuer and offering consistent
with the form’s current requirements.
The table below summarizes these
items, omitting items in Form N–4 that,
by their terms, would not apply to
RILAs.
TABLE 5—ISSUER AND OFFERING DISCLOSURES
Item
Similar form S–1
disclosure
Description
Prospectus (Part A)
Legal Proceedings (Item 15) ...........
A description of material pending legal proceedings to which the registered separate account, the principal underwriter, or the insurance company is a party, including similar information regarding
any proceedings instituted or known to be contemplated by a governmental authority.
Item 11(c) (legal proceedings).
Statement of Additional Information (Part B)
General Information and History
(Item 19).
Underwriters (Item 23) ....................
Basic information regarding the background and organization of the
insurance company, including the jurisdiction in which it is organized and a description of its business.
Identification of the principal underwriters (other than the insurance
company), and for affiliated underwriters, a description of the nature of the affiliation. For each principal underwriter distributing the
registrants’ contracts, the insurance company must provide information about the offering and related commissions. If the registrant
made payments to an underwriter of or dealer in the contracts during its last fiscal year over a threshold amount, the registrant must
disclose certain information about those payments.
Item 11(a) (description of business).
Item 8 (plan of distribution).
Other Information (Part C)
Directors and Officers of the Insurance Company (Item 28).
Persons Controlled by or Under
Common Control with the Insurance Company or the Registrant
(Item 29).
Indemnification (Item 30) ................
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Principal Underwriters (Item 31) .....
A statement of the name, principal business address, position, and
office held for each director or officer of the insurance company.
Disclosure of persons directly or indirectly controlled by or under
common control with the registrant or the sponsoring insurance
company.
Item 11(k) (directors and executive
officers).
Item 11(k) (directors and executive
officers).
Information about the effect of relevant indemnification agreements,
arrangements, or statutory provisions through which underwriters
or affiliates are insured or indemnified against any liability incurred
in their official capacity.
A statement of investment companies, other than any registered separate account related to the filing, each principal underwriter is also
acting as a principal underwriter. More detailed information about
principal underwriters identified in Item 23, such as recent information about commissions and other compensation received from the
registrant by each principal underwriter.
Item 14 (indemnification of directors and officers).
Item 8 (plan of distribution).
Information about the issuer and the
offering process are relevant when
purchasing an annuity contract,
including in the context of a RILA.249
These items, which largely correspond
to items currently required to be
disclosed by RILAs on Forms S–1 and
S–3 as detailed in the table above,
provide the appropriate amount of
information about the issuing insurance
company and the offering of securities
in a way tailored to annuity contract
investors. For example, because an
investor’s rights under RILAs are
dependent on the insurance company’s
claim-paying ability, RILA purchasers
also share an interest in disclosures of
material pending legal proceedings
involving the insurance company or
related parties. On the other hand,
where Form S–1 disclosures have less
relevance to RILAs, we have not
included those disclosures in proposed
Form N–4.
247 See Registration Forms for Insurance Company
Separate Accounts That Offer Variable Annuity
Contracts, Investment Company Act Release No.
14575 (June 24, 1985) [50 FR 26145 (June 25, 1985)]
(‘‘Forms N–3 and N–4 Adopting Release’’).
248 See VASP Adopting Release at n.26 and
accompanying text.
249 See Forms N–3 and N–4 Adopting Release.
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(d) Request for Comment
We request comment on our proposed
application of these requirements and
disclosures to RILAs.
89. Is it appropriate to require RILA
issuers to meet these general
instructions of the form? Should we
tailor any particular provision to
account for the differences between
RILAs and the variable annuities that
currently use the form? For example, is
there any reason to treat RILAs different
for purposes of the ‘‘essentially
identical’’ test?
90. The investor testing results
suggested that investors had significant
difficulty in understanding certain
terminology used in connection with
RILAs, in particular the words ‘‘term’’
and ‘‘investment term.’’ 250 Should we,
as a result, change any instruction to aid
in investor understanding? For example,
the form currently provides that the
prospectus disclosure requirements in
Form N–4 are intended to elicit
information for an average or typical
investor who may not be sophisticated
in legal or financial matters.251 In light
of this feedback in investor testing,
should we amend this instruction or
otherwise provide that insurance
companies should not use ‘‘term,’’
‘‘investment term,’’ or other terminology
that investors found confusing?
Regardless of whether insurance
companies use ‘‘investment term’’ or
different terminology, in the glossary
definition of the ‘‘investment term’’ (or
another term to describe that concept)
should insurance companies be required
to specifically disclose to investors that
the ‘‘investment term’’ is not the same
as the life of the contract? As another
example, should we require, rather than
permit, the use of a glossary or list of
definitions for the entirety of the form
so that investors have one place to look
to understand a particular term? Should
we clarify what terms are ‘‘special
terms’’? What terminology in particular
should be considered a special term in
the RILA context?
91. Should we define certain key
terms that insurance companies must
use in their registration statement to
help to mitigate investor confusion and
help investors compare one RILA to
another? Which key terms should we
address and how should they be
defined?
92. Is it appropriate, as proposed, to
apply these exiting Form N–4 disclosure
requirements to RILA issuers? Are any
of these disclosure items inappropriate
for including in a RILA registration?
250 See OIAD Report at Section 7, Conclusions,
Summary of Findings.
251 See Instruction C.1.b of Form N–4.
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93. Are there other details about the
RILA contract, not otherwise addressed
above, that we should require be
disclosed on amended Form N–4? Are
there details regarding the issuer or
offering that we should require?
94. Certain of these disclosures are
repeated throughout the registration
statement. For example, similar
disclosures regarding principal
underwriters are contained in the
prospectus (Item 11) and SAI (Item 23).
Should we limit these items to a
particular location in the registration
statement?
95. Under the proposal, certain
information that RILA issuers currently
provide on Forms S–1 and S–3 would
still be required by Form N–4, but
would be placed in the SAI rather than
the prospectus. Should any of the
information we propose to require in the
SAI instead be provided in the
prospectus?
96. Are these items properly ordered?
Should we move any of these items to
greater prominence or move items from
the prospectus, SAI, or Part C to another
part of the registration statement?
9. Inline XBRL
We are proposing to require RILA
issuers to tag certain of the information
they would disclose in their
prospectuses and SAIs in a structured,
machine-readable data language.
Specifically, we are proposing to require
RILA issuers to tag the required
information in Inline XBRL in
accordance with Rule 405 of Regulation
S–T (17 CFR 232.405) and the EDGAR
Filer Manual.252 The proposed
requirements for RILA issuers would
include tagging of the overview and
more in-depth descriptions of indexlinked options and contract adjustments
that RILA issuers would have to include
in their prospectuses under the
proposal, the proposed disclosure of
census-type information regarding
contracts with index-linked options,
and information disclosed about
changes in and disagreements with
252 This proposed tagging requirements would be
implemented by amending General Instruction
C.3(h) of Form N–4, and by revising rule 405(b) of
Regulation S–T to include the proposed RILAspecific disclosures. Pursuant to rule 301 of
Regulation S–T, the EDGAR Filer Manual is
incorporated by reference into the Commission’s
rules. In conjunction with the EDGAR Filer Manual,
Regulation S–T governs the electronic submission
of documents filed with the Commission. Rule 405
of Regulation S–T specifically governs the scope
and manner of disclosure tagging requirements for
operating companies and investment companies,
including the requirement in rule 405(a)(3) to use
Inline XBRL as the specific structured data language
to use for tagging the disclosures.
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71129
accountants.253 RILA issuers, in
addition to variable contracts issuers
whose contracts offer fixed options,
would have to tag the proposed
descriptions of fixed options available
under the contract.254 Form N–4 filers
also would have to tag the proposed
new disclosures indicating that the
insurance company is relying on the
exemption provided by rule 12h–7, and
variable contract issuers would have to
tag the proposed new statement relating
to the risks of variable options.255
In addition, RILA issuers would have
to tag those prospectus disclosures that
Form N–4 currently requires to be
tagged.256 These include the following
disclosure items: the Key Information
Table, Fee Table, Principal Risks of
Investing in the Contract, Other Benefits
Available Under the Contract, and
Investment Options Available Under the
Contract in the statutory prospectus.
The proposed Inline XBRL
requirements, like the current Inline
XBRL requirements for Form N–4
issuers, would only apply to contracts
being sold to new investors. The result
of this proposed approach would be that
prospectus disclosure for contracts that
are no longer being sold to new
investors would not need to be tagged,
as we believe tagging this disclosure
would have less utility for current
investors and other market
participants.257 Issuers of variable
annuities registered on Form N–4 are
currently required to tag certain
registration statement disclosure items
using Inline XBRL.258 These items are
those that would be most suited to being
tagged in a structured format and be of
greatest utility for investors and other
data users that seek structured data to
analyze and compare RILA contracts.
This rationale is the same as that which
the Commission articulated in originally
adopting these tagging requirements in
253 See proposed General Instruction C.3(h) of
Form N–4; see also proposed Items 2(b)(2), 2(d),
6(d), 7(e), 26(c), and 31A.
254 See proposed General Instruction C.3(h) of
Form N–4; see also proposed Item 6(e).
255 See proposed General Instruction C.3(h) of
Form N–4; see also proposed Items 6(a)
(instruction) and 6(c)(1).
256 See rule 405(b) of Regulation S–T; proposed
General Instruction C.3(h) of Form N–4; see also
proposed Items 3, 4, 5, 10, and 17.
257 See VASP Adopting Release at paragraph
accompanying n.904.
258 See General Instruction C.3(h) of current Form
N–4; see also Interactive Data to Improve Financial
Reporting, Release No. 33–9002 (Jan. 30, 2009) [74
FR 6776], as corrected by Release No. 33–9002A
(Apr. 1, 2009) [74 FR 15666] (requiring operating
companies to submit financial statements
accompanying their registration statements and
periodic and current reports in XBRL).
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the context of variable annuity
disclosure.259
In addition to these existing items,
requiring Inline XBRL tagging of the
new disclosure requirements we are
proposing to include in Form N–4
would benefit investors, other market
participants, and the Commission by
making the disclosures more readily
available and easily accessible for
aggregation, comparison, filtering, and
other analysis.260 We chose these
particular items in the form to
structure—including those that issuers
of variable annuities would newly have
to structure—because we believe that
they are the most salient to investors
and benefit most from being structured.
We believe that tagging this disclosure,
along with the requirement for RILA
issuers to tag the same other disclosure
items that are currently tagged, would
result in information being tagged that
would best permit investors and other
data users to analyze and compare
RILAs. For example, this would enable
automated extraction and analysis of
descriptions of index-linked options
available under the contract,
information regarding the features of
each currently offered index-linked
option, and information regarding
contract adjustments. This would allow
investors and other market participants
more efficiently to perform large-scale
analysis and comparison across RILAs
(including the index-linked options that
different RILAs offer) and time periods.
Similarly, the requirement to tag
information about fixed options will
permit the same type of analysis with
respect to these investment options—
including comparing fixed options
across contracts, as well as index-linked
options, variable options, and fixed
options offered under the same contract.
As another example, census-type
information about variable annuity
contracts, which is parallel to the SAI
disclosure we propose to require for
contracts with index-linked options, is
currently reported in structured data
format.261 Requiring census-type
information about contracts with indexlinked options to be tagged in Inline
XBRL would help the Commission and
staff identify trends in insurance
companies’ offerings of the contracts,
similar to the tools the Commission and
staff currently have to identify trends in
259 See
VASP Adopting Release at section II.E.
supra footnotes 253–255. These primarily
include the proposed new disclosure items that are
specific to RILAs, as opposed to extant Form N–4
disclosure items to which we are proposing
incremental amendments to address RILAs along
with variable annuities.
261 See supra section II.B.I.A.6; see also Item F.14
of Form N–CEN.
260 See
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the offering of variable annuity
contracts. An Inline XBRL requirement
also would facilitate other analytical
benefits, such as more easily extracting
and searching disclosures about
annuities, and automatically comparing
these disclosures against prior periods.
We are proposing to require RILA
issuers to submit Interactive Data Files
as follows, consistent with the approach
for issuers of variable annuities
registered on Form N–4:
• For most post-effective
amendments, Interactive Data Files
would have to be filed either
concurrently with the filing, or in a
subsequent amendment that is filed on
or before the date that the post-effective
amendment that contains the related
information becomes effective; 262
• For initial registration statements
(and post-effective amendments other
than as described in the bullet
immediately above), Interactive Data
Files would have to be filed in a
subsequent amendment on or before the
date the registration statement or posteffective amendment that contains the
related information becomes
effective; 263 and
• For any form of prospectus filed
pursuant to rule 497(c) or (e), Interactive
Data Files would have to be submitted
concurrently with the filing.264
We anticipate that this approach
would facilitate the timely availability
of important information in a structured
format for investors, investment
professionals, and other data users
yielding substantial benefits. For data
aggregators responding to investor
demand for the data, the availability of
the required disclosures in the Inline
XBRL format concurrent with filing or
before the date of effectiveness would
allow them to quickly process and share
the data and related analysis with
investors.
Like other issuers, RILA issuers could
request temporary and continuing
hardship exemptions for the inability to
timely file electronically the Interactive
Data File.265
Request for Comments
We request comment generally on the
proposed amendments to require the
262 See proposed General Instruction C.3(h)(i)(B)
of Form N–4. This instruction relates to posteffective amendments filed pursuant to paragraph
(b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
263 See proposed General Instruction C.3(h)(i)(A)
of Form N–4. This instruction relates to initial
registration statements and post-effective
amendments other than those filed pursuant to
paragraph (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
264 See proposed General Instruction C.3(h)(ii) of
Form N–4.
265 See rule 201 Regulation S–T (temporary
hardship exemption) and rule 202 of Regulation S–
T (continuing hardship exemption).
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use of Inline XBRL, and specifically on
the following issues:
97. Should we adopt rules that make
the submission of structured data in the
Inline XBRL format mandatory for RILA
issuers?
98. Is it appropriate that RILA issuers
would have to tag the same disclosure
items that variable annuity issuers tag?
Why or why not? If RILA issuers were
to be required to tag other disclosure
items that are also applicable to variable
annuities, should variable annuity
issuers also be required to tag these
same items?
99. Is it appropriate that all Form N–
4 filers would have to tag certain of the
new disclosure items that we are
proposing to add to Form N–4, in
particular, proposed Items 2(b)(2), 2(d),
6(a) (instruction), 6(c)(1), 6(d), 6(e), 7(e),
26(c), and 31A of Form N–4? Should
insurance companies not be required to
tag any of these items, and if so, why
not? Are there other proposed
disclosure items that we should also
require insurance companies to tag? If
so, why?
100. Is it appropriate that the
approach for RILA issuers to submit
Interactive Data Files be consistent with
the current approach for issuers of
variable annuities registered on Form
N–4, as proposed? If not, what
alternative approach would be more
appropriate and why? Is it appropriate
that, like variable annuities registered
on Form N–4, the proposed Inline XBRL
requirements for RILA issuers would
apply only to contracts being sold to
new investors? Do commenters agree
that tagging the prospectus disclosure
would have less utility for current
investors and other market participants?
101. Are any other amendments
necessary or appropriate to require the
submission of the proposed required
information in Inline XBRL? If so, what
are they?
C. Option To Use a Summary
Prospectus
We are proposing to amend rule 498A
to permit RILA issuers, as well as
issuers of ‘‘combination contracts’’
offering a combination of index-linked
options and variable options, to use a
summary prospectus to satisfy statutory
prospectus delivery obligations.266
266 Section 5(b)(2) of the Securities Act makes it
unlawful to carry or cause to be carried a security
for purposes of sale or for delivery after sale ‘‘unless
accompanied or preceded’’ by a prospectus that
meets the requirements of section 10(a) of the Act.
See section 10(a) of the Securities Act (generally
requiring a prospectus relating to a security to
contain the information contained in the
registration statement). For purposes of this release,
a prospectus meeting the requirements of a section
10(a) prospectus is referred to as a ‘‘statutory
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Investors would continue to have access
to the RILA statutory prospectus and
other information about the RILA
contract online, with paper or electronic
copies of this information upon
request.267 This proposed approach
would provide parity between RILA
issuers and issuers of variable annuities
registered on Form N–4, which are
permitted to use summary prospectuses
to satisfy their prospectus delivery
obligations.
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RILA Summary Prospectus Overview
The current summary prospectus rule
for variable contracts uses a layered
disclosure approach designed to provide
investors directly with key information
relating to the contract’s terms, benefits,
and risks in a concise and readerfriendly presentation, with more
detailed information available
elsewhere. We anticipate that the
summary prospectus framework would
improve investor understanding of RILA
contracts, as the Commission similarly
expressed when it adopted the summary
prospectus rule for variable contracts.268
This proposed approach for RILA
contracts builds on the Commission’s
decades of experience with layered
disclosure and rules permitting the use
of summary prospectuses.269 The
proposal also recognizes investors’
expressed preferences for concise and
engaging disclosure of key information.
Accordingly, we believe the proposed
approach is consistent with the RILA
prospectus.’’ For purposes of this section, we refer
to RILA contracts and combination contracts
together as ‘‘RILA contracts.’’
267 To further effectuate the changes being
proposed, we propose to exclude RILA offerings
from the provisions of rule 172, which provides that
a final prospectus will be deemed to precede or
accompany a security for sale for purposes of
Securities Act section 5(b)(2) as long as the final
prospectus meeting the requirements of Securities
Act section 10(a) is filed or the issuer will make a
good faith and reasonable effort to file it with the
Commission as part of the registration statement
within the required rule 424 prospectus filing
timeframe. Consistent with registered investment
companies and business development companies,
RILA offerings would be subject to a separate
framework governing communications with
investors under the proposal. See supra section II.E;
see also Offering Reform Release at section VI.B.1.b.
268 See VASP Adopting Release at n.21 and
accompanying text.
269 See id.; see also Enhanced Disclosure and New
Prospectus Delivery Option for Registered OpenEnd Management Investment Companies,
Investment Company Act Release No. 28584 (Jan.
13, 2009) [74 FR 4545 (Jan. 26, 2009)] (‘‘2009
Summary Prospectus Adopting Release’’); Tailored
Shareholder Reports for Mutual Funds and
Exchange-Traded Funds; Fee Information in
Investment Company Advertisements, Investment
Company Act Release No. 34731 (Oct. 26, 2022) [87
FR 72758 (Nov. 25, 2022)] (‘‘Tailored Shareholder
Reports Adopting Release’’) (adopting rules
incorporating a layered disclosure approach to
open-end funds’ annual and semi-annual reports to
shareholders).
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Act’s mandate of designing disclosure
requirements ‘‘with the goal of ensuring
that key information is conveyed in
terms that a purchaser is able to
understand.’’ 270
The proposed amendments to rule
498A would broaden the scope of the
rule to address RILA contracts.271 Under
the proposed amendments, the rule’s
conditions for relying on the rule to
satisfy prospectus delivery obligations
would be the same for RILA contracts as
for variable contracts.272 These
conditions include the requirements to
send or give a summary prospectus to
an investor no later than the time of the
‘‘carrying or delivery’’ of the contract
security, as well as: (1) requirements for
the contents that must be included in a
summary prospectus, (2) limitations on
binding a summary prospectus with
other materials, and (3) requirements
that the summary prospectus, statutory
prospectus, and contract statement of
additional information must be publicly
accessible, free of charge, on a website
in the manner that the rule specifies.
The proposed amendments to rule
498A would involve the use of two
distinct types of summary prospectuses
for RILA contracts, employing the same
270 See VASP Adopting Release at n.20 and
accompanying text; Tailored Shareholder Reports
Adopting Release at nn.10, 11, and 29 and
accompanying text; see also supra discussion
following footnote 7.
271 To facilitate this change, and to make the
terminology used in rule 498A more consistent with
certain terms used in the proposed amendments to
Form N–4, we are also proposing a number of
amendments to the rule’s definitions. Specifically,
we would (1) amend the definitions to ‘‘Class,’’
‘‘Contract,’’ Investment Option,’’ ‘‘Registrant,’’
‘‘Variable Annuity Contract,’’ and ‘‘Variable Life
Insurance Contract’’ to address RILA contracts, and/
or to make changes to these definitions that
correspond with amendments to certain definitions
in Form N–4 (either definitions of these same terms
in Form N–4, or definitions of other terms in Form
N–4 that would otherwise affect the way these
terms are defined in rule 498A); (2) add definitions
for ‘‘Fixed Option,’’ ‘‘Index-Linked Option,’’
‘‘Insurance Company,’’ ‘‘Registered Separate
Account,’’ ‘‘RILA Contract,’’ and ‘‘Variable Option’’
consistent with their counterparts in the proposed
Form N–4 amendments; and (3) deleting the
definition of ‘‘Depositor.’’ These changes are
necessary to communicate the provisions of the rule
that would be applicable to RILA and combination
contracts.
272 See proposed rule 498A(f). Rule 498A also
provides that a communication relating to an
offering registered on Form N–4 that a person sends
or gives after the effective date of the registration
statement (other than a prospectus that Section 10
of the Securities Act permits or requires) will not
be deemed a prospectus under section 2(a)(10) of
the Securities Act, under certain conditions. The
proposed amendments to rule 498A would extend
this provision to RILA contracts. See rule 498A(g).
Under the proposed amendments, the rule 498A
provision addressing information that may be
incorporated by reference into a summary
prospectus also would apply the same to RILAs as
it does to other contracts currently within the scope
of the rule. See rule 498A(d).
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71131
approach the rule currently uses for
variable contracts. An ‘‘initial summary
prospectus,’’ covering contracts offered
to new investors, would include certain
key information about the contract’s
most salient features, benefits, and risks,
presented in plain English in a
standardized order. The rule
amendments would also require
‘‘updating summary prospectuses’’ to be
provided to existing investors in RILA
contracts as a condition to relying on
the rule. The updating summary
prospectus would include a brief
description of certain changes to the
contract that occurred during the
previous year, as well as a subset of the
information required to appear in the
initial summary prospectus. Certain key
information about the index-linked
options that the contract offers would be
provided in both the initial summary
prospectus and updating summary
prospectus.273
As under current rule 498A for
variable contracts, the proposed use of
summary prospectuses for RILA
contracts would be voluntary. This
would be appropriate to provide RILA
issuers sufficient time to transition to a
summary prospectus regime, as well as
in recognition of the fact that there
could be different relative benefits of
using a summary prospectus for certain
RILA issuers and investors in these
contracts.274 Similar considerations
informed the Commission’s decision to
adopt a voluntary summary prospectus
regime for variable contracts.275
Initial Summary Prospectus
As under the current rule 498A, an
initial summary prospectus for a RILA
273 This proposed approach is consistent with the
approach for information about variable options in
variable contracts’ summary prospectuses, in which
certain key information about the portfolio
companies offered as variable options appears in
both the initial summary prospectus and updating
summary prospectus. See proposed rule
498A(b)(5)(ix); proposed rule 498A(c)(6)(iv).
274 The Commission similarly discussed the
relative benefits to variable contract issuers of using
a summary prospectus, based on the types of
products that these issuers offer and the length of
their current prospectuses, as well as the benefit of
more concise disclosure to investors, in adopting
rule 498A. See, e.g., VASP Adopting Release at
section IV.E.1 (discussion in the Economic Analysis
section of the release, addressing the Commission’s
consideration of mandating summary prospectuses
for variable contracts).
275 See VASP Adopting Release at discussion
accompanying nn.41–45; see also infra section
III.C.1.c (discussing that different issuers and
investors could expect to benefit differently from
this optional prospectus delivery regime, although
we expect a majority of RILA issuers to choose to
use summary prospectuses and that therefore the
majority of RILA investors will have the option to
use both summary prospectuses and statutory
prospectuses in their decision-making, in whatever
proportion investors think is best for their
preferences).
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contract may only describe a single
contract that the RILA issuer currently
offers for sale.276 An initial summary
prospectus may describe more than one
class of a currently offered contract.277
Aggregating disclosures for multiple
contracts, or currently offered and nolonger-offered features and options of a
single contract, can hinder investors
from distinguishing between contract
features and options that apply to them
and those that do not. As a result, an
initial summary prospectus could
simplify and consolidate lengthy and
complex disclosures. The content and
ordering of items is designed to
highlight aspects of a RILA contract that
may not be emphasized in marketing
materials and other disclosures.
Like other summary prospectuses that
rule 498A addresses, we are proposing
a standardized presentation for RILA
initial summary prospectuses to require
certain disclosure items that we believe
would be most relevant to investors to
appear at the beginning of the initial
summary prospectus, followed by
supplemental information.278 The
required presentation could also
facilitate comparisons of different RILA
contracts, as well as comparisons
between RILA contracts and variable
annuities. An initial summary
prospectus must contain the
information required by the rule, and
only that information, in the order
specified by the rule.279 The
information would be required to
appear in the same order, and under
relevant corresponding headings, as the
rule specifies.
The chart in Table 6 below outlines
the information that we propose to
require to appear in an initial summary
prospectus for a RILA contract. We
would not change these content
requirements, with the exception of the
ordering of the Overview of the Contract
and KIT disclosures, from the current
variable annuity requirements. The
Commission has historically viewed
these items as providing annuity
investors with key information relating
to a contract’s terms, benefits, and risks
in a concise and reader-friendly
presentation, and highlighting aspects of
the contract that may not be emphasized
in marketing materials and other
disclosures.280 We preliminarily believe
that this rationale is equally true in the
context of RILA disclosure. Further, as
discussed above, we propose that the
Overview of the Contract disclosures
(currently Item 3 of Form N–4, but
proposed to be re-numbered as Item 2)
should precede the KIT (currently Item
2 of Form N–4, but proposed to be renumbered as Item 3), due to the context
that the Overview section provides and
based upon our experience with the
form [and taking into account the results
of investor testing].281 This change
would be reflected in the requirements
of rule 498A.282 Otherwise, the same
order of disclosures would be provided
as under the current rule.
TABLE 6—OUTLINE OF THE INITIAL SUMMARY PROSPECTUS
Relevant paragraph in proposed
amendments to rule 498A
Item of
Form N–4
(as proposed
to be
amended)
Applicable to RILA
contracts?
Rule 498A(b)(2)(i) through (iv) ...
........................
✓ ...............................
✓
Rule 498A(b)(2)(v) .....................
Rule 498A(b)(3) .........................
........................
........................
✓ ...............................
✓ ...............................
✓
✓
Rule 498A(b)(4) .........................
........................
✓ ...............................
✓
Rule 498A(b)(5)(ii) .....................
2
✓ ...............................
(each paragraph of
Item 2, as applicable).
Important Information You Should Consider About the [Contract].
Rule 498A(b)(5)(i) ......................
3
Benefits Available Under the [Contract]
Buying the [Contract] .............................
Making Withdrawals: Accessing the
Money in Your [Contract].
Additional Information About Fees ........
Rule 498A(b)(5)(iv) ....................
Rule 498A(b)(5)(v) .....................
Rule 498A(b)(5)(vii) ....................
10(a)
11(a)
12(a)
✓ ...............................
(with line items applicable to RILA contracts, as specified
in instructions to
Item 3).
✓ ...............................
✓ ...............................
✓ ...............................
✓
(each paragraph of
Item 2 except
(b)(2) and (d),
which are generally
only applicable to
RILA contracts).
✓
(with line items applicable to variable
annuities, as specified in instructions
to Item 3).
✓
✓
✓
Rule 498A(b)(5)(viii) ...................
4
✓ ...............................
✓
Heading in initial summary prospectus
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Cover Page:
Identifying Information (front cover
page) 1.
Legends (front cover page) 2 .................
EDGAR Contract Identifier (back cover
page).
Table of Contents (optional) ..................
Content:
Overview of the [Contract] .....................
276 See
proposed rule 498A(b)(1).
definition of the term ‘‘class’’ in the
proposed amendments is the same as the definition
in the current rule (that is, as a class of a contract
that varies principally with respect to distributionrelated fees and expenses). Proposed rule 498A(a).
278 See VASP Adopting Release at paragraph
accompanying nn.58–59.
279 Proposed rule 498A(b)(5).
277 The
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280 See VASP Adopting Release at nn. 47–48 and
accompanying text. To the extent that these content
requirements are unchanged from the content
requirements for variable annuity summary
prospectuses, our rationale for these requirements
has not changed from the rationale that is discussed
throughout the sections of the VASP Adopting
Release that address each of the content items
discussed in Table 6 below. See VASP Adopting
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Applicable to variable
annuities registered
on Form N–4?
Release at section II.A.1.c. Further, we provide our
reasoning as to why these particular disclosures are
important to investors in the RILA context as a
general matter in section II.B, supra.
281 See supra section II.B.I.A.2.
282 Currently, rule 498A requires issuers to place
‘‘Important Information You Should Consider
About the [Contract]’’ disclosures before ‘‘Overview
of the [Contract] disclosures.’’
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71133
TABLE 6—OUTLINE OF THE INITIAL SUMMARY PROSPECTUS—Continued
Relevant paragraph in proposed
amendments to rule 498A
Heading in initial summary prospectus
Appendix: [Investment Options/Portfolio
Companies] Available Under the Contract.
Item of
Form N–4
(as proposed
to be
amended)
Rule 498A(b)(5)(ix) ....................
17
Applicable to RILA
contracts?
✓ ...............................
(Item 17(b) and
17(c), as applicable).
Applicable to variable
annuities registered
on Form N–4?
✓
(Item 17(a) and
17(c), as applicable).
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Notes to Table 6:
1 The beginning or front cover page of a RILA contract’s initial summary prospectus, like the initial summary prospectus of a variable annuity
registered on Form N–4, would need to include the following information: (1) the insurance company’s name; (2) the name of the contract, and
the class or classes if any, to which the initial summary prospectus relates; (3) a statement identifying the document as a ‘‘Summary Prospectus
for New Investors’’; and (4) the approximate date of the first use of the initial summary prospectus.
2 The required legends would be the same for RILA contracts and for variable annuities registered on Form N–4. These legends address the
purpose of the summary prospectus, the availability of the statutory prospectus and other information, information regarding the permitted cancellation period for the contract, and a statement that additional information about RILA contracts has been prepared by Commission staff and is
available at investor.gov. The initial summary prospectuses for RILA contracts as well as variable annuities also would have to include the additional statements that we are proposing to require on the cover page of the prospectus for all Form N–4 issuers. See supra section II.B.1; see
also proposed Item 1(a)(6)–(8) of Form N–4.
A RILA initial summary prospectus
would be permitted to include a table of
contents. A table of contents must show
the page number of the various sections
or subdivisions of the summary
prospectus, and immediately follow the
cover page in any initial summary
prospectus delivered electronically.
The topics of the contents included in
an initial summary prospectus—as well
as the required headings under which
these contents must appear—are the
same for a RILA contract summary
prospectus as for a summary prospectus
of a variable annuity registered on Form
N–4.283 Further, certain of these
required contents would vary in
substance to reflect the unique aspects
of RILA contracts as compared to
variable annuities. These are indicated
in Table 1 above and include:
• Disclosure provided under the
heading ‘‘Overview of the Contract’’
(Item 2 of Form N–4), where disclosure
for RILA contracts must include specific
information about index-linked options
currently offered under the contract, as
well as interim value adjustments or
market value adjustments that could
affect an investor’s contract value;
• Disclosure provided under the
heading ‘‘Important Information You
Should Consider About the Contract’’
(Item 3 of Form N–4), where certain
rows in the required table are specific to
RILA contracts as opposed to variable
annuities;
• Disclosure provided under the
heading ‘‘Additional Information About
Fees’’ (Item 4 of Form N–4), where the
requirements for fee information for
RILA contracts differ from the parallel
requirements for variable annuities
(reflecting that RILA contracts generally
do not entail annual contract expenses,
283 Proposed
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but there are other costs associated with
an investment in a RILA contract); and
• Disclosure under the heading
‘‘Appendix: Investment Options
Available Under the Contract’’ (Item 17
of Form N–4), where a RILA contract
would include a different summary
table for index-linked options offered
under the contract than the summary
table of variable options offered under a
variable annuity.
Each of these disclosure items, which
would also appear in a RILA statutory
prospectus, is discussed in more detail
in section II.B above.
Updating Summary Prospectus
As under current rule 498A, RILA
issuers would not send an updated
initial summary prospectus to investors
each year. Instead, any RILA issuers
would send an updating summary
prospectus, which would provide a brief
description of certain changes with
respect to the contract that occurred
within the prior year.284 This would
allow investors to focus their attention
on new or updated information relating
to the contract. Additionally, the
updating summary prospectus would
include certain of the items required in
the initial summary prospectus that are
most likely to entail contract changes
and where any such contract changes
are most likely to be important to
investors because they affect how
investors evaluate RILA contracts and
are relevant to investors when
considering additional investment
284 A RILA issuer, like a variable annuity issuer,
could only use an updating summary prospectus if
it uses an initial summary prospectus for each
currently offered contract described under the
contract statutory prospectus to which the updating
summary prospectus relates. Proposed rule
498A(c)(1). See also VASP Adopting Release at
n.209 and accompanying text.
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decisions or otherwise monitoring their
contracts. This is consistent with the
Commission’s approach for variable
annuity updating summary
prospectuses.285
Because the initial summary
prospectus is designed for someone
making an initial investment decision,
we believe that existing RILA investors
would benefit more from receiving a
shorter-form document including a brief
summary of the changes to the contract,
than from receiving the initial summary
prospectus year after year.286 This
approach also takes into account the
cost to maintain and update separate
initial summary prospectuses for
currently offered contracts and those no
longer offered.
Unlike an initial summary prospectus,
which could describe only a single
contract that a RILA issuer currently
offers for sale, an updating summary
prospectus for a RILA could describe
one or more contracts covered in the
statutory prospectus to which the
updating summary prospectus relates,
285 See VASP Adopting Release at section II.A.2.a.
As discussed above, the policy rationale for content
requirements that would be the same among
updating summary prospectuses for RILA contracts
and variable annuity contracts—as well as the
rationale for the location of these contents—is the
same as that which the Commission articulated in
adopting rule 498A. To the extent that these content
requirements are unchanged from the content
requirements for variable annuity summary
prospectuses, our rationale for these requirements
has not changed from the rationale that is discussed
throughout the sections of the VASP Adopting
Release that address each of the content items
discussed in Table 7 below. See VASP Adopting
Release at section II.A.2.c. Further, we provide our
reasoning as to why these particular disclosures are
important to investors in the RILA context as a
general matter in section II.B, supra.
286 The Commission discussed this rationale
when it initially adopted rule 498A. See VASP
Adopting Release at section II.A.2.a.
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as under current rule 498A.287 Similar
to the initial summary prospectus, an
updating summary prospectus could
also describe more than one class of a
contract.
Updating summary prospectuses for
RILA contracts, like initial summary
prospectuses, would include specific
disclosure items appearing in a
prescribed order, under relevant
corresponding headings.288 An updating
summary prospectus for a RILA contract
would have to contain the information
required by the rule, and only that
information, in the order specified by
the rule. The chart in Table 7 below
outlines the information that we
propose to require to appear in an
updating summary prospectus for a
RILA contract.
TABLE 7—OUTLINE OF THE UPDATING SUMMARY PROSPECTUS
Heading in updating summary prospectus
Cover Page:
Identifying Information (front cover
page) 1.
Legends (front cover page) 2 .................
EDGAR Contract Identifier (back cover
page).
Table of Contents (optional) 3 ................
Content:
Updated Information About Your Contract.
Important Information You Should Consider About the [Contract].
Appendix: [Investment Options/Portfolio
Companies] Available Under the Contract.
Relevant paragraph in proposed
amendments to Rule 498A
Item of
amended
Form N–4
Applicable to RILA
contracts?
Applicable to variable
annuities registered
on Form N–4?
Rule 498A(c)(3)(i) through (iv) ...
........................
✓ ...............................
✓
Rule 498A(c)(3)(v) .....................
Rule 498A(c)(4) ..........................
........................
........................
✓ ...............................
✓ ...............................
✓
✓
Rule 498A(c)(5) ..........................
........................
✓ ...............................
✓
Rule 498A(c)(6)(i) through (ii) ....
........................
✓ ...............................
✓
Rule 498A(c)(6)(iii) .....................
3
Rule 498A(c)(6)(iv) .....................
17
✓ ...............................
(with line items applicable to RILA contracts, as specified
in instructions to
Item 3).
✓ ...............................
(Item 17(b) and
17(c), as applicable).
✓
(with line items applicable to variable
annuities, as specified in instructions
to Item 3).
✓
(Item 17(a) and
17(c), as applicable).
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Notes to Table 7:
1 The beginning or front cover page of a RILA contract’s updating summary prospectus, like the updating summary prospectus of a variable
annuity registered on Form N–4, would need to include the following information: (1) the insurance company’s name; (2) the name of the contract(s), and the class or classes if any, to which the updating summary prospectus relates; (3) a statement identifying the document as an ‘‘Updating Summary Prospectus’’; and (4) the approximate date of the first use of the updating summary prospectus.
2 The required legends would be the same for RILA contracts and for variable annuities registered on Form N–4. These legends address the
purpose of the summary prospectus, the availability of the statutory prospectus and other information, and a statement that additional information
about RILA contracts has been prepared by the SEC staff and is available at investor.gov. The updating summary prospectuses for RILA contracts as well as variable annuities also would have to include the additional statements that we are proposing to require on the cover page of
the prospectus for all Form N–4 issuers. See supra section II.B.1; see also proposed Item 1(a)(6) through (8) of Form N–4.
3 The requirements for this optional table of contents would be the same for an updating summary prospectus as for an initial summary prospectus. See proposed rule 498A(b)(4); proposed rule 498A(c)(5).
The updating summary prospectus for
a RILA contract would be required to
include a concise description of certain
changes to the contract made after the
date of the most recent updating
summary prospectus or statutory
prospectus that was sent or given to
investors. These changes would appear
under the heading ‘‘Updated
Information About Your Contract,’’ with
a required legend following the
heading.289 The changes that the rule
would require a RILA issuer to describe
include those that relate to: (1) the
availability of investment options under
the contract; (2) the overview of the
contract; (3) the KIT; (4) certain
information about fees; (5) benefits
available under the contract; (6)
purchases and contract value; and (7)
surrenders and withdrawals. The
updating summary prospectus also
could include a concise description of
any other changes that the RILA issuer
wishes to disclose, provided they
occurred within the same time period as
the other changes the rule would require
the issuer to describe. In providing a
concise description of a contract-related
change in the updating summary
prospectus, RILA issuers would have to
provide enough detail to allow investors
to understand the change and how it
will affect them.290
The topics for which a change would
necessitate a description in the updating
summary prospectus would be the same
for RILA contracts as for variable
annuities registered on Form N–4. We
do not anticipate that disclosures
addressing these topics in a contract
statutory prospectus would change
frequently, and thus providing investors
with a notice and a brief description of
any changes that do occur may be more
informative than repeating all the
disclosures each year.291 Despite the
infrequency of changes, investors
should be notified of any changes to
these items given their importance to
the investor’s experience of investing in
a RILA contract.292
We are proposing to amend rule 498A
to specify that, in the context of a RILA
287 Proposed rule 498A(c)(2); see also VASP
Adopting Release at nn.342–343 and accompanying
paragraph.
288 Proposed rule 498A(c)(6).
289 The legend would be the same for RILA
contracts and variable annuities: ‘‘The information
in this Updating Summary Prospectus is a summary
of certain [Contract] features that have changed
since the Updating Summary Prospectus dated
[date]. This may not reflect all of the changes that
have occurred since you entered into your
[Contract].’’ Proposed rule 498A(c)(6)(i)(A).
290 Proposed rule 498A(c)(6)(i)(B); see also VASP
Adopting Release at paragraph accompanying
n.374.
291 See VASP Adopting Release at paragraph
following n.372.
292 See id. at paragraph accompanying nn.365–
369.
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contract updating summary prospectus,
the change of availability of investment
options includes a change to any of the
features of the index-linked options
disclosed in the table that Item 17(b) of
Form N–4 requires (that is, the table in
the appendix of investment options that
will appear in a RILA contract summary
prospectus).293 When the Commission
adopted rule 498A, it stated that a
change that has affected availability of
portfolio companies (or investment
options) includes changes in the
portfolio companies (or investment
options) offered under the contract or
available in connection with any
optional benefit.294 In the context of
index-linked options, any change to the
features of the index-linked options that
the required table would describe—that
is, the index, type of index, crediting
period, index crediting methodology,
limit on index loss, and/or guaranteed
minimum limit on index gain—would
meaningfully change the investor’s
experience of investing in a RILA
contract with the index-linked option
that investor had previously chosen. For
this reason, under the proposed
amendments a change to any of these
features would represent a change in the
availability of the investment options
that the RILA contract offers.
The topics of the additional contents
included in an updating summary
prospectus—as well as the required
headings under which these contents
must appear—would be the same for
RILA contracts and for variable
annuities registered on Form N–4.295
Certain of these required contents,
however, would vary in substance to
reflect the unique aspects of RILA
contracts as compared to variable
annuities. These are indicated in Table
2 above and include:
• Disclosure provided under the
heading ‘‘Important Information You
Should Consider About the Contract’’
(Item 3 of Form N–4), where certain
rows in the required table are specific to
RILA contracts as opposed to variable
annuities; and
• Disclosure under the heading
‘‘Appendix: Investment Options
Available Under the Contract’’ (Item 17
of Form N–4), where a RILA contract
would include a different summary
table for index-linked options offered
under the contract than the summary
table of variable options offered under a
variable annuity.
293 Proposed
rule 498A(c)(6)(i).
Adopting Release at n.361.
295 Proposed rule 498A(c)(6).
294 VASP
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Online Accessibility of Contract
Statutory Prospectus and Certain Other
Documents Relating to the Contract
Investors who receive a RILA contract
initial or updating summary prospectus
would have access to more detailed
information about the RILA contract,
either by reviewing the information
online, or by requesting the information
to be sent in paper or electronically. In
this respect, the proposed amendments
would include the same requirements
for RILA contracts as for variable
contracts. These requirements further
the layered disclosure framework that
rule 498A creates for variable contracts
and would, under the proposed
amendments, similarly create for RILA
contracts. Those insurance companies
that issue RILAs, to the extent that they
also issue variable annuity contracts
that use summary prospectuses under
rule 498A, therefore should be generally
familiar with the practice of making this
information available online and be able
to integrate it with existing processes for
variable annuities. Similar to what the
Commission expressed in the context of
variable annuity summary prospectuses,
permitting RILA investors to access the
contract statutory prospectus in several
ways (online and by physical or
electronic delivery) would maximize the
accessibility and usability of this
information and that investors have
historically indicated a preference for
both online and paper resources.296
Under the proposed amendments, a
RILA issuer relying on rule 498A (like
a variable annuity issuer relying on this
rule currently), would have to make the
contract’s current initial summary
prospectus, updating summary
prospectus, statutory prospectus, and
SAI (together, the ‘‘required online
contract documents’’) available
online.297 These required online
contract documents would be required
to be publicly accessible, free of charge,
at the website address that the cover
page of the summary prospectus
specifies, on or before the time that the
296 See VASP Adopting Release at n.417 and
accompanying text; and Office of Investor
Education and Advocacy of the U.S. Securities and
Exchange Commission, Study Regarding Financial
Literacy Among Investors (Aug. 2012), available at
https://www.sec.gov/news/studies/2012/917financial-literacy-study-part1.pdf, at iv, xix. These
proposed requirements are unchanged from the
requirements for variable annuity summary
prospectuses, and our rationale for these
requirements has not changed from the
Commission’s rationale that is discussed
throughout the sections of the VASP Adopting
Release that discuss online accessibility
requirements. See VASP Adopting Release at
sections II.A.5 and II.A.6.
297 For proposed requirements relating to the
required online contract documents, see generally
proposed rule 498A(h).
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person relying on the rule provides the
summary prospectus to investors.298
The website address on which the
required online contract documents
appear must be specific enough to lead
investors directly to the documents,
although the website could be a central
site with prominent links to each
document.299 The required online
contract documents would have to be
presented in a manner that is humanreadable and capable of being printed
on paper in human-readable format, and
persons accessing the documents must
be able to permanently retain electronic
versions of the documents. The
proposed amendments include
requirements for linking within the
electronic versions of the contract
statutory prospectus and SAI that are
available online, and also for linking
between electronic versions of contract
summary and statutory prospectuses
that are available online.
Both initial summary prospectuses
and updating summary prospectuses for
RILA contracts would, like variable
annuity summary prospectuses, be
required to define any ‘‘special terms’’
elected by the registrant, using any
presentation that clearly conveys their
meaning to investors.300 In RILA
contract summary prospectuses that are
available online, the proposed
amendments (like the current rule)
require that investors be able either to
view the definition of each special term
upon command, or to move directly
back and forth between each special
term and the corresponding entry in any
glossary or list of definitions the
summary prospectus includes.
Satisfying each of these requirements
regarding online accessibility of contract
statutory prospectuses and certain other
documents relating to the contract is a
condition for a RILA issuer to rely on
rule 498A to satisfy prospectus delivery
obligations.301 Failure to comply with
any of these conditions could result in
a violation of section 5(b)(2) unless the
contract statutory prospectus is
delivered by means other than reliance
on the rule. We recognize, however, that
there may be times when, due to events
298 A current version of each of the required
online contract documents would have to remain
available for at least 90 days following either: (1)
the time of the ‘‘carrying or delivery’’ of the contract
security if a person is relying on the rule to satisfy
its section 5(b)(2) prospectus delivery obligations;
or (2) if a person is relying on the rule to send
communications that will not be deemed to be
prospectuses, the time that the person sends or
gives the communication to investors. Proposed
rule 498A(h)(1).
299 Proposed rule 498A(b)(2)(v)(B).
300 Proposed rule 498A(e).
301 Proposed rule 498A(f)(4); proposed rule
498A(g)(4).
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beyond a person’s control, the person
may temporarily not be in compliance
with the rule’s conditions regarding the
availability of the required online
contract documents. The proposed
amendments, like the current rule,
includes a safe harbor provision
addressing temporary
noncompliance.302
Other Requirements for Summary
Prospectus and Other Contract
Documents
Like current rule 498A, the proposed
amendments to rule 498A include
additional requirements for RILA
contract summary prospectuses.303
These include:
• Certain requirements relating to the
delivery of paper or electronic copies of
the required online contract documents
upon request;
• The requirement that a contract
summary prospectus must be given
greater prominence than any materials
that accompany the contract summary
prospectus;
• Requirements that: (1) the required
online documents be presented in a
format that is convenient for reading
and printing, and (2) a person be able to
retain electronic versions of these
documents in a format that is
convenient for reading and printing; and
• The requirement for any website
address that is included in an electronic
version of the summary prospectus to be
an active hyperlink.
Failure to comply with these
additional requirements would not,
however, negate a person’s ability to
rely on the rule to satisfy prospectus
delivery obligations.
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Request for Comments
We request comment on the proposed
amendments to rule 498A, which would
permit RILA issuers to use a summary
prospectus to satisfy statutory
prospectus delivery obligations:
102. Is it appropriate to permit RILA
issuers, as well as issuers of
‘‘combination contracts,’’ to use a
summary prospectus to satisfy statutory
302 Proposed rule 498A(h)(4). This provides that
the conditions regarding the availability of the
required online contract documents will be deemed
to be met, even if the required online contract
documents are temporarily unavailable, provided
that the person has reasonable procedures in place
to ensure that those materials are available in the
required manner. A person relying on the rule to
satisfy prospectus delivery obligations is required to
take prompt action to ensure that those materials
become available in the manner required as soon as
practicable following the earlier of the time when
the person knows, or reasonably should have
known, that the documents were not available in
the manner required.
303 For these additional proposed requirements,
see generally proposed rule 498A(i).
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prospectus delivery obligations? Why or
why not?
103. Would the current rule 498A
framework, which provides for an initial
summary prospectus and an updating
summary prospectus, be appropriate for
RILA contracts?
104. Is it appropriate that the use of
summary prospectuses for RILA
contracts be voluntary, as proposed?
Should the use of summary
prospectuses for RILA contracts instead
be mandatory?
105. Should an initial summary
prospectus for a RILA contract only
describe a single contract that the RILA
issuer currently offers for sale, as
proposed? Instead should we permit an
initial summary prospectus to describe
more than one contract? Do commenters
recommend any other changes to the
proposed scope requirements for initial
summary prospectuses for RILA
contracts?
106. Is the proposed presentation for
RILA initial summary prospectuses
appropriate, or should we modify the
initial summary prospectus presentation
requirements in any way?
107. Are the proposed summary
prospectus cover page requirements
appropriate? For example, is it
appropriate that initial (and updating)
summary prospectuses for RILA
contracts as well as variable annuities
also would have to include the
additional statements that we are
proposing to require on the cover page
of the prospectus for all Form N–4
issuers?
108. Do the proposed RILA initial
summary prospectus content items
represent the disclosure that would best
highlight the key terms, benefits, and
risks of a RILA contract? Do the
proposed content items capture key
considerations that a typical contract
investor would find salient? Should an
initial summary prospectus include
additional information an investor
would need in order to make an
informed investment decision, and if so,
what would this information be? For
example, is there any information we
are proposing to include in Item 6 of
Form N–4 that we should include in the
summary prospectus? Alternatively,
should we exclude or modify any of the
proposed initial summary prospectus
disclosure requirements? To the extent
that commenters suggest changes that
would result in different content across
initial summary prospectuses for RILA
contracts versus variable annuities, why
would such changes be appropriate, and
how should we address these suggested
changes in the context of ‘‘combination
contracts’’ offering a combination of
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index-linked options and variable
options?
109. Under the proposal, would initial
summary prospectuses for RILA
contracts, on average, be longer, shorter,
or about the same length as variable
annuity initial summary prospectuses?
What would account for any meaningful
differences in average length?
110. Is the proposed updating
summary prospectus approach
appropriate for existing RILA investors?
Do commenters agree that existing RILA
investors would benefit more from a
brief summary of the changes to the
contract reflected in the statutory
prospectus than from receiving all of the
disclosures in the initial summary
prospectus? Instead should existing
RILA investors receive a summary
prospectus akin to the initial summary
prospectus year after year?
111. Should we permit, as proposed,
an updating summary prospectus for a
RILA contract to describe one or more
contracts covered in the related
statutory prospectus? Do commenters
recommend any other changes to the
proposed scope requirements for
updating summary prospectuses for
RILA contracts?
112. We request comment on the
proposed requirement to include a brief
description of certain contract-related
changes in the updating summary
prospectus. Would this disclosure
requirement be useful to investors? Is
the scope of changes that a RILA issuer
would be required to discuss
appropriate? Are there other topics
about which we should require a RILA
issuer to describe a change? Should we
define a change in the availability of
investment options that would require
disclosure as a change to any of the
features of the index-linked options that
the table that Item 17(b) of Form N–4
would require, as proposed? If not, what
definition would be more appropriate
and why?
113. Do the other proposed RILA
contract updating summary prospectus
content items represent the disclosure
that would be most appropriate and
useful for existing investors, for
example in considering whether to
continue making additional purchase
payments or reallocate contract value? If
not, what alternative disclosure should
we require?
114. Should rule 498A include, as
proposed, the same requirements with
respect to online accessibility of a RILA
contract statutory prospectus and
certain other documents relating to the
contract as the rule provides for variable
annuities (including, as described
above, the requirements to make the
required online contract documents
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available online, presentation and
linking requirements for these
documents, and requirements relating to
the definitions of ‘‘special terms’’)? If
not, what alternative requirements
should we adopt to help ensure that
investors who receive a RILA contract
summary prospectus have access to
more detailed information about the
RILA contract if they want it? For
example, should the required online
contract documents also include
information about the current limits on
gains for each index-linked option
offered under the contract? As another
example, should the required online
contract documents for issuers of RILAs
and variable annuities that rely on rule
498A also include the financial
statements of the registrant and/or
insurance company, to the extent that
these financial statements are not
included in the SAI (if, for instance, an
insurer’s financial statements are filed
on Form N–VPFS or Form 10–K, and are
incorporated by reference into the
registration statement)? To what extent
would using the same approach for both
RILAs and variable annuities ease
compliance burdens on insurers? Is it
appropriate that, as proposed, satisfying
each of these proposed online
accessibility requirements would be a
condition for a RILA issuer to rely on
rule 498A to satisfy prospectus delivery
obligations? Are there any modifications
we should make to the proposed safe
harbor provision for temporary
noncompliance?
115. Should rule 498A include, as
proposed, the same other requirements
for summary prospectuses (relating to
delivery upon request, prominence of
the summary prospectus in relation to
accompanying materials, ‘‘convenient
for reading and printing’’ formatting,
and hyperlinking requirements) as the
rule currently requires for variable
annuity summary prospectuses? Is it
appropriate that, as proposed, satisfying
each of these proposed requirements
would not be a condition for a RILA
issuer to rely on rule 498A to satisfy
prospectus delivery obligations?
D. Accounting (Items 16 and 26)
We are proposing to permit RILA
issuers to provide financial statements
on amended Form N–4 in the same way
that insurance companies currently do
on Form N–4. The principal
consequence of this change would be
that the financial statements filed in
connection with a RILA registration
statement could be prepared in SAP to
the same extent as currently permitted
for insurance companies’ financial
statements filed on that form.
Instruction 1 to Item 26(b) of Form N–
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4 currently permits insurance
companies that are the depositors of
variable annuity separate accounts to
prepare their financial statements for
use in a registration statement filed on
Form N–4 in accordance with SAP if the
depositor would not have to prepare its
financial statements in accordance with
GAAP except for use in that registration
statement or other registration
statements filed on Forms N–3, N–4, or
N–6 (the forms used to register
insurance products that are issued by
investment companies).304 The
instruction further states that the
depositor insurance company’s financial
statements must be prepared in
accordance with GAAP if it prepares
financial information in accordance
with GAAP for use by its parent (as
defined in Regulation S–X) in any report
under sections 13(a) and 15(d) of the
Exchange Act or any registration
statement filed under the Securities
Act.305 In interpreting this instruction
the Commission has stated that the
insurance product forms do not require
the use of GAAP when: (1) GAAP
financial statements are not prepared for
either the depositor or its parent; or (2)
the depositor’s parent prepares GAAP
financial statements, but 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.306
Forms S–1 and S–3 do not include an
instruction similar to Instruction 1 of
Item 26(b) of Form N–4. Rather RILAs
registered on these forms are required to
provide their financial statements in
accordance with GAAP. The
Commission, however, acting through
authority delegated to the staff, has
permitted insurance companies
registering on Form S–1 to include SAP
financial statements in RILA registration
statements in the circumstances
permitted by Form N–4.307 The
304 Similar to insurance products currently filing
registration statements on these forms, RILA issuers
would also be required, if all of the required
financial statements of the insurance company are
not in the prospectus, to state in the prospectus,
under a separate caption, where the financial
statements may be found and to briefly explain how
investors may obtain any financial statements not
in the SAI. Proposed item 16 of Form N–4.
305 Similar instructions are contained in the other
forms used to register insurance products issued by
investment companies. See instruction 1 to Item
31(b) of Form N–3 and instruction 1 to Item 28(b)
of Form N–6.
306 See Registration Form for Insurance Company
Separate Accounts Registered as Unit Investment
Trusts that Offer Variable Life Insurance Policies,
Investment Company Act Release No. 23066 (Mar.
13, 1998) [63 FR 13988 (Mar. 23, 1998)] (discussing
the same instruction in Form N–6).
307 See, e.g., F&G Life Letter.
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71137
Commission has stated that this
approach appropriately recognizes the
cost burdens that would be imposed if
the Commission were to require GAAP
financial statements in cases where the
depositor is not otherwise required to
prepare financial information in
accordance with GAAP.308 We
preliminarily believe this is also true for
insurance companies that offer RILAs
and that it is important to provide for
the consistent treatment of financial
statements for all insurance companies
that meet the circumstances permitted
by Form N–4. As a result, permitting
RILA issuers to rely on Instruction 1 to
Item 26 to provide SAP financial
statements to the same extent as issuers
registering offerings of variable
annuities on Form N–4 would be
consistent with investor protection. In
addition, SAP financial statements,
which focus on an issuer’s ability to
meet its obligations under its insurance
contracts, as regulated by state law,
appear to provide sufficient material
information for investors evaluating
RILAs.
Another consequence of requiring
insurance companies to register
offerings of RILAs on Form N–4 is that
they will have greater flexibility to
update their registration statement
without the need to update certain
financial statements. Under section
10(a)(3) of the Securities Act, RILA
issuers, like variable annuity issuers,
generally must file a post-effective
amendment annually to update their
audited fiscal year-end financial
statements. In addition, Regulation S–X
requires Form S–1 filers to include
unaudited interim financial statements
in any new registration statement or
post-effective amendment that goes
effective later than 134 days after the
end of the insurer’s fiscal year.309 Form
N–4 filers are not subject to this
requirement.310 In addition, after the
end of an insurer’s fiscal year, RILA
issuers must include year-end audited
financial statements in any new
registration statement or post-effective
amendment filed 45 days after the fiscal
308 See Registration Form for Insurance Company
Separate Accounts Registered as Unit Investment
Trusts That Offer Variable Life Insurance Policies,
Investment Company Act Release No. 25522 (Apr.
12, 2002) [67 FR 19848 (Apr. 23, 2002)]; see also
VASP Adopting Release at n.813 and accompanying
text.
309 17 CFR 210.3–12(a). RILA issuers that rely on
rule 12h–7 are not required to provide periodic
Exchange Act reports, including quarterly reports
that include interim financial statements. Therefore,
they must prepare interim financial statements for
Securities Act registration statements, like Form S–
1 and Form S–3, even though they do not prepare
interim financial statements for other purposes.
310 See Instruction 3 to Item 26(b) of Form N–4.
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year-end.311 However, Form N–4 filers
instead have a 90-day grace period.312
As a result of the proposal to include
RILAs on Form N–4, RILA issuers
therefore would be able to file and
amend their registration statements
during certain times of year without the
need to update their financial
statements, which RILA issuers cannot
do today.313 These approaches, in
consideration of consistency in
treatment among all insurance
companies that meet the circumstances
permitted by Form N–4, are equally
appropriate for RILA filers on Form N–
4.
We are also proposing to require
RILAs to provide the information
relating to changes in and disagreements
with accountants on accounting and
financial disclosure as detailed in 17
CFR 229.304 (‘‘Item 304 of Regulation
S–K’’). Further, RILAs would be
required to provide as an exhibit any
letter from the insurance company’s
former independent accountant
regarding its concurrence or
disagreement with the statements made
by the insurance company in the
registration statement concerning the
resignation or dismissal as the insurance
company’s principal accountant. These
items are currently provided by RILAs
on Forms S–1 and S–3 and are designed
to address the practice of ‘‘opinion
shopping’’ for an auditor willing to
support a proposed accounting
treatment designed to help a company
achieve its reporting objectives even
though that treatment might frustrate
reliable reporting.314 The proposed
amendments would not be required for
variable annuities in light of their tiered
investment company structure. Variable
annuities typically invest indirectly in
mutual funds offered as investment
options under such contracts, which
themselves are subject to similar
disclosure obligations relating to
changes in and disagreements with
accountants on accounting and financial
disclosure.315
We request comment on these aspects
of the proposal.
116. Is it appropriate, as proposed, to
permit RILA issuers to use the same
approach with respect to the use of SAP
financial statements, for purposes of
preparing financial statements that are
included on a registration statement on
Form N–4, as Form N–4 currently
provides for insurance company
issuers? Why or why not?
117. Would SAP financials provide
sufficient material information for a
RILA investor to make an informed
investment decision? Why or why not?
118. Why do insurance companies
currently provide SAP financials
instead of GAAP financials in their
Form N–4 registration statements when
permitted to do so? Do SAP financials
currently provide sufficient material
information for a variable annuity
investor to make an informed
investment decision?
119. Should we require the proposed
items relating to changes in accountants
for RILAs? If so, should we also require
these items for all Form N–4 filers? If
the information called for in Item 304 of
Regulation S–K is required, is it
appropriately placed in the SAI?
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and
Amendments to Form 24F–2
We are proposing to require insurance
companies to pay securities registration
fees relating to RILA offerings using the
same method used for variable
annuities.316 Specifically, issuers
registering the offerings of RILAs on
amended Form N–4 would be deemed
to be registering an indeterminate
amount of securities upon effectiveness
of the registration statement.317 These
315 See
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311 See
17 CFR 210.3–01(c).
312 See Instruction 3 to Item 26(b) of Form N–4.
313 A further consequence of the proposed
changes would be that insurance companies would
generally be making available their RILA-related
financial statements to investors on an annual basis,
consistent with the timing of financial statements
for variable annuities. Currently, insurance
companies relying upon rule 12h–7 provide their
RILA-related financials annually, whereas
insurance companies not relying on that rule
provide financial statements quarterly. Insurance
companies not relying on rule 12h–7 will file
financial statements more frequently than annually
if there are any post-effective amendments to the
registration statement that require updated financial
statements. See Form 10–Q.
314 See Disclosure Amendments to Regulation S–
K, Form 8–K and Schedule 14A Regarding Changes
in Accountants and Potential Opinion Shopping
Situations, Investment Company Act Release No.
16358 (Apr. 12, 1988) [53 FR 12924 (Apr. 20,
1988)]; see also item 11(i) of Form S–1.
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Item 27(b)(4) of Form N–1A.
accommodate the changes proposed in this
release, EDGAR would be modified to require
insurance companies registering RILAs to use a
different CIK than that used for their other offerings.
One CIK would be utilized to register the offerings
of RILAs on Form N–4 and pay registration fees for
securities relating to RILA offerings on Form 24F–
2. The other would be utilized to register the
insurance company’s other offerings of securities as
they do currently. As a result, insurance companies
would need to utilize separate CIKs for their RILArelated filings. If the issuer only offers RILAs, it
should only use one CIK. Further, we are proposing
to amend rule 313 of Regulation S–T in order to
permit filings relating to RILA offerings to have
both an investment company type and contract
identifier in order to facilitate RILA issuers’ filing
these forms and for ease in identification of
particular RILA contracts.
317 The proposed rule amendments would apply
the same registration fee payment approach to
RILAs that is currently provided by rule 24f–2 to
current Form N–4 issuers. See proposed rules
316 To
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issuers would then be required to pay
registration fees annually based on their
net sales of these securities, no later
than 90 days after the issuer’s fiscal year
ends, on the form that is used by
registered separate accounts to pay
securities registration fees relating to
variable annuities (Form 24F–2).318 We
are further proposing to specify the
calculation method for paying securities
registration fees for RILA offerings,
consistent with the fee calculation
methodology that applies to variable
annuities.319 We are also proposing
amendments to Form 24F–2 to specify
when issuers can take credits for RILA
redemptions that pre-date their use of
that form and when expiring annuity
contracts are rolled over into a new
crediting period, as well as other nonsubstantive and conforming
amendments.320
456(e) (providing that where the registration
statement relates to a RILA offering, RILA issuers
would be deemed to have registered an
indeterminate amount of securities for purposes of
sections 5 and 6(a) of the Securities Act upon the
effective date of its registration statement); and
457(u) (providing for RILA issuers to pay
registration fees for securities relating to RILA
offerings on the same annual net basis as other
Form N–4 issuers); see also proposed Form 24F–2.
See section 4(e) of the Exchange Act [15 U.S.C.
78d–4(e)]; section 28 of the Securities Act [15
U.S.C. 77z–3]. We preliminarily believe that these
actions are necessary or appropriate in the public
interest and consistent with the protection of
investors.
318 As a general matter, the proposed amendments
would provide the same process for registering an
indeterminate amount of securities relating to RILA
offerings as is currently provided for exchangetraded vehicle securities under rule 456(d) (which,
in turn, mirrors of the process for current Form N–
4 issuers to register securities) except that (1) this
process would be mandatory for RILAs and (2)
RILA issuers would pay fees on Form 24F–2 instead
of through a prospectus supplement in accordance
with rule 424. See also Securities Offering Reform
for Closed-End Investment Companies, Investment
Company Act Release No. 33836 (Apr. 8, 2020) [85
FR 33290 (June 1, 2020)] (‘‘Closed-End Fund
Offering Reform Adopting Release’’). For example,
the proposed amendments would provide the same
mechanics as other Form 24F–2 issuers when
addressing interest calculations for late payments.
319 All payments of filings fees for RILA
registration statements would continue to be made
by wire transfer, debit card, or credit card or via an
ACH and there would be no refunds. See 17 CFR
230.111; proposed instruction A.5 to Form 24F–2.
320 In addition to conforming changes in proposed
Form 24F–2 to effectuate the changes discussed
below, in order to improve the form we are
proposing to: (1) remove reporting relating to shares
paid for prior to Oct. 11, 1997; (2) remove the
statement in current Instruction A.3 to consult the
EDGAR Filer Manual because the instructions
referenced in Instruction A.3 are intended to be
removed from the EDGAR Filer Manual; (3) remove
current Instruction C.4, which includes EDGAR
header tags for Item 5 of the form, as this
information is no longer sufficient for filing
purposes and current technical specifications are
provided through the technical specifications page
on the Commission’s web page; (4) revise current
Instruction C.9 for Item 5(vii) to correspond to the
current instructions for fee filing rates on the
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Currently, insurance companies, like
most issuers, register a specific amount
of securities when registering RILAs and
are required to pay a registration fee for
those securities to the Commission at
the time of filing a registration statement
on Form S–1 or S–3.321 In contrast, the
Investment Company Act provides that
certain registered investment
companies, including the variable
annuity separate accounts that file on
Form N–4, are deemed to have
registered an indefinite amount of
securities upon the effective date of
their registration statement.322 Instead
of paying registration fees at the time of
filing a registration statement, registered
separate accounts pay registration fees
in arrears based on their net issuance of
securities, no later than 90 days after the
issuer’s fiscal year end, on Form 24F–
2.323 As a result, RILA issuers must
currently ensure that they do not
inadvertently sell more securities than
they have registered, however this is not
a concern in relation to variable
annuities. Further, RILA issuers pay fees
at effectiveness on Forms S–1 or S–3 for
the securities being registered, while
registered separate accounts do not pay
a fee at effectiveness on Form N–4 but
rather pay fees annually on Form 24F–
2 on the net sales of securities that year.
Consistent with the other elements of
this proposal, these proposed
amendments are designed to require
insurance companies to use the same
framework to pay securities registration
fees for RILAs that they do for variable
annuities. Insurance companies offer
RILAs in a manner substantially similar
to variable annuities and would
similarly benefit from paying
registration fees on an annual net basis
and from registering offerings of an
indeterminate number of securities. The
proposed amendments would provide
registration fee payment parity for an
insurance company that may offer one
or more related insurance products,
including index-linked options offered
as part of combination annuity
contracts.324 Requiring insurance
companies to pay registration fees for
securities relating to RILA offerings on
Form 24F–2 would therefore be efficient
for insurance companies. This approach
would eliminate the risk that a RILA
issuer may inadvertently oversell
securities with respect to a registration
statement on Form N–4, and the
payment of fees on an annual net basis
furthermore should lead to a reduction
in overall filing fees relating to
RILAs.325 Further, by requiring RILA
and variable annuity offerings to use the
same form and payment method, this
process also would be efficient for the
Commission.
The proposed fee calculation method
is also consistent with the continuous
offering of RILAs to investors. These
investors may make additional
allocations or other investment
decisions over time with respect to an
investment in a RILA. One effect of this
is that RILA issuers, unlike other Form
S–1 or S–3 issuers, may have increased
difficulty in using the filing fees
associated with unsold securities of a
particular RILA offering to offset the
filing fees due for a subsequent
registration statement. This is because
many RILA issuers are not easily able to
terminate a RILA offering, a necessary
step to recoup fees paid on unsold
securities for use in a separate RILA
offering.326
We are also proposing amendments to
Form 24F–2 that would indicate when
RILA issuers can take credits for
redemptions of securities not claimed in
Commission’s website; (5) correct the website
linked in current Instruction D.1; and (6) remove
the estimated Paperwork Reduction Act burden
cited in current Instruction F as extraneous in light
of the OMB approval box that contains information
on this topic.
321 In general, issuers today—including insurance
companies issuing securities relating to RILA
offerings—are required under the Securities Act to
pay a registration fee to the Commission at the time
of filing a registration statement. See sections
6(b)(1) (requiring applicants to pay a fee to the
Commission at the time of filing a registration
statement) and (c) (providing that a registration
statement shall not be deemed to have taken place
without payment of a registration fee) of the
Securities Act [15 U.S.C. 77f(b)(1) and (c)]. This
means they pay registration fees at the time they
register the offering of securities, regardless of when
(or if) they sell them. In addition, although wellknown seasoned issuers have additional flexibility
in paying filing fees, none of the insurance
companies that issue securities relating to RILA
offerings currently claim status as a well-known
seasoned issuer. See supra footnote 21.
322 See 15 U.S.C. 80a–24(f).
323 See id.; Form 24F–2.
324 For combination products, each issuer of
securities under the product (e.g., the separate
account for the variable option and the insurance
company for the index-linked option) would file a
separate Form 24F–2 relating to the payment of
registration fees for its respective securities offered
under the product.
325 As part of the proposed amendments to Form
24F–2, RILA issuers would be required to include
the value of any expiring annuity contract or indexlinked option that is rolled over into a new
crediting period in its calculation of the aggregate
sale price of securities sold during the fiscal year.
RILA issuers further would be required to report
such contracts or options as a redemption. This
would result in zero net sales being reported in this
situation. See proposed instruction C.4 to Form
24F–2.
326 See 17 CFR 230.457(p). To facilitate the
transition to calculating fees on an annual net basis
and filing Form 24F–2, a RILA’s fee calculation
should exclude excess securities that were
registered under its last registration statement that
remain unsold prior to the effectiveness of any final
rule. See proposed instruction C.5 to Form 24F–2.
This would be so that a filing fee is not charged
twice for the same securities being registered.
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a prior fiscal year (‘‘non-claimed prior
redemptions’’). Typically, issuers that
file Form 24F–2 can take credit for these
redemptions to offset some of the
purchases being reported for the current
fiscal year. This is only intended to be
available for non-claimed prior
redemptions that had occurred since the
use of the form (and the payment of
registration fees on an annual net basis)
was available to the issuer.327 The form,
however, includes a legacy instruction
for any non-claimed redemptions in a
prior fiscal year that ends no earlier
than October 11, 1995. This specific
date is related to the timing of open-end
funds’ and unit investment trusts’
transition to Form 24F–2.328 With the
addition of RILAs to this form, we are
removing the reference to October 11,
1995 in Item 5(iii) of Form 24F–2 and
amending the related instructions so
that it is clear that issuers will only be
able to take credit for non-claimed prior
redemptions that occur on or after the
date the issuer became eligible to use
the form, which for RILA issuers would
be the effective date of the proposed
amendments, if adopted.329
We request comment on the proposed
fee payment methodology for RILAs and
the proposed amendments to Form 24F–
2.
120. Is it appropriate to require RILA
issuers to pay registration fees in arrears
for the registration of securities? Would
the process be more efficient for
insurance companies than the current
registration fee processes used by RILA
issuers? If not, what is the appropriate
manner in which RILA issuers should
pay registration fees? For example,
should we instead amend Form N–4 to
permit or require the payment of fees on
that form for RILA issuers at the time
the issuer files the registration
statement, consistent with insurance
companies’ current practices when
paying registration fees for securities
offerings registered on Forms S–1 and
S–3?
121. Instead of requiring RILA issuers
to pay registration fees in arrears as
proposed, should we permit RILA
issuers to choose whether to take this
treatment or use some other registration
fee system?
327 See generally Closed-End Fund Offering
Reform Adopting Release at n.348.
328 See Registration Under the Securities Act of
1933 of Certain Investment Company Securities,
Investment Company Act Release No. 22815 (Sep.
10, 1997) [62 FR 47934 (Sep. 12, 1997)] at n.9.
329 In addition to RILA issuers, interval funds
have been able to use Form 24F–2 since Aug. 1,
2021 (the effective date of rule 24f–2 as applied to
interval funds), so these funds likewise would only
be able to take credit for non-claimed prior
redemptions since that date.
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122. Is the proposed calculation
methodology appropriate for RILAs? If
not, what aspects of the methodology
should be changed and why?
123. Is it appropriate to have RILA
issuers file Form 24F–2 for this purpose,
or should we instead have RILA issuers
file a prospectus pursuant to rule 424(i),
consistent with the treatment of
exchange-traded vehicle securities
under rule 456(d)?
124. Are the proposed amendments to
Form 24F–2 appropriate? Should we
tailor Form 24F–2 to RILAs in other
ways? Are the proposed amendments
clear as to how a RILA issuer would use
that form? Are there any other
clarifications we should offer?
125. Should we, as proposed, require
separate Form 24F–2 filings for indexlinked options and variable options that
are offered as investment options in
combination contracts? If not, how can
we amend Form 24F–2 and rules 456
and 457 to accommodate combination
contracts, given different legal entities
are issuing the securities associated
with different types of investment
options?
126. Are the proposed amendments to
rule 456 and 457 sufficiently clear as to
how RILA issuers should calculate and
pay the registration fees for securities
relating to RILA offerings? Should we
amend the rules further to provide more
clarity?
127. The proposed amendments to
rule 456 and Form 24F–2 provide
procedures for how to address a merger
or the cessation of operations of the
issuer, which in the RILA context is the
insurance company issuing the RILA.
Are these provisions necessary for RILA
issuers? Should these instructions
instead address the cessation or merger
of the particular RILA being reported?
128. Do commenters agree with the
proposed requirements for how to
address non-claimed prior redemptions?
Why or why not?
129. Are there any other
considerations or changes we should
make to facilitate requiring RILA issuers
to pay registration fees in arrears, either
regarding securities already registered
by RILA issuers or for some other
reason?
2. Post-Effective Amendments and
Prospectus Supplements
To facilitate the registration of RILA
offerings on Form N–4 and consistent
with the other elements of this proposal,
we are proposing amendments to
require RILA issuers to use the same
framework for filing post-effective
amendments to the registration
statement that other issuers on Form N–
4 currently use. Specifically, the
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proposal would amend rule 485 to
require RILA issuers to use that rule
when amending RILA registration
statements on Form N–4. This change
would permit RILA issuers to file posteffective amendments that become
automatically effective under rule 485(a)
after a specified period of time after the
filing or, in certain enumerated
circumstances, immediately effective
under rule 485(b).330 In addition, we are
also proposing amendments that would
require RILA issuers to apply rule 497
under the Securities Act when
appropriate to file RILA prospectuses
and prospectus supplements with the
Commission.331 These amendments are
intended to facilitate a uniform posteffective amendment and prospectus
filing framework for issuers on Form N–
4 and should provide increased
efficiencies for RILA issuers and
Commission staff by applying consistent
procedures for all security offerings
registered on Form N–4.
Our rules currently provide different
processes for RILA issuers on Forms S–
1 and S–3 and current issuers on Form
N–4 to update and keep current a
registration statement or prospectus.
Form N–4 is used by separate accounts
that are unit investment trusts that offer
variable contracts to register their
securities under the Investment
Company Act and to register an
indefinite amount of continuously-sold
securities under the Securities Act.
Therefore, these issuers have a system of
updating their disclosures that
facilitates that structure. Issuers on
Form N–4 typically update their
registration statements annually through
a post-effective amendment filed in
accordance with rule 485 in order to,
among other things, comply with
Securities Act requirements.332 Rule
485(b) provides for the immediate
effectiveness of many of the routine
updates that issuers on Form N–4 may
make over the course of a continuous,
long-term offering, for example, those
amendments filed for no purpose other
than to bring the financial statements up
to date under section 10(a)(3) of the
Securities Act.333 These issuers also file
forms of prospectuses used in their
330 See
rule 485(b).
with this change, we are also
proposing corresponding changes to (1) rule 424(f)
to specify that RILA issuers must use rule 497
rather than rule 424 when filing prospectuses and
prospectus supplements, and (2) rule 415(b) to
exempt RILA offerings from the requirements of
paragraph (a) of that rule consistent with the
treatment of variable annuity separate accounts.
332 See, e.g., section 10(a)(3) of the Securities Act
[15 U.S.C. 77j(a)(3)].
333 See rule 485(b)(1)(i). Material post-effective
amendments, however, are not immediately
effective. See rule 485(a).
331 Consistent
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offerings through rule 497 and can
supplement their prospectuses, also
known as ‘‘stickering,’’ to reflect certain
changes to the information disclosed by
making a filing with the Commission in
accordance with rule 497.
Conversely, RILA issuers currently
follow the processes operating
companies use to update their
registrations statements. Operating
companies that are engaged in a
continuous offering of securities, like
RILA issuers, are similarly required to
update their registration statement each
year and may update their registration
statement for changes other than to
bring the financial statements up to
date.334 For RILAs whose offerings are
registered on Form S–1, these updates
typically occur through a post-effective
amendment.335 Rule 462 currently
provides RILA issuers with a limited set
of circumstances, none of which are
specific or generally relevant to RILA
offerings, in which a post-effective
amendment to a registration statement is
effective upon filing.336 Rather, when a
RILA issuer seeks to update a RILA
registration statement on Form S–1, the
issuer must file a post-effective
amendment that is typically declared
effective by Commission staff acting
pursuant to delegated authority.337
In addition to differences in the posteffective amendment process, RILA
issuers also follow different processes to
file prospectuses than current Form N–
4 filers, relying on rule 424 rather than
rule 497. Although these rules provide
for similar processes, there are certain
differences. For example, rule 424
requires an issuer to file a prospectus
only if the issuer makes substantive
changes or additions to a previouslyfiled prospectus, whereas rule 497
requires funds to file every prospectus
that varies from any previously-filed
prospectus.338 Accordingly, under the
proposed amendments, a RILA issuer
334 See, e.g., section 10(a)(3) of the Securities Act;
rule 415(a); Item 512 of Regulation S–K.
335 Under Form S–3, the section 10(a)(3) update
need not be made through a post-effective
amendment. Rather, under this form, the section
10(a)(3) update generally occurs when the issuer
files its annual report on Form 10–K containing the
issuer’s audited financial statements for its most
recently completed fiscal year.
336 See rule 462(d) and (e). For example, this rule
provides that a post-effective amendment that seeks
only to add exhibits to a registration statement
would be effective upon filing. In addition,
although a well-known seasoned issuer is permitted
to file a post-effective amendment to an automatic
shelf registration statement with immediate
effectiveness, none of the insurance companies
currently offering RILAs currently claims status as
a well-known seasoned issuer.
337 See 15 U.S.C. 77h; 17 CFR 229.501(a); 17 CFR
230.473. See also supra footnote 335 (describing the
Form S–3 post-effective amendment process).
338 See rule 424(a); rule 497.
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would be required to file every
prospectus relating to a RILA offering
that varies in form from a previously
filed prospectus before it is first used.339
This approach would provide a publicly
accessible, usable database of current
RILA prospectuses which would also
assist the Commission in conducting its
regulatory functions. In addition, rule
424 includes provisions related to
continuous or delayed securities
offering under rule 415.340 However, in
light of the proposed amendments to the
RILA registration framework, these
provisions would no longer be
applicable to RILAs.341
Consistent with the other elements of
this proposal, the proposed
amendments are designed to provide
parity between RILAs and other
annuities registered on Form N–4.
RILAs, like variable annuities, are
longer-term investment products that
are continuously offered and must
maintain a current registration
statement and up-to-date prospectus for
new investors as well as for existing
investors that may be able to make
additional contributions or reallocate
assets. Accordingly, applying rule 485’s
simplified post-effective amendment
process is a more appropriate
framework for RILA registration
statements in light of their similarity to
variable annuities. RILA registration
statements are routinely updated over
the course of an offering and may be
subject to material and non-material
amendments over the long-term nature
of the investment product. As such, the
proposed amendments addressing the
post-effective amendment process for
RILA registration statement should
provide benefits to current RILA issuers
using Form S–1 by reducing
administrative complexity when
updating financial statements included
in a registration statement or when
making other changes to a registration
statement through rule 485’s provisions
for automatic and immediate
effectiveness.342 Requiring RILA issuers
to rely on the simplified post-effective
amendment process would enable these
issuers to update their disclosures in a
manner that complements and
facilitates RILAs’ offering structure and
particularly provide efficiency in the
context of combination contracts.
Requiring RILA issuers to rely on
rules 485 and 497 also would provide a
uniform post-effective amendment and
prospectus filing framework for all
issuers using Form N–4 and provide
339 See
proposed rule 497(e).
rule 424(b).
341 See proposed rule 415(b).
342 See proposed rule 485.
3. Prospectus Delivery
We also propose to prohibit the use of
rule 172 in connection with the offering
340 See
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insurance companies that may offer one
or more related insurance products,
including index-linked options offered
as part of combination annuity
contracts, consistent filing requirements
across related products. This should
also result in enhanced efficiencies as
these issuers would no longer be
required to manage distinct filing
processes for related products. In
addition, employing the framework
provided by rules 485 and 497 would
provide Commission staff with an
increased degree of administrative
efficiency by facilitating the review of
amendments containing material
changes to RILA registration statements
while permitting amendments with nonmaterial changes to become effective
immediately.
We request comment on the proposed
application of rules 485 and 497 to
RILAs.
130. Should we require RILA issuers
to file post-effective amendments to
registration statements on Form N–4
under rule 485? Are there additional
circumstances not currently enumerated
in the rule for which we should permit
the immediate effectiveness of posteffective amendments?
131. Do commenters agree that the
current post-effective amendment
process for RILA registration statements
on Form S–1 may result in increased
uncertainty and costs for RILA issuers
than if the same issuers used the
proposed post-effective amendment
process under proposed rule 485 to
amend RILA registration statements?
Will using the process required by rule
485 mitigate these concerns?
132. Should we require RILA issuers
to file prospectuses and prospectus
supplements under rule 497 rather than
under rule 424? If not, what is a more
appropriate process for RILA issuers to
file prospectuses and prospectus
supplements given the proposed move
of RILA registration statements to Form
N–4?
133. How would RILA issuers be
affected by the requirement to file the
exact form of prospectus under rule 497,
given rule 424 only requires filers to file
prospectuses that contain substantive
changes from or additions to a
previously filed prospectus?
134. Are there other filing rules that
should be amended to help facilitate the
movement of RILA registration
statements to Form N–4? Is so, please
explain what rules should be amended
and the rationale for the suggested
changes.
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of a RILA. Under rule 172, a final
prospectus is deemed to precede or
accompany a security for sale for
purposes of Securities Act section
5(b)(2) as long as the final prospectus
meeting the requirements of Securities
Act section 10(a) is filed or the issuer
will make a good faith and reasonable
effort to file it with the Commission as
part of the registration statement within
the required rule 424 prospectus filing
timeline.343
Registered investment companies,
including variable annuity separate
accounts, are excluded from rule 172
and therefore must deliver a prospectus
to investors.344 Therefore, we are
excluding RILA offerings from rule 172
to ensure that investors receive a
prospectus about these complex
investments and because we are
proposing to treat offerings of RILAs like
offerings of variable annuities in other
respects. Moreover, we understand that,
as a practical matter, RILA issuers
typically do not rely on rule 172
because RILA issuers typically deliver
prospectuses to accompany or precede
other communications, such as annuity
applications, in order to avoid those
communications being offers that
otherwise would be non-conforming
prospectuses that violate section 5 of the
Securities Act.345
We request comment on excluding
RILA offerings from rule 172.
135. Is our understanding correct that
RILA issuers typically deliver
prospectuses to investors to accompany
or precede other communications, and
thus do not rely on rule 172? If not, in
what circumstances to RILA issuers
typically rely on rule 172? Is there any
reason we should permit RILA issuers to
rely on rule 172 even though issuers
cannot rely on the rule for other
offerings registered on Form N–4?
F. Materially Misleading Statements in
RILA Sales Literature
We are proposing to amend rule 156
to make its provisions applicable to
RILA sales literature. Under the Federal
securities laws applicable to all
securities (including RILA offerings), it
343 See Rule 172(b) and (c); see also Offering
Reform Release at n.561 and accompanying text.
344 Id. at section VI.B.1.b.
345 See section 2(a)(10) of the Securities Act
(providing, in part, that a communication sent or
given after the effective date of the registration
statement shall not be deemed a prospectus if it is
proved that prior to or at the same time with such
communication a written prospectus meeting the
requirements of section 10(a) was sent or given to
the person to whom the communication was made).
See also Offering Reform Release at n.561 (stating
that a final prospectus only filed as provided in rule
172 will not be considered to be sent or given prior
to or with a written offer within the meaning of this
clause of section 2(a)(10)).
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is unlawful for any person to use
materially misleading communications
in connection with the offer or sale of
any security.346 Rule 156 does not
prohibit or permit any particular
representations or presentation, rather it
is an interpretive rule that provides
factors to be weighed in considering
whether a statement involving a
material fact is or might be misleading
in the specific context of investment
company sales literature for purposes of
the Federal securities laws, including
sales literature relating to the sale of
variable annuities. Applying this rule to
RILA sales literature is consistent with
the RILA Act in that it would provide
RILA issuers guidance on ways to avoid
presenting investors with materially
misleading advertisements, which
should help ensure that investors
receive the information necessary to
make informed decisions about these
products.347
Rule 156 provides guidance on
whether a statement involving a
material fact is misleading in sales
literature, depending on an evaluation
of the context in which it is made, with
the rule providing four non-exhaustive
factors to guide in this determination.348
While these factors have some relevance
to the marketing of all securities,
similarities between variable annuities
and RILAs (as to how and to whom they
are marketed), make the extension of
rule 156 to RILAs particularly
appropriate. Like investment company
sales literature generally (and variable
annuity marketing materials
particularly), RILA advertisements
discuss complex investment features,
and RILA issuers should benefit from
rule 156’s contextual analysis in
considering whether a particular
representation is materially misleading.
Thus, the proposed amendments to rule
156 would help address these concerns
by focusing attention to specific areas of
RILA sales literature that we have
identified as being particularly
susceptible to misleading statements.349
Commission staff have reviewed RILA
advertisements to better understand
how insurance companies market these
products to investors. As part of this
review, and based upon prior
346 See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR
240.10b–5.
347 See Mutual Fund Sales Literature Interpretive
Rule, Investment Company Act Release No. 10915
(Oct. 26, 1979); [44 FR 64070 (Nov. 6, 1979)] (‘‘Rule
156 Release’’).
348 See rule 156(b).
349 See, e.g., Rule 156 Release (Rule 156 is
‘‘intended to highlight general areas which, based
on the Commission’s regulatory experience with
investment company sales literature, had proven to
be particularly susceptible to misleading
statements’’).
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experience reviewing RILA registration
statements, the staff identified common
RILA marketing approaches that could
benefit from rule 156’s guidance about
advertising statements that could be
misleading under the Federal securities
laws without appropriate context.
For example, in the sales literature
reviewed by the staff, insurance
companies typically marketed RILAs as
growth products based primarily on the
linkage to an underlying index. Current
rule 156(b)(1)(ii) provides that a
statement could be misleading because
of ‘‘[t]he absence of explanations,
qualifications, limitations or other
statements necessary or appropriate to
make such statement not misleading.’’
Thus, if rule 156 were applied to RILAs
as proposed, rule 156 would assist
insurance companies in considering
whether representations about a RILA as
a growth product would require
qualification in light of particular RILA
features, such as the existence and
extent of any limitations on upside
index performance. Representations that
highlight downside protections of a
RILA could similarly be misleading
without the context of the cost or
limitation of those protections (e.g.,
upside limitations). The same analysis
would apply to representations that tout
customization without discussing the
trade-offs associated with that
customization (e.g., long lock-up
periods to get the best rates or having to
experience a contract adjustment when
making a change), or fail to explain that
the insurance company has reserved the
right to change or remove key features
of the contract while surrender charges
still apply. If RILA sales literature
discussed these aspects of the contract
without adequately explaining these
limitations or the insurer’s discretion to
alter key features, that omission could
make the advertisement misleading.
Accordingly, the application of rule
156(b)(1)(ii) to RILA sales literature
would require an insurance company to
consider whether an advertisement
would be materially misleading if it
suggests a given RILA is a lossavoidance vehicle or a customizable
product in the absence of qualifying
explanations or statements. Similarly, if
sales literature advertises a particular
feature of the product’s bounded return
structure (including, e.g., a specified
index; an upside feature such as a
particular ‘‘cap rate’’ or ‘‘participation
rate’’; or a downside feature such as a
‘‘floor’’ or ‘‘buffer’’) that is not available
for the life of the product or the full
term of any surrender charge period, the
rule would require consideration of
whether the statement is misleading
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without providing additional context as
to the insurer’s discretion.
As another example, current rule
156(b)(4) provides that
‘‘[r]epresentations about fees or
expenses associated with an investment
in a fund could be misleading because
of statements or omissions made
involving a material fact, including
situations where portrayals of the fees
and expenses associated with an
investment in the fund omit
explanations, qualifications, limitations,
or other statements necessary or
appropriate to make the portrayals not
misleading.’’ While RILA investors are
not typically charged direct ongoing fees
or expenses, RILAs do typically limit an
investor’s ability to participate in upside
performance, and charges like contract
adjustments can impose costs upon
highlighted features such as guaranteed
benefits. In the context of RILA sales
literature, the proposed application of
this provision of rule 156 to RILA
advertisements would require
consideration about whether
representations or portrayals either of a
RILA’s costs or charges (e.g., advertising
implying that a RILA had low costs or
no ongoing charges), or optional benefits
that are subject to a contract adjustment,
would necessitate qualifying statements
or explanations regarding the costs or
tradeoffs to the investor to receive an
advertised benefit or those generally
associated with the RILA.350
Lastly, current rule 156(b)(2)(i) states
that ‘‘[r]epresentations about past or
future investment performance could be
misleading because of statements or
omissions made involving a material
fact, including situations where:
[p]ortrayals of past income, gain, or
growth of assets convey an impression
of the net investment results achieved
by an actual or hypothetical investment
which would not be justified under the
circumstances, including portrayals that
omit explanations, qualifications,
limitations, or other statements
necessary or appropriate to make the
portrayals not misleading.’’ In the
context of RILA advertising, the
350 Insurance companies may apply a contract
adjustment to the investors’ account when an
investor annuitizes or takes advantage of benefits
like ‘‘free withdrawal’’ provisions (that typically
permit investors to withdraw up to 10% of the
contract value each year without paying a surrender
charge), death benefits, systemic withdrawals, and
guaranteed benefits. See The Design and Regulatory
Framework of Registered Index-Linked Annuities,
ALI CLE Conference on Life Insurance Products
2022 (‘‘It is important to note that interim value
adjustments may apply to surrenders and all types
of ‘withdrawals,’ such as free look payments;
annuitization; death benefit payments; deductions
for third party advisory fees; systemic withdrawals;
and even income payments under guaranteed
benefit riders.’’)
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proposed provision would require
consideration of whether illustrations
about the operation of a RILA or its
features could be misleading because,
for example, they use assumptions (such
as limits on gains or index performance
that includes dividends whereas the
RILA’s index does not include
dividends) that are not currently offered
or exceed what could be reasonably
anticipated or use ‘‘cherry picked’’ data.
Including historical index performance
in an advertisement also would mislead
investors if, for example, it suggested
that the performance shown is
predictive of future performance of the
index or a RILA. On the other hand,
using the index’s historical performance
to illustrate how a RILA works in a fair
and balanced way (e.g., by showing
index performance relative to
representative limits on gains and
losses, as some RILA advertisements
currently do) would be consistent with
the proposed extension of rule 156 to
RILA advertisements, assuming those
advertisements otherwise include
appropriate caveats to ensure that the
illustrations are not misleading.351
Moreover, our preliminary view is that
purporting to show the historical
performance of the RILA or any
particular index-linked option itself
would generally be materially
misleading. This is because the terms of
a RILA investment, such as limits on
gains, change frequently, making past
performance irrelevant to current
investors who are not able to utilize
those past rates in current market
conditions. In addition, to the extent
that a RILA is using a point-to-point
crediting method, that RILA’s return to
an investor would be particularly
sensitive to the specific date the
investor purchased the RILA and when
the crediting period ends for the indexlinked option chosen by the investor.352
This further increases the likelihood of
a current investor’s investment
experience deviating from the historical
performance of a given RILA, even
when that RILA had similar terms to
those currently offered. Our
understanding is that insurance
companies do not currently advertise
the historical performance of the RILA
or any particular index-linked option
itself.
351 See rule 156(b)(1)(ii) (statement can be
misleading because of ‘‘absence of explanations,
qualifications, limitations or other statements
necessary or appropriate to make such statement
not misleading’’).
352 See, e.g., OIAD Report at Section 3, Comparing
RILA Features, Variations in Term Length and
Simulated Returns; Section 7, Conclusions,
Implications of the Research: The Economics of
RILAs.
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In addition to rule 156,
advertisements and sales literature for
existing N–4 issuers is subject to 17 CFR
230.482 (‘‘rule 482’’). Rule 482 requires,
among other things, enhanced
disclosures in investment company and
business development company
advertisements designed to convey
balanced information to prospective
investors, particularly with respect to
standardizing representations of a
fund’s past performance.353 These
provisions were introduced as a result
of the Commission’s experience with
fund advertisements that were creating
unrealistic or misleading expectations
through representations regarding past
performance.354 Accordingly, rule 482
now permits funds to use performance
data in their advertisements, but only
according to standardized
methodologies set forth in the rule.
Unlike the rules applicable to most
RILAs, rule 482 also permits registered
investment companies and business
development companies to provide
advertisements and sales literature to
investors without it being accompanied
or preceded by a statutory
prospectus.355
While not required by the RILA Act,
we nevertheless considered whether
RILA advertising might raise similar
concerns that would justify amending
rule 482 to include RILAs. As explained
below, we have not yet seen sufficient
evidence to support an expansion of
rule 482 to RILAs at this time, though
we acknowledge such concerns may
develop in the future.356 This
conclusion largely follows from the
rule’s standardized performance data
requirements, which do not align with
current practices in RILA
advertisements. While variable annuity
marketing materials frequently utilize
standardized performance returns, this
is not the case with RILA
advertisements. Rather than relying on
past performance, insurance companies
typically market RILAs on other bases
that are less amenable to standardized
performance metrics, for example
highlighting that these are flexible
products whose features can be
customized to fit a particular investor’s
needs. RILA advertising also typically
does not attempt to utilize past
353 See Amendments to Investment Company
Advertising Rules, Investment Company Act
Release No. 26195 (Sept. 29, 2003) [68 FR 57760
(Oct. 6, 2003)] (‘‘482 Amendment Release’’).
354 See id.
355 See 17 CFR 230.433(b)(2).
356 As a result, RILA sales literature, as ‘‘free
writing’’ prospectuses, would continue to be subject
to 17 CFR 230.164 and 17 CFR 230.433, as well as
any other applicable rule that permits a
communication notwithstanding the ‘‘gun jumping’’
provisions of the Securities Act.
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performance, suggesting there is neither
a need for rules prescribing RILAspecific past performance metrics, nor
sufficient experience to inform the
development of such metrics. For these
reasons, we would not change rule 482
to include RILAs.
We request comment on the proposed
application of rule 156 to RILAs and our
proposal not to amend rule 482 to
include RILAs.
136. Would the application of rule
156 to RILA sales literature help to
prevent or address material
misstatements in those
communications? Is there any other
action we should take to address this
concern?
137. Are there differences between
variable annuities and RILAs that would
justify not extending rule 156 to RILA
sales literature as proposed?
138. Instead of extending rule 156 to
RILAs, should we create a new rule that
specifically and solely deals with
materially misleading information in
RILA sales literature? If so, what is it
about RILAs that necessitates a RILAspecific rule about materially
misleading sales literature, and what
particular areas or topics should we
address in a RILA-specific sales
literature rule?
139. Do commenters agree with the
contextual concerns highlighted above
with regards to the representations
typically used in RILA sales literature?
Are there other claims or suggestions in
RILA sales literature that insurance
companies use that we should be
concerned about?
140. Do insurance companies
currently utilize any performance
metrics in RILA advertisements? Why
do insurance companies not currently
utilize past performance in RILA sales
literature to the same extent as variable
annuity advertisements? Is there a way
to standardize RILA past performance
information? Is there a way to view
RILA past performance information as
other than as materially misleading?
141. Do commenters agree that
advertising the historical performance of
a RILA or any particular index-linked
option would be misleading in light of
the customized nature of RILA contracts
and the pace at which the RILA features
that determine RILA performance are
subject to change?
142. Are there benefits to investors in
amending rule 482 to include RILA
advertising materials? If so, how should
it be amended? How would we address
past performance metrics for a RILA in
light of the customized nature of RILAs
and the changing nature of RILA
features?
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143. Should we permit insurance
companies to provide RILA sales
literature to investors without being
accompanied or preceded by a summary
or statutory prospectus as variable
annuities do? How would insurance
companies be able to present such a
complex product to investors in a way
that they can understand?
G. Existing Commission Letters
Certain Commission letters, or
portions thereof, exempting insurance
companies from the requirement to
provide financial statements prepared in
accordance with GAAP in connection
with the registration of an offering of
RILAs on Form S–1 based on the
authority provided in 17 CFR 210.3–13
(‘‘3–13 Exemptions’’) would be
withdrawn or rescinded in connection
with any adoption of this proposal in
light of the proposed change to permit
RILAs to provide SAP financial
statements on amended Form N–4 in the
same way that other insurance
companies are permitted to do so on
current Form N–4.357 Following the
compliance date of any final rule, some
letters, or portions thereof, would be
moot, superseded, or otherwise
inconsistent with the final rule and,
therefore, would be withdrawn or
rescinded. If commenters believe that
additional Commission letters or other
actions, or portions thereof, should be
withdrawn or rescinded, they should
identify the letter or guidance, state why
it is relevant to the proposal, how it or
any specific portion thereof should be
treated, and the reason therefor. Based
on the proposal, 3–13 Exemptions that
would be withdrawn or rescinded
would include, but would not
necessarily be limited to, all of the 3–
13 Exemptions listed below.
TABLE 8—EXISTING COMMISSION LETTERS
Name
Date
Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company of New York ..................
Athene Annuity and Life Company ................................................................................................................................................
Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York ......................................
MONY Life Insurance Company of America .................................................................................................................................
Symetra Life Insurance Company and First Symetra National Life Insurance Company of New York .......................................
Forethought Life insurance Company ...........................................................................................................................................
Nationwide Life Insurance Company .............................................................................................................................................
Minnesota Life Insurance Co .........................................................................................................................................................
MEMBERS Life Insurance Co .......................................................................................................................................................
Transamerica Life Insurance Company and Transamerica Financial Life Insurance Company ..................................................
Midland National Life Insurance Company ...................................................................................................................................
Protective Life Insurance Company and Protective Life and Annuity Insurance Company .........................................................
Everlake Life Insurance Company ................................................................................................................................................
Fidelity & Guaranty Life Insurance Company and Fidelity & Guaranty Life Insurance Company of New York ..........................
Delaware Life Insurance Company and Gainbridge life Insurance Company ..............................................................................
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We request comment on the proposed
recessions.
144. Are there any other Commission
letters or actions that should be
rescinded or withdrawn if the proposal
is adopted?
145. Are there any staff letters or
guidance pieces that would be moot,
superseded, or otherwise inconsistent
with the final rule?
146. In a future rulemaking, should
we consider codification of any 3–13
Exemptions that have been granted to
other insurance products? If so, what
considerations should the Commission
consider in doing so?
H. Registered Market-Value Adjustment
Annuities
In addition to RILAs, there are other
non-investment company insurance
products that are securities under the
Federal securities laws. Like RILAs,
offerings of these securities are currently
registered by insurance companies on
Forms S–1 or S–3. For example, some
357 Rule 3–13 provides, in part, that the
‘‘Commission may, upon the informal written
request of the registrant, and where consistent with
the protection of investors, permit the omission of
one or more of the financial statements herein
required or the filing in substitution therefor of
appropriate statements of comparable character.’’
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annuity contracts that offer fixed
investment options and apply marketvalue adjustment annuities (‘‘MVAs’’) to
amounts withdrawn from such fixed
options before the end of the fixed
option’s term (e.g., due to contract
withdrawals, transfers to other
investment options, and annuitization)
are required to register the MVA with
the Commission (‘‘registered
MVAs’’).358 For these annuities, fixed
options are either offered on their own
or in a combination contract with
variable options. Like RILAs, a
significant feature of a registered MVA
is the contract adjustment.
Because RILAs and registered MVAs
differ only with respect to the manner
in which interest is calculated and
credited, many of the disclosures we are
proposing for RILAs on Form N–4
would also be appropriate for registered
MVAs. This is particularly true of the
proposed disclosures relating to the
operation of contract adjustments, given
their importance in both a RILA and a
registered MVA.
We are not proposing to require
insurance companies to register
offerings of registered MVAs on Form
N–4 at this time because the RILA Act
does not address these securities and
imposes specific timelines for the
Commission both to propose rules and
to adopt final rules. We request
comment below, however, on whether
we should also require insurance
companies to register offerings of
registered MVAs on Form N–4. To help
commenters evaluate these requests for
comment, we also have analyzed the
changes to Form N–4 we believe would
be necessary to accommodate offerings
of these securities:
• Adding registered MVAs to the list
of permissible uses of Form N–4 on the
facing page and general instructions; 359
• Adjusting the definition of
‘‘Contract Adjustment’’ in the form to
We would not be rescinding exemptions provided
in any of the letters outlined below provided with
respect to non-RILA insurance products because
they are not affected by this rulemaking.
358 Registered MVAs are securities because the
MVA feature imposes certain investment risks on
purchasers. See Section 3(a)(8) of the Securities Act
and 17 CFR 230.151; see also SEC v. Variable
Annuity Life Insurance Co. of America, 359 U.S. 65,
77 (1959).
359 See, e.g., proposed General Instruction B.1 of
Form N–4.
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account for investment options beyond
index-linked options;
• In the discussion of how interest is
calculated for the contract’s fixed
options in the description of the
insurance company, registered separate
account, and investment options,
requiring: (1) a statement that an
investor could lose a significant amount
of money due to the contract adjustment
if amounts are removed from a fixed
option prior to the end of its term, (2)
a description of the transactions subject
to a contract adjustment with crossreferences to the related disclosure in
the prospectus, and (3) a prominent
statement of the maximum amount of
loss, as a percentage, an investor could
experience from a negative contract
adjustment and that this loss could be
greater due to surrender charges and tax
consequences; 360
• Adjusting the disclosures in the
prospectus about contract adjustments
in the charges-related disclosures to
account for investment options beyond
index-linked options having contract
adjustments; 361
• In the appendix of available
investment options, in the discussion of
fixed options, requiring: (1) a legend
stating that if amounts are withdrawn
from a fixed option before the end of its
term, the insurance company may apply
the contract adjustment and that this
may result in a significant reduction in
contract value; and (2) the provision of
appropriate cross-references to the
prospectus disclosure relating to
contract adjustments; 362
• Requiring registered MVAs to
provide the same disclosure proposed
for RILAs regarding changes in
accountants; 363
• Requiring registered MVAs to
provide the same census-type
information as we are proposing for
RILAs; 364 and
• Requiring the same undertakings
and exhibits for registered MVAs as we
are proposing for RILAs.365
In addition to these changes to Form
N–4, if we were to require insurance
companies to use Form N–4 to register
offerings of registered MVAs, we would
360 See
proposed Item 6(e)(2) of Form N–4.
proposed Item 7(e) of Form N–4.
362 See proposed Item 17(c) of Form N–4.
363 See proposed Item 26(c) of Form N–4. As with
RILAs, if insurance companies were required to use
Form N–4 for registered MVAs, they would also be
permitted to use SAP in registered MVA registration
statements to the same degree as other Form N–4
filers. See supra section II.D. If we were to do this,
3–13 Exemptions provided in connection with
registered MVAs would be withdrawn or rescinded
for the reasons discussed in section II.G above.
364 See proposed Item 31A of Form N–4.
365 See proposed Items 27(q) and 34(b) of Form
N–4.
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anticipate providing the same functional
changes we are proposing for RILAs,
that is, the ability to use a summary
prospectus and the use of the same
filing and marketing rules, for the same
reason as we are proposing these
changes for RILAs.366 For example, we
could create a defined term ‘‘registered
market value-adjusted annuity’’ in rule
405 that would be an annuity (1) that is
deemed a security; (2) that is offered or
sold in a registered offering; (3) that is
issued by an insurance company that is
subject to the supervision of either the
insurance commissioner or bank
commissioner of any State or any
agency or officer performing like
functions as such commissioner; (4) not
issued by an investment company; and
(5) whose value may reflect a positive or
negative adjustment (based on
calculations using a predetermined
formula, or a change in interest rates, or
some other factor or benchmark) if
amounts are withdrawn before the end
of a specified period. We could then use
this definition to apply to registered
MVAs those Securities Act rules we
propose to apply to RILAs.367 We would
also expect to have the same
requirements as to the use of Inline
XBRL for similar reasons.368
We request comment on whether to
require insurance companies to register
the offering of registered MVAs on Form
N–4.
147. Would it be appropriate to
require insurance companies to register
the offering of registered MVAs on Form
N–4 (as proposed to be as amended in
this proposal)? Should all of the changes
suggested above apply to registered
MVAs?
148. Is the definition of ‘‘registered
market-value adjusted annuity’’
included above as an example the
correct one?
149. Are there any other disclosures
that would be relevant in the registered
MVA context?
I. Technical Amendment to Form N–6
The Commission is proposing a
technical amendment to Form N–6 to
reflect the correct placement of an
amendment to this form that the
Commission adopted in 2020 in the
release titled ‘‘Facilitating Capital
Formation and Expanding Investment
366 See
supra sections II.C, E, and F.
definition mirrors that of ‘‘registered
index-linked annuity’’ we are proposing to add to
rule 405 for RILAs, other than the last provision
which borrows from the definition of ‘‘contract
adjustment’’ we are proposing to add to Form N–
4. We could also consider creating a defined term
in rule 405 that combines both the RILA and
registered market-value adjusted annuity
definitions for simplicity.
368 See supra section II.B.9.
367 This
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Opportunities by Improving Access to
Capital in Private Markets’’ (herein
referred to as the ‘‘Exempt Offering
Framework Adopting Release’’).369 In
that release, the Commission adopted,
among other amendments, amendments
to certain instructions associated with
the Exhibits items of Form N–4 and
Form N–6. The amendatory instructions
in the Exempt Offering Framework
Adopting Release erroneously referred
to outdated Exhibits items of these
forms. That is, the amendatory
instructions referred to Items 24 and 26
respectively, instead of Items 27 and 30
respectively (as adopted by the
Commission in earlier amendments to
Forms N–4 and N–6 in the VASP
Adopting Release).370 The amendments
we are proposing to Form N–4 correctly
reflect the placement of the amendment
that the Commission adopted in the
Exempt Offering Framework Adopting
Release in Item 27 of the form instead
of in Item 24. We are also proposing a
technical amendment to Item 30 of
Form N–6 that correctly reflects the
placement of the amendment that the
Commission adopted in the Exempt
Offering Framework Adopting Release
in this item instead of in Item 26.
J. Compliance Period
We are proposing a compliance date
one year after publication of final
amendments in the Federal Register.371
All initial registration statements and
post-effective amendments that are
annual updates to effective registration
statements on Form N–4 that are filed
after the compliance date would be
required to comply with the
amendments. This compliance period is
designed to give registrants sufficient
time to comply with the proposed
changes, including to update their
registration statements; to prepare to use
rules 485 and 497 to update their
registration statements and file
prospectuses with the Commission; and
to begin paying securities registration
fees on Form 24F–2.
RILAs that have previously registered
offerings of securities on Forms S–1 or
S–3 would file a post-effective
amendment to their registration
statement pursuant to rule 485(a) at the
369 Facilitating Capital Formation and Expanding
Investment Opportunities by Improving Access to
Capital in Private Markets, Investment Company
Act Release No. 34082 (Nov. 2, 2020) [86 FR 3496
(Jan. 14, 2021)].
370 See Exempt Offering Framework Adopting
Release at amendatory instructions 50 and 51; see
also VASP Adopting Release at section II.C.4 (Table
6).
371 This compliance period would apply for all of
the amendments in this release other than the
technical amendment to Form N–6 discussed in
section II.I supra.
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time of their next annual update
following the compliance date, using
Form N–4.372 In appropriate
circumstances, we would consider
requests by registrants with respect to
existing variable annuity contracts to
file post-effective amendments pursuant
to Securities Act rule 485(b)(1)(vii)
when these post-effective amendments
make conforming changes to comply
with the proposed amendments to Form
N–4.373
We also are proposing to provide a
six-month delayed effective date for all
amendments except for the amended
Form N–4, amended rule 498A, and
technical amendments to Form N–6,
such that all other final amendments
would be effective six months after
publication in the Federal Register.
Thus, we propose that a registrant
would be able to rely on rule 498A to
satisfy its obligations to deliver a RILA
contract’s statutory prospectus
beginning on the effective date of the
rule amendments, provided that the
registrant is also in compliance with the
amendments to Form N–4. The delayed
effective date for remaining
amendments would provide the
Commission time to prepare the EDGAR
system to accommodate transitioning
RILA offerings onto the proposed
framework.374
372 A post-effective amendment filed under rule
485(a) [17 CFR 230.485(a)] generally becomes
effective either 60 days or 75 days after filing,
unless the effective date is accelerated by the
Commission. RILA registrants generally should be
able to rely on template filing relief, in which case
they would not need to file a rule 485(a) filing for
each RILA. See proposed amended rule
485(b)(1)(vii). Existing RILA issuers that only issue
RILAs and will be using the same CIK would be
permitted to transition by filing a 485APOS or
485BPOS in EDGAR. Both of these submission
types allow the entity to keep its current Securities
Act file number, and both allow the filer to obtain
new contract IDs and the needed Form N–4
investment company type designation in EDGAR.
RILA issuers that will be acquiring new CIKs for
their RILA offerings would need to transition by
filing an administrative Form N–4 submission
under a newly-issued CIK to obtain a new
Securities Act file number, new contract IDs, and
the Form N–4 investment company type (which is
used for EDGAR purposes only).
373 A post-effective amendment filed under rule
485(b) may become effective immediately upon
filing. A post-effective amendment may be filed
under rule 485(b) if it is filed for one or more
specified purposes, including to make nonmaterial
changes to the registration statement. A posteffective amendment filed for any purpose not
specified in rule 485(b) generally must be filed
pursuant to rule 485(a). Under rule 485(b)(1)(vii),
the Commission may approve the filing of a posteffective amendment to a registration statement
under rule 485(b) for a purpose other than those
specifically enumerated in the rule. The
Commission’s staff has been delegated the authority
to approve registrants’ requests under rule
485(b)(1)(vii). 17 CFR 200.30–5(b–3)(1).
374 There would be no transition period
associated with the technical amendment to Form
N–6 discussed in section II.I supra.
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We are not delaying the effective date
of the proposed changes to Form N–4
and rule 498A, however, to allow
registrants to begin filing registration
statements under the revised form as
soon as possible. We believe allowing
registrants to use the new form as soon
as possible following the Commission’s
adoption of final amendments is
consistent with Congress’s intent in
directing the Commission to prepare
and finalize a new form for RILAs
within 18 months of enactment.
We request comment on the proposed
compliance period:
150. Would the proposed compliance
period provide registrants sufficient
time to prepare to comply with the
amendments? Would more time be
appropriate or, conversely, should we
provide a shorter compliance period to
ensure that investors receive the benefit
of the proposed amendments more
quickly?
151. Should we provide a separate
compliance period to provide more time
for insurance companies to comply with
the requirement to structure certain
disclosure in Inline XBRL? For example,
should we provide an additional year
period after the date insurance
companies are required to first update
their disclosure?
152. Is it appropriate to permit a
registrant to rely on rule 498A to satisfy
its obligations to deliver a RILA
contract’s statutory prospectus
beginning on the effective date of the
rule amendments, provided that the
registrant is also in compliance with the
amendments to Form N–4?
K. General Request for Comment From
Retail Investors
We are requesting input from the
retail investor community relating to the
experiences of seeking information
about, and investing in, a RILA. We
understand that RILAs are typically sold
to retail investors. This, together with
the congressional mandate to design
disclosure requirements for RILAs with
the goal of ensuring that key
information is conveyed in terms a
purchaser is able to understand, makes
feedback from retail investors
particularly relevant as we consider the
disclosures that would be required in a
RILA registration form.375 Specifically,
we invite retail investors seeking to
comment on their feedback with
annuities generally and RILAs in
particular to submit a short Feedback
Flyer, available at Appendix D.
375 See supra discussion accompanying and
following footnote 7.
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III. Economic Analysis
A. Introduction
We are mindful of the costs imposed
by, and the benefits obtained from, our
rules. Section 3(f) of the Exchange Act,
section 2(b) of the Securities Act, and
section 2(c) of the Investment Company
Act state that when the Commission is
engaging in rulemaking under such
titles and is required to consider or
determine whether the action is
necessary or appropriate in (or, with
respect to the Investment Company Act,
consistent with) the public interest, the
Commission shall consider whether the
action will promote efficiency,
competition, and capital formation, in
addition to the protection of investors.
Further, section 23(a)(2) of the Exchange
Act requires the Commission to
consider, among other matters, the
impact such rules would have on
competition and states that the
Commission shall not adopt any rule
that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
We are proposing amendments to our
rules designed to carry out the
requirements of Section 101(b) Division
AA, Title I of the Consolidated
Appropriations Act, 2023, to establish a
registration form for RILAs. The
Commission is proposing to amend the
form currently used by most variable
annuity separate accounts, Form N–4, to
require issuers of RILAs to register
offerings on that form as well. To
facilitate this amendment, the
Commission is also proposing to amend
certain filing rules and make other
related amendments. In addition, we are
proposing other amendments to Form
N–4 that would apply to all issuers that
use that form. We are also proposing to
apply a current Commission rule that
provides guidance as to when sales
literature is materially misleading under
the Federal securities laws to RILA
advertisements and sales literature.
While the Commission has developed
a set of specific registration forms for
variable insurance contracts, RILA
issuers cannot use those forms because
a RILA issuer is not an investment
company. Currently, insurance
companies register the offerings of
RILAs on the Securities Act registration
forms that are typically used to register
traditional debt or equity offerings,
Forms S–1 and S–3. Because Forms S–
1 and S–3 are not tailored to the
particular characteristics of RILAs (or
indeed insurance products more
generally), these forms include a
number of disclosure requirements that
may be less material to investors when
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considering whether a statement
involving a material fact is or might be
misleading in the specific context of
investment company sales literature to
RILAs, in order to address misleading
statements about RILA fees, product
features, and certain performance
presentations in RILA sales literature.
We have considered the potential
costs and benefits that would result
from the proposed rules, as well as the
potential effects on efficiency,
competition, and capital formation.
Certain potential economic effects of the
proposed rule would stem from the
statutory mandate, while others would
stem from the discretion we are
exercising. We discuss the potential
economic effects of the proposed
amendments in section III.C. We also
consider certain alternatives to our
proposed approach to implementing the
statutory mandate, as discussed in
section III.E. We note that, where
possible, we have attempted to quantify
the costs, benefits, and effects on
efficiency, competition, and capital
formation expected to result from the
proposed rule. In some cases, however,
we are unable to quantify the economic
effects because we lack the information
necessary to provide a reasonable and
reliable estimate. Nevertheless, as
described more fully below, the
Commission is providing both a
qualitative assessment and quantified
estimate of the economic effects, where
feasible. The Commission invites
commenters to include estimates and
data that could help it form useful
estimates of the economic effects of the
proposed amendments.
evaluating an insurance product like a
RILA and do not include line-item
requirements mandating RILA-specific
information that is of importance to
investors in these products. The
inclusion of disclosures that are of little
relevance to investors and the omission
of information that is of importance to
investors limits the usefulness of the
information investors currently receive
about RILAs and thus their ability to
make informed investment decisions. In
addition, Forms S–1 and S–3 require the
use of GAAP financial statements, rather
than the SAP financial statements that
the State insurance regulators require.
SAP financial statements, which focus
on an issuer’s ability to meet its
obligations under its insurance
contracts, as regulated by State law,
appear to provide sufficient material
information for investors evaluating
RILAs. Investors may also benefit from
the lower cost burdens on issuers
provided by the use of SAP financial
statements, to the extent that those
savings are passed along to investors.
The proposed rule would increase the
usefulness of the information provided
to current and prospective investors in
RILAs by:
• Adapting the existing registration
and disclosure framework for variable
insurance contracts to accommodate
RILAs;
• Requiring RILA-specific disclosure
requirements in Form N–4, including
disclosures specific to the underlying
investment options, such as, for each
available index-linked option, the
index, crediting period, and index
crediting methodology;
• Proposing amendments to Form N–
4 based on our experience in
administering the form and in reaction
to our observations of investor testing,
which would be applicable to all issuers
that use this registration form and
which are designed to improve
disclosures;
• Switching the order of the Key
Information Table and Overview of the
Contract items;
• Utilizing a question and answer
format for the Key Information Table;
• Removing an instruction that
permits registrants to omit additional
disclosure in the prospectus that repeats
information disclosed in the Overview
of the Contract or the Key Information
Table; and
• Extending the current rule
providing factors to be weighed in
a. The Market for Annuity Products
As of January 2023, there were 90
RILAs registered with the Commission
issued by 23 insurance companies.376
Among the 90 RILAs, 50 are stand-alone
RILA products, while 40 are
combination contracts that offer indexlinked options as well as variable
options. The number of RILAs registered
with the SEC on Form S–1 is 52, while
the remaining 38 are registered on Form
376 Based on analysis of Forms S–1, S–3 and POS
AM filed by RILA issuers.
377 EDGAR Database. Certain Commission letters,
or portions thereof, exempt insurance companies
from the requirement to provide financial
statements prepared in accordance with GAAP in
connection with the registration of an offering of
RILAs on Form S–1. See Section II.G.
378 Data obtained from Forms S–1, S–3 and POS
AM filed by RILA issuers.
379 Data obtained from Forms S–1, S–3 and POS
AM filed by RILA issuers.
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B. Baseline
1. Affected Parties
The proposed rule would affect
issuers of and investors in RILAs, as
well as issuers of and investors in
variable annuities that are registered on
Form N–4.
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S–3. A little over half of the registered
RILAs (47 RILAs) report SAP financials,
with the remainder (43 RILAs) reporting
GAAP financials.377
RILA contracts currently offer a
variety of index-linked options.
Specifically, RILA contracts that are
currently registered with the
Commission offer index-linked options
whose returns are linked, in part, to
between two and nine indices with an
average among RILAs of 4.3 indices.378
The indices associated with current
RILA contracts commonly include the
S&P 500, Russell 2000, and NASDAQ–
100. RILA contracts offer index-linked
options with less well known indices
and ETFs as well, but with much less
frequency.379
As discussed in Section I, indexlinked options whose returns are based,
in part, on the same index may
nevertheless have different elements
that contribute to an investor’s returns.
Notably, different index-linked options
whose returns are linked to the same
index may offer different crediting
periods (the set length of time for
measuring growth of contract value
based on the performance of the linked
index—for example, one or three years),
crediting methodologies, and buffer or
floor levels. RILAs that are currently
registered with the Commission offer
between 4 and 64 index-linked options,
with an average of 22.8 index-linked
options. Common crediting periods
include one, two, three, and six years,
with one year being most common. In
the past, index-linked options with
terms as long as 10 years have been
offered, although the longest indexlinked option term currently offered is
six years. For those ‘‘combination’’
contracts that offer index-linked options
and variable options, the number of
variable options ranges from 1 to 100,
with an average of 10.4 variable options.
The most common variable option is a
money market fund—in all instances of
combination contracts, a money market
fund (or, in one case, a similar liquid
investment) is offered as a variable
option.
Table 9 provides information on the
dollar amount of RILA sales from 2016
to 2022.380 RILA sales have increased
from $7.3 billion in 2016 to $41.1
billion in 2022, which represents a
463% increase between these two years.
380 Fact Tank: Sales Data, Life Insurance
Marketing and Research Association, https://
www.limra.com/en/newsroom/fact-tank/ (using
data from the U.S. Individual Annuity Sales surveys
for Q4 for each year from 2016 through 2022).
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
TABLE 9—SALES OF RILAS, 2016–2022
Sales of RILAs ($ billions) .........................
2016
2017
2018
2019
2020
2021
2022
7.3
9.0
11.2
17.4
24.1
38.7
41.1
Source: Fact Tank: Sales Data, Life Insurance Marketing and Research Association, https://www.limra.com/en/newsroom/fact-tank/ (using data
from the U.S. Individual Annuity Sales surveys for Q4 for each year from 2016 through 2022).
A recent survey of insurers found that
85% of respondents believed in 2021
that RILA sales would increase by 10%
or more over the next three years, 10%
believed that RILA sales would increase
by less than 10%, while 5% believed
that RILA sales would remain the same
over that time period. No respondents
indicated that they believed RILA sales
would decrease.381 When surveyed
about the factors driving the growth in
RILA sales, the three most commonly
cited reasons were: (1) increased
understanding of RILAs among advisers
and broker-dealers (85%), (2) the
entrance of large, reputable insurers into
the RILA market (80%), and (3)
increased supply due to the entrance of
large issuers and distributors of RILAs
(80%).382 Respondents also indicated
that they expected to see the largest
increases in sales among the following
distribution channels: independent
agents or broker/dealers, captive
insurance agents, regional broker/
dealers, and wirehouses.383 RILAs were
also the product most insurers indicated
had ‘‘tremendous’’ growth potential
over the near term.384
As of 2019, there were a total of 2,396
unique variable annuity products
offered by a total of 33 companies.385
Net assets totaled $2,018.0 billion. Also
in 2019, variable annuity sales totaled
$98.3 billion.386 Of the total sales, $62.8
billion (64% of total sales) were
annuities within qualified plans and
$35.5 (36%) were non-qualified
annuities.387 Investors purchased
annuities across various distribution
channels—captive agents, $34.5 billion,
(35% of total sales); independent
financial planners/NASD firms, $39.2
billion (40%); banks/credit unions, $9.2
billion (9%); wirehouses/regional
broker-dealers, $12.6 billion (13%); and
direct response, $2.8 billion (3%).388
b. Issuing Insurance Companies
The number of insurance companies
currently offering securities registered
as RILAs with the Commission is 23,
from 19 insurance company complexes.
Out of these 23 insurance companies, 15
of them register RILAs on Form S–1,
while the remaining 8 use Form S–3.389
Insurance companies offer, on
average, 4 RILA contracts, ranging from
a maximum of 11 RILAs to a minimum
of 1 RILA. The top two issuers offer 21
RILAs in total, or 29% of the number of
existing RILA products.390
c. Investors
In 2021 there were an estimated 83
million individuals aged 45–64 and 56
million individuals aged 65 or older in
the United States, representing 25
percent and 17 percent of the total
population, respectively.391 The number
of individuals age 65 or older is
projected to be 65 million (19 percent of
the total projected population) in 2025,
78 million (21 percent of the projected
population) in 2035, 83 million (22
percent of the projected population) in
2045, and 90 million (24 percent of the
projected population) in 2055.392
Individuals that are planning for, or
are already in, retirement face
388 Id.
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381 Cerulli
Associates & Insured Retirement
Institute, Custom Key Findings, U.S. Annuity
Markets 2021: Acclimating to Industry Trends and
Changing Demand Ex. 1 (2021) (‘‘Cerulli Report’’),
available at https://www.irionline.org/wp-content/
uploads/2022/02/IRI-Key-Findings_2021_Final_
12622.pdf.
382 Id. at Exhibit 2.
383 Id. at Exhibit 3. Other RILA distribution
channels include: brokerage general agencies/
independent marketing organizations, registered
investment advisers, and direct sales.
384 Cerulli Report at Exhibit 5.
385 See Insured Retirement Institute Retirement
Fact Book 2020 (‘‘IRI Fact Book’’). In 2018 (the last
year for which this information is available in the
2020 edition), the total number of variable annuity
contracts in force was 17.9 million, with an average
individual contract value of $113,053.
386 Id.
387 Id.
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389 Data obtained from Forms S–1, S–3 and POS
AM filed by RILA issuers.
390 Calculated using data obtained from Forms S–
1, S–3 and POS AM filed by RILA issuers.
391 Annual Estimates of the Resident Population
for Selected Age Groups by Sex for the United
States: Apr. 1, 2020, to July 1, 2021 (NC–EST2021–
AGESEX). We do not have demographic data on
RILA investors. A 2013 survey found that 86
percent of individual annuity investors purchased
their first annuity before age 65, including 47%
who were between the ages of 50 and 64 years old.
The average age of investors at first purchase of an
annuity is 51. The average current annuity investor
age is 70. See The Gallup Organization and Mathew
Greenwald & Associates for The Committee of
Annuity Insurers, Survey of Ownership of
Individual Annuity Contracts (2013).
392 Projected Age Groups and Sex Composition of
the Population: Main Projections Series for the
United States, 2017–2060. U.S. Census Bureau,
Population Division: Washington, DC.
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increasing challenges with respect to
achieving their income goals for
retirement. First, people are living
longer. Second, traditional definedbenefit retirement systems that provide
guaranteed income are being replaced
with defined-contribution systems that
require people to accumulate their own
retirement savings.393 Evidence suggests
that, on average, individuals may not be
saving appropriately to meet their
retirement goals. For example, one
survey found that while 74 percent of
individuals are saving for retirement: (1)
51 percent of older individuals have less
than $50,000 saved for retirement, (2) 57
percent of individuals save less than 10
percent of their income, and (3) 33
percent of individuals save less than 5
percent of their income.394 In addition
to the finding that individuals may not
be saving an appropriate amount for
retirement, there is also concern that
individuals may not be taking on an
appropriate amount of financial risk.395
Investors may not be saving
appropriately to meet their retirement
goals for several reasons. For example,
individuals may face meaningful
burdens (e.g., search costs) when trying
to identify appropriate investments or
savings products. Once identified,
investors may face additional burdens
(e.g., acquiring and analyzing large
amounts of information) to determine
which specific investments or saving
products among the ones identified
allow investors to best meet their
savings goals.396 Second, improving
393 John Y. Campbell, Restoring Rational Choice:
The Challenge of Consumer Financial Regulation
(NBER Working Paper No, 22025, 2016), available
at https://www.nber.org/papers/w22025 (‘‘Campbell
Paper’’).
394 Insured Retirement Institute, Retirement
Readiness Among Older Workers 2021 (2021) (‘‘IRI
Survey’’), available at https://www.irionline.org/wpcontent/uploads/legacy/default-document-library/
iri-retirement-readiness-2021_fullreport.pdf.
395 See Campbell Paper. Campbell argues that
individuals take too little financial risk and that the
willingness to take financial risk varies with
wealth—individuals with greater wealth are willing
to take on more financial risk than individuals with
less wealth.
396 John Y. Campbell, Howell E. Jackson, Brigitte
C. Madrian, and Peter Tufano, Consumer Financial
Protection, 25 J. Econ. Perspectives 91 (2011)
(‘‘Campbell et al. Paper’’). Campbell et al. note that
making decisions about financial products often
requires considerable information on terms and
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technology has permitted the
development of more complex and
confusing financial products.397 As a
result of the burden associated with
identifying appropriate investments, as
well as the burden of acquiring and
analyzing information to choose among
the set of appropriate investments,
investors may spend less time and effort
(i.e., resources) than is required to make
appropriate investment decisions.
Investors may not be saving
appropriately for other reasons, as well.
For example, some investors may not
make the appropriate decisions for
themselves even if they were presented
with all the information that was
required to make a decision. Decision
making limitations may be particularly
problematic in the context of saving for
retirement because learning from
experience is difficult. Investing in
retirement products is only done
infrequently and the outcomes from
investing decisions are delayed, perhaps
for decades, and are subject to large
random shocks, so that personal
experience is slow to accumulate and is
contaminated by noise. Also, financial
innovation can reduce the relevance of
an investor’s prior experiences. For
example, prior experience investing in
investment vehicles with unbounded
returns would be less relevant for
investing in RILAs (which have
bounded returns) than it would be for
investing in variable annuities (which
have unbounded returns).398 Another
conditions, particularly for financial decisions that
are undertaken only infrequently.
397 See Campbell Paper.
398 See Campbell et al. Paper. The Campbell Paper
identifies five aspects of ‘‘financial ignorance’’ that
may lead to poor investor decision making. First,
investors may lack understanding of basic concepts
necessary to make appropriate decisions. For
example, investors appear to lack an understanding
of diversification and the tradeoff between risk and
return. Second, investors may not understand the
terms of financial contracts. Third, it appears that,
rather than using all available historical data to
form views about future returns on alternative
strategies, investors rely on their own specific
experiences to form an opinion. Fourth, individuals
appear to not understand their own difficulties with
financial decision making. Finally, investors appear
to not understand the incentives faced by other
parties and the effect these incentives have on their
strategic behavior. Other studies suggest poor
investment decisions may result from investor
uncertainty and lack of investor familiarity with
different assets. For example, individuals may not
invest appropriately because individuals are
unable, given historical experience, to form precise
estimates of how they expect assets to perform in
the future. See, e.g., Raymond Kan and Guofu Zhao
(2007). Optimal Portfolio Choice with Parameter
Uncertainty, Journal of Financial and Quantitative
Analysis, 27(3), 621–656. Rather than being unable
to form precise estimates of how they expect assets
to perform in the future, investors may not have,
perhaps due to not having the requisite experience,
the ability to form any expectation about how they
expect an asset to perform in the future. If investors’
ambiguity is great enough, they simply may choose
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possibility is that investors may have
preferences that lead them to favor
present consumption over future
consumption (‘‘present-biased
preferences’’) and, as a result, they save
an inappropriate amount for
retirement.399 Finally, many people
have a limited financial capacity to
save, particularly individuals already
burdened with student loans and
mortgages.
2. Current Regulatory Requirements
As discussed in section I above,
RILAs are securities for purposes of the
Securities Act, and public offerings of
RILAs, therefore, must be registered
with the Commission.400 Unlike
variable annuity contracts for which the
Commission has adopted a specific
registration form tailored to those
products, insurance companies register
RILA offerings on Form S–1 or Form S–
3.
Form S–1 is available to any issuer
(except foreign governments and issuers
of asset-backed securities) to register
securities for which no other
registration form is authorized or
prescribed. A registration statement on
Form S–1 contains extensive disclosure
about all aspects of the issuer’s business
and financial condition and consists of
two parts: a prospectus (Part I), and
additional information not required to
be included in the prospectus (Part II),
but that is publicly available on the
Commission’s EDGAR website. Form S–
1 allows incorporation by reference only
on a very limited basis. The prospectus
must contain financial statements
meeting the requirements of Regulation
S–X, which generally includes audited
financial statements prepared in
accordance with GAAP.401 Currently,
not to invest in particular assets. See, e.g., David
Easley and Maureen O’Hara (2009). Ambiguity and
Nonparticipation: The Role of Regulation, Review of
Financial Studies, 22(5), 1817–1843. Finally,
investors may make poor investment decisions
because they choose to overweight investment in
assets with which they are familiar, and
underweight, or exclude, investment assets with
which they are less familiar. See, e.g., Gur
Hubberman (2001). Familiarity Breeds Investment,
Review of Financial Studies, 14(3), 659–680 and
Massimo Massa and Andrei Simonov (2006).
Hedging, Familiarity, and Portfolio Choice, Review
of Financial Studies, 19(2), 633–685.
399 See Campbell et al. Paper. Campbell et al. note
that individuals with present-biased preferences
favor present consumption which can lead an
individual to make decisions today that reduce
their future welfare in a way that the individual
later regrets.
400 See supra footnote 5 and accompanying text.
401 Certain Commission letters, or portions
thereof, exempt insurance companies from the
requirement to provide financial statements
prepared in accordance with GAAP in connection
with the registration of an offering of RILAs on
Form S–1. As discussed in Section III.B.1.a, 47
RILAs report SAP financials.
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disclosures about RILA offerings are
largely unstructured. The audited
financial statements in the prospectus, if
prepared in accordance with GAAP,
must be tagged in Inline XBRL if the
Form S–1 contains a price or a price
range.402 Form S–1 must be declared
effective by the Commission before any
sales of the registered securities may be
made. The time required for
Commission review will depend on the
number and complexity of Commission
comments and the issuer’s ability to
adequately address those comments.
The issuer must pay the Commission
registration fee before it files a Form S–
1. The amount of the fee is based on the
proposed maximum aggregate offering
price.403 The issuer must indicate the
amount of each type of security being
registered and calculate the fee payable
for each security.
Form S–3 is a ‘‘short-form’’
registration statement under the
Securities Act that can be used by
companies that have been subject to
reporting obligations under the
Exchange Act for at least one year and
that satisfy certain other
requirements.404 Reporting obligations
under the Exchange Act include audited
financial statements prepared in
402 See
17 CFR 229.601(b)(101)(i)(B).
Form S–1 (or S–3) fees paid for a
withdrawn registration statement are available to
the issuer for use with its future registration
statements. The amount available for use as an
offset under rule 429 under the Securities Act
equals the portion of the filing fee paid that is
associated with any unsold securities of the same
class registered on an earlier registration statement.
Once a filing fee has been used as an offset, those
unsold securities on the earlier registration
statement are deemed deregistered. RILAs are
continuously offered to investors, who in many
cases are long-term investors that may make
additional allocations or other investment decisions
with respect to an investment in a RILA. Because
RILA investors may make additional allocations or
other investment decisions with respect to an
investment, unless a prior RILA offering is
completely unsold, RILA issuers may have
increased difficulty in using filing fees associated
with unsold securities of a prior offerings.
404 The issuer must be either organized under
U.S. law with its principal business operations in
the United States or a foreign private issuer that
reports under the Exchange Act using the domestic
reporting forms. The issuer must have a class of
securities registered under section 12(b) or 12(g) of
the Exchange Act, or be required to file reports
under section 15(d) of the Exchange Act. The issuer
must have been subject to the reporting
requirements of the Exchange Act and have filed all
reports and materials required under sections 13,
14, and 15(d) of the Exchange Act for the 12
calendar months preceding the filing of Form S–3,
and, with certain exceptions, must have timely filed
all such reports and other materials required to be
filed during the 12 calendar months and any
portion of a month immediately preceding the filing
of the registration statement. An issuer that meets
all of the requirements of Form S–3 and that has
a public float of $75 million or more (i.e., ‘‘seasoned
issuers’’) may use Form S–3 to register any offering
of debt or equity for cash.
403 Generally,
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accordance with GAAP and structured
in Inline XBRL. A registration statement
on Form S–3 contains extensive
disclosure about all aspects of the
issuer’s business and financial
condition and consists of two parts: a
prospectus which includes, either
directly or incorporated by reference
from the issuer’s Exchange Act filings,
detailed information about the issuer
(Part I), and additional information not
required to be included in the
prospectus (Part II), but that is publicly
available on the Commission’s EDGAR
website.
Registration using Form S–3 offers
issuers advantages over registration
using Form S–1. First, Form S–3 allows
significant incorporation by reference,
which allows for shorter prospectuses
and makes Form S–3 easier to complete.
Also, Form S–3 also allows for forward
incorporation by reference, eliminating
the need to file post-effective
amendments to keep registration
statements current.
A Form S–3 filed by a non-WKSI must
be declared effective by the
Commission. A Form S–3 receives
either a full review, a targeted review of
one or more sections of the registration
statement, or no review. Commonly, a
full review takes approximately 30 days
with targeted reviews taking less time.
The time to resolve any Commission
comments will depend on the number
and complexity of the Commission’s
comments. An issuer must pay
Commission filing fees before it files
Form S–3. The amount of the filing fee
is based on the proposed maximum
aggregate offering price.
Under the Federal securities laws
applicable to all securities (including
RILA offerings), it is unlawful for any
person to use materially misleading
communications in connection with the
offer or sale of any security.405 Rule 156
is an interpretive rule that provides
factors to be weighed in considering
whether a statement involving a
material fact is or might be misleading
in the specific context of investment
company sales literature, including
literature relating to the sale of variable
annuities.
As discussed in section I above, in
2022 Congress enacted the RILA Act
directing the Commission to adopt a
new registration form for RILAs within
18 months of enactment (i.e., the end of
June 2024). If the Commission fails to
adopt the form by the end of June 2024,
the RILA Act provides that issuers can
begin registering the offering of RILAs
on Form N–4.
405 See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR
240.10b–5.
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3. Market Practice
Annuities can play a role in helping
investors save for retirement and receive
guaranteed lifetime income during
retirement.406 There are multiple types
of annuities available to help investors
who have different financial goals or
tolerances for risk save for retirement:
fixed annuities, variable annuities, and
RILAs. Fixed annuities offer investors
preservation of their investment by
guaranteeing a minimum rate of return,
but with little opportunity for asset
growth. During the accumulation
phase,407 a traditional (i.e., book value)
fixed annuity offers investors a fixed
rate of return (known in advance) for a
given period of time.408 A market value
adjusted annuity (see section II.H) is
similar to a traditional annuity, but the
assets are subject to a market value
adjustment based on interest rate
changes.409 Fixed index annuities
guarantee a certain rate of return,410 but
also provide the potential for (limited)
additional returns based on the
performance of a specified market
index.411
Variable annuities accumulate savings
based on the performance of the
underlying investment options chosen
by an investor. Typically, investors are
able to choose among investment
options that pass on the returns of a
wide variety of mutual funds such as
equity funds, bond funds, funds that
combine equities and bonds, actively
managed funds, index funds, domestic
406 Id. The IRI Fact Book argues that annuities
give investors the ability to create their own
pensions. The IRI Fact Book also argues that, unlike
mutual funds, annuities offer a wide variety of
guarantees to protect an investor’s investment. For
example, death benefits provide principal
protection in the event that an investor dies during
a market downturn.
407 During the accumulation phase, also called the
savings phase, capital builds up. In this phase, the
investor pays premiums into the contract to
accumulate assets. See IRI Fact Book.
408 Id. The IRI Fact Book also notes that fixed
annuities involve less investment risk because they
offer a guaranteed minimum rate of interest. The
minimum rate is not affected by fluctuations in
market interest rates.
409 Id. The IRI Fact Book contends that fixed
index annuities are designed for investors who
want to partake in the benefits of a market-linked
vehicle with a protected investment floor if there
is a downturn in the index.
410 Currently, insurance companies with a
minimum A.M. Best Insurance Ratings of A¥ offer
fixed rate annuities that guarantee between 3.70%
and 5.40% for a three-year period, and between
3.20% and 5.25% for a ten-year period. Multi-Year
Guarantee Annuities (MYGA), ANNUITY
ADVANTAGE (accessed Aug. 17, 2023, and filtered
by ‘‘State’’ of ‘‘- All’’; ‘‘Min AM Best’’ of ‘‘A¥’’;
‘‘Years’’ of ‘‘10’’; and ‘‘Range’’ of ‘‘Exact’’), https://
www.annuityadvantage.com/annuity-rates-quotes/
multi-year-guarantee-annuities/
?rating=4&years=10&pos=300&sort=guarantee_
period_yield&limit=all.
411 IRI Fact Book.
PO 00000
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funds, and international funds.412
Depending on the investment options
chosen, variable annuities can offer
investors the greatest opportunity for
asset growth, but they also can involve
the greatest amount of investment-based
risk, compared to other types of
annuities.413
RILAs are an index-linked product
that can be purchased by individual
investors as part of both qualified and
non-qualified retirement accounts.414
RILAs combine features of fixed-index
annuities and variable annuities. RILAs
limit or reduce downside risk in return
for an investor accepting limited upside
performance. In exchange for giving up
the complete protection of principal
offered by fixed annuities, a RILA
investor is potentially afforded greater
upside potential than that provided by
fixed annuities, though typically less
than the potential upside of investing in
the same index within a variable
annuity.415 RILAs allow investors some
ability to customize a level of risk with
which they are comfortable.416 Like
other annuities, RILAs have an
accumulation phase followed by a
payout phase. The accumulation phase
is divided into one or more crediting
periods.417 Also like other annuities,
after a ‘‘surrender charge’’ period
(generally, 3 to 10 years following an
investor’s last premium payment),
investors can usually surrender their
contract at the end of any crediting
period and receive full account value.418
Investors, however, may lose money if
they withdraw early from an investment
option or from the contract, as
explained in section I.A above.
At the end of a crediting period, the
issuer credits a RILA investor’s contract
value with ‘‘interest’’ (which can be
either positive or negative) that is based
on the performance of a specified index,
412 Id.
413 Additionally, variable annuities often involve
direct fees, such as insurance charges, and indirect
expenses, including management and other fees and
expenses associated with the underlying mutual
funds in which the variable annuity subaccounts
invest. See IRI Fact Book.
414 Thorsten Moenig, It’s RILA Time: An
Introduction to Registered Index-Linked Annuities,
89 J. Risk & Ins. 339 (2022) (‘‘Moenig Paper’’).
415 See IRI Fact Book.
416 Id. The IRI Fact Book also contends that
historically investors generally fell into one of two
camps: those willing to exchange safety of principal
for modest returns, and those able to tolerate the
higher risk of being invested in securities in
exchange for greater upside potential. RILAs
address a developing demand for products that
allow investors some ability to customize a level of
risk with which they are comfortable. Structured
annuities (i.e., RILAs) meet the needs of the inbetween investor who wants some degree of
certainty but also desires some upside potential.
417 Id.
418 Id.
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
subject to restrictions on the upside,
through a cap and/or ‘‘participation
rate,’’ as well as some form of downside
protection.419 If the index declines, the
credited loss is lessened by either a floor
(a maximum loss percentage), a buffer
(index losses are credited to the RILA
investor’s contract value only when they
exceed a certain threshold), or a
downside participation rate (the loss
credited to contract value is a certain
percentage of the index loss).420 RILA
downside protection mechanisms
typically do not change over time,
whereas issuers may, and likely will,
change upside limits on gains for both
new contracts as well as existing
contracts to reflect changing market
conditions.421 If a RILA contract offers
downside protection in the form of a
floor, then the increased volatility
would expose the issuer to greater
downside risk. To offset the increased
downside risk, an issuer might choose
to reduce its upside risk by lowering cap
rates.422 If the RILA contract offers
downside protection in the form of a
buffer, then increased volatility would
expose the issuer to reduced downside
risk. The reduced downside risk might
cause issuers to increase cap rates.423
Also, unlike variable annuities, most
RILAs do not include any direct ongoing
fees or charges to the investor. Insurance
companies, however, can benefit from
offering RILAs in at least three ways.
First, insurance companies can benefit
from a favorable imbalance between the
downside protections that a RILA
contract offers, and the upside limits the
contract offers.424 That is, insurance
companies set the level of upside limits
such that their value (to the issuer)
exceeds the cost of providing the
downside protection mechanism to
investors.425 One study estimates an
average annual cost to investors from
the imbalance between the downside
protections that a RILA contract offers
and the upside limits is approximately
0.17% of the RILA investment
amount.426 To assess if the findings of
the study continue to be relevant for the
current RILA market, the staff
conducted an independent analysis of
RILA contract terms. Specifically, staff
examined 24 one-year term rates linked
to the S&P 500 index, Nasdaq 100 index,
Russell 2000 index, and MSCI EAFE.427
These rates were offered by three
insurance companies across a two-week
interval.428 In particular, staff calculated
the fair value of the portfolio, composed
of a risk-free zero-coupon bond with
one-year maturity and a collection of
hypothetical index options with oneyear expiration that would replicate the
promised payoff for each contract.429
Staff used the Black-Scholes formula for
European options to derive fair prices of
these hypothetical index options. In
71151
estimating the implied volatility for
each specific strike price, staff utilized
an estimated one-year volatility
surface.430 The volatility surface
estimates the values for implied
volatility across a range of standardized
options with varying implied strike
prices, including both calls and puts.
Staff then linearly interpolated between
the implied volatilities with implied
strikes adjacent to the strike price of
each hypothetical option to obtain the
implied volatility. This implied
volatility is used as an input in the
Black-Scholes formula to derive the fair
values of the options.431 Staff assumed
that the options expire in exactly one
year. The annual cost of each contract
is defined as the difference between the
par value and the calculated risk-neutral
fair price of the contract, divided by the
par value.432
Table 10 presents the mean and
median annual costs for each of the
twenty-four contracts during the sample
period. The annual costs hover around
zero for all contracts. The mean annual
costs are positive for nearly all of the
contracts, ranging from 0.04% for
contract 22 and 0.93% for contract 20,
but negative for others, such as contract
1, contract 2, contract 3, and contract
16. These results are consistent with the
Moenig Paper’s findings of a mean cost
of 0.17%.
TABLE 10—PRICING OF TWENTY-FOUR SAMPLE RILA CONTRACTS
Mean
(%)
Contract 1 ................................................................................................................................................................
Contract 2 ................................................................................................................................................................
419 Id.
lotter on DSK11XQN23PROD with PROPOSALS2
420 Id.
The Moenig Paper argues that RILAs are
structurally similar to fixed-index annuities except
that RILAs may credit negative returns. A fixedindex annuity can be viewed as a special case of
a RILA with a floor of 0%. The insurer provides full
protection on the index return in exchange for a low
cap rate (commonly between 2% and 4%).
421 See Moenig Paper.
422 Id.
423 Id.
424 Id.
425 We understand that for shorter crediting
periods and for common indexes such as the S&P
500, insurance companies are able to use exchangetraded derivative securities to closely approximate
the insurer’s liabilities from a RILA contract at the
end of each crediting period. For example, for a
RILA with both a floor and a cap, the insurance
company can hedge its liability by purchasing a call
option (with an appropriate strike price given the
floor) and selling a call (with a higher strike price
that is dependent on the cap). The insurance
company can offer a cap such that the proceeds
from selling the call with the higher strike price
exceed the cost of purchasing the call option with
the lower strike price. For a RILA with a downside
buffer (as opposed to a floor) and a cap, the process
for insurance companies to hedge their liabilities is
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similar, but with a different mix of options. In the
case of a RILA with a downside buffer and a cap,
the insurance company would purchase a call
option, sell a call option (with a higher strike price),
and selling a put option (with a lower strike price,
as appropriate given the downside buffer). In this
case, the insurance company can offer a cap such
that the proceeds from selling the call and the put
exceed the cost of the call option with the lower
of the two strike prices.
426 See Moenig Paper; Public Filings on EDGAR.
427 The staff obtained the term rates from Rates:
Current rates for Allianz Index Advantage ADV
Variable Annuity, Allianz, https://
www.allianzlife.com/what-we-offer/Annuities/
registered-index-linked-annuities/index-advantageadv/rates (visited Sept. 14, 2023); Variable
Annuities, Equitable, https://equitable.com/
retirement/products/variable-annuities (click ‘‘View
Performance Cap Rates’’) (visited Sept. 14, 2023);
Nationwide Defender Annuity, Nationwide (Sept. 1,
2023), (visited Sept. 14, 2023).
428 Each contract designates a distinct set of buffer
and cap rates with no additional features. The
sample period spans from September 5 to 15, 2023.
The Moenig Paper cited an industry survey as a
source for the data in its analysis. We understand
that the industry survey cited does not contain
updated product-level contract-level details beyond
PO 00000
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Sfmt 4702
¥0.30
¥0.64
Median
(%)
¥0.30
¥0.64
the data cited in the Moenig Paper. We request
comment on data sources (e.g., pricing vendors) that
should be considered for these calculations. See
infra section III.F.
429 More specifically, the options position
encompasses a long At-the-Money (ATM) call
option, coupled with a short Out-the-Money (OTM)
call option with strike price equal to the index
value increased by a factor of the cap rate and a
short OTM put option with strike price equal to the
index value decreased by a factor of the buffer rate.
430 The volatility surface data is obtained through
IvyDB OptionMetrics.
431 The other model inputs—the end-of-day S&P
500 index value and the risk-free interest rate—are
obtained through IvyDB OptionMetrics.
432 The staff incorporated any explicit annual
product fee charged by the insurance company into
the cost calculation. This analysis could be
extended to incorporate several additional factors
that differentiate the RILA from the replicating
strategy that would be priced in a market. For
example, it does not consider any effective
difference to the investor in liquidity because of
early withdrawal charges or penalties, differences
in portfolio value prior to maturity, death benefits,
or specific crediting methods. We request comment
on these aspects of pricing of RILA contracts below.
See infra section III.F.
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
TABLE 10—PRICING OF TWENTY-FOUR SAMPLE RILA CONTRACTS—Continued
Mean
(%)
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
Contract
3 ................................................................................................................................................................
4 ................................................................................................................................................................
5 ................................................................................................................................................................
6 ................................................................................................................................................................
7 ................................................................................................................................................................
8 ................................................................................................................................................................
9 ................................................................................................................................................................
10 ..............................................................................................................................................................
11 ..............................................................................................................................................................
12 ..............................................................................................................................................................
13 ..............................................................................................................................................................
14 ..............................................................................................................................................................
15 ..............................................................................................................................................................
16 ..............................................................................................................................................................
17 ..............................................................................................................................................................
18 ..............................................................................................................................................................
19 ..............................................................................................................................................................
20 ..............................................................................................................................................................
21 ..............................................................................................................................................................
22 ..............................................................................................................................................................
23 ..............................................................................................................................................................
24 ..............................................................................................................................................................
¥0.30
0.57
0.34
0.37
0.42
0.39
0.60
0.72
0.51
0.09
0.22
0.24
0.35
¥0.08
0.16
0.12
¥0.08
0.93
0.63
0.04
0.33
0.38
Median
(%)
¥0.29
0.61
0.34
0.50
0.44
0.40
0.58
0.74
0.46
0.09
0.22
0.25
0.36
¥0.11
0.11
0.13
¥0.22
0.93
0.64
0.04
0.33
0.38
Note: The table summarizes the annual costs for each of the twenty-four contracts offered by three insurance companies during a two-week
interval. See Rates: Current rates for Allianz Index Advantage ADV Variable Annuity, Allianz, https://www.allianzlife.com/what-we-offer/Annuities/
registered-index-linked-annuities/index-advantage-adv/rates (visited Sept. 14, 2023); Variable Annuities, Equitable, https://equitable.com/retirement/products/variable-annuities (click ‘‘View Performance Cap Rates’’) (visited Sept. 14, 2023); Nationwide Defender Annuity, Nationwide (Sept.
1, 2023), https://nationwidefinancial.com/media/pdf/VAM-3629AO.pdf (visited Sept. 14, 2023). At the end of each business day, we employ a
market price approach to compute the fair value of each contract. We then compare the fair value to the par value to derive the annual cost and
incorporate any explicit product fee. Subsequently, we compute the mean and median annual costs for each contract over the two-week measurement period.
Also, we understand that, generally,
insurance companies can benefit from
offering RILAs by investing RILA
proceeds into fixed-income securities
such as corporate bonds, thereby
earning a ‘‘credit risk premium.’’
Further, insurance companies can
benefit when a RILA offers index-linked
options whose index for measuring
performance is a price-based index that
does not account for dividend
payments. For example, if an investor
chooses an index-linked option whose
performance is based, in part, on the
S&P 500 Price Return Index, the
credited return may be based on the
point-to-point change in the S&P 500,
which does not include the dividend
payments of the underlying stocks.433
The excluded dividends can act as an
implicit ‘‘fee’’ on investors with the
magnitude of the implicit fee being
comparable to average dividend rates
among the underlying index stocks.434
lotter on DSK11XQN23PROD with PROPOSALS2
433 See
supra footnote 431.
The Moenig Paper provides the following
example. If stock prices rise by 7% on average over
the crediting period, in addition to paying 2% in
dividends, then the RILA account would be
credited 7%, even though investors in the
underlying stocks would earn a 9% return.
Omitting dividend payments benefits insurers by
reducing the cost of providing a given amount of
downside protection (e.g., through lower option
prices).
434 Id.
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While most RILAs do not include any
explicit ongoing fees or charges to the
investor, RILAs typically have charges
for early or mid-term withdrawals. As
discussed in section II.B.2.a, charges for
early or mid-term withdrawals could
include, surrender charges, contract
adjustments, and transaction charges
(separate from surrender charges).435
RILAs differ from other annuity
contracts in other ways as well. Variable
annuities involve a direct investment of
premiums into subaccount(s) that
correspond to one, or more, of many
mutual funds. RILA premiums, on the
other hand, are not directly invested
into the assets of the underlying index,
and typically investors can only choose
among index-linked options whose
returns are based on a small number of
mainstream indexes.436 Also, the
financial guarantees common to variable
annuities are long term and are only
applied when the contract terminates,
either at maturity or due to the
investor’s death, or if the account value
reaches zero due to guaranteed
withdrawals.437 These factors make
variable annuity guarantees difficult to
value and hedge due to their long-term
435 See
436 See
also supra footnote 431.
Moenig Paper.
437 Id.
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nature (potentially 25 years, or more).438
The guarantees that RILA contracts offer
as part of their bounded return
structure, on the other hand, are shortterm (i.e., they are limited to the
crediting period of the index-linked
option the investor selects, which is
usually one, two, three, or six years) and
tied to the performance of a common
index, so that issuers can hedge the
embedded liabilities accurately through
the financial markets.439
Further, guarantees that RILA
contracts offer may be much less
dependent on investor behavior than
variable annuity guarantees. Variable
annuity investors may have a strong
incentive to surrender or exchange their
policy when an embedded guarantee
loses its value (i.e., moves ‘‘out of the
money’’).440 The guarantees RILA
contracts offer reset with the end of the
crediting period of the index-linked
option the investor selects, so such
guarantees are more commonly ‘‘at the
money’’ and investors do not have as
strong of an incentive to surrender or
exchange their policies.441
438 Id.
439 Id.
440 Thorsten Moenig and Nan Zhu (2018). Lapseand-Reentry in Variable Annuities, Journal of Risk
and Insurance, 85(4), 911–938 (‘‘Moenig and Zhu
Paper’’).
441 See Moenig Paper.
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Additionally, RILAs and variable
annuities differ with respect to their use
of proceeds. As discussed in Section
II.B.4, variable annuity proceeds are
held in separate accounts and, therefore,
insulated from the issuer’s creditors.
Variable annuity proceeds in unitized
sub-accounts must be invested as the
investor chooses and returns are
credited to the account directly. Like
variable annuity proceeds, RILA
proceeds are placed into a (nonunitized) separate account. As a result,
the proceeds are not insulated from the
issuer’s creditors. Also, RILA proceeds
can be invested as the issuer sees fit.
We understand that for index-linked
options offering shorter crediting
periods, and whose returns are based on
common indexes such as the S&P 500
Index, insurance companies are able to
invest RILA proceeds in exchangetraded derivative securities that closely
approximate the issuer’s liabilities from
a RILA contract at the end of each
crediting period.442 In doing so,
insurance companies are able to hedge
away their risk at a low cost. Further,
we understand that insurance
companies can, and do, invest the
remaining proceeds into fixed-income
securities (e.g., corporate bonds) that
allow them to earn a ‘‘credit risk
premium.’’ 443 The credit risk premium
can be an important source of benefits
to issuers.444
C. Benefits and Costs
1. Benefits
lotter on DSK11XQN23PROD with PROPOSALS2
a. Use of Form N–4
Unlike variable annuity offerings that
are registered on Form N–4, insurance
companies register RILA offerings on
Forms S–1 or S–3. These forms include
a number of disclosure requirements
that are specific to the insurance
company issuing the RILA that the
Commission does not require in the
registration statements for offerings of
variable annuities.
We are proposing that insurance
companies use Form N–4 to register the
offering of RILAs and we are proposing
to adapt Form N–4 for that purpose.445
Because it is an existing form, we
believe RILA issuers and investors are
familiar with Form N–4. As a result of
expanding the scope of Form N–4 to
address RILAs, RILA offerings would be
registered on the same form as variable
annuities. Requiring that insurance
companies register RILA offerings on
442 Id.
443 Id.
444 Id.
445 See
proposed General Instruction B.1 of Form
N–4.
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Form N–4 would leverage insuranceproduct specific disclosure
requirements reflected in the form and
also would permit the summary
prospectus layered disclosure
framework the Commission adopted in
2020 for variable annuities.
The following sections discuss the
specific benefits deriving from the
contents and requirements of the form
in detail. In addition to these benefits,
expanding the scope of Form N–4 to
include RILAs would benefit investors
by making it easier for them to evaluate
and compare RILAs, and also to
compare other annuity products with
RILAs. For example, investors may
require less effort to evaluate and
compare annuity products that register
using the same form. To the extent that
investors require less effort to evaluate
and compare these annuity products,
investors may be more likely to make
decisions that better align with their
investment goals.
b. Contents of Form N–4
The proposal is designed to facilitate
the Commission’s goal it sought to
achieve in adopting Form N–4, namely
to help investors make an informed
investment decision regarding the
annuity products that are registered on
that form. The registration process on
Form N–4 uses a layered disclosure
approach designed to provide investors
with key information relating to the
contract’s terms, benefits, and risks in a
concise and more reader-friendly
presentation, with access to more
detailed information for those investors
who want it. Providing investors with
key information is particularly
important in the context of annuity
contracts since their structure is
typically more complex than other types
of investment products commonly sold
to retail investors.
Specifically, the proposal would
update the contents of Form N–4 to
specifically address RILAs, including
by: (1) amending the form’s general
instructions; (2) amending the
requirements for front and back cover
pages; (3) updating the Key Information
Table; (4) providing new principal
disclosures regarding RILA investment
options; and (5) providing for new
contract adjustment and fee disclosures.
The proposal would also include certain
other technical and conforming
amendments to Form N–4 and related
rules designed to accommodate the
inclusion of RILA offerings on that form
as well as requiring the insurance
company to provide disclosure in
response to the remaining items on
Form N–4 to the extent applicable.
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71153
(1) General Instructions
The proposal would require RILA
offerings registered on Form N–4 to
comply with the general instructions of
that form, including requirements
related to: (1) using document design
techniques that promote effective
communication, (2) organizing
information to make it easier for
investors to understand, (3) including
information in the prospectus or SAI not
otherwise required so long as the
additional information is not
incomplete, inaccurate, or misleading,
and does not obscure or impede
understanding of the information that is
required, (4) requiring Form N–4 filers
to define special terms used in the
prospectus in any presentation that
clearly conveys meaning to investors,
(5) allowing insurance companies to
describe multiple contracts that are
essentially identical in a single
prospectus, (6) making available the
dates of both the prospectus and SAI, (7)
providing an interactive data file related
to certain information on the form, (8)
requiring insurance companies to
include active hyperlinks, or other
means of facilitating access that leads
directly to the relevant website, for an
electronic version of the prospectus, and
(9) the use of incorporation by reference.
The general instructions are designed to
require clear and consistent disclosure
to investors about annuity contracts
currently registered on the form and to
make clear how filers must prepare and
file their registration statements.
We believe clear disclosure benefits
investors by making it easier for
investors to evaluate and compare
offerings. Concise and decision-useful
disclosures can help facilitate the
investment decision-making process.
Also, the presentation of information in
a consistent manner could facilitate not
only the evaluation and comparison
among RILA offerings, but also could
facilitate the comparison of RILAs to
other annuity products.446 Further,
certain investors, while aware of
variable annuities, simply may not be
aware of RILAs as an investment option.
Presentation of information in a
consistent manner on Form N–4 could
increase investor awareness of RILAs as
an investment option.
(2) Front and Back Cover Pages
The proposal would make certain
changes to information currently
required on the front and back pages of
446 The consistent presentation of information
also could facilitate information collection by third
parties such as investment advisers and data
aggregators who could then, in turn, provide
information to investors.
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
a prospectus for all registrants on Form
N–4. Like variable annuities registered
on Form N–4, RILAs would be required
to present certain information on the
front and back cover pages of the
prospectus. The proposal would require
several new cover page disclosures for
all Form N–4 issuers. One of these
would provide additional information
distinguishing among the investment
options available in the annuities
registering on Form N–4 and crossreference the prospectus appendix that
provides additional information about
each option. These changes could help
investors better understand what
investment options are available under
the contract, in an easily identifiable
location. Also, the proposal would
require the inclusion of three new
legends that highlight risks that are
particularly prevalent in RILAs. The
new legends that highlight risk that are
particularly prevalent in RILAs should
benefit investors by putting them on
notice of these key considerations at the
outset, helping the investor make
informed decisions.
lotter on DSK11XQN23PROD with PROPOSALS2
(3) Key Information Table
As required for current Form N–4
issuers, the proposal would require
RILA issuers to provide a Key
Information Table in their registration
statements. The KIT includes a
summary of five areas: (1) fees and
expenses, (2) risks, (3) restrictions, (4)
taxes, and (5) conflicts of interest. The
KIT is important summary disclosure
for investors that is included in the
prospectus, and the proposed
amendments to the KIT requirements
are intended to highlight important
considerations related to RILAs,
including certain unique and/or opaque
aspects of RILAs.447 Consistent with our
layered disclosure approach for variable
annuities registered on Form N–4, RILA
issuers would be required to provide
cross-references in the KIT to the
location in the statutory prospectus
where the subject matter is described in
greater detail. Certain of the amended
KIT requirements would apply to all
Form N–4 issuers. In particular, in a
447 Many of the summary points presented in the
KIT are discussed in greater detail in other parts of
the form. In this way, the KIT is an integral part
of the layered disclosure approach the Commission
traditionally has taken with annuity products. To
ensure that the KIT serves this function effectively,
we also are proposing to delete Form N–4’s general
instruction stating that where the discussion of
information required by the Overview of the
Contract (currently Item 3) or KIT (currently Item
2) also responds to the disclosure requirements in
other items of the prospectus, registrants need not
include additional disclosure in the prospectus that
repeats the information disclosed in the Overview
of the Contract or the KIT. See infra footnote 84 and
accompanying text.
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change from the current KIT
requirements for Form N–4 issuers, the
amendments would require that
responses in an item be presented in a
Q&A format.448 In a change for all Form
N–4 issuers, the proposal also would
change the order in which the KIT
appears relative to the Overview of the
Contract disclosures in the prospectus.
Overall, the proposed KIT
requirements (like the current KIT
requirements for variable annuities) are
designed to provide a brief description
of key facts about a RILA in a specific
sequence and in a standardized
presentation that is designed to be easy
to read and navigate. We believe that a
standardized presentation that is
designed to be easy to read and navigate
benefits investors by making it easier for
investors to evaluate and compare RILA
offerings. Also, the standardized
presentation of information could
facilitate not only the evaluation and
comparison among RILA offerings, but
also could facilitate the comparison of
RILAs to other annuity products.
(4) Principal Disclosure Regarding RILA
Offerings
The proposal would amend Form N–
4 to require disclosure that would
provide investors with information
about all annuities whose offerings are
registered on Form N–4 as well as with
specific information about RILAs and
the index-linked options available
under the RILA contracts. With regard
to Form N–4 issuers generally, the
proposal would require registrants to
disclose investment option risk, early
withdrawal risk, contract benefits risk,
insurance company risk, and the risk of
contract changes. With regard to specific
information about RILAs, the proposal
includes requirements related to: (1)
information about RILAs generally and
an overview of certain key elements of
any index-linked option offered under
the contract; (2) a more in-depth
description of index-linked investment
options available under the contract; (3)
the inclusion of an appendix that
consolidates certain summary
information related to index-linked
options and fixed options available
under the contract (which would
accompany similar information about
variable options offered under a
‘‘combination’’ contract); and (4) certain
principal risk disclosures relating to
investing in the RILA contract that the
prospectus describes.
The proposed disclosure requirements
are designed to provide additional
448 Currently, such format is suggested but not
required. See General Instruction C.3.(c) of Form N–
4.
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information regarding the risk of
investing in Form N–4 issuers generally,
as well as the unique aspects of RILAs
and certain summary and detailed
information about index-linked options
available under a RILA contract. The
information could benefit investors by
making it easier for investors to evaluate
and compare variable annuity products
registered on Form N–4. The required
disclosure relating to index-linked and
fixed options available under a contract
could benefit investors by facilitating
the comparison of these investment
options to other investment options
available under the contract, as well as
to investment options that other RILA
contracts offer.
(5) Addition of Contract Adjustments
and Other Amendments to Fee and
Expense Disclosures
RILA investors have the ability to take
a withdrawal or transfer out their money
before the end of a crediting period. If
amounts are removed from an
investment option before the end of a
crediting period, typically an insurance
company will apply an interim value
adjustment to the investor’s contract
value. The IVA, which will adjust the
contract value based on a formula, can
move up and down as market
conditions change throughout the
crediting period and may adjust daily.
The IVA is irrelevant if the investor
does not move money from an
investment option until the end of the
crediting period, but it becomes relevant
if the investor withdraws or transfer the
money before the end of a crediting
period. Similarly, a positive or negative
market value adjustment could apply if
amounts are partially or fully
withdrawn from the contract before the
end of a specified period. These contract
adjustments, whose calculation varies
by insurance company, may have a
positive or negative effect on the value
of the contract.
We propose amendments to Form N–
4 to require specific disclosures with
respect to contract adjustments.
Currently, Form N–4 requires variable
annuity registrants to provide
comprehensive information on the fees
and expenses that investors will pay
when buying, owning, and surrendering
a contract, including expenses paid each
year during the time the investor owns
the contract. Although RILAs typically
do not charge the explicit fees and
expenses common to variable annuities,
they do typically utilize contract
adjustments. Since negative adjustments
may result in substantial costs to
investors, we believe that it is important
to include a detailed description of
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contract adjustments in the registration
statement.
Specifically, we are proposing to
expand current disclosure requirements
to address contract adjustments that
could affect investors’ contract value
when buying, owning, and surrendering
or making withdrawals from an
investment option. We are also
proposing certain other specific
disclosures about contract adjustments,
such as requiring disclosures about the
maximum potential loss that an investor
could experience in connection with a
negative contract adjustment.
We believe that these disclosures
would benefit investors since they
would be able to better evaluate the
costs of purchasing and owning annuity
contracts, including RILAs. In addition,
these disclosures can make lessinformed investors aware of RILAs’
unique characteristics, which could
increase investor understanding of
RILAs as an investing option.
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(6) Other Amendments to Form N–4
The proposal would include certain
other amendments to Form N–4 and
related rules designed to accommodate
the inclusion of RILA offerings on Form
N–4. These include amendments to
Form N–4’s facing sheet, definitions,
exhibit list, and required
representations, as well as amendments
to certain Securities Act rules that help
to implement the proposal. Because
these other amendments to Form N–4
and related rules are designed to
accommodate the inclusion of RILA
offerings on Form N–4, the benefits that
could accrue as a result of these other
amendments are those that result from
RILA issuers registering offerings on
Form N–4 rather than Form S–1 or Form
S–3.
The proposal would also amend Form
N–4’s required exhibits list to add new
Item 27(p) for all issuers, which would
require the filing of any power of
attorney included pursuant to rule
483(b). While this exhibit is already
required to be filed with a Form N–4
registration statement under rule 483(b),
practices differ in regard to the
placement of a required power of
attorney exhibit within the exhibit list.
This amendment would benefit
investors in comparing these exhibits
for all annuity products whose offerings
are registered using Form N–4 by
standardizing the location of these
exhibits in the registration statement.
Facilitating the comparison of annuity
products could benefit investors by
helping them to invest in RILAs in a
manner that is consistent with their
overall financial needs and objectives.
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We are also proposing to add new
Item 31A in Form N–4 to require
census-type information on RILAs
offered in connection with the
applicable registration statement. Under
this proposed new item, an insurance
company would have to provide
information regarding any RILA offered
through the registration statement, as of
the most recent calendar year-end,
including (1) the name of each contract;
(2) the number of contracts outstanding;
(3) the total value of investor allocations
attributable to index-linked options; (4)
the number of contracts sold during the
prior calendar year; (5) the gross
premiums received during the prior
calendar year; (6) the amount of contract
value redeemed during the prior
calendar year; and (7) whether the
contract is a combination contract. The
information in new Item 31A would
help the Commission and staff in
identifying trends in insurance
companies’ offerings of RILAs and have
a more complete understanding of the
marketplace for annuity securities.
We also propose amendments to Item
34 of Form N–4 to require RILA issuers
to include two specific undertakings in
their registration statements on Form N–
4: (1) to file, during any period in which
offers or sales are made, through a posteffective amendment to its registration
statement, any prospectus required by
section 10(a)(3) of the Securities Act
and, (2) that, for the purposes of
determining liability under the
Securities Act, each post-effective
amendment shall be deemed to be a new
registration statement relating to the
securities offered therein, and the
offering of such securities at that time
shall be deemed to be the initial bona
fide offering thereof. These proposed
undertakings are the same as two
undertakings RILA issuers currently
provide in registration statements. We
believe that it remains appropriate for
RILA issuers to continue to furnish
these representations concerning posteffective amendments to a registration
statement as, under the proposed
amendments, RILAs may be
continuously offered on a registration
statement for an indefinite amount of
time.
(7) Remaining Items
The proposal would require RILA
issuers to provide disclosure in
response to the remaining items on
Form N–4 to the extent applicable.
These are items that we have previously
determined are relevant in the context
of variable annuity offerings. Requiring
RILA filers to provide disclosure in
response to the remaining items on
Form N–4 to the extent applicable
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would help ensure that comparable
information is provided in a
standardized, consistent manner for all
filers using Form N–4.
We believe standardized, consistent
disclosure of comparable information
benefits investors by making it easier for
investors to evaluate and compare RILA
offerings. Also, the presentation of
information in a standardized,
consistent manner across all filers using
Form N–4 could facilitate not only the
evaluation and comparison among RILA
offerings, but also could facilitate the
comparison of RILAs to variable
annuities. Further, certain investors,
while aware of variable annuities,
simply may not be aware of RILAs as an
investment option. Presentation of
information in a standardized,
consistent manner on Form N–4 could
increase investor awareness of RILAs as
an investing option. Facilitating the
comparison of annuity products could
benefit investors by helping them to
invest in RILAs in a manner that is
consistent with their overall financial
needs and objectives.
(8) Inline XBRL
The proposal would require many of
the newly added disclosures on Form
N–4 to be structured (i.e., tagged) in
Inline XBRL, a structured, machinereadable data language.449 In addition,
RILA issuers would have to tag those
prospectus disclosures that Form N–4
currently requires to be tagged.
Currently, disclosures about RILA
offerings are largely unstructured; only
the insurance company’s financial
statements, if reported in GAAP and
included in a registration statement that
includes a price or price range, are
required to be tagged in Inline XBRL.450
Certain of the existing disclosures on
Form N–4 are required to be tagged in
Inline XBRL.451
The proposed tagging requirements
are designed to make the tagged
disclosures more readily accessible for
aggregation, comparison, filtering, and
other analysis. As a point of
comparison, XBRL requirements for
public operating company financial
statement disclosures have been
observed to improve investor
understanding of the disclosed
449 See
supra section II.B.9.
supra footnote 402.
451 Currently tagged disclosures include: Item 2
(Key Information), Item 4 (Fee Table), Item 5
(Principal Risks of Investing in the Contract), Item
10 (Benefits Available under the Contract), and Item
17 (Portfolio Companies under the Contract). See
Instruction C.3.h of Form N–4; 17 CFR
232.405(b)(2)(iii).
450 See
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information.452 While those
observations are specific to operating
company financial statement
disclosures (including footnotes), and
not to disclosures on Form N–4, they
indicate that the proposed Inline XBRL
requirements would provide investors
with increased insight into key features
of the contract that is described in the
Form N–4 registration statement. For
example, the data tagging could allow
third parties such as financial data
aggregators to efficiently compare and
otherwise process the disclosed
information into analyses accessible to
investors.
c. Option To Use a Summary Prospectus
We are proposing to amend rule 498A
to permit RILA issuers, as well as
issuers of ‘‘combination contracts’’
offering a combination of index-linked
options and variable options, to use a
summary prospectus to satisfy statutory
prospectus delivery obligations.
Investors would continue to have access
to the RILA statutory prospectus and
other information about the RILA
contract online, with paper or electronic
copies of this information upon request.
The current summary prospectus rule
for variable contracts uses a layered
disclosure approach designed to provide
investors directly with key information
relating to the contract’s terms, benefits,
and risks in a concise and readerfriendly presentation, with more
detailed information available
elsewhere. The proposed amendments
to rule 498A would broaden the scope
of the rule to address RILA contracts.
As discussed in section II.C above, the
proposed amendments to rule 498A
would involve the use of two distinct
types of summary prospectuses for RILA
contracts, employing the same approach
the rule currently uses for variable
contracts. An ‘‘initial summary
prospectus,’’ covering contracts offered
to new investors, would include certain
key information about the contract’s
most salient features, benefits, and risks,
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452 See,
e.g., Birt, J., Muthusamy, K. & P. Bir,
XBRL and the Qualitative Characteristics of Useful
Financial Information, 30 Account. Res. J. 107
(2017) (finding ‘‘financial information presented
with XBRL tagging is significantly more relevant,
understandable and comparable to non-professional
investors’’); Cahan, S.F., Chang, S., Siqueira, W.Z.
& K. Tam, The roles of XBRL and processed XBRL
in 10–K readability, J. Bus. Fin. Account. (2021)
(finding 10–K file size reduces readability before
XBRL’s adoption since 2012, but increases
readability after XBRL adoption, indicating ‘‘more
XBRL data improves users’ understanding of the
financial statements’’); Efendi, J., Park, J.D. & C.
Subramaniam, Does the XBRL Reporting Format
Provide Incremental Information Value? A Study
Using XBRL Disclosures During the Voluntary Filing
Program, 52 Abacus 259 (2016) (finding XBRL
filings have larger relative informational value than
HTML filings).
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presented in plain English in a
standardized order. The rule
amendments would also require
‘‘updating summary prospectuses’’ to be
provided to existing investors in RILA
contracts. The updating summary
prospectus would include a brief
description of certain changes to the
contract that occurred during the
previous year, as well as a subset of the
information required to appear in the
initial summary prospectus. Certain key
information about the index-linked
options that the contract offers as
investment options would be provided
in both the initial summary prospectus
and updating summary prospectus.
The proposed rule would create a
choice for insurance companies. They
may meet their prospectus delivery
obligations by providing the statutory
prospectus, or they may satisfy these
obligations by providing a summary
prospectus and making statutory
prospectuses and other required
documents available online. Those
insurance companies that expect to
benefit by providing summary
prospectuses would choose to rely on
the proposed amendments to meet their
prospectus delivery obligations. Those
insurance companies that do not expect
to benefit from this optional prospectus
delivery regime would choose to
continue to provide statutory
prospectuses to investors.
The presentation proposed for the
initial summary prospectus may also
reduce the investor effort required to
compare RILA contracts, to consider
different index-linked options that a
RILA offers, or to compare RILA
contracts with each other and with
variable annuity contracts, when an
investor considers a new investment.
Information provided in a concise, userfriendly presentation could allow
investors to compare information across
contracts and as a result, may lead
investors to make decisions that better
align with their investment goals.453
453 Research suggests that individuals are
generally able to make more efficient decisions
when they have comparative information that
allows them to assess relevant trade-offs. See, e.g.,
Christopher K. Hsee, George F. Loewenstein, Sally
Blount, Max H. Bazerman (1999). Preference
Reversals Between Joint and Separate Evaluations
of Options: A Review and Theoretical Analysis,
Psychological Bulletin, 125(5), 576–90; see also
Jeffrey R. Kling, Sendhil Mullainathan, Eldar Shafir,
Lee Vermeulen, Marian V. Wrobel (2012).
Comparison Friction: Experimental Evidence from
Medicare Drug Plans, Quarterly Journal of
Economics, 127(1), 199–235. In a randomized field
experiment, some senior citizens choosing between
Medicare drug plans were randomly selected to
receive a letter with personalized, standardized,
comparative cost information. Plan switching was
28% in the group that received a letter with
personalized, standardized, comparative cost
information, but only 17% in the comparison
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If insurance companies choose to
meet their prospectus delivery
obligations by delivering summary
prospectuses to investors, with other
documents available online, investors
would then have a choice as well.
Under the layered disclosure framework
we are proposing for RILAs, investors
would receive information in the form
of a summary prospectus, with more
detailed information available online if
the investor chooses to access it.454
Thus, investors can continue to review
the statutory prospectuses by accessing
them online, or they may request paper
or electronic delivery of statutory
prospectuses on an ad hoc basis.
Alternatively, investors may choose
only to consult the summary
prospectuses. Further, if investors want
to rely on some combination of
summary and statutory prospectuses to
receive information about the contract,
that choice is available to them as well.
Given the Commission’s experience
administering the optional summary
prospectus regime for variable
annuities, we expect a majority of RILA
issuers would choose to use summary
prospectuses. Thus, we expect that the
vast majority of investors will have the
option to use both summary
prospectuses and statutory prospectuses
in their decision-making, in whatever
proportion investors think is best for
their preferences.
Initial Summary Prospectus. Should
insurance companies issuing RILAs
choose to use summary prospectuses,
investors may benefit in a number of
ways.455 The proposed initial summary
prospectus for RILAs would be limited
to describing only the contract and
features currently available under the
statutory prospectus. This focus could
make more salient the features and risks
of a RILA, thereby facilitating investors’
evaluation of those features and risks.
We are proposing a standardized
presentation for RILA initial summary
prospectuses to require certain
disclosure items that would be most
relevant to investors to appear at the
beginning of the initial summary
prospectus, followed by supplemental
group, and the intervention caused an average
decline in predicted consumer cost of about $100
a year among letter recipients.
454 During investor testing, several participants
felt they would need information beyond the
information contained in the KIT to make a
decision about a RILA. See OIAD Report at Section
5, Qualitative Testing, Results from Round 1.
455 Some investors may prefer to read statutory
prospectuses, and therefore, the advantages
associated with summary disclosure, as described
in this section, may not apply to those investors.
The statutory prospectus would, under the
proposed rule, be available online and in paper or
electronic format upon request.
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information. An initial summary
prospectus must contain the
information required by the rule, and
only that information, in the order
specified by the rule.456 The
information would be required to
appear in the same order, and under
relevant corresponding headings, as the
rule specifies. The required presentation
could also facilitate comparisons of
different RILA contracts, as well as
comparisons between RILA contracts
and variable annuities.
We believe standardized, consistent
disclosure of comparable information
benefits investors by making it easier for
investors to evaluate and compare RILA
offerings. Also, the presentation of
information in a standardized,
consistent manner could facilitate not
only the evaluation and comparison
among RILA offerings, but also could
facilitate the comparison of RILAs to
other variable annuities. Further, certain
investors, while aware of variable
annuities, simply may not be aware of
RILAs as an investment option.
Presentation of information in a
standardized, consistent manner in an
initial summary prospectus could
increase investor awareness of RILAs as
an investing option.
In addition, given the time required to
review a statutory prospectus, RILA
investors may benefit from summary
prospectuses because they offer a
shorter alternative to statutory
prospectus disclosure. There is evidence
that suggests that consumers benefit
from summary disclosures.457 Within
the specific context of investing, there is
evidence from related contexts that
suggests that summary prospectuses
allow investors to spend less time and
effort to arrive at the same portfolio
decision as if they had relied on a
statutory prospectus.458 This research is
456 Proposed
rule 498A(b)(5).
is evidence that the summarization of
key information is useful to consumers. See, e.g.,
Sumit Agarwal, Souphala Chomsisengphet, Neale
Mahoney, Johannes Stroebel, Regulating Consumer
Financial Products: Evidence from Credit Cards
(NBER Working Paper No. 19484, rev. 2014),
available at https://www.nber.org/papers/w19484.
The authors find that a series of requirements in the
CARD Act, including provisions designed to
promote simplified disclosure, has produced
decreases in both over-limit and late fees, saving US
credit card users $20.8 billion annually; see also
Robert L. Clark, Jennifer A. Maki & Melinda Sandler
Morrill, Can Simple Informational Nudges Increase
Employee Participation in a 401(k) Plan? 80 S.
Econ. J. 677 (2014). The authors find that a flyer
with simplified information about an employer’s
401(k) plan, and about the value of contributions
compounding over a career, had a significant effect
on participation rates.
458 See John Beshears, James J. Choi, David
Laibson & Brigitte C. Madrian, How Does Simplified
Disclosure Affect Individuals’ Mutual Funds
Choices?, in Explorations in the Economics of Aging
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457 There
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consistent with the 2012 Financial
Literacy Study, which showed that at
least certain investors favor a layered
approach to disclosure with the use,
wherever possible, of summary
documents containing key information
about an investment product or
service.459
Also, investors allocate their attention
selectively,460 and the sheer volume of
disclosure in a statutory prospectus may
discourage some investors from reading
contract statutory prospectuses. The
observations of a telephone survey
conducted on behalf of the Commission
with respect to mutual fund statutory
prospectuses (which are typically
shorter than variable contract statutory
prospectuses, and shorter than RILA
statutory prospectuses are expected to
be under the proposal) are consistent
with the view that the volume of
disclosure may discourage investors
from reading statutory prospectuses.461
That survey observed that many mutual
fund investors do not read statutory
prospectuses because they are long,
complicated, and hard to understand.
Responses to investor surveys in other
contexts, also suggest that shareholders
75 (David A. Wise ed., 2010) (‘‘Beshears Paper’’),
available at https://scholar.harvard.edu/laibson/
publications/how-does-simplified-disclosure-affectindividuals-mutual-fund-choices. We note,
however, that while the authors find evidence that
investors spend less time making their investment
decision when they are able to use summary
prospectuses, there is no evidence that the quality
of their investment decisions is improved. In
particular, ‘‘On the positive side, the Summary
Prospectus reduces the amount of time spent on the
investment decision without adversely affecting
portfolio quality. On the negative side, the
Summary Prospectus does not change, let alone
improve, portfolio choices. Hence, simpler
disclosure does not appear to be a useful channel
for making mutual fund investors more
sophisticated . . .’’ Id. at 13 (manuscript page).
459 See 2012 Financial Literacy Study.
460 See George Loewenstein, Cass R. Sunstein &
Russell Golman. (2014) Disclosure Psychology
Changes Everything, 6 Ann. Rev. Econ. 391 (2014).
461 Prior to the Commission’s 2009 adoption of
mutual fund summary prospectus rules, the
Commission engaged a consultant to conduct focus
group interviews and a telephone survey
concerning investors’ views and opinions about
various disclosure documents filed by companies,
including mutual funds. During this process,
investors participating in focus groups were asked
questions about a hypothetical Summary
Prospectus. Investors participating in the telephone
survey were asked questions relating to several
disclosure documents, including mutual fund
prospectuses. See Abt SBI, Inc., Final Report: Focus
Groups on a Summary Mutual Fund Prospectus
(May 2008), available at https://www.sec.gov/
comments/s7-28-07/s72807-142.pdf. Although the
results from the investor testing reflect stated
investor preferences, they do not provide us with
information with respect to the extent to which
RILA investors would actually be more likely to
read a RILA summary prospectus relative to a
statutory prospectus.
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may be more likely to read more concise
shareholder reports.462
To the extent summary prospectuses
increase readership of RILA contract
disclosures, they could improve the
quality and efficiency of portfolio
allocations made on the basis of
disclosed information for those
investors who otherwise would not have
read the statutory prospectus.
The presentation proposed for the
initial summary prospectus may also
reduce the investor effort required to
compare RILA contracts, to consider
different index-linked options that a
RILA offers, or to compare RILA
contracts with each other and with
variable annuity contracts, when an
investor considers a new investment.
Information provided in a concise, userfriendly presentation could allow
investors to compare information across
contracts and as a result, may lead
investors to make decisions that better
align with their investment goals.463 For
example, the proposed amendments
would require insurance companies to
distill certain key product information
into tables, which could facilitate
comparison across different products.
Further, the proposed framework for
RILA contract summary and statutory
prospectuses also includes design
elements to facilitate investor use. In
particular, the proposed amendments
include requirements for linking both
within the electronic version of a
contract statutory prospectus and
between the electronic versions of the
contract statutory prospectus and the
contract summary prospectus. The
linking requirement would permit
investors who use the electronic
versions of contract prospectuses to
quickly navigate between related
sections within the contract statutory
prospectus and back and forth between
related sections of the contract summary
prospectus and the contract statutory
prospectus. Further, the proposal would
also require that investors either be able
to view the definition of each special
term used in an online summary
prospectus upon command, or to move
directly back and forth between each
special term and the corresponding
entry in any glossary or list of
definitions that the summary prospectus
includes. This requirement would
facilitate understanding of terms that
may be confusing or unfamiliar among
investors viewing the documents online.
Updating Summary Prospectus. As
under current rule 498A, we are not
proposing that RILA issuers send an
462 Tailored Shareholder Reports Adopting
Release.
463 See supra footnote 453.
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updated initial summary prospectus to
investors each year. Instead, any RILA
issuer that relies on rule 498A would
send an updating summary prospectus,
which would provide a brief description
of certain changes with respect to the
contract that occurred within the prior
year.464 The updating summary
prospectus would also include certain
of the information required in the initial
summary prospectus that we consider
most relevant to investors when
considering additional investment
decisions.465 Further, updating
summary prospectuses for RILA
contracts, like initial summary
prospectuses, would include specific
disclosure items appearing in a
prescribed order, under relevant
corresponding headings.466 An updating
summary prospectus for a RILA contract
would have to contain the information
required by the rule, and only that
information, in the order specified by
the rule.
The proposed updating summary
prospectus for RILAs would have many
of the same benefits for investors
associated with the initial summary
prospectus discussed above, with
respect to presenting key information in
an easier and less time-consuming
manner for investors. Specifically,
because many terms of the RILA
contract do not change from year-toyear, the contract statutory prospectus
may contain large amounts of disclosure
that is duplicative of disclosure that the
investor has previously received. Those
changes that do occur may be important
to investors, but the disclosure about
these changes could be difficult for the
investor to identify given the volume of
prospectus disclosure that investors
would otherwise receive, and the
current lack of a requirement to identify
new or changed information.
Under the proposed amendments, the
updating summary prospectus would
include a concise description of
important changes affecting the
statutory prospectus disclosure relating
to certain topics that occurred within
the prior year—namely: (1) the
availability of investment options under
the contract, (2) the overview of the
contract, (3) the KIT, (4) certain
information about fees, (5) benefits
available under the contract, (6)
purchases and contract value, and (7)
surrenders and withdrawals. These are
topics that are most likely to entail
contract changes and, for the reasons
previously noted, are the types of
464 Proposed
465 See
rule 498A(c)(1).
supra footnote 285 and accompanying
text.
466 Proposed
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contract changes most likely to be
important to investors because they
affect how investors evaluate RILA
contracts and are relevant to investors
when considering whether to continue
in the existing option (if available) or
transfer funds to a different option. The
proposed updating summary
prospectus, if used by issuers to satisfy
their prospectus delivery obligations,
would likely reduce the burden on
investors and increase their
understanding of their contract by
highlighting certain changes to the
contract made during the previous year,
while foregoing the repetition of most
information that had remained
unchanged.
d. Use of Statutory Accounting
The proposal would permit RILA
issuers to provide financial statements
on amended Form N–4 in the same way
that insurance companies currently do
on Form N–4.467 As a result of this
change, the financial statements filed in
connection with a RILA registration
statement could be prepared in SAP to
the same extent as currently permitted
for insurance companies’ financial
statements filed on that form. We expect
this approach to appropriately recognize
the cost burdens if we were to require
GAAP financial statements in cases
where the insurance company is not
otherwise required to prepare financial
information in accordance with GAAP.
In addition, SAP financial statements,
which focus on an issuer’s ability to
meet its obligations under its insurance
contracts, as regulated by State law,
appear to provide sufficient material
information for investors evaluating
RILAs. As a result, permitting insurance
companies to provide SAP financial
statements when registering the offering
of a RILA to the same extent as they can
in connection with variable annuities on
Form N–4 would be consistent with
investor protection. Also, investors
could benefit to the extent the reduced
cost burdens provided by SAP financial
statements are passed along to investors.
The proposal also would require
RILAs to provide information relating to
changes in and disagreements with
accountants on accounting and financial
disclosure as detailed in 17 CFR 229.304
(‘‘Item 304 of Regulation S–K’’). Further,
RILAs would be required to provide as
467 Certain Commission letters, or portions
thereof, exempt insurance companies from the
requirement to provide financial statements
prepared in accordance with GAAP in connection
with the registration of an offering of RILAs on
Form S–1. As discussed in Section III.B.1.a, among
RILA contracts that are currently registered with the
Commission, 47 RILAs report SAP financials and 43
RILAs report GAAP financials.
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an exhibit any letter from the insurance
company’s former independent
accountant regarding its concurrence or
disagreement with the statements made
by the insurance company in the
registration statement concerning the
resignation or dismissal as the insurance
company’s principal accountant. These
items are currently provided by RILAs
on Forms S–1 and S–3 and are designed
to address the practice of ‘‘opinion
shopping’’ for an auditor willing to
support a proposed accounting
treatment designed to help a company
achieve its reporting objectives even
though that treatment might frustrate
reliable reporting.468 Because the
requirements for Form N–4 filers under
the proposal are the same as for Form
S–1 and Form S–3 filers currently, we
would not expect any additional
benefits from the requirement to provide
information relating to changes in and
disagreements with accountants on
accounting and financial disclosure.
e. Filing Rules
Fee Payment Method and
Amendments to Form 24F–2. The
proposal would require RILA issuers to
pay registration fees for RILAs using the
same method that other filers on Form
N–4 currently use. Issuers registering
the offerings of RILAs on amended Form
N–4 would be deemed to be registering
an indeterminate amount of RILAs upon
effectiveness of the registration
statement. These issuers would then be
required to pay registration fees
annually based on their net sales of
these securities, no later than 90 days
after the issuer’s fiscal year ends, on the
form that is used by current Form N–4
filers to pay registration fees (Form 24F–
2). The proposal would further specify
the calculation method for paying RILA
registration fees, consistent with the fee
calculation methodology that applies to
current Form N–4 filers. The proposal
would also indicate when issuers can
take credits for RILA redemptions that
pre-date their use of that form and when
expiring annuity contracts are rolled
over into a new crediting period as well
as other minor technical amendments.
The proposed filing rules would
provide benefits to insurance
companies. Rather than registering a
specific amount of securities, insurance
companies would register an indefinite
amount of securities upon the effective
date of their registration statement.
Registering an indefinite amount of
468 See Disclosure Amendments to Regulation S–
K, Form 8–K and Schedule 14A Regarding Changes
in Accountants and Potential Opinion Shopping
Situations, Investment Company Act Release No.
16358 (Apr. 12, 1988) [53 FR 12924 (Apr. 20,
1988)]; see also item 11(i) of Form S–1.
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securities benefits insurance companies
by eliminating the risk that a RILA
issuer may inadvertently oversell
securities with respect to a registration
statement on Form N–4. The payment of
fees on an annual net basis furthermore
should lead to a reduction in overall
filing fees relating to RILAs. To the
extent that there are cost savings for
issuers, some of those savings may
potentially be passed on to investors.
Post-Effective Amendments and
Prospectus Supplements. As discussed
in section II.E, the proposal would
require RILA issuers to use the same
framework for filing post-effective
amendments to the registration
statement as is currently used by other
filers on Form N–4. First, the proposal
would amend rule 485 under the
Securities Act to require RILA issuers to
use that rule when amending RILA
registration statements on Form N–4.
Requiring RILA issuers to use that rule
when amending RILA registration
statements on Form N–4 would permit
RILA issuers to file post-effective
amendments that become automatically
effective under rule 485(a) after a
specified period of time after the filing
or, in certain enumerated
circumstances, immediately effective
under rule 485(b). Issuers may benefit to
the extent automatic effectiveness
allows issuers to tap favorable windows
of opportunity in the RILA market, to
structure terms of RILAs on a real-time
basis to accommodate investor demand,
and to determine or change the plan of
distribution in response to changing
market conditions.
Second, the proposal would require
RILA issuers to apply rule 497 under the
Securities Act when appropriate to file
RILA prospectuses and prospectus
supplements with the Commission.
Under the proposed amendments, a
RILA issuer would be required to file
every prospectus relating to a RILA
offering that varies in form from a
previously filed prospectus before it is
first used. This approach—rather than
requiring filing only if the issuer makes
substantive changes from or additions to
a previously-filed prospectus—may
benefit both investors and issuers. The
requirement that insurance companies
file every prospectus that varies in form
from a previously filed prospectus
before it is first used could facilitate
investor evaluation and comparison by
making publicly available the most
timely information currently available
to investors. We would expect this
benefit to be minimal, however, because
rule 424 under the Securities Act
requires RILA issuers only to file
prospectuses that contain substantive
changes. Prospectuses required to be
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filed under rule 497 that would not be
required to file under rule 424, then,
would be prospectuses updated with
minor, non-substantive changes and
likely of limited informational benefit to
investors.
As discussed above, certain issuers
use a short-form registration statement
on Form S–3, which requires less
information than Form S–1 and allows
for significant incorporation by
reference. Certain issuers also can rely
on rule 430B under the Securities Act to
omit certain information from the
‘‘base’’ prospectus when the registration
statement becomes effective and later
provide that information in a
subsequent Exchange Act report
(forward) incorporated by reference, a
prospectus supplement, or a posteffective amendment. Issuers registering
annuity product offerings on Form N–4,
on the other hand, have limited ability
to incorporate information by reference
into their registration statements and
cannot forward incorporate information
from subsequently filed Exchange Act
reports. Issuers registering annuity
product offerings on Form N–4 also
cannot rely on rule 430B to omit certain
information from the base prospectus.
Under the proposal, then, RILA
investors would have all the
information available in one location
rather than needing to separately access
the information on a website or request
the incorporated materials. As a result,
costs to investors for assembling and
assimilating necessary information
could decrease, with a potentially
stronger effect for investors that may not
have the technical capabilities or
monetary resources to search efficiently
through multiple information sources.
Issuers may benefit from applying
rule 497 as well. The proposed rule
would facilitate a uniform post-effective
amendment and prospectus filing
framework for all Form N–4 filers,
which would provide insurance
companies with more consistent filing
requirements across similar products.
This, in turn, could benefit insurance
companies by making it easier to
execute such offerings and may decrease
compliance costs.
f. Materially Misleading Statements in
RILA Sales Literature
The proposal would amend rule 156
to make its provisions applicable to
RILA sales literature. Rule 156 is an
interpretive rule that provides factors to
be weighed in considering whether a
statement involving a material fact is or
might be misleading in the specific
context of investment company sales
literature, including literature relating to
the sale of variable annuities. Proposed
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71159
amendments to rule 156 would indicate
that whether a statement involving a
material fact is misleading in RILA sales
literature would depend on an
evaluation of the context in which it is
made, with the rule providing nonexhaustive factors to guide in this
determination.
For example, rule 156(b)(1)(ii)
currently provides that a statement
could be misleading because of the
absence of explanations, qualifications,
limitations or other statements
necessary or appropriate to make such
statement not misleading. This
provision, where made applicable to
RILA sales literature, would generally
require an insurance company to
consider whether an advertisement
would be materially misleading if it
markets the investment as a growth
investment, a loss-avoidance vehicle, or
a customizable product in the absence
of qualifying explanations or statements.
Similarly, if sales literature advertises a
particular feature of the product’s
bounded return structure that is not
available for the life of the product or
the full term of any surrender charge
period, the provision as made
applicable to RILA sales literature
would require consideration of whether
the statement is misleading without
providing additional context as to the
issuer’s discretion to make changes.
Further, rule 156(b)(4) currently
provides that representations about fees
or expenses associated with an
investment in a fund could be
misleading because of statements or
omissions made involving a material
fact, including situations where
portrayals of the fees and expenses
associated with an investment in the
fund omit explanations, qualifications,
limitations, or other statements
necessary or appropriate to make the
portrayals not misleading. We are
proposing to amend this provision also
to address representations about the fees
or expenses associated with a RILA
contract. In the context of RILA sales
literature, this provision as amended
would require consideration about
whether representations or portrayals
either of a RILA’s costs or charges, or
optional benefits that are subject to a
contract adjustment, would require
qualifying statements or explanations
regarding the economic costs to the
investor to receive an advertised benefit
or those generally associated with the
RILA.
Also, rule 156(b)(2)(i) currently states
that representations about past or future
investment performance could be
misleading because of statements or
omissions made involving a material
fact. This includes situations where
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portrayals of past income, gain, or
growth of assets convey an impression
of the net investment results achieved
by an actual or hypothetical investment
which would not be justified under the
circumstances, including portrayals that
omit explanations, qualifications,
limitations, or other statements
necessary or appropriate to make the
portrayals not misleading. This
provision, where made applicable to
RILA sales literature, would require
consideration of whether illustrations
about the operation of a RILA or its
features could be misleading because,
for example, they use assumptions that
are not currently offered or exceed what
could be reasonably anticipated or use
‘‘cherry picked’’ data.
By reducing the potential for
misleading or fraudulent statements in
RILA sales literature, applying rule 156
to RILAs would provide investors with
protections and help ensure that
investors receive the information
necessary to make informed decisions
about these products. Ensuring that
investors receive the information
necessary to make informed decisions
could benefit investors by facilitating
investor evaluation of RILAs as well as
investor comparison of RILAs to other
annuity products.
2. Costs
The proposal could lead to certain
additional costs for insurance
companies. These costs would likely
vary across insurance companies,
depending on their existing lines of
business. Costs may also vary
depending on the extent to which
insurance companies create
prospectuses that vary in form from
previously filed prospectuses and the
frequency of certain events, such as
changes in accountants and
disagreements with accountants on
accounting and financial disclosure.
Generally, the costs would be lower for
insurance companies that currently offer
products that register on Form N–4, for
those insurance companies that do not
change or remove key features of RILAs
frequently, and for those insurance
companies that do not experience
changes in, and disagreements with,
accountants on accounting and financial
disclosure.
We anticipate that the costs to
insurance companies would be
comprised of both direct compliance
costs and indirect costs. Direct costs for
insurance companies would consist of
internal costs (for compliance attorneys
and other non-legal staff, such as
computer programmers, to prepare and
review the required disclosure) and
external costs (including filing fees,
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outside legal and accounting fees, as
well as any costs associated with
outsourcing all or a portion of the Form
N–4 filing responsibilities to a filing
agent, software consultant, or other
third-party service provider).
The proposal could lead to certain
costs for investors as well. Any portion
of additional costs that is not borne by
insurance companies would ultimately
be passed on to RILA investors.
Investors also may bear costs associated
with certain proposed changes such as
the proposed change in filing rules as
well as an insurance company’s option
to use a summary prospectus.
a. Direct Costs
Form N–4. We believe that the direct
costs associated with the proposed
amendments would be most significant
for the first Form N–4 registration
statement that an insurance company
would be required to prepare and file
because the insurance company would
need to familiarize itself with the new
registration form and may need to
configure its systems to efficiently
gather the required information. In
subsequent periods, we anticipate that
insurance companies would incur
significantly lower costs because much
of the work involved in the initial
registration statement preparation and
filing is non-recurring and because of
efficiencies realized from system
configuration and reporting automation
efforts accounted for in the initial filing
period. The costs associated with
preparing and filing a new registration
statement (on Form N–4 as opposed to
Forms S–1/S–3) would be ameliorated
to the extent an insurance company
currently has experience and systems in
place to prepare and file registration
statements on Form N–4 (e.g., the
insurance company currently offers
variable annuities whose offerings are
registered on Form N–4). We estimate
the aggregate additional annual internal
time cost to be $16,133,834 and the
aggregate annual external cost burden to
be $2,914,740.469
Insurance companies would also
incur compliance costs to tag many of
the newly required Form N–4
disclosures (as well as those prospectus
disclosures that Form N–4 currently
requires to be tagged) in Inline XBRL.
Various XBRL and Inline XBRL
preparation solutions have been
developed and used by operating
companies and investment companies
to fulfill their structuring requirements,
and some evidence suggests that, for
smaller operating companies, XBRL
compliance costs have decreased over
469 See
PO 00000
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Frm 00074
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time.470 We estimate the total aggregate
additional annual internal time cost for
XBRL compliance would be $308,560
and the aggregate annual external cost
burden to be $63,000.471 In addition, 22
of the 23 insurers that issue RILAs also
offer variable products registered on
Forms N–3, N–4, or N–6, all of which
are currently structured, or otherwise
have experience tagging registration
statements.472
As such, to the extent these
companies comply with Inline XBRL
requirements internally rather than
outsourcing to an external service
provider, they may already be familiar
with Inline XBRL software and may be
able to leverage existing Inline XBRL
preparation processes and/or expertise
in complying with the new tagging
requirements. This would limit the
compliance costs arising from the new
tagging requirements for these issuers to
only those costs related to selecting
additional Inline XBRL tags for those
new disclosures proposed to be tagged,
and reviewing the tags selected for those
disclosures. Accordingly, we do not
anticipate that the costs associated with
Form N–4 tagging would be significant
enough to deter insurance companies
from entering the market for RILAs. As
such, we do not expect that the new and
modified tagging requirements in this
proposal would decrease competition in
the market for RILAs.473
Option to Use a Summary Prospectus.
Issuers will benefit from the option to
use a summary prospectus to the extent
that providing layered disclosure
through a summary prospectus regime
(including costs of producing and
delivering initial summary and updating
summary prospectuses and of making
statutory prospectuses, and other
470 An AICPA survey of 1,032 public operating
companies with $75 million or less in market
capitalization in 2018 found an average cost of
$5,850 per year, a median cost of $2,500 per year,
and a maximum cost of $51,500 per year for fully
outsourced XBRL creation and filing, representing
a 45% decline in average cost and a 69% decline
in median cost since 2014. See AICPA, XBRL Costs
for Small Companies Have Declined 45% since
2014 (2018), available at https://us.aicpa.org/
content/dam/aicpa/interestareas/frc/accounting
financialreporting/xbrl/downloadabledocuments/
xbrl-costs-for-small-companies.pdf. Note that this
survey was limited to small operating companies.
Additionally, a NASDAQ survey of 151 listed
issuers and other respondents in 2018 found an
average XBRL compliance cost of $20,000 per
quarter, a median XBRL compliance cost of $7,500
per quarter, and a maximum XBRL compliance cost
of $350,000 per quarter in XBRL costs per quarter.
See Letter from Nasdaq, Inc. (Mar. 21, 2019);
Request for Comment on Earnings Releases and
Quarterly Reports, Securities Act Release No. 10588
(Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)].
471 See infra Table 16.
472 Based on analysis of Forms S–1, S–3, and POS
AM filed by RILA issuers.
473 See also infra section III.D.
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documents available online) is less
expensive than providing statutory
prospectuses to new investors and
updated statutory prospectuses to
existing investors annually. Insurance
companies choosing to provide
summary prospectuses would bear a
one-time cost of preparing both the
initial summary prospectus and the
updating summary prospectus, as well
as costs associated with preparing
updated versions the updating summary
prospectus in the future on at least an
annual basis. We estimate the average
annual burden to prepare initial and
updating summary prospectuses to be
$5,000 per registration.474
Insurance companies that choose to
provide summary prospectuses are
required to make statutory prospectuses
and other materials available online. We
estimate the aggregate cost to comply
with the proposed website posting
requirements of the rule for documents
relating to RILAs to be $772 per
registrant.475 However, some of these
costs may have already been incurred by
issuers of ‘‘combination’’ contracts
offering variable options as well as
index-linked options.
Insurance companies that rely on rule
498A to use summary prospectuses for
variable annuities are also required to
include inter- and intra-document
linking and special terms definitions.
One linking requirement would allow
the reader to move back and forth
between a table of contents of the
contract statutory prospectus or SAI,
and the related sections of each
document. Although prospectuses and
SAIs are not required to have individual
headings corresponding to the items in
the registration forms, we assume that
the sections of a prospectus or SAI
would correspond with the item
requirements of the forms. We estimate
that Form N–4 filers would require 27
back-and-forth internal links. The other
linking requirement would allow the
reader to move back and forth between
each section of the summary prospectus
and any related section of the contract
statutory prospectus and SAI that
provides additional detail. This backand-forth movement could occur either
directly from the summary prospectus
to the relevant section of the statutory
prospectus or SAI, or indirectly by
linking from the summary prospectus to
a table of contents in the statutory
prospectus or SAI. For our analysis, we
assume direct links as those will tend to
be more costly when compared with
indirect linking through a table of
contents.
474 See
475 See
Table 11, Rule 498A PRA Estimates.
Table 11, Rule 498A PRA Estimates.
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An initial summary prospectus for a
Form N–4 issuer includes eight sections.
The Key Information Table has
instructions stating that, wherever
feasible, a registrant should provide
cross-references or links to the location
in the statutory prospectus where the
subject matter is described in greater
detail. There are 12 sections of the Key
Information Table. Therefore, we
estimate that there would be 18 backand-forth links between initial summary
prospectuses and statutory prospectuses
for a Form N–4 issuer.
An updating summary prospectus for
a Form N–4 issuer includes three
sections, one of which, the Key
Information Table, includes 12 sections.
One section is the ‘‘Updated
Information About Your Contract’’
section. The number of links in this
section would depend on the number of
updates discussed. For example,
assuming discussion of four updates, we
estimate the number of back-and-forth
links between a Form N–4 issuer’s
updating summary prospectus and
statutory prospectus to be 16.
The proposed rule amendments
would also require that RILA investors
either be able to view the definition of
each special term used in an online
summary prospectus upon command
(e.g., by ‘‘hovering’’ the computer’s
pointer or mouse over the term), or to
move directly back-and-forth between
each special term and the corresponding
entry in any glossary or list of
definitions that the summary prospectus
includes. We assume that RILA issuers
could replicate links to a glossary or the
computer code required to implement
access to definitions by ‘‘hovering’’ over
a term with little or no burden, but that
there would be a burden associated with
creating the requisite link or code for
each special term. Accordingly, we
estimate the cost to comply with the
proposed requirement to include interand intra-document linking and special
terms definitions as described above
would include 6 burden hours and a
cost of $800 annually, per registrant.476
Filing the Prospectus. As discussed in
section II.E, RILA issuers follow
different processes to file prospectuses
than current Form N–4 filers. For
example, a RILA issuer is required to
file a prospectus only if the issuer
makes substantive changes or additions
to a previously-filed prospectus,
whereas current Form N–4 filers are
required to file every prospectus that
varies from any previously-filed
prospectus. Accordingly, under the
proposed amendments, a RILA issuer
would be required to file every
476 See
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71161
prospectus relating to a RILA offering
that varies in form from a previously
filed prospectus before it is first used.
The proposed requirement could
increase the number of prospectuses
required to be filed by RILAs which
could, in turn, increase costs for
issuers.477 For each additional
prospectus required to be filed by
RILAs, we estimate an addition internal
cost burden of $113,659.70 and an
external cost burden of $24,000.478
Materially Misleading Statements in
RILA Sales Literature. The proposal
would amend rule 156 to make its
provisions applicable to RILA sales
literature. The cost of the proposed
amendments would include the direct
cost of analyzing advertising materials
in light of the guidance rule 156
provides. This may require review and
approval of advertisements beyond what
occurs currently, particularly because
determining whether a statement
involving a material fact is misleading
in RILA sales literature would depend
on an evaluation of the context in which
it is made. We expect some of these
costs to be borne in the first year after
the rule adoption. That is, these costs
would be transition costs and not
sustained beyond the first year. We
estimate that the transition costs
associated with the proposed
advertising rule amendments would be
$5,715.479 Also, ongoing sales literature
activity may require internal review and
approval of advertisements. We estimate
that the costs associated with ongoing
sales literature activity would be $1,905,
annually.480 These costs would be borne
477 The potential increase in cost could be greater
for Form S–3 filers than for Form S–1 filers. Form
S–3 requires less information than Form S–1. Also,
Form S–1 allows incorporation by reference only on
a very limited basis. Form S–3 allows for forward
incorporation by reference. Form S–3 filers may
need to produce incrementally more information to
file on Form N–4 than Form S–1 filers.
Transitioning to Form N–4 could be more expensive
for Form S–3 filers than for Form S–1 filers, as a
result.
478 See Table 11, Rule 498A PRA Estimates. As
discussed in footnote 477, these costs could be
greater for Form S–3 filers than for Form S–1 filers.
Also, we estimate an additional internal time cost
of $2,436 for each additional prospectus required to
be filed by separate account registrants.
479 We estimate an initial burden of 15 hours, per
advertisement, to review existing advertising
materials at a blended cost of $381 ($5,715 = 15 ×
$381). See Tailored Shareholder Reports for Mutual
Funds and Exchange-Traded Funds; Fee
Information in Investment Company
Advertisements adopting release at footnote 744.
480 We estimate an initial burden of 5 hours, per
advertisement, to review existing advertising
materials at a blended cost of $381 ($5,715 = 15 ×
$381). See Tailored Shareholder Reports for Mutual
Funds and Exchange-Traded Funds; Fee
Information in Investment Company
Advertisements adopting release at footnote 745.
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by issuers and third parties who prepare
RILA advertisements.
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b. Indirect Costs
Form N–4. While the prospectuses
and other registration statement
disclosure required by the proposal
would likely facilitate investor
evaluation and comparison of RILAs,
investors could experience certain
transition costs under the proposal, and
some investors may experience other
ongoing costs. Transition costs would
include the costs of the inconvenience
to some investors of adapting to the new
materials and to the changes in the
presentation of information. Investors
would also bear a one-time cost of the
inconvenience of adjusting to the
changes in the disclosures they receive.
These costs are likely to be relatively
lower for investors with less experience
investing in RILAs.
Option to Use a Summary Prospectus.
While we expect that, should insurance
companies opt to use summary
prospectuses, the majority of investors
would benefit from their disclosures,
certain investors may incur costs. For
example, although research indicates
that investors generally prefer to receive
summary disclosures there may be RILA
investors who prefer to rely on statutory
prospectuses when making investment
decisions. While RILA statutory
prospectuses would continue to be
available online and in paper or
electronic copy upon request, access to
those statutory prospectuses would
require investors to take additional
steps, imposing some burden. For
example, investors choosing to access
the statutory prospectus online rather
than requesting a paper copy would
need to manually enter a hyperlink from
a paper updating summary prospectus
or click on a link to a website containing
the statutory prospectus. To the extent
that internet access and use among RILA
investors is not universal, those
investors without home internet access
might experience a reduction in their
ability to quickly and easily access
statutory prospectus information.481
481 According to the most recent U.S. census data,
approximately 85% of U.S. households had some
form of broadband internet access in their home in
2018, and 92% had a computer (e.g., desktop,
laptop, tablet or smartphone). See Michael Martin,
Computer and internet Usage in the United States:
2018, U.S. Census Bureau (Apr. 21, 2021), available
at https://www.census.gov/library/publications/
2021/acs/acs-49.html; see also Pew Research
Center, internet/Broadband Fact Sheet (Apr. 7,
2021), available at https://www.pewresearch.org/
internet/fact-sheet/internet-broadband/ (‘‘Today,
93% of American adults use the internet.’’ and
‘‘Today, roughly three-quarters of American adults
have broadband internet service at home.’’); see also
Ani Petrosyan, internet Usage in the United
States—Statistics & Facts, Statista (Aug. 31, 2023),
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Even for those investors with home
internet access, there may be some
resistance to taking the additional step
of accessing the statutory prospectus
online.
Use of Statutory Accounting
Principles. The proposal would permit
RILA issuers to provide financial
statements on amended Form N–4 in the
same way that insurance companies
currently do on Form N–4. One
consequence of this change would be
that the financial statements filed in
connection with a RILA registration
statement could be prepared in SAP to
the same extent as currently permitted
for insurance companies’ financial
statements filed on that form. The
proposed rule would create a choice for
certain insurance companies. They may
prepare their registration statements in
SAP, or they may prepare their
registration statements in GAAP. Those
insurance companies that expect to
benefit from preparing their registration
statements in SAP (e.g., through
reduced costs) would choose SAP.
Those insurance companies that do not
expect to benefit from the option to
prepare their registration statements in
SAP would continue to prepare their
registration statements in GAAP.
Because the proposed rule would, for
certain issuers, create the option, but
not the obligation, to prepare their
registration statements in SAP, we do
not believe this provision of the
proposed rule would create additional
costs.
Filing and Prospectus Delivery Rules.
As discussed in section II.E, when a
RILA issuer seeks to amend a RILA
registration statement on Form S–1, the
issuer must file a post-effective
amendment that is typically declared
effective by Commission staff acting
pursuant to delegated authority on such
date as the Commission may determine.
To the extent that investors previously
benefited from the Commission staff’s
review of these filings before they
become effective, allowing filings of
RILA offerings to become automatically
effective may eliminate such reviews
and, as a result, possibly increase the
costs to investors. However, issuers
would still face liability under the
Federal securities laws for registration
statement disclosures (e.g., sections 12
and 17 of the Securities Act and section
10(b) and rule 10b–5 under the
Exchange Act), which may ameliorate
the potential costs associated with
reduced staff review. Moreover, rule 485
available at https://www.statista.com/topics/2237/
internet-usage-in-the-united-states/#topicOverview
(‘‘Today, over 90 percent of Americans have access
to the internet’’).
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only permits updates to become
immediately effective in limited,
enumerated circumstances, in order to
provide an opportunity for staff review
for all other changes.
As discussed in section II.E.3, we
understand that RILA issuers typically
deliver prospectuses to accompany or
precede other communications, such as
annuity applications. It is possible that
providing layered disclosure through a
summary contract prospectus regime
(including costs of delivering initial
summary and updating summary
prospectuses and making statutory
prospectuses and other documents
available online) could result in reduced
costs for issuers.482
Materially Misleading Statements in
RILA Sales Literature. Issuers and third
parties involved in preparing or
disseminating investment company
advertisements may incur costs to
comply with the proposed advertising
rule amendments. While reducing the
potential for misleading or fraudulent
statements in RILA sales literature
would provide investors with
protections and help ensure that
investors receive the information
necessary to make informed decisions
about these products, investors could
bear the costs of these amendments
through increased expenses that funds
would incur to implement the proposal.
Alternatively, if the cost of compliance
with these proposed amendments were
significant, some RILAs might reduce
advertising to lower the extra costs of
compliance. If this were to occur,
investors who would otherwise rely on
advertisements to make investment
decisions about RILAs or compare
RILAs with other investment products
might have less complete information
for these purposes.
D. Effects on Efficiency, Competition,
and Capital Formation
Efficiency. To investors, the costs of
purchasing a RILA are more than just
the dollar cost of the contract and
include the value of an individual’s
time spent evaluating the contract and
its various aspects. Further, for those
482 See VASP Adopting Release. In the VASP
Adopting Release we estimate that printing and
mailing expenses are $0.18 less for initial and
updating summary prospectuses than for statutory
prospectuses. Because we understand RILA
prospectuses to not be as long as variable annuity
prospectuses, we would expect savings among RILA
issuers to be less than the VASP Adopting Release
savings, but we do not have a basis for believing
savings for RILA issuers will be of an order of
magnitude less than the VASP Adopting Release
savings. We therefore believe savings for RILA
issuers will be between approximately $.02 and
$.18. We estimate the internal cost time of online
posting of contract documents to be $772. See infra,
Table 11.
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investors who do not gain a full
understanding of the contract, there
could be a cost stemming from a
potential mismatch between an
investor’s goals and the purchased
contract. Depending on the size of an
individual’s potential purchase, certain
of these additional costs could be
considerable in comparison to the
monetary costs associated with contract
purchase and could discourage
investors from considering RILAs even
in circumstances where investment in a
RILA would be beneficial.
For their part, insurance companies
only supply RILAs to the extent they
expect the benefits derived from
providing the contracts to be greater
than the costs of supplying the contract.
For issuers, costs include not only those
costs associated with producing and
servicing RILAs, but also those costs
associated with meeting various
statutory and regulatory obligations.
These costs borne by both insurance
companies and individuals are
examples of market ‘‘frictions.’’ Market
frictions have the effect of reducing the
benefits from (i.e., the efficiency of)
contracting between market
participants.483 Rules that reduce costs
for investors, issuers, or both, reduce
market frictions and potentially enhance
the benefits from contracting between
market participants. By facilitating
investor evaluation and comparison of
RILAs as well as facilitating the
comparison of RILAs to other annuity
contracts, the proposed rule could
reduce frictions for investors. Requiring
insurance companies to use a single
registration form and filing process for
all RILAs as well as all variable annuity
separate accounts that are structured as
unit investment trusts, as well as
allowing RILA issuers to provide
financial statements on amended Form
N–4 in the same way that insurance
companies currently do on Form N–4,
may also reduce certain compliance
burdens for insurance companies. In
addition, requiring RILA issuers to tag
certain key information in Inline XBRL
would enable investors, third-party
information providers, Commission
staff, and other data users to capture and
analyze that information more quickly
and efficiently than is possible when the
same information is provided solely in
a static, text-based format.
These increases in efficiency could
lead investors to save more
appropriately to meet their retirement
goals. For example, for existing RILA
investors the proposal may increase the
483 If market frictions are sufficiently large,
market frictions could eliminate exchange
altogether.
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likelihood that investors choose to
invest more or less money in RILAs in
a manner that is consistent with their
overall financial needs and objectives—
a level that may be higher or lower than
current levels. Similarly, the proposal
may lead existing investors to choose to
allocate their money into different
investment options that the RILA offers,
or different RILAs (or other insurance
products like variable annuities) that
best meet their needs. The proposal also
may help promote investment in RILAs
by investors who currently do not invest
in RILAs, to the extent such investments
are appropriate for them. Finally, access
to clearer information about the contract
provisions may reduce the chances that
an investor makes mid-crediting period
withdrawals or transfers or surrenders a
RILA when the costs of doing so does
not justify the benefits.
Competition. If the proposed rule
increases efficiency of exchange in the
RILA market, then we may observe a
change in investment in RILAs. For
example, if there are individuals who
currently do not invest in RILAs (or
invest less than they would have)
because the costs other than the price of
the contract are too high (including the
effort to gain sufficient understanding of
the product) or they are not aware of
RILAs as an investment, then to the
extent the proposed rule lowers those
costs or makes investor more aware of
RILAs, we would expect to observe
more investors entering the RILA
market. Conversely, there may be RILA
investors who, because of the burden,
choose not to read statutory
prospectuses. To the extent those
investors are more likely to read
summary prospectuses, those investors
may decide, as a result, that other
investments or products are better
suited to their investment goals. This
could result in fewer investments in
RILAs. If there are insurance companies
who limit their participation in the
RILA market as a result of the
requirement to register RILA offerings
on Form S–1 or Form S–3 or because of
the costs of current prospectus delivery
requirements, those insurance
companies may increase participation in
the RILA market. To the extent that
competition in a market is related to the
size of the market, the net effect of these
potential changes in investor demand
for, and issuer supply of, RILAs could
affect competition in the RILA market.
The proposed rule could also affect
competition by requiring that
information about RILAs be presented
in a concise, user-friendly way, which
could allow investors to compare
information across products. Requiring
RILA issuers to tag certain key
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information in Inline XBRL could
further facilitate comparisons of
information across registrants by making
it easier for investors (directly or
through third-party data aggregators) to
extract and aggregate information
through automated means for analysis
and comparison, which could increase
competition among RILA issuers for
investor capital. For example, the
proposed rule requires issuers to distill
certain key product information into
tables. The presentation of this
information in a table facilitates
evaluation among different RILAs as
well as comparison to variable
annuities. Greater comparison among
different RILAs as well as comparison to
variable annuities could lead to greater
competition. Furthermore, by reducing
the costs associated with aggregating
data across RILAs, the proposed Inline
XBRL requirement could reduce barriers
to entry for third-party data aggregators
and induce competition among firms
that supply information about RILAs to
investors, including other third-party
aggregators and sales agents.
The effect on competition between
insurance companies could be limited,
however, to the extent RILA investors
rely on an agent to help them select
their RILA contract and the investment
options under the contract and do not
have access to broad comparisons across
different RILAs (or among different
investment options that the RILA offers)
at the time of sale.484 Agents generally
only provide their customers with a
subset of all RILAs available in the
general marketplace. Thus, while the
product information in summary
prospectuses would facilitate
comparison across products offered by
the agent, the effect would likely be
limited to the agent’s set of products
rather than to the broader market.
Capital Formation. As discussed in
connection with the potential effects of
the proposed rule on competition, if the
proposed rule increases the efficiency of
exchange in the RILA market, then we
may observe a change in investment in
RILAs. As discussed in section III.B.3,
unlike variable annuities that involve a
direct investment of premiums into one
or more mutual funds, which in turn
invest in underlying securities, RILA
premiums are not directly invested into
the assets of the indexes that are
484 We do not have data on the extent to which
investors rely on agents when purchasing RILAs. In
2019, $95.5 billion of total variable annuity sales of
$98.3 billion (97%) were through a distribution
channel involving an agent. If investors rely on
agents when purchasing RILAs to the same extent
they do when purchasing variable annuities, then
the vast majority of RILA investors rely on agents
when purchasing RILAs.
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associated with the index-linked
options offered under the contract, but
are typically invested into fixed-income
securities such as corporate bonds. To
the extent that an increase or decrease
in the demand for RILAs is not driven
by investors substituting either away
from, or into, variable annuities or other
investment vehicles as an alternative,
we would not expect changing demand
for RILAs to have any effect on the
underlying securities. An increase or
decrease in the demand for RILAs
could, however, increase or decrease the
demand for fixed-income securities
such as corporate bonds. To the extent
the proposed rule would cause investors
to either substitute away from, or into,
variable annuities or another investment
that entail investment in underlying
funds (which, in turn, invest in a
portfolio of securities), there could be an
effect on capital formation. If investors
substitute away from variable annuities
or other investment vehicles into RILAs,
there could be a reduction in the
demand for the underlying securities
and, by extension, a reduction in capital
formation. If investors substitute away
from RILAs and into variable annuities
or other investment vehicles, there
could be an increase in the demand for
the underlying securities. To the extent
issuers invest RILA proceeds into fixedincome securities such as corporate
bonds, there could be an increase in the
demand for those securities.
The proposed Inline XBRL
requirements could increase the
efficiency of capital formation to the
extent that making disclosures available
in a structured format reduces some of
the information barriers that make it
costly for RILA issuers to find
appropriate sources of new investors.
Smaller issuers in particular may benefit
more from enhanced exposure to
investors. If tagging certain disclosures
in a structured format increases the
availability, or reduces the cost, of
collecting and analyzing key
information about RILAs, smaller RILA
issuers may benefit from improved
coverage by third-party information
providers and data aggregators.
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E. Reasonable Alternatives
1. Creating an Entirely New Registration
Form for RILAs
The proposed rule would require the
registration of RILA offerings on Form
N–4. Most variable annuities use Form
N–4, which has disclosure requirements
tailored to these investments that
provide investors with key information
about a variable annuity’s terms,
benefits, and risks in a concise and
reader-friendly presentation. Currently,
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insurance companies register RILA
offerings on Forms S–1 or S–3, which
allow registering general debt or equity
offerings. Forms S–1 and S–3 require
issuers to disclose not only information
about the offering itself, but also
extensive information about the
registrant issuing the securities. In
addition, registrants must include
financial statements prepared in
accordance with GAAP, unless an
exemption has been granted pursuant to
17 CFR 210.3–13 that permit insurance
companies to substitute SAP financials
in lieu of GAAP financials. Form N–4,
on the other hand, allows insurance
companies to file financial statements
prepared in accordance with SAP if they
do not otherwise prepare GAAP
financial statements. As an alternative,
we could have required insurance
companies to register RILA offerings on
an entirely new form.
Form N–4 was designed for
investment companies, and RILA
issuers are not investment companies. A
new form specifically tailored to RILAs
could be more beneficial than working
to fit them into an existing framework
that was designed with a different
structure in mind.
A completely new registration form
for RILA offerings could negatively
affect investors’ ability to compare
different RILAs with variable annuities
that register on Form N–4 (including
‘‘combination’’ contracts that offer
index-linked options as well as variable
options). Furthermore, given that we are
proposing to amend Form N–4 to
address those aspects specific to RILAs,
but many of the current form
requirements are relevant to the
registration of RILA offerings, a
completely new and separate form for
RILAs would not offer much (if any)
benefit to investors in terms of new
information compared to the proposed
amendments to Form N–4. Since most
variable annuity issuers already use
Form N–4 to register their securities,
and many RILA contracts are offered as
‘‘combination’’ contracts, the amended
Form N–4 would efficiently provide
investors with product-specific
information about these combination
contracts. As a result, investors would
be able to compare annuity products,
and the investment options that these
products offer, with less time and effort.
To the extent that investors use less
time and effort to compare annuity
products and their underlying
investment options, investors may be
more likely to make decisions that align
better with their investment goals.
We preliminarily believe that
requiring RILA offerings to be registered
on Form N–4 rather than on an entirely
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new form would also be more efficient
for insurance companies since they
would generally follow the same
procedures they already use for the
registration of variable annuities. Using
Form N–4 to register variable annuities
and RILA offerings would also be less
costly for insurance companies than
using Form N–4 for variable annuities
and a completely new form for RILAs
since registrants are already familiar
with Form N–4. It also would be less
costly because, if RILA offerings had to
be registered on a form other than Form
N–4, combination contracts offering
variable options and index-linked
options would have to use two separate
registration forms.
Commission staff would also benefit
from using Form N–4 for RILAs because
the disclosure requirements for variable
annuities and RILAs would be located
in one form only, and registration
statements for these products would be
subject to the same filing and review
processes. This would reduce the use of
resources by Commission staff needed
to review the registration statements of
RILAs and variable annuities.
2. Alternatives to Specific Form N–4
Amendments
The Commission is proposing
amendments to Form N–4 so that
insurance companies can register RILA
offerings using that form. While the
substance of many of the requirements
in Form N–4 would not change from the
current version of the form, we are
proposing to update some items to
include disclosures specifically tailored
to RILAs. In certain limited
circumstances, we have changed the
disclosure requirements provided on the
form for all filers, including those
registering variable annuities.
As an alternative, we could have
proposed more or less tailoring the form
for RILAs. A larger number of
amendments tailored to RILAs than the
number we propose would be more
costly for insurance companies
registering RILA offerings because
insurance companies that offer
combination contracts (or that otherwise
register variable annuities on Form N–
4) would have to make more changes to
their disclosure. For example, we could
have required insurance companies to
provide a diagram in the KIT to
illustrate surrender charges and contract
adjustments during different time
periods of the contract, or illustrations
showing how caps, floors, and/or
buffers could affect an investor’s returns
across different market scenarios.
Also, we could require insurance
companies to provide information
related to the economic tradeoffs
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associated with index-linked options.
For example, we could require the
insurance company to compare a
hypothetical investment in the indexlinked option to the value, or cost, of a
combination of (i) derivatives that
would provide the index-linked option’s
investment exposure; (ii) a fixed-income
component; and (iii) the standard
insurance features offered with the
index-linked option, similar to the
analysis in the Moenig Paper and the
analysis conducted by the staff in
section III.B.3.485 In such a comparison,
we could either require that the
insurance company should use the
hypothetical investment discounted by
the rate of interest the insurance
company is crediting, or would credit,
on fixed annuities with a term equal to
the duration of the crediting periods of
the index-linked option, or we could
require the insurance company to use
the value of a risk-free zero-coupon
bond with a time to maturity equal to
the crediting period of the index-linked
option, consistent with our analysis in
section III.B.3.486 We could also
consider requiring additional disclosure
related to the setting of early withdrawal
charges or penalties and their impact on
such a comparison of hypothetical
investments. For example, we could
require the calculation of a disclosure
similar to the analysis in the Moenig
Paper and the analysis conducted by the
staff in section III.B.3 to explicitly
include the impact of early withdrawal
charges or penalties on the liquidity of
the investment. We could also require
more prominent placement of these
features on marketing or other materials,
or we could require a comparison of
these features to potential benefits of the
RILA to clarify for investors possible
trade-offs.
Conversely, a smaller number of
amendments tailored to RILAs than the
number we propose would be less costly
for insurance companies. Since
insurance companies already use Form
N–4 to register variable annuities, and
most RILA issuers offer variable
annuities registered on Form N–4
(including, in many cases, combination
contracts), we preliminarily believe that
the costs of complying with the
disclosure requirements of the amended
form would not be substantial.
The amendments to Form N–4 that we
propose would promote investor
understanding of RILA contracts by
presenting information in a clear and
concise manner. Proposing a larger
number of amendments tailored to
RILAs may add too much, or less
485 See
supra section II.B.3.b.
486 Id.
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relevant, information, which may
overwhelm investors who may not have
the time or capacity to process all the
information.487 Proposing only a subset
of amendments tailored to RILAs, as
compared with the proposed approach,
could result in less investor
understanding relative to the
understanding resulting from the
proposed amendments.
3. Require the Use of Form N–4 for
Registered MVAs
As discussed above, while we are not
proposing to require insurance
companies to register offerings of
registered MVAs on Form N–4, one
alternative would have been requiring
insurance companies to register the
offering of registered MVAs on Form N–
4.488 These offerings are currently
registered on Forms S–1 or S–3 but
differ from RILAs only with respect to
the manner in which interest is
calculated and credited.489 As a result,
many of the benefits and costs identified
above regarding RILAs would also be
true in applying the same registration
and disclosure framework to offerings of
registered MVAs, including potentially
a change to the filing fee process to file
on Form 24f–2 and requiring the issuers
to follow rule 156. For example, as with
RILAs, expanding the scope of Form N–
4 to include registered MVAs would
benefit investors by making it easier for
them to compare registered MVAs, and
also compare registered MVAs with
other annuity product offerings
registered using Form N–4.490 In
particular, because both RILAs and
registered MVAs include contract
adjustments, the inclusion of specified
disclosures about contract adjustments
would benefit investors since they
would be able to better evaluate the
costs of purchasing and owning annuity
contracts, including registered MVAs.
Requiring the registration of registered
MVAs on Form N–4 also would entail
efficiency benefits to insurance
companies that offer combination
487 See, e.g., Julie R. Agnew and Lisa R. Szykman
(2005). Asset Allocation and Information Overload:
The Influence of Information Display, Asset Choice,
and Investor Experience, Journal of Behavioral
Finance, 6(2), 57–70, and Alejandro Bernales,
Marcela Valenzuela and Ilknur Zer (2023). Effects
of Information Overload on Financial Markets: How
Much Is Too Much? International Finance
Discussion Papers 1372, Washington: Board of
Governors of the Federal Reserve System.
488 See supra section II.H.
489 Based on internal estimates, there are 45
registered MVAs from 15 different insurance
companies. 27 of these registered MVAs are in
combination contracts whereas 18 are standalone.
27 of these registered MVAs use Form S–1 and 18
use Form S–3. Lastly, 26 of these registered MVAs
use GAAP financials and 19 use SAP.
490 See supra section III.C.1.
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contracts, for example ones that include
both variable annuities registered on
Form N–4 and registered MVAs, as the
use of the same registration form for all
of these products may reduce these
companies’ compliance burdens.
Conversely, including registered
MVAs on Form N–4 would also entail
similar costs to those outlined above for
the proposed registration and disclosure
approach for RILAs. These would
include direct costs to the insurance
company, for example filing fees, as
well as outside legal and account fees.
Direct costs also would include costs
associated with filing the first Form N–
4 registration statement in connection
with the registration of a registered
MVA offering, where the insurance
company would be required to
familiarize itself with the new
registration form and may need to
configure its systems to efficiently
gather the required information.
Further, investors would bear certain
indirect costs, such as the cost of
adapting to new materials and the
changes in the presentation of
information.
Ultimately, we determined not to
propose to require insurance companies
to register offerings of registered MVAs
on Form N–4 at this time, but we
request comment on this reasonable
alternative.
4. Limiting Scope of Structured Data
Requirements
The proposed rule would require
many of the newly added disclosures on
Form N–4 to be tagged in Inline XBRL,
and also would require RILA issuers to
tag those prospectus disclosures that
Form N–4 currently requires to be
tagged. Alternatively, the Commission
could have limited the tagging
requirement to only those disclosures
being added to Items of Form N–4 that
are already tagged in Inline XBRL.491
Under this alternative, disclosures
relating to: the overview of the contract;
the description of the Insurance
company, registered separate account,
and investment options; charges;
purchases and contract value; purchase
of securities being offered;
disagreements with and changes to
accountants; information about
contracts with index-linked options and
fixed options subject to a contract
adjustment; and fee representations and
undertakings would not be tagged.
Limiting the scope of tagging
requirements in this manner would
result in reduced compliance burdens
for insurance companies, which would
be required to apply fewer tags to their
491 See
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disclosures on Form N–4 filings.
However, the alternative would also
remove the informational benefits
associated with making those
disclosures available in a machinereadable manner. Furthermore, because
Form N–4 filers already have Inline
XBRL tagging obligations with respect to
certain of the form’s disclosure
requirements, the burden reductions
resulting from such an alternative
would be limited.
F. Request for Comment
Throughout this release, we have
discussed the anticipated benefits and
costs of the proposed rule and its
potential effect on efficiency,
competition, and capital formation.
While we do not have comprehensive
information on all aspects of RILA
registration and reporting, we are using
the data currently available in
considering the effects of the proposed
rule. We request and encourage any
interested person to submit comments
regarding the proposed rule, our
analysis of the potential effects of the
rules and other matters that may have
an effect on the proposed rules. We
request that commenters identify
sources of data and information with
respect to annuity contracts in general,
but also with respect to RILAs in
particular, as well as provide data and
information to assist us in analyzing the
economic consequences of the proposed
rules. We are also interested in
comments on the qualitative benefits
and costs we have identified and any
benefits and costs we may not have
discussed. We urge commenters to be as
specific as possible.
Comments on the following questions
are of particular interest.
153. What additional qualitative or
quantitative information should be
considered as part of the baseline for the
economic analysis of these
amendments?
154. Are the benefits and costs of
proposed amendments accurately
characterized? If not, why not? Should
any of the costs or benefits be modified?
What, if any, other costs or benefits
should be taken into account? If
possible, please offer ways of estimating
these benefits and costs. What
additional considerations can be used to
estimate the benefits and costs of the
proposed amendments?
155. To the extent commenters
believe any specific additional data
sources would help better quantify the
benefits and costs of the proposal, we
request that commenters provide this
data. In particular, the following data
could be particular informative:
historical information about current
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limits on index gains associated with
the index-linked options offered under
a RILA, quantitative data about contract
adjustments incurred by investors who
make withdrawals from an index-linked
option or from a RILA contract before
the end of a specified period, and/or
data regarding the frequency with which
RILA contracts are annuitized.
156. Are the effects on competition,
efficiency, and capital formation arising
from the proposal accurately
characterized? If not, why not?
157. Are there any other reasonable
alternatives to the proposed new rule
that should be considered? Are there
any additional benefits or costs that
should be associated with the
reasonable alternatives considered?
158. We indicate that insurance
companies benefit from the sale of
RILAs in at least three ways. First,
insurance companies can benefit from a
favorable imbalance between the
downside protections that a RILA
contract offers, and the upside caps the
contract offers. Second, insurance
companies invest RILA proceeds into
fixed-income securities such as
corporate bonds, thereby earning a
‘‘credit risk premium.’’ Finally,
insurance companies can benefit when
a RILA offers index-linked options
whose index for measuring performance
is a price-based index that does not
account for dividend payments. Are we
correct in our characterization of how
insurance companies benefit from the
sale of RILAs? In what other ways, if
any, do insurance companies benefit
from the sale of RILAs?
159. We characterize RILAs as
combining features of fixed-index
annuities and variable annuities—
limiting or reducing downside risk in
return for an investor accepting capped
upside performance. In exchange for
giving up the complete protection of
principal offered by fixed annuities, a
RILA investor is afforded greater upside
potential than that provided by fixed
annuities, though typically less than the
potential upside of a variable annuity. Is
our characterization of RILAs, compared
to other annuity products, correct? If
not, how do RILAs compare to other
annuity products?
160. In Section III.B.3, we analyze the
imbalance between the downside
protections that a RILA contract offers,
and the upside limits the contract offers.
Does our analysis reflect a risk-neutral
valuation for a RILA with a cap and
buffer or floor? What alternative
considerations should we include in
calculating such a valuation? Do the
methodological assumptions (such as
generating prices through the linear
interpolation of implied volatilities)
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create significant bias or other problems
for the analysis? How do RILAs set
surrender charges or other early
withdrawal charges or penalties, and
should these charges or penalties be
considered when performing this
calculation since they reduce the
liquidity of the investment? Should we
require additional disclosure related to
early withdrawal charges, fees, or
penalties? For example, should we
require more prominent placement of
these features on marketing or other
materials, or should we require a
comparison of these features to potential
benefits of the RILA to clarify for
investors possible trade-offs? Are there
other data sources (e.g., pricing vendors)
that should be considered for these
calculations? Are there certain time
periods or types of contracts that we
should consider when doing these or
similar calculations? What
considerations should be used in
assessing whether the cost derived in
our analysis is large or small? Also, are
other measures related to the economic
content of downside protections and
upside limits that would be beneficial
for investors?
161. We indicate that for shorter
crediting periods and for common
indexes such as the S&P 500, issuers are
able to use exchange traded derivative
securities to closely approximate the
issuer’s liabilities from a RILA contract
at the end of each crediting period. Do
issuers use exchange derivative
securities to approximate the issuer’s
liabilities from a RILA contract? If not,
how do issuers use the proceeds from
RILA sales?
162. Under the proposed rule, to what
extent would insurance companies
choose to meet their disclosure
obligation by providing investors with
summary prospectuses while making
statutory and other documents available
on a website? As discussed above, we
expect the vast majority of investors will
have the option to use both summary
prospectuses and statutory prospectuses
in their decision-making, in whatever
proportion investors think is best for
their preferences. To what extent would
investors in RILA contracts whose
issuers elect to rely on rule 498A
request to receive statutory prospectuses
in paper or electronically, or seek access
to statutory prospectuses online?
163. Would any positive or negative
effect of the proposed rule on investors
be disproportionately greater for certain
investors than for others? If so, which
investors would be disproportionately
affected, to what extent, and how would
such effects manifest? What, if any,
additional measures could help mitigate
any such disproportionate effects?
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Please provide supportive data to the
extent available.
164. To what extent might reduced
burdens (e.g., using SAP accounting
rather than GAAP accounting) borne by
issuers be passed on to existing
investors? Under what circumstances,
and in what form, would insurance
companies pass benefits through to
existing investors?
165. To what extent would the
proposed rule affect the ability of
investors to understand the investment
risks of RILAs and to efficiently allocate
capital? Would investors be more likely
to allocate additional capital to RILAs?
What would be the effect on issuer
competition for investor capital?
166. To what extent would investors
realize benefits from Inline XBRL
tagging requirements for certain newly
added disclosures on Form N–4, as
opposed to tagging requirements for
only those disclosures within currently
tagged Form N–4 Items? How would
this approach affect costs for insurance
companies? Would there be any cost
saving?
167. To what extent would an
increase or decrease in the demand for
RILAs be driven by investors
substituting either away from, or into,
variable annuities or other investment
vehicles? We assume that if investors do
substitute away from, or into, variable
annuities or other investment vehicles
into RILAs, that the effect on capital
formation would be small. Is our
assumption correct? If not, why would
the effect on capital formation be larger
than what we assumed?
lotter on DSK11XQN23PROD with PROPOSALS2
IV. Paperwork Reduction Act
We are proposing amendments to
several rules and forms that would
modify the registration, offering, and
communications processes for RILAs
under the Securities Act. We are also
proposing amendments to Form N–4
and related rules that would apply to all
issuers of that form.492 The proposed
amendments, if adopted, would
implement the requirements relating to
RILAs in the RILA Act.493 The proposed
amendments would have an impact on
the current collections of information
burdens under the Paperwork Reduction
Act of 1995 (‘‘PRA’’) of the following
rules and forms: Rule 498A, Form N–4,
492 We are proposing amendments rules 485 and
497 of Regulation C (OMB Control No. 3235–0074),
which describes the procedures to be followed in
preparing and filing registration statements with the
Commission, and rule 405 of Regulation S–T (OMB
Control No. 3235–0424), which specifies the
requirements that govern the electronic submission
of documents. The proposed amendments would
require RILA issuers to tag specified information in
registration statements filed on Form N–4 or post-
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Investment Company Interactive Data,
and Form 24F–2. The titles for the
existing collections of information are:
(1) ‘‘Rule 498A Summary Prospectus for
Variable Annuity and Variable Life
Insurance Contracts’’ (OMB Control No.
3235–0765), which we would retitle to
‘‘Rule 498A Summary Prospectus for
Variable and Index-Linked Annuity and
Variable Life Insurance Contracts;’’ (2)
‘‘Form N–4, Registration Statement of
Separate Accounts Organized as Unit
Investment Trust’’ (OMB Control No.
3235–0318), which we would retitle to
‘‘Form N–4, Registration Statement of
Separate Accounts Organized as Unit
Investment Trust or of Index-Linked
Annuity Contracts;’’ (3) ‘‘Annual Notice
of Securities Sold Pursuant to Rule 24f–
2.’’ (OMB Control No. 3235–0456),
which we would retitle to ‘‘Annual
Notice of Securities Sold Pursuant to 17
CFR 270.24f–2 or 230.456(e);’’ and (4)
‘‘Investment Company Interactive Data’’
(OMB Control No. 3235–0642).
The Commission is submitting these
collections of information to OMB for
review and approval in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11.
The hours and costs associated with
preparing and filing the forms constitute
reporting and cost burdens imposed by
each collection of information. 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 OMB control
number. We discuss below the
collection of information burdens
associated with proposed amendments
to rule 498A and Investment Company
Interactive Data, as well as Forms N–4
and 24F–2, which are filed with the
Commission and are not kept
confidential. A description of the
proposed amendments, including the
need for the information and its
proposed use, as well as a description
of the likely respondents, can be found
in Section II above, and a discussion of
the economic effects of the proposed
amendments can be found in Section III
above.
A. Rule 498A
We are proposing to amend rule 498A
to permit RILA issuers, as well as
issuers of ‘‘combination contracts’’
offering a combination of index-linked
effective amendments thereto, as well as in forms
of prospectuses filed pursuant to rule 497(c) or
497(e) under the Securities Act that include
information that varies from the registration
statement using Inline XBRL These burdens are
included in our estimates for the Investment
Company Interactive Data collection of information
discussed in section IV.D below.
493 See Public Law 117–328; 136 Stat. 4459 (Dec.
29, 2022).
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71167
options and variable options, to use a
summary prospectus to satisfy statutory
prospectus delivery obligations.
Consistent with current rule 498A, the
proposed use of summary prospectuses
for RILAs would be voluntary, but the
rule’s requirements would be mandatory
for issuers that elect to send or give a
summary prospectus in reliance upon
proposed rule 498A. We are also
proposing to make certain amendments
to Form N–4 that would affect the
variable annuity summary prospectuses
currently provided to investors. The
proposed amendments to rule 498A are
part of a layered disclosure approach
that is designed to provide investors
with a summary prospectus to help
them make informed investment
decisions regarding RILAs, as discussed
in more detail above. These
amendments would result in a change
in our estimate of the burdens
associated with this collection of
information, specifically to account for
these additional requirements for
issuers that use rule 498A currently and
to add RILAs to the estimates.
The respondents to these collections
of information would be RILA issuers
and registered variable annuity separate
accounts. The information provided
under rule 498A will not be kept
confidential.
In our most recent Paperwork
Reduction Act submission for Rule
498A, we estimated for rule 498A a total
aggregate annual hour burden of 14,688
hours, and a total aggregate annual
external cost burden of $11,559,420.494
We estimate that 90 RILAs would be
registered using Form N–4 if the
proposal was adopted and that that
there are 419 registrants on current
Form N–4 that would be impacted by
the proposed amendments.495 The
summary prospectus is voluntary, so the
percentage of RILA issuers that will
choose to utilize it is uncertain. Given
this uncertainty, we have assumed that
insurance companies will choose to use
a summary prospectus for 90% of all
RILAs, which is the same as our current
estimate for variable annuity separate
accounts. The table below summarizes
our PRA initial and ongoing annual
burden estimates associated with the
proposed amendments to rule 498A.
494 On Nov. 13, 2020, the Office of Management
and Budget approved this collection of information
estimate for rule 498A.
495 The RILA estimate is based on a review of
RILA registration statements filed with the
Commission as of May 2023 and the current Form
N–4 registrants estimate is based on Form N–CEN
reports through Apr. 15, 2023.
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TABLE 11—RULE 498A PRA ESTIMATES
Internal
initial
burden hours
Internal
annual
burden hours
Internal
time costs
Wage rate 2
Annual
external
cost burden
Proposed Estimates
Separate Account Registrants
Proposed Amendments .............................................................
Number of registrants 3 .............................................................
Total annual burden ..................................................................
Use of summary prospectus .....................................................
Total new annual burden for Reliance on Rule 498A ..............
19
........................
........................
........................
........................
16
× 419
2,514
× 90%
2,262.60
$425 (compliance attorney) ....
$2,550
× 419
$1,068,450
× 90%
$961,605
........................
........................
........................
........................
........................
RILA Registrants
40
4 24.67
$313 (blended rate) 5 ..............
$7,709.38
8 $5,000
2
........................
........................
........................
........................
........................
6 2.67
$289 (webmaster) ...................
$771.63
8,481.01
× 90
$763,290.90
× 90%
$686,961.81
........................
$5,000
× 90
$405,000
× 90%
$364,500
Initial Summary Prospectus ..................................................................................................................................................................................................
Updating Summary Prospectus ............................................................................................................................................................................................
Total annual burden ..............................................................................................................................................................................................................
Use of summary prospectus .................................................................................................................................................................................................
Total new annual burden for Reliance on Rule 498A ..........................................................................................................................................................
$120,000
$1,048,000
$1,168,000
× 90%
$1,051,200
Preparation and filing of Initial Summary Prospectus/Updating
Summary Prospectus.
Online Posting of Contract Documents .....................................
Total burden per registrant ........................................................
Number of registrants 7 .............................................................
Total annual burden ..................................................................
Use of summary prospectus .....................................................
Total new annual burden for Reliance on Rule 498A ..............
27.34
× 90
2,460.60
× 90%
2,214.54
Estimates for Printing and Mailing by RILA Registrants 9
Total Burdens
Responses
Current aggregate annual burden estimates ............................
Aggregate proposed additional annual burden estimates ........
Revised aggregate annual burden estimates ...........................
Internal
hour
estimate
676
I
10 + 83
= 759
I
14,688
+ 4,477.14
= 19,165.14
Internal
hour cost
estimate
External
cost
estimate
$3,900,193
+ 1,648,566.81
= 5,548,759.81
$11,559,420
+ $1,415,700
= $12,975,120
Notes:
1 Burden estimates also include the burden associated with the proposed amendments for separate account registrants that use a notice document as part of the
modernized alternative disclosure framework in connection with discontinued variable annuity contracts. See VASP Adopting Release at section II.E. Internal annual
burden hours represents initial burden estimates annualized over a three-year period plus three hours of on-going annual burden hours.
2 The Commission’s estimates of the relevant wage rates are based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013. The estimated wage figures are modified by Commission staff to account for an 1,800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of inflation. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013 (as adjusted to account for inflation, the
‘‘SIFMA Wage Report’’).
3 Estimate is based on a review of N–CEN reports through Apr. 15, 2023. In its most recently approved PRA submission, the Commission estimated that 426 registrants on Form N–4 would be subject to the information collection burden under current rule 498A. For the estimated burden of the proposed amendments to rule
498A, we have taken into account updated data regarding the number of registrants on Form N–4.
4 Represents initial burden estimates annualized over a three-year period plus 11 hours of ongoing annual burden hours.
5 Represents a blended wage rate of a compliance attorney ($425 per hour) and an intermediate accountant ($200 per hour). $313 is based on the following calculation: ($425 + $200)/2 = $313 rounded to the nearest whole dollar.
6 Represents initial burden estimates annualized over a three-year period plus two hours of ongoing annual burden hours.
7 This estimate is based on the number of RILAs, as estimated through review of RILA registration statements filed with the Commission as of May 2023.
8 We estimate that each insurance company that chooses to rely on rule 498A with regards to a RILA will incur a one-time collective external cost burden of
$10,000 per registration statement to prepare both a new initial summary prospectus and a new updating summary prospectus for offerings on Form N–4. We also
estimate an on-going collective burden of $2,500 per registration statement during each subsequent year to prepare updates to these materials. The three-year average cost of these estimates is $5,000.
9 Costs associated with printing and mailing for separate account registrants are already accounted for in the currently approved burdens for rule 498A. Estimates
for RILA issuers printing and mailing costs are based on the currently approved burdens for printing and mailing costs under rule 498A.
10 The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (90 responses) and the difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (426 responses) and the proposed
additional annual burden estimates (419 responses). (90 RILA responses subtracted by 7 registered separate account responses).
lotter on DSK11XQN23PROD with PROPOSALS2
B. Form N–4
Under the proposed amendments,
RILA issuers would register offerings on
Form N–4, as amended to address the
features and risks of RILAs. We are also
proposing other amendments to Form
N–4 that would apply to all issuers that
use that form. For example, we are
proposing to switch the order of the Key
Information Table and Overview of the
Contract items, require issuers to
present information in the KIT in a Q&A
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format, and to require more specific
principal risk disclosures. These
amendments would result in a change
in our estimate of the burdens
associated with this collection of
information, specifically to account for
these additional requirements for
issuers that use Form N–4 currently and
to add RILAs to the estimates.
Form N–4 generally imposes two
types of reporting burdens on issuers
that use the form: (1) the burden of
preparing and filing the initial
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registration statement; and (2) the
burden of preparing and filing posteffective amendments to a previously
effective registration statement. In our
most recent Paperwork Reduction Act
submission for Form N–4, we estimated
for Form N–4 a total aggregate annual
hour burden of 292,487 hours, and a
total aggregate annual external cost
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burden of $33,348,866.496 Compliance
with the disclosure requirements of
Form N–4 is mandatory, and the
responses to the disclosure
requirements will not be kept
confidential. The respondents to these
collections of information would be
RILA issuers and registered variable
annuity separate accounts. The purpose
of the information collection
requirements on Form N–4 are to meet
the filing and disclosure requirements of
the Securities Act and Investment
Company Act, as applicable, and to
provide investors with information
necessary to evaluate an investment in
an offering of securities registered on
the form.
We estimate that 90 RILA respondents
and 419 separate account registrants
would be subject to collection of
information requirements under the
proposed amendments to Form N–4.497
The table below summarizes our PRA
initial and ongoing annual burden
estimates associated with the proposed
amendments to Form N–4.
TABLE 12—FORM N–4 PRA ESTIMATES FOR INITIAL FILINGS
Internal initial
burden hours
Internal annual
burden hours
Wage rate 2
Annual
external
cost burden
Internal time costs
Proposed Estimates 3
Separate Account Registrants
12
1 14
........................
× 42
588
Proposed amendments .........................................................
Estimated number of annual responses 4 .............................
Total new annual burden ......................................................
I........................ I
$406 (blended rate for compliance attorney and senior
programmer) 3.
................................................
................................................
$5,684
........................
× 42
$238,728
........................
........................
$158,701.34
8 $40,000
$143
× 20
$3,176,886.80
........................
× 20
$800,000
RILA Issuers
Proposed amendments to Form N–4 ....................................
300
5 390.89
Website availability requirement 6 .........................................
Estimated number of annual responses 7 .............................
Total new annual burden ......................................................
........................
........................
........................
0.5
× 20
7,827.80
I
I
$406 (blended rate for compliance attorney and senior
programmer) 3.
$286 (webmaster) .................
................................................
................................................
Total Burdens
Responses
Current aggregate annual burden estimates ........................
Aggregate proposed additional annual burden estimates ....
Revised aggregate annual burden estimates .......................
Internal hour
estimate
30
9 + 32
I
= 62
I
8,427
+ 8,416.80
= 16,843.80
Internal hour cost
estimate
................................................
................................................
................................................
$2,494,716
+ $3,416,614.80
= $5,911,330.80
External cost
estimate
$754,740
+ $800,000
= $1,554,740
Notes:
1 This estimate includes the initial burden estimates annualized over a three-year period, plus 10 hours of ongoing annual burden hours.
2 The Commission’s estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission staff to
account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation.
3 The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386). $406 is
based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
4 The estimate of the annual number of registration statements filed on Form N–4 is based on the average annual number of filings received by the Commission
over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the Commission estimated that separate accounts will make
approximately 30 initial registration statement filings per year. For the estimated burden of the proposed amendments to Form N–4, we have taken into account updated data regarding the number of initial filings on Form N–4.
5 The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 290.89 hours of ongoing annual burden hours. The ongoing
annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N–4 plus 10 hours of ongoing annual burden hours.
6 The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites. See Item 17 of
proposed Form N–4.
7 This estimate is based on a review of Morningstar data regarding the number of new RILA product launches that occurred over the prior three calendar years
(2020–2022), rounded to the nearest ten. Current RILA registration statements would make their first filing on proposed Form N–4 as a post-effective amendment.
See supra footnote 195 and accompanying text.
8 We estimate that the external cost to prepare and file an initial registration statement on Form N–4 is $40,000 per filing.
9 The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (20 responses) and the difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (30 responses) and the proposed
additional annual burden estimates (42 responses). (20 RILA responses plus 12 registered separate account responses).
TABLE 13—FORM N–4 PRA ESTIMATES FOR POST-EFFECTIVE AMENDMENT FILINGS
Internal initial
burden hours
Internal annual
burden hours
Internal time
costs
Wage rate 2
Annual external
cost burden
Proposed Estimates 3
lotter on DSK11XQN23PROD with PROPOSALS2
Separate Account Registrants
Proposed amendments .........................................................
12
16
Estimated number of annual responses 4 .............................
Total new annual burden ......................................................
........................
........................
× 1,016
6,096
496 On Oct. 26, 2021, the Office of Management
and Budget approved without change this burden
estimate.
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$406 (blended rate for compliance attorney and senior
programmer) 3.
................................................
................................................
497 For RILA registrants, this estimate is based on
a review of RILA registration statements filed with
the Commission as of May 2023. For separate
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$2,436
............................
× 1,016
$2,474,976
............................
............................
account registrants, this amount is based on Form
N–CEN reports through Apr. 15, 2023.
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TABLE 13—FORM N–4 PRA ESTIMATES FOR POST-EFFECTIVE AMENDMENT FILINGS—Continued
Internal initial
burden hours
Internal annual
burden hours
Internal time
costs
Wage rate 2
Annual external
cost burden
RILA Issuers
Proposed amendments to Form N–4 ....................................
210
5 279.95
Website availability requirement 6 .........................................
Estimated number of annual responses 7 .............................
Total new annual burden ......................................................
........................
........................
........................
0.5
× 90
25,240.50
I
I
$406 (blended rate for compliance attorney and senior
programmer) 3.
$286 (webmaster) .................
................................................
................................................
$113,659.70
8 $24,000
$143
× 90
10,242,243
............................
× 90
$2,160,000
................................................
Internal hour cost
estimate
................................................
................................................
................................................
$84,100,454
+ $12,717,219
= 96,817,673
Total Burdens
Responses
Current aggregate annual burden estimates ........................
Aggregate proposed additional annual burden estimates ....
Revised aggregate annual burden estimates .......................
Internal hour
estimate
1,366
I
9¥260
= 1,106
I
+ 284,060
+ 31,336.50
= 315,369.50
External cost
estimate
+ $32,594,126
+ $2,160,000
= $34,754,126
Notes:
1 This estimate includes the initial burden estimates annualized over a three-year period, plus two hours of on-going annual burden hours.
2 The Commission’s estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission staff to
account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation.
3 The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386). $406 is
based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
4 The estimate of the annual number of post-effective amendments to registration statements on Form N–4 is based on the average annual number of filings received by the Commission over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the Commission estimated that
separate accounts will make approximately 1,366 post-effective amendment filings per year on Form N–4. For the estimated burden of the proposed amendments to
Form N–4, we have taken into account updated data regarding the number of post-effective amendment filings on Form N–4.
5 The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 207.95 hours of ongoing annual burden hours. The ongoing
annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N–4 plus an addition 2 hours of ongoing annual
burden hours.
6 The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites. See Item 17 of
proposed Form N–4.
7 This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
8 We estimate that the external cost to prepare and file a post-effective registration statement on Form N–4 is approximately $24,000 per filing.
9 The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (90 responses) and the difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (1,366 responses) and the proposed
additional annual burden estimates (1,016 responses). (90 RILA responses subtracted by 350 registered separate account responses).
TABLE 14—TOTAL BURDEN ESTIMATES FOR FORM N–4
Responses
Internal annual
burden hours 1
Internal time costs
Annual external
cost burden
Total Burden Estimates Including Amendments
Current aggregate annual burden estimates ........................................................................
Aggregate proposed additional annual burden estimates ....................................................
Revised aggregate annual burden hours .............................................................................
1,366
¥228
= 1,168
292,487
+ 39,753.30 +
= 332,240.30
$86,595,170
+ $16,133,833.80
= $102,729,004
$33,348,866
+ $2,914,740
= $36,263,606
Notes:
1 This estimate includes the initial burden estimates annualized over a three-year period.
Under the proposed amendments,
insurance companies would be required
to pay applicable securities registration
fees relating to RILAs in arrears on Form
24F–2. Consistent with the other
elements of this proposal, these
proposed amendments are designed to
require insurance companies to use the
same framework to pay securities
registration fees for RILAs that they do
for variable annuities. Form 24F–2 is the
annual notice of securities sold by
certain funds that accompanies the
payment of registration fees with respect
to the securities sold during the fiscal
year, net of securities redeemed or
repurchased during the year.
Compliance with Form 24F–2 is
mandatory. Responses to this form are
not kept confidential.
In our most recent Paperwork
Reduction Act submission for Form
24F–2, we estimated for Form 24F–2 a
total aggregate annual hour burden of
27,176 hours, and a total aggregate
annual external cost burden of $0.498
The likely respondents to the proposed
amendments would include RILA
issuers and current Form 24F–2 filers,
which open-end investment companies,
unit investment trusts, registered
closed-end investment companies that
make periodic repurchase offers under
17 CFR 270.23c–3, and face-amount
certificate companies. We estimate that
90 RILA respondents would be subject
to these proposed amendments and
would file one Form 24F–2 filing each
per year.499 The table below summarizes
our PRA initial and ongoing annual
burden estimates associated with the
proposed amendments to Form 24F–2.
498 On May 14, 2021, the Office of Management
and Budget approved this burden estimate.
499 This estimate is based on a review of RILA
registration statements filed with the Commission
as of May 2023. We do not believe that the
proposed amendments to Form 24F–2 will affect
the estimated burdens associated with current Form
24F–2 filers. We have not amended the currently
approved burdens for current Form 24F–2 filers
with more recent data for the purposes of this PRA
estimate.
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C. Form 24F–2
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71171
TABLE 15—FORM 24F–2 PRA ESTIMATES
Internal initial
burden hours
Internal annual
burden hours
Internal time
costs
Wage rate 2
Annual external
cost burden
Proposed Estimates
Clerical work to file Form 24f–2 .............................................
Submission in a structured data format .................................
Total annual burden per response .........................................
Number of annual responses 3 ...............................................
Total new annual burden ........................................................
13
3
3
........................
........................
........................
13
6
× 90
540
$82 (compliance clerk) ..........
$316 (programmer) ................
................................................
................................................
................................................
$246
$948
$1,194
× 90
$107,460
$0
$0
..............................
× 90
$0
Total Estimated Burdens Including Amendments
Responses
Current aggregate annual burden ..........................................
Aggregate proposed additional annual burden estimates ......
Revised aggregate burden estimates .....................................
Internal annual
burden hours
6,794
+ 90
= 6,884
27,176
+ 540
= 27,716
Internal time
costs
................................................
................................................
................................................
$4,633,508
+ $107,460
= $4,140,968
Annual external
cost burden
$0
+ $0
= $0
Notes:
1 The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 2 hours of ongoing annual burden hours.
2 The Commission’s estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission staff to
account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation.
3 This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
D. Investment Company Interactive Data
The Investment Company Interactive
Data collection of information
references current requirements for
certain registered investment companies
and BDCs to submit to the Commission
in Inline XBRL certain information
provided in response to specified form
and rule requirements included in their
registration statements and Exchange
Act reports. We are proposing
amendments to Form N–4, as well as
rule 405 of Regulation S–T, that would
require certain new structured data
reporting requirements for RILA
issuers.500 The proposed amendments
would require RILA issuers to tag
specified information in registration
statements filed on Form N–4 or posteffective amendments thereto, as well as
in forms of prospectuses filed pursuant
to rule 497(c) or 497(e) under the
Securities Act that include information
that varies from the registration
statement using Inline XBRL.501 The
purpose of the information collection is
to make information regarding RILAs
easier for investors to analyze and to
help automate regulatory filings and
business information processing, and to
improve consistency across all types of
investment products offered on Form
N–4 with respect to the accessibility of
information they provide to the market.
Insurance companies that use Form
N–4 to register variable annuities are
currently required to tag certain
registration statement disclosure items
using Inline XBRL.502 For the insurance
companies that would now be
registering RILAs on Form N–4, our
proposed data tagging requirements
would represent new burdens.
Nevertheless, RILA issuers generally do
have prior experience submitting filings
to the Commission in Inline XBRL. The
vast majority of insurance companies
that currently register RILAs on Forms
S–1 and S–3 also separately file Form
N–4 to register variable annuities and
variable life insurance products or
currently tag their RILA registration
statements and are thus familiar with
the current Form N–4 tagging
requirements.503 In addition, insurance
companies that register RILAs on Forms
S–1 and S–3 that file GAAP financial
statements must tag them using Inline
XBRL.504 Given this prior experience,
we do not expect the proposed tagging
requirements to be as burdensome to
many RILA issuers as it would be for
issuers that would be going through the
Inline XBRL tagging and submission
process for the first time.
In our most recent Paperwork
Reduction Act submission for the
Investment Company Interactive Data
collection of information, we estimated
a total annual hour burden of 323,724
hours, and a total annual external cost
burden of $16,041,450.505 Compliance
with the interactive data requirements is
mandatory, and the responses will not
be confidential.
The table below summarizes our PRA
estimates for the burdens associated
with the proposed tagging requirements
that would apply to RILAs that file with
the Commission on Form N–4.
TABLE 16—INVESTMENT COMPANY INTERACTIVE DATA
Internal initial
burden hours
Internal annual
burden hours 1
Internal time
costs
Wage rate 2
Annual external
cost burden
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Proposed Burdens
Proposed disclosures for current N–4 filers 3 .........................
1
41
Number of current N–4 filers 6 ................................................
........................
× 400
500 The Investment Company Interactive Data
collection of information do not impose any
separate burden aside from that described in our
discussion of the burden estimates for this
collection of information.
501 See supra section II.B.9.
502 See General Instruction C.3(h) of current Form
N–4. As discussed above, some of the proposed
items would also require certain variable annuity
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$406 (blended rate for compliance attorney and senior
programmer).
................................................
issuers to provide a few additional disclosures,
which though relatively minor, would also have to
tagged.
503 Based on analysis of Forms S–1, S–3, and POS
AM filed by RILA issuers, 22 of the 23 insurance
companies that issue RILAs also offer variable
products registered on Forms N–3, N–4, or N–6, all
of which are currently structured, or otherwise have
experience tagging registration statements.
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$406
5 $50
× 400
× 400
504 See Inline XBRL Filing of Tagged Data,
Securities Act Release No. 10514 (June 28, 2018) [83
FR 40846 (Aug. 16, 2018)].
505 This estimate is based on the last time the PRA
renewal for the Investment Company Interactive
Data information collection was approved in 2023.
See ICR Reference No. 202212–3235–007, available
at https://www.reginfo.gov/public/do/
PRAViewICR?ref_nbr=202212-3235-007.
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TABLE 16—INVESTMENT COMPANY INTERACTIVE DATA—Continued
Internal initial
burden hours
Internal annual
burden hours 1
Total new burden estimates for current N–4 filers .................
Proposed Form N–4 disclosures for RILAs 7 ..........................
........................
9
400
84
Number of RILAs 10 ................................................................
Total new burden estimates for RILAs ...................................
Total new aggregate annual burden ......................................
........................
........................
........................
× 90
360
11 760
Internal time
costs
Wage rate 2
................................................
$406 (blended rate for compliance attorney and senior
programmer).
................................................
................................................
................................................
Annual external
cost burden
$162,400
$1,624
$20,000
9 $700
× 90
$146,160
12 $308,560
× 90
$63,000
13 $63,000
Total Proposed Estimated Burdens Including Amendments
Responses
Current aggregate annual burden estimates ..........................
Proposed additional annual burdens ......................................
Revised aggregate annual burden estimates .........................
Internal hour
estimate
14,702
+ 90
14,792
323,724
+ 760
324,484
Internal hour
cost estimate
................................................
................................................
................................................
I
$27,066,240
+ $308,560
$27,374,800
External cost
estimate
I
$16,041,450
+ $63,000
$16,124,450
Notes:
1 Includes initial burden estimates annualized over a 3-year period.
2 The PRA estimates assume that the types of professionals that will be involved in complying with the new interactive data requirements. The Commission’s estimates of the relevant wage rates are based on the SIFMA Wage Report. The $406 wage rate reflects current estimates of the blended hourly rate for an in-house
compliance attorney ($425) and a senior programmer ($386). $406 is based on the following calculation: ($425 + $386)/2 = $406. This estimate represents the average burden for a filer on Form N–4 that is currently subject to interactive data requirements.
3 Estimated incremental burden for a variable annuity Form N–4 filer that is subject to the form’s current interactive data requirements.
4 Includes initial burden estimates annualized over a three-year period, plus 0.67 hour of ongoing annual burden hours. The estimate of 1 hour is based on the following calculation: ((1 initial hour/3) + 0.67 hour of additional ongoing burden hours) = 1 hour.
5 Estimated incremental external cost for Form N–4 variable annuity registrants that already submit certain information using Inline XBRL.
6 Based on Form N–CEN filing data for 2022, we estimate that 400 variable annuity registrants file on Form N–4.
7 Estimated average burden for a RILA that files on Form N–4 that is currently subject to interactive data requirements on other Commission forms.
8 Includes initial burden estimates annualized over a three-year period, plus 1 hour of ongoing annual burdens. The estimate of 4 hours is based on the following
calculation: ((9 initial hours/3) + 1 hour of additional ongoing burden hours) = 4 hours.
9 We estimate an incremental external cost for RILAs that would be newly filing on Form N–4 of $700 to reflect one-time compliance and initial set-up costs. Because RILAs are currently subject to Inline XBRL tagging requirements on other forms, we do not estimate any burdens related to one time-costs associated with becoming familiar with structured data requirements (e.g., the acquisition of new software or the services of consultants).
10 Estimated number of RILAs that currently file on Forms S–1 and S–3.
11 760 hours = (400 variable annuity registrants × 1 hour = 400) + (90 RILAs × 4 hours = 360).
12 $308,560 internal time cost = (400 variable annuity registrants × $406 = $162,400) + (90 RILAs × $1,624 = $146,160).
13 $63,000 annual external cost = (400 variable annuity registrants × $50 = $20,000) + (90 RILAs × $700 = $63,000).
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E. Request for Comment
We request comment on whether our
estimates are reasonable. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission
solicits comments to: (1) evaluate
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information will have practical utility;
(2) evaluate the accuracy of the
Commission’s estimate of the burden of
the proposed collection of information;
(3) determine whether there are ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(4) determine whether there are ways to
minimize the burden of the collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons wishing to submit comments on
the collection of information
requirements of the proposed
amendments should direct them to the
OMB Desk Officer for the Securities and
Exchange Commission,
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov, and should send a copy to
Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090, with reference to File No.
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S7–16–23. OMB is required to make a
decision concerning the collections of
information between 30 and 60 days
after publication of this release;
therefore a comment to OMB is best
assured of having its full effect if OMB
receives it within 30 days after
publication of this release. Requests for
materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, refer to File No. S7–16–23, and
be submitted to the Securities and
Exchange Commission, Office of FOIA
Services, 100 F Street NE, Washington,
DC 20549–2736.
V. Regulatory Flexibility Certification
Section 3(a) of the Regulatory
Flexibility Act of 1980 (‘‘Regulatory
Flexibility Act’’) 506 requires the
Commission, when issuing a rulemaking
proposal, to prepare and make available
for public comment an initial regulatory
flexibility analysis that describes the
impact of the proposed rule and form
amendments on small entities unless we
certify that the rule and form
amendments, if adopted, would not
have a significant economic impact on
a substantial number of small
entities.507 Pursuant to 5 U.S.C. 605(b),
506 5
507 5
PO 00000
U.S.C. 603(a).
U.S.C. 605(b).
Frm 00086
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we hereby certify that the proposed
amendments to Forms N–4 and 24F–2,
rules 313 and 405 of Regulation S–T,
and rules 156, 172, 405, 415, 424, 456,
457, 485, 497, and 498A under the
Securities Act, would not, if adopted,
have a significant economic impact on
a substantial number of small entities.
We are proposing amendments to
Form N–4 pursuant to the authority set
forth in the Securities Act, particularly
sections 6, 7, 8, 10, 19, and 28 thereof
[15 U.S.C. 77f, 77g, 77h, 77j, 77s, and
77z–3], the Exchange Act, particularly
sections 3, 4, 10, 12, 13, 14, 15, 17, 23,
35A, and 36 thereof [15 U.S.C. 78c, 78d,
78j, 78l, 78m, 78n, 78o, 78q, 78w, 78ll,
and 78mm]; the Investment Company
Act, particularly sections 8, 30, and 38
thereof [15 U.S.C. 80a–8, 80a–29, and
80a–37], and the RILA Act, particularly
section 101 thereof [Pub. L. 117–328,
div. AA, title I, 136 Stat. 4459 (2022)].
Form–N–4 is the registration form
currently used by most variable annuity
separate accounts. These proposed
amendments would implement the
requirements relating to RILAs
contained in the RILA Act by allowing
Form N–4 to also be used for the
registration of RILAs.
The proposed amendments would
add to Form N–4 new disclosure
requirements that specifically address
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the features and risks of RILAs.
Specifically, the proposal would amend
the contents of Form N–4, including the
form’s general instructions,
requirements for front and back cover
pages, the key information table,
principal disclosures regarding RILA
investment options, and contract
adjustment and fee disclosures. These
amendments would apply only to
insurance companies registering RILAs.
We are also proposing applying the
form’s existing disclosure requirements
to RILAs where appropriate. For
example, we are proposing to permit
insurance companies to provide
financial statements on amended Form
N–4 regarding RILAs in the same way
that that they do under the current Form
N–4 for variable annuities, including
permitting the use of SAP to the same
extent as variable annuities.
In addition to adding RILAs to Form
N–4, we are proposing amendments to
the form that would be applicable to all
issuers, which are designed to improve
disclosures based upon our experience
in administering the form and feedback
received in investor testing. For
example, we are proposing to switch the
order of the key information table and
overview of the contract items in the
prospectus to require more specific
principal risk disclosures. All Form N–
4 filers would be subject to these
proposed amendments.
To facilitate to the inclusion of RILAs
on Form N–4, we are proposing
amending Form 24F–2, rules 313 and
405 of Regulation S–T, and rules 156,
172, 405, 415, 424, 456, 457, 485, 497,
and 498A, pursuant to authority set
forth in the Securities Act, particularly
sections 6, 7, 8, 10, and 19(a), and 28
thereof [15 U.S.C. 77e, 77f, 77g, 77h, 77j,
and 77s, and 77z–3(a)], the Exchange
Act, particularly sections 3, 4, 10, 12,
13, 14, 15, 17, 23, 35A, and 36 thereof
[15 U.S.C. 78c, 78d, 78j, 78l, 78m, 78n,
78o, 78q, 78w, 78ll, and 78mm]; the
Investment Company Act, particularly
sections 8, 30, and 38 thereof [15 U.S.C.
80a–8, 80a–29, and 80a–37], and the
RILA Act, particularly section 101
thereof [Pub. L. 117–328, div. AA, title
I, 136 Stat. 4459 (2022)]. For example,
the proposed amendment to rule 498A
would permit RILA issuers to use a
summary prospectus to satisfy statutory
prospectus delivery obligations, and the
proposed amendments to rules 485 and
497 would make those rules applicable
to RILA issuers when amending RILA
registration statements on Form N–4 or
when filing prospectuses and
prospectus supplements with the
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Commission.508 The proposed
amendments to Form 24F–2, Rule 313 of
Reg S–T, and rules 456 and 457 would
require insurance companies to pay
securities registration fees relating to
RILA offerings according to the same
method used for variable annuities.
Because we propose subjecting RILA
offerings to an investor communication
framework similar to the framework
applicable to variable annuity offerings,
the proposed amendments to rule 172
would exclude RILA offerings from that
rule’s provisions. The proposed
amendment of rule 405 of Reg S–T
would require inline XBRL tagging of
RILA-specific disclosures, while the
proposed amendment of rule 405 would
add a new defined term for RILAs to
facilitate their registration on Form N–
4 and to simplify references to RILAs in
our proposed rule amendments. The
proposed amendments to rule 156
would require RILA issuers to comply
with the rule’s guidance as to when
sales literature is materially misleading
under the Federal securities laws.
For purposes of the Securities Act and
the Regulatory Flexibility Act, generally,
an issuer, other than an investment
company, will be considered a small
entity if it has net assets of $5 million
or less as of the end of its most recent
fiscal year, and the issuer’s offering does
not exceed $5 million.509 RILA issuers
are not investment companies and based
on a review of EDGAR filings of existing
RILA issuers, we do not expect any
RILA issuers will be treated as small
entities. The analysis is different for
existing N–4 filers (i.e., variable annuity
issuers), as the insurance company
separate accounts registering variable
annuities are deemed to be investment
companies. Generally, for purposes of
the Investment Company Act and the
Regulatory Flexibility Act, an
investment company is a small entity if,
together with other investment
companies in the same group of related
investment companies, it has net assets
of $50 million or less as of the end of
its most recent fiscal year.510 Because
State law generally treats separate
account assets as the property of the
sponsoring insurance company, rule 0–
508 Relatedly, we propose amending rule 424 to
specify that RILA issuers must use rule 497 rather
than rule 424 when filing prospectuses and
prospectus supplements, and making similar
amendments to rule 415 to exempt RILA offerings
from its provisions, consistent with the framework
applied to existing N–4 issuers.
509 17 CFR 230.157 (defining ‘‘small business’’ or
‘‘small organization’’ under the Securities Act for
purposes of the Regulatory Flexibility Act); 15
U.S.C 77c(b)(1) (defining ‘‘small entity’’ to mean
‘‘small business,’’ ‘‘small organization,’’ or ‘‘small
governmental jurisdiction’’).
510 17 CFR 270.0–10(a).
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71173
10 aggregates each separate account’s
assets with the assets of the sponsoring
insurance company, together with assets
held in other sponsored separate
accounts.511 As a result, the
Commission expects few, if any,
separate account to be treated as small
entities.
For this reason, we believe that the
proposed amendments would not, if
adopted, have a significant economic
impact on a substantial number of small
entities.
The Commission encourages written
comments on the certification. We
solicit comment as to whether the
proposed form and rule amendments
could have an effect on small entities
that has not been considered. We ask
that commenters describe the nature of
any impact on small entities and
provide empirical data to support the
extent of the impact.
VI. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (‘‘SBREFA’’), the Commission
must advise OMB whether a proposed
regulation constitutes a 184 ‘‘major’’
rule. Under SBREFA, a rule is
considered ‘‘major’’ where, if adopted, it
results in or is likely to result in:
• An annual effect on the economy of
$100 million or more;
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment, or innovation.
We request comment on whether our
proposal would be a ‘‘major rule’’ for
purposes of SBREFA. We solicit
comment and empirical data on:
• The potential effect on the U.S.
economy on an annual basis;
• Any potential increase in costs or
prices for consumers or individual
industries; and
• Any potential effect on competition,
investment, or innovation.
Commenters are requested to provide
empirical data and other factual support
for their views to the extent possible.
Statutory Authority
The amendments contained in this
release are being proposed under the
authority set forth in the Securities Act,
particularly sections 6, 7, 8, 10, 19, and
28 thereof [15 U.S.C. 77a et seq.]; the
Exchange Act, particularly sections 3, 4,
10, 12, 13, 14, 15, 17, 23, 35A, and 36
thereof [15 U.S.C. 78a et seq.]; the
Investment Company Act, particularly,
Sections 8, 30, and 38 thereof, and the
511 17
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RILA Act, particularly section 101
thereof [Pub. L. 117–328, div. AA, title
I, 136 Stat. 4459 (2022)].
List of Subjects
17 CFR Part 230
Advertising, Confidential business
information, Investment companies,
Reporting and recordkeeping
requirements, Securities.
17 CFR Part 232
Administrative practice and
procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Reporting and recordkeeping
requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and
recordkeeping requirements, Securities.
Text of Rule and Form Amendments
For reasons set forth in the preamble,
we are proposing to amend title 17,
chapter II 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, 77b note, 77c,
77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss,
78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note,
78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a–
28, 80a–29, 80a–30, and 80a–37, and Pub. L.
112–106, sec. 201(a), sec. 401, 126 Stat. 313
(2012), unless otherwise noted.
*
*
*
*
*
Sections 230.400 to 230.499 issued under
secs. 6, 8, 10, 19, 48 Stat. 78, 79, 81, and 85,
as amended (15 U.S.C. 77f, 77h, 77j, 77s).
Sec. 230.457 also issued under secs. 6 and
7, 15 U.S.C. 77f and 77g.
*
■
*
*
*
*
2. Revise § 230.156 to read as follows:
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§ 230.156 Investment company and
registered index-linked annuity sales
literature.
(a) Under the Federal securities laws,
including section 17(a) of the Securities
Act of 1933 (15 U.S.C. 77q(a)) and
section 10(b) of the Securities Exchange
Act of 1934 (15 U.S.C. 78j(b)) and
§ 240.10b–5 of this chapter (Rule 10b–5)
thereunder, it is unlawful for any
person, directly or indirectly, by the use
of any means or instrumentality of
interstate commerce or of the mails, to
use sales literature which is materially
misleading in connection with the offer
or sale of registered index-linked
annuity (as defined in § 230.405 (Rule
405)) securities or securities issued by
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an investment company. Under these
provisions, sales literature is materially
misleading if it:
(1) Contains an untrue statement of a
material fact; or
(2) Omits to state a material fact
necessary in order to make a statement
made, in the light of the circumstances
of its use, not misleading.
(b) Whether or not a particular
description, representation, illustration,
or other statement involving a material
fact is misleading depends on
evaluation of the context in which it is
made. In considering whether a
particular statement involving a
material fact is or might be misleading,
weight should be given to all pertinent
factors, including, but not limited to,
those listed below.
(1) A statement could be misleading
because of:
(i) Other statements being made in
connection with the offer of sale or sale
of the securities in question;
(ii) The absence of explanations,
qualifications, limitations or other
statements necessary or appropriate to
make such statement not misleading; or
(iii) General economic or financial
conditions or circumstances.
(2) Representations about past or
future investment performance could be
misleading because of statements or
omissions made involving a material
fact, including situations where:
(i) Portrayals of past income, gain, or
growth of assets convey an impression
of the net investment results achieved
by an actual or hypothetical investment
which would not be justified under the
circumstances, including portrayals that
omit explanations, qualifications,
limitations, or other statements
necessary or appropriate to make the
portrayals not misleading; and
(ii) Representations, whether express
or implied, about future investment
performance, including:
(A) Representations, as to security of
capital, possible future gains or income,
or expenses associated with an
investment;
(B) Representations implying that
future gains or income may be inferred
from or predicted based on past
investment performance; or
(C) Portrayals of past performance,
made in a manner which would imply
that gains or income realized in the past
would be repeated in the future.
(3) A statement involving a material
fact about the characteristics or
attributes of an investment company or
registered index-linked annuity could
be misleading because of:
(i) Statements about possible benefits
connected with or resulting from
services to be provided or methods of
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operation which do not give equal
prominence to discussion of any risks or
limitations associated therewith;
(ii) Exaggerated or unsubstantiated
claims about management skill or
techniques, characteristics of the
investment company or registered
index-linked annuity or an investment
in securities issued by such company,
services, security of investment or
funds, effects of government
supervision, or other attributes; and
(iii) Unwarranted or incompletely
explained comparisons to other
investment vehicles or to indexes.
(4) Representations about the fees or
expenses associated with an investment
in the fund or registered index-linked
annuity could be misleading because of
statements or omissions made involving
a material fact, including situations
where portrayals of the fees and
expenses associated with an investment
in the fund or registered index-linked
annuity omit explanations,
qualifications, limitations, or other
statements necessary or appropriate to
make the portrayals not misleading.
(c) For purposes of this section, the
term sales literature shall be deemed to
include any communication (whether in
writing, by radio, or by television) used
by any person to offer to sell or induce
the sale of securities of any investment
company or registered index-linked
annuity. Communications between
issuers, underwriters and dealers are
included in this definition of sales
literature if such communications, or
the information contained therein, can
be reasonably expected to be
communicated to prospective investors
in the offer or sale of securities or are
designed to be employed in either
written or oral form in the offer or sale
of securities.
(d) Nothing in this section may be
construed to prevent a business
development company or a registered
closed-end investment company from
qualifying for an exemption under
§ 230.168 or § 230.169.
■ 3. Amend § 230.172 by revising
paragraph (d) to read as follows:
§ 230.172
Delivery of prospectuses.
*
*
*
*
*
(d) Exclusions. This section shall not
apply to any:
(1) Offering of any investment
company registered under the
Investment Company Act of 1940 (15
U.S.C. 80a–1 et seq.), other than a
registered closed-end investment
company;
(2) A business combination
transaction as defined in § 230.165(f)(1);
(3) Offering registered on Form S–8
(§ 239.16b of this chapter); or
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(4) Offering of any registered indexlinked annuity (as defined in § 230.405
(Rule 405)) securities.
■ 4. Amend § 230.405 by adding in
alphabetical order definitions for ‘‘Form
available solely to investment
companies registered under the
Investment Company Act of 1940’’ and
‘‘Registered index-linked annuity’’ to
read as follows:
§ 230.405
Definitions of terms.
*
*
*
*
*
Form available solely to investment
companies registered under the
Investment Company Act of 1940. A
form available solely to investment
companies registered under the
Investment Company Act of 1940
includes the form used to register the
offering of securities of a registered
index-linked annuity for purposes of the
Securities Act of 1933.
*
*
*
*
*
Registered index-linked annuity. The
term registered index-linked annuity
means an annuity or an option available
under an annuity:
(1) That is deemed a security;
(2) That is offered or sold in a
registered offering;
(3) That is issued by an insurance
company that is the subject to the
supervision of either the insurance
commissioner or bank commissioner of
any State or any agency or officer
performing like functions as such
commissioner;
(4) That is not issued by an
investment company; and
(5) Whose value, either during the
accumulation period or after
annuitization or both, will earn positive
or negative interest based, in part, on
the performance of any index, rate, or
benchmark.
*
*
*
*
*
■ 5. Amend § 230.415 by revising
paragraph (b) to read as follows:
§ 230.415 Delayed or continuous offering
and sale of securities.
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(b) This section shall not apply to any
registration statement pertaining to a
registered index-linked annuity (as
defined in § 230.405 (Rule 405)),
securities issued by a face-amount
certificate company, or redeemable
securities issued by an open-end
management company or unit
investment trust under the Investment
Company Act of 1940 or any registration
statement filed by any foreign
government or political subdivision
thereof.
■ 6. Amend § 230.424 by revising
paragraph (f) to read as follows:
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§ 230.424 Filing of prospectuses, number
of copies.
*
*
*
*
*
(f) This section shall not apply with
respect to prospectuses of an investment
company registered under the
Investment Company Act of 1940 (other
than a registered closed-end investment
company) or prospectuses that pertain
to a registered index-linked annuity (as
defined in § 230.405 (Rule 405)).
References to ‘‘form of prospectus’’ in
paragraphs (a), (b), and (c) of this
section shall be deemed also to refer to
the form of Statement of Additional
Information.
*
*
*
*
*
■ 7. Amend § 230.456 by adding
paragraph (e) to read as follows:
§ 230.456 Date of filing; timing of fee
payment.
*
*
*
*
*
(e)(1) Notwithstanding paragraph (a)
of this section, where a registration
statement relates to an offering of
registered index-linked annuity (as
defined in § 230.405 (Rule 405))
securities, an issuer shall be deemed to
register an offering of an indeterminate
amount of such securities and shall, not
later than 90 days after the end of any
fiscal year during which it has publicly
offered such securities, pay a
registration fee to the Commission
calculated in accordance with
§ 230.457(u) (Rule 457(u)) and file Form
24F–2 (referenced in 17 CFR 274.24)
with the Commission.
Instruction 1 to paragraph (e)(1): To
determine the date on which the
registration fee must be paid, the first
day of the 90-day period is the first
calendar day of the fiscal year following
the fiscal year for which the registration
fee is to be paid. If the last day of the
90-day period falls on a Saturday,
Sunday, or Federal holiday, the
registration fee is due on the first
business day thereafter.
(2) When registering an offering of an
indeterminate amount of registered
index-linked annuity securities
pursuant to paragraph (e)(1) of this
section, the securities sold will be
considered registered, for purposes of
section 6(a) of the Act, if the registration
fee has been paid and the issuer has
filed a Form 24F–2 filing pursuant to
paragraph (e)(1) of this section not later
than the end of the 90-day period.
(3) A registration statement filed in
accordance with the registration fee
payment provisions of paragraph (e)(1)
of this section will be considered filed
as to the securities identified in the
registration statement for purposes of
this section and section 5 of the Act
when it is received by the Commission,
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if it complies with all other
requirements under the Act, including
this part.
(4) For purposes of this section, if an
issuer ceases operations, the date the
issuer ceases operations will be deemed
to be the end of its fiscal year. In the
case of a liquidation, merger, or sale of
all or substantially all of the assets
(‘‘merger’’) of the issuer, the issuer will
be deemed to have ceased operations for
the purposes of this section on the date
the merger is consummated; provided,
however, that in the case of a merger of
an issuer or a series of an issuer
(‘‘Predecessor’’) with another issuer or a
series of an issuer (‘‘Successor’’), the
Predecessor will not be deemed to have
ceased operations and the Successor
will assume the obligations, fees, and
redemption credits of the Predecessor
incurred pursuant to this section if the
Successor:
(i) Had no assets or liabilities, other
than nominal assets or liabilities, and no
operating history immediately prior to
the merger;
(ii) Acquired substantially all of the
assets and assumed substantially all of
the liabilities and obligations of the
Predecessor; and
(iii) The merger is not designed to
result in the Predecessor merging with,
or substantially all of its assets being
acquired by, an issuer (or a series of an
issuer) that would not meet the
conditions of paragraph (e)(4)(i) of this
section.
(5) An issuer paying the fee required
by paragraph (e)(1) of this section or any
portion thereof more than 90 days after
the end of the fiscal year of the issuer
shall pay to the Commission interest on
unpaid amounts, calculated based on
the interest rate in effect at the time of
the interest payment by reference to the
‘‘current value of funds rate’’ on the
Treasury Department’s Bureau of Fiscal
Service internet site at https://
fiscal.treasury.gov/, or by calling (202)
874–6995, and using the following
formula: I = (X) (Y) (Z/365), where: I =
Amount of interest due; X = Amount of
registration fee due; Y = Applicable
interest rate, expressed as a fraction; Z
= Number of days by which the
registration fee payment is late. The
payment of interest pursuant to this
paragraph (e)(5) shall not preclude the
Commission from bringing an action to
enforce the requirements of this
paragraph (e).
(6) An immaterial or unintentional
failure to comply with a requirement of
this paragraph (e) will not result in a
violation of section 6(a) of the Act (15
U.S.C. 77f(a)), so long as:
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(i) A good faith and reasonable effort
was made to comply with the
requirement; and
(ii) In the case of a late payment of a
registration fee, the issuer pays the
registration fee and any interest due
thereon as soon as practicable after
discovery of the failure to pay the
registration fee.
■ 8. Amend § 230.457 by revising
paragraph (u) to read as follows:
§ 230.457
Computation of fee.
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(u) Where an issuer elects or is
required to register an offering of an
indeterminate amount of exchangetraded vehicle securities in accordance
with § 230.456(d) (Rule 456(d)) or
registered index-linked annuity
securities (as defined in § 230.405 (Rule
405)) in accordance with § 230.456(e)
(Rule 456(e)), the registration fee is to be
calculated in the following manner:
(1) Determine the aggregate sale price
of such securities sold during the fiscal
year.
(2) Determine the sum of:
(i) The aggregate redemption or
repurchase price of such securities
redeemed or repurchased during the
fiscal year; and
(ii) The aggregate redemption or
repurchase price of such securities
redeemed or repurchased during a prior
fiscal year that were not used previously
to reduce registration fees payable to the
Commission, if the prior fiscal year
ended no earlier than August 1, 2021 in
the case of exchange traded vehicle
securities, or [EFFECTIVE DATE OF
THE FINAL RULE] in the case of
registered index-linked annuity
securities.
(3) Subtract the amount in paragraph
(u)(2) of this section from the amount in
paragraph (u)(1) of this section. If the
resulting amount is positive, the amount
is the net sales amount. If the resulting
amount is negative, it is the amount of
redemption credits available for use in
future years to offset sales.
(4) The registration fee is calculated
by multiplying the net sales amount by
the fee payment rate in effect on the
date of the fee payment. If the issuer
determines that it had net redemptions
or repurchases for the fiscal year, no
registration fee is due.
■ 9. Amend § 230.485 by revising the
section heading and paragraphs (a)(1)
and (b) introductory text to read as
follows:
§ 230.485 Effective date of post-effective
amendments filed by certain registered
investment companies or issuers offering
registered index-linked annuities.
(a) * * *
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(1) Except as otherwise provided in
this section, a post-effective amendment
to a registration statement filed by a
registered open-end management
investment company, unit investment
trust or, separate account as defined in
section 2(a)(37) of the Investment
Company Act of 1940 [15 U.S.C. 80a–
2(a)(37)] or to register an offering of a
registered index-linked annuity
securities (as defined in § 230.405 (Rule
405)) shall become effective on the
sixtieth day after the filing thereof, or a
later date designated by the registrant on
the facing sheet of the amendment,
which date shall be no later than eighty
days after the date on which the
amendment is filed.
*
*
*
*
*
(b) Immediate effectiveness. Except as
otherwise provided in this section, a
post-effective amendment to a
registration statement filed by a
registered open-end management
investment company, unit investment
trust or separate account as defined in
section 2(a)(37) of the Investment
Company Act of 1940 [15 U.S.C. 80a–
2(a)(37)] or to register an offering of a
registered index-linked annuity
securities shall become effective on the
date upon which it is filed with the
Commission, or a later date designated
by the registrant on the facing sheet of
the amendment, which date shall be not
later than thirty days after the date on
which the amendment is filed, except
that a post-effective amendment
including a designation of a new
effective date pursuant to paragraph
(b)(1)(iii) of this section shall become
effective on the new effective date
designated therein, Provided, that the
following conditions are met:
*
*
*
*
*
■ 10. Amend § 230.497 by revising the
section heading and paragraphs (c) and
(e) to read as follows:
§ 230.497 Filing of investment company or
registered index-linked annuity
prospectuses—number of copies.
*
*
*
*
*
(c) For investment companies filing
on §§ 239.15A and 274.11A of this
chapter (Form N–1A), §§ 239.17a and
274.11b of this chapter (Form N–3),
§§ 239.17b and 274.11c of this chapter
(Form N–4), or §§ 239.17c and 274.11d
of this chapter (Form N–6), or an
offering of registered index-linked
annuities (as defined in Rule 405
(§ 230.405)) being filed on Form N–4,
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, 10
copies of each form of prospectus and
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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.
Investment companies filing on Forms
N–1A, N–3, N–4, or N–6 and issuers of
registered index-linked annuities filing
on Form N–4 must, if applicable
pursuant to General Instruction C.3.(g)
of Form N–1A, General Instruction
C.3.(h) of Form N–3, General Instruction
C.3.(h) of Form N–4, or General
Instruction C.3.(h) of Form N–6, submit
an Interactive Data File (as defined in
§ 232.11 of this chapter).
*
*
*
*
*
(e) For investment companies filing
on §§ 239.15A and 274.11A of this
chapter (Form N–1A), §§ 239.17a and
274.11b of this chapter (Form N–3),
§§ 239.17b and 274.11c of this chapter
(Form N–4), or §§ 239.17c and 274.11d
of this chapter (Form N–6), or an
offering of registered index-linked
annuities being filed on Form N–4, 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. Investment companies
filing on Forms N–1A, N–3, N–4, or N–
6 and issuers of registered index-linked
annuities filing on Form N–4 must, if
applicable pursuant to General
Instruction C.3.(g) of Form N–1A,
General Instruction C.3.(h) of Form N–
3, General Instruction C.3.(h) of Form
N–4, or General Instruction C.3.(h) of
Form N–6, submit an Interactive Data
File (as defined in § 232.11 of this
chapter).
*
*
*
*
*
■ 11. Revise § 230.498A to read as
follows:
§ 230.498A Summary Prospectuses for
separate accounts offering variable annuity
and variable life insurance contracts, and
contracts offering registered index-linked
options.
(a) Definitions. For purposes of this
section:
Class means a class of a Contract that
varies principally with respect to
distribution-related fees and expenses.
Contract means a Variable Annuity
Contract, a Variable Life Insurance
Contract, or a RILA Contract as defined
in this section, respectively, as well as
any Variable Annuity Contract or RILA
Contract that offers a combination of
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Index-Linked Options, Variable
Options, and/or Fixed Options.
Fixed Option means an Investment
Option under a Contract pursuant to
which the value of the Contract (for a
Form N–3 or Form N–4 Registrant,
either during an accumulation period or
after annuitization, or both) will earn
interest at a rate specified by the
Company, subject to a minimum
guaranteed rate under the Contract.
Index-Linked Option means an
Investment Option offered under a
Contract, pursuant to which the value of
the Contract, either during an
accumulation period or after
annuitization, or both, will earn positive
or negative interest based, in part, on
the performance of a specified index,
rate, or benchmark (such as a registered
exchange-traded fund that tracks an
index).
Initial Summary Prospectus means
the initial summary prospectus
described in paragraph (b) of this
section.
Insurance Company means the
insurance company issuing the
Contract, which company is subject to
State supervision. The Insurance
Company may also be the depositor or
sponsor of any Registered Separate
Account in which the Contract
participates.
Investment Option means a Fixed
Option, an Index-Linked Option, and/or
a Variable Option, as applicable.
Portfolio Company means any
company in which a Registrant on Form
N–4 or Form N–6 invests and which
may be selected as a Variable Option by
the investor.
Portfolio Company Prospectus means
the Statutory Prospectus of a Portfolio
Company and a summary prospectus of
a Portfolio Company permitted by
§ 230.498.
Registered Separate Account means a
separate account (as defined in section
2(a)(14) of the Securities Act (15 U.S.C.
77b(a)(14)) that has an effective
registration statement on §§ 239.17a and
274.11b of this chapter (Form N–3),
§§ 239.17b and 274.11c of this chapter
(Form N–4), or §§ 239.17c and 274.11d
of this chapter (Form N–6) and that has
a current prospectus that satisfies the
requirements of section 10(a) of the Act
(15 U.S.C. 77j(a)).
Registrant means, as applicable, a
Registered Separate Account or the
Insurance Company.
RILA Contract means any
accumulation contract or annuity
contract, any portion thereof, or any
unit of interest or participation therein,
issued by an Insurance Company, that
offers Index-Linked Options.
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Statement of Additional Information
means the statement of additional
information required by Part B of Form
N–1A, Form N–3, Form N–4, or Form
N–6.
Statutory Prospectus means a
prospectus that satisfies the
requirements of section 10(a) of the Act
(15 U.S.C. 77j(a)).
Summary Prospectus refers to both
the Initial Summary Prospectus and the
Updating Summary Prospectus.
Updating Summary Prospectus means
the updating summary prospectus
described in paragraph (c) of this
section.
Variable Annuity Contract means any
accumulation contract or annuity
contract, any portion thereof, or any
unit of interest or participation therein,
issued by an Insurance Company,
pursuant to which the value of the
contract, either during an accumulation
period or after annuitization, or both,
varies according to the investment
experience of a Portfolio Company.
Variable Life Insurance Contract
means a life insurance contract, issued
by an Insurance Company, that provides
for death benefits and cash values that
may vary with the investment
performance of any separate account.
Variable Option means:
(1) In the context of a Registrant on
Form N–4 or Form N–6, an Investment
Option under any Contract pursuant to
which the value of the Contract (for a
Form N–4 Registrant, either during an
accumulation period or after
annuitization, or both) varies according
to the investment experience of a
Portfolio Company;
(2) In the context of a Registrant on
Form N–3, any portfolio of investments
in which a Registrant on Form N–3
invests and which may be selected as an
option by the investor.
(b) General Requirements for Initial
Summary Prospectus. An Initial
Summary Prospectus that complies with
this paragraph (b) will be deemed to be
a prospectus that is authorized under
section 10(b) of the Act (15 U.S.C.
77j(b)) and section 24(g) of the
Investment Company Act (15 U.S.C.
80a–24(g)) for the purposes of section
5(b)(1) of the Act (15 U.S.C. 77e(b)(1)).
(1) Scope of Initial Summary
Prospectus. An Initial Summary
Prospectus may only describe a single
Contract (but may describe more than
one Class of the Contract) currently
offered by the Registrant under the
Statutory Prospectus to which the Initial
Summary Prospectus relates.
(2) Cover Page or Beginning of Initial
Summary Prospectus. Include on the
front cover page or the beginning of the
Initial Summary Prospectus:
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(i) The Insurance Company’s name;
(ii) The name of the Contract, and the
Class or Classes if any, to which the
Initial Summary Prospectus relates;
(iii) A statement identifying the
document as a ‘‘Summary Prospectus
for New Investors’’;
(iv) The approximate date of the first
use of the Initial Summary Prospectus;
(v) The following legend, which for
Initial Summary Prospectuses of
Contracts registered on Form N–4 would
be included along with the statements
described in Item 1(a)(6) through (8) of
Form N–4:
This Summary Prospectus
summarizes key features of the
[Contract].
Before you invest, you should also
review the prospectus for the [Contract],
which contains more information about
the [Contract’s] features, benefits, and
risks. You can find this document and
other information about the [Contract]
online at [__]. You can also obtain this
information at no cost by calling [__] or
by sending an email request to [__].
You may cancel your [Contract]
within 10 days of receiving it without
paying fees or penalties. In some states,
this cancellation period may be longer.
Upon cancellation, you will receive
either a full refund of the amount you
paid with your application or your total
contract value. You should review the
prospectus, or consult with your
investment professional, for additional
information about the specific
cancellation terms that apply.
Additional information about certain
investment products, including
[variable annuities/registered indexlinked annuities/variable life insurance
contracts], has been prepared by the
Securities and Exchange Commission’s
staff and is available at Investor.gov.
(A) A Registrant may modify the
legend so long as the modified legend
contains comparable information.
(B) The legend must provide a website
address, other than the address of the
Commission’s electronic filing system;
toll-free telephone number; and email
address that investors can use to obtain
the Statutory Prospectus and other
materials, request other information
about the Contract, and make investor
inquiries. The website address must be
specific enough to lead investors
directly to the Statutory Prospectus and
other materials that are required to be
accessible under paragraph (h)(1) of this
section, rather than to the home page or
other section of the website on which
the materials are posted. The website
could be a central site with prominent
links to each document. The legend may
indicate, if applicable, that the Statutory
Prospectus and other information are
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available from a financial intermediary
(such as a broker-dealer) through which
the Contract may be purchased or sold.
If a Registered Separate Account that
has an effective registration statement
on Form N–3 relies on § 270.30e–3 of
this chapter to transmit a report, the
legend must also include the website
address required by § 270.30e–
3(c)(1)(iii) of this chapter if different
from the website address required by
this paragraph (b)(2)(v)(B).
(C) The paragraph of the legend
regarding cancellation of the Contract
may be omitted if not applicable. If this
paragraph is included in the legend, the
paragraph must be presented in a
manner reasonably calculated to draw
investor attention to that paragraph.
(D) The legend may include
instructions describing how a
shareholder can elect to receive
prospectuses or other documents and
communications by electronic delivery.
(3) Back Cover Page or Last Page of
Initial Summary Prospectus.
(i) If a Registrant incorporates any
information by reference into the
Summary Prospectus, include a legend
identifying the type of document (e.g.,
Statutory Prospectus) from which the
information is incorporated and the date
of the document. If a Registrant
incorporates by reference a part of a
document, the legend must clearly
identify the part by page, paragraph,
caption, or otherwise. If information is
incorporated from a source other than
the Statutory Prospectus, the legend
must explain that the incorporated
information may be obtained, free of
charge, in the same manner as the
Statutory Prospectus.
(ii) Include on the bottom of the back
cover page or the last page of the Initial
Summary Prospectus the EDGAR
contract identifier for the contract in
type size smaller than that generally
used in the prospectus (e.g., 8-point
modern type).
(4) Table of Contents. An Initial
Summary Prospectus may include a
table of contents meeting the
requirements of § 230.481(c).
(5) Contents of Initial Summary
Prospectus. An Initial Summary
Prospectus must contain the
information required by this paragraph
(b)(5) with respect to the applicable
registration form, and only the
information required by this paragraph
(b)(5), in the order provided in
paragraphs (b)(5)(i) through (ix) of this
section, except that, for an Initial
Summary Prospectus related to a
Contract registered on Form N–4,
provide the information provided in
paragraph (b)(5)(ii) before the
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information provided by paragraph
(b)(5)(i).
(i) Under the heading ‘‘Important
Information You Should Consider
About the [Contract],’’ the information
required by Item 2 of Form N–3, Item 3
of Form N–4, or Item 2 of Form N–6.
(ii) Under the heading ‘‘Overview of
the [Contract],’’ the information
required by Item 3 of Form N–3, Item 2
of Form N–4, or Item 3 of Form N–6.
(iii) Under the heading ‘‘Standard
Death Benefits,’’ the information
required by Item 10(a) of Form N–6.
(iv) Under the heading ‘‘Benefits
Available Under the [Contract],’’ the
information required by Item 11(a) of
Form N–3 or Item 10(a) of Form N–4.
Under the heading ‘‘Other Benefits
Available Under the [Contract],’’ the
information required by Item 11(a) of
Form N–6.
(v) Under the heading ‘‘Buying the
[Contract],’’ the information required by
Item 12(a) of Form N–3, Item 11(a) of
Form N–4, or Item 9(a) through (c) of
Form N–6.
(vi) Under the heading ‘‘How Your
[Contract] Can Lapse,’’ the information
required by Item 14(a) through (c) of
Form N–6.
(vii) Under the heading ‘‘Making
Withdrawals: Accessing the Money in
Your [Contract],’’ the information
required by Item 13(a) of Form N–3,
Item 12(a) of Form N–4, or Item 12(a) of
Form N–6.
(viii) Under the heading ‘‘Additional
Information About Fees,’’ the
information required by Item 4 of Form
N–3, Item 4 of Form N–4, or Item 4 of
Form N–6.
(ix) Under the heading ‘‘Appendix:
[Portfolio Companies] [Investment
Options/Portfolio Companies] Available
Under the Contract,’’ include as an
appendix the information required by
Item 18 of Form N–3, Item 17 of Form
N–4, or Item 18 of Form N–6.
Alternatively, an Initial Summary
Prospectus for a Contract registered on
Form N–3 may include the information
required by Item 19 of Form N–3, under
the heading ‘‘Additional Information
About Investment Options Available
Under the Contract.’’
(c) General Requirements for
Updating Summary Prospectus. An
Updating Summary Prospectus that
complies with this paragraph (c) will be
deemed to be a prospectus that is
authorized under section 10(b) of the
Act (15 U.S.C. 77j(b)) and section 24(g)
of the Investment Company Act (15
U.S.C. 80a–24(g)) for the purposes of
section 5(b)(1) of the Act (15 U.S.C.
77e(b)(1)).
(1) Use of Updating Summary
Prospectus. A Registrant may only use
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an Updating Summary Prospectus if the
Registrant uses an Initial Summary
Prospectus for each currently offered
Contract described under the Statutory
Prospectus to which the Updating
Summary Prospectus relates.
(2) Scope of Updating Summary
Prospectus. An Updating Summary
Prospectus may describe one or more
Contracts (and more than one Class)
described under the Statutory
Prospectus to which the Updating
Summary Prospectus relates.
(3) Cover Page or Beginning of
Updating Summary Prospectus. Include
on the front cover page or at the
beginning of the Updating Summary
Prospectus:
(i) The Insurance Company’s name;
(ii) The name of the Contract(s) and
the Class or Classes, if any, to which the
Updating Summary Prospectus relates;
(iii) A statement identifying the
document as an ‘‘Updating Summary
Prospectus’’;
(iv) The approximate date of the first
use of the Updating Summary
Prospectus; and
(v) The following legend, which must
meet the requirements of paragraphs
(b)(2)(v)(A), (B), and (D) of this section,
as applicable, and for Updating
Summary Prospectuses of Contracts
registered on Form N–4 would be
included along with the statements
described in Item 1(a)(6) through (8) of
Form N–4:
The prospectus for the [Contract]
contains more information about the
[Contract], including its features,
benefits, and risks. You can find the
current prospectus and other
information about the [Contract] online
at [__]. You can also obtain this
information at no cost by calling [__] or
by sending an email request to [__].
Additional information about certain
investment products, including
[variable annuities/registered indexlinked annuities/variable life insurance
contracts], has been prepared by the
Securities and Exchange Commission’s
staff and is available at Investor.gov.
(4) Back Cover Page or Last Page of
Updating Summary Prospectus. Include
on the bottom of the back cover page or
the last page of the Updating Summary
Prospectus:
(i) The legend required by paragraph
(b)(3)(i) of this section; and
(ii) The EDGAR contract identifier(s)
for each contract in type size smaller
than that generally used in the
prospectus (e.g., 8-point modern type).
(5) Table of Contents. An Updating
Summary Prospectus may include a
table of contents meeting the
requirements of § 230.481(c).
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(6) Contents of Updating Summary
Prospectus. An Updating Summary
Prospectus must contain the
information required by this paragraph
(c)(6) with respect to the applicable
registration form, in the order provided
in paragraphs (c)(6)(i) through (iv) of
this section.
(i) If any changes have been made
with respect to the Contract after the
date of the most recent Updating
Summary Prospectus or Statutory
Prospectus that was sent or given to
investors with respect to the availability
of Investment Options (for Registrants
on Form N–3) or Portfolio Companies
(for Registrants on Forms N–4 and N–6)
under the Contract (including, for RILA
Contracts, a change to any of the
features of the Index-Linked Options
disclosed in the table that Item 17(b) of
Form N–4 requires), or the disclosure
that the Registrant included in response
to Item 2 (Key Information), Item 3
(Overview of the Contract), Item 4 (Fee
Table), Item 11 (Benefits Available
Under the Contract), Item 12 (Purchases
and Contract Value), or Item 13
(Surrenders and Withdrawals) of Form
N–3; Item 2 (Overview of the Contract),
Item 3 (Key Information), Item 4 (Fee
Table), Item 10 (Benefits Available
Under the Contract), Item 11 (Purchases
and Contract Value), or Item 12
(Surrenders and Withdrawals) of Form
N–4; and Item 2 (Key Information), Item
3 (Overview of the Contract), Item 4 (Fee
Table), Item 9 (Premiums), Item 10
(Standard Death Benefits), Item 11
(Other Benefits Available Under the
Contract), Item 12 (Surrenders and
Withdrawals), or Item 14 (Lapse and
Reinstatement) of Form N–6, include
the following as applicable, under the
heading ‘‘Updated Information About
Your [Contract]’’:
(A) The following legend: ‘‘The
information in this Updating Summary
Prospectus is a summary of certain
[Contract] features that have changed
since the Updating Summary Prospectus
dated [date]. This may not reflect all of
the changes that have occurred since
you entered into your [Contract].’’
(B) As applicable, provide a concise
description of each change specified in
paragraph (c)(6)(i) of this section.
Provide enough detail to allow investors
to understand the change and how it
will affect investors, including
indicating whether the change only
applies to certain Contracts described in
the Updating Summary Prospectus.
(ii) In addition to the changes
specified in paragraph (c)(6)(i) of this
section, a Registrant may provide a
concise description of any other
information relevant to the Contract
within the time period that paragraph
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(c)(6)(i) of this section specifies, under
the heading ‘‘Updated Information
About Your [Contract].’’ Any additional
information included pursuant to this
paragraph (c)(6)(ii) should not, by its
nature, quantity, or manner of
presentation, obscure or impede
understanding of the information that
paragraph (c)(6)(i) of this section
requires.
(iii) Under the heading ‘‘Important
Information You Should Consider
About the [Contract],’’ provide the
information required by Item 2 of Form
N–3, Item 3 of Form N–4, or Item 2 of
Form N–6.
(iv) Under the heading ‘‘Appendix:
[Portfolio Companies/Investment
Options/Portfolio Companies] Available
Under the [Contract],’’ include as an
appendix the information required by
Item 18 of Form N–3, Item 17 of Form
N–4, or Item 18 of Form N–6.
Alternatively, an Updating Summary
Prospectus for a Contract registered on
Form N–3 may include, under the
heading ‘‘Additional Information About
[Investment Options] Available Under
the [Contract],’’ the information
required by Item 19 of Form N–3.
(d) Incorporation by Reference into a
Summary Prospectus. (1) Except as
provided by paragraph (d)(2) of this
section, information may not be
incorporated by reference into a
Summary Prospectus. Information that
is incorporated by reference into a
Summary Prospectus in accordance
with paragraph (d)(2) of this section
need not be sent or given with the
Summary Prospectus.
(2) A Registrant may incorporate by
reference into a Summary Prospectus
any or all of the information contained
in the Registrant’s Statutory Prospectus
and Statement of Additional
Information, and any information from
the Registrant’s reports under § 270.30e–
1 of this chapter that the Registrant has
incorporated by reference into the
Registrant’s Statutory Prospectus,
provided that:
(i) The conditions of paragraphs
(b)(2)(v)(B), (c)(3)(v), and (h) of this
section are met;
(ii) A Registrant may not incorporate
by reference into a Summary Prospectus
information that paragraphs (b) and (c)
of this section require to be included in
an Initial Summary Prospectus or
Updating Summary Prospectus,
respectively; and
(iii) Information that is permitted to
be incorporated by reference into the
Summary Prospectus may be
incorporated by reference into the
Summary Prospectus only by reference
to the specific document that contains
the information, not by reference to
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another document that incorporates
such information by reference.
(3) For purposes of § 230.159,
information is conveyed to a person not
later than the time that a Summary
Prospectus is received by the person if
the information is incorporated by
reference into the Summary Prospectus
in accordance with paragraph (d)(2) of
this section.
(e) Terms used in the Summary
Prospectus. Define special terms used in
the Initial Summary Prospectus and
Updating Summary Prospectus using
any presentation style that clearly
conveys their meaning to investors,
such as the use of a glossary or list of
definitions.
(f) Transfer of the Contract Security.
Any obligation under section 5(b)(2) of
the Act (15 U.S.C. 77e(b)(2)) to have a
Statutory Prospectus precede or
accompany the carrying or delivery of a
Contract security in an offering
registered on Form N–3, Form N–4, or
Form N–6 is satisfied if:
(1) A Summary Prospectus is sent or
given no later than the time of the
carrying or delivery of the Contract
security (an Initial Summary Prospectus
in the case of a purchase of a new
Contract, or an Updating Summary
Prospectus in the case of additional
purchase payments in an existing
Contract);
(2) The Summary Prospectus is not
bound together with any materials
except Portfolio Company Prospectuses
for Portfolio Companies available as
Variable Options under the Contract,
provided that:
(i) All of the Portfolio Companies are
available as investment options to the
person to whom such documents are
sent or given; and
(ii) A table of contents identifying
each Portfolio Company Prospectus that
is bound together, and the page number
on which each document is found, is
included at the beginning or
immediately following a cover page of
the bound materials.
(3) The Summary Prospectus that is
sent or given satisfies the requirements
of paragraph (b) or (c) of this section, as
applicable, at the time of the carrying or
delivery of the Contract security; and
(4) The conditions set forth in
paragraph (h) of this section are
satisfied.
(g) Sending Communications. A
communication relating to an offering
registered on Form N–3, Form N–4, or
Form N–6 sent or given after the
effective date of a Contract’s registration
statement (other than a prospectus
permitted or required under section 10
of the Act) shall not be deemed a
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prospectus under section 2(a)(10) of the
Act (15 U.S.C. 77b(a)(10)) if:
(1) It is proved that prior to or at the
same time with such communication a
Summary Prospectus was sent or given
to the person to whom the
communication was made;
(2) The Summary Prospectus is not
bound together with any materials,
except as permitted by paragraph (f)(2)
of this section;
(3) The Summary Prospectus that was
sent or given satisfies the requirements
of paragraph (b) or (c) of this section, as
applicable, at the time of such
communication; and
(4) The conditions set forth in
paragraph (h) of this section are
satisfied.
(h) Availability of the Statutory
Prospectus and Certain Other
Documents.
(1) The current Initial Summary
Prospectus, Updating Summary
Prospectus, Statutory Prospectus,
Statement of Additional Information,
and in the case of a Registrant on Form
N–3, the Registrant’s most recent annual
and semi-annual reports to shareholders
under § 270.30e–1 of this chapter, are
publicly accessible, free of charge, at the
website address specified on the cover
page or beginning of the Summary
Prospectuses, on or before the time that
the Summary Prospectuses are sent or
given and current versions of those
documents remain on the website
through the date that is at least 90 days
after:
(i) In the case of reliance on paragraph
(f) of this section, the date that the
Contract security is carried or delivered;
or
(ii) In the case of reliance on
paragraph (g) of this section, the date
that the communication is sent or given.
(2) The materials that are accessible in
accordance with paragraph (h)(1) of this
section must be presented on the
website in a format, or formats, that:
(i) Are human-readable and capable of
being printed on paper in humanreadable format;
(ii) Permit persons accessing the
Statutory Prospectus or Statement of
Additional Information for the Contract
to move directly back and forth between
each section heading in a table of
contents of such document and the
section of the document referenced in
that section heading; provided that, in
the case of the Statutory Prospectus, the
table of contents is either required by
§ 230.481(c) or contains the same
section headings as the table of contents
required by § 230.481(c); and
(iii) Permit persons accessing a
Summary Prospectus to move directly
back and forth between:
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(A) Each section of the Summary
Prospectus and any section of the
Statutory Prospectus and Contract
Statement of Additional Information
that provides additional detail
concerning that section of the Summary
Prospectus; or
(B) Links located at both the
beginning and end of the Summary
Prospectus, or that remain continuously
visible to persons accessing the
Summary Prospectus, and tables of
contents of both the Statutory
Prospectus and the Contract Statement
of Additional Information that meet the
requirements of paragraph (h)(2)(ii) of
this section.
(iv) Permit persons accessing the
Summary Prospectus to view the
definition of each special term used in
the Summary Prospectus (as required by
paragraph (e) of this section) upon
command (e.g., by moving or
‘‘hovering’’ the computer’s pointer or
mouse over the term, or selecting the
term on a mobile device); or permits
persons accessing the Contract
Summary Prospectus to move directly
back and forth between each special
term and the corresponding entry in any
glossary or list of definitions in the
Contract Summary Prospectus (as
described in paragraph (e) of this
section).
(3) Persons accessing the materials
specified in paragraph (h)(1) of this
section must be able to permanently
retain, free of charge, an electronic
version of such materials in a format, or
formats, that meet each of the
requirements of paragraphs (h)(2)(i) and
(ii) of this section.
(4) The conditions set forth in
paragraphs (h)(1) through (3) of this
section shall be deemed to be met,
notwithstanding the fact that the
materials specified in paragraph (h)(1)
of this section are not available for a
time in the manner required by
paragraphs (h)(1) through (3) of this
section, provided that:
(i) The Registrant has reasonable
procedures in place to ensure that the
specified materials are available in the
manner required by paragraphs (h)(1)
through (3) of this section; and
(ii) The Registrant takes prompt action
to ensure that the specified documents
become available in the manner
required by paragraphs (h) through (3)
of this section, as soon as practicable
following the earlier of the time at
which it knows or reasonably should
have known that the documents are not
available in the manner required by
paragraphs (h)(1) through (3) of this
section.
(i) Other Requirements (1) Delivery
upon request. If paragraph (f) or (g) of
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this section is relied on with respect to
a Contract, the Registrant (or a financial
intermediary through which the
Contract may be purchased) must send,
at no cost to the requestor and by U.S.
first class mail or other reasonably
prompt means, a paper copy of the
Contract Statutory Prospectus, Contract
Statement of Additional Information,
and in the case of a Registrant on Form
N–3, the Registrant’s most recent annual
and semi-annual reports to shareholders
under § 270.30e-1 of this chapter, to any
person requesting such a copy within
three business days after receiving a
request for a paper copy. If paragraph (f)
or (g) of this section is relied on with
respect to a Contract, the Registrant (or
a financial intermediary through which
Contract may be purchased) must send,
at no cost to the requestor, and by email,
an electronic copy of any of the
documents listed in this paragraph (i)(1)
to any person requesting a copy of such
document within three business days
after receiving a request for an
electronic copy. The requirement to
send an electronic copy of a document
may be satisfied by sending a direct link
to the online document; provided that a
current version of the document is
directly accessible through the link from
the time that the email is sent through
the date that is six months after the date
that the email is sent and the email
explains both how long the link will
remain useable and that, if the recipient
desires to retain a copy of the document,
he or she should access and save the
document.
(2) Greater prominence. If paragraph
(f) or (g) of this section is relied on with
respect to a Contract, the Summary
Prospectus shall be given greater
prominence than any materials that
accompany the Summary Prospectus.
(3) Convenient for reading and
printing. If paragraph (f) or (g) of this
section is relied on with respect to a
Contract:
(i) The materials that are accessible in
accordance with paragraph (h)(1) of this
section must be presented on the
website in a format, or formats, that are
convenient for both reading online and
printing on paper; and
(ii) Persons accessing the materials
that are accessible in accordance with
paragraph (h)(1) of this section must be
able to permanently retain, free of
charge, an electronic version of such
materials in a format, or formats, that
are convenient for both reading online
and printing on paper.
(4) Website addresses. If paragraph (f)
or (g) of this section is relied on with
respect to a Contract, any website
address that is included in an electronic
version of the Summary Prospectus
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must include an active hyperlink or
provide another means of facilitating
access through equivalent methods or
technologies that lead directly to the
relevant website address. This
paragraph (i)(4) does not apply to
electronic versions of a Summary
Prospectus that are filed on the EDGAR
system.
(5) Compliance with this paragraph (i)
not a condition to reliance on paragraph
(f) or (g) of this section. Compliance
with this paragraph (i) is not a condition
to the ability to rely on paragraph (f) or
(g) of this section with respect to a
Contract, and failure to comply with
this paragraph (i) does not negate the
ability to rely on paragraph (f) or (g) of
this section.
(j) Portfolio Company Prospectuses—
(1) Transfer of the Portfolio Company
security. Any obligation under section
5(b)(2) of the Act to have a Statutory
Prospectus precede or accompany the
carrying or delivery of a Portfolio
Company security is satisfied if, and
information contained in the documents
referenced in paragraph (j)(1)(ii) of this
section is conveyed for purposes of
§ 230.159 when:
(i) An Initial Summary Prospectus is
used for each currently offered Contract
described under the related registration
statement;
(ii) A summary prospectus is used for
the Portfolio Company (if the Portfolio
Company is registered on Form N–1A);
and
(iii) The current summary prospectus,
Statutory Prospectus, Statement of
Additional Information, and most recent
annual and semi-annual reports to
shareholders under § 270.30e-1 of this
chapter for the Portfolio Company are
publicly accessible, free of charge, at the
same website address referenced in
paragraph (h)(1) of this section, and are
accessible under the conditions set forth
in paragraphs (h)(1), (h)(2)(i) and (ii),
and (h)(3) and (4) of this section, with
respect to the availability of documents
relating to the Contract.
(2) Communications. Any
communication relating to a Portfolio
Company (other than a prospectus
permitted or required under section 10
of the Act) shall not be deemed a
prospectus under section 2(a)(10) of the
Act (15 U.S.C. 77b(a)(10)) if the
conditions set forth in paragraph (j)(1) of
this section are satisfied.
(3) Other requirements. The materials
referenced in paragraph (j)(1)(iii) of this
section must be delivered upon request,
presented, and able to be retained under
the conditions set forth in paragraphs
(i)(1) and (3) of this section. Compliance
with this paragraph (j)(3) is not a
condition to the ability to rely on
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paragraph (j)(1) or (2) of this section,
and failure to comply with this
paragraph (j)(3) does not negate the
ability to rely on paragraph (j)(1) or (2)
of this section.
PART 232—REGULATION S–T—
GENERAL RULES AND REGULATIONS
FOR ELECTRONIC FILINGS
12. The general authority citation for
part 232 continues to read as follows:
■
Authority: 15 U.S.C. 77c, 77f, 77g, 77h,
77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m,
78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8,
80a–29, 80a–30, 80a–37, 80b–4, 80b–6a, 80b–
11, 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
*
*
*
*
*
13. Amend § 232.313 by revising
paragraphs (a) and (b) to read as follows:
■
§ 232.313 Identification of investment
company type and series and/or class (or
contract).
(a) Registered investment companies,
business development companies, and
offerings of registered index-linked
annuities must indicate their investment
company type, based on whether the
registrant’s last effective registration
statement or amendment (other than a
merger/proxy filing on Form N–14
(§ 239.23 of this chapter) was filed on
Form N–1 (§§ 239.15 and 274.11 of this
chapter), Form N–1A (§§ 239.15A and
274.11A of this chapter), Form N–2
(§§ 239.14 and 274.11a–1 of this
chapter), Form N–3 (§§ 239.17A and
274.11b of this chapter), Form N–4
(§§ 239.17b and 274.11c of this chapter),
Form N–5 (§§ 239.24 and 274.5 of this
chapter), Form N–6 (§§ 239.17c and
274.11d of this chapter), Form S–1
(§ 239.11 of this chapter), Form S–3
(§ 239.13 of this chapter), or Form S–6
(§ 239.16 of this chapter) in those
EDGAR submissions identified in the
EDGAR Filer Manual.
(b) Registered investment companies
or offerings of registered index-linked
annuities whose last effective
registration statement or amendment
(other than a merger/proxy filing on
Form N–14 (§ 239.23 of this chapter)
was filed on Form N–1A (§§ 239.15A
and 274.11A of this chapter), Form N–
3 (§§ 239.17A and 274.11b of this
chapter), Form N–4 (§§ 239.17b and
274.11c of this chapter), or Form N–6
(§§ 239.17c and 274.11d of this chapter)
must, under the procedures set forth in
the EDGAR Filer Manual:
(1) Provide electronically, and keep
current, information concerning their
existing and new series and/or classes
(or contracts, in the case of separate
accounts), including series and/or class
(contract) name and ticker symbol, if
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71181
any, and be issued series and/or class
(or contract) identification numbers;
(2) Deactivate for EDGAR purposes
any series and/or class (or contract, in
the case of separate accounts) that are
no longer offered, go out of existence, or
deregister following the last filing for
that series and/or class (or contract, in
the case of separate accounts), but the
registrant must not deactivate the last
remaining series unless the registrant
deregisters; and
(3) For those EDGAR submissions
identified in the EDGAR Filer Manual,
include all series and/or class (or
contract) identifiers of each series and/
or class (or contract) on behalf of which
the filing is made.
*
*
*
*
*
■ 14. Amend § 232.405 by revising
paragraphs (a)(3)(i) introductory text,
(a)(3)(ii), (b)(1) introductory text, (b)(2)
introductory text, (b)(2)(iii), and the
final sentence of Note 1 to the section
to read as follows:
§ 232.405 Interactive Data File
Submissions.
*
*
*
*
*
(a) * * *
(3) * * *
(i) If the electronic filer is not a
management investment company
registered under the Investment
Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account as defined in
Section 2(a)(14) of the Securities Act (15
U.S.C. 77b(a)(14)) registered under the
Investment Company Act of 1940, a
registered index-linked annuity issuer
as defined in Rule 405 under the
Securities Act (17 CFR 232.405), a
business development company as
defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15
U.S.C. 80a–2(a)(48)), a unit investment
trust as defined in Section 4(2) of the
Investment Company Act of 1940 (15
U.S.C. 80a–4), or a clearing agency that
provides a central matching service, and
is not within one of the categories
specified in paragraph (f)(1)(i) of this
section, as partly embedded into a filing
with the remainder simultaneously
submitted as an exhibit to:
*
*
*
*
*
(ii) If the electronic filer is a
management investment company
registered under the Investment
Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in
Section 2(a)(14) of the Securities Act (15
U.S.C. 77b(a)(14)) registered under the
Investment Company Act of 1940, a
registered index-linked annuity issuer
as defined in Rule 405 under the
Securities Act (17 CFR 232.405), a
business development company as
defined in Section 2(a)(48) of the
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Investment Company Act of 1940 (15
U.S.C. 80a–2(a)(48)), a unit investment
trust as defined in Section 4(2) of the
Investment Company Act of 1940 (15
U.S.C. 80a–4), or a clearing agency that
provides a central matching service, and
is not within one of the categories
specified in paragraph (f)(1)(ii) of this
section, as partly embedded into a filing
with the remainder simultaneously
submitted as an exhibit to a filing that
contains the disclosure this section
requires to be tagged; and
*
*
*
*
*
(b) * * *
(1) If the electronic filer is not a
management investment company
registered under the Investment
Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in
Section 2(a)(14) of the Securities Act (15
U.S.C. 77b(a)(14)) registered under the
Investment Company Act of 1940, a
registered index-linked annuity issuer
as defined in Rule 405 under the
Securities Act (17 CFR 232.405), a
business development company as
defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15
U.S.C. 80a–2(a)(48)), a unit investment
trust as defined in Section 4(2) of the
Investment Company Act of 1940 (15
U.S.C. 80a–4), or a clearing agency that
provides a central matching service, an
Interactive Data File must consist of
only a complete set of information for
all periods required to be presented in
the corresponding data in the Related
Official Filing, no more and no less,
from all of the following categories:
*
*
*
*
*
(2) If the electronic filer is an openend management investment company
registered under the Investment
Company Act of 1940, a separate
account (as defined in Section 2(a)(14)
of the Securities Act) registered under
the Investment Company Act of 1940
(15 U.S.C. 80a et seq.), a registered
index-linked annuity issuer as defined
in Rule 405 under the Securities Act (17
CFR 232.405), a unit investment trust as
defined in Section 4(2) of the
Investment Company Act of 1940 (15
U.S.C. 80a–4), or a clearing agency that
provides a central matching service, an
Interactive Data File must consist of
only a complete set of information for
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all periods required to be presented in
the corresponding data in the Related
Official Filing, no more and no less,
from the information set forth in:
*
*
*
*
*
(iii) Items 2(b)(2), 2(d), 3, 4, 5, 6(a)
(instruction), 6(c)(1), 6(d), 7(e), 10, 17,
26(c), and 31A of §§ 239.17b and
274.11c of this chapter (Form N–4);
*
*
*
*
*
Note 1 to § 232.405: * * * For an
issuer that is a management investment
company or separate account registered
under the Investment Company Act of
1940 (15 U.S.C. 80a et seq.), a registered
index-linked annuity issuer as defined
in Rule 405 under the Securities Act (17
CFR 232.405), a business development
company as defined in Section 2(a)(48)
of the Investment Company Act of 1940
(15 U.S.C. 80a–2(a)(48)), or a unit
investment trust as defined in Section
4(2) of the Investment Company Act of
1940 (15 U.S.C. 80a–4), General
Instruction C.3.(g) of Form N–1A,
General Instruction I of Form N–2,
General Instruction C.3.(h) of Form N–
3, General Instruction C.3.(h) of Form
N–4, General Instruction C.3.(h) of Form
N–6, General Instruction 2.(l) of Form
N–8B–2 (§ 274.12 of this chapter),
General Instruction 5 of Form S–6, and
General Instruction C.4 of Form N–CSR,
as applicable, specifies the
circumstances under which an
Interactive Data File must be submitted.
Note: Form N–6 is attached as Appendix B
to this document. Form N–6 will not appear
in the Code of Federal Regulations.
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
§ 274.24 Form 24F–2, annual filing of
securities sold pursuant to registration of
certain investment company securities and
registered index-linked annuities.
15. The general authority citation for
part 239 continues to read as follows:
■
Authority: 15 U.S.C. 77c, 77f, 77g, 77h,
77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m,
78n, 78o(d), 78o–7 note, 78u–5, 78w(a), 78ll,
78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a–
10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30,
80a–37; and sec. 71003 and sec. 84001, Pub.
L. 114–94, 129 Stat. 1321, unless otherwise
noted.
*
*
*
*
*
16. Revise Form N–4 (referenced in
§§ 239.17b and 274.11c).
■
Note: Form N–4 is attached as Appendix A
to this document. Form N–4 does not appear
in the Code of Federal Regulations.
17. Amend Form N–6 (referenced in
§§ 239.17c and 274.11d) by revising
Instruction 3 to Item 30.
■
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18. Add § 239.66 to read as follows:
§ 239.66 Form 24F–2, annual filing of
securities sold pursuant to registration of
certain investment company securities and
registered index-linked annuities.
Form 24F–2 shall be used as the
annual report filed by face amount
certificate companies, open-end
management companies, unit
investment trusts, and registered indexlinked annuities pursuant to §§ 230.456,
§ 230.457, or 270.24f–2 of this chapter
for reporting securities sold during the
fiscal year.
■ 19. Revise Form 24F–2 (referenced in
§§ 239.66 and 274.24).
Note: Form 24F–2 is attached as Appendix
C to this document. Form 24F–2 will not
appear in the Code of Federal Regulations.
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
20. The authority citation for part 274
continues 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, 80a–29, and 80a–37, unless
otherwise noted.
*
■
*
*
*
*
21. Revise § 274.24 to read as follows:
Form 24F–2 shall be used as the
annual report filed by face amount
certificate companies, open-end
management companies, unit
investment trusts, and registered indexlinked annuities pursuant to §§ 230.456,
230.457, or 270.24f–2 of this chapter for
reporting securities sold during the
fiscal year.
By the Commission.
Dated: September 29, 2023.
Vanessa Countryman,
Secretary.
Note: The following appendices will not
appear in the Code of Federal Regulations.
BILLING CODE 8011–01–P
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Appendix A-Form N-4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
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 Registered Separate Account)
(Name of Insurance Company)
(Zip Code)
(Address of Insurance Company's Principal
Executive Offices)
(Insurance Company's Telephone Number, including Area Code)
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
□
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 under the Securities Act.
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It is proposed that this filing will become effective (check appropriate box):
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
If appropriate, check the following box:
□
This post-effective amendment designates a new effective date for a previously filed posteffective amendment.
Check each box that appropriately characterizes the Registrant:
□
New Registrant (as applicable, a Registered Separate Account or Insurance Company that
has not filed a Securities Act registration statement or amendment thereto within 3 years
preceding this filing)
□
Emerging Growth Company (as defined by Rule 12b-2 under the Securities Exchange Act of
1934 ("Exchange Act"))
□
If an Emerging Growth Company, indicate by check mark if the Registrant has elected not
to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.
□
Relying on Rule 12h-7 under the Exchange Act
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-4 is to be used by (1) separate accounts that are unit investment trusts that
offer variable annuity contracts to register under the Investment Company Act of 1940 and
to offer their securities under the Securities Act of 1933, (2) insurance companies to
register index-linked annuity contracts under the Securities Act of 1933, and (3) insurance
companies to register annuity contracts that have any combination of these options under
the applicable statutes. The Commission has designed Form N-4 to provide investors with
information that will assist them in making a decision about investing in these contracts.
The Commission also may use the information provided on Form N-4 in its regulatory,
disclosure review, inspection, and policy making roles.
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A Registrant is required to disclose the information specified by Form N-4, and the
Commission will make this information public. A Registrant is not required to respond to the
collection of information contained in Form N-4 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, 100 F Street,
N.E., Washington, DC 20549. The 0MB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. § 3507.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71185
CONTENTS OF FORM N-4
GENERAL INSTRUCTIONS .................................................................................................................................................................... iv
A.
Definitions ........................................................................................................................................................................................ iv
B.
Filing and Use of Form N-4 ..............................................................................................................................................................v
C.
Preparation of the Registration Statement... ................................................................................................................................. vi
D. Incorporation by Reference ............................................................................................................................................................. x
PART A- INFORMATION REQUIRED IN A PROSPECTUS ....................................................................................................................... 1
Item 1. Front and Back Cover Pages .......................................................................................................................................................1
Item 2. Overview of the Contract .............................................................................................................................................................2
Item 3. Key Information ............................................................................................................................................................................4
Item 4. Fee Table ................................................................................................................................................................................... 10
Item 5. Principal Risks of Investing in the Contract ............................................................................................................................. 14
Item 6. Description of Insurance Company, Registered Separate Account, and Investment Options ............................................. 15
Item 7. Charges ...................................................................................................................................................................................... 21
Item 8. General Description of Contracts ............................................................................................................................................. 23
Item 9. Annuity Period ........................................................................................................................................................................... 25
Item 10. Benefits Available Under the Contract.. ................................................................................................................................. 25
Item 11. Purchases and Contract Value ............................................................................................................................................... 27
Item 12. Surrenders and Withdrawals .................................................................................................................................................. 27
Item 13. Loans ....................................................................................................................................................................................... 28
Item 14. Taxes ....................................................................................................................................................................................... 29
Item 15. Legal Proceedings ................................................................................................................................................................... 29
Item 16. Financial Statements .............................................................................................................................................................. 29
Item 17. Investment Options Available Under the Contract ................................................................................................................ 29
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION .................................................................... 35
Item 18. Cover Page and Table of Contents ........................................................................................................................................ 35
Item 19. General Information and History ............................................................................................................................................ 35
Item 20. Non-Principal Risks of Investing in the Contract ................................................................................................................... 36
Item 21. Services ................................................................................................................................................................................... 36
Item 22. Purchase of Securities Being Offered .................................................................................................................................... 37
Item 23. Underwriters ............................................................................................................................................................................ 38
Item 24. Calculation of Performance Data ........................................................................................................................................... 39
Item 25. Annuity Payments ................................................................................................................................................................... 41
Item 26. Financial Statements .............................................................................................................................................................. 41
PART C - OTHER INFORMATION ......................................................................................................................................................... 44
Item 27. Exhibits .................................................................................................................................................................................... 44
Item 28. Directors and Officers of the Insurance Company ................................................................................................................ 46
Item 29. Persons Controlled by or Under Common Control with the Insurance Company or the Registered Separate Account ... 46
Item 30. Indemnification ....................................................................................................................................................................... 46
Item 31. Principal Underwriters ............................................................................................................................................................ 4 7
Item 31A. Information about Contracts with Index-Linked Options .................................................................................................... 48
Item 32. Location of Accounts and Records ........................................................................................................................................ 48
Item 33. Management Services ............................................................................................................................................................ 48
Item 34. Fee Representation and Undertakings .................................................................................................................................. 48
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SIGNATURES ......................................................................................................................................................................................50
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
GENERAL INSTRUCTIONS
A. Definitions
References to sections and rules in this Form N-4 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-4 have the same meaning as in the Investment Company Act or the related rules, unless otherwise
indicated. As used in this Form N-4, the terms set out below have the following meanings:
uclass" means a class of a Contract that varies principally with respect to distribution-related fees
and expenses.
ucontract" means any accumulation contract or annuity contract, any portion thereof, or any unit of
interest or participation therein issued by an Insurance Company that offers Index-Linked Options, and/or
Variable Options, and/or Fixed Options, as applicable, pursuant to the registration statement prepared on
this Form.
ucontract Adjustment" means a positive or negative adjustment made to the value of the Contract
by the Insurance Company if amounts are withdrawn from an Index-Linked Option or from the Contract
before the end of a specified period. This adjustment may be based on calculations using a predetermined
formula, or a change in interest rates, or some other factor or benchmark.
ucrediting Period" means the period of time over which an Index's performance is measured,
subject to applicable limits on Index gains and losses, to determine the amount of positive or negative
interest that will be credited to an Index-Linked Option at the end of the period.
UFixed Option" means an Investment Option under the Contract pursuant to which the value of the
Contract, either during an accumulation period or after annuitization, or both, will earn interest at a rate
specified by the Insurance Company, subject to a minimum guaranteed rate under the Contract.
ulndex" or "Indexes" means any index, rate, or benchmark (such as a registered exchange-traded
fund that tracks an index) used in the calculation of positive or negative interest credited to an IndexLinked Option.
ulndex-Linked Option" means an Investment Option offered under any Contract, pursuant to which
the value of the Contract, either during an accumulation period or after annuitization, or both, will earn
positive or negative interest based, in part, on the performance of a specified Index.
ulnsurance Company" means the insurance company issuing the Contract, which company is
subject to state supervision. The Insurance Company may be the depositor or sponsor of any Registered
Separate Account in which the Contract participates. If there is more than one Insurance Company, the
information called for in this Form about the Insurance Company shall be provided for each Insurance
Company.
UPlatform Charge" means any fee charged by the Insurance Company to make a Portfolio Company
available in connection with a Variable Option under the Contract, and that varies solely on the basis of the
Portfolio Company selected.
UPortfolio Company" means any investment company in which the Registered Separate Account
invests and which may be selected by the investor in connection with a Variable Option.
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ulnvestment Option" means a Fixed Option, an Index-Linked Option, and/or a Variable Option, as
applicable.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71187
"Registered Separate Account" means a separate account (as defined in section 2(a)(37) of the
Investment Company Act [15 U.S.C. 80a-2(a)(37)]) in which the Contract participates with respect to
Variable Options offered under the Contract.
"Registrant" means, as applicable, a Registered Separate Account or the Insurance Company.
"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.].
"Statutory Prospectus" means a prospectus that satisfies the requirements of section 10(a) of the
Securities Act [15 U.S.C. 77j(a)].
"Summary Prospectus" has the meaning provided by paragraph (a)(11) of rule 498A under the
Securities Act [17 CFR 230.498A(a)(11)].
"Variable Option" means an Investment Option under any Contract pursuant to which the value of
the Contract, either during an accumulation period or after annuitization, or both, varies according to the
investment experience of a Portfolio Company.
B. Filing and Use of Form N-4
1. What is Form N-4 used for?
Form N-4 is used by all separate accounts organized as unit investment trusts and offering
Contracts with Variable Options and all Insurance Companies that offer Contracts with Variable
Options and/or Index-Linked Options to file:
(a)
An initial registration statement under the Investment Company Act and any amendments to
the registration statement;
(b)
An initial registration statement required under the Securities Act and any 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, 4, 5, 9, and 16), B,
and C (except Items 27(c), (k), (I), and (m)), and the required signatures.
No registration fees are required for a filing on Form N-4 to register as an investment company
under the Investment Company Act or to register securities under the Securities Act. If a filing on
Form N-4 is made to register securities under the Securities Act and securities are sold to the
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3. What are the fees for Form N-4?
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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-24(f)] and rules 24f-2 [17 CFR 270.24f-2], 456 [17 CFR
230.456], and 457 [17 CFR 230.457].
4. What rules apply to the filing of a registration statement on Form N-4?
(a)
For registration statements and amendments filed under both the Investment Company Act
and the Securities Act or under only the Securities Act, the general rules under the Securities
Act, particularly the rules regarding the filing of registration statements in Regulation C [17
CFR 230.400 - 230.498A], apply to the filing of registration statements on Form N-4.
Specific requirements concerning investment companies and registered index-linked
annuities appear in rules 480 - 488 and 495 - 498A of Regulation C.
(b)
For registration statements and amendments filed only under the Investment Company Act,
the general rules under the Investment Company Act, particularly the provisions in rules 8b1 - 8b-31 [17 CFR 270.8b-1 to 8b-31], apply to the filing of registration statements on Form
N-4.
(c)
The plain English requirements of rule 421(d) under the Securities Act [17 CFR 230.421(d)]
apply to prospectus disclosure in Part A of Form N-4.
(d)
Regulation S-T [17 CFR 232.10 - 232.501] applies to all filings on the Commission's
Electronic Data Gathering, Analysis, and Retrieval system ("EDGAR").
C. Preparation of the Registration Statement
(a)
The requirements of Form N-4 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 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-4 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 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 Contract with other Contracts.
(c)
Responses to the Items in Form N-4 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 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 or insurance companies. Avoid
excessive detail, technical or legal terminology, and complex language, including the use of
formulas as the primary means of communicating certain terms or features of the Contract.
Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for
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1. Administration of the Form N-4 Requirements
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71189
investors to understand and detract from its usefulness.
(d)
The requirements for prospectuses included in registration statements on Form N-4 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-4.
2. Form N-4 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 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 unless otherwise prescribed by the Form. 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 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.
(a)
Organization of Information. Organize the information in the prospectus and SAi to make it
easy for investors to understand. Notwithstanding rule 421(a) under the Securities Act [17
CFR 230.421(a)] regarding the order of information required in a prospectus, disclose the
information required by Item 2 (Overview of the Contract), Item 3 (Key Information), and
Item 4 (Fee Table) in numerical order at the front of the prospectus. Do not precede Items 2,
3, and 4 with any other Item except the Cover Page (Item 1), a glossary, if any (General
Instruction C.3.(d)), 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 response to Items 2 and 3,
information in the prospectus or the SAi that is not otherwise required 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. For example, 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. However, information regarding nonprincipal risks that is not otherwise required to be in the prospectus must be disclosed in the
SAi and not the prospectus, in accordance with Items 5 and 20.
(c)
Presentation of Information. To aid investor comprehension, Registrants are encouraged to
use, as appropriate, question-and-answer formats, tables, side-by-side comparisons,
captions, bullet points, numeric examples, illustrations or similar presentation methods. For
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3. Additional Matters
71190
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
example, such presentation methods would be appropriate when presenting disclosure for
similar Contract features, prospectuses describing multiple Contracts, or the operation of
optional benefits or annuitization.
(d)
(e)
Use of Terms.
(i)
Definitions. Define the special terms used in the prospectus (e.g., accumulation unit,
participant, Crediting Period, etc.) in any presentation that clearly conveys meaning to
investors. If the Registrant elects to include a glossary or list of definitions, only special
terms used throughout the prospectus must be defined or listed. If a special term is
used in only one section of the prospectus, it may be defined there (and need not be
included in any glossary or list of definitions that the Registrant includes).
(ii)
Alternate Terminology. A Registrant may use alternate terminology other than that used
in the form so long as the terminology used by the Registrant clearly conveys the
meaning of, or provides comparable information as, the terminology included in the
form.
Use of Form N-4 to Register Multiple Contracts
(i) A single prospectus may describe multiple Contracts that are essentially identical.
Whether the prospectus describes Contracts that are "essentially identical" will depend
on the facts and circumstances. For example, a Contract that does not offer optional
benefits would not be essentially identical to one that does for a charge. Similarly, group
and individual Contracts would not be essentially identical. However, Contracts that vary
only due to state regulatory requirements would be essentially identical.
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Paragraph (a) of General Instruction C.3 requires Registrants to disclose the
information required by Items 2, 3, and 4 in numerical order at the front of the
prospectus and generally not to precede the Items with other information. As a
general matter, Registrants providing disclosure in a single prospectus for more
than one Contract, 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 the Contracts, followed by
all of the Item 3 information for several Contracts (e.g., by providing several Key
Information Tables sequentially or by providing a single Key Information Table
containing separate disclosures for each Contract to the extent that such
disclosures would vary by Contract), and followed by all of the Item 4 information
for the Contracts. Alternatively, the prospectus may present Items 2, 3, and 4 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, 3, and 4 in a standard order at the beginning of the
prospectus. Registrants that present Items 2, 3, and 4 for each of several Contracts
sequentially or that utilize another presentation should consider whether investors
might benefit from a brief explanation about how the information in the prospectus
is presented, such as headings for each contract in the prospectus' table of
contents and/or a brief narrative at the beginning of the prospectus explaining the
presentation. Registrants are encouraged to present information in a manner that
limits repetition.
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(A)
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
(B)
71191
The Registrant should generally include appropriate titles, headings, or any other
information to promote clarity and facilitate understanding regarding which
disclosures apply to which Contract, if such disclosures would vary based on the
Contract.
(ii) Multiple prospectuses may be combined in a single registration statement on Form N-4
when the prospectuses describe Contracts that are substantially similar. For example, a
Registrant could determine it is appropriate to include multiple prospectuses in a
registration statement in the following situations: (i) the prospectuses describe the same
Contract that is sold through different distribution channels; (ii) the prospectuses
describe Contracts that differ only with respect to Portfolio Companies offered; or (iii) the
prospectuses describe both the original and a modified version of the same Contract
(where the "modified" version differs in the features or options that the Registrant offers
under that Contract).
(f)
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].
(g)
Sa/es 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.
(h)
Interactive Data File
(A)
Except as required by paragraph (h)(i)(B), the Interactive Data File must be
submitted as an amendment to the registration statement to which the Interactive
Data File relates. The amendment must be submitted on or before the date the
registration statement or post-effective amendment that contains the related
information becomes effective.
(B)
In the case of a post-effective amendment to a registration statement filed
pursuant to paragraphs (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485 under the Securities
Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with
the filing, or as an amendment to the registration statement to which the
Interactive Data Filing relates that is submitted on or before the date the posteffective amendment that contains the related information becomes effective.
(ii) An Interactive Data File is required to be submitted to the Commission in the manner
provided by rule 405 of Regulation S-T for any form of prospectus filed pursuant to
paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that
includes information provided in response to Items 2(b)(2), 2(d), 3, 4, 5, 6(a)
(instruction), 6(c)(1), 6(d), 6(e), 7(e), 10, 17, 26(c), or 31A that varies from the
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(i) An Interactive Data File (see rule 232.11 of Regulation S-T [17 CFR 232.11]) is required
to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T
[17 CFR 232.405] for any registration statement or post-effective amendment thereto on
Form N-4 that includes or amends information provided in response to Items 2(b)(2),
2(d), 3, 4, 5, 6(a) (instruction), 6(c)(1), 6(d), 6(e), 7(e), 10, 17, 26(c), or 31A with regard
to Contracts that are being sold to new investors.
71192
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
registration statement with regard to Contracts that are being sold to new investors. The
Interactive Data File must be submitted with the filing made pursuant to rule 497.
(iii) The Interactive Data File must be submitted in accordance with the specifications in the
EDGAR Filer Manual, and in such a manner that will permit the information for each
Contract, and, for any information that does not relate to all of the Classes in a filing,
each Class of the Contract to be separately identified.
(i)
Website Addresses. Any website address included in an electronic version of the Statutory
Prospectus must include an active hyperlink or other means of facilitating access that leads
directly to the relevant website address. This requirement does not apply to an electronic
Statutory Prospectus filed on the EDGAR system.
D. Incorporation by Reference
1. General Requirements
All incorporation by reference must comply with the requirements of this Form and the following
rules on incorporation by reference: 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 rule 0-4 under the Investment
Company Act [17 CFR 270.0-4] (additional rule on incorporation by reference for investment
companies). In general, a Registrant may incorporate by reference, in the answer to any item of
Form N-4 not required to be in the prospectus, any information elsewhere in the registration
statement or in other statements, applications, or reports filed with the Commission.
Specific Rules for Incorporation by Reference in Form N-4:
(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 Band C require to be included in the Registrant's registration statement.
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2.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71193
PART A - INFORMATION REQUIRED IN A PROSPECTUS
Item 1. Front and Back Cover Pages
(a) Front Cover Page. Include the following information on the outside front cover page of the
prospectus:
(1)
The Registered Separate Account's name.
(2)
The Insurance Company's name.
(3)
The types of Contracts offered by the prospectus (e.g., group, individual, single premium
immediate, flexible premium deferred).
(4)
The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(5)
The types of Investment Options offered under the Contract, and a cross-reference to the
prospectus appendix providing additional information about each option.
(6)
A statement that the Contract is a complex investment and involves risks, including potential
loss of principal. For Contracts with Index-Linked Options, prominently state that the Insurance
Company limits the amount an investor can earn on an Index-Linked Option, the potential for
investment loss could be significantly greater than the potential for investment gain, and an
investor could lose a significant amount of money if the Index declines in value. Prominently
disclose as a percentage the maximum amount of loss from negative Index performance that an
investor could experience after taking into account the minimum guaranteed limit on Index loss
provided under the Contract.
(7)
A statement that the Contract is not a short-term investment and is not appropriate for an
investor who needs ready access to cash. Briefly state that withdrawals could result in
surrender charges, negative Contract Adjustments, taxes, and tax penalties, as applicable.
Prominently state as a percentage the maximum potential loss resulting from a negative
Contract Adjustment, if applicable.
(8)
A statement that the Insurance Company's obligations under the Contract are subject to its
financial strength and claims-paying ability.
(9)
The date of the prospectus.
(10) The statement required by rule 481(b)(1) under the Securities Act [17 CFR 230.481(b)(1)].
(12) If applicable, the legend: "If you are a new investor in the Contract, you may cancel your
Contract within 10 days of receiving it without paying fees or penalties[, although we will apply
the Contract Adjustment]. In some states, this cancellation period may be longer. Upon
cancellation, you will receive either a full refund of the amount you paid with your application or
your total Contract value. You should review this prospectus, or consult with your investment
professional, for additional information about the specific cancellation terms that apply."
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(11) The statement that additional information about certain investment products, including [type of
Contract]. has been prepared by the Securities and Exchange Commission's staff and is
available at Investor.gov.
71194
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Instruction. A Registrant may include on the front cover page any additional information, subject to the
requirements of General Instruction C.3.(b) and (c).
(b) Back Cover Page. Include the following information on the outside back cover page of the prospectus:
(1) A statement that the SAi includes additional information about the Registrant. Explain that the SAi
is available, without charge, upon request, and explain how investors may make inquiries about
their Contracts. Provide a toll-free (or collect) telephone number for investors to call to request the
SAi, to request other information about the Contracts, and to make investor inquiries.
Instructions.
1. A Registrant may indicate, if applicable, that the SAi and other information are available on its
website and/or by email request.
2. A Registrant may indicate, if applicable, that the SAi and other information are available from
an insurance agent or financial intermediary (such as a broker-dealer or bank) through which
the Contracts may be purchased or sold.
3. When a Registrant (or an insurance agent or financial intermediary through which Contracts
may be purchased or sold) receives a request for the SAi, the Registrant (or insurance agent
or financial intermediary) must send the SAi within 3 business days of receipt of the request,
by first-class mail or other means designed to ensure equally prompt delivery.
(2) A statement whether and from where information is incorporated by reference into the prospectus
as permitted by General Instruction D. Unless the information is delivered with the prospectus,
explain that the Registrant will provide the information without charge, upon request (referring to
the telephone number provided in response to paragraph (b)(1)).
Instruction. The Registrant may combine the information about incorporation by reference with the
statements required under paragraph (b)(1).
(3) A statement that reports and other information about the Registered Separate Account are
available on the Commission's website at https://www.sec.gov, and that copies of this information
may be obtained, upon payment of a duplicating fee, by electronic request at the following email
address: publicinfo@sec.gov.
(4) The EDGAR contract identifier for the Contract on the bottom of the back cover page in type size
smaller than that generally used in the prospectus (e.g., 8-point modern type).
Item 2. OveNiew of the Contract
Provide a concise description of the Contract including the following information:
(b) Phases of Contract. Briefly describe the accumulation (savings) phase and annuity (income) phase of
the Contract.
(1) This discussion should include a brief overview of the Investment Options available under the
Contract.
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(a) Purpose. Briefly describe the purpose(s) of the Contract (e.g., to help the investor accumulate assets
through an investment portfolio, to provide or supplement the investor's retirement income, to
provide death and/or other benefits). State for whom the Contract may be appropriate (e.g., by
discussing a representative investor's time horizon, liquidity needs, and financial goals).
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71195
Instructions.
1. Prominently disclose that additional information about each Investment Option is provided in
an appendix to the prospectus and provide a cross-reference to the appendix.
2. A detailed explanation of the Registered Separate Account, Portfolio Companies, Indexes, and
Investment Options is not necessary and should be avoided.
(2) With respect to any Index-Linked Option currently offered under the Contract, include the
following information.
(i) State that the Insurance Company will credit positive or negative interest at the end of a
Crediting Period to amounts allocated to an Index-Linked Option based, in part, on the
performance of the Index.
(ii) Disclose that an investor could lose a significant amount of money if the Index declines in
value.
Instruction. Prominently state as a percentage the maximum amount of loss an investor
could experience from negative Index performance, after taking into account the minimum
guaranteed limit on Index loss provided under the Contract.
(iii) Briefly explain that the Insurance Company limits the negative Index return used in
calculating interest credited to an Index-Linked Option at the end of its Crediting Period.
Briefly describe the manner(s) in which the Insurance Company limits negative returns
through the use of a floor, buffer, or some other rate or measure. Provide an example of
how such rate could operate to limit a negative Index return (e.g., "if the Index return is 25% and the buffer rate is -10%, we will credit -15% (the amount that exceeds the buffer
rate) at the end of the Crediting Period, meaning your Contract value will decrease by
15%"). Disclose the minimum limit on Index losses guaranteed for the life of the Contract
for any Index-Linked Option.
(iv) Briefly explain that the Insurance Company limits the positive Index return used in
calculating interest credited to an Index-Linked Option at the end of its Crediting Period.
Briefly describe the manner(s) in which the Insurance Company limits positive returns
through the use of a cap, participation rate, or some other rate or measure. Provide an
example of how such rate could operate to limit a positive Index return (e.g., "if the Index
return is 12% and the cap rate is 4%, we will credit 4% in interest at the end of the
Crediting Period, meaning your Contract value will increase by 4%"). Disclose the minimum
limit on Index gains guaranteed for the life of the Contract for any Index-Linked Option.
(3) State, if applicable, that if an investor annuitizes, the investor will receive a stream of income
payments, however (i) the investor will be unable to make withdrawals, and (ii) death benefits and
living benefits will terminate.
(d) Contract Adjustment. If applicable, state that an investor could lose a significant amount of money
due to the Contract Adjustment if amounts are removed from an Index-Linked Option or from the
Contract prior to the end of a specified period. Briefly describe the transactions subject to the
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(c) Contract Features. Summarize the Contract's primary features, including death benefits, withdrawal
options, loan provisions, and Contract benefits. If applicable, state that the investor will incur an
additional fee for selecting a particular benefit.
71196
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Contract Adjustment.
Instruction. Prominently state as a percentage the maximum amount of loss an investor could
experience from a negative Contract Adjustment. State that this loss could be greater due to
surrender charges and tax consequences.
Item 3. Key Information
Include the following information:
Important Information You Should Consider About the [Contract]
FEES AND EXPENSES
Are There Charges for Early
Withdrawals?
Are There Transaction
Charges?
Are There Ongoing Fees and
Expenses?
RISKS
Is There a Risk of Loss From
Poor Performance?
Is this a Short-Term
Investment?
What are the Risks
Associated with the
Investment Options?
Is There Any Chance the
Insurance Company Won't
Pay Amounts Due to Me
Under the Contract?
RESTRICTIONS
Are there any Restrictions on
Contract Benefits?
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Are There Restrictions on the
Investment Options?
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71197
TAXES
What are the Contract's Tax
lmpl ications?
CONFLICTS OF INTEREST
How are Investment
Professionals Compensated?
Should I Exchange My
Contract?
Instructions.
1. General.
(a) Disclose the required information in the tabular presentation(s) reflected herein, in the order
specified. A Registrant may exclude any disclosures that are not applicable, or modify any of
the statements required to be included, so long as the modified statement contains
comparable information. Notwithstanding this instruction and General Instruction C.3.(d)(ii),
the title, headings, and sub-headings for this tabular presentation may not be modified or
substituted with alternate terminology unless otherwise provided.
(b) Provide cross-references to the location in the Statutory Prospectus where the subject matter
is described in greater detail. Cross-references in electronic versions of the Summary
Prospectus and/or Statutory Prospectus should link directly to the location in the Statutory
Prospectus where the subject matter is discussed in greater detail, or should provide a means
of facilitating access to that information through equivalent methods or technologies. The
cross-reference should be adjacent to the relevant disclosure, either within the table row, or
presented in an additional table column.
(c) All disclosures provided in response to this Item should be short and succinct, consistent with
the limitations of a tabular presentation.
(d) All disclosures provided in this tabular presentation also must be presented in a question and
answer format. Unless the context otherwise requires, when answering a question presented
on a given row of the table, begin the response with •ves" or "No" in bold text.
(a) Are There Charges for Early Withdrawals? Include a statement that if the investor withdraws
money from the Contract within [x] years following the investor's last purchase payment, the
investor will be assessed a surrender charge. Include in this statement the maximum
surrender charge (as a percentage of [purchase payment or amount surrendered]), and the
maximum number of years that a surrender charge may be assessed since the last purchase
payment under the Contract. Provide an example of the maximum surrender charge an
investor could pay (in dollars) under the Contract assuming a $100,000 investment (e.g., "[i]f
you make an early withdrawal, you could pay a surrender charge of up to $9,000 on a
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2. fees and Expenses.
71198
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
$100,000 investment. This loss will be greater if there is a negative Contract Adjustment,
taxes, or tax penalties.").
If applicable, include a statement that if all or a portion of account value is removed from an
Index-Linked Option or from the Contract before the expiration of a specified period, the
Insurance Company will apply a Contract Adjustment, which may be negative. Include in this
statement the maximum potential loss (as a percentage of the investment) resulting from a
negative adjustment (e.g., "[y]ou could lose up to XX% of your investment due to the contract
adjustment"). Provide an example of the maximum negative adjustment that could be applied
(in dollars) assuming a $100,000 investment (e.g., "[i]f you allocate $100,000 to an
investment option with a 3-year Crediting Period and later withdraw the entire amount before
the 3 years have ended, you could lose up to $90,000 of your investment. This loss will be
greater if you also have to pay a surrender charge, taxes, and tax penalties."). Provide a brief
narrative description of the Contract transactions subject to the Contract Adjustment (e.g.,
withdrawals, surrender, annuitization, etc.).
Are There Transaction Charges? State that in addition to surrender charges and Contract
Adjustments (if applicable), the investor may also be charged for other transactions, and
provide a brief narrative description of the types of such charges (e.g., front-end loads,
charges for transferring cash value between Investment Options, charges for wire transfers,
etc.).
(b)
(c) Are There Ongoing Fees and Expenses?
Include the following information, in the order specified:
(i) Minimum and Maximum Annual Fee Table.
(A) The legend: "The table below describes the fees and expenses that you may pay each
year, depending on the Investment Options and optional benefits you choose. Please
refer to your Contract specifications page for information about the specific fees you
will pay each year based on the options you have elected."
(B) Provide Minimum and Maximum Annual Fees in substantially the following tabular
format, in the order specified.
Annual Fee
Minimum
Maximum
Base Contract
(varies by Contract Class)
Portfolio Company fees and expenses
Optional benefits available for an
additional charge
(for a single optional benefit, if
elected)
[ ]%
[ ]%
[ ]%
[ ]%
[ ]%
[ ]%
(D) Calculate Base Contract fees by dividing the total amount of Base Contract fees
(including dollar-based Contract expenses) collected during the year that are
attributable to the Contract by the total average net assets that are attributable to the
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(C) Explain, in a parenthetical or footnote to the table or each caption, the basis for each
percentage (e.g.,% of separate account value or benefit base, or% of net asset value).
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71199
Contract.
(E) If the Insurance Company offers multiple Portfolio Companies under the Contract, it
should disclose the minimum and maximum "Annual Portfolio Company Expenses"
calculated in accordance with Item 3 of Form N-1A [17 CFR §§ 239.15A and 274.11A]
(before expense reimbursements or fee waiver arrangements). If the Insurance
Company charges a Platform Charge to make any of the Portfolio Companies available
as investment options under the Contract, the Insurance Company should include the
maximum Platform Charge associated with each Portfolio Company when calculating
minimum and maximum Annual Portfolio Company Expenses.
(F) The Minimum Annual Fee means the lowest current fee for each annual fee category
(i.e., the least expensive Contract Class, the lowest Portfolio Company Total Annual
Operating Expenses, and the least expensive optional benefit available for an
additional charge). The Maximum Annual Fee means the highest current fee for each
annual fee category (i.e., the most expensive Contract Class, the highest Portfolio
Company Total Annual Operating Expenses, and the most expensive optional benefit
available for an additional charge).
(G) For Contracts that offer Index-Linked Options and impose ongoing fees and expenses
on the Index-Linked Options, Variable Options, and/or Fixed Options, precede the table
with a prominent statement explaining that (1) there is an implicit ongoing fee on
Index-Linked Options by the Insurance Company limiting, through the use of a cap,
participation rate, or some other rate or measure, the amount an investor can earn on
an Index-Linked Option; (2) imposing this limit helps the Insurance Company make a
profit on the Index-Linked Option; and (3) in return for accepting this limit on Index
gains, an investor will receive some protection from Index losses.
(ii) Lowest and Highest Annual Cost Table.
(A) The legend: "Because your Contract is customizable, the choices you make affect how
much you will pay. To help you understand the cost of owning your Contract, the
following table shows the lowest and highest cost you could pay each year, based on
current charges. This estimate assumes that you do not take withdrawals from the
Contract, which could add surrender charges and negative Contract Adjustments that
substantially increase costs."
(B) Provide Lowest and Highest Annual Costs in substantially the following tabular format,
in the order specified.
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Highest Annual Cost:
$[]
Assumes:
Assumes:
•
•
•
•
•
•
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Investment of $100,000
5% annual appreciation
Least expensive combination
of Contract Classes and
Portfolio Company fees and
expenses
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Investment of $100,000
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benefits, and Portfolio
Company fees and expenses
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Lowest Annual Cost:
$[]
71200
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•
•
•
Lowest Annual Cost:
Highest Annual Cost:
$[]
$[]
•
No optional benefits
No sales charges
No additional purchase
payments, transfers or
withdrawals
•
No sales charges
No additional purchase
payments, transfers or
withdrawals
(C) Calculate the Lowest and Highest Annual Cost estimates in the following manner:
a. Calculate the dollar amount of fees that would be assessed based on the
assumptions described in the table above for each of the first 10 Contract years.
b. Total each year's fees (discounted to the present value using a 5% annual discount
rate) and divide by 10 to calculate the estimated dollar amounts that are required
to be set forth in the table above.
c. Sales loads, other than ongoing sales charges, should be excluded from the Lowest
and Highest Annual Cost estimates.
d. Amounts of any bonus payment should be excluded from the Lowest and Highest
Annual Cost estimates.
e. Unless otherwise provided, the least and most expensive combination of Contract
Classes, Portfolio Company fees and expenses, and optional benefits should be
based on the disclosures provided in the Example in Item 4. If a different
combination of Contract Classes, Annual Portfolio Company Expenses, and/or
optional benefits would result in different Minimum or Maximum fees in different
years, use the least expensive and most expensive combination of Contract
Classes, Annual Portfolio Company Expenses, and optional benefits each year.
(iii) For Contracts that offer Index-Linked Options and that do not impose any ongoing fees and
expenses under the Contract, prominently state, in lieu of the disclosure required by
Instructions 2(c)(i) and (ii), that (1) there is an implicit ongoing fee on Index-Linked Options
by the Insurance Company limiting, through the use of a cap, participation rate, or some
other rate or measure, the amount an investor can earn on an Index-Linked Option; (2)
imposing this limit helps the Insurance Company make a profit on the Index-Linked
Options; and (3) in return for accepting this limit on Index gains, an investor will receive
some protection from Index losses.
(a) /s There a Risk of Loss From Poor Performance? State that an investor can lose money by
investing in the Contract. For a Contract with Index-Linked Options, prominently state as a
percentage the maximum amount of loss an investor could experience from negative Index
performance, after taking into account the minimum guaranteed limit on Index loss provided
under the Contract.
(b) /s This a Short-Term Investment? State that a Contract is not a short-term investment and is
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3. Risks.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71201
not appropriate for an investor who needs ready access to cash, accompanied by a brief
explanation. State that amounts withdrawn from the Contract may result in surrender charges,
taxes, and tax penalties. If applicable, state that amounts removed from an Index-Linked
Option or from the Contract before the end of a specified period may also result in a negative
Contract Adjustment and loss of positive Index performance.
For Index-Linked Options, state that Contract value will be reallocated at the end of the
Crediting Period according to the investor's instructions, and disclose the default reallocation
in the absence of such instructions.
(c) What are the Risks Associated with the Investment Options? State that an investment in the
Contract is subject to the risk of poor investment performance and can vary depending on the
performance of the Investment Options available under the Contract (e.g., Portfolio
Companies, if a Variable Option, or the Index, if an Index-Linked Option), that each Investment
Option (including any Fixed Option) will have its own unique risks, and that the investor should
review the available Investment Options before making an investment decision. For IndexLinked Options, also state that:
(A) The cap, participation rate, or some other rate or measure, as applicable, will limit positive
Index returns (e.g., limited upside). Provide an example for each type of limit imposed
under the Contract (e.g., "if the Index return is 12% and the cap rate is 4%, we will credit
4% in interest at the end of the Crediting Period"), and prominently state that this may
result in the investor earning less than the Index return; and
(B) The floor, buffer, or some other rate or measure, as applicable, will limit negative Index
returns (e.g., limited protection in the case of market decline). Provide an example for
each type of limit imposed under the Contract (e.g., "if the Index return is -25% and the
buffer rate is -10%, we will credit-15% (the amount that exceeds the buffer rate) at the
end of the Crediting Period"), and prominently state that even after limiting a negative
Index return, the investor could still lose up to XX.% of their investment.
(d) Is There Any Chance the Insurance Company Won't Pay Amounts Due to Me Under the
Contract? State that an investment in the Contract is subject to the risks related to the
Insurance Company, including that any obligations (including under any Fixed Options and
Index-Linked Options), guarantees, or benefits are subject to the claims-paying ability of the
Insurance Company. Further state that more information about the Insurance Company,
including if applicable its financial strength ratings, is available upon request, and indicate
how such requests can be made (e.g., via toll-free telephone number).
Instruction. A Registrant may include the Insurance Company's financial strength rating(s) and
omit the portion of the disclosures regarding the availability of the Insurance Company's financial
strength ratings specified by the last sentence of Instruction 3.(d).
(a) Are There Limits on the Investment Options? State whether there are any restrictions that may
limit the Investment Options that an investor may choose, as well as any limitations on the
transfer of Contract value among Investment Options. State any reservation of rights by the
Insurance Company or the Registered Separate Account under the Contract, including if
applicable, the right to remove or substitute Portfolio Companies, add or remove Index-Linked
Options and change the features of an Index-Linked Option from one Crediting Period to the
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4. Restrictions.
71202
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
next, including the Index and the current limits on Index gains and losses (subject to
contractual minimum guarantees), substitute the Index of an Index-Linked Option during its
Crediting Period, and stop accepting additional purchase payments.
(b) Are There Any Restrictions on Contract Benefits? State whether there are any restrictions or
limitations relating to benefits offered under the Contract (e.g., death benefits, living benefits,
Contract loans, performance "locks" relating to the Contract Adjustment, etc.), and/or whether
a benefit may be modified or terminated by the Insurance Company. If applicable, state that
withdrawals that exceed limits specified by the terms of a Contract benefit may affect the
availability of the benefit by reducing the benefit by an amount greater than the value
withdrawn, and/or could terminate the benefit.
5. Taxes-What are the Contract's Tax Implications? State that an investor should consult with a tax
professional to determine the tax implications of an investment in and purchase payments
received under the Contract, and that there is no additional tax benefit to the investor if the
Contract is purchased through a tax-qualified plan or individual retirement account (IRA). Explain
that withdrawals will be subject to ordinary income tax and may be subject to tax penalties.
6. Conflicts of Interest.
(a) How Are Investment Professionals Compensated? State that some investment professionals
may receive compensation for selling the Contract to investors, and briefly describe the basis
upon which such compensation is typically paid (e.g., commissions, revenue sharing,
compensation from affiliates and third parties). State that these investment professionals may
have a financial incentive to offer or recommend the Contract over another investment.
(b) Should I Exchange my Contract? State that some investment professionals may have a
financial incentive to offer an investor a new contract in place of the one the investor already
owns, and that an investor should only exchange their contract if the investor determines,
after comparing the features, fees, and risks of both contracts, and any fees or penalties to
terminate the existing contract, that it is preferable for the investor to purchase the new
contract rather than continue to own the existing contract.
Instruction. A Registrant may omit these line-items if neither the Registrant nor any of its related
companies pay financial intermediaries for the sale of the Contract or related services.
Item 4. Fee Table
Include the following information:
The first table describes the fees and expenses that you will pay at the time that you buy the Contract,
surrender or make withdrawals from an Investment Option or from the Contract, or transfer Contract
value between Investment Options. State premium taxes may also be deducted.
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The following tables describe U'le fees and expenses U'lat you will pay when buying, owning, and
surrendering or making withdrawals from an Investment Option or from the Contract. Please refer to your
Contract specifications page for information about the specific fees you will pay each year based on the
options you have elected.
71203
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of purchase payments)
_%
Deferred Sales Load (or Surrender Charge) (as a percentage of purchase
payments or amount surrendered, as applicable)
_%
Transfer Fee
_%
Contract Adjustment Maximum Potential Loss (as a percentage of Contract
value at the start of the Crediting Period or amount withdrawn, as applicable)
_%
The next table describes the fees and expenses that you will pay each year during the time that you own
the Contract (not including Portfolio Company fees and expenses).
If you choose to purchase an optional benefit, you will pay additional charges, as shown below.
Annual Contract Expenses
Administrative Expenses
$_
Base Contract Expenses (as a percentage of average account value or
Contract value)
_%
Optional Benefit Expenses (as a percentage of benefit base or other (e.g.,
average account value))
_%
In addition to the fees described above, we limit the amount you can earn on an
Index-Linked Option. Imposing this limit helps us make a profit on the IndexLinked Option. In return for accepting this limit on Index gains, you will receive
,ome protection from Index losses.
The next item shows the minimum and maximum total operating expenses charged by the Portfolio
Companies that you may pay periodically during the time that you own the Contract. Expenses shown
may change over time and may be higher or lower in the future. These amounts also include applicable
Platform Charges if you choose to invest in certain Portfolio Companies. A complete list of Portfolio
Companies available under the Contract, including their annual expenses, may be found at the back of
this document.
Annual Portfolio Company Expenses
Maximum
_%
_%
Example
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(expenses that are deducted from Portfolio Company assets,
including management fees, distribution and/or service
(12b-1) fees, and other expenses)
Minimum
71204
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
This Example is intended to help you compare the cost of investing in the Variable Options with the cost
of investing in other annuity contracts that offer variable options. These costs include transaction
expenses, annual Contract expenses, and Annual Portfolio Company Expenses.
The Example assumes all Contract value is allocated to the Variable Options. The Example does not
reflect the Contract Adjustment. Your costs could differ from those shown below If you Invest In IndexLinked Options or Fixed Options.
The Example assumes that you Invest $100,000 In the Varlable Options for the time periods Indicated.
The Example also assumes that your investment has a 5% return each year and assumes the most
expensive combination of Annual Portfolio Company Expenses and optional benefits available for an
additional charge. Although your actual costs may be higher or lower, based on these assumptions, your
costs would be:
If you surrender your
Contract at the end of
the applicable time
period:
If you annuitize at the
end of the applicable
time period:
If you do not
surrender your
Contract:
1 year
3 years
5 years
10 years
$_
$_
$_
$_
1 year
3 years
5 years
10 years
$_
$_
$_
$_
1 year
3 years
5 years
10 years
$_
$_
$_
$_
Instructions
1. Include the narrative explanations in the order indicated. A Registrant may modify a narrative
explanation if the explanation contains comparable information to that shown, and may omit a
narrative explanation that is not applicable under the Contract.
2. Assume that the Contract is owned during the accumulation period for purposes of the table
(including the Example). If an annuitant would pay different fees or be subject to different
expenses, disclose this in a brief narrative and provide a cross-reference to those portions of the
prospectus describing these fees.
3. A Registrant may omit captions if the Registrant does not charge or reserve the right to charge the
fees or expenses covered by the captions.
5. In the Transaction Expenses and Annual Contract Expenses tables, the Registrant must disclose
the maximum guaranteed charge, unless a specific instruction directs otherwise. If a fee other
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4. Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one
percent.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71205
than a Contract Adjustment is calculated based on a benchmark (e.g., a fee that varies according
to volatility levels or Treasury yields), the Registrant must also disclose the maximum guaranteed
charge as a single number. The Registrant may disclose the current charge, in addition to the
maximum charge, if the disclosure of the current charge is no more prominent than, and does not
obscure or impede understanding of, the disclosure of the maximum charge. In addition, the
Registrant may include in a footnote to the table a tabular, narrative, or other presentation
providing further detail regarding variations in the charge. For example, if deferred sales charges
decline over time, the Registrant may include in a footnote a presentation regarding the
scheduled reductions in the deferred sales charges.
6. Provide a separate fee table (or separate column within the table) for each Contract offered by
the prospectus that has different fees.
7. For a Contract with more than one Class, provide a separate response for each Class.
Transaction Expenses
8. "Sales Load Imposed on Purchases" includes the maximum sales load imposed upon purchase
payments and may include a tabular presentation, within the larger table, of the range of such
sales loads.
9. "Deferred Sales Load" includes the maximum contingent deferred sales load (or surrender
charge), expressed as a percentage of the original purchase price or amount surrendered, and
may include a tabular presentation, within the larger table, of the range of contingent deferred
sales loads over time.
10. "Transfer Fee" includes the maximum fee charged for any exchange or transfer of Contract value
between Investment Options or from the Registered Separate Account to another investment
company or from the Registered Separate Account to the insurance company's general account.
The Registrant may include a tabular presentation of the range of transfer fees unless such a
presentation would be so lengthy as to encumber the larger table, in which case the Registrant
should only provide a cross-reference to the narrative portion of the prospectus discussing the
transfer fee.
11. "Contract Adjustment Maximum Potential Loss" includes the maximum negative Contract
Adjustment that may be imposed, expressed as a percentage of Contract value at the start of the
Crediting Period or of the amount withdrawn, as applicable. The Registrant should list in a
footnote the Contract transactions subject to a Contract Adjustment.
12.lf the Registrant (or any other party pursuant to an agreement with the Registrant) charges any
other transaction fee, add another caption describing it and list the (maximum) amount or basis
on which the fee is deducted.
Annual Contract Expenses
14.Base Contract Expenses include mortality and expense risk fees and account fees and expenses.
Account fees and expenses include all fees and expenses charged to any Investment Option
(except sales loads, mortality and expense risk fees, and optional benefits expenses) that are
deducted on a percentage basis.
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13.Administrative Expenses include any Contract, account, or similar fee imposed on a dollar basis
and charged on any recurring basis (e.g., $50 per year).
71206
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
15.Optional Benefits Expenses include any optional features (e.g., enhanced death benefits and
living benefits) offered under the Contract for an additional charge.
16. If the Registrant (or any other party pursuant to an agreement with the Registrant) imposes any
other recurring charge (other than Annual Portfolio Company Expenses), add another caption
describing it and list the (maximum) amount or basis on which the charge is deducted.
Annual Portfolio Company Expenses
17.lf a Registrant offers multiple Portfolio Companies, it should disclose the minimum and maximum
"Annual Portfolio Company Expenses" for any Portfolio Company calculated in accordance with
Item 3 of Form N-1A [17 CFR §§ 239.15A and 274.11A (before expense reimbursements or fee
waiver arrangements). If the Insurance Company charges a Platform Charge to make any of the
Portfolio Companies available as investment options under the Contract, the Registrant should
include the maximum Platform Charge associated with each Portfolio Company when calculating
minimum and maximum Annual Portfolio Company Expenses.
18.A Registrant may also reflect, in an additional line-item to the range of Annual Portfolio Company
Expenses, minimum and maximum Annual Portfolio Company Expenses calculated in accordance
with Item 3 of Form N-1A that include expense reimbursements or fee waiver arrangements that
are in place and reflected in the Portfolio Company's registration statement pursuant to Item 3 of
Form N-1A. If the Registrant provides this disclosure, also disclose the period for which the
expense reimbursements or fee waiver arrangement is expected to continue, and, if applicable,
that it can be terminated at any time at the option of a Portfolio Company. If the Registrant
charges a Platform Charge to make any of the Portfolio Companies available as investment
options under the Contract, the Registrant should include the current Platform Charge associated
with each Portfolio Company when calculating minimum and maximum Annual Portfolio Company
Expenses that include expense reimbursements or fee waiver arrangements.
Example
19. For purposes of the Example(s) in the table, provide the following for each Variable Option
Contract Class:
(a) Assume that the percentage amounts listed under "Annual Contract Expenses" remain the
same in each year of the 1-, 3-, 5-, and 1O-year periods;
(b) The most expensive combination of Contract features must be shown first. Additional expense
presentations are permitted, but not required;
(c) Assume the maximum sales load that may be deducted from purchase payments is deducted;
(d) For any breakpoint in any fee, assume that the amount of Variable Option (and Portfolio
Company) assets remains constant as of the level at the end of the most recently completed
fiscal year;
(e) Assume no exchanges or other transactions;
dollar-based Contract expenses) collected during the year that are attributable to the Contract
by the total average net assets that are attributable to the Contract. Add the resulting
percentage to Base Contract expenses and assume that it remains the same in each year of
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(f) Reflect any Contract expenses by dividing the total amount of Contract expenses (including
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71207
the 1-, 3-, 5-, and 10-year periods;
(g) Reflect any deferred sales load (or surrender charge) by assuming a complete surrender on
the last day of the year;
(h) Provide the information required in the second section of the Example only if Variable Option
fees upon annuitization are different from those charged upon surrender; and
(i) Provide the information required in the third section of the Example only if a sales load or
other fee is charged upon a complete surrender.
Item 5. Principal Risks of Investing in the Contract
Summarize the principal risks of purchasing a Contract, including as applicable:
(a) Investment Option Risk. Explain the principal risks of investing in an Investment Option, including
the risks of poor investment performance and, for Index-Linked Options, the maximum potential
loss from negative Index performance over the Crediting Period, as a percentage.
(b) Early Withdrawal Risk. State that Contracts are unsuitable as short-term savings vehicles. Explain
the limitations on access to cash value through withdrawals, including, as applicable, surrender
charges, negative Contract Adjustments, loss of interest, and the possibility of adverse tax
consequences. State the maximum potential loss resulting from a negative Contract Adjustment,
as a percentage.
(c) Index-Linked Option Risk. In addition to the potential loss from negative Index performance,
describe the principal risks of investing in any Index-Linked Option offered under the Contract.
State that an investor is not invested in the Index or in the securities tracked by the Index.
Instructions. Include in this discussion:
(1) The principal risks relating to, as applicable, limiting positive Index returns, the possibility of
losses despite limits on negative Index returns, interest crediting methodologies, the impact
of Contract fees on the amount of interest credited, and the reallocation of Contract value at
the end of an Index-Linked Option's Crediting Period,
(2) The principal risks associated with the Index, including, as applicable, risks relating to type
(e.g., market risk, small-cap risk, foreign securities risk, emerging market risk, etc.), the
exclusion of dividends from Index return, and market volatility. Specify which risks relate to
each Index offered under the Contract. Describe the principal risks related to the possible
substitution of the Index before the end of an Index-Linked Option's Crediting Period.
(d) Contract Benefits Risk. Describe the principal risks associated with any benefits under the
Contract, including the impact of excess withdrawals, if applicable.
(f) Contract Changes Risk. Describe the principal risks relating to any material reservation of rights
under the Contract, including if applicable, the right to remove or substitute Portfolio Companies,
add or remove Index-Linked Options and change the features of an Index-Linked Option from one
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(e) Insurance Company Risk. Explain the principal risks associated with the Insurance Company's
ability to meet its guarantees under the Contract, including risks relating to its financial strength
and claims-paying ability.
71208
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Crediting Period to the next, stop accepting additional purchase payments, and impose
investment restrictions or limitations on transfers.
Item 6. Description of Insurance Company, Registered Separate Account, and Investment Options
Concisely discuss the organization and operation or proposed operation of the Insurance Company,
Registered Separate Account, Variable Options, Index-Linked Options, and Fixed Options. Include the
information specified below, as applicable.
(a) Insurance Company. Provide the name and address of the Insurance Company. State that the
Insurance Company is obligated to pay all amounts promised to investors under the Contracts, subject to
its financial strength and claims-paying ability.
Instruction. If applicable, indicate that the Insurance Company is relying on the exemption provided by
rule 12h-7 under the Securities Exchange Act (17 CFR 240.12h-7).
(b) Registered Separate Account. Briefly describe the Registered Separate Account. Include a statement
indicating that:
(1) income, gains, and losses credited to, or charged against, the separate account reflect the
separate account's own investment experience and not the investment experience of the
Insurance Company's other assets; and
(2) the assets of the separate account may not be used to pay any liabilities of the Insurance
Company other than those arising from the Contracts.
(c) Variable Options. Briefly describe the Variable Options currently offered under the Contract, including
statements indicating that:
(1) Contract value allocated to a Variable Option will vary based on the investment experience of the
corresponding Portfolio Company in which the Variable Option invests. There is a risk of loss of
the entire amount invested.
(2) Information regarding each Portfolio Company, including (i) its name, (ii) its type (e.g., money
market fund, bond fund, balanced fund, etc.) or a brief statement concerning its investment
objectives, (iii) its investment adviser and any sub-investment adviser, (iv) current expenses, and
(v) performance is available in an appendix to the prospectus, and provide cross-references. State
that each Portfolio Company has issued a prospectus that contains more detailed information
about the Portfolio Company, and provide instructions regarding how investors may obtain paper
or electronic copies.
(3) Concisely discuss the rights of investors to instruct the Insurance Company on the voting of
shares of the Portfolio Companies, including the manner in which votes will be allocated.
(d) Index-Linked Options.
(i) The Insurance Company will credit positive or negative interest at the end of a Crediting
Period to amounts allocated to an Index-Linked Option based, in part, on the performance of
the Index. An investment in an Index-Linked Option is not an investment in the Index or in
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(1) Describe the Index-Linked Options currently offered under the Contract, including statements
indicating that:
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71209
any Index fund.
(ii) The potential for investment loss could be significantly greater than the potential for
investment gain. An investor could lose a significant amount of money if the Index declines
in value.
Instruction. Prominently state as a percentage the maximum amount of loss an investor
could experience from negative Index performance, after taking into account the minimum
guaranteed limit on Index loss provided under the Contract.
(iii) An investor could lose a significant amount of money due to the Contract Adjustment if
amounts are removed from an Index-Linked Option prior to the end of its Crediting Period.
Instruction. Prominently state as a percentage the maximum amount of loss an investor
could experience from a negative Contract Adjustment. State that this loss could be greater
due to surrender charges and tax consequences.
(iv) The Insurance Company can add or remove Index-Linked Options and change the features
of an Index-Linked Option from one Crediting Period to the next, including the Index and the
current limits on Index gains and losses, subject to contractual minimum guarantees.
(v) Information regarding the features of each currently offered Index-Linked Option, including
(i) its name, (ii) its type (e.g., market Index, exchange-traded fund, etc.), or a brief statement
describing the assets that the Index seeks to track (e.g., U.S. large-cap equities), (iii) its
Crediting Period, (iv) its Index crediting methodology, (v) its limit on Index loss, and (vi) its
guaranteed minimum limit on Index gain, is available in an appendix to the prospectus, and
provide cross-references.
Instruction. This statement may be modified to conform to the table provided in response to
Item 17(b).
(2) Describe how interest is calculated and credited for each Index-Linked Option.
(i) Limits on Index Losses
(A) State that the Insurance Company will limit the negative Index return used in
calculating interest credited to an Index-Linked Option at the end of its Crediting
Period. Describe the manner(s) in which the Insurance Company will limit negative
returns through the use of a floor, buffer, or some other rate or measure. Provide an
example of how such rate could operate to limit a negative Index return (e.g., "if the
Index return is -25% and the buffer rate is -10%, we will credit -15% (the amount that
exceeds the buffer rate) at the end of the Crediting Period, meaning your Contract
value will decrease by 15%").
(C) Describe the factors the Insurance Company considers in determining the current rate
for an Index-Linked Option, and how that choice may impact other features of the
option set by the Insurance Company. Explain what an investor should consider
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(B) Disclose the current limit on Index losses for each Index-Linked Option, and the
minimum limit guaranteed for the life of the Contract for any Index-Linked Option. State
that the current limit on Index losses will not change during an Index-Linked Option's
Crediting Period.
71210
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
regarding limits on Index losses before selecting an Index-Linked Option for
investment.
(ii) Limits on Index Gains.
(A) State that the Insurance Company will limit the positive Index return used in calculating
interest credited to an Index-Linked Option at the end of its Crediting Period. Describe
the manner(s) in which the Insurance Company will limit positive returns through the
use of a cap, participation rate, or some other rate or measure. Provide an example of
how such rate could operate to limit a positive Index return (e.g., "if the Index return is
12% and the cap rate is 4%, we will credit 4% in interest at the end of the Crediting
Period, meaning your Contract value will increase by 4%").
(B) Disclose the current limit on Index gains for each Index-Linked Option, and the
minimum limit guaranteed for the life of the Contract for any Index-Linked Option. State
that the current limit on Index gains will not change during an Index-Linked Option's
Crediting Period.
(C) Describe the factors the Insurance Company considers in determining the current rate
for an Index-Linked Option, and how that choice may impact other features of the
option set by the Insurance Company. Explain what an investor should consider
regarding limits on Index gains before selecting an Index-Linked Option for investment.
(iii) Crediting Period.
(A) Generally describe the Index-Linked Option Crediting Periods available under the
Contract (e.g., 1, 3, and 6 years) and the factors an investor should consider regarding
different Crediting Period lengths before selecting an Index-Linked Option for
investment.
(B) Prominently state that amounts must remain in an Index-Linked Option until the end of
its Crediting Period to be credited with all or partial interest, as applicable, and to avoid
a possible Contract Adjustment in addition to potential surrender charges and tax
consequences. Describe the transactions subject to a Contract Adjustment. Provide
cross-references to related disclosure in the prospectus.
(iv) Methodology and Examples.
(A) For each Index crediting methodology, describe how interest is calculated and credited
at the end of a Crediting Period based on the interest crediting formula or performance
measure (e.g. point-to-point, step-up calculations, enhanced performance).
(B) For each Index, provide a bar chart showing the annual return for each of the last 10
calendar years (or for the life of the Index if less than 10 years). Provide a hypothetical
example alongside each Index return that reflects the return after applying a 5% cap
and a -10% buffer.
The bar chart shown below provides the Index's annual returns for the last 10
calendar years (or for the life of the Index if less than 10 years), as well as the
Index returns after applying a hypothetical 5% cap and a hypothetical -10%
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Include the following legend before the bar chart, in the format specified:
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71211
buffer. The chart illustrates the variability of the returns from year to year and
shows how hypothetical limits on Index gains and losses may affect these returns.
Past performance is not necessarily an indication of future performance.
The performance below is NOT the performance of any Index-Linked Option. Your
performance under the Contract will differ, perhaps significantly. The
performance below may reflect a different return calculation, time period, and
llmlt on Index gains and losses than the Index-Linked Options, and does not
reflect Contract fees and charges, including surrender charges and the Contract
Adjustment, which reduce performance.
Instructions.
1.
Include only one legend if bar charts for multiple Indexes are
presented.
2.
Provide the corresponding numerical return adjacent to each bar.
3.
If the Contract does not offer any Index-Linked Option that uses a cap
in its Index crediting methodology, the Company may reflect the rate or
measure used to limit Index gains under the Contract assuming a hypothetical
percentage comparable to a 5% cap. If the Contract does not offer any IndexLinked Option that uses a buffer in its Index crediting methodology, the
Company may reflect the rate or measure used to limit Index losses under the
Contract assuming a hypothetical percentage comparable to a -10% buffer.
4.
If applicable, disclose in a footnote to the table that the Index return
does not reflect the dividends paid on the assets comprising the Index.
5.
If applicable, disclose in a footnote to the table that the Index provider
deducts fees and costs when calculating the Index return.
Do not include additional performance presentations or historical Index
6.
performance that precedes the inception of the Index.
(C) Provide a numerical example to illustrate the mechanics of each type of Index crediting
methodology in a clear, concise, and understandable manner.
Include the following legend, in the format specified:
The following examples illustrate how we calculate and credit interest under each
Index crediting methodology assuming hypothetical Index returns and
hypothetical limits on Index gains and losses. The examples assume no
withdrawals.
Instructions.
2.
Include in the example a positive Index return above the limit on Index gains
and a negative Index return below the limit on Index losses.
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1. Assume hypothetical returns and limits that are reasonable based on current
and anticipated market conditions and Contract sales.
71212
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
3.
Reflect any charges subtracted from interest credited or deducted from
Contract value in the Index-Linked Options.
4.
Additional examples, charts, graphs, or other presentations may be included if
clear, concise, and understandable.
(v) Indexes.
(A) For each Index, briefly describe the types of investments that compose the Index.
Direct the investor to additional information about the Index.
Instructions.
1. Where there is more than one version of an Index (for example a total return
version, price return version), it should be clear which Index relates to the IndexLinked Option.
2. If the Index is an exchange-traded fund ("ETF"), clarify whether the Index
performance is based on the ETF's Net Asset Value or closing value. Also clarify if
the performance is based on the share price of the ETF and the impact of using
share price as opposed to total return.
3. If applicable, state that the Index does not reflect dividends paid on the securities
comprising the Index, or that the Index deducts fees and costs when calculating
Index performance, which will reduce Index performance.
(B) State that the Insurance Company reserves the right to substitute an Index prior to
the end of a Crediting Period. Explain: (a) all circumstances that could necessitate a
substitution; (b) how the Insurance Company would choose a replacement Index; (c)
when and how investors will be notified of any such change; (d) how Index return will
be calculated at the end of the Crediting Period; and (e) what would happen if a
suitable replacement Index were not found, including whether the Index-Linked
Option will be discontinued prior to the end of the Crediting Period.
(vi) Maturity. State whether investors will receive advance notice of a maturing Index-Linked
Option. Disclose how an investor may provide instructions on reallocating Contract value at
the end of the Crediting Period, and any automatic default reallocation in the absence of
such instructions.
Instruction. Explain how investors will be informed of Index-Linked Options available for
allocation at the end of a Crediting Period, including any changes to currently offered IndexLinked Options, and the discontinuance or addition of Index-Linked Options.
(e) Fixed Options.
(1) Describe the Fixed Options currently offered under the Contract. State that information
regarding the features of each currently offered Fixed Option, including (i) its name, (ii) its term,
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(vii)Other Material Features. Describe any other material aspect of the Index-Linked Options,
including limitations on transfers to or from the Index-Linked Options, rate holds, "bail-out"
provisions, start dates, and holding accounts. If applicable, briefly describe how charges may
impact Index-Linked Option value.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71213
and (iii) its minimum guaranteed interest rate, is available in an appendix to the prospectus,
and provide cross-references.
Instruction. This statement may be modified to conform to the table provided in response to
Item 17(c).
(2) Describe how interest is calculated and when it is credited for each Fixed Option. Disclose the
length of the term and the minimum guaranteed interest rate.
Instruction. Disclose the minimum guaranteed interest rate as a numeric rate, rather than
referring to any minimums permitted under state law.
(i) Maturity. If applicable, state whether investors will receive advance notice of a maturing
Fixed Option. Disclose how an investor may provide instructions on reallocating Contract
value at the end of the term, and any automatic default reallocation in the absence of such
instructions.
Instruction. Explain how investors will be informed of Fixed Options available for allocation at
the end of a term, including any changes to currently offered Fixed Options, and the
discontinuance or addition of Fixed Options.
(ii) Other Material Features. Describe any other material aspect of the Fixed Options, including
limitations on transfers to or from the Fixed Options, rate holds, start dates, and holding
accounts.
Item 7. Charges
(a) Description. Briefly describe all current charges deducted from purchase payments, Contract value,
or Investment Option assets, or any other source (e.g., sales loads, premium taxes and other taxes,
administrative and transaction charges, risk charges, Contract loan charges, and optional benefit
charges). Indicate whether each charge will be deducted from purchase payments, Contract value, or
Investment Option assets, the proceeds of withdrawals or surrenders, or some other source. When
possible, specify the amount of any charge as a percentage or dollar figure (e.g., 0.95% of average
daily net assets or $5 per exchange). For recurring charges, specify the frequency of the deduction
(e.g., daily, monthly, annually). Identify the person who receives the amount deducted, briefly explain
what is provided in consideration for the charges, and explain the extent to which any charge can be
modified. Where it is possible to identify what is provided in consideration for a particular charge
(e.g., use of sales load to pay distribution costs), explain what is provided in consideration for that
charge separately.
1. Describe the sales loads applicable to the Contract and how sales loads are charged and
calculated, including the factors affecting the computation of the amount of the sales load. If the
Contract has a front-end sales load, describe the sales load as a percentage of the applicable
measure of purchase payments and as a percentage of the net amount invested for each
breakpoint. For Contracts with a deferred sales load, describe the sales load as a percentage of
the applicable measure of purchase payments (or other basis) that the deferred sales load may
represent. Percentages should be shown in a table. Identify any events on which a deferred sales
load is deducted (e.g., surrender or withdrawal). The description of any deferred sales load should
include how the deduction will be allocated among Investment Options and when, if ever, the
sales load will be waived (e.g., if the Contract provides a free withdrawal amount).
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Instructions.
71214
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
2. Unless set forth in response to Instruction 1, list any special purchase plans or methods
established pursuant to a rule or an exemptive order that reflect scheduled variations in, or
elimination of, the sales load (e.g., group discounts, waiver of sales load upon annuitization or
attainment of a certain age, waiver of deferred sales load for a certain percentage of Contract
value ("free corridor"), investment of proceeds from another policy, exchange privileges,
employee benefit plans, or the terms of a merger, acquisition or exchange offer made pursuant to
a plan of reorganization); identify each class of individuals or transactions to which such plans
apply; state each different sales charge available as a percentage of the public offering price and
as a percentage of the net amount invested; and state from whom additional information may be
obtained. Describe any other special purchase plans or methods established pursuant to a rule
that reflect other variations in, or elimination of, the sales load or in any administrative charge or
other deductions from purchase payments, and generally describe the basis for the variation or
elimination in the sales load or other deduction (i.e., the size of the purchaser, a prior or existing
relationship with the purchaser, the purchaser's assumption of certain administrative functions,
or other characteristics that result in differences in costs or services).
3. If proceeds from sales loads will not cover the expected costs of distributing the Contracts,
identify from what source the shortfall, if any, will be paid. If any shortfall is to be made from
assets from the Insurance Company's general account, disclose, if applicable, that any amounts
paid by the Insurance Company may consist, among other things, of proceeds derived from Base
Contract Expenses.
4. If the Contract's charge for premium or other taxes varies according to jurisdiction, identification
of the range of current premium or other taxes is sufficient.
(b) Commissions Paid to Dealers. State the commissions paid to dealers as a percentage of purchase
payments.
(c) Portfolio Company Charges. State that charges are deducted from and expenses paid out of the
assets of the Portfolio Companies that are described in the prospectuses for those companies.
(d) Operating Expenses. Describe any type of operating expenses for which the Registered Separate
Account is responsible. If organizational expenses of the Registered Separate Account are to be paid
out of its assets, explain how the expenses will be amortized and the period over which the
amortization will occur.
(e) Contract Adjustment. Describe any Contract Adjustment under the Contract.
1.
State the maximum potential loss, as a percentage, that could result from a negative Contract
Adjustment.
2.
Define the period during which the Contract Adjustment applies.
3.
Describe all transactions subject to the Contract Adjustment. For example, as applicable, state
whether an adjustment will be applied if amounts are transferred or withdrawn from an IndexLinked Option or from the Contract due to a partial withdrawal, surrender, election of an annuity
option, payment of death benefit proceeds, etc., or where a particular Contract option (such as a
withdrawal under a guaranteed living benefit) is utilized. Describe any circumstances under which
the adjustment will be waived.
4.
Briefly describe in simple terms the manner in which the Contract Adjustment is determined,
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Instructions.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71215
including: (i) whether the adjustment results from the application of a particular formula or set of
factors (e.g., a change in value of hypothetical derivative instruments); (ii) the factors that may
cause a positive or negative adjustment (e.g., timing of withdrawal, Index volatility, increase in
external interest rates, etc.); (iii) a description of any proportionate withdrawal calculations; and (iv)
how a positive or negative adjustment is applied (e.g., allocated among the Investment Options,
applied to a withdrawal amount). Detailed disclosure on the method of calculating the Contract
Adjustment should be placed in the SAi in response to Item 22. Provide a cross-reference to the SAi
for more information about the Contract Adjustment, including examples illustrating the operation
of the adjustment.
5.
State how the Contract Adjustment will affect the Contract value, surrender value, death benefit,
and any living benefits, and disclose that a negative adjustment could reduce the values under the
Contract by an amount greater than the value withdrawn. If applicable, state the impact of the
Contract Adjustment on interest to be credited to an Index-Linked Option at the end of its Crediting
Period.
6.
Describe the relationship between the Contract Adjustment and any other charges or fees applied
under the Contract, including, for example, the sequence in which charges and adjustments are
applied.
7.
Briefly describe the purpose of the Contract Adjustment (e.g., to transfer risk from the Insurance
Company to the investor to protect the Insurance Company from losses on its own investments
supporting Contract guarantees if amounts are withdrawn prematurely).
8.
Disclose how an investor can obtain information about the current value of a Contract Adjustment.
State that this value can fluctuate daily, and the current value quoted to the investor may differ
from the actual value calculated at the time of adjustment.
Item 8. General Description of Contracts
(a) Contract Rights. Identify the person or persons (e.g., the investor, participant, annuitant, or
beneficiary) who have material rights under the Contracts, and the nature of those rights (1) during
the accumulation period, (2) during the annuity period, and (3) after the death of the annuitant or
investor.
Instruction. Disclose all material state variations and intermediary-specific variations (e.g., variations
resulting from different brokerage channels) to the offering.
(b) Contract Provisions and Limitations. Briefly describe any provisions and limitations for:
(1) minimum Contract value, and the consequences of falling below that amount;
(2) allocation of purchase payments among Investment Options;
(3) transfer of Contract value between Investment Options, including transfer programs (e.g., dollar
cost averaging, portfolio rebalancing, asset allocation programs, and automatic transfer
programs);
Instruction. In discussing conversion or exchange of Contracts, the Registrant should include any
time limits on conversion or exchange, the name of the company issuing the other contract and
whether that company is affiliated with the issuer of the Contract, and how the cash value of the
Contract will be affected by the conversion or exchange.
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(4) conversion or exchange of Contracts for another contract, including a fixed or variable annuity or
life insurance contract; and
71216
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
(5) buyout offers, including interests or participations therein.
(c) General Account. Describe the obligations under the Contract that are funded by the Insurance
Company's general account (e.g., Index-Linked or Fixed Options, death benefits, living benefits, or
other benefits available under the Contract), and state that these amounts are subject to the
Insurance Company's claims-paying ability and financial strength.
(d) Contract or Registered Separate Account Changes. Briefly describe the changes that can be made
in the Contracts or the operations of the Registered Separate Account by the Registered Separate
Account or the Insurance Company, including:
(1) why a change may be made (e.g., changes in applicable law or interpretations of law);
(2) who, if anyone, must approve any change (e.g., the investor or the Commission); and
(3) who, if anyone, must be notified of any change.
Instruction. Describe only those changes that would be material to a purchaser of the Contracts, such as
a reservation of the right to deregister the Registered Separate Account under the Investment Company
Act or to substitute one Portfolio Company for another. Do not describe possible non-material changes,
such as changing the time of day at which accumulation unit values are determined.
(e) Class of Purchasers. Disclose any limitations on the class or classes of purchasers to whom the
Contract is being offered.
(f) Frequent Transfers among Variable Options.
(1) Describe the risks, if any, that frequent transfers of Contract value among Variable Options may
present for other investors and other persons (e.g., participants, annuitants, or beneficiaries) who
have material rights under the Contract.
(2) State whether or not the Registered Separate Account or Insurance Company has adopted
policies and procedures with respect to frequent transfers of Contract value among Variable
Options.
(3) If neither the Registered Separate Account nor the Insurance Company has adopted any such
policies and procedures, provide a statement of the specific basis for the view of the Insurance
Company that it is appropriate for the Registered Separate Account and Insurance Company not
to have such policies and procedures.
(4) If the Registered Separate Account or Insurance Company has any such policies and procedures,
describe those policies and procedures, including:
(i)
whether or not the Registered Separate Account or Insurance Company discourages frequent
transfers of Contract value among Variable Options;
(iii) any policies and procedures of the Registered Separate Account or Insurance Company for
deterring frequent transfers of Contract value among Variable Options, including any
restrictions imposed by the Registered Separate Account or Insurance Company to prevent or
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(ii) whether or not the Registered Separate Account or Insurance Company accommodates
frequent transfers of Contract value among Variable Options; and
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71217
minimize frequent transfers. Describe each of these policies, procedures, and restrictions
with specificity. Indicate whether each of these restrictions applies uniformly in all cases or
whether the restriction will not be imposed under certain circumstances, including whether
each of these restrictions applies to trades that occur through omnibus accounts at
intermediaries, such as investment advisers, broker-dealers, transfer agents, and third party
administrators. Describe with specificity the circumstances under which any restriction will
not be imposed. Include a description of the following restrictions, if applicable:
(A) any restrictions on the volume or number of transfers that may be made within a given
time period;
(B) any transfer fee;
(C) any costs or administrative or other fees or charges that are imposed on persons deemed
to be engaged in frequent transfers of Contract value among Variable Options, together
with a description of the circumstances under which such costs, fees, or charges will be
imposed;
(D) any minimum holding period that is imposed before a transfer may be made from a
Variable Option into another;
(E) any restrictions imposed on transfer requests submitted by overnight delivery,
electronically, or via facsimile or telephone; and
(F) any right of the Registered Separate Account or Insurance Company to reject, limit, delay,
or impose other conditions on transfers or to terminate or otherwise limit Contracts based
on a history of frequent transfers among Variable Options, including the circumstances
under which such right will be exercised.
(5) If applicable, include a statement, adjacent to the disclosure required by paragraphs (f)(1)
through (f)(4) of this Item, that the Statement of Additional Information includes a description of
all arrangements with any person to permit frequent transfers of Contract value among Variable
Options.
Item 9. Annuity Period
Briefly describe the annuity options available. The discussion should include:
(a) Material factors that determine the level of annuity benefits;
(b) The annuity commencement date (give the earliest and latest possible dates);
(c) Frequency and duration of annuity payments, and the effect of these on the level of payment;
(d) The effect of assumed investment return;
(f) Rights, if any, to change annuity options or to effect a transfer of investment base after the annuity
commencement date.
Instructions:
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(e) Any minimum amount necessary for an annuity option and the consequences of an insufficient
amount; and
71218
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
1.
Describe the choices, if any, available to a prospective annuitant, and the effect of not specifying
a choice. Where an annuitant is given a choice in assumed investment return, explain the effect
of choosing a higher, as opposed to a lower, assumed investment return.
2.
Detailed disclosure on the method of calculating annuity payments should be placed in the SAi in
response to Item 25.
(g) If applicable, state that the investor will not be able to withdraw any Contract value amounts after the
annuity commencement date.
Item 10. Benefits Available Under the Contract
(a) Include the following information:
The following table[s] summarize information about the benefits available under the contract.
Name of Benefit
Purpose
Is Benefit
Standard or
Optional
Maximum Fee
Brief Description
of Restrictions/
Limitations
[ ]%
[ ]%
Instructions.
1. General.
(a) The table required by paragraph (a) of this Item is meant to provide a tabular summary
overview of the benefits described in paragraph (b) of this Item (e.g., standard or optional
death benefits, standard or optional living benefits, etc.).
(b) If the Contract offers multiple benefits of the same type (e.g., death benefit accumulation
benefit withdrawal benefit, long-term care benefit), the Registrant may include multiple tables
in response to paragraph (a) of this Item, if doing so might better permit comparisons of
different benefits of the same type. Registrants that choose to use a single table should
consider whether grouping together multiple benefits of the same type, with appropriate
headings, might similarly permit better comparisons of those benefits.
(c) The Registrant should include appropriate titles, headings, or any other information to
promote clarity and facilitate understanding of the table(s) presented in response to
paragraph (a) of this Item. For example, if certain optional benefits are only available to
certain investors (e.g., investors who invested during specific time periods), the table could
include footnotes or headings to identify which optional benefits are affected and to whom
those optional benefits are available.
2. Name of Benefit. State the name of each benefit included in the table(s).
4. Is Benefit Standard or Optional. State whether the benefit is standard or optional. If the
Registrant includes titles or headings for the table(s) specifying whether the benefit is standard or
optional, the Registrant does not need to include the "Is Benefit Standard or Optional" column in
the table(s).
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3. Purpose. Briefly describe the purpose of each benefit included in the table(s).
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71219
5. Maximum Fee. State the maximum fee associated with each benefit included in the table(s).
Include parentheticals providing information about what the stated percentage refers to (e.g.,
percentage of Contract value, percentage of benefit base, etc.).
6. Current Fee. The Registrant may disclose the current charge in a separate column titled "Current
Charge," if the disclosure of the current charge is no more prominent than, and does not obscure
or impede understanding of, the disclosure of the maximum charge.
7. Brief Description of Restrictions/Limitations. Briefly describe the restriction(s) or limitation(s)
associated with each benefit. Registrants are encouraged to use short phrases (e.g., "benefit
limits investment options available," "withdrawals could terminate benefit") to describe the
restriction(s) or limitation(s).
(b) Briefly describe any benefits (e.g., death benefits, living benefits, etc.) offered under a Contract,
including:
(1) Whether the benefit is standard or optional;
(2) The operation of the benefit, including the amount of the benefit and how the benefit amount may
vary, the circumstances under which the value of the benefit may increase or be reduced
(including the effect of withdrawals), and how the benefit may be terminated;
(3) Fees and costs, if any, associated with the benefit; and
(4) How the benefit amount is calculated and payable and the effect of choosing a specific method of
payment on calculation of the benefit.
(c) Briefly describe any limitations, restrictions and risks associated with any benefit offered under the
Contract (e.g., restrictions on which Portfolio Companies or Investment Options may be selected; risk
of reduction or termination of benefit or of additional costs resulting from excess withdrawals).
Instruction. In responding to paragraphs (b) and (c) of this Item, provide one or more examples
illustrating the operation of each benefit in a clear, concise, and understandable manner.
Item 11. Purchases and Contract Value
(a) Briefly describe the procedures for purchasing a Contract. Include a concise explanation of:
(1) the minimum initial and subsequent purchase payments required and any limitations on the
amount of purchase payments that will be accepted (if there are separate limits for each
Investment Option, state these limits);
(2) a statement of when initial and subsequent purchase payments are credited; and
(3) a description of how purchase payments are allocated to the Investment Options, including how
such allocation would take place in the absence of instructions from the investor.
(1) Describe the manner in which purchase payments are credited, including: (A) an explanation
that purchase payments are credited on the basis of accumulation unit value; (B) how
accumulation unit value is determined; and (C) how the number of accumulation units
credited to a Contract is determined.
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(b) For Variable Options:
71220
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(2) Explain that investment performance of the Portfolio Companies, expenses, and deduction of
certain charges affect accumulation unit value and/or the number of accumulation units.
(3) Describe when calculations of accumulation unit value are made and that purchase payments
are credited to a Contract on the basis of accumulation unit value next determined after
receipt of a purchase payment.
(c) Identify each principal underwriter (other than the Insurance Company) of the Contracts and state its
principal business address. If the principal underwriter is affiliated with the Registrant or any
affiliated person of the Registrant, identify how they are affiliated (e.g., the principal underwriter is
controlled by the Insurance Company).
Item 12. Surrenders and Withdrawals
(a) Surrender and Withdrawal. Briefly describe how surrenders and withdrawals can be made from a
Contract, including any limits on the ability to surrender, how the proceeds are calculated, and when
they are payable. Briefly describe the potential effect of such surrenders and withdrawals.
(b) Additional Information Regarding Surrender and Withdrawal. Indicate generally whether and under
what circumstances surrenders and withdrawals are available under a Contract, including the
minimum and maximum amounts that may be surrendered or withdrawn, any limits on their
availability, how the proceeds are calculated, and when the proceeds are payable.
(c) Effect of Surrender and Withdrawal. Indicate generally whether and under what circumstances
surrenders or withdrawals will affect a Contract's cash value, death benefit(s), and/or any living
benefits, and whether any charge(s) and Contract Adjustment will apply.
(d) Investment Option Allocation. Describe how surrenders and withdrawals will be allocated to the
Investment Options, including how such allocation would take place in the absence of instructions
from the investor.
Instruction. The Registrant should generally describe the terms and conditions that apply to surrender
and withdrawal transactions. Technical information regarding the determination of amounts available to
be surrendered or withdrawn should be included in the SAi.
(e) Involuntary Redemption. Briefly describe any provision for involuntary redemptions under the
Contract and the reasons for it, such as the size of the account or infrequency of purchase payments.
(f) Revocation Rights. Briefly describe any revocation rights (e.g., "free look" provisions), including a
description of how the amount refunded is determined. Disclose the method for crediting Variable
Option earnings to purchase payments during the free look period, and whether Investment Options
are limited during the free look period.
Item 13. Loans
Briefly describe the loan provisions of the Contract, including any of the following that are applicable.
(b) Limitations. Describe any limits on availability of loans (e.g., a prohibition on loans during the first
Contract year).
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(a) Availability of Loans. State that a portion of the Contract's cash surrender value may be borrowed.
State how the amount available for a loan is calculated.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71221
(c) Interest. Describe how interest accrues on the loan, when it is payable, and how interest is treated if
not paid. Explain how interest on the amount in the collateral account is credited to the Contract and
allocated to the investment options.
(d) Effect on Contract Value and Death Benefit. Describe how loans and loan repayments affect Contract
value and how they are allocated among the investment options, including, if applicable, how such
allocation would take place in the absence of instructions from the investor. Include (i) a brief
explanation that amounts borrowed under a Contract do not participate in the investment experience
of an Investment Option and that loans, therefore, can affect the Contract value and death benefit
whether or not the loan is repaid, and (ii) a brief explanation that the Contract value at surrender and
the death proceeds payable will be reduced by the amount of any outstanding Contract loan plus
accrued interest.
(e) Other Effects. Describe any other effect that a loan could have on the Contract (e.g., the effect of a
Contract loan in excess of Contract value).
(f) Procedures. Describe the loan procedures, including how and when amounts borrowed are
transferred out of the Investment Options and how and when amounts repaid are credited to the
Investment Options.
Item 14. Taxes
(a) Tax Consequences. Describe the material tax consequences to the investor and beneficiary of buying,
holding, exchanging, or exercising rights under the Contract.
Instruction. Discuss the taxation of annuity payments, death benefit proceeds, periodic and non-periodic
withdrawals, loans, and any other distribution that may be received under the Contract, as well as the tax
benefits accorded the Contract, and other material tax consequences. Describe, if applicable, whether
the tax consequences vary with different uses of the Contract.
(b) Qualified Plans. Identify the types of qualified plans for which the Contracts are intended to be used.
Instructions:
1.
Identify the types of persons who may use the plans (e.g., corporations, self-employed individuals)
and disclose, if applicable, that the terms of the plan may limit the rights otherwise available
under the Contracts.
2.
Do not describe the Internal Revenue Code requirements for qualifications of plans or the nonannuity tax consequences of qualification (e.g., the effect on employer taxation).
(c) Effect. Describe the effect, if any, of taxation on the determination of cash values or Contract values.
Describe any material pending legal proceedings, other than ordinary routine litigation incidental to the
business, to which the Registered Separate Account, the principal underwriter, or the Insurance
Company is a party. Include the name of the court where the case is pending, the date instituted, the
principal parties involved, a description of the factual basis alleged to underlie the proceeding, and the
relief sought. Include similar information as to any proceedings instituted, or known to be contemplated,
by a governmental authority.
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Item 15. Legal Proceedings
71222
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Instruction. For purposes of this requirement, legal proceedings are material only to the extent that they
are likely to have a material adverse effect on the Registered Separate Account, the ability of the
principal underwriter to perform its contract with the Registrant, or the ability of the Insurance Company
to meet its obligations under the Contracts.
Item 16. Financial Statements
If all of the required financial statements of the Registered Separate Account and the Insurance
Company (see Item 26 and General Instruction C.3.(b)) are not in the prospectus, state, under a separate
caption, where the financial statements may be found. Briefly explain how investors may obtain any
financial statements not in the Statement of Additional Information.
Item 17. Investment Options Available Under the Contract
Include the following information as an Appendix under the heading "Appendix: Investment Options
Available Under the Contract." A Registrant may modify the Appendix heading as appropriate under the
Contract.
(a) Variable Options. Include the following legend, in the format specified below:
The following is a list of Portfolio Companies available under the Contract. More information about the
Portfolio Companies is available in the prospectuses for the Portfolio Companies, which may be
amended from time to time and can be found online at[_]. You can also request this information at no
cost by calling[ __ ] or by sending an email request to[_].
The current expenses and performance information below reflects fee and expenses of the Portfolio
Companies, but do not reflect the other fees and expenses that your Contract may charge [, such as
Platform Charges]. Expenses would be higher and performance would be lower if these other charges
were included. Each Portfolio Company's past performance is not necessarily an indication of future
performance.
Type/Investment
Objective
[Insert]
Portfolio Company
and Adviser/
Subadviser
Current Expenses
Average Annual Total Returns
(as of 12/31/_J
[J%
[Names of Portfolio
Company and
1 year
5year
10year
[J%
[J%
[J%
adviser/subadviser]
Instructions.
1. General.
(b) The introductory legend to the table must provide a website address, other than the address
of the Commission's electronic filing system; toll free telephone number; and email address
that investors can use to obtain the prospectuses of the Portfolio Companies and to request
other information about the Portfolio Companies. The website address must be specific
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(a) Only include Portfolio Companies that are investment options under the Contract. Indicate if
investments in any of the Portfolio Companies are restricted (e.g., because of a "hard" or
"soft" close).
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71223
enough to lead investors directly to the prospectuses of the Portfolio Companies, rather than
to the home page or other section of the website on which the materials are posted. The
website could be a central site with prominent links to each document.
(c) The legend may indicate, if applicable, that the prospectuses and other information are
available from a financial intermediary (such as an insurance sales agent or broker-dealer)
through which the Contract may be purchased or sold.
(d) Registrants not relying upon rule 498AU) under the Securities Act [17 CFR 230.498AU)] with
respect to the Portfolio Companies that are investment options under the Contract may, but
are not required to, provide the next-to-last sentence of the first paragraph of the introductory
legend to the table regarding online availability of the prospectuses.
(e) If applicable, include a statement explaining that updated performance information is
available and providing a website address and/or toll-free (or collect) telephone number
where the updated information may be obtained.
2. Type/Investment Objective. Briefly describe each Portfolio Company's type (e.g., money market
fund, bond fund, balanced fund, etc.), or include a brief statement describing the Portfolio
Company's investment objectives.
3. Portfolio Company and Adviser;Subadviser. State the name of each Portfolio Company and its
adviser/subadviser, as applicable. The adviser's/sub-adviser's name may be omitted if it is
incorporated into the name of the Portfolio Company. A Registrant also need not identify a subadviser whose sole responsibility for the Portfolio Company is limited to day-to-day management
of the Portfolio Company's holdings of cash and cash equivalent instruments, unless the Portfolio
Company is a money market fund or other Portfolio Company with a principal investment strategy
of regularly holding cash and cash equivalent instruments. If the Portfolio Company has three or
more sub-advisers, each of which manages a portion of the Portfolio Company's portfolio, the
Registrant need not identify each such sub-adviser, except that the Registrant must identify any
sub-adviser that is (or is reasonably expected to be) responsible for the management of a
significant portion of the Portfolio Company's net assets. For purposes of this paragraph, a
significant portion of a Portfolio Company's net assets generally will be deemed to be 30% or
more of the Portfolio Company's net assets.
4. Current Expenses. Report "Total Annual Fund Operating Expenses" as calculated pursuant to Item
3 of Form N-1A [17 CFR §§ 239.15A and 27 4.11A], reflecting any expense reimbursements or
fee waiver arrangements that are in place and reported in the Portfolio Company's registration
statement pursuant to Item 3 of Form N-1A. If applicable, identify each Portfolio Company subject
to an expense reimbursement or fee waiver arrangement and provide a footnote stating that their
annual expenses reflect temporary fee reductions.
6. Current Expenses + Platform Charge. If the Insurance Company charges a Platform Charge to
make any of the Portfolio Companies available as investment options under the Contract, add a
column titled "Current Expenses + Platform Charge." The column contemplated by this Instruction
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5. Platform Charge. If the Insurance Company charges a Platform Charge to make any of the
Portfolio Companies available as investment options under the Contract, add a column titled
"Platform Charge" disclosing the current Platform Charge for each Portfolio Company. If
applicable, also provide a footnote indicating the highest level to which any relevant Platform
Charge may be increased.
71224
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
must be presented in a manner reasonably calculated to draw investor attention to that column.
7. Average Annual Total Returns. For purposes of this Item, "average annual total returns" means
the "average annual total return" (before taxes) as calculated pursuant to Item 4(b)(2)(iii) of Form
N-1A.
(b) Index-Linked Options. Include the following legend, in the format specified below:
The following is a list of Index-Linked Options currently available under the Contract. We may change the
features of the Index Linked Options listed below (including the Index and the current limits on Index
gains and losses), offer new Index-Linked Options, and terminate existing Index-Linked Options. We will
provide you with written notice before doing so. Information about current limits on Index gains is
available at [provide website address].
Note: If amounts are withdrawn from an Index-Linked Option before the end of its Crediting Period, we
may apply a Contract Adjustment. This may result in a significant reduction in your Contract value that
could exceed any protection from Index loss that would be in place if you held the option until the end of
the Crediting Period.
Index
Type of Index
Crediting Period
[Name of Index]
[Insert]
[ ] Year
Limit on Index
Loss (if held
until end of
Guaranteed
Index Crediting
Crediting
Minimum Limit
Period)
on Index Gain
Methodolo~
[l
[ ]%
[ ]%
Instructions.
1. General.
(a) Include appropriate cross-references in the legend to the section(s) of the prospectus that
describe the features of the Index-Linked Options as well as the Contract Adjustment.
(b) Only include those Index Linked Options that are available under the Contract. Indicate if
investments in any of the Index-Linked Options are restricted (e.g., because of a "hard" or
"soft" close).
(c) An Insurance Company may add, modify, or exclude table headings only as necessary to
describe the material features of an Index-Linked Option.
(e) The website address in the legend must be specific enough to lead investors directly to
current rates, rather than to the home page or other section of the website on which the
rates are posted.
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(d) If an Index provider calculates the Index return in a manner that does not reflect the full
investment performance of the assets tracked by the Index (e.g., the return does not reflect
dividends paid on the assets composing the Index, the return reflects a fee or cost, etc.),
then include, if applicable, a footnote to the table stating that the Index return does not
reflect the full investment performance of the assets it tracks, which will reduce Index
performance.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71225
2. Index. Provide the name of the Index.
3. Type. Briefly describe the type of Index (e.g., market index, exchange-traded fund, etc.), or
include a brief statement describing the assets that the Index seeks to track (e.g., U.S. large-cap
equities).
4. Crediting Period. State the duration of the Index-Linked Option.
5. Index Crediting Methodology. If the Insurance Company utilizes multiple index crediting
methodologies under the Contract (e.g., point-to-point, step-up, enhanced upside, etc.), include a
column indicting the type of methodology used for each Index-Linked Option.
6. Limit on Index Loss (if held until end of Crediting Period). State the current percentage used by
the Insurance Company in its interest crediting methodology to limit the amount of negative
Index return credited to the Index-Linked Option. Identify in the table whether this limit is a
buffer, floor, or some other rate or measure.
7. Limit on Index Gain. State the guaranteed minimum percentage the Insurance Company may
use in its interest crediting methodology to limit the amount of positive Index return credited to
the Index-Linked Option. Identify in the table whether this limit is a cap, participation rate, or
some other rate or measure.
(c) Fixed Options. Include the following legend, in the format specified below:
The following is a list of Fixed Options currently available under the Contract. We may change the
features of the Fixed Options listed below, offer new Fixed Options, and terminate existing Fixed Options.
We will provide you with written notice before doing so.
Minimum Guaranteed Interest
Name
Term
Rate
[Name of Fixed Option]
I ] Year
[ ]%
Instructions.
1. General.
(a) Include appropriate cross-references in the legend to the section(s) of the prospectus that
describe the features of the Fixed Options.
(b) Only include those Fixed Options that are available under the Contract.
(c) A Company may add, modify, or exclude table headings only as necessary to describe the
material features of a Fixed Option.
3. Minimum Guaranteed Interest Rate. Disclose the minimum guaranteed interest rate as a
numeric rate, rather than referring to any minimums permitted under state law.
(d) Restrictions. If the availability of one or more Investment Options varies by benefit offered under
the Contract:
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2. Term. State the duration of the Fixed Option.
71226
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(1) The following sentence should be added to the first paragraph of the legend preceding each table
above, as applicable: "Depending on the [optional] benefits you choose, you may not be able to
invest in certain Investment Options, as noted below."; and
[Investment Option]
[Benefit #1]
[Benefit #2]
[Benefit #3]
[Benefit #4]
Investment Option A
0
0
0
0
Investment Option B
0
0
0
Investment Option C
0
0
Investment Option D
0
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(2) Indicate which Investment Options are available (or are restricted) under the benefits offered
under the Contract. The Appendix could incorporate a separate table that is structured pursuant
to the following example, or could use any other presentation that might promote clarity and
facilitate understanding:
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71227
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 18. Cover Page and Table of Contents
(a) Front Cover Page. Include the following information on the outside front cover page of the SAi:
(1) The Registered Separate Account's name.
(2) The Insurance Company's name.
(3) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(4) A statement or statements:
(i)
That the SAi is not a prospectus;
(ii)
How the prospectus may be obtained; and
(iii) Whether and from where information is incorporated by reference into the SAi, as permitted
by General Instruction D.
Instruction. Any information incorporated by reference into the SAi must be delivered with the SAi.
(5) The date of the SAi and the prospectus to which the SAi relates.
(b) Table of Contents. Include under appropriate captions (and subcaptions) a list of the contents of the
SAi and, when useful, provide cross-references to related disclosure in the prospectus.
Item 19. General Information and History
(a) Insurance Company. Provide the date and form of organization of the Insurance Company, the name
of the state or other jurisdiction in which the Insurance Company is organized, and a description of
the general nature of the Insurance Company's business.
Instruction. The description of the Insurance Company's business should be short and need not list all of
the businesses in which the Insurance Company engages or identify the jurisdictions in which it does
business if a general description (e.g., "variable annuity" or "reinsurance") is provided.
(b) Registered Separate Account. Provide the date and form of organization of the Registered Separate
Account and the Registered Separate Account's classification pursuant to section 4 of the Investment
Company Act [15 U.S.C. 80a-4] (i.e., a separate account and a unit investment trust).
(d) Ownership of Registered Separate Account Assets. If 10 percent or more of the assets of any
Variable Option are not attributable to Contracts or to accumulated deductions or reserves (e.g.,
initial capital contributed by the Insurance Company), state what percentage those assets are of the
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(c) History of Insurance Company and Registered Separate Account. If the Insurance Company's name
was changed during the past five years, state its former name and the approximate date on which it
was changed. If, at the request of any state, sales of contracts offered by the Registered Separate
Account have been suspended at any time, or if sales of contracts offered by the Insurance Company
have been suspended during the past five years, briefly describe the reasons for and results of the
suspension. Briefly describe the nature and results of any bankruptcy, receivership, or similar
proceeding, or any other material reorganization, readjustment, or succession of the Insurance
Company during the past five years.
71228
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
total assets of the Registered Separate Account. If the Insurance Company, or any other person
controlling the assets, has any present intention of removing the assets from the Registered
Separate Account, so state.
(e) Control of Insurance Company. State the name of each person who controls the Insurance Company
and the nature of its business.
Instruction. If the Insurance Company is controlled by another person that, in turn, is controlled by
another person, give the name of each control person and the nature of its business.
Item 20. Non-Principal Risks of Investing in the Contract
Summarize the non-principal risks of purchasing a Contract to the extent not disclosed in the prospectus.
Item 21. SeNices
(a) Expenses Paid by Third Parties. Describe all fees, expenses, and costs of the Registered Separate
Account that are to be paid by persons other than the Insurance Company or the Registered Separate
Account, and identify those persons.
(b) Service Agreements. Summarize the substantive provisions of any management-related service
contract that may be of interest to a purchaser of the Contracts, under which services are provided to
the Registrant in connection with the Contracts, unless the contract is described in response to some
other item of the form. Indicate the parties to the contract, and the total dollars paid and by whom for
each of the pastthree years.
Instructions:
1.
The term "management-related service contract" includes any contract with the Registrant to
keep, prepare, or file accounts, books, records, or other documents required under federal or
state law, or to provide any similar services with respect to the daily administration of the
Registered Separate Account, but does not include the following:
(a) Any agreement with the Registrant to act as custodian or agent to administer purchases and
redemptions under the Contracts, and
(b) Any contract with the Registrant for outside legal or auditing services, or contract for personal
employment entered into with the Registrant in the ordinary course of business.
2.
In summarizing the substantive provisions of any management-related service contract, include
the following:
(a) The name of the person providing the service;
(b) The direct or indirect relationships, if any, of the person with the Registered Separate Account,
the Insurance Company, or the principal underwriter; and
(c) Other Service Providers.
(1) Unless disclosed in response to paragraph (b) or another item of this form, identify and state the
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(c) The nature of the services provided, and the basis of the compensation paid for the services
for the Registrant's last three fiscal years.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71229
principal business address of any person who provides significant administrative or business
affairs management services for the Registrant in connection with the Contracts (e.g., an
"Administrator," "Sub-Administrator," "Servicing Agent"), describe the services provided, and the
compensation paid for the services.
(2) State the name and principal business address of the Registered Separate Account's custodian
and Registrant's independent public accountant and describe generally the services performed by
each.
(3) If the Registered Separate Account's assets are held by a person other than the Insurance
Company, a commercial bank, trust company, or depository registered with the Commission as
custodian, state the nature of the business of each such person.
(4) If an affiliated person of the Registered Separate Account or the Insurance Company, or an
affiliated person of such an affiliated person, acts as administrative or servicing agent for the
Registrant in connection with the Contracts, describe the services the person performs and the
basis for remuneration. State, for the past three years, the total dollars paid for the services, and
by whom.
Instruction. No disclosure need be given in response to paragraph (c)(4) of this Item for an
administrative or servicing agent who is also the Insurance Company.
(5) If the Insurance Company is the principal underwriter of the Contracts, so state.
Item 22. Purchase of Securities Being Offered
(a) Describe the manner in which Registrant's securities are offered to the public. Include a description
of any special purchase plans and any exchange privileges not described in the prospectus.
Instruction. Address exchange privileges between Investment Options, between the Registered Separate
Account and other separate accounts, and between the Registered Separate Account and contracts
offered through the Insurance Company's general account.
(b) Describe the method that will be used to determine the sales load on the Contracts offered by the
Registrant.
Instruction. Explain fully any difference in the price at which Contracts are offered to members of the
public, as individuals or as groups, and the prices at which the Contracts are offered for any class of
transactions or to any class of individuals, including officers, directors, members of the board of
managers, or employees of the Insurance Company, underwriter, Portfolio Company, or investment
adviser to the Portfolio Company.
(c) Frequent Transfer Arrangements. Describe any arrangements with any person to permit frequent
transfers of Contract value among Variable Options, including the identity of the persons permitted to
engage in frequent transfers pursuant to such arrangements, and any compensation or other
consideration received by the Registered Separate Account, the Insurance Company, or any other
party pursuant to such arrangements.
1.
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Instructions:
71230
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accounts managed or sponsored by the Insurance Company, any investment adviser of a Portfolio
Company, or any affiliated person of the Insurance Company or of any such investment adviser.
If the Registrant has an arrangement to permit frequent transfers of Contract value among
Variable Options by a group of individuals, such as the participants in a defined contribution plan
that meets the requirements for qualification under section 401(k) of the Internal Revenue Code
(26 U.S.C. 401(k)), the Registrant may identify the group rather than identifying each individual
group member.
2.
(d) Contract Adjustment. Fully explain the operation of any Contract Adjustment under the Contract,
including any formulas used to calculate the adjustment.
Instruction. Include one or more numeric examples to illustrate the application of the Contract
Adjustment. The example should include a negative adjustment, reflect surrender charges, if
applicable, and disclose the percentage change in Contract value as a result of the adjustment.
Item 23. Underwriters
(a) Identification. Identify each principal underwriter (other than the Insurance Company) of the
Contracts, and state its principal business address. If the principal underwriter is affiliated with the
Registered Separate Account, the Insurance Company, or any affiliated person of the Registered
Separate Account or the Insurance Company, identify how they are affiliated (e.g., the principal
underwriter is controlled by the Insurance Company).
(b) Offering and Commissions. For each principal underwriter distributing Contracts of the Registrant,
state:
(1) whether the offering is continuous; and
(2) the aggregate dollar amount of underwriting commissions paid to, and the amount retained by,
the principal underwriter for each of the Registrant's last three fiscal years.
(c) Other Payments. With respect to any payments made by the Registrant to an underwriter of or dealer
in the Contracts during the Registrant's last fiscal year, disclose the name and address of the
underwriter or dealer, the amount paid and basis for determining that amount, the circumstances
surrounding the payments, and the consideration received by the Registrant. Do not include
information about:
(1) Payments made through deduction from purchase payments made at the time of sale of the
Contracts; or
(2) Payments made from Contract values upon surrender of or withdrawal from the Contracts
Instructions.
1.
Information need not be given about the service of mailing proxies or periodic reports of the
Registered Separate Account.
Exclude information about bona fide contracts with the Registered Separate Account or the
Insurance Company for outside legal or auditing services, or bona fide contracts for personal
employment entered into with the Registered Separate Account or the Insurance Company in the
ordinary course of business.
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2.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71231
3.
Information need not be given about any service for which total payments of less than
$15,000 were made during each of the Registrant's last three fiscal years.
4.
Information need not be given about payments made under any contract to act as
administrative or servicing agent.
If the payments were made under an arrangement or policy applicable to dealers generally,
5.
describe only the arrangement or policy.
Item 24. Calculation of Performance Data
(a) Money Market Funded Sub-Accounts. Yield quotation(s) included in the prospectus for an account or
sub-account of a Registered Separate Account that holds itself out as a "money market" account or
sub-account should be calculated according to paragraphs (a)(1) - (2).
(1) Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet of the
Registered Separate Account included in the registration statement, calculate the yield by
determining the net change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a balance of one accumulation
unit of the account or sub-account at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from Contracts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return, and then multiplying
the base period return by (365/7) with the resulting yield figure carried to at least the nearest
hundredth of one percent.
(2) Effective Yield Quotation. Based on the 7 days ended on the date of the most recent balance
sheet of the Registered Separate Account included in the registration statement, calculate the
effective yield, carried to at least the nearest hundredth of one percent, by determining the net
change, exclusive of capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one accumulation unit of the account or
sub-account at the beginning of the period, subtracting a hypothetical charge reflecting
deductions from Contracts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then compounding the base
period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula:
EFFECTIVE YIELD= [(BASE PERIOD RETURN +1)365/7]-1.
1.
When calculating the yield or effective yield quotations, the calculation of net change in account
value must include all deductions that are charged to all Contracts in proportion to the length of
the base period. For any account fees that vary with the size of the account, assume an account
size equal to the sub-account's mean (or median) account size.
2.
Deductions from purchase payments and sales loads assessed at the time of redemption or
annuitization should not be reflected in the computation of yield and effective yield. However, the
amount or specific rate of such deductions must be disclosed.
3.
Exclude realized gains and losses from the sale of securities and unrealized appreciation and
depreciation from the calculation of yield and effective yield. Exclude income other than
investment income.
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4.
If applicable, disclose that the performance information may not reflect all Contract charges
(contracts may impose certain charges that are not reflected in the performance of the subaccount, but reduce the value of an investment in the sub-account, such as optional benefit
charges). Performance would be lower if these charges were included.
(b) Other Sub-Accounts. Performance information included in the prospectus for the Registered
Separate Account should be calculated according to paragraphs (b)(i) - (iii).
(1) Average Annual Total Return Quotation. For the 1-, 5-, and 10-year periods ended on the date of
the most recent balance sheet of the Registered Separate Account included in the registration
statement, calculate the average annual total return by finding the average annual compounded
rates of return over the 1-, 5-, and 10-year periods that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where:
p
=
a hypothetical initial purchase payment of $1,000
T
=
average annual total return
n
=
number of years
ERV =
ending redeemable value of a hypothetical $1,000 purchase payment made
at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10year periods (or fractional portion).
1.
Assume the maximum sales load (or other charges deducted from purchase payments) is
deducted from the initial $1,000 purchase payment.
2.
Include all recurring fees that are charged to all Contracts. For any account fees that vary with
the size of the account, assume an account size equal to the sub-account's mean (or median)
account size. If recurring fees charged to Contracts are paid other than by redemption of
accumulation units, they should be appropriately reflected.
3.
Determine the ending redeemable value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods and the deduction of all nonrecurring charges deducted at the
end of each period.
4.
If the Registered Separate Account's registration statement has been in effect less than one,
five, or ten years, the time period during which the registration statement has been in effect
should be substituted for the period stated.
5.
Carry the total return quotation to the nearest hundredth of one percent.
6.
Total return information in the prospectus need only be current to the end of the Registered
Separate Account's most recent fiscal year.
7.
If applicable, disclose that the performance information may not reflect all Contract charges
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Instructions:
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71233
and provide one or more examples of such charges (contracts may impose certain charges
that are not reflected in the performance of the sub-account, but reduce the value of an
investment in the sub-account, such as optional benefit charges). State that performance
would be lower if these charges were included.
(2) Yield Quotation. Based on a 30-day (or one month) period ended on the date of the most recent
balance sheet of the Registered Separate Account included in the registration statement,
calculate yield by dividing the net investment income per accumulation unit earned during the
period by the maximum offering price per unit on the last day of the period, according to the
following formula:
YIELD = 2[t-b
cd
+ 1) 6 -
1]
Where:
a = net investment income earned during the period by the Portfolio Company attributable
to shares owned by the sub-account
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units outstanding during the period
d = the maximum offering price per accumulation unit on the last day of the period.
Instructions:
1. Include among the expenses accrued for the period all recurring fees that are charged to all
Contracts. For any account fees that vary with the size of the account, assume an account size
equal to the sub-account's mean (or median) account size.
2. If a broker-dealer or an affiliate (as defined in paragraph (b) of rule 1-02 of Regulation S-X [17
CFR 210.1-02(b)]) of the broker-dealer has, in connection with directing the Portfolio
Company's brokerage transactions to the broker-dealer, provided, agreed to provide, paid for,
or agreed to pay for, in whole or in part, services provided to the Portfolio Company (other than
brokerage and research services as these terms are defined in section 28(e) of the Securities
Exchange Act [15 U.S.C. 78bb(e)]), add to expenses accrued for the period an estimate of
additional amounts that would have been accrued for the period if the Portfolio Company had
paid for the services directly in an arms-length transaction.
3. Net investment income must be calculated by the Portfolio Company as prescribed by Item
26(b)(4) of Form N-1A.
NOTE: (a-b) = net investment income in the Item 26(b)(4) equation.
5. If applicable, disclose that the performance information may not reflect all Contract charges
(contracts may impose certain charges that are not reflected in the performance of the subaccount, but reduce the value of an investment in the sub-account, such as optional benefit
charges). State that performance would be lower if these charges were included.
(3) Non-Standardized Performance Quotation. A Registered Separate Account may calculate
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4. Disclose the amount or specific rate of any nonrecurring account or sales charges.
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performance using any other historical measure of performance (not subject to any prescribed
method of computation) if the measurement reflects all elements of return.
Item 25. Annuity Payments
Describe the method for determining the amount of annuity payments if not described in the prospectus.
In addition, describe how any change in the amount of a payment after the first payment is determined.
Item 26. Financial Statements
(a) Registered Separate Account. Provide financial statements of the Registered Separate Account.
Instructions. Include, in a separate section, the financial statements and schedules required by
Regulation S-X [17 CFR 210]. Financial statements of the Registered Separate Account may be limited
to:
(i)
An audited balance sheet or statement of assets and liabilities as of the end of the most recent
fiscal year;
(ii) An audited statement of operations of the most recent fiscal year conforming to the requirements
of rule 6-07 of Regulation S-X [17 CFR 210.6-07];
(iii) An audited statement of cash flows for the most recent fiscal year if necessary to comply with
generally accepted accounting principles; and
(iv) Audited statements of changes in net assets conforming to the requirements of rule 6-09 of
Regulation S-X [17 CFR 210.6-09] for the two most recent fiscal years.
(b) Insurance Company. Provide financial statements of the Insurance Company.
Instructions:
2. All statements and schedules of the Insurance Company required by Regulation S-X, except for
the consolidated balance sheets described in rule 3-01 of Regulation S-X [17 CFR 210.3-01],
and any notes to these statements or schedules, may be omitted from Part Band instead
included in Part C of the registration statement. If any of this information is omitted from Part B
and included in Part C, the consolidated balance sheets included in Part B should be
accompanied by a statement that additional financial information about the Insurance
Company is available, without charge, upon request. When a request for the additional
financial information is received, the Registrant should send the information within 3 business
days of receipt of the request, by first-class mail or other means designed to ensure equally
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1. Include, in a separate section, the financial statements and schedules of the Insurance
Company required by Regulation S-X. If the Insurance Company would not have to prepare
financial statements in accordance with generally accepted accounting principles except for
use in this registration statement or other registration statements filed on Forms N-3, N-4, or
N-6, its financial statements may be prepared in accordance with statutory requirements. The
Insurance Company's financial statements must be prepared in accordance with generally
accepted accounting principles if the Insurance Company prepares financial information in
accordance with generally accepted accounting principles for use by the Insurance Company's
parent, as defined in rule 1-02(p) of Regulation S-X [17 CFR 210.1-02(p)], in any report under
sections 13(a) and 15(d) of the Securities Exchange Act [15 U.S.C. 78m(a) and 78o(d)] or any
registration statement filed under the Securities Act.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71235
prompt delivery.
1. Notwithstanding rule 3-12 of Regulation S-X [17 CFR 210.3-12], the financial statements of the
Insurance Company need not be more current than as of the end of the most recent fiscal year
of the Insurance Company. In addition, when the anticipated effective date of a registration
statement falls within 90 days subsequent to the end of the fiscal year of the Insurance
Company, the registration statement need not include financial statements of the Insurance
Company more current than as of the end of the third fiscal quarter of the most recently
completed fiscal year of the Insurance Company unless the audited financial statements for
such fiscal year are available. The exceptions to rule 3-12 of Regulation S-X contained in this
Instruction 3 do not apply when:
(a) The Insurance Company's financial statements have never been included in an effective
registration statement under the Securities Act of a separate account that offers variable
annuity contracts or variable life insurance contracts; or
(b) The balance sheet of the Insurance Company at the end of either of the two most recent
fiscal years included in response to this Item shows a combined capital and surplus, if a
stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000;
or
(c) The balance sheet of the Insurance Company at the end of a fiscal quarter within 135 days
of the expected date of effectiveness under the Securities Act (or a fiscal quarter within 90
days of filing if the registration statement is filed solely under the Investment Company Act)
would show a combined capital surplus, if a stock company, or an unassigned surplus, if a
mutual company, of less than $2,500,000. If two fiscal quarters end within the 135 day
period, the Insurance Company may choose either for purposes of this test.
Any interim financial statements required by this Item need not be comparative with financial statements
for the same interim period of an earlier year.
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(c) Changes in and Disagreements with Accountants. For Contracts with Index-Linked Options, include
the information required by Item 304 of Regulation S-K [17 CFR 229.304].
71236
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
PART C- OTHER INFORMATION
Item 27. Exhibits
Subject to General Instruction D regarding incorporation by reference and rule 483 under the Securities
Act [17 CFR 230.483], file the exhibits listed below as part of the registration statement. Letter or
number the exhibits in the sequence indicated and file copies rather than originals, unless otherwise
required by rule 483. Reflect any exhibit incorporated by reference in the list below and identify the
previously filed document containing the incorporated material.
(a) Board of Directors Resolution. The resolution of the board of directors of the Insurance Company
authorizing the establishment of the Registered Separate Account.
(b) Custodian Agreements. All agreements for custody of securities and similar investments of the
Registered Separate Account, including the schedule of remuneration.
(c) Underwriting Contracts. Underwriting or distribution contracts between the Registered Separate
Account or Insurance Company and a principal underwriter and agreements between principal
underwriters or the Insurance Company and dealers.
(d) Contracts. The form of each Contract, including any riders or endorsements.
(e) Applications. The form of application used with any Contract provided in response to (d) above.
(f) Insurance Company's Certificate of Incorporation and By-Laws. The Insurance Company's current
certificate of incorporation or other instrument of organization and by-laws and any related
amendment.
(g) Reinsurance Contracts. Any contract of reinsurance related to a Contract.
(h) Participation Agreements. Any participation agreement or other contract relating to the investment by
the Registered Separate Account in a Portfolio Company.
(i) Administrative Contracts. Any contract relating to the performance of administrative services in
connection with administering a Contract.
U) Other Material Contracts. Other material contracts not made in the ordinary course of business to be
performed in whole or in part on or after the filing date of the registration statement.
(k) Legal Opinion. An opinion and consent of counsel regarding the legality of the securities being
registered, stating whether the securities will, when sold, be legally issued and represent binding
obligations of the Insurance Company.
(I) Other Opinions. Copies of any other opinions, appraisals, or rulings, and consents of their use relied
on in preparing this registration statement and required by section 7 of the Securities Act [15 U.S.C.
77g].
(n) Initial Gapital Agreements. Any agreements or understandings made in consideration for providing
the initial capital between or among the Registered Separate Account, Insurance Company,
underwriter, or initial investors and written assurances from the Insurance Company or initial
investors that purchases were made for investment purposes and not with the intention of redeeming
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(m)Omitted Financial Statements. Financial statements omitted from Item 26.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71237
or reselling.
(o) Form of Initial Summary Prospectuses. The form of any Initial Summary Prospectus that the
Registrant intends to use on or after the effective date of the registration statement, pursuant to rule
498A under the Securities Act [17 CFR 230.498A].
(p) Power of attorney. Any power of attorney included pursuant to rule 483(b) under the Securities Act
[17 CFR 230.483(b)].
(q) Letter Regarding Change in Certifying Accountant. For Contracts with Index-Linked Options, a letter
from the Insurance Company's former independent accountant regarding its concurrence or
disagreement with the statements made by the Insurance Company in the registration statement
concerning the resignation or dismissal as the Insurance Company's principal accountant.
Instructions.
1. Schedules (or similar attachments) to the exhibits required by this Item are not required to be
filed provided that they do not contain information material to an investment or voting decision
and that information is not otherwise disclosed in the exhibit or the disclosure document. Each
exhibit filed must contain a list briefly identifying the contents of all omitted schedules.
Registrants need not prepare a separate list of omitted information if such information is
already included within the exhibit in a manner that conveys the subject matter of the omitted
schedules and attachments. In addition, the Registrant must provide a copy of any omitted
schedule to the Commission or its staff upon request.
3. The Registrant may redact specific provisions or terms of exhibits required to be filed by
paragraphs (g) and U) of this Item if the Registrant customarily and actually treats that
information as private or confidential and if the omitted information is not material. If it does
so, the Registrant should mark the exhibit index to indicate that portions of the exhibit or
exhibits have been omitted and include a prominent statement on the first page of the
redacted exhibit that certain identified information has been excluded from the exhibit
because it is both not material and the type that the Registrant treats as private or
confidential. The Registrant also must include brackets indicating where the information is
omitted from the filed version of the exhibit. If requested by the Commission or its staff, the
Registrant must promptly provide on a supplemental basis an unredacted copy of the exhibit
and its materiality and privacy or confidentiality analyses. Upon evaluation of the Registrant's
supplemental materials, the Commission or its staff may require the Registrant to amend its
filing to include in the exhibit any previously redacted information that is not adequately
supported by the Registrant's analyses. The Registrant may request confidential treatment of
the supplemental material submitted under this Instruction 3 pursuant to Rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the possession of the
Commission or its staff. After completing its review of the supplemental information, the
Commission or its staff will return or destroy it, if the Registrant complies with the procedures
outlined in Rule 418 under the Securities Act [17 CFR 230.418].
4. Each exhibit identified in the exhibit index (other than an exhibit filed in extensible Business
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2. The Registrant may redact information from exhibits required to be filed by this Item if
disclosure of such information would constitute a clearly unwarranted invasion of personal
privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses
and similar information).
71238
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Reporting Language) must include an active link to an exhibit that is filed with the registration
statement or, if the exhibit is incorporated by reference, an active hyperlink to the exhibit
separately filed on EDGAR. If the registration statement is amended, each amendment must
include active hyperlinks to the exhibits required with the amendment.
5. Registrants are required to provide the Initial Summary Prospectus exhibits, as required by
paragraph (o) of this Item, only in connection with the filing of an initial registration statement,
or in connection with a pre-effective amendment or a post-effective amendment filed in
accordance with paragraph (a) of rule 485 under the Securities Act [17 CFR 230.485(a)].
Registrants should add a legend clearly identifying the document as a form of Initial Summary
Prospectus the Registrant intends to use on or after the effective date of the registration
statement.
Item 28. Directors and Officers of the Insurance Company
Provide the following information about each director or officer of the Insurance Company:
(1)
(2)
Name and Principal Business Address
Positions and Offices with Insurance Company
Instruction. Registrants are required to provide the above information only for officers or directors who are
engaged directly or indirectly in activities relating to the Registered Separate Account or the Contracts, and
for executive officers including the Insurance Company's president, secretary, treasurer, and vice
presidents who have authority to act as president in the president's absence.
Item 29. Persons Controlled by or Under Common Control with the Insurance Company or the Registered
Separate Account
Provide a list or diagram of all persons directly or indirectly controlled by or under common control with
the Insurance Company or the Registered Separate Account. For any person controlled by another
person, disclose the percentage of voting securities owned by the immediately controlling person or
other basis of that person's control. For each company, also provide the state or other sovereign power
under the laws of which the company is organized.
Instructions:
1. Include the Registered Separate Account and the Insurance Company in the list or diagram and
show the relationship of each company to the Registered Separate Account and Insurance
Company and to the other companies named, using cross-references if a company is controlled
through direct ownership of its securities by two or more persons.
Item 30. Indemnification
State the general effect of any contract, arrangements, or statute under which any underwriter or
affiliated person of the Registrant is insured or indemnified against any liability incurred in his or her
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2. Indicate with appropriate symbols subsidiaries that file separate financial statements,
subsidiaries included in consolidated financial statements, or unconsolidated subsidiaries
included in group financial statements. Indicate for other subsidiaries why financial statements
are not filed.
71239
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
official capacity, other than insurance provided by any underwriter or affiliated person for his or her own
protection.
Item 31. Principal Underwriters
(a) Other Activity. State the name of each investment company (other than the Registered Separate
Account) for which each principal underwriter currently distributing the Registrant's securities also
acts as a principal underwriter, Insurance Company, sponsor, or investment adviser.
(b) Management. Provide the information required by the following table for each director, officer, or
partner of each principal underwriter named in the response to Item 23:
(1)
(2)
Name and Principal Business Address
Positions and Offices with Underwriter
Instruction. If a principal underwriter is the Insurance Company or an affiliate of the Insurance Company,
and is also an insurance company, the above information for officers or directors need only be provided
for officers or directors who are engaged directly or indirectly in activities relating to the Registered
Separate Account or the Contracts, and for executive officers including the Insurance Company's or its
affiliate's president, secretary, treasurer, and vice presidents who have authority to act as president in
the president's absence.
(c) Compensation From the Registrant. Provide the information required by the following table for all
commissions and other compensation received, directly or indirectly, from the Registrant during the
Registrant's last fiscal year by each principal underwriter:
(1)
(2)
(3)
(4)
(5)
Name of
Principal
Underwriter
Net Underwriting
Discounts
Compensation on
Redemption
Brokerage
Commission
Other
Compensation
Instructions:
1. Disclose the type of services rendered in consideration for the compensation listed under column
(5).
2. Information need not be given about the service of mailing proxies or periodic reports of the
Registered Separate Account.
4. Exclude information about any service for which total payments of less than $15,000 were made
during each of the Registrant's last three fiscal years.
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3. Exclude information about bona fide contracts with the Registered Separate Account or the
Insurance Company for outside legal or auditing services, or bona fide contracts for personal
employment entered into with the Registered Separate Account or the Insurance Company in the
ordinary course of business.
71240
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
5. Exclude information about payments made under any agreement whereby another person
contracts with the Registered Separate Account or the Insurance Company to perform as
custodian or administrative or servicing agent.
Item 31A. Information about Contracts with Index-Linked Options
For any Contract with Index-Linked Options offered through this registration statement, provide the
information required by the following table as of December 31 of the prior year:
Name of the
Contract
Number of
Contracts
outstanding
Total value
attributable to
the IndexLinked Option
Number of
Contracts
sold during
the prior
calendar
vear
Gross
premiums
received
during the
prior calendar
vear
Amount of
Contract value
redeemed
during the
prior calendar
vear
Combination
Contract
(Yes/No)
Instructions:
1. In the case of group Contracts, each participant certificate should be counted as an individual
Contract.
2. "Total value attributable to the Index-Linked Option" means the sum of the Contract value in the
Index-Linked Options of each individual Contract. For "Combination Contracts," which for
purposes of this Item are Contracts that offer Variable Options in addition to Index-Linked
Options, exclude amounts allocated to the Registered Separate Account.
Item 32. Location of Accounts and Records
State the name and address of each person maintaining physical possession of each account, book, or
other document, required to be maintained by the Registered Separate Account pursuant to section
31(a) of the Investment Company Act [15 U.S.C. 80a-30(a)] and the rules under that section.
Instruction. The Registered Separate Account may omit this information to the extent it is provided in its
most recent report on Form N-CEN [17 CFR 274.101].
Item 33. Management Services
Provide a summary of the substantive provisions of any management-related service contract not
discussed in Part A or Part B, disclosing the parties to the contract and the total amount paid and by
whom for the Registrant's last three fiscal years.
Instructions:
1. The instructions to Item 21(b) shall also apply to this Item.
2. Exclude information about any service provided for payments totaling less than $15,000 during
each of the Registrant's last three fiscal years.
(a) With regard to Variable Options, provide a representation of the Insurance Company that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the Insurance Company.
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Item 34. Fee Representation and Undertakings
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71241
(b) With regard to Index-Linked Options, furnish the following undertakings in substantially the following
form:
1. To file, during any period in which offers or sales are being made, a post-effective amendment to
the registration statement to include any prospectus required by section 10(a)(3) of the Securities
Act; and
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2. That, for the purpose of determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide
offering thereof.
71242
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant (certifies that it meets all of the requirements for effectiveness of this registration
statement under rule 485(b) under the Securities Act and) has duly caused this registration statement
to be signed on its behalf by the undersigned, duly authorized, in the City of_ _ __, and State of
_ _ _ _ _ _ _ _ _ , on this _ _ _ _ _day of_ _ _ _ _ _ _ _ _ __
(Registered Separate Account)
By------------------(Signature)
(Title)
(Insurance Company)
By------------------(Name of Officer of Insurance Company)
(Title)
Instruction:
If the registration statement is being filed only under the Securities Act or under both the Securities
Act and the Investment Company Act, it should be signed by both the Registered Separate Account
and the Insurance Company, if applicable. If the registration statement is being filed only under the
Investment Company Act, it should be signed only by the Registered Separate Account.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
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Title
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Signature
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71243
Appendix B---Form N-6
Form N-6
*
*
*
*
*
Item 30. Exhibits
*
*
*
*
*
Instructions.
*
*
*
3. The Registrant may redact specific provisions or terms of exhibits required to be filed by
paragraphs (g) and G) of this Item if the Registrant customarily and actually treats that information as
private. If it does so, the Registrant should mark the exhibit index to indicate that portions of the
exhibit have been omitted and include a prominent statement on the first page of the redacted exhibit
that certain identified information has been excluded from the exhibit because it is both not material
and the type that the Registrant treats as private or confidential. The Registrant also must include
brackets indicating where the information is omitted from the filed version of the exhibit.
If requested by the Commission or its staff, the Registrant must promptly provide on a
supplemental basis an unredacted copy of the exhibit and its materiality and privacy or confidentiality
analyses. Upon evaluation of the Registrant's supplemental materials, the Commission or its staff may
require the Registrant to amend its filing to include in the exhibit any previously redacted information
that is not adequately supported by the Registrant's analyses. The Registrant may request confidential
treatment of the supplemental material submitted under this Instruction 3 pursuant to rule 83 of the
Commission's Organizational Rules [17 CFR 200.83] while it is in the possession of the Commission
or its staff. After completing its review of the supplemental information, the Commission or its staff
Securities Act [17 CFR 230.418].
*
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*
*
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will return or destroy it, if the Registrant complies with the procedures outlined in rule 418 under the
71244
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Appendix C-Form 24F-2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2 under the
Investment Company Act of
1940 or Rule 456(e) under the
Securities Act of 1933
Read Instructions at end of this Form before preparing.
1.
Name and address of issuer:
2.
The name and EDGAR identifier of each series or class of securities for which this Form is filed.
If the Form is being filed for all series and classes of securities of the issuer, check the box but do not list series
or classes:
□
3.
Investment Company Act File Number:
Securities Act File Number:
4(a). Last day of fiscal year for which this Form is filed:
4(b ). □ Check box if this Form is being filed late (i.e., more than 90 calendar days after the end of the
issuer's fiscal year). (See Instruction A.2)
Note: If the Form is being filed late, interest must be paid on the registration fee due.
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4( c). Och eek box if this is the last time the issuer will be filing this Form.
71245
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
5.
Calculation of registration fee (if calculating on a class-by-class or series-by-series basis, provide the EDGAR
identifier for each such class or series):
(i)
Aggregate sale price of securities sold during the
fiscal year pursuant to section 24(f) or rule 456(e):
$----
(ii) Aggregate price of securities redeemed or
repurchased during the fiscal year:
$_ _ _ _
(iii) Aggregate price of securities redeemed or
repurchased during any prior fiscal year
ending no earlier than the date the issuer
became eligible to use this form that were
not previously used to reduce registration
fees payable to the Commission:
$_ _ _ _
-$ _ _ __
(iv) Total available redemption credits [add Items 5(ii) and 5(iii)]:
(v) Net sales -- if Item 5(i) is greater than Item 5(iv)
[subtract Item 5(iv) from Item 5(i)]:
$ _____ I
(vi) Redemption credits available for use in future years
- if Item 5(i) is less than Item 5(iv)
[subtract Item 5(iv) from Item 5(i)]:
$(
x _ _ _ __
(vii) Multiplier for determining registration fee (See
. Instruction C.9):
(viii) Registration fee due [multiply Item 5(v) by Item
. 5(vii)] (enter "O" if no fee is due):
6.
=$
-----
Interest due - if this Form is being filed more than 90 days after the end of the issuer's fiscal
year (see Instruction D):
+$_ _ _ __
7.
Total of the amount of the registration fee due plus any interest due [line 5(viii) plus line 6]:
=$ _ __
VerDate Sep<11>2014
Explanatory Notes (if any): The issuer may provide any information it believes would be helpful in
understanding the information reported in response to any item of this Form. To the extent responses relate
to a particular item, provide the item number(s), as applicable.
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8.
71246
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
SIGNATURES
This report has been signed below by the following persons on behalf of the issuer and in the
capacities and on the dates indicated.
By (Signature and Title)*_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
Date
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*Please print the name and title of the signing officer below the
signature.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71247
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 24F-2
Annual Notice of Securities Sold
Pursuant to Rule 24f-2 under
the Investment Company Act of 1940 or
Rule 456(e) under the Securities Act of 1933
INSTRUCTIONS
A. General
1. This Form should be used by an open-end management investment company, closed-end management
company that makes periodic repurchase offers pursuant to§ 270.23c-3(b) of this chapter (an 'interval fund"), face
amount certificate company, or unit investment trust for annual filings required by rule 24f-2 under the Investment
Company Act of 1940 [15 U.S.C. 80a] ('Investment Company Act") or an issuer that offers registered index-linked
annuity securities for annual filings required by rule 456 under the Securities Act of 1933 [15 U.S.C. 77a-aa]
("Securities Act") (each an "issuer''). If the issuer has registered more than one class or series of securities that are
required to be reported on this form on the same registration statement under the Securities Act, the issuer may file
a single Form 24F-2 for those classes or series that have the same fiscal year end. Such an issuer may calculate its
fees based on aggregate net sales of the series having the same fiscal year end. An issuer choosing to calculate
registration fees on a class-by-class or series-by-series basis should make a single filing consisting of a separate
Form 24F-2 for each class or series in a single EDGAR document.
2. This Form must be filed within 90 calendar days after the end of the issuer's fiscal year or, if the last day of the
90 day period falls on Saturday, Sunday or a Federal holiday, the first business day thereafter. For example, a Form
24F-2 for a fiscal year ending on June 30 must be filed no later than September 28. If September28 falls on a Saturday
or Sunday, the Form must be filed on the following Monday. In these instructions, we refer to this as the "Due Date."
3. Pursuant to rule 101(a)(1)(iv) of Regulation S-T [17 CFR 232.101(a)(1)(iv)] this Form must be submitted in
electronic format using the Commission's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system.
4. This Form must be accompanied by the appropriate registration fee. If the Form is being filed late, interest must
be paid. See Instruction D.
5. This Form will be deemed filed with the Commission on the date on which it is received and accepted by the
Commission. The Commission will not accept for filing any Form accompanied by insufficient payment of the
registration fee. A Form accompanied by insufficient payment of the registration fee will not be deemed accepted
and filed until receipt by the Commission of proper payment of the registration fee. No part of the registration fee is
refundable. Issuers should refer to rule 111 of the Securities Act [17 CFR 230.111], rule 0-8 under the Investment
Company Act [17 CFR 270.0-8], rule 3a of the Commission's Rules of Informal and other Procedures [17 CFR
202.3a], and rule 13(c) under Regulation S-T [17 CFR 232.13(c)] for instructions on payment of fees to the
Commission.
B. Identifying Information
1. Item 1 - Provide the name of the issuer as it appears on the cover of the issuer's most recent Securities Act
registration statement or post-effective amendment.
3. Item 3 - If applicable, the Investment Company Act file number should be the number assigned to the issuer's
registration statement filed under the Investment Company Act (beginning with "811-"). The Securities Act file
number is the number of the issuer's most recent Securities Act registration statement (beginning with "2-", "33-" or
"333-") relating to the securities being reported (e.g., issuers of registered index-linked annuities should use the most
recent registered index-linked annuity Securities Act registration statement being reported, but not any other
intervening Securities Act registration statements relating to securities not being reported).
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2. Item 2 - If the Form is being filed for all classes and series of securities of the issuer, the issuer should check
the box and not list the names of the classes and series. Issuers of registered index-linked annuities should check
this box if the Form is being filled for all of the issuer's registered index-linked annuity and classes.
71248
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
4.
Item 4(a) - In the case of an issuer that ceases operations, the date it ceases operations is deemed the last day
of its fiscal year for purposes of section 24(f) of the Investment Company Act or rule 456(e) of the Securities Act.
5.
Item 4(b) - Check the box if the Form is filed late. If the issuer files the Form late, the issuer is required under
section 24(f) or rule 456(e) to pay interest on unpaid amounts at the rate applicable to Treasury and tax loan
accounts. See Instruction D.
6.
Item 4(c) - Check the box if this is the last time the issuer will be filing Form 24F-2 (i.e., if the issuer has ceased
operations).
C. Computation of Registration Fee
1. Item 5 is a work sheet for calculating the registration fee due. An issuer must aggregate prices for all classes or
series for which the Form is being filed. If the issuer charges a front-end sales load on its securities, the aggregate
sale price must include the sales load.
2.
Mergers -
(a) In the case of a liquidation, merger, or sale of all or substantially all of the assets of an issuer ("merger''), the
securities of the entity ceasing operation (the "Predecessor'') that are exchanged for or converted into the other issuer
(the "Successor") should be treated as redemptions on the Predecessor's final Form 24F-2 (not the Successor's).
(b) In the case of a merger in which the Predecessor is not deemed to cease operations ( e.g., a reorganization),
the Successor inherits the sales and redemption credits of the Predecessor, and the Successor must report them
as sales and redemptions on its next Form 24F-2 filing. The Predecessor in this type of merger need not file a final
Form 24F-2. See Rule 24f-2(b)(1) and (2) [17 CFR 270.24f-2(b)(1) and (2)] and rule 456(e)(4) [17 CFR
230.456(e)(4)].
3.
Special Rule for Unit Investment Trusts - The aggregate sale price of securities sold to a unit investment trust
("UIT") that offers interests that are registered under the Securities Act and on which a registration fee has been or
will be paid to the Commission, may be excluded from the aggregate sale price of securities reported in Item 5(i). If
the issuer chooses to exclude the aggregate sale price of these securities from Item 5(i), the issuer may not use
securities redeemed or repurchased from those UITs for purposes of determining the redemption or repurchase price
of securities in Items 5(ii) and 5(iii).
4.
Special Rule for Registered Index-Linked Annuities - The aggregate sale price of securities sold during the
fiscal year in reliance upon registration under rule 456(e) shall indude the value of any expiring annuity contract or investment
option that is rolled over into a new crediting period. The value of such contracfs or options should therefore be reported in Item
5(i). In addition, the value of such expiring annuity contract or options should also be reported in Item 5(ii) as a redemption. \/\/here
the contract value of the new and expiring annuity contract is the same, the reported amounts attributable to such contracts in Items
5(i) and 5(ii) would result in a net-zero calculation.
5.
Item 5(i) - Report the aggregate sale price of securities sold during the fiscal year in reliance upon registration
under section 24(f) or rule 456(e ). Include securities issued pursuant to dividend reinvestment plans ("DRIP shares")
whether or not they are required to be registered under the Securities Act. Do not include the sale price of securities,
if any, that were registered under the Securities Act other than pursuant to section 24(f) or rule 456(e), as applicable.
[Example: An interval fund issuer sold 1,000,000 shares, 250,000 of which were registered prior to August 1, 2021.
Item 5(i) should show the aggregate sale price of 750,000 shares.]
6. Item 5(ii) - Report the aggregate redemption or repurchase price of securities redeemed or repurchased during
the fiscal year in reliance upon registration under section 24(f) or rule 456(e). Do not include securities that have been
redeemed or repurchased, if any, other than pursuant to section 24(f) or rule 456(e), as applicable.
7.
Item 5(iii) - Report the aggregate redemption or repurchase price of securities redeemed or repurchased during
any prior fiscal year ending no earlier than the date the issuer became eligible to use this Form (e.g., August 1, 2021
for interval funds, [EFFECTIVE DATE] for issuers of registered index-linked annuity securities, and October 11, 1995
for all other filers on this Form) that were not used previously to reduce registration fees payable to the Commission.
Items 5(iv) through 5(vi) - Report the sum of Items 5(ii) and 5(iii) in Item 5(iv). Subtract Item 5(iv) from Item
5(i). If Item 5(iv) is less than Item 5(i), report the result in Item 5(v) (net sales). If Item 5(iv) is greater than Item 5(i),
report the resulting negative number in parentheses in Item 5(vi) (net redemptions or repurchases). The amount of
redemptions or repurchases reported in Item 5(vi) may be used by the issuer in future years to offset sales (by
including it in response to Item 5(iii) of Form 24F-2 filed for the next fiscal year).
9.
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Item 5(vii) - The registration fee is calculated by multiplying the net sales amount (Item 5(v)) by the fee rate.
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8.
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71249
For the current fee rate, see https://www.sec.gov/ofm/Article/feeamt.html The fee rate in effect at the time of filing
applies to all securities sold during the fiscal year, regardless of whether the fee rate changes during the year.
10. Item 5(viii) - If the issuer reports net redemptions or repurchases in Item 5(vi), report "O" in Item 5(viii).
D. Computation of Interest Due if Form is Filed Late
1.
Item 6 - Section 24(f) and rule 456(e) require any issuer that pays its registration fee after the Due Date (see
Instruction A.2) to pay interest to the Commission on fees that are not paid on time. The payment of interest does
not preclude the Commission from bringing an action to enforce the requirements of section 24(f) or rule 456( e), as
applicable. Under section 11 of the Debt Collection Act [31 U.S.C. 3717(a)], the interest rate is published by the
Secretary of the Treasury. The rate is computed annually and is effective on January 1 each year. In some
circumstances the rate may be changed on a quarterly basis. Filers owing interest should verify the current interest
rate. Filers can find the rate by looking for the "current value of funds rate" on the Treasury Department's internet
site at https://fiscal.treasury.gov/reports-statements/cvfr/rates.html.
2. The interest is assessed only on the amount of the registration fee due, and begins to accrue on the day after
the Due Date. The amount of interest due should be calculated based on the interest rate in effect at the time the
interest payment is made using the following formula:
I = (X) (Y) (Z/365)
where:
I = Amount of interest due
X = Amount of registration fee due
Y = Applicable interest rate, expressed as a fraction
Z = Number of days by which the registration fee payment is late
E. Signature
The Form must be signed on behalf of the issuer by an authorized officer of the issuer. See rule 302 of Regulation ST [17 CFR 232.302] regarding signatures on forms filed electronically.
F. SEC's Collection of Information
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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. Filing of this Form is mandatory. The principal purpose of this collection of
information is to enable issuers to calculate the registration fee payable to the Commission. Any member of the
public may direct to the Commission any comments concerning the accuracy of the burden estimate of this Form, and
any suggestions for reducing this burden. This collection of information has been reviewed by the Office of
Management and Budget in accordance with the clearance requirements of 44 U.S.C. 3507. The responses to the
collection of information will not be kept confidential.
71250
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Appendix D-Retail Investor Feedback Flyer
Tell Us about Your Experiences with Registered Index-Linked Annuities and Other
Annuity Products
We are requesting input from retail investors regarding registered index-linked annuities
(or "RILAs"), a type of annuity contract offered by insurance companies. In a RILA, the
investor's gains or losses are based on whether a selected index goes up or down over a set
period of time, such as three years. These annuities also have what is called a "bounded return
structure," meaning that they will usually limit your losses when the index goes down, but at the
cost oflimiting your gains when the index goes up. We encourage interested persons to provide
comments on any or all of the following questions. Please provide your comments on or before
[INSERT DATE 30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL
REGISTER OR November 28, 2023, WHICHEVER IS LATER] - and thank you for your
feedback!
Part 1: Have you purchased or considered purchasing any kind of annuity, including a
RILA? lfso:
1. What were your reasons for either purchasing or not purchasing the annuity?
Text box
a. What features of the annuity appealed to you?
b. What were your investment goals?
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Text box
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71251
Text box
c. What alternatives did you consider to the annuity, if any?
Text box
2. Where did you learn about the annuity? Did someone recommend it to you?
Text box
3. What kind of annuity did you consider purchasing?
Yes
No
Fixed annuity
[ ]
[ ]
Variable annuity
[ ]
[ ]
RILA
[ ]
[ ]
Other type of annuity
(please specify)
[ ]
[ ]
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4. What kind of annuity did you end up purchasing?
71252
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Fixed annuity
[ ]
[ ]
Variable annuity
[ ]
[ ]
RILA
[ ]
[ ]
Other type of annuity
(please specify)
[ ]
[ ]
5. What documents or other materials did you use when considering the purchase?
Text box
a. Did you find those documents or materials easy or challenging to
understand?
I
Text box
b. Which documents did you find to be more confusing?
I
Text box
c. Were the documents or materials at a reading level comfortable for you?
Yes
No
[ ]
[ ]
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Text box (please add any explanatory detail)
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
71253
d. Were those documents or materials helpful?
Yes
No
[ ]
[ ]
Text box (please add any explanatory detail)
e. What, if any, other information do you wish had been available?
Text box
f.
If the annuity was a RILA, how well do you think that the documents you
received explained the RILA' s features?
Text box
g. If the annuity was a RILA, do you think, based on the documents you
VerDate Sep<11>2014
Yes
No
[ ]
[ ]
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received, you could explain all of the RILA' s features?
71254
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Proposed Rules
Text box (please add any explanatory detail)
Part 2: Have you purchased a RILA? A RILA is a type of annuity contract where the
investor's gains or losses are based on whether a selected index goes up or down over a
set period of time subiect to a bounded return structure. lfso:
6. Please describe your experience investing in the RILA.
a. Has your experience with the RILA been consistent with your
expectations for the RILA, based on any materials you read (or
information that a financial professional told you) before purchasing the
RILA? For example, if you purchased the RILA based on the expectation
that it was a long-term investment and would allow you to participate to a
degree in positive market performance while providing some protection
against loss, was that your experience? Conversely, did you find that you
ended up having to withdraw money early and lose some of the benefits
you had anticipated?
Yes
No
[ ]
[ ]
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b. If you have withdrawn money from the RILA, did you pay fees or
penalties?
Yes
No
[ ]
[ ]
Text box (please add any explanatory detail)
c. Were you aware when you purchased the RlLA that withdrawals would be
subject to such fees or penalties?
Yes
No
[ ]
[ ]
Text box (please add any explanatory detail)
Part 3: When you make investment decisions, what type ofinformation do you want?
7. When you select investments, what information sources do you most commonly
VerDate Sep<11>2014
Yes
No
Prospectus
[ ]
[ ]
Annual shareholder report
[ ]
[ ]
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Website of the investment product
[ ]
[ ]
Other information source (please explain below)
[ ]
[ ]
Text box (please add any explanatory detail, including any other information
source not mentioned above)
8. Do you prefer to rely on a recommendation from a financial professional?
Yes
No
[ ]
[ ]
a. If you rely on a financial professional, do you also separately research the
recommended investment?
Yes
No
[ ]
[ ]
9. Do you prefer to receive short summary documents (with more detailed disclosures
Yes
No
[ ]
[ ]
a. If you answered "yes":
What do you consider an appropriate length for a summary?
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1-2 pages
[ ]
3-5 pages
[ ]
6-10 pages
[ ]
More than 10 pages
[ ]
71257
What topics do you want the summary to include? For example, should the
summary explain the investment being offered, any fees being charged,
ways that you may not get the returns described, or the risks of the
investment?
Textbox
If an investment product offers different features you can select (such as
the type of index it tracks or the time in which the investment lasts), how
would you like to see the summary organized? For example:
A summary based on the decisions you will have to make
when selecting among available features, and the
implications of selecting various features?
A summary of each feature of the investment product, to
allow the reader to identify important information for a
particular decision?
Yes
[ ]
No
[ ]
[ ]
[ ]
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b. Please share any reasons you may prefer to receive a longer, more detailed
disclosure document instead of a summary.
Textbox
Part 4: Is there anything else you want to tell us about RILA.s?
Text box
**
Ways to Submit Your Feedback
You can send us feedback in the following ways (include the file number S7-16-23 in your
response):
Print Your Responses and Mail
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, De 20549-1090
Select a PDF printer to create a file you can email to: rule-comments@sec.gov
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Print Your Responses and Email
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Do not include personal identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in part or withhold entirely
from publication submitted material that is obscene or subject to copyright protection.
If you are interested in more information on the proposal, or want to provide feedback on
additional questions, please see the Commission's proposing release, available at
https://www.sec.gov/files/rules/proposed/2022/33-11250.pdf. Comments should be received on
or before [INSERT DATE 30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL
REGISTER OR November 28, 2023, WHICHEVER IS LATER].
Thank you!
[FR Doc. 2023–21986 Filed 10–12–23; 8:45 am]
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BILLING CODE 8011–01–C
]]>Agencies
[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Proposed Rules]
[Pages 71088-71259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21986]
[[Page 71087]]
Vol. 88
Friday,
No. 197
October 13, 2023
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 230, 232, 239, and 274
Registration for Index-Linked Annuities; Amendments to Form N-4 for
Index-Linked and Variable Annuities; Proposed Rule
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 /
Proposed Rules
[[Page 71088]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, and 274
[Release No. 33-11250; 34-98624; IC-35028; File No. S7-16-23]
RIN 3235-AN30
Registration for Index-Linked Annuities; Amendments to Form N-4
for Index-Linked and Variable Annuities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rule and form amendments to provide a tailored form to
register the offerings of registered index-linked annuities
(``RILAs''). Specifically, the Commission is proposing to amend the
form currently used by most variable annuity separate accounts, Form N-
4, to require issuers of RILAs to register offerings on that form as
well. To facilitate this amendment, the Commission is also proposing to
amend certain filing rules and make other related amendments. These
changes would, if adopted, implement the requirements relating to RILAs
contained in Division AA, Title I of the Consolidated Appropriations
Act, 2023. Further, the Commission is proposing other amendments to
Form N-4 that would apply to all issuers that would use that form under
the proposal. The Commission is also proposing to apply to RILA
advertisements and sales literature a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws. The Commission is proposing a
technical amendment to Form N-6 to correct an error from a prior
Commission rulemaking. Finally, the Commission requests comment as to
whether to require the registration of market-value adjustments
associated with certain annuities on Form N-4 as well.
DATES: Comments should be submitted on or before November 28, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/2023/09/rila); or
Send an email to [email protected]. Please include
File Number S7-16-23 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-16-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/2023/09/rila). Comments are also available for website viewing and printing
in the Commission's Public Reference Room, 100 F Street NE, Washington,
DC 20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's public
reference room. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. Retail investors seeking to comment on their experiences
with annuities generally and RILAs in particular may want to submit a
short Feedback Flyer, available at Appendix D.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (https://www.sec.gov/rules/2023/09/rila).
FOR FURTHER INFORMATION CONTACT: Christian Corkery, Michael Khalil,
Rachael Hoffman, James Maclean, Amy Miller, or Laura Harper Powell,
Senior Counsels; Bradley Gude, Branch Chief; Amanda Hollander Wagner,
Senior Special Counsel; or Brian McLaughlin Johnson, Assistant
Director, Investment Company Regulation Office, at (202) 551-6792;
Elisabeth Bentzinger or Min Oh, Senior Counsels; Michael Kosoff, Senior
Special Counsel, Disclosure Review and Accounting Office, at (202) 551-
6921, Division of Investment Management, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the following rules and forms:
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\1\ 15 U.S.C. 77a et seq.
----------------------------------------------------------------------------------------------------------------
Commission reference CFR citation (17 CFR)
----------------------------------------------------------------------------------------------------------------
Securities Act of 1933 (``Securities Act''): \1\
Rule 156.............................................. Sec. 230.156
Rule 172.............................................. Sec. 230.172
Rule 405.............................................. Sec. 230.405
Rule 415.............................................. Sec. 230.415
Rule 424.............................................. Sec. 230.424
Rule 456.............................................. Sec. 230.456
Rule 457.............................................. Sec. 230.457
Rule 485.............................................. Sec. 230.485
Rule 497.............................................. Sec. 230.497
Rule 498A............................................. Sec. 230.498A
Regulation S-T:
Rule 313 of Regulation S-T............................ Sec. 232.313
Rule 405 of Regulation S-T............................ Sec. 232.405
Forms:
Form N-4.............................................. Sec. 239.17b and 274.11c
Form N-6.............................................. Sec. 239.17c and 274.11d
[[Page 71089]]
Form 24F-2............................................ Sec. 239.66 and Sec. 274.24
----------------------------------------------------------------------------------------------------------------
Table of Contents
I. Introduction and Background
A. Typical RILA Features
B. Current Registration Process
C. Evidence of Investor Views and Areas of Potential Confusion
D. Overview of Proposal
II. Discussion
A. Use of Form N-4
B. Contents of Form N-4
1. Front and Back Cover Pages (Item 1)
2. Key Information Table (Item 3)
3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
4. Principal Risks of Investing in the Contract (Item 5)
5. Addition of Contract Adjustments and Other Amendments to Fee
and Expense Disclosures (Items 4, 7, and 22)
6. Information About Contracts With Index-Linked Options (Item
31A)
7. Other Amendments and Provisions
8. Remaining Form N-4 Items
9. Inline XBRL
C. Option To Use a Summary Prospectus
D. Accounting (Items 16 and 26)
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and Amendments to Form 24F-2
2. Post-Effective Amendments and Prospectus Supplements
3. Prospectus Delivery
F. Materially Misleading Statements in RILA Sales Literature
G. Existing Commission Letters
H. Registered Market-Value Adjustment Annuities
I. Technical Amendment to Form N-6
J. Compliance Period
K. General Request for Comment From Retail Investors
III. Economic Analysis
A. Introduction
B. Baseline
1. Affected Parties
2. Current Regulatory Requirements
3. Market Practice
C. Benefits and Costs
1. Benefits
2. Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Creating an Entirely New Registration Form for RILAs
2. Alternatives to Specific Form N-4 Amendments
3. Require the Use of Form N-4 for Registered MVAs
4. Limiting Scope of Structured Data Requirements
F. Request for Comment
IV. Paperwork Reduction Act
A. Rule 498A
B. Form N-4
C. Form 24F-2
D. Investment Company Interactive Data
E. Request for Comment
V. Regulatory Flexibility Certification
VI. Consideration of Impact on the Economy
Statutory Authority
I. Introduction and Background
An annuity contract (``annuity'' or ``contract'') is a type of
insurance product in which an investor makes a lump-sum payment or a
series of payments in return for future payments from the insurance
company to meet retirement and other long-term financial goals. A RILA
is one of several types of annuity contracts offered by insurance
companies. An investor in a RILA allocates purchase payments to one or
more investment options under which the investor's returns (both gains
and losses) are based at least in part on the performance of an index
or other benchmark (collectively, ``indexes''), over a set period of
time (``crediting period'').\2\ In some cases, insurance companies
offer RILAs on a standalone basis with various index-linked investment
options (``index-linked options'') for investors to choose from. In
other cases, insurance companies offer ``combination'' annuity
contracts that provide index-linked options together with other
investment options, such as mutual funds (``portfolio companies'')
offered as investment options under a variable annuity (``variable
options'').\3\ An investor purchasing a combination contract, for
example, may have the ability to allocate purchase payments under the
contract to index-linked options; variable options that pass on the
returns of mutual funds selected by the investor; and/or fixed account
options for which the insurance company promises to pay a fixed and
stated minimum rate of interest. The market for RILAs has grown
significantly in recent years, with annual RILA sales of $41.1 billion
in 2022 alone, more than tripling since 2017.\4\ We understand that
RILAs are predominantly sold by broker-dealers, although investment
advisers may also provide advice on RILAs, and insurance companies also
may offer RILAs directly.
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\2\ Insurance companies frequently refer to crediting periods as
``investment terms'' or sometimes simply ``terms.'' See, e.g.,
Investor Testing Report on Registered Index Linked Annuities, Office
of Investor Advocate Division (``OIAD Report'') at Section 2, RILAs:
Structure of Contracts and Investment Options, Investment Terms. As
noted in OIAD's report, investor testing suggested that investors
consistently struggled with this terminology, and a number of
participants seemed to equate ``investment term'' or ``term'' with
the length of the insurance contract rather than the length of the
investment product options within the RILA contract, leading them to
misunderstand the operation of the RILA. Id. at Section 5,
Qualitative Testing, Results from Round 1. In an effort to mitigate
that confusion, we have opted to use the term crediting period in
this release and in the proposed amendments to Form N-4. The most
common crediting periods are one, three, and six years. See id. at
Section 3, Overview of the RILA Market and Simulated Performance
over Historical Periods, RILA Indexes, Investment Terms, and
Insurance Features, Figure 2.
\3\ Variable annuity contracts and variable life insurance
contracts (together, ``variable contracts'') combine both investment
and insurance features. Investors generally allocate their purchase
payments to a range of investment options, typically mutual funds
which are separately registered and have their own prospectuses. The
investor's account value changes depending on the performance of the
investment options selected. Variable annuities allow investors to
receive periodic payments for either a definite period (e.g., 20
years), or for an indefinite period (e.g., the life of the
investor). See Updated Disclosure Requirements and Summary
Prospectus for Variable Annuity and Variable Life Insurance
Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020)
[85 FR 25964 (May 1, 2020)] (``VASP Adopting Release'') at nn.4-5
and n.8 and accompanying text.
\4\ See LIMRA, ``LIMRA: Record Annuity Sales in 2022 Expected to
Continue Into First Quarter 2023,'' news release, Mar. 8, 2023
(reporting 2022 RILA sales of $41.1 billion), https://www.limra.com/en/newsroom/news-releases/2023/limra-record-annuity-sales-in-2022-expected-to-continue-into-first-quarter-2023/ and LIMRA, ``LIMRA
Secure Retirement Institute: Total Annuity Sales Continued to
Decline in 2017,'' news release, Feb. 21, 2018 (reporting 2017 sales
of structured annuity products, i.e., RILAs, of $9.2 billion),
https://www.limra.com/en/newsroom/news-releases/2018/limra-secure-retirement-institute-total-annuity-sales-continued-to-decline-in-2017/.
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RILAs are securities for purposes of the Securities Act of 1933
(``Securities Act'').\5\ Unlike variable annuity contracts for which
the Commission has adopted a specific registration form tailored to
those products, insurance companies currently register offerings of
RILAs on Securities Act registration
[[Page 71090]]
Forms S-1 or S-3.\6\ In 2022, Congress enacted Division AA, Title I of
the Consolidated Appropriations Act, 2023 (``RILA Act''), directing the
Commission to adopt a new registration form for RILAs within 18 months
of enactment.\7\ The RILA Act requires the Commission to design the
form to ensure that a purchaser using the form receives the information
necessary to make knowledgeable decisions, taking into account (1) the
availability of information; (2) the knowledge and sophistication of
that class of purchasers; (3) the complexity of the RILA; and (4) any
other factor the Commission determines appropriate. The RILA Act also
requires the Commission to engage in investor testing as part of its
rulemaking process and to incorporate the results of the testing in the
design of the form, with the goal of ensuring that key information is
conveyed in terms that a purchaser is able to understand. If the
Commission fails to adopt the form within 18 months of enactment, the
RILA Act provides that RILA issuers can begin registering RILA
offerings on existing Form N-4.
---------------------------------------------------------------------------
\5\ Depending on the context, ``RILA'' is also used in this
release to collectively refer to both stand-alone RILAs and the
index-linked options available in a combination contract. When
referring to the entity registering the RILA, we use the term ``RILA
issuer'' or ``insurance company.'' Index annuities that meet the
requirements of section 989J of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111-203) or section 3(a)(8) of
the Securities Act are treated as exempt securities for purposes of
the Securities Act, but RILAs do not fall within this exemption due,
in large part, to the shifting of a significant level of investment
risk from the RILA issuer to the investor. RILAs and index-linked
option, as used in this release, refer only to those index annuities
that are securities for the purposes of the Securities Act. See,
e.g., sections 101(a)(5) and (6) of Division AA, Title I of the
Consolidated Appropriations Act, 2023.
\6\ The registration forms for variable annuity contracts are
Form N-3 (for variable annuity separate accounts structured as
management companies) and Form N-4 (for variable annuity separate
accounts structured as unit investment trusts). The separate account
established by the sponsoring insurance company is the legal entity
that registers its securities. Separate accounts are typically
registered as investment companies under the Investment Company Act.
See section 2(a)(37) of the Investment Company Act. The Commission
first adopted the registration form for variable annuities over 30
years ago. See Registration Forms for Insurance Company Separate
Accounts that Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 14, 1985) [50 FR 26145] (June 25,
1985)]. In this release, we focus only on Form N-4, and not Form N-
3, because Form N-4 is the registration form identified in the RILA
Act and the form used to register the majority of variable annuity
contracts.
\7\ Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
---------------------------------------------------------------------------
We are proposing to amend Form N-4 to require RILA issuers to
register RILA offerings, including associated features of the RILA such
as any contract adjustments, on that form and to tailor the form's
requirements accordingly.\8\ We also are proposing to amend other rules
related to the securities offering process to allow these issuers to
conduct RILA offerings in the same way issuers conduct offerings of
variable annuities. Consistent with the RILA Act, these proposed
amendments collectively are designed to provide investors disclosures
tailored to RILAs and highlight key information about these complex
products, building on the Commission's layered disclosure framework in
place for variable annuities. We are also proposing certain amendments
to Form N-4 that would apply to offerings of variable annuities, based
on our experience with the form since its last amendment and the
investor testing conducted in connection with this rulemaking.\9\ In
addition, we are proposing to apply a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws to RILA advertisements and sales
literature. Finally, we are proposing a technical amendment to Form N-6
to correct an error from a prior Commission rulemaking.
---------------------------------------------------------------------------
\8\ Under this proposal, the amended Form N-4 will not register
the RILA issuers themselves, only the offering of RILA securities.
Unlike separate accounts which register variable annuities, RILA
issuers are not investment companies, and thus need not register
with the Commission as an investment company as separate accounts
do.
\9\ See VASP Adopting Release.
---------------------------------------------------------------------------
A. Typical RILA Features
RILAs are complex financial products that are sold to retail
investors. The following are some of the most prevalent features that
contribute to this complexity, and that might make it challenging for
an investor to assess the features, risks, and possible return profile
of a RILA. These features also are important ones for financial
professionals to consider when recommending that an investor purchase a
RILA.
Bounded Return Structure. Under a RILA, the insurance
company will credit positive or negative ``interest'' to the investor's
contract value at the end of each crediting period. The amount credited
is based, in part, on the performance of the specified index (e.g., the
S&P 500).\10\ The amount of any positive interest credited will also
depend on whether the contract includes provisions such as a ``cap
rate'' or ``participation rate.'' A cap rate places an upper limit on
an investor's ability to participate in the index's upside performance
directly (e.g., with a current cap rate of 5%, if the index is up 10%
at the end of the crediting period, the investor's contract value will
be credited with only 5% positive interest). A ``participation rate''
sets an investor's return to some specified percentage of the index's
return (e.g., an 80% participation rate would result in an investor
receiving positive interest of 80 cents on the dollar of gains in the
index). The contract generally will include one of these limits on how
much the insurance company will credit the investor if the performance
of the index goes up in value by the end of the crediting period
(collectively ``limits on gains''). Similarly, the contract generally
will include terms limiting the investor's losses to some extent if the
performance of the index goes down in value. This might include a
``buffer'' (which limits the investor's exposure to losses up to a
fixed percentage), or a ``floor'' (which places a lower limit on the
investor's exposure to loss) (collectively ``limits on losses''). For
example, with a ``buffer'' of -5%, if the index is down 2%, that
investor will not lose anything, but if the index is down 7% the
investor will lose 2% (the difference between the loss and the buffer
rate). With a ``floor'' of -5%, if the index is down 2%, the investor
will lose 2%, but if the index is down 7%, the investor will only lose
5%. These limits can be complex and overlapping, and may change at the
beginning of each new crediting period, subject to certain minimum
guarantees stated in the contract. Over time, the investor's contract
value will increase or decrease, depending on the performance of the
index and the particular contract provisions (such as the bounded
return structure). Despite the bounded return structure, a RILA is not
necessarily a low-risk investment product as the investor could lose a
significant amount of money if the index performs poorly.
---------------------------------------------------------------------------
\10\ Insurance companies typically choose indexes for the RILA
contract where any gains in the value of the index do not include
dividends paid on the securities that make up the index.
---------------------------------------------------------------------------
Fees and Expenses. For many RILAs, the investor pays no
direct or explicit ongoing fees and expenses under the RILA, and this
is sometimes a feature disclosed in RILA marketing materials. However,
the RILA's bounded return structure requires investors to agree to
tradeoffs that come with their own economic costs. In exchange for some
protection against losses if the index goes down in value, investors
must also agree to contractual provisions limiting the amount of gains
they will receive if the index goes up in value. A RILA's upside limits
on gains can reduce an investor's return in the same way that a direct
fee can and can help make the RILA more profitable to the insurance
company.
Charges and Penalties for Early Withdrawals. Investors
also can lose significant money if they withdraw their money early from
an investment option or from the contract. This can arise in several
circumstances. First, a RILA typically will specify a period of time
during which a ``surrender charge'' will apply, for example nine years
following an investor's last premium payment. Typically, this charge is
greatest in the first year of the surrender period, decreasing each
year until the end of the surrender period. An investor who
[[Page 71091]]
withdraws money during this period will pay a fee, such as 9% of the
amount withdrawn. Second, an insurance company may make an adjustment,
either to the investor's contract value or to the amount paid to the
investor, if amounts are withdrawn from an index-linked option before
the end of its crediting period or from the contract before the end of
a specified period. For example, when an investor in a RILA chooses a
particular index-linked option, the RILA may provide that the index-
linked option's crediting period is one year. If amounts are removed
from that index-linked option before the end of this one-year crediting
period, typically for any reason, the insurance company will apply an
``interim value adjustment'' or ``IVA.'' The IVA will adjust the
contract value based, generally, on a complex formula where the IVA may
change daily and can be positive or negative.\11\ As a result, the
investor could lose a significant amount of money, even if the index
has a gain at the time of the withdrawal.
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\11\ Common methods of calculating this adjustment include
prorating the crediting method based on the number of days that have
elapsed since the start of the crediting period, employing a market-
based formula designed to approximate the present value of the index
and/or employing interest-rate-based MVAs to offset certain insurer
losses and costs, or some combination of these two. See Clifford E.
Kirsch, Variable Annuities and Other Insurance Investment Products
(Third Edition 2022) at 29-8, available at https://plus.pli.edu/Details/Details?start=0&rows=50&fq=%7e2B%7etitle_id%7e3A282B22%7e240085%7e2229%7e&fq=%7e2B%7eid%7e3A282B22%7e240085-CH29%7e2229%7e&sort=s_date+desc&origin=title.
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Similarly, the insurance company might apply a positive or negative
``market value adjustment'' or ``MVA'' (collectively with IVAs, a
``contract adjustment'') to the contract value if the investor
partially or fully withdraws amounts from the contract. Contract
adjustments could be made in response to a number of contract
transactions, such as a surrender, withdrawal, payment of the death
benefit, or the start of annuity payments, and an investor could
experience a negative contract adjustment even when the investor takes
an otherwise permissible withdrawal, such as under a guaranteed living
benefit.\12\ These adjustments can also negatively impact other values
under the contract, such as the surrender value and death benefit.
Moreover, these fees and adjustments are not always mutually exclusive.
Indeed, under the terms of certain RILA contracts, an investor could
experience a decrease in contract value from a negative interim value
adjustment and a negative market value adjustment, depending on the
timing of the withdrawal, and also pay a surrender charge. An investor
may also be subject to income taxes and face a Federal income tax
penalty if the investor withdraws money before a certain age.\13\
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\12\ Id. at 29-13. Under these benefits, RILA investors are
permitted to take a certain amount of guaranteed withdrawals from
their contract each year without reducing the value of guaranteed
withdrawals for future years. These can be a standard feature or an
optional rider chosen by an investor. Id. at 29-12.
\13\ See Updated Investor Bulletin: Indexed Annuities, SEC's
Office of Investor Education and Advocacy, July 31, 2020, https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_indexedannuities.
Staff reports and other staff documents (including those cited
herein) represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person.
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Changes by Insurer. Crediting periods for an index-linked
option in a RILA contract generally range from one to six years. The
insurance company may change or remove key features of index-linked
options, such as the cap rates, floors, or even change the index. These
changes may often be made at the insurance company's discretion and
renewal provisions can and do change over time. Also, RILA contracts
typically state that an investor will be automatically renewed at the
end of a crediting period into the same or substantially similar index-
linked option, often with a new limit on gains. If the same index-
linked option is unavailable, the terms of the contract generally
provide that the insurance company may place the investor into a more
conservative investment option as a default, such as a fixed account or
an index-linked option with a 0% floor.
Taxes. Special tax rules generally apply to RILAs and
other annuities, with both tax advantages and potential adverse tax
impacts in certain circumstances. For example, assets within a RILA
generally grow tax-deferred. As discussed above, however, investors may
face a Federal income tax penalty if money is withdrawn before the
investor reaches a certain age.\14\
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\14\ For these and other reasons, insurance companies generally
advertise RILAs as a long-term investment. This is similar to the
treatment of variable annuities. See VASP Adopting Release at n.14
and accompanying text.
---------------------------------------------------------------------------
Providing investors with key information is particularly important
in the context of RILAs, since their features are typically complex and
their risks may not be apparent or easily understood by prospective
investors absent clear disclosure. Form N-4's existing disclosure
requirements regarding features of annuities would complement the
proposed RILA-specific disclosures, such that the amended Form N-4
would provide investors with key information both about the annuity
contract and the associated registered index-linked or variable
investment options.
B. Current Registration Process
The current requirements for issuers offering RILAs and variable
annuities differ in many respects, both in terms of the disclosure
issuers must provide, and with respect to the registration process. We
highlight here some of these key differences.
On required disclosure, because the Commission currently does not
have a specific registration form for RILAs, insurance companies
register the offerings of RILAs on Forms S-1 or S-3.\15\ Although
specific disclosure requirements apply for certain securities such as
capital stock or debt, the forms' disclosure requirements are not
specifically tailored to particular kinds of securities given the wide
range of securities offerings that can be registered on the forms.\16\
Forms S-1 and S-3 thus do not include specific line-item requirements
addressing disclosures about RILAs and their complex features, such as
how limits on gains operate or the application of contract adjustments.
These forms also require issuers to disclose information about the
offering itself as well as extensive information about the registrant
issuing the securities that may be less material to a RILA investor
than information about the contract's features. Required information
about the registrant includes, for example, management's discussion and
analysis of financial condition and results of operations (``MD&A''),
which requires a narrative discussion of the registrant's financial
statements, and disclosure about executive compensation. Domestic
registrants also must include financial statements prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\17\
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\15\ See, e.g., General Instruction I of Form S-1 (``This Form
shall be used for the registration under the Securities Act of 1933
(`Securities Act'); of securities of all registrants for which no
other form is authorized or prescribed'').
\16\ See Item 9 of Forms S-1 and S-3 and 17 CFR 229.202
(providing specific disclosure requirements for certain securities
such as capital stock, debt, warrants or rights, and directing
issuers of other types of securities to include a brief description
that is comparable to that required for the specified kinds of
securities).
\17\ See 17 CFR 210.4-01(a)(1) (stating that financial
statements filed with the Commission which are not prepared in
accordance with GAAP will be presumed to be misleading or inaccurate
unless the Commission has otherwise provided). See also infra
footnote 20.
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[[Page 71092]]
Most variable annuities, in contrast, are registered on Form N-
4.\18\ This form is designed for variable annuities and has disclosure
requirements tailored to these investments. Providing investors with
key information in a reader-friendly format is particularly important
in the context of variable annuity contracts because their structure is
complex. Accordingly, Form N-4's disclosure requirements are designed
to provide investors with key information relating to a variable
contract's provisions, benefits, and risks in a concise and reader-
friendly presentation, along with targeted information about the
insurance company and the offering. Form N-4's disclosure requirements
thus focus more on the specific features of variable annuities than on
the issuing insurance company. This presentation is designed to
highlight the most important information for an investor in a variable
annuity, so that the only matters included in the prospectus are those
for which there is a substantial likelihood that a reasonable investor
would consider them important in deciding whether to invest.\19\ This
focus on the provisions of the variable contract itself, rather than
certain details about the operation of the insurance company, reflects
that a variable annuity contract is not a direct investment in the
capital stock or debt of the insurance company, but rather a contract
with the insurance company under which the investor's exposure to the
insurance company generally is limited to the company's ability to
honor any guarantees associated with the contract. In addition, rule
498A together with Form N-4 implements a layered disclosure approach
for variable annuities by permitting insurance companies and others to
use a summary prospectus framework for variable annuities while making
the more-detailed statutory prospectus, as well as the contract's
statement of additional information (``SAI''), available online. Form
N-4 also provides a limited exception for insurance companies to file
financial statements prepared in accordance with statutory accounting
principles (``SAP''), referred to as ``statutory requirements'' in the
form instructions, rather than GAAP. Specifically, insurance companies,
which act as the depositors of variable annuity separate accounts
registered on Form N-4, may use SAP financials solely when the
insurance company does not otherwise prepare GAAP financial statements
or GAAP financial information for use by a parent in the parent's
Securities Exchange Act of 1934 (``Exchange Act'') reports or the
parent's registration statements filed under the Securities Act.\20\
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\18\ According to Form N-CEN filings received through March 23,
2023, there were 419 variable annuity separate accounts registered
as unit investment trusts (``UITs'') in 2022.
\19\ The Commission has long sought to tailor disclosures for
annuity products. See Registration Forms for Insurance Company
Separate Accounts, Investment Company Act Release No. 13689 (Dec.
23, 1983) [49 FR 614 (Jan. 5, 1984)] (``Form[] N-4 would permit
shorter and simpler prospectuses than are required under current
practice, . . . by incorporating many of the reduced disclosure
requirements of Form N-1A. Separate account disclosure requirements
that experience has shown are unnecessary also would be eliminated,
as well as certain disclosure requirements that are holdovers from
the requirements applicable to non-separate account unit investment
trust.''); Registration Form Used By Open-End Management Investment
Companies, Investment Company Act Release No. 12927 (Dec. 27, 1982)
[48 FR 813 (Jan. 7, 1983)] (``In order to shorten and simplify the
prospectus for mutual funds, the Commission has concluded that it is
necessary to eliminate certain types of information from the
prospectus, so that only matters of fundamental importance to most
mutual fund investors will be included in the prospectus'').
\20\ See, e.g., Instruction 1 to Item 31(b) in Form N-3 and
Instruction 1 to Item 26(b) in Form N-4. In addition, although Form
S-1 requires GAAP financial statements, exemptions have been granted
pursuant to 17 CFR 210.3-13 that permit insurance companies to
substitute SAP financials in lieu of GAAP financials when
registering RILAs on Form S-1 in circumstances permitted by Form N-
4. See, e.g., Letter from Jenson Wayne, Chief Accountant, Division
of Investment Management, to Stephen E. Roth, Eversheds Sutherland
(US) LLP, regarding Fidelity & Guaranty Life Insurance Company and
Fidelity & Guaranty Life Insurance Company of New York (Mar. 17,
2023) (available at https://www.sec.gov/files/fidelity-guaranty-031723.pdf) (``F&G Life Letter'').
---------------------------------------------------------------------------
With respect to the registration process, insurance companies
registering an offering of RILA securities are required under the
Securities Act to pay a registration fee to the Commission at the time
of filing a registration statement.\21\ This means that they pay
registration fees at the time they register the offer and sale of the
securities, regardless of when (or if) they sell them. The registration
statement for the RILA offering also must include current financial
information, including any annual update required by section 10(a)(3)
of the Securities Act.\22\ An insurance company registering a RILA
offering on Form S-1 must provide any section 10(a)(3) update to the
registration statement by filing a post-effective amendment which must
be declared effective, typically by the staff acting pursuant to
delegated authority.\23\
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\21\ Section 6(b)(1) of the Securities Act [15 U.S.C.
77f(b)(1)]. Certain ``well-known seasoned issuers'' or ``WKSIs'' can
use a different registration process than what is described here.
See generally Securities Offering Reform, Investment Company Act
Release No. 26993 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
(``Offering Reform Release''). None of the insurance companies
offering RILAs are WKSIs, however, and we generally do not
anticipate that RILA issuers will meet the conditions to operate as
a WKSI. We therefore do not generally discuss the WKSI registration
process in this release. Even if a RILA issuer were to qualify as a
WKSI, the Securities Act rules that provide a streamlined offering
process for WKSIs generally would be inapplicable to RILA offerings
on Form N-4, as proposed. For example, although a WKSI can file an
automatic shelf registration statement, this would not be applicable
under the proposal because Form N-4 does not permit a shelf
registration statement and an automatic shelf registration statement
must be filed on Forms S-3, F-3, or N-2. See rule 405 (definition of
``automatic shelf registration statement''). As another example,
WKSIs are permitted to use the ``pay-as-you-go'' method of paying
securities registration fees, but the registration fees for RILA
offerings would be paid annually in arrears under the proposal. See
17 CFR 230.456(b).
\22\ Section 10(a)(3) of the Securities Act provides that when a
prospectus is used more than nine months after the effective date of
the registration statement, the information contained therein shall
be as of a date not more than sixteen months prior to such use. 15
U.S.C. 77j.
\23\ See Section 8(c) of the Securities Act [15 U.S.C. 77h(c)]
and 17 CFR 230.462 (``rule 462'').
---------------------------------------------------------------------------
If the offering is registered on Form S-3, the insurance company's
annual report on Form 10-K containing audited financial statements will
operate as a post-effective amendment to the registration statement for
purposes of section 10(a)(3).\24\ The insurance company is required to
provide a complete set of its financial statements, certain schedules,
and executive compensation disclosures in a structured data format
using Inline XRBL, but is not otherwise required to provide other
information in the registration statement as structured data.\25\
Insurance companies offering RILAs also are not required to deliver
prospectuses to investors because they can rely on the Commission's
``access equals delivery'' framework in rule 172, although in practice
we understand that insurance companies typically deliver prospectuses
to accompany or precede other communications.
---------------------------------------------------------------------------
\24\ An issuer filing a registration statement on Form S-3 will
incorporate by reference information in reports under the Exchange
Act filed after the registration statement has become effective,
including the issuer's annual report on Form 10-K. Accordingly,
certain information required to be included in the prospectus may be
included directly in the prospectus or included in an Exchange Act
report that is incorporated by reference into the prospectus.
\25\ See rule 405(b) of Regulation S-T.
---------------------------------------------------------------------------
When an insurance company registers a variable annuity separate
account on Form N-4, in contrast, it pays registration fees based on
the net issuance of securities, no later than 90 days after each fiscal
year end.\26\ The insurance company can update its registration
statement to include updated financial information required by section
10(a)(3) by filing an immediately effective post-effective amendment
under rule 485. These
[[Page 71093]]
provisions together are designed to allow insurance companies to
efficiently conduct continuous offerings of variable annuities. The
insurance company also must structure certain key information in Inline
XBRL to enhance the utility of that information to investors and must
deliver a prospectus to investors because the ``access equals
delivery'' framework in rule 172 is not available for variable
annuities.
---------------------------------------------------------------------------
\26\ See 17 CFR 270.24f-2 (``rule 24f-2'').
---------------------------------------------------------------------------
C. Evidence of Investor Views and Areas of Potential Confusion
Consistent with the RILA Act, the Commission received feedback on
individuals' comprehension and views on RILA disclosure through
investor testing. Specifically, we received feedback through
qualitative investor testing interviews, as well as quantitative
testing designed to assess whether the design of certain hypothetical
RILA disclosure provided to participants affects their comprehension of
the disclosed information. Each of these aspects of investor testing
was designed by the Commission's Office of the Investor Advocate
(``OIAD''). As described in more detail in section II.B below, this
feedback helped us to identify areas of Form N-4 that we propose to
amend to help ensure that a RILA purchaser receives key information
that the purchaser is able to understand.
OIAD conducted two rounds of qualitative interviews with a mix of
investors across demographic characteristics, locations, and levels of
financial literacy who either already owned annuities or had expressed
interest in investing in an annuity product.\27\ These interviews aimed
to generate hypotheses about certain content areas in RILA disclosure--
specifically, disclosure that could appear in select rows of the ``Key
Information Table'' (or ``KIT'') in RILA registration statements, as
discussed below--that may cause confusion and lead to impediments to
investor understanding of key information.\28\ These interviews
concentrated on assessing: (1) potential RILA disclosure, focusing on a
hypothetical KIT, for areas of confusion or misunderstanding; and (2)
participants' mental models regarding the way RILA products function,
including potential benefits, drawbacks, and risks of a RILA
investment. The interviews also included hypothetical scenarios.\29\
---------------------------------------------------------------------------
\27\ OIAD's qualitative testing consisted of two rounds of in-
depth hour-long interviews with twenty participants, using a semi-
structured, open-ended format so that participants could express
their reactions and beliefs, regardless of whether they are
accurate, in order to assess the reasoning of a sampling of
investors regarding RILA products, and their reactions to potential
RILA disclosures. See OIAD Report at Section 5, Qualitative Testing,
Methods.
\28\ OIAD Report at Section 1, Introduction and Executive
Summary.
\29\ See OIAD Report at Section 5, Qualitative Testing, Methods.
---------------------------------------------------------------------------
Feedback from both rounds of qualitative interviews generally
showed that the interview participants did not have much, if any,
familiarity with RILAs. Furthermore, interviews in both rounds
illustrated that many participants struggled to understand the details
of the RILA contract presented in sample KIT disclosure.\30\
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\30\ Several participants in Round 2 were ``significantly more
sophisticated than the average investor,'' with some having worked
in a financial field or had over $1 million in retirement assets,
and these participants also ``struggled to correctly apply the
concepts discussed in the KIT.'' OIAD Report at Section 5,
Qualitative Testing, Results from Round 2.
---------------------------------------------------------------------------
With regard to the first round specifically, participants indicated
significant confusion about the features and fees associated with
RILAs, and often cited certain specific terminology, such as ``index
option,'' ``interim value adjustment,'' ``buffer,'' and ``investment
term,'' as confusing to them.\31\ For example, many participants
mistakenly conflated ``investment term'' with the length of the entire
insurance contract, leading them incorrectly to conclude that they
could avoid any fees or charges if they liquidated their investment at
the end of an initial one-year investment period.\32\ Participants
often did not appear to understand that there are multiple aspects of a
typical RILA contract that could negatively affect an investor's
contract value or the amounts an investor could withdraw from the
contract (e.g., the fact that a withdrawal could be subject to a
surrender charge, interim value adjustment, and tax penalty).\33\ Some
participants expressed that a chart or graph would be useful to help
them understand certain information presented about a RILA contract,
such as surrender periods or how the contract's bounded return
structure would function.\34\ Additionally, some participants indicated
they would need more specific information--besides the information in
the hypothetical KIT rows shared with them--to evaluate the
appropriateness of a RILA.\35\
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\31\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1. As noted above, supra footnote 2, to alleviate the
confusion generated by ``investment term,'' we use the term
``crediting period'' in this release and in the proposed amendments
to Form N-4.
\32\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
\33\ See OIAD at Section 5, Qualitative Testing, Results from
Round 1.
\34\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\35\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------
While first-round interview participants may not have been able to
understand RILA features and economic tradeoffs fully after reviewing
sample KIT disclosure, some were able to identify certain potential
drawbacks and explain certain aspects of RILA contracts following their
review of this sample disclosure. This was demonstrated in
participants' responses to sample scenarios, where the interview
facilitator presented facts about a hypothetical investor's background,
and participants were asked to provide their opinions about whether a
RILA contract would be an appropriate investment option for those
investors and discuss their reasoning. For instance, participants in
the first-round interviews could generally identify that a RILA
contract could present particular risks for individuals without a long
time horizon.\36\ On the other hand, as noted above, these participants
often identified only a single charge or penalty that would apply even
in scenarios where, for example, a surrender charge, early withdrawal
tax penalty, and interim value adjustment might all apply.\37\ Some
participants were able to identify that a RILA contract could be
appropriate for an individual in light of factors such as desire to
protect against losses in the stock market, taking into account
considerations such as age, investment time horizon, and other sources
of liquid funds.\38\ Some interview participants also demonstrated that
they could use the KIT disclosure to discern quickly that they would
not be interested in purchasing a RILA contract, for example because of
liquidity needs or relatively short investment time horizons.\39\
---------------------------------------------------------------------------
\36\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1. However, OIAD's report also notes that in the second round
of testing, many participants did not understand that RILAs are
intended as a retirement savings vehicle, and that there may be tax
penalties for withdrawal prior to age 59\1/2\. See id., Results from
Round 2. Similarly, only 12.6% of participants in the quantitative
testing correctly identified that RILAs are investing vehicles that
are intended purely as retirement savings vehicles. Id., Section 6,
Quantitative Testing, Results, Summary of Quantitative Testing.
\37\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\38\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
\39\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------
Commission staff used this feedback to update sample KIT disclosure
in between qualitative interview rounds. In particular, in the second
round, sample
[[Page 71094]]
KITs were modified to include: (1) the phrase ``investment term''
rather than ``term,'' (2) a table to show how investment term interacts
with contract length, (3) graphics to provide more information about
RILA loss limitation features such as floors and buffers, and (4)
expanded links to additional information to indicate that more
information could be available.\40\ Following these changes,
participants demonstrated modestly improved comprehension in certain
limited areas. For example, the sample KIT disclosure used in the
second-round of qualitative testing emphasized that contract
adjustments can substantially reduce the value of an investment if
investors withdraw money before the end of an investment term.
Participants who viewed this modified disclosure had greater success in
identifying the potential financial impact of this feature, with some
expressing concern about the potential magnitude of the contract
adjustment.\41\ Additionally, some second-round participants who viewed
the KIT contract adjustment disclosure also asked for more specific
information about how the adjustment is calculated, which suggests that
layered disclosure might be useful for these concepts.\42\ Even though
these participants were unable to define certain terms relevant to
contract adjustments (e.g., interim value adjustment), most second-
round participants seemed to understand that RILAs are not a short-term
investment and should only be used if an investor will not need to make
early withdrawals.\43\
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\40\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Appendix C.
\41\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\42\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\43\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------
The second round of testing also introduced a table in the sample
KIT disclosure that attempted to help illustrate how fees were charged
over the surrender period of the contract, the difference between the
investment term (i.e., the crediting period) and the contract length,
and how the surrender charge and potential contract adjustments could
vary over different time frames.\44\ Nonetheless, participants in the
second round of testing still had difficulty distinguishing between
surrender charges and contract adjustments or understanding that both
can apply cumulatively to reduce an investor's contract value in cases
of early withdrawal.\45\ Most participants in the second round of
testing also continued to struggle with the mechanics of ``buffers,''
despite the inclusion of graphics in the hypothetical KITs designed to
illustrate how buffers work.\46\ There were a number of areas where
participants wanted information that was not part of the KIT rows being
tested, such as the specific index-linked options available under the
contract, and some participants with more investing experience wanted
information about past returns on the RILA, as well as additional
information on fees and charges--particularly regarding caps on gains
and other bounded return features--in order to understand the ways in
which insurance companies profit from RILAs.\47\
---------------------------------------------------------------------------
\44\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Results from Round 2.
\45\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\46\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
\47\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------
Following the qualitative interviews, OIAD conducted quantitative
testing designed to assess comprehension of key concepts about RILAs
and the extent to which the organization of disclosures affected
participants' comprehension of the disclosed information.\48\
Approximately 2,500 participants completed OIAD's quantitative testing
study, which was fielded over an eight-day period and targeted groups
who were more likely to have some experience with financial
products.\49\ Participants received focused portions of a hypothetical
KIT to test disclosures. For example, participants were randomly
assigned to one of two formats for the sample KIT disclosure, one with
a Q&A format and one with a statement-based format.\50\ Overall, the
results of OIAD's quantitative testing suggest that most investors
experience challenges in understanding RILAs.\51\ This round of testing
reviewed overall comprehension of participants as well as whether
participants were able to assess four sub-scores: (1) appropriateness
of RILAs for investors based on their characteristics, (2) how a RILA
works, (3) how the charges and penalties associated with RILAs affect
liquidity, and (4) the insurance protections offered by RILAs.\52\
Across all participants, the average percentage of questions scored
correct was 58%, which, while higher than the expected score for people
randomly guessing (50%), was lower relative to what might be considered
a well-informed purchaser of a RILA product.\53\ However, the results
of the sub-scores varied, specifically 57% for appropriateness, 49% for
how a RILA works, 57% for insurance, and 62% for liquidity.\54\
Comprehension varied depending on the particular concept tested. For
example, 80.7% of participants were able to correctly identify that
RILA investors cannot access their money whenever they need it at no
cost, suggesting that the tested disclosures were sufficient to put
participants on notice to the potential for contract adjustments and
surrender charges.\55\ Conversely, only 12.6% of participants correctly
identified that RILAs are intended purely as retirement savings
vehicles, rather than a product appropriate for other, shorter-term
investing goals (e.g., education and home purchasing), suggesting
continued investor confusion on this topic.\56\ Additionally,
participants in the quantitative testing were classified into three
groups based on their experience with investing. Not surprisingly,
increased investment experience correlated with greater overall
comprehension, with non-investors (those with no existing investments)
averaging slightly less than 50% correct, 11.7 percentage points lower
than the average for the group with the most investment experience.\57\
The Q&A KIT format demonstrated a statistically significant, albeit
quantitatively small, improvement over the non-Q&A KIT format,
particularly with regard to the non-investor group, who saw a 5.7
percentage points increase in comprehension in connection with the Q&A
format with regard to overall comprehension.\58\
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\48\ OIAD Report at Section 6, Quantitative Testing.
\49\ OIAD Report at Section 6, Quantitative Testing, Methods.
\50\ OIAD Report at Section 6, Quantitative Testing, Study
Design and Overview.
\51\ OIAD Report at Section 6, Quantitative Testing, Summary of
Quantitative Testing.
\52\ OIAD Report at Section 6, Quantitative Testing,
Comprehension Measures.
\53\ OIAD Report at Section 6, Quantitative Testing, Results.
\54\ OIAD Report at Section 6, Quantitative Testing, Results,
Table 6.
\55\ OIAD Report at Section 6, Quantitative Testing, Results.
\56\ OIAD Report at Section 6, Quantitative Testing, Results.
\57\ See OAID Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
\58\ See OIAD Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
---------------------------------------------------------------------------
Overall, investor testing successfully identified a range of
barriers to investor understanding of RILAs and associated disclosures.
However, with the few
[[Page 71095]]
exceptions noted above, variations in disclosures did not result in
significant improvements in investor comprehension in the investor
testing. Accordingly, while OIAD's investor testing has been successful
in identifying specific areas of investor confusion regarding RILAs,
those results were largely inconclusive in terms of determining
specific disclosures that are relatively more successful in addressing
the identified confusion.
We have incorporated those results in our design of the proposed
Form N-4 amendments, endeavoring to give particular attention to areas
of identified investor confusion while leveraging existing disclosure
requirements. Because investor testing did not, for the most part,
provide persuasive evidence of superior disclosures, we are proposing
to largely utilize the existing Form N-4 disclosures which have been
developed over time, and with which staff, investors, and RILA issuers
are already familiar. Building upon these existing disclosures has
additional benefits, because combination contracts offering both
variable and index-linked options will be required to comply with Form
N-4, making it more efficient to build on the form's requirements for
both types of investment options. We seek comment throughout this
release on specific areas for improvement that can aid investor
comprehension. Further, we are requesting specific input from the
retail investor community, through a short Feedback Flyer, relating to
their experiences with annuities generally and RILAs specifically.\59\
---------------------------------------------------------------------------
\59\ See infra section II.K; Appendix D.
---------------------------------------------------------------------------
Further, in addition to investor testing focused specifically on
sample RILA disclosure, our proposal--and the current disclosure
requirements in Form N-4 that we are building upon--also draw on the
Commission's past investor testing efforts, outreach, and other
empirical research concerning investors' preferences. This includes,
for example, information about summary content and layered disclosure
approaches.\60\ The Commission has historically received feedback
showing that investors generally prefer concise, layered
disclosure.\61\ Investors participating in certain past quantitative
and qualitative investor testing initiatives on the Commission's behalf
have also expressed preferences for, wherever possible, the use of a
summary containing key information about an investment product or
service written in clear, concise, and understandable language and
presented in an accessible format.\62\ Each of these sources of
evidence of investor preferences, understanding, and behaviors in
response to disclosures specific to RILAs and other investment products
more generally has provided important context and support for our
proposal's approach to RILA disclosure.
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\60\ See Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts,
Investment Company Act Release No. 33286 (Oct. 30, 2018) [83 FR
61730 (Nov. 30, 2018)] (VASP Proposing Release) at paragraphs
accompanying nn.38-43.
\61\ See, e.g., Request for Comment on Fund Retail Investor
Experience and Disclosure, Investment Company Act Release No. 33113
(June 5, 2018) [83 FR 26891] (June 11, 2018] (``Investor Experience
RFC''). Feedback in comment letters generally showed that retail
investors prefer concise, layered disclosure and feel overwhelmed by
the volume of information they currently receive. Multiple comment
letters reflected a preference for shorter summary disclosures, with
additional information available online or upon request. See, e.g.,
Comment Letter of C. Scott (July 26, 2018) (expressing preference
for shorter summary disclosures, and suggesting disclosures ``trim
the fat and replace the text-heavy disclosures with something that
is clear, succinct, and transparent''); Comment Letter of Helena
Krus (July 29, 2018) (noting a preference to receive shorter summary
disclosures, with additional information available online or upon
request, and suggesting that the option should be available for all
documents over 5 pages).
\62\ See supra footnote 61; see also, e.g., SEC Staff, Study
Regarding Financial Literacy Among Investors (Aug. 2012). The key
information that investors found useful and relevant before
purchasing an investment product includes information on fees and
expenses, investment performance, principal risks, and investment
objectives. With respect to the presentation of disclosure, the
study indicates that investors preferred disclosures being ``written
in clear, concise, understandable language, using bullet points,
tables, charts, and/or graphs.'' Materials relating to this study,
including the staff's report, are available at https://www.investor.gov/publications-research-studies/sec-research.
---------------------------------------------------------------------------
D. Overview of Proposal
We are proposing to modernize and enhance the registration and
disclosure framework for RILAs by adapting the existing registration
and disclosure framework that is familiar to investors and issuers for
variable annuity separate accounts to accommodate RILAs.
Use of Form N-4. We are proposing to amend Form N-4 so
that issuers seeking to register the offering of RILAs must use that
form. To accommodate this, we are also proposing amendments to that
form that specifically address the features and risks of RILAs. For
example, we are proposing amendments to the form's ``Key Information
Table'' that highlight key features of RILAs that should be disclosed
so that investors may determine whether a RILA is an appropriate
investment for them. In particular, the KIT highlights key features of
a RILA contract that may be substantially different from the features
of investment products investors may be more familiar with, and that
investor testing suggests may not be readily apparent to investors.
Further, because the insurance company would register the offering of a
RILA on Form N-4 under the proposal, it would be subject to the
requirements in the form related to financial statements, including the
form instruction that currently permits variable annuity issuers to
file insurance company SAP financial statements in certain
circumstances.
Form N-4 Amendments for All Issuers. In addition to adding
RILAs to Form N-4, we are also proposing amendments to the form that
would be applicable to offerings of variable annuities. These proposed
amendments are informed by the staff's historical experience in
administering the form and respond to observations from investor
testing relevant to variable annuity offerings. For example, one
takeaway from investor testing was that the complicated jargon of RILA
contracts was a consistent impediment to investor comprehension of KIT
disclosures.\63\ To address this confusion, we are proposing to switch
the order of the Key Information Table and Overview of the Contract
items to introduce investors earlier to the terminology and concepts
underlying annuity contracts, in the hopes that this context will
improve investor comprehension of KIT disclosures. Because variable
annuities are also complicated investment products, we are proposing to
switch the order for these products as well, so that variable annuity
investors also have the benefit of this additional context.
---------------------------------------------------------------------------
\63\ See OIAD Report at Section 6, Quantitative Testing, Summary
of Quantitative Testing.
---------------------------------------------------------------------------
Summary Prospectus. Consistent with the inclusion of RILAs
on Form N-4, we are proposing to permit RILA issuers to make use of the
summary prospectus framework available to variable annuity registrants
on Form N-4.
Updates to the Filing Rules. To accommodate RILA
registrations on Form N-4, we are proposing to require RILA issuers to
pay fees in arrears on Form 24F-2 and we are proposing amendments to
address RILAs in the rules that variable annuities use to file post-
effective amendments and to update prospectuses.
Materially Misleading Statements in Sales Literature. The
proposed amendments would require RILA issuers to comply with rule 156,
which provides guidance as to when sales literature is materially
misleading under the Federal securities laws.
Our proposal, if adopted, would implement the RILA Act's mandate.
[[Page 71096]]
II. Discussion
A. Use of Form N-4
We propose to require insurance companies to use Form N-4 to
register the offering of RILAs, as well as amendments to the form to
require disclosures specific for these securities.\64\ As discussed
above, the registration forms currently used by RILA issuers do not
include line-item disclosure requirements addressing the unique aspects
of RILAs, like limits on gains or the application of contract
adjustments. They also require information about the issuer, such as
MD&A, that may be less important to annuity investors, given that they
are not making a direct investment in the insurance company, and that
the Commission has not determined to require for variable annuities.
Conversely, most variable annuity issuers already use Form N-4 to
register their securities and the form is designed to provide investors
with product-specific information about annuity contracts.\65\
Requiring insurance companies to register RILA offerings on Form N-4
therefore leverages the form's existing insurance-product specific
disclosure requirements, including disclosure requirements that help
effectuate the relatively new summary prospectus layered disclosure
framework the Commission adopted in 2020 for variable contracts. With
the RILA-specific disclosures we are proposing to add to Form N-4, we
intend that the form will provide investors with the information
necessary to make informed decisions about RILAs.
---------------------------------------------------------------------------
\64\ See proposed General Instruction B.1 of Form N-4. Form N-4,
as we propose to amend it, would provide that Form N-4 is ``to be
used by insurance companies to register index-linked annuity
contracts under the Securities Act of 1933.'' Insurance companies
therefore would not be permitted to register RILA offerings on Forms
S-1 or S-3, as they do today.
\65\ Variable annuities register on Form N-3 if they are issued
by separate accounts that are organized as management investment
companies. However, most variable annuities are issued by separate
accounts that are organized as unit investment trusts and therefore
use Form N-4. See supra footnote 6.
---------------------------------------------------------------------------
Including RILAs on Form N-4 also could provide further benefits to
investors by facilitating not only investor comparison among RILAs, but
also the comparison of index-linked options to variable options in the
same annuity contract. For example, investors would be able to review
summary information of all the available investment options of an
annuity contract--index-linked options, variable options, and fixed
options--and compare these options in one place in the prospectus
appendix required by Form N-4.\66\ Currently, we understand that
approximately 44% of the RILAs offered in the marketplace are offered
as index-linked options through combination products.\67\ Registering
the offerings of RILAs on Form N-4, rather than a new or different
form, also would be more efficient for insurance companies and
Commission staff. In this regard, insurance companies would benefit
from using a single form, with tailored disclosure requirements, to
register the offerings of both RILAs and combination contracts with
index-linked options. In addition, many of the insurance companies
issuing RILAs also issue variable annuity contracts and therefore are
familiar with the requirements of Form N-4. Using Form N-4 for RILAs
also would be efficient for our staff because the disclosure
requirements for variable contracts and RILAs would be consolidated in
one place. Further, because Congress has authorized RILA issuers to use
Form N-4 if the Commission fails to adopt a registration form for RILAs
within 18 months of the RILA Act's enactment, we believe that requiring
insurance companies to use the form is consistent with congressional
intent.
---------------------------------------------------------------------------
\66\ See infra section II.B.3(c).
\67\ Based on an informal Commission staff review of RILA
filings on the EDGAR system as of May 2, 2023.
---------------------------------------------------------------------------
Requiring insurance companies to register RILA offerings on Form N-
4 under the proposal would result in changes to RILA disclosure, in
that they would have to comply with the current Form N-4 disclosure
requirements in addition to the proposed new RILA-specific disclosure
requirements. While Form N-4 contains some of the issuer- and offering-
specific disclosures required by Forms S-1 and S-3, it does not contain
them all. Specifically, Form N-4 does not include many of the
disclosures relating to the mechanics of the offering (e.g., use of
proceeds, dilution, etc.); offering participants other than the issuer,
such as selling securities holders; and certain details of the issuer
(e.g., descriptions of property, executive compensation, etc.). These
disclosures may be more useful to an investor considering an investment
in the capital stock or debt securities of the insurance company rather
than an investment in a RILA issued by the insurance company. Unlike an
investor in the insurance company itself, a RILA investor's direct
investment exposure to the insurance company is limited to the
insurance company's claims-paying ability, which also is supported by
State insurance regulations and supervision designed to ensure that
insurance companies are able to satisfy their obligations under their
insurance contracts. Requiring insurance companies to register RILA
offerings on Form N-4 would leverage that form's annuity-focused
requirements to ensure that investors receive those disclosures that
would be the most important in the RILA context.
To accommodate the offering of RILAs on Form N-4 and to provide a
consistent framework for all offerings registered on the form, we are
proposing, as discussed in more detail below, changes to certain rules
and requirements such that RILA issuers would be subject to the same
process requirements as variable annuities.\68\ For example, similar to
the current offering processes for issuers of variable annuities,
insurance companies registering RILA offerings would be permitted to
use a streamlined summary prospectus and required to pay fees to
register their securities annually rather than at the time of filing a
registration statement.\69\ These changes would provide efficiencies
for insurance companies and Commission staff in establishing consistent
requirements for offerings registered on Form N-4. It would, however,
result in some trade-offs for RILA issuers. For example, insurance
companies currently registering RILA offerings on Form S-3 would lose
the ability to update their registration statement by incorporating by
reference their annual report but would be able to update their
registration statement annually with an immediately effective
amendment. On balance, and as discussed in more detail throughout this
release, requiring insurance companies registering RILA offerings to
follow the offering processes proposed in this release should result in
efficiencies for insurance companies and our staff. We anticipate that
requiring RILA offerings to be registered on Form N-4 will also benefit
investors by leveraging the form's annuity-specific disclosure
requirements and extending the variable annuity summary prospectus to
RILAs. Having a common registration form also should make it easier for
investors deciding between an investment in a RILA or a variable
annuity to compare the offerings.
---------------------------------------------------------------------------
\68\ See infra sections I.C and II.E.
\69\ See also infra section II.E.3 (discussing proposed changes
to rule 172).
---------------------------------------------------------------------------
We request comment on the proposed requirement to register RILA
offerings on Form N-4.
1. As proposed, should we require RILA issuers to use Form N-4? Is
another existing registration form more
[[Page 71097]]
appropriate for RILAs? If so, which registration form and why?
2. Given that any existing registration form would require RILA-
specific amendments, should the Commission instead develop a new form
specifically for RILAs?
3. Is it appropriate to require an annuity that offers different
types of investment options (e.g., variable options as well as index-
linked options) to address these different types of investment options
on the same registration form? Would requiring different registration
forms for annuities offering different types of investment options be
more or less efficient for insurance companies that offer variable
annuities, RILAs, and combination contracts?
4. Is there any information currently required by Forms S-1 or S-3
that we should also require RILA issuers to disclose?
5. Would requiring RILAs to follow the same filing and other
process requirements as variable annuities (such as requirements for
paying registration fees, and the ability to use a summary prospectus)
be efficient for insurance companies because they could use the same
processes to pay registration fees and update registration statements
for variable annuities, RILAs, and combination contracts?
6. Do commenters believe that there are any disclosures from Forms
S-1 and S-3 we are not including in the proposed Form N-4, particularly
the MD&A and executive compensation disclosures, that could be of
material relevance to RILA investors? If so, please explain their
relevance to RILA investors.
7. Do commenters agree with our estimate that approximately 44% of
RILA securities offered in the marketplace are offered as index-linked
options through combination products? If not, what percentage do
commenters think more accurately reflects RILA securities offered as
index-linked options through combination products, and what is the
basis for this estimate?
8. Should Form N-4, as amended, be the only form that insurance
companies could use to register RILA offerings? Should we permit the
continued use of Forms S-1 and S-3 in addition to the amended Form N-4?
Would this be appropriate, given that RILA issuers can already use
those forms? How would we ensure that investors receive the information
necessary to make informed decisions through use of those forms,
including the benefit of the proposed RILA-specific disclosure
requirements informed by investor testing?
9. Do commenters expect that any RILA issuers will meet the
conditions to operate as a WKSI, and if so, what is the basis for this
expectation?
10. Do commenters agree that leveraging Form N-4's annuity specific
disclosure requirements and summary prospectus regime would benefit
investors? Would registering RILA offerings on Form N-4 make it easier
for RILA investors to compare RILA offering with variable annuity
offerings? Are there any other potential benefits or disadvantages to
investors in registering RILA offerings on Form N-4 as compared to
other forms?
B. Contents of Form N-4
As proposed, many items of current Form N-4 would apply to RILAs.
We are also proposing updates to Form N-4 to include disclosures
specific to RILAs. In certain circumstances, we propose changing the
disclosures provided on the form that would apply to both RILAs and
variable annuities. The chart in Table 1 below outlines these items and
any substantive changes we are proposing.\70\ We discuss these changes
in more detail in the sections that follow.
---------------------------------------------------------------------------
\70\ Some proposed changes entail a non-substantive change such
as a change to a defined term or specifying that the provision would
continue to be applicable only to a registered separate account or
variable option. These are not flagged in the following table but
are instead discussed in section II.B.7 supra.
Table 1--Overview of Proposed Form N-4
----------------------------------------------------------------------------------------------------------------
Item Description Substantive changes Discussion
----------------------------------------------------------------------------------------------------------------
Prospectus (Part A)
----------------------------------------------------------------------------------------------------------------
1.................................. Front and Back Cover Adding new legends and Section II.B.1.
Pages. other standardized
disclosures applicable to
all issuers.
2.................................. Overview of the New RILA-specific Section II.B.3(a).
Contract. disclosures; moving order
of appearance up.
3.................................. Key Information....... New RILA-specific Section II.B.2.
disclosures; changing to a
question-and-answer
format; moving order of
appearance down; change
discussion of restrictions
on optional benefits to
cover all benefits.
4.................................. Fee Table............. New contract adjustment Section II.B.5.
disclosure.
5.................................. Principal Risks of Providing more detailed Section II.B.4.
Investing in the disclosures applicable to
Contract. all issuers.
6.................................. Description of the New RILA-specific Section II.B.3(a).
Insurance Company, disclosures and one new
Registered Separate item regarding variable
Account, and options.
Investment Options.
7.................................. Charges............... New disclosures related to Section II.B.5.
contract adjustments.
8.................................. General Description of No substantive change...... Section II.B.8(b).
Contracts.
9.................................. Annuity Period........ No substantive change...... Section II.B.8(b).
10................................. Benefits Available No substantive change...... Section II.B.8(b).
Under the Contract.
11................................. Purchases and Contract No substantive change...... Section II.B.8(b).
Value.
12................................. Surrenders and No substantive change...... Section II.B.8(b).
Withdrawals.
13................................. Loans................. No substantive change...... Section II.B.8(b).
14................................. Taxes................. No substantive change...... Section II.B.8(b).
15................................. Legal Proceedings..... No substantive change...... Section II.B.8(c).
16................................. Financial Statements.. No substantive change (but Section II.D.
see Item 26).
[[Page 71098]]
17................................. Investment Options New RILA-specific Section II.B.3(b).
Available Under the disclosures.
Contract.
----------------------------------------------------------------------------------------------------------------
Statement of Additional Information (Part B)
----------------------------------------------------------------------------------------------------------------
18................................. Cover Page and Table No substantive change...... Section II.B.8(b).
of Contents.
19................................. General Information No substantive change...... Section II.B.8(c).
and History.
20................................. Non-Principal Risks of No substantive change...... Section II.B.8(b).
Investing in the
Contract.
21................................. Services.............. No substantive change...... Section II.B.8(b).
22................................. Purchase of Securities New disclosure of specific Section II.B.5.
Being Offered. contract adjustment
information.
23................................. Underwriters.......... No substantive change...... Section II.B.8(c).
24................................. Calculation of Clarifying only applies to Section II.B.7.
Performance Data. variable options.
25................................. Annuity Payments...... No substantive change...... Section II.B.8(b).
26................................. Financial Statements.. Providing that RILA issuers Section II.D.
can use the relevant
instructions and adding
requirements relating to
changes in and
disagreements with
accountants for RILAs.
----------------------------------------------------------------------------------------------------------------
Other Information (Part C)
----------------------------------------------------------------------------------------------------------------
27................................. Exhibits.............. Adding power of attorney Section II.B.7(d).
for all issuers and
accountant letters for
RILA issuers as exhibits.
28................................. Directors and Officers No substantive change...... Section II.B.8(c).
of the Insurance
Company.
29................................. Persons Controlled or No substantive change...... Section II.B.8(c).
Under Common Control
with the Insurance
Company or the
Registrant.
30................................. Indemnification....... No substantive change...... Section II.B.8(c).
31................................. Principal Underwriters No substantive change...... Section II.B.8(c).
31A................................ Information about New disclosure of RILA Section II.B.6.
contracts with Index- specific information.
Linked Options.
32................................. Location of Accounts No substantive change...... Section II.B.7.
and Records.
33................................. Management Services... No substantive change...... Section II.B.8(b).
34................................. Fee Representation and Adding new RILA Section II.B.7(d).
Undertakings. undertakings.
----------------------------------------------------------------------------------------------------------------
1. Front and Back Cover Pages (Item 1)
We propose to require RILA issuers to include the information Form
N-4 currently requires on the front and back cover pages of the
prospectus. Currently, issuers are required to include on the front and
back cover pages basic identifying information about the issuer and the
contract, information on how to review the document (e.g., what the SAI
is and where to find it), as well as certain legends, for example, one
relating to the ability for an investor to cancel the contract within
10 days.\71\ The table below outlines these existing disclosures that
RILAs would be required to include if applicable.
---------------------------------------------------------------------------
\71\ One change specific to this legend would be to indicate
whether the insurance company will apply a contract adjustment on
any money returned during this period. Contract adjustments are a
defining element of a RILA, but can apply in other circumstances.
Nonetheless, given the context of this legend, we believe that it is
important for investors to know whether they will be subject to this
charge if they elect to have their money returned. See supra
sections II.B.5 (discussing contract adjustments generally) and II.F
(discussing that it could be materially misleading to advertise that
investors can receive their money back during a period of time
without indicating that a contract adjustment could apply).
Table 2--Existing Information Required by Item 1 of Form N-4
[With proposed adjustments]
------------------------------------------------------------------------
Item No. Disclosure Cover
------------------------------------------------------------------------
Identifying Information
------------------------------------------------------------------------
Item 1(a)(2).................. Insurance company's Front.
name.
Item 1(a)(3).................. Types of contracts Front.
offered (e.g., group,
individual, etc.).
Item 1(a)(4).................. Name and class of Front.
contract.
Item 1(a)(9).................. Date of prospectus.... Front.
Item 1(b)(4).................. EDGAR identifier Back.
number.
------------------------------------------------------------------------
[[Page 71099]]
Legends
------------------------------------------------------------------------
Item 1(a)(10)................. Statement that the Front.
Commission has not
approved or
disapproved of the
securities or passed
upon the accuracy or
adequacy of the
disclosure in the
prospectus and that
any contrary
representation is a
criminal offense (as
required in 17 CFR
230.481(b)(1)).
Item 1(a)(11)................. Statement that Front.
additional
information about the
contract is available
on Investor.gov.
Item 1(a)(12)................. A legend that states Front.
that if you are a new
investor, you may
cancel your contract
within 10 days of
receiving it with
some details about
the operation of this
process.
------------------------------------------------------------------------
Other Information
------------------------------------------------------------------------
Item 1(b)(1).................. Statement that the SAI Back.
contains additional
information, that it
is available to
investors, and how
investors may obtain
the SAI or make
inquiries about their
contracts.
Item 1(b)(2).................. Statement about Back.
whether and from
where information is
incorporated by
reference.
------------------------------------------------------------------------
In addition, we are proposing to add several new disclosures to the
cover page to accommodate RILAs. The first proposed amendment would
require the insurance company to identify the types of investment
options offered under the contract and cross-reference the prospectus
appendix that provides additional information about each option.\72\
Given the addition of investment options beyond variable options to the
form, this would help investors better understand what investment
options are available under the contract.
---------------------------------------------------------------------------
\72\ See proposed Item 1(a)(5) of Form N-4.
---------------------------------------------------------------------------
The other proposed amendments to the cover page would require
additional new disclosures that highlight RILAs' complexities and
certain associated risks. These include RILA's limitation on gains and
potential for loss, that they are not short-term investments, and that
payments under the contract are subject to the insurance company's
financial strength and claims-paying ability. The proposed legends
would require issuers to include statements on the front cover
disclosing the following:
(1) The contract is a complex investment and involves risks,
including the potential loss of principal;
(2) For contracts that include index-linked options, a prominent
statement that the insurance company limits the amount the investor can
earn, the potential for investment loss could be significantly greater
than the potential for investment gain, an investor could lose a
significant amount of money if the index declines in value, and a
prominent statement disclosing as a percentage the maximum amount of
loss from negative index performance that an investor could experience
after taking into account the minimum guaranteed limit on index loss
provided under the contract;
(3) The contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash, and
withdrawals could result in surrender charges, negative contract
adjustments, taxes, and tax penalties as applicable with a prominent
statement of the maximum potential loss resulting from a contract
adjustment, if applicable; and
(4) The insurance company's obligations under the contract are
subject to its financial strength and claims paying ability.\73\
---------------------------------------------------------------------------
\73\ See proposed Item 1(a) of Form N-4.
---------------------------------------------------------------------------
This cover page disclosure is designed to put an investor on notice
of these key considerations to help the investor make informed
decisions.
While these proposed additional disclosures are important for
investors in RILAs, they are also relevant in many cases to investors
in variable annuities. For example, while RILAs are complex
investments, variable annuities are complex as well. Variable
annuities, like RILAs, also are not short-term investments. As a
result, we are proposing to apply the proposed new disclosures to all
Form N-4 issuers to ensure that investors in both RILAs and variable
annuities receive appropriate disclosures.
We request comment on the requirement of RILAs to include the
information in Item 1 of Form N-4 on their registration statement and
the inclusion of new legends for all Form N-4 filers, as applicable, on
the front cover of the registration statement.
11. Would the new legends be effective in helping investors make
informed decisions with regards to RILAs? Do commenters agree that it
is appropriate to require the legends for variable annuities? Are the
disclosures in the Overview of the Contract, Key Information Table, and
elsewhere in the prospectus--as discussed later in this release--
sufficient such that these legends are not necessary? Conversely, are
legends effective in alerting investors to key concepts for a RILA or
variable annuity on the cover page of the prospectus? Are there
additional legends that are appropriate in light of the complexity of
RILAs and variable annuities? For example, should a legend be required
that specifically discloses a contract's upside limitation, such as due
to a participation rate or cap rate?
12. Are there any examples or illustrations of how RILAs operate
that we should require on the front or back cover pages? Are examples
or illustrations more effective communication tools than legends on the
cover page of the prospectus? Should examples or illustrations be
provided in addition to legends?
13. Is there any other information we should require on the front
or back cover pages?
[[Page 71100]]
2. Key Information Table (Item 3)
RILA issuers, like variable annuities issuers currently, would be
required to provide a Key Information Table in their registration
statements under the proposal. We also are proposing amendments to the
KIT's disclosure requirements to address key RILA features, as well as
other amendments that would apply to all Form N-4 issuers.
The KIT provides summary prospectus disclosure, including a brief
description of key facts about a variable annuity in a specific
sequence and in a standardized presentation.\74\ Specifically, the KIT
currently includes a summary of five topic areas: (1) fees and
expenses; (2) risks; (3) restrictions; (4) taxes; and (5) conflicts of
interest. The KIT functions as an integral part of the layered
disclosure approach in Form N-4 by identifying key considerations
upfront, with more detail to follow later in the prospectus. The
proposed amendments to the KIT, which are informed by investor testing,
are intended to build on this framework and highlight important
considerations related to RILAs, including certain aspects of RILAs
that our investor testing observed are difficult for investors to
understand and thus require clear disclosure in order to help investors
make informed investment decisions.\75\
---------------------------------------------------------------------------
\74\ See VASP Adopting Release at section II.A.1.c.ii; see also
infra section II.C.
\75\ See, e.g., OIAD Report at Section 5, Qualitative Testing
(following two rounds of in-depth interviews to assess potential
RILA KIT disclosure for areas of confusion or misunderstanding,
qualitative interviews suggested confusion with RILA terms and
concepts relating to, for example, contract adjustments such as
interim value adjustments and loss limiting features such as
buffers); OIAD Report at Section 6, Quantitative Testing, Results,
Subgroup Analysis (noting 5.7 percentage point effect of the Q&A KIT
structure on overall comprehension for ``non-investors'' during
quantitative testing).
---------------------------------------------------------------------------
Form N-4 currently prescribes format requirements for the KIT to
enhance the readability and comparability of the disclosure that also
would apply to RILA offerings under the proposal.\76\ Specifically,
RILA issuers would be required to disclose the required information in
the tabular presentation reflected in the instructions, in the order
specified, without any modification or substitution with alternate
terminology of the title, headings, and sub-headings for the tabular
presentation, unless otherwise provided. Consistent with the form's
current requirements, RILA issuers, however, would be permitted to
exclude any disclosures (other than the title, headings, and sub-
headings for this tabular presentation) in the KIT that are not
applicable, or modify any of the statements required to be included, so
long as the modified statement contains comparable information. RILA
issuers also would be required to provide cross-references to the
location in the statutory prospectus where the subject matter is
described in greater detail, either accessed by direct electronic link
or through equivalent methods or technologies, as required for variable
annuity KIT disclosure. Consistent with current requirements, RILA
issuers would include these cross-references adjacent to the relevant
disclosure, either within the table row, or presented in an additional
table column. As currently is required, all disclosures for the KIT
should be short and succinct, consistent with the limitations of a
tabular presentation.
---------------------------------------------------------------------------
\76\ See proposed instruction 1 to Item 3 of Form N-4.
---------------------------------------------------------------------------
We are proposing three modifications that would apply to
registration statements both for RILAs and for variable annuities.
These changes are designed to provide investors with a better
understanding of these products, and are informed in part by the
results of investor testing. First, we are proposing to require issuers
to present the information in the KIT in a question-and-answer
(``Q&A'') format.\77\ As a result of this change, the various line
items of the KIT would be rephrased as questions (e.g., ``Are there
charges for early withdrawals?'' instead of ``Charges for Early
Withdrawals''). The instructions would further require that, unless the
context otherwise requires, issuers should begin the response with a
``Yes'' or ``No'' in bold text when answering a question presented in a
given row of the KIT. Consistent with the directional results of the
quantitative investor testing, we anticipate that the Q&A format may
improve investor comprehension of RILA-specific topics. Because the
effect of the Q&A KIT structure on overall comprehension was larger for
non-investors than independent investors, this format may particularly
improve comprehension for less-experienced investors.\78\ We also
expect that rephrasing the current line items in a Q&A format would
more clearly convey the importance of the KIT information to help RILA
and variable annuity investors make informed investment decisions.\79\
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\77\ Proposed instruction 1(d) to Item 3 of Form N-4.
\78\ For purposes of investor testing, participants were
classified into three groups: those with no investments in stocks,
bonds, mutual funds, or other securities (non-investors); those with
investments exclusively in retirement savings accounts (retirement
only); and those with investments outside of retirement accounts
(independent investors). See OIAD Report at Section 6, Quantitative
Testing, Subgroup Analysis, Investor Status. The report noted a 5.7
percentage point effect of the Q&A KIT structure on overall
comprehension for ``non-investors''. Id.
\79\ The Commission's proposed Q&A format is consistent with
previous rulemaking experience. See Form CRS Relationship Summary;
Amendments to Form ADV, Investor Act Release No. 5247 (June 5, 2019)
[84 FR 33492 (June 12, 2019)] (adopting question-and-answer format
in response to feedback from surveys and studies and commenters who
noted that ``the question-and-answer format is a more effective
design for consumer disclosures because it focuses on questions to
which a consumer wants answers and allows a consumer to skim quickly
and understand where to get more information.''). The proposed
format is also supported by prior surveys and studies to help design
effective disclosures to retail investors. See, e.g., Angela A.
Hung, et al., RAND Corporation, Investor Testing of Form CRS
Relationship Study (2018), available at https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf, at p. 23 (reporting that about 60% of respondents
favored a question-and-answer format over the sample relationship
summary format presented in the survey); Kleimann Communication
Group, Inc., Report on Development and Testing of Model Client
Relationship Summary, Presented to AARP and Certified Financial
Planner Board of Standards, Inc. (Dec. 5, 2018), available at
https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf, at
p. 4 (``Readers ask questions when they read, especially of
functional documents. . . . For good design, we want to build upon
this tendency by identifying key questions investors should or are
likely to ask and featuring them prominently in the text, thus
easing the cognitive task for readers. As a result, we used
questions in the headings to introduce each section's major
topic.''); Susan Kleimann, Making Disclosures Work for Consumers,
Presentation to the SEC's Investor Advisory Committee (June 14,
2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf (encouraging
the use of question-and-answer format, the use of headings to make
structure clear, and a strong design grid to organize elements,
among other disclosure design principles, to promote readability),
cited in VASP Adopting Release at n.112 and accompanying text. See
also Office of Investor Education and Assistance, U.S. Securities
and Exchange Commission, A Plain English Handbook (Aug. 1998) (``You
can make complex information more understandable by giving your
readers an example using one investor. This technique explains why
`question and answer' formats often succeed when a narrative
abstraction fails.'').
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Second, we propose to change the order in which the KIT (current
Item 2) appears relative to the Overview of the Contract (current Item
3) disclosures.\80\ The Overview of the Contract disclosures provide
general information about the contract and important context about the
information summarized in the KIT. Based on our observations of
investor testing, we believe RILA investors may generally benefit from
more context to understand
[[Page 71101]]
the KIT disclosures. For example, interview participants generally
found certain RILA-specific terminology confusing, such as ``index,''
``investment term,'' ``interim value adjustment,'' and ``buffer.'' \81\
Further, investor testing indicated that investors had difficulty in
understanding the basic features and concepts of RILA contracts.\82\
The proposed Overview of the Contract disclosures would require
descriptions and examples to help investors understand these RILA
features and provide a basis for better understanding the issues
flagged by the KIT disclosures.\83\ Thus, based on investor testing, we
propose to change the location of the KIT so that it appears after
(rather than before) the Overview of the Contract section. Placing the
Overview of the Contract section first may similarly provide context of
the issues flagged in variable annuity KITs.
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\80\ The current instructions to Form N-4 require that,
notwithstanding 17 CFR 230.421(a), the KIT, Overview, and Fee Table
must be disclosed in numerical order. General instruction C.3(a) of
Form N-4. The proposal would change this instruction to reflect the
change in order.
\81\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Summary of Qualitative Testing, Section 6,
Quantitative Testing, Summary of Quantitative Testing.
\82\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Summary of Qualitative Testing, Section 6 and 7 Quantitative
Testing, Summary of Quantitative Testing, Section 7, Conclusions,
Summary of Findings.
\83\ See, e.g., proposed Item 2(b)(2) of Form N-4.
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Third, we propose to delete Form N-4's general instruction stating
that where the discussion of information required by the Overview of
the Contract (currently Item 3) or KIT (currently Item 2) also responds
to the disclosure requirements in other items of the prospectus,
registrants need not include additional disclosure in the prospectus
that repeats the information disclosed in the Overview of the Contract
or the KIT.\84\ In administering Form N-4, we have observed that this
instruction has led to confusion on the part of registrants. For
example, while both the KIT and Item 5 require disclosures about
principal risks, the KIT expressly contemplates that more detailed
information will be repeated later in the prospectus, specifically
requiring registrants to provide cross-references to the more detailed
prospectus discussion.\85\ Item 5 requires registrants to summarize the
principal risks of the contract in one place, and was not intended to
permit an insurance company to omit principal risks from that section
if those risks were also disclosed in the KIT.\86\ Moreover, the
layered disclosure framework requires a degree of repetition to ensure
both that the KIT contains key disclosures and that the detailed
sections that follow contain all of the key information about the given
topic. We believe this is particularly important for RILAs in light of
the challenges our investor testing suggests investors have in
understanding these products. This way, investors will see the key
risks regardless of whether they review targeted sections of the
prospectus.
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\84\ General Instruction C.3.(a) of Form N-4.
\85\ See instruction 1(b) to Item 2 of Form N-4.
\86\ See Item 5 of Form N-4; VASP Adopting Release at text
following n.689 (``The principal risks section is designed to
provide a consolidated presentation of principal risks which can be
cross-referenced by registrants to reduce repetition that might
otherwise occur if the same principal risks are repeated in
different sections of the prospectus.'').
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The proposed overall format of the KIT is depicted below:
Table 3--Proposed Key Information Table
------------------------------------------------------------------------
------------------------------------------------------------------------
Fees and Expenses:
Are There Charges for Early
Withdrawals?
Are There Transaction Charges?
Are There Ongoing Fees and Expenses?
Risks:
Is There a Risk of Loss From Poor
Performance?
Is this a Short-Term Investment?
What are the Risks Associated with the
Investment Options?
Is There Any Chance the Insurance
Company Won't Pay Amounts Due to Me
Under the Contract?
Restrictions:
Are There Restrictions on the
Investment Options?
Are there any Restrictions on Contract
Benefits?
Taxes:
What are the Contract's Tax
Implications?
Conflicts of Interest:
How are Investment Professionals
Compensated?
Should I Exchange My Contract?
------------------------------------------------------------------------
(a) Fees and Expenses
RILA contracts typically have implicit fees, expenses, and charges
for early or mid-term withdrawals that can be confusing or surprising
to investors, as observed in our investor testing.\87\ We anticipate
that investors would benefit from tailored disclosure about certain
unique features of a RILA contract's fee and expense structure as
described below to help them make informed decisions.
---------------------------------------------------------------------------
\87\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Results from Round 2.
---------------------------------------------------------------------------
Early Withdrawal Charges. As RILAs may have surrender charges, we
propose to require RILA issuers to provide the existing KIT surrender
charge disclosure in this first line item under the ``Fees and
Expenses'' heading so that RILA investors understand how surrender
charges are assessed (e.g., that if they make a withdrawal within a
specified period after their last premium payment, they may pay a
significant surrender charge that will reduce the value of their
investment).\88\ This disclosure must include the maximum surrender
charge, the maximum number of years that a surrender charge may be
assessed, and an example of the maximum surrender charge an investor
could pay in dollars based on a $100,000 investment. In a change to the
current form requirements, we also are proposing to require that
offerings of both variable annuities and RILAs disclose that this loss
will be greater if there is a negative contract adjustment, taxes, or
tax penalties, to make clear that an investor may lose more than just
the surrender charge upon an early withdrawal.
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\88\ Proposed instruction 2(a) to Item 3 of Form N-4.
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We also are proposing to require specific disclosure on contract
adjustments, which can result in investor losses if the investor
withdraws
[[Page 71102]]
money from an index-linked option, or withdraws money from the RILA
entirely before the end of a specified period.\89\ Specifically, if the
contract includes contract adjustments, the insurance company would be
required to include a statement that if all or a portion of account
value is removed from an index-linked option or from the contract
before the expiration of a specified period, the insurance company will
apply a contract adjustment, which may be negative. Similar to the
disclosures relating to surrender charges, this statement would include
the maximum potential loss (as a percentage of the investment)
resulting from a negative adjustment (e.g., ``[y]ou could lose up to
XX% of your investment due to the contract adjustment''). The insurance
company also would be required to provide an example of the maximum
negative adjustment that could be applied (in dollars) assuming a
$100,000 investment (e.g., ``[i]f you allocate $100,000 to an
investment option with a 3-year crediting period and later withdraw the
entire amount before the 3 years have ended, you could lose up to
$90,000 of your investment. This loss will be greater if you also have
to pay a surrender charge, taxes, and tax penalties.''). We also
propose to require the insurance company to provide a brief narrative
description of the contract transactions subject to a contract
adjustment (e.g., withdrawals, surrender, annuitization, etc.) as part
of the response to this item to make clear to investors the range of
transactions that could result in a contract adjustment.
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\89\ As noted above, contract adjustments include adjustments
made when amounts are removed prematurely from an index-linked
option, often referred to as interim value adjustments, as well as
adjustments made when amounts are removed prematurely from the
contract, often referred to as market value adjustments. Thus, a
specified period would include index-linked option crediting periods
(which again, are typically referred to by insurance companies as
``investment terms'' or ``terms''), as well as any specified period
relating to a market value adjustment.
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Transaction Charges. The second line item in the ``Fees and
Expenses'' section of the proposed amended KIT, ``Are there transaction
charges?,'' would require registrants to disclose that the investor may
also be charged for other transactions in addition to surrender charges
(and now contract adjustments), along with a brief narrative
description of the types of such charges (e.g., front loads, charges
for transferring cash value between investment options, etc.).\90\ This
line item is designed to provide a simple narrative description to
alert investors that surrender charges and contract adjustments are not
the only transaction charges they could pay. We are proposing to
require RILA issuers to provide this disclosure.
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\90\ Proposed instruction 2(b) to Item 3 of Form N-4.
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Ongoing Fees and Expenses. The third line item in the ``Fees and
Expenses'' section, ``Are there ongoing fees and expenses?,'' is
designed to alert investors that they also will bear recurring fees on
an annual basis. This item currently requires the insurance company to
disclose (1) a minimum and maximum annual fee table and (2) a lowest
and highest annual cost table, both along with applicable legends.\91\
The minimum and maximum annual fee table is designed to consolidate the
more detailed information in the Fee Table that appears later in the
prospectus, in order to minimize the need for investors to perform
complex calculations to understand the fees they will pay.\92\ The
lowest and highest annual cost table is designed to provide investors
with a high-level cost illustration that will give investors a tool to
understand the basic cost framework of the contract.\93\ We are
proposing to require RILA issuers to provide this disclosure.\94\
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\91\ See instruction 2(c) to Item 2 of Form N-4. The minimum and
maximum annual fee table requires a tabular description of the fees
and expenses that an investor may pay each year, depending on the
investment options chosen. This includes minimum and maximum
percentages for: base contract fees; portfolio company fees and
expenses; and optional benefits available for an additional charge.
The lowest and highest annual cost table requires a tabular
description of the lowest and highest cost an investor could pay
each year, based on current charges and a set of standardized
assumptions (e.g., $100,000 investment and 5% annual appreciation).
\92\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.144
and accompanying text; see also Item 4 of Form N-4.
\93\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.147
and accompanying text.
\94\ See proposed instruction 2(c) to Item 3 of Form N-4.
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We also are proposing to require that where a contract imposes
limits on gains on the amount an investor can earn on an index-linked
option, insurance companies disclose that they impose these limits on
gains and that they serve as an implicit ongoing fee.\95\ In other
words, as a result of limits on gains imposed under a contract, an
investor is sacrificing the potential for investment gains that exceed
the cap or other limit on upside performance. Specifically, insurance
companies would prominently state that they impose an implicit ongoing
fee on index-linked options by limiting, through the use of a cap,
participation rate, or some other rate or measure, the amount an
investor can earn on an index-linked option. Further, insurance
companies would state that imposing this limit helps the insurance
company make a profit on the index-linked option, and that, in return
for accepting this limit on index gains, an investor will receive some
protection from index losses. This disclosure would be required to
precede the minimum and maximum annual fee table. If the contract
offers an index-linked option subject to limits on gains but does not
impose any explicit ongoing fees or expenses under the contract, and
thus there would be no need to include the minimum and maximum annual
fee and lowest and highest cost tables, the insurance company would
include this disclosure in lieu of such tables.\96\ Where there are no
explicit ongoing fees, minimum and maximum annual fee and cost tables
showing zero fees could mislead investors because an index-linked
option imposing limits on gains has implicit fees inherent in limiting
upside index participation.
---------------------------------------------------------------------------
\95\ See proposed instruction 2(c)(i)(G) to Item 3 of Form N-4.
\96\ Proposed instruction 2(c)(iii) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Lastly in this line item, we propose to revise the last sentence in
the required legend in the lowest and highest annual cost table to
include the underlined language: ``This estimate assumes that you do
not take withdrawals from the Contract, which could add surrender
charges and negative Contract Adjustments that substantially increase
costs.'' \97\ This would further alert investors to the cost impact of
a contract adjustment if they withdraw money early.
---------------------------------------------------------------------------
\97\ See proposed Instruction 2(c)(ii)(A) to Item 3 of Form N-4.
Currently, this legend only refers to surrender charges, not
negative contract adjustments.
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(b) Risks
Risk of Loss. Under the first line item in the amended KIT under
the heading ``Risks,'' ``Is there a risk of loss from poor
performance?,'' we would, as required by an existing instruction in the
form, require RILA issuers to state that an investor can lose money by
investing in the contract. RILAs, like variable annuities, are subject
to the risk of investment loss. We also are proposing to amend this
instruction to provide that, if an annuity contract offers an index-
linked option, the insurance company must disclose, as a percentage,
the maximum amount of loss an investor could experience from negative
index performance, after taking into account the minimum guaranteed
limit on index loss provided under the
[[Page 71103]]
contract.\98\ For example, with a guaranteed buffer of -10%, a
registrant would disclose that investors could lose up to 90% of their
investment in an index-linked option due to poor index performance even
with the loss limitation feature. This amendment is designed to make
clear to investors investing in an index-linked option that they can
still lose money even though index-linked options typically include
features designed to limit investment loss.
---------------------------------------------------------------------------
\98\ See proposed Instruction 3(a) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Short-Term Investment. The second line item under the Risks
heading, ``Is this a short-term investment?,'' currently requires a
statement that the contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash along with a
brief explanation. This statement and an accompanying brief explanation
is equally applicable to RILAs and we therefore would require RILA
issuers to make the same disclosure.\99\ We also are proposing to amend
this item to require issuers of RILAs and variable annuities to state
that (1) amounts withdrawn from the contract may result in surrender
charges, taxes, and tax penalties; and (2) if applicable, that amounts
removed from an index-linked option or the contract before a specified
period may also result in a negative contract adjustment and loss of
positive index performance. These disclosures are designed to make
clear to investors some of the key reasons why these investments are
not short-term investments. These disclosures are particularly
important for an investor considering a RILA in light of the potential
negative consequences if the investor withdraws money early from a
particular index-linked option or the contract. We are not limiting
these disclosures to contracts with index-linked options, however,
because these disclosures may be equally material for a variable
annuity. To further illustrate that index-linked options are not short-
term investments even though they may have a short crediting period, we
also propose new risk disclosure for index-linked options that would
require issuers offering such investment options to state that contract
value will be reallocated at the end of the crediting period according
to the investor's instructions, and to disclose the default
reallocation in the absence of such instructions.
---------------------------------------------------------------------------
\99\ See proposed instruction 3(b) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Risks Associated with Investment Options. The third line item under
the Risk heading, ``What are the risks associated with the investment
options?,'' is intended to focus on the general risk of poor investment
performance.\100\ Currently, the KIT therefore requires the insurance
company to state that: (1) an investment in the contract is subject to
the risk of poor investment performance and can vary depending on the
performance of the investment options available under the contract; (2)
each investment option will have unique risks; and (3) the investor
should review these investment options before making an investment
decision. We are proposing conforming changes to the required statement
to refer to index-linked options now that RILAs are included on Form N-
4.\101\
---------------------------------------------------------------------------
\100\ VASP Adopting Release at the text accompanying n.170.
\101\ See proposed instruction 3(c) to Item 3 of Form N-4.
---------------------------------------------------------------------------
We also are proposing to require the insurance company to provide
additional information about any index-linked options offered under the
contract to highlight how the insurance company limits the investor's
participation in gains and losses of the index. For the risk of limited
upside, the insurance company would be required to (1) state that the
cap, participation rate, or some other rate or measure, as applicable,
will limit positive index returns (e.g., limited upside), (2) provide
an example for each type of limit imposed under the contract (e.g., if
the index return is 12% and the cap rate is 4%, the insurance company
will credit the investor 4% in interest at the end of the term), and
(3) prominently state that this may result in the investor earning less
than the index's return.\102\
---------------------------------------------------------------------------
\102\ See proposed instruction 3(c)(A) to Item 3 of Form N-4.
---------------------------------------------------------------------------
For the risk of limited protection in the case of market decline,
the insurance company would be required to (1) state that the floor,
buffer, or some other rate or measure, as applicable, will limit
negative index returns (e.g., limited protection in the case of market
decline), (2) provide an example for each type of limit imposed under
the contract (e.g., ``if the Index return is -25% and the buffer rate
is -10%, we will credit -15% (the amount that exceeds the buffer rate)
at the end of the crediting period''), and (3) prominently state that
even after limiting a negative index return, investors could still lose
up to XX% of their investment.\103\ The disclosure in this row of the
KIT is designed to highlight that each investment option, including an
index-linked option, will have unique risks. The proposed disclosure on
index-linked options would highlight one of the central economic
tradeoffs index-linked options present: that an investor will sacrifice
the potential for returns if the index goes up in exchange for some
protection from loss if the index goes down.
---------------------------------------------------------------------------
\103\ See proposed instruction 3(c)(B) to Item 3 of Form N-4.
---------------------------------------------------------------------------
Insurance Company Risks. The fourth line item under the Risk
heading, ``Is there any chance the insurance company won't pay amounts
due to me under the contract?,'' is meant to alert investors that any
obligations, guarantees, or benefits under the contract that may be
subject to the claims-paying ability of the insurance company will
depend on the financial solvency of the insurance company.\104\ Form N-
4 therefore currently requires the insurance company to include a
statement to this effect in this row of the KIT and either to provide
the insurance company's financial strength ratings or state, if
applicable, that they are available upon request. We propose to require
a RILA issuer to provide the same statement, with a conforming change
to include index-linked options as an obligation of the insurance
company.\105\
---------------------------------------------------------------------------
\104\ See VASP Adopting Release at section II.A.1.c.ii.(ii); see
also proposed Instruction 3(d) to Item 2 of Form N-4 (``State that
an investment in the Contract is subject to the risks related to the
Insurance Company, including that any obligations (including under
any Fixed Options and Index-Linked Options), guarantees, or benefits
are subject to the claims-paying ability of the Insurance
Company.'').
\105\ See proposed instruction 3(d); see also infra section
II.B.7(b) (discussing changes of Form N-4's defined terms, including
replacing ``depositor'' with ``insurance company,'' to facilitate
inclusion of RILAs on the form).
---------------------------------------------------------------------------
(c) Restrictions
Investments. We propose to require RILA issuers to include the
disclosure required by the first line item under the heading
``Restrictions,'' ``Are there limits on the Investment Options?'' This
current item would be modified to require the insurance company to
state whether there are any restrictions that may limit the investment
options that an investor may choose, as well as any limitations on the
transfer of contract value among investment options.\106\ As these
limitations can exist for RILAs, we propose to require RILA issuers to
make
[[Page 71104]]
this disclosure so that investors can assess that disclosure in
determining whether the RILA is an appropriate investment for them.
---------------------------------------------------------------------------
\106\ See proposed instruction 4(a) to Item 3 of Form N-4. The
current item requires the insurance company to state whether there
are any restrictions that may limit the investments that an investor
may choose, as well as any limitations on the transfer of contract
value among portfolio companies. Consistent with the corresponding
changes made to defined terms, we would also clarify that this item
applies to any investment option, not just the portfolio companies
available as investment options under a variable option. See infra
section II.B.7.
---------------------------------------------------------------------------
Currently, the form also generally requires the insurance company
to state that it reserves the right to remove or substitute portfolio
companies as investment options, if applicable. Insurance companies
typically reserve the right to change the index-linked options that are
available under a contract as well as key features of available index-
linked options. To alert investors that the available index-linked
options and key terms of those index-linked options may change in the
future we are proposing to require the insurance company to state any
reservation of its rights under the contract, including, if applicable,
the right to (1) add or remove index-linked options, (2) change the
features of an index-linked option from one crediting period to the
next, including the changes to the index and the current limits on
gains and limits on index losses (subject to contractual minimum
guarantees), and (3) substitute the index of an index-linked option
during its crediting period. We are also proposing to require that
insurance companies disclose any right to stop accepting additional
purchase payments, which may be significant to investors given the
impact this reservation can have on investors' ability to accumulate
contract value for retirement, grow the death benefit, and increase
optional benefit values.
Contract Benefits. The second line item under ``Restrictions,''
``Are there any restrictions on contract benefits?'' requires a
statement about whether there are any restrictions or limitations
relating to benefits offered under the contract, and/or whether a
benefit may be modified or terminated by the insurance company. It also
requires a statement that withdrawals that exceed limits specified by
the terms of a contract benefit may affect the availability of the
benefit by reducing the benefit by an amount greater than the value
withdrawn and/or could terminate the benefit. We are proposing that
this item be broadened to include disclosure on restrictions or
limitations relating to any benefit under the contract, not just
optional benefits (as currently required). While a benefit under the
contract might be characterized as standard, it could have restrictions
that should be disclosed in the KIT because of the benefit's importance
to the investor's rights under the contract, such as a proportionate
withdrawal calculation under a standard death benefit.\107\ We propose
to require RILA issuers to include this disclosure, as such disclosure
is equally applicable to RILAs as it is to variable annuities.
---------------------------------------------------------------------------
\107\ See proposed instruction 4(b) to Item 3 of Form N-4.
Similarly, we are proposing a change to the discussion in the
overview of the contract item about contract features that would
broaden that discussion to cover both optional and standard contract
benefits. See proposed Item 2(c) of Form N-4.
---------------------------------------------------------------------------
(d) Taxes
We also propose to require RILA issuers to include the line item
under the heading ``Taxes,'' ``What are the Contract's tax
implications?'' \108\ This line item is designed to alert investors to
the tax implications of variable contracts and, as we propose to amend
this item, of RILAs. It currently requires a statement that an investor
should consult with a tax professional to determine the tax
implications of an investment in, and purchase payments received under,
the contract. The insurance company must also state that there is no
additional tax benefit to the investor if the contract is purchased
through a tax-qualified plan or individual retirement account
(``IRA''), and that withdrawals will be subject to ordinary income tax
and may be subject to tax penalties. We propose to subject RILAs to
this requirement because the same tax considerations apply.
---------------------------------------------------------------------------
\108\ See proposed instruction 5 to Item 3 of Form N-4.
---------------------------------------------------------------------------
(e) Conflicts of Interest
Investment Professional Compensation. We propose to require RILA
issuers to include the first line item under the heading ``Conflicts of
Interest,'' ``How are investment professionals compensated?'' \109\
This current line item for variable contracts is designed to alert
investors to the existence of compensation arrangements for investment
professionals and the potential conflicts of interest arising from
these arrangements.\110\ It requires issuers to disclose that an
investment professional may be paid for selling the contract to
investors. An issuer must describe the basis upon which such
compensation is typically paid (e.g., commissions, revenue sharing,
compensation from affiliates and third parties). An issuer providing
the required disclosure also must state that investment professionals
may have a financial incentive to offer or recommend the contract over
another investment. The same compensation arrangements and potential
conflicts are relevant for RILAs, and we therefore are proposing to
require an insurance company registering a RILA to provide the same
disclosure.
---------------------------------------------------------------------------
\109\ See proposed instruction 6(a) to Item 3 of Form N-4.
\110\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------
Exchanges. We propose to require RILA issuers to include the second
line item under the heading ``Conflicts of Interest,'' ``Should I
exchange my Contract?,'' with conforming changes.\111\ This current
line item for variable contracts is designed to alert investors to
potential conflicts of interest that may arise from contract sales that
stem from exchanges.\112\ It requires issuers to state that some
investment professionals may have a financial incentive to offer a new
contract in place of the one owned by the investor. An issuer must
further state that investors should only exchange their contract if
they determine, after comparing the features, fees, and risks of both
contracts, that it is preferable to purchase the new contract rather
than continue to own the existing contract. These same considerations
apply to an investor considering an exchange involving a RILA. In a
change that would apply to variable annuities and RILAs, and to put
investors on notice that there may also be costs or charges associated
with terminating an existing contract, we are also proposing that
issuers disclose in this legend that investors should consider any fees
or penalties to terminate the existing contract in considering whether
to exchange a contract.
---------------------------------------------------------------------------
\111\ See proposed instruction 6(b) to Item 3 of Form N-4; see
also infra section II.B.7.
\112\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------
(f) Requests for Comment on Key Information Table
We request comment generally on the proposed amendments to the KIT,
and specifically on the following issues.
14. Should we require all issuers to provide the ``Overview of the
Contract'' disclosure before the KIT, as proposed? Would this provide
relevant context for an investor to help understand the KIT disclosure
or, conversely, would it detract from the KIT's efficacy in conveying
key information about the contract up front in a consistent format? Are
there other reasons to precede the KIT disclosure with the current
``Overview of the Contract'' disclosure? Alternatively, should we allow
issuers to maintain the current order of disclosure and include new
rows in the KIT to provide contract overview disclosure to investors?
Would this be a more effective way to provide context for investor to
understand the KIT, or
[[Page 71105]]
would it lead to disclosure that is too lengthy for the KIT format and
potentially duplicate disclosure in the Overview of the Contract
section of the prospectus? Alternatively, should we require the
Overview of the Contract to precede the KIT only in prospectuses
offering annuity contracts with index-linked options, rather than for
all issuers?
15. Should we add disclosure to the KIT regarding whether index-
linked options offered under the contract are based on a price return
index (i.e., an index that only reflects price movements of the
security) or a total return index (i.e., one that includes additionally
factors like dividends), so that, where appropriate, investors
understand whether or not they can expect their account value to
increase as a result of dividends?
16. Should we add any additional headings and sub-headings to the
KIT, for example, a new heading ``Contract Overview,'' with related
line items or sub-headings ``What is the purpose of the contract?,''
``What is the time period for measuring growth (or loss) on my contract
value?,'' and/or ``Who may the contract be appropriate for?''? Would
this information be helpful to an investor in providing context for the
KIT disclosure or, conversely, would these requirements lead to lengthy
disclosure that makes the KIT less investor friendly?
17. Would rephrasing the topics of the KIT line items in a question
format and requiring the descriptions in the right-hand column of the
KIT to be presented in an answer format, as proposed, be helpful for
investors making an initial purchase of an annuity contract? Should we
make the Q&A format mandatory for all issuers that use Form N-4? Or
should we instead require that issuers state the line items in the
left-hand column as brief descriptions of the topics to be detailed in
the right-hand column of the KIT, as is currently required? Should any
of the required line items or sub-headings be worded in a different
way, or using different terminology, than the proposal would require?
18. Should we allow issuers to change the wording of the line item
questions in circumstances where the changes would not impede investor
comprehension and clear, consistent disclosure? Could this undermine
standardized disclosures and investors' ability to make comparisons of
certain disclosure topics among RILA and variable annuity prospectuses,
or would issuers' ability to customize the disclosure lead to more
informed investor decisions about that particular RILA?
19. Should we require issuers to add a new column in the KIT
labeled ``Location in the Prospectus'' or similar caption, and place it
next to the relevant disclosure presented in the table to provide
hyperlinked cross-references directly to the location in the statutory
prospectus where the investor can find more detailed information about
the subject matter or should we, as proposed, continue to permit
issuers to provide cross-references either within the table row or
presented as an additional column? Are there any particular sub-
headings or captions that would help investors identify where to find
information?
20. Should we mandate particular examples or illustrations in the
KIT? For example, should we require a chart of historical index
performance with the guaranteed minimum cap overlaid? Should we require
a table showing examples of the dollar amounts of losses and gains,
without fees, an investor would face in a variable annuity as compared
to RILAs with various floors, buffers, and caps over a four-year period
assuming various index movements? \113\ Are there other useful examples
or illustrations currently provided by RILAs that help to illustrate
their structure effectively to investors that we should include in the
KIT? For example, should we require a graphic in the KIT to illustrate
surrender charges and contract adjustments during different time
periods of the contract? If so, what should the requirements for these
graphics or illustrations be? Should we require illustrations in the
KIT showing how caps, floors, and/or buffers could affect an investor's
returns across different market scenarios? If so, what should these
scenarios be? As another example, we request comment below on requiring
insurance companies to disclose the difference between a hypothetical
$100,000 investment in an index-linked option and the value, or the
cost to assemble, the economic components underlying the index-linked
option.\114\ Should that disclosure be required in the KIT?
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\113\ See N.Y. Comp. Codes R. & Regs. tit. 11, App. 28.8 (2023).
\114\ See Section II.B.3.b.
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21. We have proposed that insurance companies include disclosures
in the KIT regarding any limits on gains the RILA imposes, including an
illustrative example demonstrating the operation of those limits. Would
this disclosure be improved by requiring that the example conform to
any specific parameters? Would other examples be helpful? For example,
should we require that the example use the most common limit on gains
offered under the RILA for the previous year? Should we require that
the example disclose the amount of gains an investor would have given
up due to the limit over the prior ten years, based on the index's
performance during that time and assuming the limit on gains discussed
in the example applied during each of those ten years? Should we
require that the example use only round numbers?
22. Should we allow or require issuers to provide cross-references
to charts or other graphics designed to facilitate investor
understanding of RILAs, including, e.g., educational resources designed
by the Commission staff? Should we require issuers to provide these
hyperlinked cross-references in the current right-hand column of the
KIT directly after the relevant sentence of disclosure? Would the KIT
be more succinct and easier to read if the hyperlinked cross-references
were placed on the cover page of the prospectus instead of the KIT?
Would requiring the registrant to state ``More information can be found
at:'' before or after these cross-references help investors easily find
the information they may need to make an informed investment decision?
Should we require cross-references to other prospectus sections to
include a specific page number in the prospectus where an investor
could find the information?
23. Besides hyperlinks, are there other technological tools that
would help an investor find information that is cross-referenced in the
KIT or on the cover page of the prospectus, such as QR codes or other
technological tools?
24. Is the level of detail of the disclosure that we propose in
each line item of the KIT appropriate? Does it strike the right balance
between providing enough information to alert an investor to the most
salient facts (including ongoing implicit fees, expenses, risks, and
conflicts) of the RILA contract, but not too much, or too detailed
information? If not, how should we modify the table and/or the
instructions? Are there other key features of RILA contracts that RILA
issuers should disclose in the KIT to help investors make an informed
investment decision?
25. RILAs are frequently marketed as a way to protect against
investment losses through loss-limiting features such as buffers and
floors. Should we require RILA issuers to provide more detailed
disclosures about how these loss-limiting features have affected RILA
investors historically? For example, would investors be better
positioned to
[[Page 71106]]
make informed decisions if we were to require RILA issuers to disclose:
(a) the total number of investor crediting periods (across all
investors and index-linked options) that utilized a loss-limiting
feature for a certain historical period (e.g., the past five years);
(b) the percentage of those investor crediting periods where an
investor's contract value benefited from a loss-limiting feature
(because the feature eliminated or reduced a negative credit resulting
from the performance of the index-linked option); and (c) the
percentage of those investor crediting periods where an investor's
contract value was not impacted by a loss-limiting feature. Should a
RILA issuer have experience with a certain minimum number of crediting
periods in order to be subject to this disclosure? What should a RILA
issuer disclose if their experience with loss-limiting features does
not meet the minimum threshold? Where in the prospectus would be the
appropriate location for this information? For example, if we require
this disclosure, do commenters feel it would be best positioned as part
of the KIT, in Item 6 (in the Limits on Index Losses section), or in
the Contract Overview? Are there other disclosures that commenters
would recommend in the alternative as a way to increase investor
knowledge about the utility of loss-limiting features and their ability
to positively affect investors' contract values? Whether or not we
require more detailed disclosures about the historical effects of loss-
limiting features, should we require similar disclosure about the
historical effects of limits on gains (i.e., upper limits on an
investor's ability to participate in an index-linked option's upside
performance)? Should we require disclosure comparing the economic
effects of the limits on gains to the limits on losses? For example,
should we require disclosure of the number of periods in which each
limit would have actually limited an investor's losses or capped an
investor's gains? Should we require disclosure of the dollar value of
losses an investor would be protected against compared to gains an
investor would give up over a prescribed period of time, such as the
past 10 years?
26. Are there any particular legends that should be included in the
KIT, e.g., ``We will not return your money at the end of the crediting
period unless you tell us to,'' ``The contract adjustment applies in
addition to any surrender charge,'' ``You may earn less than the
index's return,'' and/or ``You may lose up to [X]% of your investment
if you withdraw your money before the end of a crediting period. This
loss can be greater if there is a surrender charge, taxes, and/or tax
penalties''? If so, what legends and why?
27. Is the process of what happens at the end of the crediting
period adequately highlighted in the proposed KIT? Should insurance
companies be required to provide more specific details, either in the
KIT or elsewhere in the prospectus, about how investors can choose an
investment option at the end of the crediting period and the
limitations on those choices?
28. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Fees and Expenses'' line items convey the
appropriate amount of information to investors and concisely alert
investors to the most important fees, charges, penalties, and expenses
associated with the RILA contract?
29. Should the proposed ``Fees and Expenses'' line item, ``Are
there charges for early withdrawals?,'' include disclosure both about
the surrender charges and contract adjustments, as proposed? Would this
disclosure sufficiently alert investors to the typical contract
adjustment of a contract and its impact in reducing contract value (in
addition to any surrender charge) if the investor withdraws money
before the expiration of a specified period? Alternatively, should we
sub-divide this line item into two line items, with the one focused on
surrender charges and the other titled (for example) ``Are there
penalties for mid-term withdrawals?,'' focused on contract adjustments?
Would this help an investor to understand both concepts better? Or
would sub-dividing the line item cause confusion, for example by making
it seem as if a surrender charge and a contract adjustment could not
apply simultaneously? If so, should we require an explicit disclosure
that they could apply simultaneously?
30. Would the Minimum and Maximum Annual Fee and Lowest and Highest
Cost tables assist investors in understanding the costs of their
investment and help them compare the costs of different investment
options and optional benefits in the RILA context? Should we modify the
proposed disclosure or require other additional information to
accompany the tables?
31. Would the proposed disclosure that an issuer would provide
about contracts that do not impose ongoing fees and expenses adequately
convey the implicit ongoing fees of contracts with index-linked options
that have features that limit positive index return? If not, should we
modify the proposed disclosure or require additional information from
issuers?
32. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Risks'' line items adequately convey an
overview of the risks of investing in a contract with an index-linked
option? Are there other risks of investing in these contracts that we
should require a registrant to disclose in the proposed KIT? For
example, should we require RILA issuers to state that an investor can
lose money by investing in these contracts including a loss of
principal? Alternatively, should we require all issuers to state this,
not just RILA issuers?
33. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Restrictions'' line items convey the
appropriate amount of information about certain restrictions that
various contract options may entail, in light of the goals of the
proposed KIT and the unique nature of a RILA? Should an issuer be
required to disclose information about restrictions in the KIT other
than those associated with the contract's investment options and
benefits? If so, what? Instead, should we provide flexibility by
permitting issuers to disclose other restrictions at their discretion?
Do commenters agree that our proposal to require disclosure about
restrictions on contract benefits generally (as opposed to the current
requirement which is limited to optional benefits) is appropriate?
34. Is the disclosure that a RILA issuer (along with other issuers
that use Form N-4) would be required to provide in response to the
proposed ``Taxes'' line item appropriate, in light of the goals of the
proposed KIT? Given that some investors in these products may not have
the means or ability to consult a tax professional, should we require
additional disclosures in addition to the required statement that
investors should consult a tax professional? For example, should a RILA
issuer be required to consider which tax consequences are most likely
be faced by retail investors and to provide general information
regarding those consequences? For example, should an issuer be required
to emphasize more prominently that withdrawals will be subject to
ordinary income tax, and not the capital gains rates? Should the line
item require disclosure of the specific tax penalties and requirements
that investors in annuity contracts may incur (e.g., penalties for
withdrawal before age 59\1/2\, or that purchases through a tax-
qualified plan may be subject to required minimum distribution each
year beginning at age 70\1/2\)?
[[Page 71107]]
35. Are the disclosures that a RILA issuer (along with other
issuers that use Form N-4) would be required to provide in response to
the proposed ``Conflicts of Interest'' line items appropriate, in light
of the goals of the proposed KIT? Would these disclosures adequately
apprise investors of the potential conflicts that arise when their
investment professional is compensated for recommending an investment
into a new, or an exchange from, an existing RILA contract or variable
annuity contract? Should we revise these proposed disclosure
requirements, and if so, how?
36. Do the instructions associated with each of the proposed line
items clearly explain what an issuer would be required to disclose? In
keeping with the structured format of a tabular presentation, we sought
to promote concise disclosure by largely directing issuers to state,
rather than to explain, certain information in response to the required
line items. Should the instructions prescribe specific language or
should issuers have flexibility in drafting their responses? Are there
any particular instructions that we should include or modify in any
way, for clarity or for any other reason?
37. Should we require particular terms in the KIT (e.g., those that
are defined in a related glossary or list of definitions that the
insurance company chooses to include) to be formatted in a way that
will emphasize them, or indicate that they are defined elsewhere in the
prospectus, for example by using bold and/or italic font?
38. Should we apply the structural changes we are proposing to the
KIT in other variable insurance contract registration forms, that is,
Forms N-3 and N-6? The principles we outlined above regarding the
potential efficacy of these changes could be just as applicable in the
context of those forms as in the context of Form N-4. For example,
should we apply the proposed requirements for Forms N-3 and N-6 issuers
to present all disclosures in the KIT in a Q&A format and to begin each
response with a ``yes'' or ``no'' in bold text when answering a
question presented in a given row of the KIT, unless the context
otherwise requires? Similarly, should we require in those forms that
issuers include in their required legends on contract exchanges that
investors consider any fees or penalties to terminate the existing
contract before exchanging their contracts?
3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
We are proposing amendments to Form N-4 to provide investors with
the principal disclosures regarding RILAs and the index-linked options
available under the contract in three items of the form. First,
investors would receive a concise description of the basic information
about any index-linked option available under the contract as well as
any contract adjustments in Item 2 (Overview of the Contract), which,
as discussed above, would appear before the KIT.\115\ Second, investors
would be provided with detailed information about the index-linked
options available under the contract in Item 6 (Description of the
Insurance Company, Registered Separate Account, and Investment
Options). Lastly, investors would be provided with a summary
information table, with legends highlighting risks, that outlines the
available index-linked options in Item 17 (Investment Options Available
Under the Contract). These amendments build on the existing disclosure
requirements in each item to help ensure that investors have key
information about the annuity contract and available investment
options, regardless of whether the contract is a variable annuity, a
RILA, or combination contract offering both variable and index-linked
options.
---------------------------------------------------------------------------
\115\ Because we propose to require the KIT to appear before the
Overview of the Contract, current Item 3 (Overview of the Contract)
would be renumbered as Item 2.
---------------------------------------------------------------------------
(a) Overview of the Contract (Item 2)
We are proposing to amend Item 2 (Overview of the Contract) to
include information about RILAs generally and require the insurance
company to provide an overview of certain key elements of any index-
linked options offered under the contract and to highlight any contract
adjustments. This item is designed to describe certain basic and
introductory information about the contract and its benefits.\116\ It
currently requires a concise description of the contract. This
description must include information about (1) the contract's purpose
(e.g., to help the investor accumulate assets through an investment
portfolio), (2) the phases of the contract (the accumulation (savings)
and annuity (income) phases) including a discussion of the investment
options available under the contract, and (3) the primary features of
the contract (such as death benefits).
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\116\ See VASP Adopting Release at text accompanying n.207.
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We would require insurance companies to provide this existing
disclosure when registering RILA offerings, adjusted to account for the
specifics of RILAs, because it is equally relevant for these types of
annuity contracts. In particular, in addition to the general
information about the contract already required by Form N-4, the
following information would be required with respect to any index-
linked option offered under the contract:
A statement that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index;
A statement that an investor could lose a significant
amount of money if the index declines in value and prominent disclosure
of the maximum amount of loss (as a percentage) an investor could
experience from negative index performance, after taking into account
the minimum guaranteed limit on index loss provided under the contract;
and
An explanation that the insurance company limits the
negative or positive index returns used in calculating interest
credited to an index-linked option at the end of its crediting period,
accompanied by a brief description of the manner in which such returns
may be limited, along with an example and disclosure of the minimum
limit on index losses guaranteed for the life of the contract for any
index-linked option.\117\
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\117\ See proposed Item 2(b)(2)(i) through(iv) of Form N-4.
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We also are proposing to require the insurance company to state, if
applicable, that an investor could lose a significant amount of money
due to the contract adjustment if amounts are removed from an index-
linked option or from the contract prior to the end of a specified
period.\118\ The issuer would also provide a brief description of the
transactions subject to a contract adjustment. We would require a
prominent statement, as a percentage, of the maximum amount of loss an
investor could experience from a negative contract adjustment and that
this loss could be greater due to surrender charges and tax
consequences.
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\118\ See proposed Item 2(d) of Form N-4.
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These disclosures, together, are designed to highlight upfront some
of the key elements of a RILA. The required disclosure about any index-
linked option offered under the contract would highlight for investors
the key
[[Page 71108]]
features of these investment options in general: that returns are based
in part on an index, that investors could still lose a significant
amount of money under the contract, and that there are limits on both
positive and negative index performance. The required disclosure on
contract adjustments would highlight a separate but important
consideration for an investor considering investing in a RILA: that in
addition to any losses from poor index performance, the investor also
can lose a significant amount of money if the investor takes money out
of an index-linked option or the contract early. These disclosures
collectively also would provide context for the KIT, which immediately
follows this item under the proposal, as well as context for more
detailed disclosures that would appear elsewhere in the prospectus.
In addition to these items that are specific to RILAs, we also are
proposing to expand the current requirements for disclosures regarding
optional benefits in Form N-4. Currently, when summarizing a contract's
primary features, the form requires a discussion of any optional
benefits.\119\ A benefit under the contract, such as a non-optional
guaranteed living benefit, might be characterized as a standard (i.e.,
not optional) benefit but nonetheless be a key feature of the contract
that should be highlighted for investors in the overview section of the
prospectus. We are therefore proposing to require that the discussion
of benefits cover all of the primary contract benefits, not just
optional benefits.\120\ This requirement would apply to all contracts
registered on the form.
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\119\ See current Item 3(c) of Form N-4.
\120\ See proposed Item 2(c) of Form N-4; see also supra
footnote 107 and accompanying text.
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We request comment on the proposed summary disclosures contained in
Item 2.
39. Is the proposed information on index-linked options and
contract adjustments appropriate? Is there other or different
information we should require? For example, we are proposing to require
RILA issuers to include examples of how limits on gains and downside
protection operate but do not mandate a form of presentation. Should we
require these examples be provided in a graphical presentation, or
require only a narrative example? Should we require the examples be
converted into a dollar amount? Would investors understand the examples
more readily if we did this? As another example, should we require RILA
issuers to briefly summarize the index crediting methodologies
available under the contract?
40. Should we require the proposed disclosures for index-linked
options and contract adjustments in Item 2, including the existing
disclosure to be provided in the context of a RILA? Is this information
necessary for investors to understand the other disclosures in the
prospectus?
41. Should we, as proposed, broaden the current discussion of the
primary contract features to include a discussion of contract benefits
generally, not just optional benefits (the current focus of the
disclosure requirement)?
(b) Description of Insurance Company, Registered Separate Account, and
Investment Options (Item 6)
We propose to amend Item 6 of Form N-4 to modify certain existing
disclosure requirements and to expand the item to include new
disclosures for RILAs. Proposed Item 6(d), discussed further below,
would set forth most of the substantive new disclosure requirements for
contracts that include index-linked options. We would also include new
disclosures for any fixed options provided as part of the contract. The
information that would be required by the proposed amendments is
designed to convey key aspects of each index-linked option offered
under the contract to investors.
As an initial matter, the proposed amendments to Item 6 would
largely retain the existing requirement to provide a concise discussion
about the insurance company, registered separate account, and variable
options, subject to certain modifications in nomenclature to implement
definitional changes and minor restructuring to accommodate the
addition of RILAs to the form.\121\ Specifically, these changes would
incorporate the proposed changes to certain defined terms and revise
existing disclosures to clarify the entities that should be associated
with certain disclosures (e.g., because the insurance company would be
obligated to pay all amounts promised to investors under the contracts
subject to its financial strength and claims-paying ability, we would
require disclosure about this topic to be framed in terms of the
insurance company, not the registered separate account, as the
requirement is currently worded).\122\
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\121\ See proposed Item 6(a) through (c) of Form N-4.
\122\ We also propose to add an instruction requiring the
insurance company to indicate whether it is relying upon the
exemption provided by 17 CFR 240.12h-7 (``rule 12h-7''), consistent
with the requirements of that rule. See proposed Instruction to Item
6(a) of Form N-4; see also rule 12h-7(f) (requiring issuers of
securities subject to insurance regulation that rely on the
exemption from the duty to file section 13(a) reports with respect
to securities registered under the Securities Act to provide a
statement indicating that fact in the relevant prospectus).
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We are proposing to require one new disclosure item for contracts
that offer variable options, which would be similar to a proposed
disclosure for index-linked options, discussed below. Specifically, the
prospectus for such contracts would be required to include a statement
indicating that ``contract value allocated to a Variable Option will
vary based on the investment experience of the corresponding Portfolio
Company in which the Variable Option invests,'' and ``there is a risk
of loss of the entire amount invested.'' \123\ The risk of loss
inherent in a variable annuity is currently disclosed in the form's
``Key Information Table,'' and we are proposing to mandate this
disclosure in Item 6 as well to warn that an investor can lose the
entire amount invested in a variable option. In addition to informing
investors about investment risks in a variable option generally, where
an annuity contract offers both variable and index-linked options, this
disclosure also would help to explain the different nature of the
investment risks posed by each kind of investment option. In that case
the prospectus would disclose the maximum loss associated with the
index-linked options while also disclosing that, for the variable
options, the investor could lose the entire amount invested.
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\123\ See proposed Item 6(c)(1) of Form N-4.
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Description of Index-Linked Options
We are proposing to require the insurance company to disclose
information about the key features of the index-linked options
currently offered under the contract.\124\ These proposed disclosures
are designed to complement other proposed disclosures in the prospectus
about index-linked options generally by providing investors specific
information about each index-linked option's features and risks, akin
to the information that is currently available to investors about
variable options in the prospectuses for the mutual funds underlying
those options. Specifically, the insurance company would be required to
describe the index-linked options currently offered under the contract
as well as information about how interest is calculated and credited
for each index-linked option, specifically: (1) limits on index losses;
(2) limits on index gains; (3) crediting period; (4) crediting
methodology and
[[Page 71109]]
examples; (5) relevant indexes; (6) maturity; and (7) other material
features of the index-linked option. These disclosures are intended in
part to address points that investors found to be confusing in investor
testing.\125\ Further, some investors in the qualitative interviews
indicated that they would prefer more information about these points
relative to the KIT disclosures.\126\
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\124\ See proposed Item 6(d) of Form N-4.
\125\ See OIAD Study at Section 7, Conclusions, Summary of
Findings and Discussion.
\126\ See OIAD Study at Section 5, Qualitative Testing, Summary
of Qualitative Testing.
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Description of the Index-Linked Options Currently Offered
Under the proposed amendments, RILA issuers would be required to
describe the index-linked options currently offered under the contract,
including statements indicating that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index.\127\ To dispel potential investor confusion
relating to the reference to an index, we are proposing to require RILA
issuers to state that an investment in an index-linked option is not an
investment in the index or in any index fund.
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\127\ See proposed Item 6(d)(1) of Form N-4.
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Other cautionary statements regarding the index-linked options
offered would include that the potential for investment loss could be
significantly greater than the potential for investment gain, and that
an investor could lose a significant amount of money if the index
declines in value. To illustrate the potential scope of such a loss,
RILA issuers would have to prominently state (as a percentage) the
maximum amount of loss an investor could experience from negative index
performance over a crediting period, after taking into account the
minimum guaranteed limit on index loss provided under the contract.
Because index-linked options are often marketed as a way to limit
investment losses, this disclosure is designed to convey to investors
that they could still lose a significant amount on an index-linked
option, despite having a floor or buffer.
To emphasize the substantial risks associated with an early
withdrawal from an index-linked option, RILA issuers would be required
to state that an investor could lose a significant amount of money due
to the contract adjustment if amounts are removed from an index-linked
option prior to the end of its crediting period. To further underscore
the risk, RILA issuers would also prominently state (as a percentage)
the maximum amount of loss an investor could experience from a negative
contract adjustment, and that this loss could be greater due to
surrender charges and tax consequences.
To inform investors of the possibility that their investment
options could be unilaterally changed without action on their part, the
insurance company would be required to state, if applicable, that it
can add or remove index-linked options and change the features of an
index-linked options from one crediting period to the next, including
the index and current limits on gains and limits on index losses,
subject to contractual minimum guarantees.
Similar to the current requirement for prospectuses for contracts
that offer variable options, the insurance company would be required to
state that certain information regarding the features of each currently
offered index-linked option is available in an appendix to the
prospectus,\128\ and to provide a cross-reference to that appendix. An
instruction would permit this statement to be modified if needed to
conform to the corresponding table in the appendix.\129\ As described
further below, the appendix would also be amended to include a table
listing the index-linked options currently available under the
contract.\130\
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\128\ See proposed Item 17 of Form N-4.
\129\ See infra footnote 164 and accompanying text.
\130\ See infra at section II.B.3(b) (describing proposed
amendments to Item 17 (Portfolio Companies Available Under the
Contract) to include parallel provisions for RILAs).
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How Interest Is Calculated and Credited
To aid investors in making informed investment decisions, we
propose to require RILA issuers to describe how interest is calculated
and credited for each index-linked option.\131\ As part of this
description, the insurance company would be required to disclose any
limits on index losses and/or index gains, the crediting periods
available under the contract (e.g., 1, 3, and 6 years), a description
of an index-linked option's index crediting methodology, information
about each index, what happens when an index-linked option matures, and
any other material features associated with index-linked options. We
discuss each of these requirements in turn.
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\131\ See proposed Item 6(d)(2) of Form N-4.
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How Interest Is Calculated and Credited--Limits on Index Losses and
Gains
We are proposing to require the insurance company to describe, as a
primary element of a RILA contract, the limits on index losses and
gains for each index-linked option.\132\ In each case, and as
applicable, the insurance company would be required to state that such
limits apply and describe how index losses and gains would be limited
(for example, through the use of a floor or buffer to limit losses, or
a cap or participation rate to limit gains). We also are proposing to
require the insurance company to provide examples to help investors
understand how these limits work in practice. To illustrate the limits
on index losses, the prospectus would include an example showing how
the limit on index losses could operate to limit a negative return
(e.g., if the index return is -25% and the buffer is -10%, the
insurance company will credit -15% (the amount that exceeds the buffer)
at the end of the term, meaning the investor's contract value will
decrease by 15%). The prospectus similarly would include an example of
how the limit on gains could operate to limit a positive return (e.g.,
if the index return is 12% and the cap rate is 4%, the insurance
company will credit 4% in interest at the end of the term, meaning the
investor's contract value will increase by 4%).
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\132\ See proposed Item 6(d)(2)(i) and (ii) of Form N-4.
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We also propose to require the insurance company to disclose, for
each index-linked option, current limits on index losses and gains, as
well as the minimum limits on losses and gains that are guaranteed for
the life of the contract.\133\ The guaranteed minimum limits tend to be
lower than those currently provided for in the contract but will not
change for the life of the contract, whereas the actual limits for an
index-linked option will vary from crediting period to crediting
period. However, at no point will these limits be lower than the
guaranteed minimums. Both pieces of information are important to
understanding the potential returns of an index-linked option because
one of the central economic tradeoffs a RILA presents is an investor's
consideration of whether to sacrifice potential gains in exchange for
protection against potential losses. An investor therefore will not
only need to consider the guaranteed limits, but also understand that
the actual limits can vary over the life of the contract.\134\
[[Page 71110]]
We also propose to require the insurance company to state that current
limits on gains and limits on index losses will not change during the
index-linked option's crediting period. This would help investors
understand that although the current limits on gains and limits on
losses--unlike the minimum guaranteed limits--can change from crediting
period to crediting period, they will not change during any given
crediting period.
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\133\ Proposed Items 6(d)(2)(i)(B) and 6(d)(2)(ii)(B) of Form N-
4.
\134\ This information about minimum guaranteed index gain
limits is also set forth in the appendix, which is part of the
summary prospectus. See proposed Instruction 7 to Item 17(b);
proposed rule 498A(b)(5)(ix). We are also proposing to require RILAs
to publish online limits on gains. See infra section II.B.3.c.
Although changes to an index-linked option, including current limits
on gains, are material, we recognize that these limits in particular
can change from time to time. Therefore, insurance companies may
update current limits on gains using a prospectus supplement filed
pursuant to rule 497 under the Securities Act. See infra section
II.E.2.
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Because an insurer can generally set rates at its discretion and
may take into account a number of factors in setting those rates, we
are proposing that the insurance company explain how it selects rates
for limiting index losses and gains to help investors understand how
the features of a particular index-linked option will impact that
option's risk/return profile. In particular, we are proposing to
require the insurance company to describe the factors it considers in
determining the current limits on losses and gains for an index-linked
option (e.g., long-term interest rates, market volatility, the cost of
option contracts supporting the index-linked option guarantees,
etc.),\135\ and how that choice may impact other features of the option
set by the insurance company.
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\135\ Similar disclosure has been required in other contexts.
See, e.g., Item 9(a) of Form N-4 (requiring disclosure of material
factors that determine the level of annuity benefits); see also
Instruction 2 to Item 7(a) of Form N-6 (requiring the identification
of factors that determine the applicable cost of insurance rate).
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Giving investors information about the factors the insurer
considers in determining current limits--which are key features of an
index-linked option--may help manage their expectations regarding how
the product operates. If an investor sees that last year's cap on an
index-linked option was 22% and this year the cap is 17%, the proposed
disclosure may help them understand why the insurer's rates have
changed.\136\ If an insurer discloses that it takes various specified
factors into consideration, but ultimately sets rates at its own
discretion, the investor should know that as well.
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\136\ For example, an insurer might disclose that caps and
participation rates may vary depending on factors such as market
volatility, hedging strategies and investment performance, the
investor's index effective date, or interest rates, among others.
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The proposed disclosure about how the current limits on index gains
or losses may impact other aspects of the index-linked option is
designed to explain the inverse relationship between various features
of the index-linked option. For example, the insurance company could
include an explanation regarding how the limit on index losses for an
index-linked option could impact the current limit on index gains. This
could help an investor understand, for example, that if the insurance
company determines to increase the extent to which the index-linked
option will protect against loss, the insurance company may then reduce
the amount of upside index participation the investor could receive.
The prospectus would also require an explanation of the factors an
investor should consider regarding limits on index losses or gains
before selecting an index-linked option for investment. This disclosure
should assist an investor in choosing among the index-linked options
available under the contract, such as by explaining the difference
between a floor and a buffer, or by highlighting index-linked options
with features that assume more risk in return for higher potential
return, or vice versa.
How Interest Is Calculated and Credited--Crediting Period
We are proposing to require the insurance company to generally
describe the crediting periods of the index-linked options available
under the contract (e.g., 1, 3, and 6 years), along with the factors an
investor should consider regarding different crediting period lengths
before selecting an index-linked option.\137\ An example of one such
factor an insurance company could include as part of this disclosure
would be that crediting periods introduce timing risk that forces
investors to take losses at the end of a crediting period, and shorter
crediting periods might increase this risk.\138\ The insurance company
also would be required to prominently state that amounts must remain in
an index-linked option until the end of its crediting period to be
credited with all or partial interest, as applicable, and to avoid a
possible contract adjustment in addition to potential surrender charges
and tax consequences. This discussion would also include a description
of the transactions subject to a contract adjustment (e.g., living
benefits), with appropriate cross-references to related disclosures in
the prospectus. These disclosures collectively are designed to help an
investor make an informed investment decision when selecting an index-
linked option, taking into account that withdrawing money before the
end of the applicable crediting period can have adverse consequences.
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\137\ See proposed Item 6(d)(2)(iii) of Form N-4.
\138\ See OIAD Report at Section 2, RILAs: Structure of
Contracts and Investment Options, Investment Terms (``The role of
[crediting periods] also creates a situation that may be unique for
RILA purchasers relative to other investments they hold. In
particular, RILA investors periodically realize gains or losses at
the end of each [crediting period]. In contrast, a mutual fund
investor (for example) could wait to sell the fund during down
markets, avoiding realizing those losses. Thus, the [crediting
period] feature adds a 'timing risk` for RILA investors relative to
certain other investments.'').
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How Interest Is Calculated and Credited--Methodology and Examples
Each index-linked option has an ``index crediting methodology''
that explains how interest is calculated and credited to the contract.
For example, one index crediting methodology is ``point-to-point,''
that is, the amount credited to the contract is based upon a comparison
of the index's performance at two points in time (such as at the
beginning and end of the crediting period). We- propose to require
insurance companies to explain the index crediting methodologies used
in the index-linked options available under the RILA contract, along
with numerical examples about how these methodologies work. We further
propose to require insurance companies to provide a bar chart that
illustrates the annual total return of each index along with
hypothetical examples of index return after applying standardized
limitations on index gains and losses.
Specifically, insurance companies would be required to describe,
for each index crediting methodology,\139\ how interest is calculated
and credited at the end of a crediting period based on the interest
crediting formula or performance measure.\140\ Form N-4, as we propose
to amend it, would provide examples of common crediting methods that
the insurance company would describe if applicable, such as point-to-
point, step-up calculations, and enhanced performance.\141\ To help
[[Page 71111]]
investors understand how these crediting methods work, we also are
proposing to require the insurance company to include a numeric example
to illustrate the mechanics of each index crediting methodology.\142\
The examples would be required to show, in a clear, concise, and
understandable manner, how each crediting method functions when the
index has positive returns as well as negative returns to help
investors understand how the crediting method functions in both
circumstances.
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\139\ We understand that many index-linked options use the same
crediting methodology. If all index-linked options offered by a RILA
contract use the same crediting methodology, the prospectus would
only include one example of that crediting methodology. If, however,
the index-linked options in a RILA contract offer more than one
crediting method, or if different index-linked options in a RILA
contract offer different crediting methods, this would affect the
number of examples to be provided. The number of examples to be
provided depends on the number of crediting methodologies, not the
number of index-linked options.
\140\ See proposed Item 6(d)(2)(iv)(A) of Form N-4.
\141\ As noted above, a point-to-point crediting methodology
compares the index's performance at two points in time (such as at
the beginning and end of the crediting period). Step-up calculations
guarantee a given rate if the index's returns are positive,
regardless of the index's actual performance, subject to certain
conditions. ``Enhanced performance'' increases a positive index
return, such as by offering a participation rate of more than 100%.
\142\ See proposed Item 6(d)(2)(iv)(C) of Form N-4.
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Specifically, we would require numeric examples that reflect a
positive return above the limit on index gains, and a negative return
below the limit on index losses for each methodology. The examples also
would be required to assume hypothetical returns and limits that are
reasonable based on current and anticipated market conditions and sales
of the contract, and to reflect any charges subtracted from interest
credited to or deducted from contract value in the index-linked option
to allow investors to understand the impact of these charges on their
return. Additional examples, charts, graphs, or other presentations
would be permitted if they are clear, concise, understandable. Any
additional presentations that assume hypothetical returns and limits
also should assume hypothetical returns and limits that are reasonable
based on current and anticipated market conditions and sales of the
contract. We would also require insurance companies to include a
legend, in the format specified in the form, that (1) these examples
illustrate how the insurance company calculates and credits interest
under each index crediting methodology assuming hypothetical index
returns and hypothetical limits on index gains and losses and (2) the
examples assume no withdrawals.
We also are proposing to require a bar chart for each index
available under the currently-offered index-linked options showing the
index's annual return for the last 10 calendar years (or for the life
of the index, if less than 10 years), with the corresponding numerical
performance adjacent to each bar.\143\ Further, insurance companies
would be required to provide a hypothetical example alongside each
index return that reflects the return after applying a 5% cap and a -
10% buffer. If there are no caps or buffers offered under the contract
(if, for example, the contract includes a floor rather than a buffer),
insurance companies would be permitted to reflect a rate or measure
used to limit index gains or losses under the contract that is
comparable. Insurance companies would not be permitted to include
additional performance presentations, or historical index performance
that precedes the inception of the index. Further, insurance companies
would be required to provide two footnotes to this table, if
applicable, that disclose (1) that the index return does not reflect
dividends paid on the assets in the index, and (2) that the index
provider deducts fees and costs when calculating index return.
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\143\ See proposed Item 6(d)(2)(iv)(B) of Form N-4.
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These bar charts would also be accompanied by the following legend
in the format specified in the form:
The bar chart shown below provides the Index's annual returns
for the last 10 calendar years (or for the life of the Index if less
than 10 years), as well as the Index returns after applying a
hypothetical 5% cap and a hypothetical -10% buffer. The chart
illustrates the variability of the returns from year to year and
shows how hypothetical limits on Index gains and losses may affect
these returns. Past performance is not necessarily an indication of
future performance.
The performance below is NOT the performance of any Index-Linked
Option. Your performance under the Contract will differ, perhaps
significantly. The performance below may reflect a different return
calculation, time period, and limit on Index gains and losses than
the Index-Linked Options, and does not reflect Contract fees and
charges, including surrender charges and the Contract Adjustment,
which reduce performance.
This information is intended to provide context for the index-
linked options that the RILA contract offers and would better inform an
investor when deciding whether to invest in a RILA. For example, if an
index-linked option provides that the investor will experience at least
5% of the upside performance of an index, investors may view the
tradeoffs of this investment differently if the index historically has
returned, for example, 10% per year (thus capping gains at 5% during
those past periods) or 1% per year. Similarly, if an index-linked
option offers a -10% buffer, the investor could compare that against
the index performance in the bar chart and assess the extent to which
the buffer would have provided downside protection against market
losses in negative return years.
We appreciate, however, that historical index presentation alone,
without the addition of hypothetical caps and buffers, may mislead
investors into thinking that these historical rates of index
performance are what investors would have received under the contract
if they invested in a particular index-linked option. As we discuss in
more detail below, we are concerned that presenting historical RILA
performance without additional context can be potentially misleading
given that investors cannot access the same RILA terms as were
available historically. Relatedly, we are concerned that statements in
RILA advertisements are being made without sufficient context so that
investors can understand the qualifications to those statements.\144\
As an example of how historical index performance could confuse
investors, consider an investor who has selected an index-linked option
with performance based on the performance of XYZ Index and a one-year
crediting period, and this investor has allocated contract value to
that index-linked option over 10 consecutive crediting periods. This
investor's RILA contract value after 10 years likely will differ from
the XYZ Index's 10-year performance. Reasons for this likely difference
include, for example, that the index-linked option only provides a
portion of the performance of the index because of a cap rate, buffer,
or floor.
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\144\ See also infra section II.F.
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Accordingly, we are proposing to require insurance companies to
provide historical index information to investors, but with important
qualifications so that investors will not confuse this index
information for the historical performance of the RILA itself. In
particular, the overlay of hypothetical caps and buffers is designed to
help investors understand better how those limits can cause RILA
performance to differ from that of the index. Further, the legends we
are proposing also are designed to put investors on notice that the
presented performance is not the RILA's performance.
The proposed bar chart, including the proposed 10-calendar-year
period, is modeled on the risk/return bar chart in Item 4(b)(2) of Form
N-1A. Form N-4 also currently requires variable annuity issuers to show
10-years of performance in the portfolio company appendix. We
preliminarily believe that 10 calendar years is an appropriate time to
illustrate the performance of the index over the long term to help
guide investors. We are proposing to require a 5% cap rate and -10%
buffer rate to help investors understand how caps and buffers affect
the index return, but without using values that are so high or so low
that they will bear no resemblance to the
[[Page 71112]]
level of gains and losses that is being offered. The illustrative rates
are designed to achieve this effect because they are higher than
typical guaranteed levels of caps and floors, but lower than typical
currently offered levels.
How Interest Is Calculated and Credited--Indexes
The index underlying an index-linked option is a central feature of
the investment, as the investor's return will be based on the index's
performance, subject to applicable limits on gains and losses. We
therefore are proposing to require the insurance company to provide for
each index a brief description of the types of investments that compose
the index and where the investor can find more information about the
index.\145\ Where there is more than one version of an index (for
example a total return version and a price return version), the
disclosure would clearly state which version of the index relates to
the index-linked option. If the index is an exchange-traded fund
(``ETF''), the disclosure would have to clarify whether the index's
performance for purposes of determining the amounts credited in the
index-linked option is based on the ETF's net asset or closing value
and, if the performance is based on the ETF's share price, the impact
of using the share price as opposed to total return. These disclosures
collectively are designed to help ensure that investors understand the
applicable indexes. The disclosure would also state, if applicable,
that the index does not reflect dividends paid on its underlying
securities, or that the index deducts fees and costs when calculating
index performance, which will reduce index performance. This is
important disclosure because an index that does not reflect dividends
paid on underlying securities, or that deducts fees and costs, will
have a lower return, all else equal, than an index that includes
dividends and does not deduct fees and costs.
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\145\ See proposed Item 6(d)(2)(v)(A) of Form N-4.
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We also propose to require the insurance company to state that it
reserves the right to substitute an index prior to the end of the
crediting period.\146\ This would put investors on notice that the
index associated with a particular index-linked option--which is a key
driver of the investor's return--could change in the middle of a
crediting period. The insurance company also would be required to
disclose all circumstances that could necessitate a substitution, how
the insurance company would choose a replacement index, when and how
investors would be notified of this change, how index return will be
calculated at the end of the crediting period, and what would happen if
a suitable replacement index were not found, including whether the
index-linked option will be discontinued prior to the end of the
crediting period. This information would allow an investor to better
understand the likelihood of the insurance company making a
substitution and its potential effects.
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\146\ See proposed Item 6(d)(2)(v)(B) of Form N-4. Insurers
generally reserve the right to change the index in the middle of the
crediting period if the index is discontinued or there is a
substantial change in the calculation of the index. Based on staff
experience, such changes are exceedingly rare.
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How Interest Is Calculated and Credited--Maturity and Other Material
Features
To help investors anticipate what may happen at the end of an
index-linked option's crediting period, the insurance company also
would be required to state whether an investor would receive advanced
notice of a maturing index-linked option, how an investor might provide
instructions regarding the reallocation of the contract value rate at
the end of the crediting period, and any automatic default allocation
in the absence of such instructions.\147\ In describing these matters,
the prospectus must also explain how investors will be informed of the
index-linked option available for allocation at the end of a crediting
period, including any changes to the currently-offered index-linked
options and the discontinuance or addition of index-linked options.
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\147\ See proposed Item 6(d)(2)(vi) of Form N-4.
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Finally, we propose to require the insurance company to describe
any other material aspects of the index-linked option to ensure that
any other item not discussed above that could affect an investment
decision is disclosed.\148\ This would include disclosure related to
limitations on transfers to or from index-linked options, rate holds,
``bail-out'' provisions, start dates, and holding accounts.\149\ We
would also require a brief description of how charges may impact the
index-linked option's value if applicable as part of this discussion.
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\148\ See proposed Item 6(d)(2)(vii) of Form N-4.
\149\ A ``rate hold'' locks in interest at the current cap (or
other rate limiting index gains) for the period between which the
insurance company receives the investor's annuity application and
the time the investor's premium payment is allocated to the index-
linked option. A bail-out provision is a contract provision that
provides if a current cap (or other rate limiting index gains) is
set below a specified value, the investor may withdraw value from
that index-linked option or RILA without a contract adjustment (and
in some cases without a surrender charge) during a specified period
after the start of the crediting period. A holding account is
typically a conservative investment option (typically a money market
fund or a fixed option) where amounts allocated to the index-linked
option are held until the next index-linked option start date. This
is used for index-linked options that start on a particular day each
month (e.g., the 15th of the month).
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Fixed Options
In addition to variable options and index-linked options, annuity
contracts commonly include fixed investment options, such as
traditional, unregistered fixed options and unregistered index
options.\150\ In the variable annuity context, a fixed option provides
an alternative for investors who wish to avoid the market risk of
investing in a variable option. A fixed option can also serve as the
holding account for amounts that are pending allocation to a particular
investment option. In addition, a fixed option may be the default
allocation vehicle at the end of an index-linked option's crediting
period.
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\150\ See proposed Item 6(e) of Form N-4. Interests in fixed
account options are exempt securities under Section 3(a)(8) of the
Securities Act.
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Form N-4 generally requires registrants to describe the fundamental
features and risks of an annuity contract, including those, like fixed
options, that are distinct from the variable options offered through
the registered separate account.\151\ The form also currently requires
specific disclosure about fixed options in the KIT and the Contract
Overview.\152\ Because we are proposing to include disclosures relating
to index-linked options in Item 6, we are also proposing to require
disclosures on this other type of investment option available to
annuity contract investors so that they have a complete understanding
of what they may invest in through that contract, either actively, or
by default. This approach is designed to increase investor
comprehension by ensuring that substantive information about all of the
available investment options is presented in the same location in the
prospectus.
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\151\ General Instruction C.1.(a) of Form N-4 (stating that
``[a] Registrant's prospectus should clearly disclose the
fundamental features and risks of the [Contracts], using concise,
straightforward, and easy to understand language.'').
\152\ Items 2 and 3 of Form N-4.
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The proposed disclosures for fixed options would be similar to
those provided for index-linked options, tailored for the specifics of
a fixed option. Specifically, registrants would be required to describe
the fixed options currently offered under the contract and state that
information regarding the features of each currently-offered fixed
option, including its name, term, and
[[Page 71113]]
minimum guaranteed interest rate is available in an appendix with
cross-references.\153\ Further, registrants would be required to
describe how interest is calculated and when it is credited for each
fixed option as well as the length of the term and minimum guaranteed
interest rate (stated as a numeric rate, rather than referring to any
minimums permitted under State law). As with index-linked options, the
registrant also would be required to state whether an investor would
receive advance notice of a maturing fixed option, including what steps
an investor might take to provide instructions regarding the
reallocation of contract value at the end of the term, and any
automatic default allocation in the absence of such instructions. In
describing these matters, the registrant must also explain how
investors will be informed of the fixed options available for
allocation at the end of a term, including any changes to the currently
offered fixed options and the discontinuance or addition of fixed
options. Also as with index-linked options, we would require disclosure
of any other material aspect of the fixed options, including
limitations on transfers to or from the fixed options, rate holds,
start dates and holding accounts.
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\153\ As discussed below, we are also proposing to require
disclosure relating to any fixed options currently offered under the
contract in the Item 17 appendix.
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Request for Comment
We request comment generally on the proposed amendments to Item 6
of Form N-4, and specifically on the following issues:
42. Should we require each of the specific disclosures (e.g.,
disclosures relating to limits on index losses and gains, crediting
period, etc.) relating to the RILAs and index-linked options as
proposed? Would all of these proposed amendments provide information
that would be important to investors? Should we modify or expand any of
these proposed disclosure requirements?
43. Should we make any other changes to the required prospectus
disclosures addressing index-linked options? For example, we are
proposing to require numeric examples, charts, graphs, or other
presentations, as appropriate, to illustrate the mechanics of each type
of index crediting methodology.\154\ Would the proposed requirement be
likely to provide useful information for investors? If not, why not?
Would the inclusion of such examples, charts, and graphs be likely to
confuse investors about how index-linked options work? Is there a
concern that insurance companies would utilize these examples to over-
emphasize the benefits of RILAs relative to their risks? If so, how
could this be remedied? Should such examples be included in the
prospectus in response to Item 6, or would they be better located
elsewhere in the prospectus, for example, in Items 3 or 17? Given the
potential length of such examples, should they be included in an
appendix to the prospectus?
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\154\ Proposed Item 6(d)(2)(iv) of Form N-4.
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44. Should the current limits on gains and losses be required in
the statutory prospectus, as proposed? If not, where should such
disclosure be located? Should insurance companies update current limits
on gains as they change from time to time by filing a rule 497
prospectus supplement, or should a rule 485 post-effective amendment be
required?
45. Should we require the proposed disclosures relating to the
risks of investing in variable options?
46. Should we require that the historical performance of indexes be
disclosed as proposed? Is the proposed bar chart an effective or
appropriate presentation approach, or should we instead require another
presentation approach, such as a line graph or the 1-, 5-, and 10 year
table required in the Form N-1A? If so, why? Are there any concerns
that investors would confuse the inclusion of historical index
information with the performance of the index-linked option itself? If
so, are our proposed requirements to provide a hypothetical example of
a 5% cap and -10% buffer and a legend sufficient to make clear that the
performance illustrated by the bar chart does not show or suggest how
an investment in the contract will perform for the investor? Are the 5%
cap and -10% buffer appropriate limits to use in the hypothetical
examples? Instead of prescribing a specific cap and buffer, should we
require or permit issuers to include the current and/or guaranteed
limits as an overlay to the bar chart, or would this provide too much
visual clutter for investors, or be misleading in any way? Is 10
calendar years of index performance the right amount of time to
present?
47. Should we require discussion of fixed investment options
currently offered under the contract? Are the proposed disclosure items
appropriate for these types of investment options?
48. Is there other information we should require insurance
companies to disclose to help investors better understand the economic
tradeoffs associated with an index-linked option? For example, issuers
of structured notes that offer bounded returns similar to RILAs
disclose the issuer's valuation of the note, based on the value of (1)
the embedded derivatives; and (2) a fixed-income bond. This disclosure
allows investors to understand the difference between the issuer's
valuation and the original issue price that they are paying for the
structured note. Would a similar disclosure for RILAs, provided with
respect to each permutation of an index-linked option, be helpful to
investors? Would the difference between a hypothetical $100,000
investment in an index-linked option and the value, or the cost to
assemble, the economic components underlying the index-linked option be
informative to investors? Would it appropriately reflect the implied
cost the investor is paying when investing in that index-linked option?
If we were to require this disclosure, should it be expressed in
dollars, as a percentage of a hypothetical $100,000 investment, or
both? Should we require the insurance company to annualize the costs
over a stated period of time to express the cost as more akin to an
annual expense? Recognizing that RILAs are intended to be long-term
investments, what would be an appropriate period of time (e.g., 10, 20,
or 30 years)?
49. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require the
insurance company to compare a hypothetical $100,000 investment in the
index-linked option to the value, or cost, of the following components:
derivatives that would provide the index-linked option's investment
exposure; a fixed-income component; and the standard insurance features
offered with the index-linked option?
50. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require that
the insurance company value or price the derivatives using exchange-
listed derivatives, such as exchange-traded options, and based on
prices on the exchange, except in cases where exchange-listed
derivatives could not efficiently provide the index-linked option's
investment exposure? Would that approach provide for consistent and
reliable pricing? In practice are insurance companies typically
constructing and hedging index-linked options' investment exposure
using exchange-listed options or other derivatives where feasible?
51. If we were to require insurance companies to provide the
disclosure described in request for comment 48, in determining the
value of the derivatives underlying an index-linked option, should we
require insurance companies
[[Page 71114]]
to use a collection of hypothetical index options with an expiration
equal to the crediting period, consistent with our analysis in section
III.B.3? \155\
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\155\ See infra footnote 429 and accompanying text.
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52. If we were to require insurance companies to provide the
disclosure described in request for comment 48, what calculation would
be appropriate for the fixed-income component of an index-linked
option? Should we, for example, provide that the insurance company
should use the $100,000 hypothetical investment discounted by the rate
of interest the insurance company is crediting, or would credit, on
fixed annuities with a term equal to the duration of the crediting
periods of the index-linked option? Conversely, should we require the
insurance company to use the value of a risk-free zero-coupon bond with
a time to maturity equal to the crediting period of the index-linked
option, consistent with our analysis in section III.B.3?
53. If we were to require insurance companies to provide the
disclosure described in request for comment 48, how should the
insurance company value, or determine the cost of purchasing
separately, the standard insurance features? Do insurance companies
maintain internal pricing information that could be used for this
purpose where those features are not offered separately rather than in
connection with annuities or other financial products sold by the
insurance company? Should the cost or value of insurance be based on
amounts insurance companies are required to reserve in connection with
those insurance obligations? Should we require additional disclosure
related to early withdrawal charges, fees, or penalties? For example,
should we require more prominent placement of these features on
marketing or other materials, or should we require a comparison of
these features to potential benefits of the RILA to clarify for
investors possible trade-offs?
54. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we, in addition
to requiring the disclosure of this cost figure, also require the
insurance company separately to disclose the costs or values associated
with each component underlying the index-linked option?
55. If we were to require insurance companies to provide the
disclosure described in request for comment 48, where should insurance
companies place it in the registration statement? Would this
information be most helpful to investors if it were included in the
disclosure required by Item 6, which provides more detailed information
on each index-linked option, or in the summary prospectus appendix
identifying the RILA's investment options? Alternatively, should it be
disclosed the KIT as a range based on the available index-linked
options? If this information were in the summary prospectus, would it
change frequently and result in a high number of prospectus supplements
delivered to investors? If we were to further require the disclosure of
the underlying components and pricing assumptions used to determine the
cost to investors disclosure, would the SAI be an appropriate place for
that disclosure? Should these disclosures be structured using inline
XBRL as proposed for other additional disclosures?
(c) Appendix: Investment Options Available Under the Contract (Item 17)
We propose to amend Item 17 to include a discussion of the index-
linked options and fixed options available under the contract. This
item currently requires a variable annuity issuer to include in an
appendix to the prospectus a table that consolidates certain summary
information about each portfolio company offered under the contract.
The current appendix is designed to provide investors with an overview
of variable options available under the contract in a uniform, tabular
presentation that promotes comparison, because the investment
experience of an investor in a variable annuity will largely depend on
the underlying investments available under the contract.\156\
Similarly, we anticipate that an overview of the index-linked options
available to investors in a RILA, as well as any fixed option currently
available under the contract, would help investors understand and
compare the various investment options offered under the contract.
Consolidating this summary information about the contract's investment
options--equivalent to what is currently provided for variable
options--into a concise, easy to read tabular presentation should
enhance the ability of investors to understand, evaluate, and compare
all the investment options available under the contract.
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\156\ VASP Adopting Release at n.267 and accompanying text.
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To reflect the expanded scope of the appendix, we would amend the
current heading to ``Investment Options Available Under the Contract.''
\157\ We would provide a new instruction that explains that issuers may
modify this new heading as appropriate under the contract. For example,
if there are only variable options offered under the contract, an
issuer could change the heading to ``Portfolio Companies Available
Under the Contract,'' consistent with the current requirements of the
form. Because variable options, fixed options, and index-linked options
can vary by benefit offered under the contract, we also propose to move
the restrictions table currently required for variable annuities by
instruction 1(f) of Item 17 to be a separate requirement for all
investment options, with no other changes.\158\
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\157\ ``Investment options'' are defined as any variable option,
index-linked option, or fixed option available under the contract.
See infra section II.B.7(b).
\158\ Proposed Item 17(d) of Form N-4.
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Index-Linked Options
To accommodate the inclusion of index-linked options in the
appendix, we propose to add a new table titled ``Index-Linked
Options.'' \159\ As part of our approach to layered disclosure, the
information to be supplied in the table for index-linked options would
summarize certain prospectus disclosures required elsewhere in the
prospectus.\160\
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\159\ See proposed Item 17(b) of Form N-4.
\160\ See, e.g., proposed Item 6(d) of Form N-4.
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Legends
Similar to the requirements for variable annuities, the table for
index-linked options would be prefaced with a legend. Specifically, the
legend would state that the table lists index-linked options currently
available under the contract. Further, because insurance companies
typically change the index-linked options available over time, we would
require the legend to specify that the insurance company may change the
features of the index-linked options in the table (including the index
and the current limits on gains and limits on losses), offer new index-
linked options, or terminate existing index-linked options, and that
the insurance company will provide the investor with written notice
before making any of these changes.
As discussed above, current limits on index gains for index-linked
options would be disclosed in the prospectus in response to Item 6, and
changes to current limits on index gains would be disclosed in
prospectus supplements.\161\ However, to avoid frequent updates to the
summary prospectus, insurance companies would not be required to
include current limits on index gains for index-linked options in the
appendix as
[[Page 71115]]
those limits can change frequently.\162\ Instead, and in addition to
the disclosure in Item 6, to ensure that investors have convenient
access to changes in current limits on index gains, which can
significantly affect an investor's returns on an index-linked option,
the proposed legend would require insurance companies to state that
current limits on gains are available at a website address.\163\ This
website address must be specific enough to lead investors directly to
current rates, rather than to the home page or other section of the
website on which the rates are posted. Requiring RILA issuers
separately to include information about current limits on gains on
their websites would benefit investors by making this information
easier to find and understand. Furthermore, because websites may be
updated quickly, website disclosure would be efficient for compiling
index-linked options' current limits on gains, given our understanding
that these rates can change often and that insurance companies
currently disclose current rates on their websites.
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\161\ See proposed Item 6(d)(2)(i)(B) of Form N-4 and supra
footnote 134.
\162\ As discussed below, the proposed appendix would appear in
the summary prospectus, but Item 6 would not. See infra section
II.C; see also infra section II.E.1 (discussing proposal to amend
rules 485 and 497 for RILAs).
\163\ Consistent with the current instructions to the form, any
website address, including this one, that is included in an
electronic version of the statutory prospectus would be required to
include an active hyperlink or other means of facilitating access
that leads directly to the relevant website address. However, this
requirement would not apply to an electronic summary prospectus that
is filed on EDGAR. See proposed General Instruction C.3.i of Form N-
4.
---------------------------------------------------------------------------
Lastly, set off from the rest of the legend and with emphasis, we
would require a notation that if amounts are withdrawn from an index-
linked option before the end of its crediting period, the insurance
company may apply a contract adjustment and that this may result in a
significant reduction in the investor's contract value that could
exceed any protection from the index's loss that would be in place if
an investor held the option until the end of the term. We are proposing
this notation given the potential impact on an investor's returns if
amounts are withdrawn prior to the end of a crediting period.
We propose to require the legend to include appropriate cross-
references to the section(s) of the prospectus that describe the
features of the index-linked options as well as the contract
adjustment. This approach is designed to help investors that are
interested in more detail about key aspects of the index-linked options
to locate that information quickly.
Table
The legend would be followed by a table that lists and highlights
key elements of each index-linked option available under the contract.
Specifically, the table would require, in sequential columns, the
identification of (1) each index by name; (2) type of index; (3)
crediting period, indicating the duration of the index-linked option in
years; (4) index crediting methodology; (5) limits on index loss if
held to the end of the crediting period; and (6) guaranteed minimum
limit on index gain.
The description of the type of index would be a brief statement of
which type of index it is (e.g., market index, exchange-traded fund,
etc.), or a brief statement describing the assets that the index seeks
to track (e.g., U.S. large-cap equities). The column indicating the
type of index crediting methodology used for each index-linked option
would only be required if the RILA utilizes multiple index crediting
methodologies under the contract (e.g., point-to-point, step-up,
enhanced upside, etc.).\164\ The disclosures regarding limits on index
loss would require an issuer to state the current percentage used in
the insurance company's interest credit methodology to limit the amount
of negative index return credited to the index-linked option and to
identify in the table whether this limit is a buffer, floor, or some
other rate or measure.\165\ In the last column, issuers would be
required to state the guaranteed minimum percentage that may be used to
limit the amount of positive index return credited to the index-linked
option and to identify in the table whether this limit is a cap,
participation rate, or some other rate or measure.\166\
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\164\ If all index-linked options offered by a RILA contract
used the same crediting methodology, the table would not include the
column. See, e.g., supra footnote 139.
\165\ In contrast to current limits on index gain, we understand
that the current limits on index loss typically do not change
frequently.
\166\ As discussed above, instead of also requiring a column for
current limits on index gains (in addition to the column for
guaranteed minimum limit on index gains), the legend would state
that information about current limits on index gains is available at
a specified website address.
---------------------------------------------------------------------------
To ensure investors only receive disclosure relevant to them, RILAs
would only be permitted to include in the table those index-linked
options that are available under the contract. Further, to promote
disclosure in a consistent format to facilitate comparisons, issuers
would be allowed to add, modify, or exclude table headings only as
necessary to describe the material features of an index-linked option.
Insurance companies would also be required to indicate if any of the
index-linked options are restricted (e.g., because of a ``hard'' or
``soft'' close), consistent with the current disclosure requirements
for variable options. The proposed instructions also would state that
if an index provider calculates the index's return in a manner that
does not reflect the full investment performance of the assets tracked
by the index (e.g., the return does not reflect dividends paid on the
assets composing the index, the return reflects a fee or cost, etc.), a
footnote to the table must, if applicable, be included stating that the
index's return does not reflect the full investment performance of the
assets it tracks, which will reduce the index's performance. An
investor evaluating index-linked options may be more familiar with a
version of a given index that reflects the full performance of the
index constituents, and this disclosure would alert investors that the
index associated with a particular index-linked option will have
relatively lower returns.
Fixed Options
Consistent with our proposed approach to the Item 6 disclosure
requirements, we are proposing to require in the appendix summary
information about fixed options currently available under the contract.
These disclosure requirements would be similar to the legend and table
for index-linked options discussed above, adjusted to reflect fixed
option details. The fixed option legend, in addition to identifying
that what follows is a list of fixed options currently available under
the contract, would indicate that the insurance company (1) may change
the features of the fixed options identified, offer new ones, and
terminate existing ones and (2) will provide the investor written
notice before doing so. The fixed option table would include columns
identifying (1) the name of the fixed option, (2) the term, and (3) the
minimum guaranteed interest rate.\167\ Insurance companies would be
instructed to include appropriate cross-references in the legend to the
sections of the prospectus that describe the features of fixed options.
As with index-linked options, insurance companies could add, modify, or
exclude table heading only as necessary to describe material features
of a fixed option.
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\167\ Consistent with the approach in Item 6, the minimum
guaranteed interest rate would be required to be stated as a numeric
rate rather than referring to any minimums permitted under State
law.
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[[Page 71116]]
Request for Comment
We request comment generally on the proposed inclusion of index-
linked option summary information in the appendix, and specifically on
the following issues:
56. Should we require these new disclosures to be included in the
appendix? Are the proposed appendix disclosures for index-linked
options appropriate? Would they help investors to compare information
among index-linked options and generally understand the index-linked
options available? Is this information likely to be relevant and useful
to investors? Is there more or different information that we should
require? Should any of the information not be included? For example,
should we require current limits on gains to be disclosed in the
appendix, rather than requiring the appendix to include a website
address where information about current limits is available (as well as
requiring this information in the statutory prospectus)? Would
investors find it useful to have online access to information about
current limits on gains? Will investors find current limits on index
loss in the summary prospectus useful even if the current limits on
index gains are not included?
57. We are proposing to require in the statutory prospectus numeric
examples, charts, graphs or other presentations to illustrate the
mechanics of each type of index crediting methodology.\168\ Should we
permit or require some or all of these examples for index-linked
options to be included in the appendix? Would the inclusion of these
examples add undue length or complexity to the appendix, or overwhelm
the disclosure for other investment options? Could these concerns be
ameliorated by only permitting or requiring a limited number of
examples (e.g., no more than 4), or by placing certain other
limitations on the inclusion of such examples? If so, how? If we were
to require examples for index-linked options to be included in the
appendix, should we also require the examples to be included in the
Item 6 disclosures, or should such disclosures only be required in a
single location (and if so, which one)?
---------------------------------------------------------------------------
\168\ Proposed Item 6(d)(2)(iv) (Methodology and Examples) of
Form N-4. We are proposing to permit this information to be included
in an appendix. See supra section II.B.3(a).
---------------------------------------------------------------------------
58. Should we include the proposed disclosure in the appendix
relating to fixed options currently available under the contract? Are
there any changes we should make to the specific proposed disclosure
requirements?
4. Principal Risks of Investing in the Contract (Item 5)
An investment in a contract offering index-linked options exposes
investors to unique risks that may be different from those that are
common to other investment products, including contracts that solely
offer variable options. We propose to amend Item 5 to address certain
principal risks that are particularly relevant to investors in RILAs.
In addition to restructuring the current item to incorporate the
proposed risk disclosure requirements addressing index-linked options,
we propose certain structural changes that are designed to clarify
existing requirements but are not anticipated to result in
substantively different disclosure requirements for contracts offering
variable options. These proposed changes also would consolidate certain
risk disclosures insurance companies currently provide for variable
annuities in other sections of the prospectus. We are proposing to
require these disclosures in a single location to more consistently and
effectively communicate risks to investors. As the Commission has
previously explained, the principal risk disclosure in the prospectus
is designed to provide a consolidated presentation of principal risks,
which registrants can cross-reference to reduce repetition that might
otherwise occur if the same principal risks were repeated in different
sections of the prospectus.\169\
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\169\ See VASP Adopting Release at n. 690 and accompanying text.
---------------------------------------------------------------------------
The principal risk disclosure item of Form N-4 currently consists
of a single paragraph requiring a registrant to summarize in the
prospectus the principal risks of purchasing a contract, including the
following risks: (1) poor investment performance, (2) that contracts
are unsuitable as short-term savings vehicles, (3) limitations on
access to cash value through withdrawals, and (4) the possibility of
adverse tax consequences. We propose to retain these substantive risk
disclosure requirements but would restructure the current single
paragraph into separate sub-items while also making certain minor
changes designed to clarify existing obligations.\170\ The proposed
sub-items are designed to be non-exclusive examples of the principal
risks of investing in the contract being registered. In addition to
existing disclosure requirements, these sub-items would also include
new risk disclosures specific to index-linked options, as
applicable.\171\ We are making parallel changes to the risk disclosures
most applicable to variable annuities to avoid any implication that
risk disclosure should be provided at a different level of detail than
the disclosures for RILAs. Most contracts offering variable options
that are currently registered on Form N-4 likely would not need to
revise their risk disclosure in response to the proposed amendments to
the risk disclosure requirements. In our experience, it is common
practice for these registrants currently to include the disclosures
that the proposal would require in their prospectuses as principal risk
disclosure (or elsewhere in their prospectuses).
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\170\ See proposed Item 5(a)-(b), (d)-f) of Form N-4.
\171\ See proposed Item 5(c) of Form N-4.
---------------------------------------------------------------------------
The proposed approach would retain the current requirement for
registrants to explain the principal risks of purchasing a contract,
but would also require an explanation of the principal risks of
investing in an investment option, including the risks of poor
investment performance.\172\ Additionally, for index-linked options, a
registrant would disclose the maximum potential loss from negative
index performance over the crediting period, as a percentage. Although
disclosures that address certain risks of index-linked options would be
required in other locations in the prospectus, we are proposing that
RILA issuers include certain risk factors, such as this one, in the
consolidated summary of principal risks associated with the
contract.\173\ The maximum potential loss resulting from negative index
performance is a salient way to quantify potential returns for
particular investment options. For example, absent this disclosure, it
may not be apparent to investors that an index-linked option that
offers a -10% buffer still has the potential for 90% loss.\174\ This
statement would help
[[Page 71117]]
investors assess the particular risks associated with RILAs in the
context of the other required principal risk disclosures. The potential
risk of loss is particularly important for investors to understand
because RILAs are often presented to investors as having the benefit of
offering a balance between the opportunity for growth and the reduced
risk of loss relative to savings alone or more conservative
investments.\175\
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\172\ See proposed Item 5(a) of Form N-4.
\173\ See proposed Item 1(a)(6) (Outside Front Cover Page)
(``Prominently disclose as a percentage the maximum amount of loss
from negative Index performance that an investor could experience
after taking into account the minimum guaranteed limit on Index loss
provided under the Contract.''); proposed Item 2(b)(ii) (Overview of
the Contract) (``[P]rominently state as a percentage the maximum
amount of loss an investor could experience from negative Index
performance, after taking into account the minimum guaranteed limit
on Index loss provided under the Contract.''); proposed Item
6(d)(1)(ii) (Investment Options) (``Prominently state as a
percentage the maximum amount of loss an investor could experience
from negative Index performance, after taking into account the
minimum guaranteed limit on Index loss provided under the
Contract.'').
\174\ We recognize that this example may suggest to some
investors that an option with a buffer is riskier than one with a
floor. In fact, the protection offered by a buffer is more likely to
be triggered than the protection offered by a floor. In general, a
buffer protects the investor from experiencing smaller, more common
losses on an index (as well a portion of any larger loses), while a
floor protects the investor from larger, less-common losses (but
does not protect against smaller losses). Insurers that offer both
buffers and floors should generally make this distinction clear to
investors in their Item 5 risk disclosures, as well as in response
to proposed Items 2(b)(2) and 6(d) of Form N-4.
\175\ See OIAD Report at Section 4, Review of RILA Marketing.
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The next proposed sub-item, which concerns the risks of early
withdrawal, would retain the current requirement for registrants to
disclose that contracts are unsuitable as short-term savings vehicles
and to summarize the limitations on access to cash value through
withdrawals, including the possibility of adverse tax
consequences.\176\ We propose to expand this disclosure requirement to
specify that a summary of the limitations on access to cash value
through withdrawals may also include, if applicable, surrender charges,
as well as negative contract adjustments and loss of interest. These
are features of RILAs that implicate why they are not short-term saving
vehicles. In addition, insurance companies that offer index-linked
options would be required to state the maximum potential loss resulting
from a negative contract adjustment, as a percentage. Although this
last statement would be required to be provided in other locations in
the prospectus, we are proposing to include this risk disclosure in the
consolidated summary of principal risks because contract adjustments
can significantly affect contract value.\177\ Also, contract
adjustments are a distinctive feature of contracts with index-linked
options that we recognize (based on results of qualitative investors
interviews) investors can find difficult to understand. Quantifying
maximum potential loss resulting from a negative contract adjustment is
intended to illustrate the possible effects of these adjustments.
Further, unlike other types of losses, contract adjustments are
typically avoidable by investors. As a result, we anticipate that
showing the maximum loss possible would help investors evaluate whether
to take an action that would result in a contract adjustment. It also
would help investors understand the potentially significant risks that
they could face in a RILA, regardless of a RILA's bounded return
structure. Therefore, this statement would assist investors in
assessing unique risks associated with index-linked options in the
context of the other required principal risk disclosures.
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\176\ See proposed Item 5(b) of Form N-4.
\177\ See proposed Item 1(a)(7) (Outside Front Cover Page)
(``Prominently state as a percentage the maximum potential loss
resulting from a negative Contract Adjustment, if applicable.'');
proposed Instruction 2(a) to Item 3 (Key Information Table)
(``Include in this statement the maximum potential loss (as a
percentage of the investment) resulting from a negative adjustment.
. . .''); proposed Item 4 (Fee Table--Transaction Expenses)
(``Contract Adjustment Maximum Potential Loss (as a percentage of
Contract value at the start of the Crediting Period or amount
withdrawn, as applicable)''); and proposed Instruction 1 to Item
7(e) (Contract Adjustment) (``State the maximum potential loss, as a
percentage, that could result from a negative Contract
Adjustment.'').
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The next proposed sub-item, which concerns the principal risks
associated with index-linked options, would include new risk disclosure
requirements tailored to address unique risks associated with these
investment options.\178\ Under these proposed requirements, a
registrant would have to describe the principal risks of investing in
any index-linked options offered under the contract (in addition to the
risks of potential loss from negative index performance, as discussed
above). The proposed sub-item would require the prospectus to include a
statement that an investor in an index-linked options is not invested
in the index or in the securities tracked by the index. This reflects
our concern, based on the results of qualitative investor interviews,
that investors may be confused about whether an investment in an index-
linked option is a direct investment in the index.
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\178\ See proposed Item 5(c) of Form N-4.
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To help ensure that RILA prospectuses address certain key risks,
the proposed instructions to this disclosure requirement would specify
that discussion of the principal risks related to index-linked options
would be required to include the principal risks relating to, as
applicable: (1) limiting positive index returns; (2) the possibility of
losses despite limits on negative index returns; (3) interest crediting
methodologies; (4) the impact of contract fees on the amount of
interest credited; and (5) the reallocation of contract value at the
end of an index-linked option's crediting period. We are also proposing
instructions specifying that this discussion would be required to
include, as applicable, principal index risks relating to: (1) the type
of index (e.g., market risk, small-cap risk, foreign securities risk,
emerging market risk, etc.); (2) the exclusion of dividends from index
return; and (3) market volatility. These instructions would require
RILA issuers to specify which risks relate to each index offered under
the contract, and to describe the principal risks related to the
possible substitution of the index before the end of an index-linked
option's term.
An additional proposed new sub-item would require a description of
the principal risks associated with any contract benefits (e.g., death
benefits, living benefits), including the impact of excess withdrawals,
if applicable. These risks include, for example, investment
restrictions associated with a living benefit, which may limit
investment performance.\179\ As an additional example, there are risks
that withdrawals may substantially reduce the benefit, that some
guaranteed benefits are based on a contingency that may never occur
(e.g., the contract value falling to zero), that the rates for contract
benefits may change over time, and that certain benefits may be
discontinued prior to election. Because these risks could impact the
expected performance of the annuity, or in some cases could even
terminate the annuity, we are proposing to require issuers to disclose
them to in the prospectus.
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\179\ See proposed Item 5(d) of Form N-4.
---------------------------------------------------------------------------
Another proposed new sub-item would require an explanation of the
principal risks associated with the insurance company's ability to meet
its guarantees under the contract, including risks relating to its
financial strength and claims-paying ability, which as described below
may be of particular concern for investors who allocate contract value
to index-linked options.\180\ We recognize that a summary of certain
insurance company risks is currently required to be disclosed in the
KIT.\181\ Moreover, although there is no corresponding disclosure
requirement that mandates the inclusion of insurance-company-related
risks in the principal risk disclosure in contract prospectuses, most
Form N-4 registrants already provide this disclosure. We therefore do
not expect that current Form N-4 registrants likely would have to
modify their disclosures to comply with the proposed requirement.
Nevertheless, we propose to require this disclosure to be included in
the consolidated principal risks section of the prospectus for
[[Page 71118]]
completeness, and to help ensure that a prospectus for a contract that
offers fixed options and index-linked options discloses the insurance
company's claims-paying ability with regard to its contractual
guarantees. In contrast to variable options, where amounts invested are
held in a separate account insulated from the insurance company's
general account and protected from general account creditors, assets
invested in an index-linked option are subject to the insurance
company's claims-paying ability for most RILAs.
---------------------------------------------------------------------------
\180\ See proposed Item 5(e) of Form N-4.
\181\ See current Instruction 3(d) to Item 2 of Form N-4.
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Lastly, we propose a final new sub-item, which would require a
description of the principal risks relating to any material reservation
of rights under the contract, including if applicable, (1) the right to
remove or substitute portfolio companies; (2) add or remove index-
linked options and change the features of an index-linked option from
one crediting period to the next; (3) stop accepting additional
purchase payments; and (4) impose investment restrictions or
limitations on transfers.\182\ We propose to require this disclosure
because the ability to discontinue contract features, alter an
investor's ability to participate in an index's upside performance, and
otherwise change features is important information for investors when
making an investment decision.
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\182\ See proposed Item 5(f) of Form N-4.
---------------------------------------------------------------------------
We request comment generally on the proposed amendments to Item 5
of Form N-4, and specifically on the following issues:
59. Do the proposed amendments to Item 5 appropriately describe the
types of principal risks that are typically associated with investing
in a contract that offers variable options and/or index-linked options?
Should different or additional principal risks be required to be
summarized in the prospectus?
60. Do commenters agree with the proposed approach of amending Item
5 to restructure the current item into separate sub-items? For
contracts offering variable options, do commenters agree that the
proposed changes would clarify existing requirements, but would not
generally result in substantively different principal risk disclosure
requirements? Would the proposed changes to Item 5 require contracts
offering variable options that are currently registered on Form N-4 to
revise their current risk disclosure, or could they continue to use
their existing disclosures? Why or why not? To the extent that Form N-4
registrants are currently disclosing risks on topics that the proposed
changes address in other parts of the prospectus, would this current
risk disclosure be considered to be ``principal'' risk disclosure?
61. Although we are proposing to require disclosure of specified
index-linked option-related principal risks to be provided in response
to the Item 5 disclosure requirements, we also propose to require
aspects of these risks to be disclosed in response to certain other
prospectus disclosure requirements, facilitating a layered disclosure
approach. Is this appropriate? What ``layers'' of risk disclosure are
appropriate for the summary prospectus, statutory prospectus, and SAI?
62. Are the proposed additions to the current principal risk
disclosures appropriate? If not, why not? Should we, for example,
require a registrant specifically to disclose principal risks
associated with index-linked options, contract benefits, the insurance
company, and any material reservation of rights under the contract, as
proposed? If not, why not? Is an insurer's ability to discontinue
contract features, reduce index limits on gains and otherwise change
features likely to be inconsistent with an investor's reasonable
expectations, as we state above? Should we modify any of the aspects of
these proposed principal risk disclosure requirements?
5. Addition of Contract Adjustments and Other Amendments to Fee and
Expense Disclosures (Items 4, 7, and 22)
We are proposing amendments to Form N-4 to require specific
disclosures regarding contract adjustments and other implicit RILA-
specific costs that can result in a significant erosion of investment
principal. The proposed disclosures are designed to provide investors
with a better understanding of the mechanics of these costs and the
associated potential for loss. Under the proposed approach, these
disclosure requirements would be set forth in Items 4, 7, and 22(d) of
Form N-4. We are also proposing revisions to the existing provisions of
these Items, applicable to all Form N-4 issuers, to clarify certain
terminology.
(a) Amendments to Fee Table Disclosure Requirements (Item 4)
We propose amending Item 4 to require specific disclosures
regarding contract adjustments and other costs specific to RILAs. Item
4 currently requires variable annuity registrants to provide
comprehensive information on the fees and expenses investors will pay
when buying, owning, and surrendering or making withdrawals from a
contract, as well as expenses paid each year during the time the
investor owns the contract. While RILAs typically do not charge the
explicit ongoing fees and expenses common to variable annuities,
investors do experience an implicit ongoing fee to the extent the
insurer limits, through the use of a cap, participation rate, or some
other rate or measure, index gains. Moreover, RILA issuers typically
utilize contract adjustments, which can result in a significant charge
to investors who make withdrawals from an index-linked option or from
the contract before the end of a specified period. Further, investor
testing suggested that most participants struggled to fully comprehend
the costs to investors of these products.\183\ These costs include
contract adjustments because they can negatively affect an investor's
contract value or the amounts an investor could withdraw from the
contract.\184\ Accordingly, we are proposing to include a detailed
description of contract adjustments in the prospectus, and that this
disclosure be proximate and similar to other disclosures regarding fees
and expenses. Thus, we are proposing several amendments to incorporate
the concept of contract adjustments as well as implicit ongoing fees
and expenses into the current Item 4 disclosure requirements. We
propose generally expanding the tabular disclosures that Item 4
requires to address contract adjustment costs that investors will pay
when buying, owning, and surrendering or making withdrawals from an
investment option, and as noted below, requiring disclosures about the
maximum potential loss that an investor could experience in connection
with a contract adjustment. We are also proposing to expand the tabular
disclosures with respect to annual contract expenses, to alert
investors to the implicit ongoing costs associated with limiting
positive index returns. In addition, we are proposing certain non-
substantive changes to the fee table disclosures and instructions that
would be applicable to all issuers.\185\
[[Page 71119]]
Particularized changes we propose to the fee table disclosures are
discussed below.
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\183\ See OIAD Report at Section 6, Quantitative Testing,
Testing Impacts, Table 9 (noting that 16.2 percent of participants
understood that a participation rate reduces potential gains from
the market and 52.1 percent of participants understood that a cap
reduces potential gains from the market).
\184\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results From Round 2.
\185\ In order to eliminate unnecessary information in the
prospectus, we propose amending the general instructions to clarify
that registrants may omit a narrative explanation that is not
applicable under the contract. See proposed instruction 1 to Item 4
of Form N-4. We also are proposing an amendment to general
instruction 5 regarding the preparation of the Transaction Expenses
and Annual Contract Expenses tables, clarifying that the instruction
to disclose the maximum guaranteed charge as a single number where a
fee is calculated based on a benchmark does not apply to a contract
adjustment. See proposed instruction 5 to Item 4 of Form N-4.
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Transaction Expenses Table
Form N-4 issuers currently must include a transaction expenses
table in their prospectuses, describing fees and expenses investors
must pay when buying, owning, and surrendering or making withdrawals in
connection with a contract. This requires a description of the sales
load imposed on purchases (as a percentage of purchase payments), the
deferred sales load (as a percentage of purchase payments or amount
surrendered, as applicable), and transfer fees. To provide proximate
and similar disclosure for RILA-specific costs, we propose to require
that insurance companies additionally include the maximum negative
contract adjustment that may be imposed, to be expressed as a
percentage of contract value at the start of the crediting period or
the amount withdrawn, as applicable. To provide investors notice of the
circumstances where they might be subject to this cost, we also propose
that insurance companies include a footnote describing all transactions
potentially subject to a contract adjustment.\186\
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\186\ See proposed instruction 11 to Item 4 of Form N-4.
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Currently this table also requires registrants to describe the
maximum exchange fee that investors could incur for any exchange or
transfer of contract value from the registrant to another investment
company, or between sub-accounts or to the insurance company's general
account. In a change relevant to all Form N-4 issuers, we are proposing
a terminology change, replacing the term ``exchange fee'' with
``transfer fee,'' as this term better reflects our experience, namely
that the vast majority of such fees are those imposed on transfers of
account value among investment options under the contract.\187\
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\187\ See proposed Instruction 10 to Item 4 of Form N-4. Under
the proposed definition, ``transfer fee'' would encompass both the
maximum fee charged for any exchange or transfer of contract value
between investment options as well as the maximum fee charged for
any exchange or transfer of contract value from the registered
separate account to another investment company or from the
registered separate account to the insurance company's general
account. Thus, the proposed amendments regarding the definition and
terminology surrounding transfer fees would not result in any
substantive change for existing Form N-4 issuers.
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Annual Contract Expenses
Form N-4 issuers currently must include an annual contract expenses
table in their prospectuses, detailing the fees and expenses that
investors pay each year in administrative expenses, base contract
expenses, and optional benefit expenses. Currently, base contract
expenses must be expressed as a percentage of average account value. In
a change relevant to all Form N-4 issuers, we propose an amendment that
would also allow base contract expenses to be expressed as a percentage
of average account value or contract value. We do not expect that this
change will substantively affect variable annuities' existing
disclosure. We are proposing this expansion to describe expenses
deducted where index-linked options or fixed options are implicated, as
those options do not generally use the concept of average account
value.\188\ Additionally, to place investors on notice of the unique
and ongoing trade-off costs associated with RILAs that may not be
captured by this table, we are proposing to require registrants to
include the following statement in the table:
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\188\ We are also proposing two related, non-substantive
amendments to the instructions relating to annual contract expenses
relevant to all issuers. These changes are to broaden terminology
given the expanded scope of issuers that under the proposal could
file on Form N-4. Currently the instruction for describing
administrative expenses references ``any Contract, account, or
similar fee on all Investor Accounts;'' however, as noted below, we
propose deleting the term ``Investor Account,'' and accordingly also
propose amending this instruction to conform to that change.
Relatedly we are proposing to amend the instruction regarding base
contract expenses to remove a reference to fees and expenses
deducted ``from separate account assets or charged to all Investor
Accounts,'' replacing it with an instruction to consider fees and
expenses ``charged to any Investment Option.''
In addition to the fees described above, we limit the amount you
can earn on an Index-Linked Option. Imposing this limit helps us
make a profit on the Index-Linked Option. In return for accepting
this limit on Index gains, you will receive some protection from
Index losses.
Annual Portfolio Company Expenses
Form N-4 currently requires issuers to include in the prospectus an
annual portfolio company expenses table, disclosing the minimum and
maximum total operating expenses charged by the portfolio companies
offered by variable annuity contracts that may be periodically charged
to investors during the time they own the contract. This includes costs
incurred by portfolio companies directly and, if the portfolio company
invests in other mutual funds, the fees and expenses the portfolio
company indirectly incurs from these investments. In a change that also
would apply to variable annuities prospectuses, we are proposing that
registrants disclose that expenses shown in this table may change over
time and may be higher or lower in future. We propose this change for
two reasons. First, this modification would help to ensure that
investors understand that these charges may increase over time,
notwithstanding that these charges are described as maximum expenses.
Second, given that we are proposing similar disclosures with regard to
features of RILA offerings that are subject to change, we propose to
require a similar level of disclosure with regard to variable annuity
offerings where appropriate.
Example
Form N-4 issuers currently must provide an example in their
prospectuses that is designed to allow variable annuity investors to
compare the cost of investing in the contract with the cost of
investing in other variable annuity contracts. We propose amending the
example requirements to clarify, for variable annuity and RILA issuers,
that the example is designed to permit investors to compare costs of
investing solely in variable options under the contract with costs
associated with variable options offered under other annuity contracts.
Under the proposal, the example would be preceded with a legend
specifically stating that: the example assumes that all contract value
is allocated to variable options; the example does not reflect contract
adjustments; and costs would likely differ if an investor selects
index-linked options or fixed options.
(b) Charges (Item 7)
Currently, Item 7 requires registrants to provide a brief
description in their prospectuses of all current charges deducted from
purchase payments, investor accounts, or assets of the registrant.
Consistent with the proposed changes to Item 4, we also are proposing a
change in terminology that would affect all Form N-4 issuers, replacing
references in Item 7 to ``investor accounts'' and the assets of
``registrants'' with the terms ``contract value'' and ``investment
option'' assets, respectively. Therefore, in responding to Item 7,
variable annuity and RILA issuers would describe charges deducted from
purchase payments, contract value, or investment option assets.\189\
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\189\ Additionally, we are proposing two non-substantive
terminology changes in Instruction 3 to Item 7(a) regarding how
registrants must describe the sources that will be used to cover
shortfalls where proceeds from sales load will not cover expected
costs. First, we propose replacing the term ``depositor'' with the
term ``insurance company.'' Second, where shortfalls are to be made
from an insurance company's general account, this instruction
requires a disclosure that amounts paid by the insurance company may
consist of proceeds derived from base contract expenses deducted
from the registered separate account. We propose striking this
italicized language referring to assets of the registered separate
account because it is superfluous given the definition of ``base
contract expenses'' in proposed Instruction 14 to Item 5, discussed
above.
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[[Page 71120]]
For the reasons described above and given the potentially
significant economic consequences contract adjustments can have on RILA
investors, we are also proposing additional specific requirements to
incorporate contract adjustments into the prospectus's disclosure of
charges, which would entail detailed descriptions of any contract
adjustments under the contract. These disclosures are designed to be
comparable in scope and proximate to existing disclosures about
contract charges applicable to variable annuities.\190\
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\190\ See instructions (a) through (d) to Item 7 of Form N-4.
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Specifically, we are proposing that insurance companies would have
to: (1) disclose (as a percentage) the maximum potential loss that
could result from a negative contract adjustment; (2) define the period
during which any contract adjustment would apply; and (3) describe all
transactions subject to a contract adjustment.\191\ Insurance companies
also would have to include a description of how the contract adjustment
will affect the contract value, surrender value, death benefit, and any
living benefits, and disclose that a negative adjustment could reduce
the value under the contract in an amount greater than the value
withdrawn.\192\ They would also need to describe, in simple terms, how
the contract adjustment is determined under the contract, and the
relationship between the contract adjustment and any other charges or
fees applied under the contract, including, for example, the sequence
in which charges and adjustments are applied.\193\ The required
disclosure would also require the issuer to briefly describe the
purpose of the contract adjustment, including, for example, that the
contract adjustment transfers risk from the insurance company to the
investor to protect the insurance company from losses on its own
investments supporting contract guarantees if amounts are withdrawn
prematurely.\194\ Finally, issuers would be required to disclose how an
investor can obtain information about the current value of the contract
adjustment, while stating that this value can fluctuate daily, and that
the quoted value may differ from the actual value at the time of
adjustment.\195\
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\191\ See proposed instructions (e)(1) through (e)(3) to Item 7
of Form N-4. In describing the transactions subject to a contract
adjustment, the insurance company would need to describe, for
example, whether adjustments apply if amounts are transferred or
withdrawn from an index-linked option or from the contract due to a
partial withdrawal, surrender, election of an annuity option, or
payment of death benefit proceeds, or where a particular optional
benefit (e.g., a withdrawal under a guaranteed living benefit) is
utilized, and to describe any circumstances under which the
adjustment will be waived.
\192\ See proposed instruction (e)(5) to Item 7 of Form N-4. If
applicable, the insurance company would also be required to state
the impact of the contract adjustment on interest to be credited to
an index-linked option at the end of its crediting period.
\193\ See proposed instructions (e)(4) and (e)(6) to Item 7 of
Form N-4. The description of how the contract adjustment is
determined would have to provide a meaningful explanation of all the
material features of the contract adjustment's application,
including: (1) information about any formula applied (e.g., a change
in value of hypothetical derivative instruments); (2) the factors
that may cause an adjustment (e.g., timing of withdrawal, index
volatility, increase in external interest rates); (3) a description
of any proportionate withdrawal calculations; and (4) how
adjustments are applied (e.g., allocated among the investment
options, applied to a withdrawal amount).
\194\ See proposed instruction (e)(7) to Item 7 of Form N-4.
\195\ See proposed instruction (e)(8) to Item 7 of Form N-4.
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These proposed disclosures are intended to provide investors with
the necessary scope and level of detail of the contract adjustments
that could negatively affect an investor's contract value or the
amounts an investor could withdraw from the contract. These disclosures
are further justified given the RILA Act's requirement that the
Commission use the results of investor testing in designing a
registration form for RILAs. That mandated investor testing showed that
participants were confused about contract adjustments, their purpose,
the situations in which they could arise, their potential magnitude,
and their relationship to other fees and charges (e.g., surrender
fees).\196\ These disclosures are designed to address these areas of
identified confusion.
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\196\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results From Round 2 and Section 7, Conclusions.
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To simplify this disclosure, we propose specifying that detailed
disclosure on the method of calculating the contract adjustment appear
in the SAI, as opposed to the prospectus.\197\ We also propose
requiring that Item 7(e) include a cross-reference to Item 22 of Form
N-4, which would require more-detailed disclosure on the contract
adjustment's calculation (including illustrative examples as to
adjustment's operation) to appear in the SAI. The more detailed SAI
discussion is not, however, a substitute for the Item 7 requirements.
Thus, for example, an insurance company could not include the formula
underlying the contract adjustment calculation in the SAI in lieu of
the required discussion of the formula in the prospectus. Rather, in
addition to stating the formula in the SAI, the insurance company would
need to include in the prospectus a brief description, in simple terms,
of the manner in which contract adjustment is determined.
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\197\ See proposed instruction (e)(4) to Item 7 of Form N-4.
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Further, while the proposed disclosures are tailored to the
mechanics of contract adjustments, they are also designed to be, where
possible, consistent with existing requirements regarding disclosure of
current charges deducted from purchase payments, investor accounts, or
assets of the registrant. For example, Form N-4 currently requires
disclosure of current fees and charges, which are typically expressed
as a percentage. Because the value of a given contract adjustment can
change daily, we are proposing that insurance companies disclose the
maximum potential loss, as a percentage, that could result from a
negative contract adjustment (rather than mandate a disclosure of a
current contract adjustment value that could quickly become
outdated).\198\
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\198\ See proposed instruction (e)(1) to Item 7 of Form N-4.
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(c) Purchase of Securities Being Offered (Item 22)
We are proposing to amend Item 22, which addresses the purchase of
securities being offered, to require specific, detailed contract
adjustment disclosures to appear in RILA issuers' SAIs. As discussed
above, issuers would be required to provide a simple explanation of the
underlying mechanics of contract adjustments in their prospectuses,
while noting that further detail is available in the SAI and providing
a cross reference to that information. Under the proposal, in addition
to the discussion required in the prospectus by Item 7, Item 22 would
require issuers to explain fully the operation of any contract
adjustment that can be applied under the contract. This more detailed
explanation would not take the place of the prospectus discussion and
would need to address all the material features of the adjustment and
include an explanation
[[Page 71121]]
of any formulas used to calculate the adjustment, and at least one
numeric example to illustrate the application of the contract
adjustment. This numeric example would have to include a negative
adjustment, reflect surrender charges (if applicable), and disclose the
percentage change in contract value as a result of the adjustment.
The mechanics of contract adjustments under a RILA contract are
typically complex, often implicating the application of factors or
formulas that can be difficult for many investors to understand.
Because the application of a negative contract adjustment can
substantially affect an investor's contract value, however, we propose
to require the inclusion of information on negative contract adjustment
in the SAI, so that investors who wish to learn more about the
calculation may do so. In addition to promoting transparency generally,
this proposed disclosure would ensure that liability attaches under
section 11 of the Securities Act for any material misrepresentations
regarding the application of a contract adjustment.
We are also proposing to make applicable to RILA issuers certain
existing SAI disclosure requirements about the purchase of securities
being offered. Specifically, we are proposing revisions to the
instructions to the existing requirement to describe the manner in
which the securities are offered to the public, which would instruct
RILA issuers to respond by addressing any exchange privileges between
investment options.\199\ Additionally, we propose to make the existing
requirement to describe the method used to determine the sales load
applicable to RILA issuers.\200\ We do not propose applying the
existing disclosure requirement dealing with frequent transfer
arrangements to RILA issuers, as its provisions are relevant only to
variable annuity contracts.\201\
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\199\ See proposed Item 22(a) of Form N-4.
\200\ See proposed Item 22(b) of Form N-4.
\201\ See proposed Item 22(c) of Form N-4.
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(d) Request for Comment
We request comment on these proposed amendments.
63. Do commenters agree that it is appropriate to include a
discussion of contract adjustments in Items 4, 7, and 22 as proposed?
If not, how would commenters suggest issuers disclose contract
adjustments to ensure that investors have sufficient information to
make an informed investment decision regarding RILAs?
64. Is it appropriate to require the disclosure of the contract
adjustment maximum potential loss in the transaction expense table? Do
commenters agree that is appropriate to require that issuers express
the contract adjustment maximum potential loss as a percentage? If not,
what alternative measure would commenters suggest?
65. Do commenters agree that the proposal strikes the proper
balance in the location of the proposed contract adjustment
disclosures? Are there any contract adjustment disclosures we propose
including in the SAI that commenters believe would be more
appropriately located in the prospectus? Are there any contract
adjustment disclosures we propose including in the prospectus that
commenters believe would be better situated in the SAI?
66. Do commenters agree with our proposal that issuers be required
to include, in the annual contract expenses table, a statement
disclosing that, in addition to the expenses described in the table,
investors will be subject to limits on the amounts they can earn in
connection with index-linked options? Do commenters agree that it is
appropriate to include a statement addressing current limits on gains
in conjunction with the annual contract expenses table? Do commenters
agree the proposed statement captures the most salient concerns to
investors of these kinds of limits on gains? Do commenters have any
suggestions for alternate wording or placement of the statement?
67. Do commenters have any suggestions about additional or
alternative disclosures that would address the areas of confusion
regarding contract adjustments that this release describes as being
identified in investor testing?
68. Are there any concerns with our proposal to use the term
``contract adjustment'' when referring to MVAs (market value
adjustments) and IVAs (interim value adjustments)? Is there an
alternative term that we should use to describe these kinds of
adjustments?
69. Does our proposal to replace the term ``exchange fee'' with
``transfer fee'' in Item 4 raise any concerns?
70. With regard to the numeric examples we propose requiring in the
SAI, should there be any additional requirements for what those
examples would need to include? For example, should we require that the
example utilize the average negative contract adjustment in operation
for the preceding year, or the negative contract adjustment expected
over the next year? Should we also (or instead) require an example of a
contract adjustment in the prospectus? If so, why, and what particular
assumptions should we require in the example?
71. Do commenters agree with our recommendation to place the more
detailed disclosures associated with the mechanics of contract
adjustments (such as applicable formulas) in the SAI as opposed to the
prospectus? Why or why not?
72. In addition to the contract adjustment disclosures we have
proposed, should we also require issuers to provide a graphic
illustrating the operation of a contract adjustment? If so, where
should we require that graphic illustration be presented, and what
particular circumstances should it illustrate? For example, would it be
helpful to require issuers to include a graphic illustration
demonstrating how a contract adjustment works when investors withdraw
amounts from their contract prior to the end of a crediting period?
Should we require illustrations that demonstrate the operation of a
contract adjustment for investors in circumstances where they change to
a different index-linked option before the end of a crediting period,
and demonstrating how they can change investment options to minimize
the financial impact to their contract value?
6. Information About Contracts With Index-Linked Options (Item 31A)
We are proposing new Item 31A of Form N-4 to require census-type
information regarding RILAs offered in connection with the applicable
registration statement. Specifically, under proposed Item 31A, an
insurance company would be required to provide the following
information regarding any RILA offered through the registration
statement, as of the most recent calendar year-end: (1) the name of
each contract; (2) the number of contracts outstanding; (3) the total
value of investor allocations attributable to index-linked options; (4)
the number of contracts sold during the prior calendar year; (5) the
gross premiums received during the prior calendar year; (6) the amount
of contract value redeemed during the prior calendar year; and (7)
whether the contract is a ``combination contract,'' that is, a contract
that offers variable options in addition to index-linked options. This
information would be required as of the most recent calendar year-end
and, accordingly, would generally be updated through a post-effective
amendment to a registration statement on Form N-4.\202\
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\202\ See proposed Item 31A of Form N-4. An issuer transitioning
from an existing registration statement on Form S-1 or S-3 to Form
N-4 through a post-effective amendment would be required to report
this information as of the most recently completed calendar year in
its first post-effective amendment transitioning onto Form N-4.
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[[Page 71122]]
This information is census-type data that would provide contract-
level disclosures designed to assist the Commission and staff in
identifying trends in insurance companies' offerings of RILAs. This
information would also provide improved transparency to investors by
supplementing the information available about the marketplace for the
contracts offered in connection with a registration statement. These
items are relatively limited in scope and primarily consist of
information that should generally be readily available to issuers. The
particular data required is similar to that provided by registered
separate accounts that likewise assist the Commission and staff in
identifying trends in variable annuities.\203\
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\203\ See Item F.14 of Form N-CEN; see also Investment Company
Reporting Modernization, Investment Company Act Release No. 32314
(Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] at the sentences
following n.1142.
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We are proposing to require information to be presented as of the
most recent calendar year-end to provide the Commission and its staff
with information that will be updated with an annual frequency for
offerings of RILAs. We anticipate that this information would typically
be updated as part of an issuer's annual update to its registration
statements for such contracts.\204\ This approach would result in
information provided as of a uniform date for all offerings of RILAs,
regardless of the issuer's filing date, and, in turn, would provide for
increased comparability across issuers and contracts.\205\ Requiring
this information to be updated annually is intended to achieve an
appropriate balance between providing the Commission and its staff with
current information while avoiding overburdening issuers. An annual
snapshot should be sufficient for the census-type nature of the
information and would provide Commission staff with appropriate
intervals of data points over time in which to identify trends in
insurance companies' offerings of RILAs. Requiring these issuers to
report such census information semi-annually or more frequently would
place an increased burden on issuers that may not be justified by a
commensurate increase in the value of the information received by the
Commission.
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\204\ See 15 U.S.C. 77j(a)(3).
\205\ We understand that insurance companies offering RILAs have
a December 31 fiscal year end which, in practice, means a
distinction between calendar year and fiscal year would result in
limited effect on the reporting.
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This reporting would provide the Commission with additional
transparency into the RILA market segment, which would in turn improve
the effectiveness of the Commission's oversight of offerings on Form N-
4. Requiring this high-level reporting would permit the Commission to
identify trends occurring in this market segment over time and assist
with allocating the Commission's resources in administering the form.
This reported information on index-linked options would complement
parallel census-type information that is currently required to be
reported annually on Form N-CEN by registered unit investment trusts
offering variable annuities.\206\ The new census-type information
therefore would help provide the Commission with a more complete
picture of the marketplace for insurance products offered through
registration statements on Form N-4. In addition, this information may
benefit the public in supplementing the information available about
RILAs.
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\206\ Issuers registering combination contracts on Form N-4
would be required to exclude amounts allocated to a variable option
when providing information in response to Item 31A as these
allocations would be separately reported by registered separate
accounts on Form N-CEN.
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We request comment on these proposed amendments.
73. Are the required reporting elements in Item 31A of proposed
Form N-4 appropriate and clear? If not, what elements require
additional instruction?
74. Do commenters agree that it is appropriate to require reporting
under Item 31A to be provided as of calendar year-end? Do commenters
agree that there is limited practical difference between requiring a
fiscal year-end and calendar year-end requirement in light of
investment company practices?
75. Should we require additional or different reporting of census-
type reporting regarding RILAs? If so, should we also amend the
requirements of Form N-CEN to ensure parallel reporting by registered
unit investment trusts offering variable annuities registered on Form
N-4?
76. Would RILA issuers face any significant challenges in providing
the required reporting elements? If so, why?
77. Do commenters agree that it would be appropriate for issuers
with existing contracts to report information required by proposed Item
31A for the calendar year prior to the calendar year the issuer first
transitions its registration statement onto Form N-4?
7. Other Amendments and Provisions
Our proposed amendments also include certain other amendments to
Form N-4 and related rules designed to accommodate the inclusion of
RILA issuers on that form. These include amendments to Form N-4's
facing sheet, definitions, exhibit list, and required representations,
as well as amendments to certain Securities Act rules that help to
implement the proposal. These proposed amendments are discussed below.
(a) Facing Sheet
We are proposing amendments to include a new checkbox section on
the facing sheet. Specifically, an issuer would be required to identify
in this new section: (1) if it is a new registrant, defined as, as
applicable, a registered separate account or insurance company that has
not filed a Securities Act registration statement or amendment thereto
within 3 years preceding this filing; \207\ (2) if it is an emerging
growth company (``EGC''), as defined by Rule 12b-2 under the Exchange
Act; (3) if it is an EGC, whether it has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act; and (4) if it is relying on an exemption from
Exchange Act reporting requirements in reliance on rule 12h-7.\208\
These changes would help the Commission better understand the types of
registration statements being filed on Form N-4 and, in the case of the
EGC information, mirrors similar facing sheet requirements found in
Form S-1. In addition, we are proposing amendments to the description
of the types of entities that use Form N-4 to include insurance
companies that offer index-linked options, either as stand-alone or
combination products.\209\
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\207\ For example, a variable annuity separate account that has
not previously filed a Securities Act registration statement would
identify itself as a new registrant, regardless of whether the
sponsoring insurance company has filed a recent Securities Act
registration statement or amendment thereto as the proposed
requirements request information on the registrant. In the same
manner, an insurance company filing on Form N-4 would determine
whether it is a new registrant solely with respect to its own
Securities Act registration statement filings.
\208\ In addition to this checkbox, we are proposing an
instruction that implements the requirements of rule 12h-7 to
indicate that the insurance company is relying upon the exemption
provided by that rule in the relevant prospectus. See supra section
II.B.3.b.
\209\ See supra section II.A.
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(b) Definitions (General Instruction A)
We are proposing amendments to General Instruction A to update the
[[Page 71123]]
existing definitions in Form N-4, add new definitions to accommodate
the inclusion of RILAs on Form N-4, and implement these proposed
definitions throughout the form. However, unless otherwise stated, the
proposed amendments to the definitions in General Instruction A would
not alter the existing obligations under Form N-4 for current issuers
on Form N-4. These changes should provide a standard set of definitions
to convey form provisions in a consistent and efficient manner without
the need for lengthy descriptions in each instance and clarify which
form provisions apply to which categories of issuers and investment
products.\210\
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\210\ We are also proposing to amend Form N-4 throughout to use
the gender-neutral reference of ``investor'' where appropriate. See,
e.g., proposed Instruction 6 to Item 2 of Form N-4.
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Specifically, we propose to add a new definition for ``index-linked
option.'' The proposed definition covers RILAs and index-linked options
offered in combination contracts, as an investment option offered under
any contract, pursuant to which the value of the contract, either
during an accumulation period or after annuitization, or both, will
earn positive or negative interest based, in part, on the performance
of a specified index.\211\ This is a functional definition focused on
the key features of a RILA and would cover RILAs as defined in the RILA
Act. We also propose to define ``fixed option'' as an investment option
under the contract pursuant to which the value of the contract, either
during an accumulation period or after annuitization, or both, will
earn interest at a rate specified by the insurance company, subject to
a minimum guaranteed rate under the contract. Further, we would change
the existing definition of ``variable annuity contract'' to ``variable
option'' and move the parts of that definition that refer to annuity
contracts generally to a new definition for ``contract.'' In connection
with the addition of other types of investment options on Form N-4, we
are proposing to amend ``portfolio company'' to clarify that this term
relates to the investment companies offered as investment options in
contracts containing variable options. We also propose to add a new
defined term ``investment option'' to refer collectively to any index-
linked, variable, or fixed option. We propose to add these items to
help clarify which provisions of amended Form N-4 apply to which types
of annuities or investment options.
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\211\ Because RILA returns may not be one for one with the
index, we propose to indicate that positive or negative interest is
only based ``in part'' on the index's performance.
---------------------------------------------------------------------------
Because an insurance company issuing a RILA is not acting as a
depositor, we propose to change the definition of ``depositor'' to
``insurance company.'' The proposed definition refers to the insurance
company that issues the contract, which company is subject to state
supervision, and that the insurance company may also be the depositor
or sponsor for a variable annuity separate account. We would also add a
new definition of ``registered separate account'' defined as the
separate account in which the contract participates with regard to any
variable option offered under the contract, and refine the definition
of ``registrant'' to mean either the registered separate account or
insurance company, as applicable. These changes further help to clarify
which provisions of the form apply to variable annuities and RILAs.
We also propose to add definitions of ``index,'' \212\ ``contract
adjustment,'' \213\ and ``crediting period'' \214\ to refer to these
RILA-centric concepts in the form and, in the case of ``contract
adjustment'' and ``crediting period,'' help clarify when the relevant
disclosures would be required. Lastly, we propose to eliminate the
currently defined term ``investor account.'' Insurance companies
typically do not use this term in their disclosure, and the more
generalized concept of contract value, which also is designed to
address the value of an investor's investment, is intended to convey
the characteristics of the broader scope of annuities that insurance
companies could register on Form N-4 under the proposal.
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\212\ As proposed, ``index'' means any index, rate, or benchmark
(such as a registered exchange-traded fund that tracks an index)
used in the calculation of positive or negative interest credited to
an index-linked option. See proposed General Instruction A to Form
N-4.
\213\ As proposed, ``contract adjustment'' means a positive or
negative adjustment made to the value of the contract by the
insurance company if amounts are withdrawn from an index-linked
option or from the contract before the end of a specified period.
This adjustment may be based on calculations using a predetermined
formula, or a change in interest rates, or some other factor or
benchmark. See id.
\214\ As proposed, ``crediting period'' means the period of time
over which an index's performance is measured, subject to applicable
limits on index gains and losses, to determine the amount of
positive or negative interest that will be credited to an index-
linked option at the end of the period.
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We also are proposing related amendments throughout Form N-4 to
help implement the proposed new definitions. For example, we are
proposing to clarify the applicability of certain variable annuity or
Investment Company Act-specific disclosure to limit those requirements
to ``registered separate accounts'' or ``variable options'' when
appropriate.\215\ As another example, the form requires disclosure of
the procedures to purchase an annuity contract including certain
particularized information.\216\ We would apply this provision
generally to all annuities including RILAs, but are only requiring
certain disclosures relating to the operation of accumulation units and
sub-accounts to contracts with variable options as those elements are
not utilized by RILAs.
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\215\ See, e.g., proposed Items 3, 7, 8, 24, 32, and 34(a) of
Form N-4; see also proposed definitions for ``class'' (clarifying
applies to all contracts) and ``platform charge'' (clarifying only
applies if there is a variable option).
\216\ See Item 11 of Form N-4.
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(c) Rules 405, 480, 481, 483, and 484
We are proposing amendments to rule 405 under the Securities Act to
add the new defined terms ``Form available solely to investment
companies registered under the Investment Company Act of 1940'' and
``registered index-linked annuity'' for purposes of Securities Act
rules.
Certain Securities Act rules apply only to registration statements
that are prepared on a form available solely to a registered investment
company or a business development company. These rules are 17 CFR
230.480 (``rule 480''), 17 CFR 230.481 (``rule 481''), 17 CFR 230.483
(``rule 483''), and 17 CFR 230.484 (``rule 484'') under the Securities
Act, and include forms such as Forms N-1A, N-2, N-3, N-4, N-5, and N-6.
These rules prescribe requirements relating to: information given with
the title of securities; information contained in registration
statements; exhibits filed as part of the registration statement; and
undertakings required with respect to requests for acceleration.
By virtue of moving RILAs, which are not issued by a registered
investment company, onto Form N-4, Form N-4 would be outside the scope
of this description absent the proposed amendments. As such, the
proposed new defined term ``form available solely to investment
companies registered under the Investment Company Act of 1940'' would
specify that these rules would continue to apply to registration
statements filed on Form N-4. Specifically, we are proposing to amend
rule 405 to state that ``a form available solely to investment
companies registered under the Investment Company Act of 1940''
includes the form used to register the offering of securities of a
registered index-linked annuity for purposes of the Securities Act of
1933. By operation of this new
[[Page 71124]]
term, RILA registration statements on Form N-4 would be subject to
rules 480, 481, 483, and 484.\217\ We propose to subject RILA
registration statements to these rules to help facilitate a consistent
application of Form N-4 requirements.
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\217\ These rules currently apply to registration statements on
Form N-4. Rule 480 prescribes requirements relating to information
given with the title of securities. Rule 481 prescribes certain
information to be required in the registration statement (e.g.,
certain legends to appear on the front and back cover pages of
prospectuses). Rule 483 prescribes certain requirements relating to
exhibits filed as part of the registration statement. Rule 484
prescribes certain required undertakings with respect to requests
for acceleration under 17 CFR 230.461 when certain arrangements
exist with respect to indemnification of specified persons against
liability under the Securities Act.
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We are also proposing to add a definition of ``registered index-
linked annuity'' to rule 405, which provides consistent definitions for
select terms used throughout the Securities Act rules, to simplify
references to RILAs in the proposed Securities Act rule amendments.
Specifically, we would define ``registered index-linked annuity'' as an
annuity or an option available under an annuity (1) that is deemed a
security; (2) that is offered or sold in a registered offering; (3)
that is issued by an insurance company that is the subject to the
supervision of either the insurance commissioner or bank commissioner
of any state or any agency or officer performing like functions as such
commissioner; (4) that is not issued by an investment company; and (5)
whose value, either during the accumulation period or after
annuitization or both, will earn positive or negative interest based,
in part, on the performance of any index, rate, or benchmark.
Under the RILA Act, the term ``registered index-linked annuity''
means an annuity (A) that is deemed to be a security, (B) that is
registered with the Commission in accordance with section 5 of the
Securities Act, (C) that is issued by an insurance company that is
subject to the supervision of the insurance commissioner or bank
commissioner of any State or any agency or officer performing like
functions as such commission, (D) that is not issued by an investment
company, and (E) the returns of which are based on the performance of a
specified benchmark index or rate (or a registered exchange traded fund
that seeks to track the performance of a specified benchmark index or
rate) and may be subject to a market value adjustment if amounts are
withdrawn before the end of the period during which that market value
adjustment applies.\218\ The proposed definition in rule 405 differs in
certain respects from this definition, but covers all offerings that
would be included in the RILA Act's definition. These differences are
intended to simplify the definition and use terminology that is
consistent with other rules under the Securities Act. For example, the
proposed definition clarifies that the insurance company is registering
the offering of a RILA, rather than the RILA itself, with the
Commission.\219\ As another example, the proposed definition in rule
405 does not include a reference to a ``market value adjustment,'' as
the RILA Act's definition does, because the RILA Act did not require
that feature as a predicate for being a ``RILA.'' \220\ Since the
presence of a market value adjustment does not factor into the
assessment of whether a security is a RILA under the RILA Act's
definition, it is unnecessary to refer to this feature in the proposed
definition in rule 405. The proposed definition, however, continues to
encompass the full scope of the RILA Act's definition.
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\218\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
\219\ This is functionally the same as the requirement of the
RILA Act that the RILA ``be registered with the Commission in
accordance with section 5 of the Securities Act of 1933.'' See
section 101(a)(5) of Division AA, Title I of the Consolidated
Appropriations Act, 2023.
\220\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022)
(defining RILA as an annuity, among other things, the returns of
which may be subject to a market value adjustment if amounts are
withdrawn before the end of a period in which that market value
adjustment is applied) (emphasis added).
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(d) Exhibits and Undertakings (Items 27 and 34)
As a function of moving RILAs onto Form N-4 and subjecting them to
the requirements of rule 483, RILA issuers would be required to file
various exhibits as part of a registration statement, similar to the
requirements these issuers are subject to when registering RILA
offerings on Forms S-1 and S-3 currently.\221\ Further, in addition to
the requirements of rule 484, we are proposing to amend Item 34 of Form
N-4 to include certain undertakings currently required of RILAs as part
of their Form S-1 and S-3 registration statements.\222\
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\221\ See Item 16 of Form S-1; Item 16 of Form S-3; Item 601 of
Regulation S-K.
\222\ The disclosure currently required in Item 34, the fee
representation mandated of registered separate accounts under the
Investment Company Act, would be retained as paragraph (a) of this
item, limited in application to variable options, and the new
undertakings added as new paragraph (b) and limited to index-linked
options. See also 15 U.S.C. 80a-26(f)(2)(A). We would also rename
this item ``Fee Representation and Undertakings.''
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Item 27--Exhibits
RILA issuers are currently subject to the integrated disclosure
requirements of Regulation S-K when registering their offerings, which
provide requirements for exhibits that must be filed as part of the
registration statement.\223\ Conversely, issuers on Form N-4 are
required to file the exhibits required by rule 483 and Item 27 of Form
N-4. To provide consistent requirements for Form N-4 issuers, we are
proposing amendments to require RILA issuers to adhere to the same
requirements as current issuers on Form N-4. RILA issuers and current
Form N-4 issuers are subject to somewhat different provisions for
filing exhibits to a registration statement. However, there are
significant similarities between the types of the exhibits that each
type of issuer is required to file, and thus we generally are not
proposing to change those requirements. RILA registration statements
will therefore continue to include the types of exhibits currently
included in their registration statements on Forms S-1 and S-3. For
example, RILA issuers filing on Form N-4 would continue to be required
to file such exhibits as the insurance company's certificate of
incorporation and by-laws, forms of contracts offered in connection
with the registration statement, underwriting agreements, legal
opinions, and other material contracts, as applicable.\224\
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\223\ See 17 CFR 229.601.
\224\ See 17 CFR 229.601; proposed Item 27 of Form N-4.
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We are not, however, proposing to amend Item 27 of Form N-4 to
include required exhibits under Regulation S-K that are generally not
applicable to RILAs or would no longer be relevant in light of the
proposed amendments.\225\ For example, RILA registration statements are
currently required to include a filing fee exhibit. Under the proposed
amendments, RILA issuers would no longer include registration fee
payments as part a registration statement or post-effective amendment
filing. Therefore, the proposed amendments to Item 27 of Form N-4 omit
this existing exhibit requirement for RILAs.\226\
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\225\ See 17 CFR 229.601; proposed Item 27 of Form N-4. For
example, some items, like Item 601(b)(96) of Regulation S-K which
requires a technical report summary to be filed as an exhibit to a
registration statement on Form S-1 when a registrant discloses
information concerning its mineral resources, are wholly
inapplicable to RILAs.
\226\ See 17 CFR 229.601(b)(107).
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We are, however, proposing to amend Form N-4's required exhibits
list to add new Item 27(p) for all issuers, which would require the
filing of any power of
[[Page 71125]]
attorney included pursuant to rule 483(b).\227\ While this exhibit is
already required to be filed with a Form N-4 registration statement
under rule 483(b), practices differ in regards to the placement of a
required power of attorney exhibit within the exhibit list. This
amendment is designed to assist the public in comparing these exhibits
by standardizing their location in the registration statement. In
addition, we are proposing conforming changes in Item 27 to reflect the
proposed amendments to the definitions in Form N-4.
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\227\ RILA registration statements on Forms S-1 and S-3
similarly include a power of attorney, when applicable, to be filed
as part of the registrations statement. See 17 CFR 229.601(b)(24).
See also supra section II.D (discussing the addition of a new
exhibit relating to changes in accountants).
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Item 34--Fee Representation and Undertakings
We are also proposing amendments to Item 34 of Form N-4 to require
RILA issuers to include specific undertakings in their registration
statements on Form N-4. Under the proposed amendments, a RILA issuer
would be required to furnish two undertakings as part of the
registration statement on Form N-4. These undertakings are (1) to file,
during any period in which offers or sales are being made, through a
post-effective amendment to its registration statement, any prospectus
required by section 10(a)(3) of the Securities Act and (2) that, for
the purposes of determining liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof. These proposed undertakings are the same as two
undertakings RILA issuers currently provide in registration
statements,\228\ and mirror the effect of similar provisions of section
24(e) of the Investment Company Act, which applies to amendments to
Form N-4 registration statements by registered separate accounts.\229\
We are proposing that RILA issuers continue to furnish these
representations concerning post-effective amendments to a registration
statement as, under the proposed amendments, RILAs may be continuously
offered on a registration statement for an indefinite amount of time.
In that time, a RILA registration statement may be subject to a number
of various post-effective amendments. Conversely, the proposed
amendments do not include other undertakings which may be currently
required in RILA registration statements. These undertakings relate to
the process for conducting continuous offerings under rule 415, which
RILAs will no longer be subject to under the proposed amendments. In
addition, we are not including other undertakings that are unnecessary
in light of the proposed amendments as a whole.\230\ For example, RILA
issuers currently are required to include an undertaking to remove from
registration any of the securities being registered that remain unsold
at the termination of an offering through a post-effective
amendment.\231\ However, under the proposed amendments, RILA issuers
will be registering an indeterminate amount of securities and paying
registration fee payments in arrears on amended Form 24F-2 for the life
of an offering. Under this approach, a RILA issuer would only pay
registration fees on the exact amount of net issuance of securities
relating to an offering and therefore, it is unnecessary to
additionally require an undertaking that relates to a surplus
registration of securities during an offering.
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\228\ See rule 415(a)(3) and 17 CFR 229.512(a). Under the
proposed amendments, RILAs would be exempt from the conditions of
rule 415, including furnishing the required undertakings pursuant to
Item 512(a) of Regulation S-K. See infra footnote 331. For example,
RILA registration statements would no longer be required to include
a statement that the issuer undertakes to file a post-effective
amendment to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. We preliminarily believe this
requirement is not necessary for RILA registration statements on
Form N-4 in light of the other amendments we are making to the
prospectus and registration statement filing process for RILAs. See
infra section II.E (discussing proposed amendments to rules 485 and
497 under the Securities Act).
\229\ See Section 24(e) of the Investment Company Act [15 U.S.C.
80a-24(e)]. Section 24(e) generally requires a registered separate
account to amend its registration statement annually to update its
prospectus for the purposes of section 10(a)(3). Section 24(e) also
provides that, for the purposes of liability under Securities Act,
the effective date of the latest amendment is deemed to be the
effective date of the registration statement with respect to
securities sold after the effectiveness of amendment.
\230\ See 17 CFR 229.512(a).
\231\ See 17 CFR 229.512(a)(3).
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(e) Request for Comment
We request comment on these proposed amendments.
78. Are the instructions for the proposed new section on the facing
sheet appropriate? Should there be additional or different options for
the proposed new section on the facing sheet?
79. Are the definitions in Part A of the General Instructions of
Form N-4 appropriate? If not, which definitions require additional
clarity or modifications? For example, do commenters believe it is
appropriate to use the collective term ``registrant'' to include
insurance companies that may not be registered entities under the
Securities Act? Do the definitions effectively convey which provisions
apply to which type of annuity contract?
80. Do commenters agree with the statement that ``investor
account'' is not generally used in insurance company disclosures to
investors relating to annuity contracts?
81. Did we appropriately scope those provisions that practically
only apply to variable options to those types of investment options?
Are there any other disclosures we should limit to variable options?
Conversely, are there provisions we limited to variable options that we
should also apply to index-linked options?
82. Should we add any additional definitions to Part A of the
General Instructions to Form N-4? Should we retain the term ``investor
account''?
83. Is the definition of ``Index-Linked Option'' appropriate?
Should we revise the definition in any way? Does this definition
encompass all potential RILAs and index-linked options offered in
combination contracts as proposed as required by the RILA Act?
84. Do commenters agree that the proposed definition of
``registered index-linked annuity'' in rule 405 is appropriate? Do
commenters agree that the proposed definition is inclusive of the types
of RILAs encompassed in the definition of ``registered index-linked
annuity'' in the RILA Act?
85. Do commenters agree that with the proposed definition of ``Form
available solely to investment companies registered under the
Investment Company Act of 1940?'' Do commenters think this may cause
confusion as RILA issuers are not investment companies registered under
the Investment Company Act?
86. Should we require RILA issuers to adhere to rules 480, 481,
483, and 484 when registering RILAs on Form N-4?
87. Do commenters agree that the Exhibit List for proposed Form N-4
encompasses the types of exhibits that RILA issuers currently include
in registration statements and is appropriate for RILAs? If not, what
exhibit requirements should govern RILAs registered on Form N-4? Are
there additional exhibits that RILA issuers should be required to file
as part of their registration statements on Form N-4? Are there any
exhibits that the integrated disclosure requirements of Regulation S-K
currently include that we should require on Form N-4?
[[Page 71126]]
88. Is it appropriate to require RILA issuers to furnish the
undertakings in Item 34 of proposed Form N-4? Are there different or
additional undertakings that should be required for these issuers?
8. Remaining Form N-4 Items
We propose to make applicable to RILAs the remaining requirements
and disclosure items on the existing Form N-4 discussed below, which we
do not propose to substantively change.\232\ The general instructions
to the proposed form include both organizational requirements along
with substantive requirements for the preparation of the registration
statement, including instructions relating to the organization,
presentation, and prospectuses permitted to be included in a
registration statement. The remaining disclosure items principally
provide investors with information about the annuity contract and how
it operates. In addition, these items provide basic information about
the insurance company or the securities offering itself, consistent
with some of the disclosures provided currently in Forms S-1 or S-3.
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\232\ As noted above, some of these items would be amended to
account for changes in defined terms and to use gender-neutral
terminology. See supra section II.B.7.
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(a) General Instructions
RILAs offerings registered on Form N-4 will need to comply with the
general instructions of that form. These general instructions are
structured to include four parts: (A) Definitions; \233\ (B) Filing and
Use of Form; (C) Preparation of the Registration Statement; and (D)
Incorporation by Reference.\234\ This would result in a number of
substantive outcomes for those issuers.\235\ Specifically:
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\233\ See supra section II.B.7(b) (discussing proposed
amendments to the definitions used in the form).
\234\ The items described in this section can generally be found
in proposed General Instruction C of Form N-4. See also supra
section II.B. [Other Amendments] (discussing definitional updates).
EDGAR permits registrants to file required financial statements
separately under a specific submission type. Thus, registrants may
incorporate by reference into their post-effective amendment and
other filings the financial statements filed under this EDGAR
submission type. See VASP Adopting Release at n.592.
\235\ We are also proposing to correct a typographical error in
General Instruction B.2(b) regarding items that can be omitted for
registration statements or amendments filed only under the
Investment Company Act. Currently, the instructions state that
issuers can omit from Part C Items 26(c), (k), (l), and (m), but
those items do not exist in the form and Item 26 (Financial
Statements) is in the SAI, not Part C. This is supposed to refer to
Item 27 (Exhibits), which do exist, are in Part C, and are more
Securities Act in nature. This instruction would be updated to refer
instead to Item 27 as a result.
---------------------------------------------------------------------------
Plain English. The instructions provide a number of points
to issuers on how best to promote effective communication between
issuers and prospective investors. For example, issuers are directed to
use document design techniques that promote effective communication and
to respond to the items in the form as simply and directly as
reasonably possible and avoid the use of formulas as the primary means
of communicating certain terms or features of a contract.\236\ Issuers
are also encouraged to use, as appropriate, Q&A formats beyond the KIT,
tables, and other presentation methods in the form generally.\237\
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\236\ See proposed General Instructions C.1.(a) and (c) to Form
N-4. This specific text is not intended to discourage use of a
formula, but rather, to clarify that if a formula is used in
connection with a term or feature, investors are first provided
appropriate plain English disclosure regarding the operation of the
term or feature. See VASP Adopting Release at n.591.
\237\ See proposed General Instruction C.3.(c) to Form N-4. As
discussed above, we are proposing to require Q&A formatted responses
to the Key Information Table. See supra section II.B.2.
---------------------------------------------------------------------------
Organization. Issuers are directed to organize information
in the prospectus and SAI to make it easy for investors to understand,
with some limitations on the order of presentation.\238\
---------------------------------------------------------------------------
\238\ See proposed General Instruction C.3.(b) to Form N-4.
---------------------------------------------------------------------------
Other Information. Issuers are permitted to include (other
than in Items 2 or 3) information in the prospectus or SAI not
otherwise required as long as the additional 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.\239\ In similar
circumstances, issuers may include sales literature in the
prospectus.\240\
---------------------------------------------------------------------------
\239\ See proposed General Instruction C.3.(b) to Form N-4.
\240\ See proposed General Instruction C.3.(g) to Form N-4.
---------------------------------------------------------------------------
Terminology. Issuers are required to define special terms
used in the prospectus in any presentation that clearly conveys meaning
to investors.\241\ Only these special terms must be defined or listed
in any glossary or list of definitions elected to be used.\242\
Registrants are not required to use the same terminology as that used
in the form as long as the registrant clearly conveys the meaning of,
or provides comparable information as, the form's terminology.
---------------------------------------------------------------------------
\241\ See proposed General Instruction C.3.(d) to Form N-4.
\242\ Registrants are also permitted to define terminology only
used in one section in such section.
---------------------------------------------------------------------------
Multiple Contracts. Issuers are permitted to describe
multiple contracts that are essentially identical in a single
prospectus, and the instructions discuss the presentation of
information regarding multiple contracts in these circumstances.\243\
Further, issuers are permitted to combine multiple prospectuses into a
single registration statement where the contracts are substantially
similar.
---------------------------------------------------------------------------
\243\ See proposed General Instruction C.3.(e) to Form N-4. The
instructions state that ``essentially identical'' is a facts and
circumstances-based determination but that contracts that differ in
providing optional benefits or being group or individual contracts
are not essentially identical whereas variances due only to State
regulatory requirements would be.
---------------------------------------------------------------------------
Timing. The instructions state that, consistent with
Securities Act rules, in most circumstances prospectuses and SAIs used
after the effective date of the registration statement shall be dated
approximately as of such effective date, but that a revised or amended
prospectus or SAI used thereafter need only bear the approximate date
of its issuance. Each supplement to the prospectus or SAI shall be
dated separately the approximate date of its first use.\244\
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\244\ See proposed General Instruction C.3.(f) to Form N-4; 17
CFR 230.423.
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Provision of Websites. Any websites included in an
electronic version of the prospectus must include active hyperlinks or
other means of facilitating access that leads directly to the relevant
website address, though this requirement does not apply to a prospectus
filed on EDGAR.\245\
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\245\ See proposed General Instruction C.3.(i) to Form N-4.
---------------------------------------------------------------------------
Incorporation by Reference. In addition to the general
requirements of the Commission rules on incorporation by reference,
issuers are not permitted to incorporate by reference information
required to be in the prospectus unless otherwise permitted by the
form, but may incorporate by reference the SAI into the prospectus
without delivering the SAI and incorporate by reference information
required to be included in the SAI or Part C.\246\
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\246\ Proposed General Instruction D of Form N-4.
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Collectively, these general instructions are designed to require
clear disclosure to investors about the variable annuity contracts
currently registered on the form and to make clear how issuers must
prepare and file their registration statements. Requiring RILA issuers
to prepare their registration statements in accordance with these
instructions would likewise facilitate the provision of clear
disclosure to
[[Page 71127]]
investors and provide clear direction to these issuers on how to
prepare and file their registration statements. Further, applying these
requirements to RILAs as proposed would help ensure the comparability
of different annuity offerings, for example, by ensuring that the
filings are held to the same plain English, multiple contract
disclosure, timing, website, and incorporation by reference standards.
(b) Contract Disclosures
The table below summarizes disclosures in the existing Form N-4
about the annuity contract, how it operates, and how it is serviced by
the insurance company, that we propose making applicable to RILA
issuers without substantive change.
Table 4--Contract Disclosures
------------------------------------------------------------------------
Item Description
------------------------------------------------------------------------
Prospectus (Part A)
------------------------------------------------------------------------
General Description of the A general description of the contract,
Contracts (Item 8). including disclosure of the parties'
material rights under the contract;
relevant contract provisions and
limitations; contract obligations funded
by the insurance company's general
account; class of purchasers, and
material changes that can be made to the
contract by the insurance company.
Annuity Period (Item 9)...... A description of the annuity options
available, including a discussion of
material factors that determine the
benefits; annuity commencement date;
frequency and duration of annuity
payments; the effect of assumed
investment return; any minimum amount
necessary for an annuity option and the
consequences of an insufficient amount;
rights to change annuity options; and,
if applicable, a disclosure that the
investor will be unable to withdraw any
contract value amounts after the annuity
commencement date.
Benefits Available Under the A tabular summary overview of the
Contract (Item 10). benefits available under the contract
(e.g., standard or optional death
benefits, standard or optional living
benefits, etc.), briefly discussing,
among other things: whether the benefit
is optional; current and maximum fees
associated with the benefit; how the
benefit amount is calculated; and any
associated restrictions or limitations.
Purchases and Contract Value A description of the procedures for
(Item 11). purchasing a contract, including concise
explanations of minimum initial and
subsequent purchase payment required,
when these payments are credited, and
how they are allocated to investment
options. Also an identification of the
principal underwriters (other than the
insurance company) of the contracts and
other information about that underwriter
such as any affiliations.
Surrenders and Withdrawals A description of how surrenders and
(Item 12). withdrawals can be made from a contract,
including limits on the ability to
surrender, how proceeds are calculated,
and when surrenders and withdrawals are
payable. Issuers must also describe
potential effect of surrenders and
withdrawals, including how they could
affect a contract's value or benefits,
and whether any charges or contract
adjustments will apply. Issuers should
also describe any involuntary redemption
provisions and any revocation rights,
disclosing the calculation methodology
and any associated limitations to
investment options.
Loans (Item 13).............. A description of the loan provisions of
the contract, including, for example,
loan availability and related
restrictions, interest mechanics, the
effect of a loan on the contract's value
and death benefit, other effects that a
loan could have on a contract; and loan
procedures.
Taxes (Item 14).............. A description of the material tax
consequences to the investor and
beneficiary of buying, holding,
exchanging, or exercising rights under
the contract. The description should
include a discussion of the taxation of
annuity payments, death benefit
proceeds, periodic and non-periodic
withdrawals, loans, and any other
distribution that may be received under
the contact, as well as the tax benefits
accorded the contract and other material
tax consequences. Issuers must identify
the types of qualified plans for which
the contracts are intended to be used
and describe any effect of taxation on
the determination of contract values.
------------------------------------------------------------------------
Statement of Additional Information (Part B)
------------------------------------------------------------------------
Cover Page and Table of A statement of the name of the insurance
Contents (Item 18). company, the contract, and related class
or classes. This item also requires a
table of contents, a statement that the
SAI is not a prospectus, information
about how to obtain the prospectus, and
a discussion of information the SAI
incorporates by reference.
Non-principal Risks of A summary of the non-principal risks of
Investing in the Contract purchasing a contract not otherwise
(Item 20). disclosed in the prospectus.
Services (Item 21)........... Information on services provided to the
registrant in connection with the
contract. If not disclosed elsewhere,
this requires a summary of the
substantive provisions of certain
management-related service contracts.
The registrant must also provide the
name and address of its independent
public accountant. Where affiliates of
the insurance company act as agents for
the registrant in connection with the
contract, issuers are required to
provide specific information about the
services performed and remuneration paid
for the services. Issuers must also
disclose if the insurance company is the
principal underwriter of the contract.
Annuity Payments (Item 25)... A description of the method for
determining the amount of annuity
payments if not described in the
prospectus and how any change in the
amount of a payment after the first
payment is determined.
------------------------------------------------------------------------
Other Information (Part C)
------------------------------------------------------------------------
Management Services (Item 33) A summary of the substantive provisions
of any management-related service
contracts not discussed in Parts A or B,
including the last three years' payment
history.
------------------------------------------------------------------------
[[Page 71128]]
These requirements apply to existing Form N-4 issuers because these
disclosures provide investors in these products with a concise
presentation of material information about the annuity contract they
would be purchasing, as well as other information that provides
necessary context about the contracts such as management service
disclosures.\247\ Because disclosure of this information is equally
fundamental to the ability of investors to make informed investment
decisions about RILA contracts, we are proposing to apply these
requirements to RILAs. For example, existing Form N-4 issuers are
required to summarize standard and optional benefits available to the
investor under the contract because these benefits are primary features
of variable contracts and are also often key differentiators between
competing products.\248\ Insurance companies also offer these benefits
in connection with RILAs.
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\247\ See Registration Forms for Insurance Company Separate
Accounts That Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 24, 1985) [50 FR 26145 (June 25, 1985)]
(``Forms N-3 and N-4 Adopting Release'').
\248\ See VASP Adopting Release at n.26 and accompanying text.
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(c) Issuer and Offering Disclosures
In addition to disclosures about the contract, the proposed
amendments to Form N-4 would require that RILA issuers make certain
disclosures relating to the issuer and offering consistent with the
form's current requirements. The table below summarizes these items,
omitting items in Form N-4 that, by their terms, would not apply to
RILAs.
Table 5--Issuer and Offering Disclosures
------------------------------------------------------------------------
Similar form S-1
Item Description disclosure
------------------------------------------------------------------------
Prospectus (Part A)
------------------------------------------------------------------------
Legal Proceedings (Item 15)... A description of Item 11(c)
material pending (legal
legal proceedings to proceedings).
which the registered
separate account, the
principal
underwriter, or the
insurance company is
a party, including
similar information
regarding any
proceedings
instituted or known
to be contemplated by
a governmental
authority.
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Statement of Additional Information (Part B)
------------------------------------------------------------------------
General Information and Basic information Item 11(a)
History (Item 19). regarding the (description of
background and business).
organization of the
insurance company,
including the
jurisdiction in which
it is organized and a
description of its
business.
Underwriters (Item 23)........ Identification of the Item 8 (plan of
principal distribution).
underwriters (other
than the insurance
company), and for
affiliated
underwriters, a
description of the
nature of the
affiliation. For each
principal underwriter
distributing the
registrants'
contracts, the
insurance company
must provide
information about the
offering and related
commissions. If the
registrant made
payments to an
underwriter of or
dealer in the
contracts during its
last fiscal year over
a threshold amount,
the registrant must
disclose certain
information about
those payments.
------------------------------------------------------------------------
Other Information (Part C)
------------------------------------------------------------------------
Directors and Officers of the A statement of the Item 11(k)
Insurance Company (Item 28). name, principal (directors and
business address, executive
position, and office officers).
held for each
director or officer
of the insurance
company.
Persons Controlled by or Under Disclosure of persons Item 11(k)
Common Control with the directly or (directors and
Insurance Company or the indirectly controlled executive
Registrant (Item 29). by or under common officers).
control with the
registrant or the
sponsoring insurance
company.
Indemnification (Item 30)..... Information about the Item 14
effect of relevant (indemnificatio
indemnification n of directors
agreements, and officers).
arrangements, or
statutory provisions
through which
underwriters or
affiliates are
insured or
indemnified against
any liability
incurred in their
official capacity.
Principal Underwriters (Item A statement of Item 8 (plan of
31). investment companies, distribution).
other than any
registered separate
account related to
the filing, each
principal underwriter
is also acting as a
principal
underwriter. More
detailed information
about principal
underwriters
identified in Item
23, such as recent
information about
commissions and other
compensation received
from the registrant
by each principal
underwriter.
------------------------------------------------------------------------
Information about the issuer and the offering process are relevant
when purchasing an annuity contract, including in the context of a
RILA.\249\ These items, which largely correspond to items currently
required to be disclosed by RILAs on Forms S-1 and S-3 as detailed in
the table above, provide the appropriate amount of information about
the issuing insurance company and the offering of securities in a way
tailored to annuity contract investors. For example, because an
investor's rights under RILAs are dependent on the insurance company's
claim-paying ability, RILA purchasers also share an interest in
disclosures of material pending legal proceedings involving the
insurance company or related parties. On the other hand, where Form S-1
disclosures have less relevance to RILAs, we have not included those
disclosures in proposed Form N-4.
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\249\ See Forms N-3 and N-4 Adopting Release.
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[[Page 71129]]
(d) Request for Comment
We request comment on our proposed application of these
requirements and disclosures to RILAs.
89. Is it appropriate to require RILA issuers to meet these general
instructions of the form? Should we tailor any particular provision to
account for the differences between RILAs and the variable annuities
that currently use the form? For example, is there any reason to treat
RILAs different for purposes of the ``essentially identical'' test?
90. The investor testing results suggested that investors had
significant difficulty in understanding certain terminology used in
connection with RILAs, in particular the words ``term'' and
``investment term.'' \250\ Should we, as a result, change any
instruction to aid in investor understanding? For example, the form
currently provides that the prospectus disclosure requirements in Form
N-4 are intended to elicit information for an average or typical
investor who may not be sophisticated in legal or financial
matters.\251\ In light of this feedback in investor testing, should we
amend this instruction or otherwise provide that insurance companies
should not use ``term,'' ``investment term,'' or other terminology that
investors found confusing? Regardless of whether insurance companies
use ``investment term'' or different terminology, in the glossary
definition of the ``investment term'' (or another term to describe that
concept) should insurance companies be required to specifically
disclose to investors that the ``investment term'' is not the same as
the life of the contract? As another example, should we require, rather
than permit, the use of a glossary or list of definitions for the
entirety of the form so that investors have one place to look to
understand a particular term? Should we clarify what terms are
``special terms''? What terminology in particular should be considered
a special term in the RILA context?
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\250\ See OIAD Report at Section 7, Conclusions, Summary of
Findings.
\251\ See Instruction C.1.b of Form N-4.
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91. Should we define certain key terms that insurance companies
must use in their registration statement to help to mitigate investor
confusion and help investors compare one RILA to another? Which key
terms should we address and how should they be defined?
92. Is it appropriate, as proposed, to apply these exiting Form N-4
disclosure requirements to RILA issuers? Are any of these disclosure
items inappropriate for including in a RILA registration?
93. Are there other details about the RILA contract, not otherwise
addressed above, that we should require be disclosed on amended Form N-
4? Are there details regarding the issuer or offering that we should
require?
94. Certain of these disclosures are repeated throughout the
registration statement. For example, similar disclosures regarding
principal underwriters are contained in the prospectus (Item 11) and
SAI (Item 23). Should we limit these items to a particular location in
the registration statement?
95. Under the proposal, certain information that RILA issuers
currently provide on Forms S-1 and S-3 would still be required by Form
N-4, but would be placed in the SAI rather than the prospectus. Should
any of the information we propose to require in the SAI instead be
provided in the prospectus?
96. Are these items properly ordered? Should we move any of these
items to greater prominence or move items from the prospectus, SAI, or
Part C to another part of the registration statement?
9. Inline XBRL
We are proposing to require RILA issuers to tag certain of the
information they would disclose in their prospectuses and SAIs in a
structured, machine-readable data language. Specifically, we are
proposing to require RILA issuers to tag the required information in
Inline XBRL in accordance with Rule 405 of Regulation S-T (17 CFR
232.405) and the EDGAR Filer Manual.\252\ The proposed requirements for
RILA issuers would include tagging of the overview and more in-depth
descriptions of index-linked options and contract adjustments that RILA
issuers would have to include in their prospectuses under the proposal,
the proposed disclosure of census-type information regarding contracts
with index-linked options, and information disclosed about changes in
and disagreements with accountants.\253\ RILA issuers, in addition to
variable contracts issuers whose contracts offer fixed options, would
have to tag the proposed descriptions of fixed options available under
the contract.\254\ Form N-4 filers also would have to tag the proposed
new disclosures indicating that the insurance company is relying on the
exemption provided by rule 12h-7, and variable contract issuers would
have to tag the proposed new statement relating to the risks of
variable options.\255\
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\252\ This proposed tagging requirements would be implemented by
amending General Instruction C.3(h) of Form N-4, and by revising
rule 405(b) of Regulation S-T to include the proposed RILA-specific
disclosures. Pursuant to rule 301 of Regulation S-T, the EDGAR Filer
Manual is incorporated by reference into the Commission's rules. In
conjunction with the EDGAR Filer Manual, Regulation S-T governs the
electronic submission of documents filed with the Commission. Rule
405 of Regulation S-T specifically governs the scope and manner of
disclosure tagging requirements for operating companies and
investment companies, including the requirement in rule 405(a)(3) to
use Inline XBRL as the specific structured data language to use for
tagging the disclosures.
\253\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Items 2(b)(2), 2(d), 6(d), 7(e), 26(c), and 31A.
\254\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Item 6(e).
\255\ See proposed General Instruction C.3(h) of Form N-4; see
also proposed Items 6(a) (instruction) and 6(c)(1).
---------------------------------------------------------------------------
In addition, RILA issuers would have to tag those prospectus
disclosures that Form N-4 currently requires to be tagged.\256\ These
include the following disclosure items: the Key Information Table, Fee
Table, Principal Risks of Investing in the Contract, Other Benefits
Available Under the Contract, and Investment Options Available Under
the Contract in the statutory prospectus. The proposed Inline XBRL
requirements, like the current Inline XBRL requirements for Form N-4
issuers, would only apply to contracts being sold to new investors. The
result of this proposed approach would be that prospectus disclosure
for contracts that are no longer being sold to new investors would not
need to be tagged, as we believe tagging this disclosure would have
less utility for current investors and other market participants.\257\
Issuers of variable annuities registered on Form N-4 are currently
required to tag certain registration statement disclosure items using
Inline XBRL.\258\ These items are those that would be most suited to
being tagged in a structured format and be of greatest utility for
investors and other data users that seek structured data to analyze and
compare RILA contracts. This rationale is the same as that which the
Commission articulated in originally adopting these tagging
requirements in
[[Page 71130]]
the context of variable annuity disclosure.\259\
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\256\ See rule 405(b) of Regulation S-T; proposed General
Instruction C.3(h) of Form N-4; see also proposed Items 3, 4, 5, 10,
and 17.
\257\ See VASP Adopting Release at paragraph accompanying n.904.
\258\ See General Instruction C.3(h) of current Form N-4; see
also Interactive Data to Improve Financial Reporting, Release No.
33-9002 (Jan. 30, 2009) [74 FR 6776], as corrected by Release No.
33-9002A (Apr. 1, 2009) [74 FR 15666] (requiring operating companies
to submit financial statements accompanying their registration
statements and periodic and current reports in XBRL).
\259\ See VASP Adopting Release at section II.E.
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In addition to these existing items, requiring Inline XBRL tagging
of the new disclosure requirements we are proposing to include in Form
N-4 would benefit investors, other market participants, and the
Commission by making the disclosures more readily available and easily
accessible for aggregation, comparison, filtering, and other
analysis.\260\ We chose these particular items in the form to
structure--including those that issuers of variable annuities would
newly have to structure--because we believe that they are the most
salient to investors and benefit most from being structured. We believe
that tagging this disclosure, along with the requirement for RILA
issuers to tag the same other disclosure items that are currently
tagged, would result in information being tagged that would best permit
investors and other data users to analyze and compare RILAs. For
example, this would enable automated extraction and analysis of
descriptions of index-linked options available under the contract,
information regarding the features of each currently offered index-
linked option, and information regarding contract adjustments. This
would allow investors and other market participants more efficiently to
perform large-scale analysis and comparison across RILAs (including the
index-linked options that different RILAs offer) and time periods.
Similarly, the requirement to tag information about fixed options will
permit the same type of analysis with respect to these investment
options--including comparing fixed options across contracts, as well as
index-linked options, variable options, and fixed options offered under
the same contract.
---------------------------------------------------------------------------
\260\ See supra footnotes 253-255. These primarily include the
proposed new disclosure items that are specific to RILAs, as opposed
to extant Form N-4 disclosure items to which we are proposing
incremental amendments to address RILAs along with variable
annuities.
---------------------------------------------------------------------------
As another example, census-type information about variable annuity
contracts, which is parallel to the SAI disclosure we propose to
require for contracts with index-linked options, is currently reported
in structured data format.\261\ Requiring census-type information about
contracts with index-linked options to be tagged in Inline XBRL would
help the Commission and staff identify trends in insurance companies'
offerings of the contracts, similar to the tools the Commission and
staff currently have to identify trends in the offering of variable
annuity contracts. An Inline XBRL requirement also would facilitate
other analytical benefits, such as more easily extracting and searching
disclosures about annuities, and automatically comparing these
disclosures against prior periods.
---------------------------------------------------------------------------
\261\ See supra section II.B.I.A.6; see also Item F.14 of Form
N-CEN.
---------------------------------------------------------------------------
We are proposing to require RILA issuers to submit Interactive Data
Files as follows, consistent with the approach for issuers of variable
annuities registered on Form N-4:
For most post-effective amendments, Interactive Data Files
would have to be filed either concurrently with the filing, or in a
subsequent amendment that is filed on or before the date that the post-
effective amendment that contains the related information becomes
effective; \262\
---------------------------------------------------------------------------
\262\ See proposed General Instruction C.3(h)(i)(B) of Form N-4.
This instruction relates to post-effective amendments filed pursuant
to paragraph (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
---------------------------------------------------------------------------
For initial registration statements (and post-effective
amendments other than as described in the bullet immediately above),
Interactive Data Files would have to be filed in a subsequent amendment
on or before the date the registration statement or post-effective
amendment that contains the related information becomes effective;
\263\ and
---------------------------------------------------------------------------
\263\ See proposed General Instruction C.3(h)(i)(A) of Form N-4.
This instruction relates to initial registration statements and
post-effective amendments other than those filed pursuant to
paragraph (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485.
---------------------------------------------------------------------------
For any form of prospectus filed pursuant to rule 497(c)
or (e), Interactive Data Files would have to be submitted concurrently
with the filing.\264\
---------------------------------------------------------------------------
\264\ See proposed General Instruction C.3(h)(ii) of Form N-4.
---------------------------------------------------------------------------
We anticipate that this approach would facilitate the timely
availability of important information in a structured format for
investors, investment professionals, and other data users yielding
substantial benefits. For data aggregators responding to investor
demand for the data, the availability of the required disclosures in
the Inline XBRL format concurrent with filing or before the date of
effectiveness would allow them to quickly process and share the data
and related analysis with investors.
Like other issuers, RILA issuers could request temporary and
continuing hardship exemptions for the inability to timely file
electronically the Interactive Data File.\265\
---------------------------------------------------------------------------
\265\ See rule 201 Regulation S-T (temporary hardship exemption)
and rule 202 of Regulation S-T (continuing hardship exemption).
---------------------------------------------------------------------------
Request for Comments
We request comment generally on the proposed amendments to require
the use of Inline XBRL, and specifically on the following issues:
97. Should we adopt rules that make the submission of structured
data in the Inline XBRL format mandatory for RILA issuers?
98. Is it appropriate that RILA issuers would have to tag the same
disclosure items that variable annuity issuers tag? Why or why not? If
RILA issuers were to be required to tag other disclosure items that are
also applicable to variable annuities, should variable annuity issuers
also be required to tag these same items?
99. Is it appropriate that all Form N-4 filers would have to tag
certain of the new disclosure items that we are proposing to add to
Form N-4, in particular, proposed Items 2(b)(2), 2(d), 6(a)
(instruction), 6(c)(1), 6(d), 6(e), 7(e), 26(c), and 31A of Form N-4?
Should insurance companies not be required to tag any of these items,
and if so, why not? Are there other proposed disclosure items that we
should also require insurance companies to tag? If so, why?
100. Is it appropriate that the approach for RILA issuers to submit
Interactive Data Files be consistent with the current approach for
issuers of variable annuities registered on Form N-4, as proposed? If
not, what alternative approach would be more appropriate and why? Is it
appropriate that, like variable annuities registered on Form N-4, the
proposed Inline XBRL requirements for RILA issuers would apply only to
contracts being sold to new investors? Do commenters agree that tagging
the prospectus disclosure would have less utility for current investors
and other market participants?
101. Are any other amendments necessary or appropriate to require
the submission of the proposed required information in Inline XBRL? If
so, what are they?
C. Option To Use a Summary Prospectus
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations.\266\
[[Page 71131]]
Investors would continue to have access to the RILA statutory
prospectus and other information about the RILA contract online, with
paper or electronic copies of this information upon request.\267\ This
proposed approach would provide parity between RILA issuers and issuers
of variable annuities registered on Form N-4, which are permitted to
use summary prospectuses to satisfy their prospectus delivery
obligations.
---------------------------------------------------------------------------
\266\ Section 5(b)(2) of the Securities Act makes it unlawful to
carry or cause to be carried a security for purposes of sale or for
delivery after sale ``unless accompanied or preceded'' by a
prospectus that meets the requirements of section 10(a) of the Act.
See section 10(a) of the Securities Act (generally requiring a
prospectus relating to a security to contain the information
contained in the registration statement). For purposes of this
release, a prospectus meeting the requirements of a section 10(a)
prospectus is referred to as a ``statutory prospectus.'' For
purposes of this section, we refer to RILA contracts and combination
contracts together as ``RILA contracts.''
\267\ To further effectuate the changes being proposed, we
propose to exclude RILA offerings from the provisions of rule 172,
which provides that a final prospectus will be deemed to precede or
accompany a security for sale for purposes of Securities Act section
5(b)(2) as long as the final prospectus meeting the requirements of
Securities Act section 10(a) is filed or the issuer will make a good
faith and reasonable effort to file it with the Commission as part
of the registration statement within the required rule 424
prospectus filing timeframe. Consistent with registered investment
companies and business development companies, RILA offerings would
be subject to a separate framework governing communications with
investors under the proposal. See supra section II.E; see also
Offering Reform Release at section VI.B.1.b.
---------------------------------------------------------------------------
RILA Summary Prospectus Overview
The current summary prospectus rule for variable contracts uses a
layered disclosure approach designed to provide investors directly with
key information relating to the contract's terms, benefits, and risks
in a concise and reader-friendly presentation, with more detailed
information available elsewhere. We anticipate that the summary
prospectus framework would improve investor understanding of RILA
contracts, as the Commission similarly expressed when it adopted the
summary prospectus rule for variable contracts.\268\ This proposed
approach for RILA contracts builds on the Commission's decades of
experience with layered disclosure and rules permitting the use of
summary prospectuses.\269\ The proposal also recognizes investors'
expressed preferences for concise and engaging disclosure of key
information. Accordingly, we believe the proposed approach is
consistent with the RILA Act's mandate of designing disclosure
requirements ``with the goal of ensuring that key information is
conveyed in terms that a purchaser is able to understand.'' \270\
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\268\ See VASP Adopting Release at n.21 and accompanying text.
\269\ See id.; see also Enhanced Disclosure and New Prospectus
Delivery Option for Registered Open-End Management Investment
Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009)
[74 FR 4545 (Jan. 26, 2009)] (``2009 Summary Prospectus Adopting
Release''); Tailored Shareholder Reports for Mutual Funds and
Exchange-Traded Funds; Fee Information in Investment Company
Advertisements, Investment Company Act Release No. 34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)] (``Tailored Shareholder Reports
Adopting Release'') (adopting rules incorporating a layered
disclosure approach to open-end funds' annual and semi-annual
reports to shareholders).
\270\ See VASP Adopting Release at n.20 and accompanying text;
Tailored Shareholder Reports Adopting Release at nn.10, 11, and 29
and accompanying text; see also supra discussion following footnote
7.
---------------------------------------------------------------------------
The proposed amendments to rule 498A would broaden the scope of the
rule to address RILA contracts.\271\ Under the proposed amendments, the
rule's conditions for relying on the rule to satisfy prospectus
delivery obligations would be the same for RILA contracts as for
variable contracts.\272\ These conditions include the requirements to
send or give a summary prospectus to an investor no later than the time
of the ``carrying or delivery'' of the contract security, as well as:
(1) requirements for the contents that must be included in a summary
prospectus, (2) limitations on binding a summary prospectus with other
materials, and (3) requirements that the summary prospectus, statutory
prospectus, and contract statement of additional information must be
publicly accessible, free of charge, on a website in the manner that
the rule specifies.
---------------------------------------------------------------------------
\271\ To facilitate this change, and to make the terminology
used in rule 498A more consistent with certain terms used in the
proposed amendments to Form N-4, we are also proposing a number of
amendments to the rule's definitions. Specifically, we would (1)
amend the definitions to ``Class,'' ``Contract,'' Investment
Option,'' ``Registrant,'' ``Variable Annuity Contract,'' and
``Variable Life Insurance Contract'' to address RILA contracts, and/
or to make changes to these definitions that correspond with
amendments to certain definitions in Form N-4 (either definitions of
these same terms in Form N-4, or definitions of other terms in Form
N-4 that would otherwise affect the way these terms are defined in
rule 498A); (2) add definitions for ``Fixed Option,'' ``Index-Linked
Option,'' ``Insurance Company,'' ``Registered Separate Account,''
``RILA Contract,'' and ``Variable Option'' consistent with their
counterparts in the proposed Form N-4 amendments; and (3) deleting
the definition of ``Depositor.'' These changes are necessary to
communicate the provisions of the rule that would be applicable to
RILA and combination contracts.
\272\ See proposed rule 498A(f). Rule 498A also provides that a
communication relating to an offering registered on Form N-4 that a
person sends or gives after the effective date of the registration
statement (other than a prospectus that Section 10 of the Securities
Act permits or requires) will not be deemed a prospectus under
section 2(a)(10) of the Securities Act, under certain conditions.
The proposed amendments to rule 498A would extend this provision to
RILA contracts. See rule 498A(g). Under the proposed amendments, the
rule 498A provision addressing information that may be incorporated
by reference into a summary prospectus also would apply the same to
RILAs as it does to other contracts currently within the scope of
the rule. See rule 498A(d).
---------------------------------------------------------------------------
The proposed amendments to rule 498A would involve the use of two
distinct types of summary prospectuses for RILA contracts, employing
the same approach the rule currently uses for variable contracts. An
``initial summary prospectus,'' covering contracts offered to new
investors, would include certain key information about the contract's
most salient features, benefits, and risks, presented in plain English
in a standardized order. The rule amendments would also require
``updating summary prospectuses'' to be provided to existing investors
in RILA contracts as a condition to relying on the rule. The updating
summary prospectus would include a brief description of certain changes
to the contract that occurred during the previous year, as well as a
subset of the information required to appear in the initial summary
prospectus. Certain key information about the index-linked options that
the contract offers would be provided in both the initial summary
prospectus and updating summary prospectus.\273\
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\273\ This proposed approach is consistent with the approach for
information about variable options in variable contracts' summary
prospectuses, in which certain key information about the portfolio
companies offered as variable options appears in both the initial
summary prospectus and updating summary prospectus. See proposed
rule 498A(b)(5)(ix); proposed rule 498A(c)(6)(iv).
---------------------------------------------------------------------------
As under current rule 498A for variable contracts, the proposed use
of summary prospectuses for RILA contracts would be voluntary. This
would be appropriate to provide RILA issuers sufficient time to
transition to a summary prospectus regime, as well as in recognition of
the fact that there could be different relative benefits of using a
summary prospectus for certain RILA issuers and investors in these
contracts.\274\ Similar considerations informed the Commission's
decision to adopt a voluntary summary prospectus regime for variable
contracts.\275\
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\274\ The Commission similarly discussed the relative benefits
to variable contract issuers of using a summary prospectus, based on
the types of products that these issuers offer and the length of
their current prospectuses, as well as the benefit of more concise
disclosure to investors, in adopting rule 498A. See, e.g., VASP
Adopting Release at section IV.E.1 (discussion in the Economic
Analysis section of the release, addressing the Commission's
consideration of mandating summary prospectuses for variable
contracts).
\275\ See VASP Adopting Release at discussion accompanying
nn.41-45; see also infra section III.C.1.c (discussing that
different issuers and investors could expect to benefit differently
from this optional prospectus delivery regime, although we expect a
majority of RILA issuers to choose to use summary prospectuses and
that therefore the majority of RILA investors will have the option
to use both summary prospectuses and statutory prospectuses in their
decision-making, in whatever proportion investors think is best for
their preferences).
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Initial Summary Prospectus
As under the current rule 498A, an initial summary prospectus for a
RILA
[[Page 71132]]
contract may only describe a single contract that the RILA issuer
currently offers for sale.\276\ An initial summary prospectus may
describe more than one class of a currently offered contract.\277\
Aggregating disclosures for multiple contracts, or currently offered
and no-longer-offered features and options of a single contract, can
hinder investors from distinguishing between contract features and
options that apply to them and those that do not. As a result, an
initial summary prospectus could simplify and consolidate lengthy and
complex disclosures. The content and ordering of items is designed to
highlight aspects of a RILA contract that may not be emphasized in
marketing materials and other disclosures.
---------------------------------------------------------------------------
\276\ See proposed rule 498A(b)(1).
\277\ The definition of the term ``class'' in the proposed
amendments is the same as the definition in the current rule (that
is, as a class of a contract that varies principally with respect to
distribution-related fees and expenses). Proposed rule 498A(a).
---------------------------------------------------------------------------
Like other summary prospectuses that rule 498A addresses, we are
proposing a standardized presentation for RILA initial summary
prospectuses to require certain disclosure items that we believe would
be most relevant to investors to appear at the beginning of the initial
summary prospectus, followed by supplemental information.\278\ The
required presentation could also facilitate comparisons of different
RILA contracts, as well as comparisons between RILA contracts and
variable annuities. An initial summary prospectus must contain the
information required by the rule, and only that information, in the
order specified by the rule.\279\ The information would be required to
appear in the same order, and under relevant corresponding headings, as
the rule specifies.
---------------------------------------------------------------------------
\278\ See VASP Adopting Release at paragraph accompanying nn.58-
59.
\279\ Proposed rule 498A(b)(5).
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The chart in Table 6 below outlines the information that we propose
to require to appear in an initial summary prospectus for a RILA
contract. We would not change these content requirements, with the
exception of the ordering of the Overview of the Contract and KIT
disclosures, from the current variable annuity requirements. The
Commission has historically viewed these items as providing annuity
investors with key information relating to a contract's terms,
benefits, and risks in a concise and reader-friendly presentation, and
highlighting aspects of the contract that may not be emphasized in
marketing materials and other disclosures.\280\ We preliminarily
believe that this rationale is equally true in the context of RILA
disclosure. Further, as discussed above, we propose that the Overview
of the Contract disclosures (currently Item 3 of Form N-4, but proposed
to be re-numbered as Item 2) should precede the KIT (currently Item 2
of Form N-4, but proposed to be re-numbered as Item 3), due to the
context that the Overview section provides and based upon our
experience with the form [and taking into account the results of
investor testing].\281\ This change would be reflected in the
requirements of rule 498A.\282\ Otherwise, the same order of
disclosures would be provided as under the current rule.
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\280\ See VASP Adopting Release at nn. 47-48 and accompanying
text. To the extent that these content requirements are unchanged
from the content requirements for variable annuity summary
prospectuses, our rationale for these requirements has not changed
from the rationale that is discussed throughout the sections of the
VASP Adopting Release that address each of the content items
discussed in Table 6 below. See VASP Adopting Release at section
II.A.1.c. Further, we provide our reasoning as to why these
particular disclosures are important to investors in the RILA
context as a general matter in section II.B, supra.
\281\ See supra section II.B.I.A.2.
\282\ Currently, rule 498A requires issuers to place ``Important
Information You Should Consider About the [Contract]'' disclosures
before ``Overview of the [Contract] disclosures.''
Table 6--Outline of the Initial Summary Prospectus
----------------------------------------------------------------------------------------------------------------
Relevant paragraph Item of Form N- Applicable to
Heading in initial summary in proposed 4 (as proposed Applicable to RILA variable annuities
prospectus amendments to rule to be amended) contracts? registered on Form
498A N-4?
----------------------------------------------------------------------------------------------------------------
Cover Page:
Identifying Information Rule 498A(b)(2)(i) .............. [check]............ [check]
(front cover page) \1\. through (iv).
Legends (front cover page) Rule 498A(b)(2)(v). .............. [check]............ [check]
\2\.
EDGAR Contract Identifier Rule 498A(b)(3).... .............. [check]............ [check]
(back cover page).
Table of Contents (optional). Rule 498A(b)(4).... .............. [check]............ [check]
Content:
Overview of the [Contract]... Rule 498A(b)(5)(ii) 2 [check]............ [check]
(each paragraph of (each paragraph of
Item 2, as Item 2 except
applicable). (b)(2) and (d),
which are
generally only
applicable to RILA
contracts).
Important Information You Rule 498A(b)(5)(i). 3 [check]............ [check]
Should Consider About the (with line items (with line items
[Contract]. applicable to RILA applicable to
contracts, as variable
specified in annuities, as
instructions to specified in
Item 3). instructions to
Item 3).
Benefits Available Under the Rule 498A(b)(5)(iv) 10(a) [check]............ [check]
[Contract].
Buying the [Contract]........ Rule 498A(b)(5)(v). 11(a) [check]............ [check]
Making Withdrawals: Accessing Rule 12(a) [check]............ [check]
the Money in Your [Contract]. 498A(b)(5)(vii).
Additional Information About Rule 4 [check]............ [check]
Fees. 498A(b)(5)(viii).
[[Page 71133]]
Appendix: [Investment Options/ Rule 498A(b)(5)(ix) 17 [check]............ [check]
Portfolio Companies] (Item 17(b) and (Item 17(a) and
Available Under the Contract. 17(c), as 17(c), as
applicable). applicable).
----------------------------------------------------------------------------------------------------------------
Notes to Table 6:
\1\ The beginning or front cover page of a RILA contract's initial summary prospectus, like the initial summary
prospectus of a variable annuity registered on Form N-4, would need to include the following information: (1)
the insurance company's name; (2) the name of the contract, and the class or classes if any, to which the
initial summary prospectus relates; (3) a statement identifying the document as a ``Summary Prospectus for New
Investors''; and (4) the approximate date of the first use of the initial summary prospectus.
\2\ The required legends would be the same for RILA contracts and for variable annuities registered on Form N-4.
These legends address the purpose of the summary prospectus, the availability of the statutory prospectus and
other information, information regarding the permitted cancellation period for the contract, and a statement
that additional information about RILA contracts has been prepared by Commission staff and is available at
investor.gov. The initial summary prospectuses for RILA contracts as well as variable annuities also would
have to include the additional statements that we are proposing to require on the cover page of the prospectus
for all Form N-4 issuers. See supra section II.B.1; see also proposed Item 1(a)(6)-(8) of Form N-4.
A RILA initial summary prospectus would be permitted to include a
table of contents. A table of contents must show the page number of the
various sections or subdivisions of the summary prospectus, and
immediately follow the cover page in any initial summary prospectus
delivered electronically.
The topics of the contents included in an initial summary
prospectus--as well as the required headings under which these contents
must appear--are the same for a RILA contract summary prospectus as for
a summary prospectus of a variable annuity registered on Form N-4.\283\
Further, certain of these required contents would vary in substance to
reflect the unique aspects of RILA contracts as compared to variable
annuities. These are indicated in Table 1 above and include:
---------------------------------------------------------------------------
\283\ Proposed rule 498A(b)(5).
---------------------------------------------------------------------------
Disclosure provided under the heading ``Overview of the
Contract'' (Item 2 of Form N-4), where disclosure for RILA contracts
must include specific information about index-linked options currently
offered under the contract, as well as interim value adjustments or
market value adjustments that could affect an investor's contract
value;
Disclosure provided under the heading ``Important
Information You Should Consider About the Contract'' (Item 3 of Form N-
4), where certain rows in the required table are specific to RILA
contracts as opposed to variable annuities;
Disclosure provided under the heading ``Additional
Information About Fees'' (Item 4 of Form N-4), where the requirements
for fee information for RILA contracts differ from the parallel
requirements for variable annuities (reflecting that RILA contracts
generally do not entail annual contract expenses, but there are other
costs associated with an investment in a RILA contract); and
Disclosure under the heading ``Appendix: Investment
Options Available Under the Contract'' (Item 17 of Form N-4), where a
RILA contract would include a different summary table for index-linked
options offered under the contract than the summary table of variable
options offered under a variable annuity.
Each of these disclosure items, which would also appear in a RILA
statutory prospectus, is discussed in more detail in section II.B
above.
Updating Summary Prospectus
As under current rule 498A, RILA issuers would not send an updated
initial summary prospectus to investors each year. Instead, any RILA
issuers would send an updating summary prospectus, which would provide
a brief description of certain changes with respect to the contract
that occurred within the prior year.\284\ This would allow investors to
focus their attention on new or updated information relating to the
contract. Additionally, the updating summary prospectus would include
certain of the items required in the initial summary prospectus that
are most likely to entail contract changes and where any such contract
changes are most likely to be important to investors because they
affect how investors evaluate RILA contracts and are relevant to
investors when considering additional investment decisions or otherwise
monitoring their contracts. This is consistent with the Commission's
approach for variable annuity updating summary prospectuses.\285\
---------------------------------------------------------------------------
\284\ A RILA issuer, like a variable annuity issuer, could only
use an updating summary prospectus if it uses an initial summary
prospectus for each currently offered contract described under the
contract statutory prospectus to which the updating summary
prospectus relates. Proposed rule 498A(c)(1). See also VASP Adopting
Release at n.209 and accompanying text.
\285\ See VASP Adopting Release at section II.A.2.a. As
discussed above, the policy rationale for content requirements that
would be the same among updating summary prospectuses for RILA
contracts and variable annuity contracts--as well as the rationale
for the location of these contents--is the same as that which the
Commission articulated in adopting rule 498A. To the extent that
these content requirements are unchanged from the content
requirements for variable annuity summary prospectuses, our
rationale for these requirements has not changed from the rationale
that is discussed throughout the sections of the VASP Adopting
Release that address each of the content items discussed in Table 7
below. See VASP Adopting Release at section II.A.2.c. Further, we
provide our reasoning as to why these particular disclosures are
important to investors in the RILA context as a general matter in
section II.B, supra.
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Because the initial summary prospectus is designed for someone
making an initial investment decision, we believe that existing RILA
investors would benefit more from receiving a shorter-form document
including a brief summary of the changes to the contract, than from
receiving the initial summary prospectus year after year.\286\ This
approach also takes into account the cost to maintain and update
separate initial summary prospectuses for currently offered contracts
and those no longer offered.
---------------------------------------------------------------------------
\286\ The Commission discussed this rationale when it initially
adopted rule 498A. See VASP Adopting Release at section II.A.2.a.
---------------------------------------------------------------------------
Unlike an initial summary prospectus, which could describe only a
single contract that a RILA issuer currently offers for sale, an
updating summary prospectus for a RILA could describe one or more
contracts covered in the statutory prospectus to which the updating
summary prospectus relates,
[[Page 71134]]
as under current rule 498A.\287\ Similar to the initial summary
prospectus, an updating summary prospectus could also describe more
than one class of a contract.
---------------------------------------------------------------------------
\287\ Proposed rule 498A(c)(2); see also VASP Adopting Release
at nn.342-343 and accompanying paragraph.
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Updating summary prospectuses for RILA contracts, like initial
summary prospectuses, would include specific disclosure items appearing
in a prescribed order, under relevant corresponding headings.\288\ An
updating summary prospectus for a RILA contract would have to contain
the information required by the rule, and only that information, in the
order specified by the rule. The chart in Table 7 below outlines the
information that we propose to require to appear in an updating summary
prospectus for a RILA contract.
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\288\ Proposed rule 498A(c)(6).
Table 7--Outline of the Updating Summary Prospectus
----------------------------------------------------------------------------------------------------------------
Relevant paragraph Applicable to
Heading in updating summary in proposed Item of Applicable to RILA variable annuities
prospectus amendments to Rule amended Form N- contracts? registered on Form
498A 4 N-4?
----------------------------------------------------------------------------------------------------------------
Cover Page:
Identifying Information Rule 498A(c)(3)(i) .............. [check]............ [check]
(front cover page) \1\. through (iv).
Legends (front cover page) Rule 498A(c)(3)(v). .............. [check]............ [check]
\2\.
EDGAR Contract Identifier Rule 498A(c)(4).... .............. [check]............ [check]
(back cover page).
Table of Contents (optional) Rule 498A(c)(5).... .............. [check]............ [check]
\3\.
Content:
Updated Information About Rule 498A(c)(6)(i) .............. [check]............ [check]
Your Contract. through (ii).
Important Information You Rule 3 [check]............ [check]
Should Consider About the 498A(c)(6)(iii). (with line items (with line items
[Contract]. applicable to RILA applicable to
contracts, as variable
specified in annuities, as
instructions to specified in
Item 3). instructions to
Item 3).
Appendix: [Investment Options/ Rule 498A(c)(6)(iv) 17 [check]............ [check]
Portfolio Companies] (Item 17(b) and (Item 17(a) and
Available Under the Contract. 17(c), as 17(c), as
applicable). applicable).
----------------------------------------------------------------------------------------------------------------
Notes to Table 7:
\1\ The beginning or front cover page of a RILA contract's updating summary prospectus, like the updating
summary prospectus of a variable annuity registered on Form N-4, would need to include the following
information: (1) the insurance company's name; (2) the name of the contract(s), and the class or classes if
any, to which the updating summary prospectus relates; (3) a statement identifying the document as an
``Updating Summary Prospectus''; and (4) the approximate date of the first use of the updating summary
prospectus.
\2\ The required legends would be the same for RILA contracts and for variable annuities registered on Form N-4.
These legends address the purpose of the summary prospectus, the availability of the statutory prospectus and
other information, and a statement that additional information about RILA contracts has been prepared by the
SEC staff and is available at investor.gov. The updating summary prospectuses for RILA contracts as well as
variable annuities also would have to include the additional statements that we are proposing to require on
the cover page of the prospectus for all Form N-4 issuers. See supra section II.B.1; see also proposed Item
1(a)(6) through (8) of Form N-4.
\3\ The requirements for this optional table of contents would be the same for an updating summary prospectus as
for an initial summary prospectus. See proposed rule 498A(b)(4); proposed rule 498A(c)(5).
The updating summary prospectus for a RILA contract would be
required to include a concise description of certain changes to the
contract made after the date of the most recent updating summary
prospectus or statutory prospectus that was sent or given to investors.
These changes would appear under the heading ``Updated Information
About Your Contract,'' with a required legend following the
heading.\289\ The changes that the rule would require a RILA issuer to
describe include those that relate to: (1) the availability of
investment options under the contract; (2) the overview of the
contract; (3) the KIT; (4) certain information about fees; (5) benefits
available under the contract; (6) purchases and contract value; and (7)
surrenders and withdrawals. The updating summary prospectus also could
include a concise description of any other changes that the RILA issuer
wishes to disclose, provided they occurred within the same time period
as the other changes the rule would require the issuer to describe. In
providing a concise description of a contract-related change in the
updating summary prospectus, RILA issuers would have to provide enough
detail to allow investors to understand the change and how it will
affect them.\290\
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\289\ The legend would be the same for RILA contracts and
variable annuities: ``The information in this Updating Summary
Prospectus is a summary of certain [Contract] features that have
changed since the Updating Summary Prospectus dated [date]. This may
not reflect all of the changes that have occurred since you entered
into your [Contract].'' Proposed rule 498A(c)(6)(i)(A).
\290\ Proposed rule 498A(c)(6)(i)(B); see also VASP Adopting
Release at paragraph accompanying n.374.
---------------------------------------------------------------------------
The topics for which a change would necessitate a description in
the updating summary prospectus would be the same for RILA contracts as
for variable annuities registered on Form N-4. We do not anticipate
that disclosures addressing these topics in a contract statutory
prospectus would change frequently, and thus providing investors with a
notice and a brief description of any changes that do occur may be more
informative than repeating all the disclosures each year.\291\ Despite
the infrequency of changes, investors should be notified of any changes
to these items given their importance to the investor's experience of
investing in a RILA contract.\292\
---------------------------------------------------------------------------
\291\ See VASP Adopting Release at paragraph following n.372.
\292\ See id. at paragraph accompanying nn.365-369.
---------------------------------------------------------------------------
We are proposing to amend rule 498A to specify that, in the context
of a RILA
[[Page 71135]]
contract updating summary prospectus, the change of availability of
investment options includes a change to any of the features of the
index-linked options disclosed in the table that Item 17(b) of Form N-4
requires (that is, the table in the appendix of investment options that
will appear in a RILA contract summary prospectus).\293\ When the
Commission adopted rule 498A, it stated that a change that has affected
availability of portfolio companies (or investment options) includes
changes in the portfolio companies (or investment options) offered
under the contract or available in connection with any optional
benefit.\294\ In the context of index-linked options, any change to the
features of the index-linked options that the required table would
describe--that is, the index, type of index, crediting period, index
crediting methodology, limit on index loss, and/or guaranteed minimum
limit on index gain--would meaningfully change the investor's
experience of investing in a RILA contract with the index-linked option
that investor had previously chosen. For this reason, under the
proposed amendments a change to any of these features would represent a
change in the availability of the investment options that the RILA
contract offers.
---------------------------------------------------------------------------
\293\ Proposed rule 498A(c)(6)(i).
\294\ VASP Adopting Release at n.361.
---------------------------------------------------------------------------
The topics of the additional contents included in an updating
summary prospectus--as well as the required headings under which these
contents must appear--would be the same for RILA contracts and for
variable annuities registered on Form N-4.\295\ Certain of these
required contents, however, would vary in substance to reflect the
unique aspects of RILA contracts as compared to variable annuities.
These are indicated in Table 2 above and include:
---------------------------------------------------------------------------
\295\ Proposed rule 498A(c)(6).
---------------------------------------------------------------------------
Disclosure provided under the heading ``Important
Information You Should Consider About the Contract'' (Item 3 of Form N-
4), where certain rows in the required table are specific to RILA
contracts as opposed to variable annuities; and
Disclosure under the heading ``Appendix: Investment
Options Available Under the Contract'' (Item 17 of Form N-4), where a
RILA contract would include a different summary table for index-linked
options offered under the contract than the summary table of variable
options offered under a variable annuity.
Online Accessibility of Contract Statutory Prospectus and Certain Other
Documents Relating to the Contract
Investors who receive a RILA contract initial or updating summary
prospectus would have access to more detailed information about the
RILA contract, either by reviewing the information online, or by
requesting the information to be sent in paper or electronically. In
this respect, the proposed amendments would include the same
requirements for RILA contracts as for variable contracts. These
requirements further the layered disclosure framework that rule 498A
creates for variable contracts and would, under the proposed
amendments, similarly create for RILA contracts. Those insurance
companies that issue RILAs, to the extent that they also issue variable
annuity contracts that use summary prospectuses under rule 498A,
therefore should be generally familiar with the practice of making this
information available online and be able to integrate it with existing
processes for variable annuities. Similar to what the Commission
expressed in the context of variable annuity summary prospectuses,
permitting RILA investors to access the contract statutory prospectus
in several ways (online and by physical or electronic delivery) would
maximize the accessibility and usability of this information and that
investors have historically indicated a preference for both online and
paper resources.\296\
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\296\ See VASP Adopting Release at n.417 and accompanying text;
and Office of Investor Education and Advocacy of the U.S. Securities
and Exchange Commission, Study Regarding Financial Literacy Among
Investors (Aug. 2012), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf, at iv, xix.
These proposed requirements are unchanged from the requirements for
variable annuity summary prospectuses, and our rationale for these
requirements has not changed from the Commission's rationale that is
discussed throughout the sections of the VASP Adopting Release that
discuss online accessibility requirements. See VASP Adopting Release
at sections II.A.5 and II.A.6.
---------------------------------------------------------------------------
Under the proposed amendments, a RILA issuer relying on rule 498A
(like a variable annuity issuer relying on this rule currently), would
have to make the contract's current initial summary prospectus,
updating summary prospectus, statutory prospectus, and SAI (together,
the ``required online contract documents'') available online.\297\
These required online contract documents would be required to be
publicly accessible, free of charge, at the website address that the
cover page of the summary prospectus specifies, on or before the time
that the person relying on the rule provides the summary prospectus to
investors.\298\ The website address on which the required online
contract documents appear must be specific enough to lead investors
directly to the documents, although the website could be a central site
with prominent links to each document.\299\ The required online
contract documents would have to be presented in a manner that is
human-readable and capable of being printed on paper in human-readable
format, and persons accessing the documents must be able to permanently
retain electronic versions of the documents. The proposed amendments
include requirements for linking within the electronic versions of the
contract statutory prospectus and SAI that are available online, and
also for linking between electronic versions of contract summary and
statutory prospectuses that are available online.
---------------------------------------------------------------------------
\297\ For proposed requirements relating to the required online
contract documents, see generally proposed rule 498A(h).
\298\ A current version of each of the required online contract
documents would have to remain available for at least 90 days
following either: (1) the time of the ``carrying or delivery'' of
the contract security if a person is relying on the rule to satisfy
its section 5(b)(2) prospectus delivery obligations; or (2) if a
person is relying on the rule to send communications that will not
be deemed to be prospectuses, the time that the person sends or
gives the communication to investors. Proposed rule 498A(h)(1).
\299\ Proposed rule 498A(b)(2)(v)(B).
---------------------------------------------------------------------------
Both initial summary prospectuses and updating summary prospectuses
for RILA contracts would, like variable annuity summary prospectuses,
be required to define any ``special terms'' elected by the registrant,
using any presentation that clearly conveys their meaning to
investors.\300\ In RILA contract summary prospectuses that are
available online, the proposed amendments (like the current rule)
require that investors be able either to view the definition of each
special term upon command, or to move directly back and forth between
each special term and the corresponding entry in any glossary or list
of definitions the summary prospectus includes.
---------------------------------------------------------------------------
\300\ Proposed rule 498A(e).
---------------------------------------------------------------------------
Satisfying each of these requirements regarding online
accessibility of contract statutory prospectuses and certain other
documents relating to the contract is a condition for a RILA issuer to
rely on rule 498A to satisfy prospectus delivery obligations.\301\
Failure to comply with any of these conditions could result in a
violation of section 5(b)(2) unless the contract statutory prospectus
is delivered by means other than reliance on the rule. We recognize,
however, that there may be times when, due to events
[[Page 71136]]
beyond a person's control, the person may temporarily not be in
compliance with the rule's conditions regarding the availability of the
required online contract documents. The proposed amendments, like the
current rule, includes a safe harbor provision addressing temporary
noncompliance.\302\
---------------------------------------------------------------------------
\301\ Proposed rule 498A(f)(4); proposed rule 498A(g)(4).
\302\ Proposed rule 498A(h)(4). This provides that the
conditions regarding the availability of the required online
contract documents will be deemed to be met, even if the required
online contract documents are temporarily unavailable, provided that
the person has reasonable procedures in place to ensure that those
materials are available in the required manner. A person relying on
the rule to satisfy prospectus delivery obligations is required to
take prompt action to ensure that those materials become available
in the manner required as soon as practicable following the earlier
of the time when the person knows, or reasonably should have known,
that the documents were not available in the manner required.
---------------------------------------------------------------------------
Other Requirements for Summary Prospectus and Other Contract Documents
Like current rule 498A, the proposed amendments to rule 498A
include additional requirements for RILA contract summary
prospectuses.\303\ These include:
---------------------------------------------------------------------------
\303\ For these additional proposed requirements, see generally
proposed rule 498A(i).
---------------------------------------------------------------------------
Certain requirements relating to the delivery of paper or
electronic copies of the required online contract documents upon
request;
The requirement that a contract summary prospectus must be
given greater prominence than any materials that accompany the contract
summary prospectus;
Requirements that: (1) the required online documents be
presented in a format that is convenient for reading and printing, and
(2) a person be able to retain electronic versions of these documents
in a format that is convenient for reading and printing; and
The requirement for any website address that is included
in an electronic version of the summary prospectus to be an active
hyperlink.
Failure to comply with these additional requirements would not,
however, negate a person's ability to rely on the rule to satisfy
prospectus delivery obligations.
Request for Comments
We request comment on the proposed amendments to rule 498A, which
would permit RILA issuers to use a summary prospectus to satisfy
statutory prospectus delivery obligations:
102. Is it appropriate to permit RILA issuers, as well as issuers
of ``combination contracts,'' to use a summary prospectus to satisfy
statutory prospectus delivery obligations? Why or why not?
103. Would the current rule 498A framework, which provides for an
initial summary prospectus and an updating summary prospectus, be
appropriate for RILA contracts?
104. Is it appropriate that the use of summary prospectuses for
RILA contracts be voluntary, as proposed? Should the use of summary
prospectuses for RILA contracts instead be mandatory?
105. Should an initial summary prospectus for a RILA contract only
describe a single contract that the RILA issuer currently offers for
sale, as proposed? Instead should we permit an initial summary
prospectus to describe more than one contract? Do commenters recommend
any other changes to the proposed scope requirements for initial
summary prospectuses for RILA contracts?
106. Is the proposed presentation for RILA initial summary
prospectuses appropriate, or should we modify the initial summary
prospectus presentation requirements in any way?
107. Are the proposed summary prospectus cover page requirements
appropriate? For example, is it appropriate that initial (and updating)
summary prospectuses for RILA contracts as well as variable annuities
also would have to include the additional statements that we are
proposing to require on the cover page of the prospectus for all Form
N-4 issuers?
108. Do the proposed RILA initial summary prospectus content items
represent the disclosure that would best highlight the key terms,
benefits, and risks of a RILA contract? Do the proposed content items
capture key considerations that a typical contract investor would find
salient? Should an initial summary prospectus include additional
information an investor would need in order to make an informed
investment decision, and if so, what would this information be? For
example, is there any information we are proposing to include in Item 6
of Form N-4 that we should include in the summary prospectus?
Alternatively, should we exclude or modify any of the proposed initial
summary prospectus disclosure requirements? To the extent that
commenters suggest changes that would result in different content
across initial summary prospectuses for RILA contracts versus variable
annuities, why would such changes be appropriate, and how should we
address these suggested changes in the context of ``combination
contracts'' offering a combination of index-linked options and variable
options?
109. Under the proposal, would initial summary prospectuses for
RILA contracts, on average, be longer, shorter, or about the same
length as variable annuity initial summary prospectuses? What would
account for any meaningful differences in average length?
110. Is the proposed updating summary prospectus approach
appropriate for existing RILA investors? Do commenters agree that
existing RILA investors would benefit more from a brief summary of the
changes to the contract reflected in the statutory prospectus than from
receiving all of the disclosures in the initial summary prospectus?
Instead should existing RILA investors receive a summary prospectus
akin to the initial summary prospectus year after year?
111. Should we permit, as proposed, an updating summary prospectus
for a RILA contract to describe one or more contracts covered in the
related statutory prospectus? Do commenters recommend any other changes
to the proposed scope requirements for updating summary prospectuses
for RILA contracts?
112. We request comment on the proposed requirement to include a
brief description of certain contract-related changes in the updating
summary prospectus. Would this disclosure requirement be useful to
investors? Is the scope of changes that a RILA issuer would be required
to discuss appropriate? Are there other topics about which we should
require a RILA issuer to describe a change? Should we define a change
in the availability of investment options that would require disclosure
as a change to any of the features of the index-linked options that the
table that Item 17(b) of Form N-4 would require, as proposed? If not,
what definition would be more appropriate and why?
113. Do the other proposed RILA contract updating summary
prospectus content items represent the disclosure that would be most
appropriate and useful for existing investors, for example in
considering whether to continue making additional purchase payments or
reallocate contract value? If not, what alternative disclosure should
we require?
114. Should rule 498A include, as proposed, the same requirements
with respect to online accessibility of a RILA contract statutory
prospectus and certain other documents relating to the contract as the
rule provides for variable annuities (including, as described above,
the requirements to make the required online contract documents
[[Page 71137]]
available online, presentation and linking requirements for these
documents, and requirements relating to the definitions of ``special
terms'')? If not, what alternative requirements should we adopt to help
ensure that investors who receive a RILA contract summary prospectus
have access to more detailed information about the RILA contract if
they want it? For example, should the required online contract
documents also include information about the current limits on gains
for each index-linked option offered under the contract? As another
example, should the required online contract documents for issuers of
RILAs and variable annuities that rely on rule 498A also include the
financial statements of the registrant and/or insurance company, to the
extent that these financial statements are not included in the SAI (if,
for instance, an insurer's financial statements are filed on Form N-
VPFS or Form 10-K, and are incorporated by reference into the
registration statement)? To what extent would using the same approach
for both RILAs and variable annuities ease compliance burdens on
insurers? Is it appropriate that, as proposed, satisfying each of these
proposed online accessibility requirements would be a condition for a
RILA issuer to rely on rule 498A to satisfy prospectus delivery
obligations? Are there any modifications we should make to the proposed
safe harbor provision for temporary noncompliance?
115. Should rule 498A include, as proposed, the same other
requirements for summary prospectuses (relating to delivery upon
request, prominence of the summary prospectus in relation to
accompanying materials, ``convenient for reading and printing''
formatting, and hyperlinking requirements) as the rule currently
requires for variable annuity summary prospectuses? Is it appropriate
that, as proposed, satisfying each of these proposed requirements would
not be a condition for a RILA issuer to rely on rule 498A to satisfy
prospectus delivery obligations?
D. Accounting (Items 16 and 26)
We are proposing to permit RILA issuers to provide financial
statements on amended Form N-4 in the same way that insurance companies
currently do on Form N-4. The principal consequence of this change
would be that the financial statements filed in connection with a RILA
registration statement could be prepared in SAP to the same extent as
currently permitted for insurance companies' financial statements filed
on that form. Instruction 1 to Item 26(b) of Form N-4 currently permits
insurance companies that are the depositors of variable annuity
separate accounts to prepare their financial statements for use in a
registration statement filed on Form N-4 in accordance with SAP if the
depositor would not have to prepare its financial statements in
accordance with GAAP except for use in that registration statement or
other registration statements filed on Forms N-3, N-4, or N-6 (the
forms used to register insurance products that are issued by investment
companies).\304\ The instruction further states that the depositor
insurance company's financial statements must be prepared in accordance
with GAAP if it prepares financial information in accordance with GAAP
for use by its parent (as defined in Regulation S-X) in any report
under sections 13(a) and 15(d) of the Exchange Act or any registration
statement filed under the Securities Act.\305\ In interpreting this
instruction the Commission has stated that the insurance product forms
do not require the use of GAAP when: (1) GAAP financial statements are
not prepared for either the depositor or its parent; or (2) the
depositor's parent prepares GAAP financial statements, but 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.\306\
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\304\ Similar to insurance products currently filing
registration statements on these forms, RILA issuers would also be
required, if all of the required financial statements of the
insurance company are not in the prospectus, to state in the
prospectus, under a separate caption, where the financial statements
may be found and to briefly explain how investors may obtain any
financial statements not in the SAI. Proposed item 16 of Form N-4.
\305\ Similar instructions are contained in the other forms used
to register insurance products issued by investment companies. See
instruction 1 to Item 31(b) of Form N-3 and instruction 1 to Item
28(b) of Form N-6.
\306\ See Registration Form for Insurance Company Separate
Accounts Registered as Unit Investment Trusts that Offer Variable
Life Insurance Policies, Investment Company Act Release No. 23066
(Mar. 13, 1998) [63 FR 13988 (Mar. 23, 1998)] (discussing the same
instruction in Form N-6).
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Forms S-1 and S-3 do not include an instruction similar to
Instruction 1 of Item 26(b) of Form N-4. Rather RILAs registered on
these forms are required to provide their financial statements in
accordance with GAAP. The Commission, however, acting through authority
delegated to the staff, has permitted insurance companies registering
on Form S-1 to include SAP financial statements in RILA registration
statements in the circumstances permitted by Form N-4.\307\ The
Commission has stated that this approach appropriately recognizes the
cost burdens that would be imposed if the Commission were to require
GAAP financial statements in cases where the depositor is not otherwise
required to prepare financial information in accordance with GAAP.\308\
We preliminarily believe this is also true for insurance companies that
offer RILAs and that it is important to provide for the consistent
treatment of financial statements for all insurance companies that meet
the circumstances permitted by Form N-4. As a result, permitting RILA
issuers to rely on Instruction 1 to Item 26 to provide SAP financial
statements to the same extent as issuers registering offerings of
variable annuities on Form N-4 would be consistent with investor
protection. In addition, SAP financial statements, which focus on an
issuer's ability to meet its obligations under its insurance contracts,
as regulated by state law, appear to provide sufficient material
information for investors evaluating RILAs.
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\307\ See, e.g., F&G Life Letter.
\308\ See Registration Form for Insurance Company Separate
Accounts Registered as Unit Investment Trusts That Offer Variable
Life Insurance Policies, Investment Company Act Release No. 25522
(Apr. 12, 2002) [67 FR 19848 (Apr. 23, 2002)]; see also VASP
Adopting Release at n.813 and accompanying text.
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Another consequence of requiring insurance companies to register
offerings of RILAs on Form N-4 is that they will have greater
flexibility to update their registration statement without the need to
update certain financial statements. Under section 10(a)(3) of the
Securities Act, RILA issuers, like variable annuity issuers, generally
must file a post-effective amendment annually to update their audited
fiscal year-end financial statements. In addition, Regulation S-X
requires Form S-1 filers to include unaudited interim financial
statements in any new registration statement or post-effective
amendment that goes effective later than 134 days after the end of the
insurer's fiscal year.\309\ Form N-4 filers are not subject to this
requirement.\310\ In addition, after the end of an insurer's fiscal
year, RILA issuers must include year-end audited financial statements
in any new registration statement or post-effective amendment filed 45
days after the fiscal
[[Page 71138]]
year-end.\311\ However, Form N-4 filers instead have a 90-day grace
period.\312\ As a result of the proposal to include RILAs on Form N-4,
RILA issuers therefore would be able to file and amend their
registration statements during certain times of year without the need
to update their financial statements, which RILA issuers cannot do
today.\313\ These approaches, in consideration of consistency in
treatment among all insurance companies that meet the circumstances
permitted by Form N-4, are equally appropriate for RILA filers on Form
N-4.
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\309\ 17 CFR 210.3-12(a). RILA issuers that rely on rule 12h-7
are not required to provide periodic Exchange Act reports, including
quarterly reports that include interim financial statements.
Therefore, they must prepare interim financial statements for
Securities Act registration statements, like Form S-1 and Form S-3,
even though they do not prepare interim financial statements for
other purposes.
\310\ See Instruction 3 to Item 26(b) of Form N-4.
\311\ See 17 CFR 210.3-01(c).
\312\ See Instruction 3 to Item 26(b) of Form N-4.
\313\ A further consequence of the proposed changes would be
that insurance companies would generally be making available their
RILA-related financial statements to investors on an annual basis,
consistent with the timing of financial statements for variable
annuities. Currently, insurance companies relying upon rule 12h-7
provide their RILA-related financials annually, whereas insurance
companies not relying on that rule provide financial statements
quarterly. Insurance companies not relying on rule 12h-7 will file
financial statements more frequently than annually if there are any
post-effective amendments to the registration statement that require
updated financial statements. See Form 10-Q.
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We are also proposing to require RILAs to provide the information
relating to changes in and disagreements with accountants on accounting
and financial disclosure as detailed in 17 CFR 229.304 (``Item 304 of
Regulation S-K''). Further, RILAs would be required to provide as an
exhibit any letter from the insurance company's former independent
accountant regarding its concurrence or disagreement with the
statements made by the insurance company in the registration statement
concerning the resignation or dismissal as the insurance company's
principal accountant. These items are currently provided by RILAs on
Forms S-1 and S-3 and are designed to address the practice of ``opinion
shopping'' for an auditor willing to support a proposed accounting
treatment designed to help a company achieve its reporting objectives
even though that treatment might frustrate reliable reporting.\314\ The
proposed amendments would not be required for variable annuities in
light of their tiered investment company structure. Variable annuities
typically invest indirectly in mutual funds offered as investment
options under such contracts, which themselves are subject to similar
disclosure obligations relating to changes in and disagreements with
accountants on accounting and financial disclosure.\315\
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\314\ See Disclosure Amendments to Regulation S-K, Form 8-K and
Schedule 14A Regarding Changes in Accountants and Potential Opinion
Shopping Situations, Investment Company Act Release No. 16358 (Apr.
12, 1988) [53 FR 12924 (Apr. 20, 1988)]; see also item 11(i) of Form
S-1.
\315\ See Item 27(b)(4) of Form N-1A.
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We request comment on these aspects of the proposal.
116. Is it appropriate, as proposed, to permit RILA issuers to use
the same approach with respect to the use of SAP financial statements,
for purposes of preparing financial statements that are included on a
registration statement on Form N-4, as Form N-4 currently provides for
insurance company issuers? Why or why not?
117. Would SAP financials provide sufficient material information
for a RILA investor to make an informed investment decision? Why or why
not?
118. Why do insurance companies currently provide SAP financials
instead of GAAP financials in their Form N-4 registration statements
when permitted to do so? Do SAP financials currently provide sufficient
material information for a variable annuity investor to make an
informed investment decision?
119. Should we require the proposed items relating to changes in
accountants for RILAs? If so, should we also require these items for
all Form N-4 filers? If the information called for in Item 304 of
Regulation S-K is required, is it appropriately placed in the SAI?
E. Filing and Prospectus Delivery Rules
1. Fee Payment Method and Amendments to Form 24F-2
We are proposing to require insurance companies to pay securities
registration fees relating to RILA offerings using the same method used
for variable annuities.\316\ Specifically, issuers registering the
offerings of RILAs on amended Form N-4 would be deemed to be
registering an indeterminate amount of securities upon effectiveness of
the registration statement.\317\ These issuers would then be required
to pay registration fees annually based on their net sales of these
securities, no later than 90 days after the issuer's fiscal year ends,
on the form that is used by registered separate accounts to pay
securities registration fees relating to variable annuities (Form 24F-
2).\318\ We are further proposing to specify the calculation method for
paying securities registration fees for RILA offerings, consistent with
the fee calculation methodology that applies to variable
annuities.\319\ We are also proposing amendments to Form 24F-2 to
specify when issuers can take credits for RILA redemptions that pre-
date their use of that form and when expiring annuity contracts are
rolled over into a new crediting period, as well as other non-
substantive and conforming amendments.\320\
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\316\ To accommodate the changes proposed in this release, EDGAR
would be modified to require insurance companies registering RILAs
to use a different CIK than that used for their other offerings. One
CIK would be utilized to register the offerings of RILAs on Form N-4
and pay registration fees for securities relating to RILA offerings
on Form 24F-2. The other would be utilized to register the insurance
company's other offerings of securities as they do currently. As a
result, insurance companies would need to utilize separate CIKs for
their RILA-related filings. If the issuer only offers RILAs, it
should only use one CIK. Further, we are proposing to amend rule 313
of Regulation S-T in order to permit filings relating to RILA
offerings to have both an investment company type and contract
identifier in order to facilitate RILA issuers' filing these forms
and for ease in identification of particular RILA contracts.
\317\ The proposed rule amendments would apply the same
registration fee payment approach to RILAs that is currently
provided by rule 24f-2 to current Form N-4 issuers. See proposed
rules 456(e) (providing that where the registration statement
relates to a RILA offering, RILA issuers would be deemed to have
registered an indeterminate amount of securities for purposes of
sections 5 and 6(a) of the Securities Act upon the effective date of
its registration statement); and 457(u) (providing for RILA issuers
to pay registration fees for securities relating to RILA offerings
on the same annual net basis as other Form N-4 issuers); see also
proposed Form 24F-2. See section 4(e) of the Exchange Act [15 U.S.C.
78d-4(e)]; section 28 of the Securities Act [15 U.S.C. 77z-3]. We
preliminarily believe that these actions are necessary or
appropriate in the public interest and consistent with the
protection of investors.
\318\ As a general matter, the proposed amendments would provide
the same process for registering an indeterminate amount of
securities relating to RILA offerings as is currently provided for
exchange-traded vehicle securities under rule 456(d) (which, in
turn, mirrors of the process for current Form N-4 issuers to
register securities) except that (1) this process would be mandatory
for RILAs and (2) RILA issuers would pay fees on Form 24F-2 instead
of through a prospectus supplement in accordance with rule 424. See
also Securities Offering Reform for Closed-End Investment Companies,
Investment Company Act Release No. 33836 (Apr. 8, 2020) [85 FR 33290
(June 1, 2020)] (``Closed-End Fund Offering Reform Adopting
Release''). For example, the proposed amendments would provide the
same mechanics as other Form 24F-2 issuers when addressing interest
calculations for late payments.
\319\ All payments of filings fees for RILA registration
statements would continue to be made by wire transfer, debit card,
or credit card or via an ACH and there would be no refunds. See 17
CFR 230.111; proposed instruction A.5 to Form 24F-2.
\320\ In addition to conforming changes in proposed Form 24F-2
to effectuate the changes discussed below, in order to improve the
form we are proposing to: (1) remove reporting relating to shares
paid for prior to Oct. 11, 1997; (2) remove the statement in current
Instruction A.3 to consult the EDGAR Filer Manual because the
instructions referenced in Instruction A.3 are intended to be
removed from the EDGAR Filer Manual; (3) remove current Instruction
C.4, which includes EDGAR header tags for Item 5 of the form, as
this information is no longer sufficient for filing purposes and
current technical specifications are provided through the technical
specifications page on the Commission's web page; (4) revise current
Instruction C.9 for Item 5(vii) to correspond to the current
instructions for fee filing rates on the Commission's website; (5)
correct the website linked in current Instruction D.1; and (6)
remove the estimated Paperwork Reduction Act burden cited in current
Instruction F as extraneous in light of the OMB approval box that
contains information on this topic.
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[[Page 71139]]
Currently, insurance companies, like most issuers, register a
specific amount of securities when registering RILAs and are required
to pay a registration fee for those securities to the Commission at the
time of filing a registration statement on Form S-1 or S-3.\321\ In
contrast, the Investment Company Act provides that certain registered
investment companies, including the variable annuity separate accounts
that file on Form N-4, are deemed to have registered an indefinite
amount of securities upon the effective date of their registration
statement.\322\ Instead of paying registration fees at the time of
filing a registration statement, registered separate accounts pay
registration fees in arrears based on their net issuance of securities,
no later than 90 days after the issuer's fiscal year end, on Form 24F-
2.\323\ As a result, RILA issuers must currently ensure that they do
not inadvertently sell more securities than they have registered,
however this is not a concern in relation to variable annuities.
Further, RILA issuers pay fees at effectiveness on Forms S-1 or S-3 for
the securities being registered, while registered separate accounts do
not pay a fee at effectiveness on Form N-4 but rather pay fees annually
on Form 24F-2 on the net sales of securities that year.
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\321\ In general, issuers today--including insurance companies
issuing securities relating to RILA offerings--are required under
the Securities Act to pay a registration fee to the Commission at
the time of filing a registration statement. See sections 6(b)(1)
(requiring applicants to pay a fee to the Commission at the time of
filing a registration statement) and (c) (providing that a
registration statement shall not be deemed to have taken place
without payment of a registration fee) of the Securities Act [15
U.S.C. 77f(b)(1) and (c)]. This means they pay registration fees at
the time they register the offering of securities, regardless of
when (or if) they sell them. In addition, although well-known
seasoned issuers have additional flexibility in paying filing fees,
none of the insurance companies that issue securities relating to
RILA offerings currently claim status as a well-known seasoned
issuer. See supra footnote 21.
\322\ See 15 U.S.C. 80a-24(f).
\323\ See id.; Form 24F-2.
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Consistent with the other elements of this proposal, these proposed
amendments are designed to require insurance companies to use the same
framework to pay securities registration fees for RILAs that they do
for variable annuities. Insurance companies offer RILAs in a manner
substantially similar to variable annuities and would similarly benefit
from paying registration fees on an annual net basis and from
registering offerings of an indeterminate number of securities. The
proposed amendments would provide registration fee payment parity for
an insurance company that may offer one or more related insurance
products, including index-linked options offered as part of combination
annuity contracts.\324\ Requiring insurance companies to pay
registration fees for securities relating to RILA offerings on Form
24F-2 would therefore be efficient for insurance companies. This
approach would eliminate the risk that a RILA issuer may inadvertently
oversell securities with respect to a registration statement on Form N-
4, and the payment of fees on an annual net basis furthermore should
lead to a reduction in overall filing fees relating to RILAs.\325\
Further, by requiring RILA and variable annuity offerings to use the
same form and payment method, this process also would be efficient for
the Commission.
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\324\ For combination products, each issuer of securities under
the product (e.g., the separate account for the variable option and
the insurance company for the index-linked option) would file a
separate Form 24F-2 relating to the payment of registration fees for
its respective securities offered under the product.
\325\ As part of the proposed amendments to Form 24F-2, RILA
issuers would be required to include the value of any expiring
annuity contract or index-linked option that is rolled over into a
new crediting period in its calculation of the aggregate sale price
of securities sold during the fiscal year. RILA issuers further
would be required to report such contracts or options as a
redemption. This would result in zero net sales being reported in
this situation. See proposed instruction C.4 to Form 24F-2.
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The proposed fee calculation method is also consistent with the
continuous offering of RILAs to investors. These investors may make
additional allocations or other investment decisions over time with
respect to an investment in a RILA. One effect of this is that RILA
issuers, unlike other Form S-1 or S-3 issuers, may have increased
difficulty in using the filing fees associated with unsold securities
of a particular RILA offering to offset the filing fees due for a
subsequent registration statement. This is because many RILA issuers
are not easily able to terminate a RILA offering, a necessary step to
recoup fees paid on unsold securities for use in a separate RILA
offering.\326\
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\326\ See 17 CFR 230.457(p). To facilitate the transition to
calculating fees on an annual net basis and filing Form 24F-2, a
RILA's fee calculation should exclude excess securities that were
registered under its last registration statement that remain unsold
prior to the effectiveness of any final rule. See proposed
instruction C.5 to Form 24F-2. This would be so that a filing fee is
not charged twice for the same securities being registered.
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We are also proposing amendments to Form 24F-2 that would indicate
when RILA issuers can take credits for redemptions of securities not
claimed in a prior fiscal year (``non-claimed prior redemptions'').
Typically, issuers that file Form 24F-2 can take credit for these
redemptions to offset some of the purchases being reported for the
current fiscal year. This is only intended to be available for non-
claimed prior redemptions that had occurred since the use of the form
(and the payment of registration fees on an annual net basis) was
available to the issuer.\327\ The form, however, includes a legacy
instruction for any non-claimed redemptions in a prior fiscal year that
ends no earlier than October 11, 1995. This specific date is related to
the timing of open-end funds' and unit investment trusts' transition to
Form 24F-2.\328\ With the addition of RILAs to this form, we are
removing the reference to October 11, 1995 in Item 5(iii) of Form 24F-2
and amending the related instructions so that it is clear that issuers
will only be able to take credit for non-claimed prior redemptions that
occur on or after the date the issuer became eligible to use the form,
which for RILA issuers would be the effective date of the proposed
amendments, if adopted.\329\
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\327\ See generally Closed-End Fund Offering Reform Adopting
Release at n.348.
\328\ See Registration Under the Securities Act of 1933 of
Certain Investment Company Securities, Investment Company Act
Release No. 22815 (Sep. 10, 1997) [62 FR 47934 (Sep. 12, 1997)] at
n.9.
\329\ In addition to RILA issuers, interval funds have been able
to use Form 24F-2 since Aug. 1, 2021 (the effective date of rule
24f-2 as applied to interval funds), so these funds likewise would
only be able to take credit for non-claimed prior redemptions since
that date.
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We request comment on the proposed fee payment methodology for
RILAs and the proposed amendments to Form 24F-2.
120. Is it appropriate to require RILA issuers to pay registration
fees in arrears for the registration of securities? Would the process
be more efficient for insurance companies than the current registration
fee processes used by RILA issuers? If not, what is the appropriate
manner in which RILA issuers should pay registration fees? For example,
should we instead amend Form N-4 to permit or require the payment of
fees on that form for RILA issuers at the time the issuer files the
registration statement, consistent with insurance companies' current
practices when paying registration fees for securities offerings
registered on Forms S-1 and S-3?
121. Instead of requiring RILA issuers to pay registration fees in
arrears as proposed, should we permit RILA issuers to choose whether to
take this treatment or use some other registration fee system?
[[Page 71140]]
122. Is the proposed calculation methodology appropriate for RILAs?
If not, what aspects of the methodology should be changed and why?
123. Is it appropriate to have RILA issuers file Form 24F-2 for
this purpose, or should we instead have RILA issuers file a prospectus
pursuant to rule 424(i), consistent with the treatment of exchange-
traded vehicle securities under rule 456(d)?
124. Are the proposed amendments to Form 24F-2 appropriate? Should
we tailor Form 24F-2 to RILAs in other ways? Are the proposed
amendments clear as to how a RILA issuer would use that form? Are there
any other clarifications we should offer?
125. Should we, as proposed, require separate Form 24F-2 filings
for index-linked options and variable options that are offered as
investment options in combination contracts? If not, how can we amend
Form 24F-2 and rules 456 and 457 to accommodate combination contracts,
given different legal entities are issuing the securities associated
with different types of investment options?
126. Are the proposed amendments to rule 456 and 457 sufficiently
clear as to how RILA issuers should calculate and pay the registration
fees for securities relating to RILA offerings? Should we amend the
rules further to provide more clarity?
127. The proposed amendments to rule 456 and Form 24F-2 provide
procedures for how to address a merger or the cessation of operations
of the issuer, which in the RILA context is the insurance company
issuing the RILA. Are these provisions necessary for RILA issuers?
Should these instructions instead address the cessation or merger of
the particular RILA being reported?
128. Do commenters agree with the proposed requirements for how to
address non-claimed prior redemptions? Why or why not?
129. Are there any other considerations or changes we should make
to facilitate requiring RILA issuers to pay registration fees in
arrears, either regarding securities already registered by RILA issuers
or for some other reason?
2. Post-Effective Amendments and Prospectus Supplements
To facilitate the registration of RILA offerings on Form N-4 and
consistent with the other elements of this proposal, we are proposing
amendments to require RILA issuers to use the same framework for filing
post-effective amendments to the registration statement that other
issuers on Form N-4 currently use. Specifically, the proposal would
amend rule 485 to require RILA issuers to use that rule when amending
RILA registration statements on Form N-4. This change would permit RILA
issuers to file post-effective amendments that become automatically
effective under rule 485(a) after a specified period of time after the
filing or, in certain enumerated circumstances, immediately effective
under rule 485(b).\330\ In addition, we are also proposing amendments
that would require RILA issuers to apply rule 497 under the Securities
Act when appropriate to file RILA prospectuses and prospectus
supplements with the Commission.\331\ These amendments are intended to
facilitate a uniform post-effective amendment and prospectus filing
framework for issuers on Form N-4 and should provide increased
efficiencies for RILA issuers and Commission staff by applying
consistent procedures for all security offerings registered on Form N-
4.
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\330\ See rule 485(b).
\331\ Consistent with this change, we are also proposing
corresponding changes to (1) rule 424(f) to specify that RILA
issuers must use rule 497 rather than rule 424 when filing
prospectuses and prospectus supplements, and (2) rule 415(b) to
exempt RILA offerings from the requirements of paragraph (a) of that
rule consistent with the treatment of variable annuity separate
accounts.
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Our rules currently provide different processes for RILA issuers on
Forms S-1 and S-3 and current issuers on Form N-4 to update and keep
current a registration statement or prospectus. Form N-4 is used by
separate accounts that are unit investment trusts that offer variable
contracts to register their securities under the Investment Company Act
and to register an indefinite amount of continuously-sold securities
under the Securities Act. Therefore, these issuers have a system of
updating their disclosures that facilitates that structure. Issuers on
Form N-4 typically update their registration statements annually
through a post-effective amendment filed in accordance with rule 485 in
order to, among other things, comply with Securities Act
requirements.\332\ Rule 485(b) provides for the immediate effectiveness
of many of the routine updates that issuers on Form N-4 may make over
the course of a continuous, long-term offering, for example, those
amendments filed for no purpose other than to bring the financial
statements up to date under section 10(a)(3) of the Securities
Act.\333\ These issuers also file forms of prospectuses used in their
offerings through rule 497 and can supplement their prospectuses, also
known as ``stickering,'' to reflect certain changes to the information
disclosed by making a filing with the Commission in accordance with
rule 497.
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\332\ See, e.g., section 10(a)(3) of the Securities Act [15
U.S.C. 77j(a)(3)].
\333\ See rule 485(b)(1)(i). Material post-effective amendments,
however, are not immediately effective. See rule 485(a).
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Conversely, RILA issuers currently follow the processes operating
companies use to update their registrations statements. Operating
companies that are engaged in a continuous offering of securities, like
RILA issuers, are similarly required to update their registration
statement each year and may update their registration statement for
changes other than to bring the financial statements up to date.\334\
For RILAs whose offerings are registered on Form S-1, these updates
typically occur through a post-effective amendment.\335\ Rule 462
currently provides RILA issuers with a limited set of circumstances,
none of which are specific or generally relevant to RILA offerings, in
which a post-effective amendment to a registration statement is
effective upon filing.\336\ Rather, when a RILA issuer seeks to update
a RILA registration statement on Form S-1, the issuer must file a post-
effective amendment that is typically declared effective by Commission
staff acting pursuant to delegated authority.\337\
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\334\ See, e.g., section 10(a)(3) of the Securities Act; rule
415(a); Item 512 of Regulation S-K.
\335\ Under Form S-3, the section 10(a)(3) update need not be
made through a post-effective amendment. Rather, under this form,
the section 10(a)(3) update generally occurs when the issuer files
its annual report on Form 10-K containing the issuer's audited
financial statements for its most recently completed fiscal year.
\336\ See rule 462(d) and (e). For example, this rule provides
that a post-effective amendment that seeks only to add exhibits to a
registration statement would be effective upon filing. In addition,
although a well-known seasoned issuer is permitted to file a post-
effective amendment to an automatic shelf registration statement
with immediate effectiveness, none of the insurance companies
currently offering RILAs currently claims status as a well-known
seasoned issuer.
\337\ See 15 U.S.C. 77h; 17 CFR 229.501(a); 17 CFR 230.473. See
also supra footnote 335 (describing the Form S-3 post-effective
amendment process).
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In addition to differences in the post-effective amendment process,
RILA issuers also follow different processes to file prospectuses than
current Form N-4 filers, relying on rule 424 rather than rule 497.
Although these rules provide for similar processes, there are certain
differences. For example, rule 424 requires an issuer to file a
prospectus only if the issuer makes substantive changes or additions to
a previously-filed prospectus, whereas rule 497 requires funds to file
every prospectus that varies from any previously-filed prospectus.\338\
Accordingly, under the proposed amendments, a RILA issuer
[[Page 71141]]
would be required to file every prospectus relating to a RILA offering
that varies in form from a previously filed prospectus before it is
first used.\339\ This approach would provide a publicly accessible,
usable database of current RILA prospectuses which would also assist
the Commission in conducting its regulatory functions. In addition,
rule 424 includes provisions related to continuous or delayed
securities offering under rule 415.\340\ However, in light of the
proposed amendments to the RILA registration framework, these
provisions would no longer be applicable to RILAs.\341\
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\338\ See rule 424(a); rule 497.
\339\ See proposed rule 497(e).
\340\ See rule 424(b).
\341\ See proposed rule 415(b).
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Consistent with the other elements of this proposal, the proposed
amendments are designed to provide parity between RILAs and other
annuities registered on Form N-4. RILAs, like variable annuities, are
longer-term investment products that are continuously offered and must
maintain a current registration statement and up-to-date prospectus for
new investors as well as for existing investors that may be able to
make additional contributions or reallocate assets. Accordingly,
applying rule 485's simplified post-effective amendment process is a
more appropriate framework for RILA registration statements in light of
their similarity to variable annuities. RILA registration statements
are routinely updated over the course of an offering and may be subject
to material and non-material amendments over the long-term nature of
the investment product. As such, the proposed amendments addressing the
post-effective amendment process for RILA registration statement should
provide benefits to current RILA issuers using Form S-1 by reducing
administrative complexity when updating financial statements included
in a registration statement or when making other changes to a
registration statement through rule 485's provisions for automatic and
immediate effectiveness.\342\ Requiring RILA issuers to rely on the
simplified post-effective amendment process would enable these issuers
to update their disclosures in a manner that complements and
facilitates RILAs' offering structure and particularly provide
efficiency in the context of combination contracts.
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\342\ See proposed rule 485.
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Requiring RILA issuers to rely on rules 485 and 497 also would
provide a uniform post-effective amendment and prospectus filing
framework for all issuers using Form N-4 and provide insurance
companies that may offer one or more related insurance products,
including index-linked options offered as part of combination annuity
contracts, consistent filing requirements across related products. This
should also result in enhanced efficiencies as these issuers would no
longer be required to manage distinct filing processes for related
products. In addition, employing the framework provided by rules 485
and 497 would provide Commission staff with an increased degree of
administrative efficiency by facilitating the review of amendments
containing material changes to RILA registration statements while
permitting amendments with non-material changes to become effective
immediately.
We request comment on the proposed application of rules 485 and 497
to RILAs.
130. Should we require RILA issuers to file post-effective
amendments to registration statements on Form N-4 under rule 485? Are
there additional circumstances not currently enumerated in the rule for
which we should permit the immediate effectiveness of post-effective
amendments?
131. Do commenters agree that the current post-effective amendment
process for RILA registration statements on Form S-1 may result in
increased uncertainty and costs for RILA issuers than if the same
issuers used the proposed post-effective amendment process under
proposed rule 485 to amend RILA registration statements? Will using the
process required by rule 485 mitigate these concerns?
132. Should we require RILA issuers to file prospectuses and
prospectus supplements under rule 497 rather than under rule 424? If
not, what is a more appropriate process for RILA issuers to file
prospectuses and prospectus supplements given the proposed move of RILA
registration statements to Form N-4?
133. How would RILA issuers be affected by the requirement to file
the exact form of prospectus under rule 497, given rule 424 only
requires filers to file prospectuses that contain substantive changes
from or additions to a previously filed prospectus?
134. Are there other filing rules that should be amended to help
facilitate the movement of RILA registration statements to Form N-4? Is
so, please explain what rules should be amended and the rationale for
the suggested changes.
3. Prospectus Delivery
We also propose to prohibit the use of rule 172 in connection with
the offering of a RILA. Under rule 172, a final prospectus is deemed to
precede or accompany a security for sale for purposes of Securities Act
section 5(b)(2) as long as the final prospectus meeting the
requirements of Securities Act section 10(a) is filed or the issuer
will make a good faith and reasonable effort to file it with the
Commission as part of the registration statement within the required
rule 424 prospectus filing timeline.\343\
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\343\ See Rule 172(b) and (c); see also Offering Reform Release
at n.561 and accompanying text.
---------------------------------------------------------------------------
Registered investment companies, including variable annuity
separate accounts, are excluded from rule 172 and therefore must
deliver a prospectus to investors.\344\ Therefore, we are excluding
RILA offerings from rule 172 to ensure that investors receive a
prospectus about these complex investments and because we are proposing
to treat offerings of RILAs like offerings of variable annuities in
other respects. Moreover, we understand that, as a practical matter,
RILA issuers typically do not rely on rule 172 because RILA issuers
typically deliver prospectuses to accompany or precede other
communications, such as annuity applications, in order to avoid those
communications being offers that otherwise would be non-conforming
prospectuses that violate section 5 of the Securities Act.\345\
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\344\ Id. at section VI.B.1.b.
\345\ See section 2(a)(10) of the Securities Act (providing, in
part, that a communication sent or given after the effective date of
the registration statement shall not be deemed a prospectus if it is
proved that prior to or at the same time with such communication a
written prospectus meeting the requirements of section 10(a) was
sent or given to the person to whom the communication was made). See
also Offering Reform Release at n.561 (stating that a final
prospectus only filed as provided in rule 172 will not be considered
to be sent or given prior to or with a written offer within the
meaning of this clause of section 2(a)(10)).
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We request comment on excluding RILA offerings from rule 172.
135. Is our understanding correct that RILA issuers typically
deliver prospectuses to investors to accompany or precede other
communications, and thus do not rely on rule 172? If not, in what
circumstances to RILA issuers typically rely on rule 172? Is there any
reason we should permit RILA issuers to rely on rule 172 even though
issuers cannot rely on the rule for other offerings registered on Form
N-4?
F. Materially Misleading Statements in RILA Sales Literature
We are proposing to amend rule 156 to make its provisions
applicable to RILA sales literature. Under the Federal securities laws
applicable to all securities (including RILA offerings), it
[[Page 71142]]
is unlawful for any person to use materially misleading communications
in connection with the offer or sale of any security.\346\ Rule 156
does not prohibit or permit any particular representations or
presentation, rather it is an interpretive rule that provides factors
to be weighed in considering whether a statement involving a material
fact is or might be misleading in the specific context of investment
company sales literature for purposes of the Federal securities laws,
including sales literature relating to the sale of variable annuities.
Applying this rule to RILA sales literature is consistent with the RILA
Act in that it would provide RILA issuers guidance on ways to avoid
presenting investors with materially misleading advertisements, which
should help ensure that investors receive the information necessary to
make informed decisions about these products.\347\
---------------------------------------------------------------------------
\346\ See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
\347\ See Mutual Fund Sales Literature Interpretive Rule,
Investment Company Act Release No. 10915 (Oct. 26, 1979); [44 FR
64070 (Nov. 6, 1979)] (``Rule 156 Release'').
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Rule 156 provides guidance on whether a statement involving a
material fact is misleading in sales literature, depending on an
evaluation of the context in which it is made, with the rule providing
four non-exhaustive factors to guide in this determination.\348\ While
these factors have some relevance to the marketing of all securities,
similarities between variable annuities and RILAs (as to how and to
whom they are marketed), make the extension of rule 156 to RILAs
particularly appropriate. Like investment company sales literature
generally (and variable annuity marketing materials particularly), RILA
advertisements discuss complex investment features, and RILA issuers
should benefit from rule 156's contextual analysis in considering
whether a particular representation is materially misleading. Thus, the
proposed amendments to rule 156 would help address these concerns by
focusing attention to specific areas of RILA sales literature that we
have identified as being particularly susceptible to misleading
statements.\349\
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\348\ See rule 156(b).
\349\ See, e.g., Rule 156 Release (Rule 156 is ``intended to
highlight general areas which, based on the Commission's regulatory
experience with investment company sales literature, had proven to
be particularly susceptible to misleading statements'').
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Commission staff have reviewed RILA advertisements to better
understand how insurance companies market these products to investors.
As part of this review, and based upon prior experience reviewing RILA
registration statements, the staff identified common RILA marketing
approaches that could benefit from rule 156's guidance about
advertising statements that could be misleading under the Federal
securities laws without appropriate context.
For example, in the sales literature reviewed by the staff,
insurance companies typically marketed RILAs as growth products based
primarily on the linkage to an underlying index. Current rule
156(b)(1)(ii) provides that a statement could be misleading because of
``[t]he absence of explanations, qualifications, limitations or other
statements necessary or appropriate to make such statement not
misleading.'' Thus, if rule 156 were applied to RILAs as proposed, rule
156 would assist insurance companies in considering whether
representations about a RILA as a growth product would require
qualification in light of particular RILA features, such as the
existence and extent of any limitations on upside index performance.
Representations that highlight downside protections of a RILA could
similarly be misleading without the context of the cost or limitation
of those protections (e.g., upside limitations). The same analysis
would apply to representations that tout customization without
discussing the trade-offs associated with that customization (e.g.,
long lock-up periods to get the best rates or having to experience a
contract adjustment when making a change), or fail to explain that the
insurance company has reserved the right to change or remove key
features of the contract while surrender charges still apply. If RILA
sales literature discussed these aspects of the contract without
adequately explaining these limitations or the insurer's discretion to
alter key features, that omission could make the advertisement
misleading. Accordingly, the application of rule 156(b)(1)(ii) to RILA
sales literature would require an insurance company to consider whether
an advertisement would be materially misleading if it suggests a given
RILA is a loss-avoidance vehicle or a customizable product in the
absence of qualifying explanations or statements. Similarly, if sales
literature advertises a particular feature of the product's bounded
return structure (including, e.g., a specified index; an upside feature
such as a particular ``cap rate'' or ``participation rate''; or a
downside feature such as a ``floor'' or ``buffer'') that is not
available for the life of the product or the full term of any surrender
charge period, the rule would require consideration of whether the
statement is misleading without providing additional context as to the
insurer's discretion.
As another example, current rule 156(b)(4) provides that
``[r]epresentations about fees or expenses associated with an
investment in a fund could be misleading because of statements or
omissions made involving a material fact, including situations where
portrayals of the fees and expenses associated with an investment in
the fund omit explanations, qualifications, limitations, or other
statements necessary or appropriate to make the portrayals not
misleading.'' While RILA investors are not typically charged direct
ongoing fees or expenses, RILAs do typically limit an investor's
ability to participate in upside performance, and charges like contract
adjustments can impose costs upon highlighted features such as
guaranteed benefits. In the context of RILA sales literature, the
proposed application of this provision of rule 156 to RILA
advertisements would require consideration about whether
representations or portrayals either of a RILA's costs or charges
(e.g., advertising implying that a RILA had low costs or no ongoing
charges), or optional benefits that are subject to a contract
adjustment, would necessitate qualifying statements or explanations
regarding the costs or tradeoffs to the investor to receive an
advertised benefit or those generally associated with the RILA.\350\
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\350\ Insurance companies may apply a contract adjustment to the
investors' account when an investor annuitizes or takes advantage of
benefits like ``free withdrawal'' provisions (that typically permit
investors to withdraw up to 10% of the contract value each year
without paying a surrender charge), death benefits, systemic
withdrawals, and guaranteed benefits. See The Design and Regulatory
Framework of Registered Index-Linked Annuities, ALI CLE Conference
on Life Insurance Products 2022 (``It is important to note that
interim value adjustments may apply to surrenders and all types of
`withdrawals,' such as free look payments; annuitization; death
benefit payments; deductions for third party advisory fees; systemic
withdrawals; and even income payments under guaranteed benefit
riders.'')
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Lastly, current rule 156(b)(2)(i) states that ``[r]epresentations
about past or future investment performance could be misleading because
of statements or omissions made involving a material fact, including
situations where: [p]ortrayals of past income, gain, or growth of
assets convey an impression of the net investment results achieved by
an actual or hypothetical investment which would not be justified under
the circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading.'' In the context of
RILA advertising, the
[[Page 71143]]
proposed provision would require consideration of whether illustrations
about the operation of a RILA or its features could be misleading
because, for example, they use assumptions (such as limits on gains or
index performance that includes dividends whereas the RILA's index does
not include dividends) that are not currently offered or exceed what
could be reasonably anticipated or use ``cherry picked'' data.
Including historical index performance in an advertisement also would
mislead investors if, for example, it suggested that the performance
shown is predictive of future performance of the index or a RILA. On
the other hand, using the index's historical performance to illustrate
how a RILA works in a fair and balanced way (e.g., by showing index
performance relative to representative limits on gains and losses, as
some RILA advertisements currently do) would be consistent with the
proposed extension of rule 156 to RILA advertisements, assuming those
advertisements otherwise include appropriate caveats to ensure that the
illustrations are not misleading.\351\ Moreover, our preliminary view
is that purporting to show the historical performance of the RILA or
any particular index-linked option itself would generally be materially
misleading. This is because the terms of a RILA investment, such as
limits on gains, change frequently, making past performance irrelevant
to current investors who are not able to utilize those past rates in
current market conditions. In addition, to the extent that a RILA is
using a point-to-point crediting method, that RILA's return to an
investor would be particularly sensitive to the specific date the
investor purchased the RILA and when the crediting period ends for the
index-linked option chosen by the investor.\352\ This further increases
the likelihood of a current investor's investment experience deviating
from the historical performance of a given RILA, even when that RILA
had similar terms to those currently offered. Our understanding is that
insurance companies do not currently advertise the historical
performance of the RILA or any particular index-linked option itself.
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\351\ See rule 156(b)(1)(ii) (statement can be misleading
because of ``absence of explanations, qualifications, limitations or
other statements necessary or appropriate to make such statement not
misleading'').
\352\ See, e.g., OIAD Report at Section 3, Comparing RILA
Features, Variations in Term Length and Simulated Returns; Section
7, Conclusions, Implications of the Research: The Economics of
RILAs.
---------------------------------------------------------------------------
In addition to rule 156, advertisements and sales literature for
existing N-4 issuers is subject to 17 CFR 230.482 (``rule 482''). Rule
482 requires, among other things, enhanced disclosures in investment
company and business development company advertisements designed to
convey balanced information to prospective investors, particularly with
respect to standardizing representations of a fund's past
performance.\353\ These provisions were introduced as a result of the
Commission's experience with fund advertisements that were creating
unrealistic or misleading expectations through representations
regarding past performance.\354\ Accordingly, rule 482 now permits
funds to use performance data in their advertisements, but only
according to standardized methodologies set forth in the rule. Unlike
the rules applicable to most RILAs, rule 482 also permits registered
investment companies and business development companies to provide
advertisements and sales literature to investors without it being
accompanied or preceded by a statutory prospectus.\355\
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\353\ See Amendments to Investment Company Advertising Rules,
Investment Company Act Release No. 26195 (Sept. 29, 2003) [68 FR
57760 (Oct. 6, 2003)] (``482 Amendment Release'').
\354\ See id.
\355\ See 17 CFR 230.433(b)(2).
---------------------------------------------------------------------------
While not required by the RILA Act, we nevertheless considered
whether RILA advertising might raise similar concerns that would
justify amending rule 482 to include RILAs. As explained below, we have
not yet seen sufficient evidence to support an expansion of rule 482 to
RILAs at this time, though we acknowledge such concerns may develop in
the future.\356\ This conclusion largely follows from the rule's
standardized performance data requirements, which do not align with
current practices in RILA advertisements. While variable annuity
marketing materials frequently utilize standardized performance
returns, this is not the case with RILA advertisements. Rather than
relying on past performance, insurance companies typically market RILAs
on other bases that are less amenable to standardized performance
metrics, for example highlighting that these are flexible products
whose features can be customized to fit a particular investor's needs.
RILA advertising also typically does not attempt to utilize past
performance, suggesting there is neither a need for rules prescribing
RILA-specific past performance metrics, nor sufficient experience to
inform the development of such metrics. For these reasons, we would not
change rule 482 to include RILAs.
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\356\ As a result, RILA sales literature, as ``free writing''
prospectuses, would continue to be subject to 17 CFR 230.164 and 17
CFR 230.433, as well as any other applicable rule that permits a
communication notwithstanding the ``gun jumping'' provisions of the
Securities Act.
---------------------------------------------------------------------------
We request comment on the proposed application of rule 156 to RILAs
and our proposal not to amend rule 482 to include RILAs.
136. Would the application of rule 156 to RILA sales literature
help to prevent or address material misstatements in those
communications? Is there any other action we should take to address
this concern?
137. Are there differences between variable annuities and RILAs
that would justify not extending rule 156 to RILA sales literature as
proposed?
138. Instead of extending rule 156 to RILAs, should we create a new
rule that specifically and solely deals with materially misleading
information in RILA sales literature? If so, what is it about RILAs
that necessitates a RILA-specific rule about materially misleading
sales literature, and what particular areas or topics should we address
in a RILA-specific sales literature rule?
139. Do commenters agree with the contextual concerns highlighted
above with regards to the representations typically used in RILA sales
literature? Are there other claims or suggestions in RILA sales
literature that insurance companies use that we should be concerned
about?
140. Do insurance companies currently utilize any performance
metrics in RILA advertisements? Why do insurance companies not
currently utilize past performance in RILA sales literature to the same
extent as variable annuity advertisements? Is there a way to
standardize RILA past performance information? Is there a way to view
RILA past performance information as other than as materially
misleading?
141. Do commenters agree that advertising the historical
performance of a RILA or any particular index-linked option would be
misleading in light of the customized nature of RILA contracts and the
pace at which the RILA features that determine RILA performance are
subject to change?
142. Are there benefits to investors in amending rule 482 to
include RILA advertising materials? If so, how should it be amended?
How would we address past performance metrics for a RILA in light of
the customized nature of RILAs and the changing nature of RILA
features?
[[Page 71144]]
143. Should we permit insurance companies to provide RILA sales
literature to investors without being accompanied or preceded by a
summary or statutory prospectus as variable annuities do? How would
insurance companies be able to present such a complex product to
investors in a way that they can understand?
G. Existing Commission Letters
Certain Commission letters, or portions thereof, exempting
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1 based on the authority
provided in 17 CFR 210.3-13 (``3-13 Exemptions'') would be withdrawn or
rescinded in connection with any adoption of this proposal in light of
the proposed change to permit RILAs to provide SAP financial statements
on amended Form N-4 in the same way that other insurance companies are
permitted to do so on current Form N-4.\357\ Following the compliance
date of any final rule, some letters, or portions thereof, would be
moot, superseded, or otherwise inconsistent with the final rule and,
therefore, would be withdrawn or rescinded. If commenters believe that
additional Commission letters or other actions, or portions thereof,
should be withdrawn or rescinded, they should identify the letter or
guidance, state why it is relevant to the proposal, how it or any
specific portion thereof should be treated, and the reason therefor.
Based on the proposal, 3-13 Exemptions that would be withdrawn or
rescinded would include, but would not necessarily be limited to, all
of the 3-13 Exemptions listed below.
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\357\ Rule 3-13 provides, in part, that the ``Commission may,
upon the informal written request of the registrant, and where
consistent with the protection of investors, permit the omission of
one or more of the financial statements herein required or the
filing in substitution therefor of appropriate statements of
comparable character.'' We would not be rescinding exemptions
provided in any of the letters outlined below provided with respect
to non-RILA insurance products because they are not affected by this
rulemaking.
Table 8--Existing Commission Letters
------------------------------------------------------------------------
Name Date
------------------------------------------------------------------------
Great-West Life & Annuity Insurance Company and Great- 9/28/2018
West Life & Annuity Insurance Company of New York...
Athene Annuity and Life Company...................... 9/28/2018
Allianz Life Insurance Company of North America and 9/28/2018
Allianz Life Insurance Company of New York..........
MONY Life Insurance Company of America............... 3/7/2019
Symetra Life Insurance Company and First Symetra 8/8/2019
National Life Insurance Company of New York.........
Forethought Life insurance Company................... 10/17/2019
Nationwide Life Insurance Company.................... 10/17/2019
Minnesota Life Insurance Co.......................... 6/11/2020
MEMBERS Life Insurance Co............................ 11/6/2020
Transamerica Life Insurance Company and Transamerica 2/11/2021
Financial Life Insurance Company....................
Midland National Life Insurance Company.............. 8/12/2021
Protective Life Insurance Company and Protective Life 10/14/2022
and Annuity Insurance Company.......................
Everlake Life Insurance Company...................... 10/21/2022
Fidelity & Guaranty Life Insurance Company and 3/17/2023
Fidelity & Guaranty Life Insurance Company of New
York................................................
Delaware Life Insurance Company and Gainbridge life 4/28/2023
Insurance Company...................................
------------------------------------------------------------------------
We request comment on the proposed recessions.
144. Are there any other Commission letters or actions that should
be rescinded or withdrawn if the proposal is adopted?
145. Are there any staff letters or guidance pieces that would be
moot, superseded, or otherwise inconsistent with the final rule?
146. In a future rulemaking, should we consider codification of any
3-13 Exemptions that have been granted to other insurance products? If
so, what considerations should the Commission consider in doing so?
H. Registered Market-Value Adjustment Annuities
In addition to RILAs, there are other non-investment company
insurance products that are securities under the Federal securities
laws. Like RILAs, offerings of these securities are currently
registered by insurance companies on Forms S-1 or S-3. For example,
some annuity contracts that offer fixed investment options and apply
market-value adjustment annuities (``MVAs'') to amounts withdrawn from
such fixed options before the end of the fixed option's term (e.g., due
to contract withdrawals, transfers to other investment options, and
annuitization) are required to register the MVA with the Commission
(``registered MVAs'').\358\ For these annuities, fixed options are
either offered on their own or in a combination contract with variable
options. Like RILAs, a significant feature of a registered MVA is the
contract adjustment.
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\358\ Registered MVAs are securities because the MVA feature
imposes certain investment risks on purchasers. See Section 3(a)(8)
of the Securities Act and 17 CFR 230.151; see also SEC v. Variable
Annuity Life Insurance Co. of America, 359 U.S. 65, 77 (1959).
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Because RILAs and registered MVAs differ only with respect to the
manner in which interest is calculated and credited, many of the
disclosures we are proposing for RILAs on Form N-4 would also be
appropriate for registered MVAs. This is particularly true of the
proposed disclosures relating to the operation of contract adjustments,
given their importance in both a RILA and a registered MVA.
We are not proposing to require insurance companies to register
offerings of registered MVAs on Form N-4 at this time because the RILA
Act does not address these securities and imposes specific timelines
for the Commission both to propose rules and to adopt final rules. We
request comment below, however, on whether we should also require
insurance companies to register offerings of registered MVAs on Form N-
4. To help commenters evaluate these requests for comment, we also have
analyzed the changes to Form N-4 we believe would be necessary to
accommodate offerings of these securities:
Adding registered MVAs to the list of permissible uses of
Form N-4 on the facing page and general instructions; \359\
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\359\ See, e.g., proposed General Instruction B.1 of Form N-4.
---------------------------------------------------------------------------
Adjusting the definition of ``Contract Adjustment'' in the
form to
[[Page 71145]]
account for investment options beyond index-linked options;
In the discussion of how interest is calculated for the
contract's fixed options in the description of the insurance company,
registered separate account, and investment options, requiring: (1) a
statement that an investor could lose a significant amount of money due
to the contract adjustment if amounts are removed from a fixed option
prior to the end of its term, (2) a description of the transactions
subject to a contract adjustment with cross-references to the related
disclosure in the prospectus, and (3) a prominent statement of the
maximum amount of loss, as a percentage, an investor could experience
from a negative contract adjustment and that this loss could be greater
due to surrender charges and tax consequences; \360\
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\360\ See proposed Item 6(e)(2) of Form N-4.
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Adjusting the disclosures in the prospectus about contract
adjustments in the charges-related disclosures to account for
investment options beyond index-linked options having contract
adjustments; \361\
---------------------------------------------------------------------------
\361\ See proposed Item 7(e) of Form N-4.
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In the appendix of available investment options, in the
discussion of fixed options, requiring: (1) a legend stating that if
amounts are withdrawn from a fixed option before the end of its term,
the insurance company may apply the contract adjustment and that this
may result in a significant reduction in contract value; and (2) the
provision of appropriate cross-references to the prospectus disclosure
relating to contract adjustments; \362\
---------------------------------------------------------------------------
\362\ See proposed Item 17(c) of Form N-4.
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Requiring registered MVAs to provide the same disclosure
proposed for RILAs regarding changes in accountants; \363\
---------------------------------------------------------------------------
\363\ See proposed Item 26(c) of Form N-4. As with RILAs, if
insurance companies were required to use Form N-4 for registered
MVAs, they would also be permitted to use SAP in registered MVA
registration statements to the same degree as other Form N-4 filers.
See supra section II.D. If we were to do this, 3-13 Exemptions
provided in connection with registered MVAs would be withdrawn or
rescinded for the reasons discussed in section II.G above.
---------------------------------------------------------------------------
Requiring registered MVAs to provide the same census-type
information as we are proposing for RILAs; \364\ and
---------------------------------------------------------------------------
\364\ See proposed Item 31A of Form N-4.
---------------------------------------------------------------------------
Requiring the same undertakings and exhibits for
registered MVAs as we are proposing for RILAs.\365\
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\365\ See proposed Items 27(q) and 34(b) of Form N-4.
---------------------------------------------------------------------------
In addition to these changes to Form N-4, if we were to require
insurance companies to use Form N-4 to register offerings of registered
MVAs, we would anticipate providing the same functional changes we are
proposing for RILAs, that is, the ability to use a summary prospectus
and the use of the same filing and marketing rules, for the same reason
as we are proposing these changes for RILAs.\366\ For example, we could
create a defined term ``registered market value-adjusted annuity'' in
rule 405 that would be an annuity (1) that is deemed a security; (2)
that is offered or sold in a registered offering; (3) that is issued by
an insurance company that is subject to the supervision of either the
insurance commissioner or bank commissioner of any State or any agency
or officer performing like functions as such commissioner; (4) not
issued by an investment company; and (5) whose value may reflect a
positive or negative adjustment (based on calculations using a
predetermined formula, or a change in interest rates, or some other
factor or benchmark) if amounts are withdrawn before the end of a
specified period. We could then use this definition to apply to
registered MVAs those Securities Act rules we propose to apply to
RILAs.\367\ We would also expect to have the same requirements as to
the use of Inline XBRL for similar reasons.\368\
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\366\ See supra sections II.C, E, and F.
\367\ This definition mirrors that of ``registered index-linked
annuity'' we are proposing to add to rule 405 for RILAs, other than
the last provision which borrows from the definition of ``contract
adjustment'' we are proposing to add to Form N-4. We could also
consider creating a defined term in rule 405 that combines both the
RILA and registered market-value adjusted annuity definitions for
simplicity.
\368\ See supra section II.B.9.
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We request comment on whether to require insurance companies to
register the offering of registered MVAs on Form N-4.
147. Would it be appropriate to require insurance companies to
register the offering of registered MVAs on Form N-4 (as proposed to be
as amended in this proposal)? Should all of the changes suggested above
apply to registered MVAs?
148. Is the definition of ``registered market-value adjusted
annuity'' included above as an example the correct one?
149. Are there any other disclosures that would be relevant in the
registered MVA context?
I. Technical Amendment to Form N-6
The Commission is proposing a technical amendment to Form N-6 to
reflect the correct placement of an amendment to this form that the
Commission adopted in 2020 in the release titled ``Facilitating Capital
Formation and Expanding Investment Opportunities by Improving Access to
Capital in Private Markets'' (herein referred to as the ``Exempt
Offering Framework Adopting Release'').\369\ In that release, the
Commission adopted, among other amendments, amendments to certain
instructions associated with the Exhibits items of Form N-4 and Form N-
6. The amendatory instructions in the Exempt Offering Framework
Adopting Release erroneously referred to outdated Exhibits items of
these forms. That is, the amendatory instructions referred to Items 24
and 26 respectively, instead of Items 27 and 30 respectively (as
adopted by the Commission in earlier amendments to Forms N-4 and N-6 in
the VASP Adopting Release).\370\ The amendments we are proposing to
Form N-4 correctly reflect the placement of the amendment that the
Commission adopted in the Exempt Offering Framework Adopting Release in
Item 27 of the form instead of in Item 24. We are also proposing a
technical amendment to Item 30 of Form N-6 that correctly reflects the
placement of the amendment that the Commission adopted in the Exempt
Offering Framework Adopting Release in this item instead of in Item 26.
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\369\ Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets,
Investment Company Act Release No. 34082 (Nov. 2, 2020) [86 FR 3496
(Jan. 14, 2021)].
\370\ See Exempt Offering Framework Adopting Release at
amendatory instructions 50 and 51; see also VASP Adopting Release at
section II.C.4 (Table 6).
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J. Compliance Period
We are proposing a compliance date one year after publication of
final amendments in the Federal Register.\371\ All initial registration
statements and post-effective amendments that are annual updates to
effective registration statements on Form N-4 that are filed after the
compliance date would be required to comply with the amendments. This
compliance period is designed to give registrants sufficient time to
comply with the proposed changes, including to update their
registration statements; to prepare to use rules 485 and 497 to update
their registration statements and file prospectuses with the
Commission; and to begin paying securities registration fees on Form
24F-2.
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\371\ This compliance period would apply for all of the
amendments in this release other than the technical amendment to
Form N-6 discussed in section II.I supra.
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RILAs that have previously registered offerings of securities on
Forms S-1 or S-3 would file a post-effective amendment to their
registration statement pursuant to rule 485(a) at the
[[Page 71146]]
time of their next annual update following the compliance date, using
Form N-4.\372\ In appropriate circumstances, we would consider requests
by registrants with respect to existing variable annuity contracts to
file post-effective amendments pursuant to Securities Act rule
485(b)(1)(vii) when these post-effective amendments make conforming
changes to comply with the proposed amendments to Form N-4.\373\
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\372\ A post-effective amendment filed under rule 485(a) [17 CFR
230.485(a)] generally becomes effective either 60 days or 75 days
after filing, unless the effective date is accelerated by the
Commission. RILA registrants generally should be able to rely on
template filing relief, in which case they would not need to file a
rule 485(a) filing for each RILA. See proposed amended rule
485(b)(1)(vii). Existing RILA issuers that only issue RILAs and will
be using the same CIK would be permitted to transition by filing a
485APOS or 485BPOS in EDGAR. Both of these submission types allow
the entity to keep its current Securities Act file number, and both
allow the filer to obtain new contract IDs and the needed Form N-4
investment company type designation in EDGAR. RILA issuers that will
be acquiring new CIKs for their RILA offerings would need to
transition by filing an administrative Form N-4 submission under a
newly-issued CIK to obtain a new Securities Act file number, new
contract IDs, and the Form N-4 investment company type (which is
used for EDGAR purposes only).
\373\ A post-effective amendment filed under rule 485(b) may
become effective immediately upon filing. A post-effective amendment
may be filed under rule 485(b) if it is filed for one or more
specified purposes, including to make nonmaterial changes to the
registration statement. A post-effective amendment filed for any
purpose not specified in rule 485(b) generally must be filed
pursuant to rule 485(a). Under rule 485(b)(1)(vii), the Commission
may approve the filing of a post-effective amendment to a
registration statement under rule 485(b) for a purpose other than
those specifically enumerated in the rule. The Commission's staff
has been delegated the authority to approve registrants' requests
under rule 485(b)(1)(vii). 17 CFR 200.30-5(b-3)(1).
---------------------------------------------------------------------------
We also are proposing to provide a six-month delayed effective date
for all amendments except for the amended Form N-4, amended rule 498A,
and technical amendments to Form N-6, such that all other final
amendments would be effective six months after publication in the
Federal Register. Thus, we propose that a registrant would be able to
rely on rule 498A to satisfy its obligations to deliver a RILA
contract's statutory prospectus beginning on the effective date of the
rule amendments, provided that the registrant is also in compliance
with the amendments to Form N-4. The delayed effective date for
remaining amendments would provide the Commission time to prepare the
EDGAR system to accommodate transitioning RILA offerings onto the
proposed framework.\374\
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\374\ There would be no transition period associated with the
technical amendment to Form N-6 discussed in section II.I supra.
---------------------------------------------------------------------------
We are not delaying the effective date of the proposed changes to
Form N-4 and rule 498A, however, to allow registrants to begin filing
registration statements under the revised form as soon as possible. We
believe allowing registrants to use the new form as soon as possible
following the Commission's adoption of final amendments is consistent
with Congress's intent in directing the Commission to prepare and
finalize a new form for RILAs within 18 months of enactment.
We request comment on the proposed compliance period:
150. Would the proposed compliance period provide registrants
sufficient time to prepare to comply with the amendments? Would more
time be appropriate or, conversely, should we provide a shorter
compliance period to ensure that investors receive the benefit of the
proposed amendments more quickly?
151. Should we provide a separate compliance period to provide more
time for insurance companies to comply with the requirement to
structure certain disclosure in Inline XBRL? For example, should we
provide an additional year period after the date insurance companies
are required to first update their disclosure?
152. Is it appropriate to permit a registrant to rely on rule 498A
to satisfy its obligations to deliver a RILA contract's statutory
prospectus beginning on the effective date of the rule amendments,
provided that the registrant is also in compliance with the amendments
to Form N-4?
K. General Request for Comment From Retail Investors
We are requesting input from the retail investor community relating
to the experiences of seeking information about, and investing in, a
RILA. We understand that RILAs are typically sold to retail investors.
This, together with the congressional mandate to design disclosure
requirements for RILAs with the goal of ensuring that key information
is conveyed in terms a purchaser is able to understand, makes feedback
from retail investors particularly relevant as we consider the
disclosures that would be required in a RILA registration form.\375\
Specifically, we invite retail investors seeking to comment on their
feedback with annuities generally and RILAs in particular to submit a
short Feedback Flyer, available at Appendix D.
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\375\ See supra discussion accompanying and following footnote
7.
---------------------------------------------------------------------------
III. Economic Analysis
A. Introduction
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the
Securities Act, and section 2(c) of the Investment Company Act state
that when the Commission is engaging in rulemaking under such titles
and is required to consider or determine whether the action is
necessary or appropriate in (or, with respect to the Investment Company
Act, consistent with) the public interest, the Commission shall
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors. Further,
section 23(a)(2) of the Exchange Act requires the Commission to
consider, among other matters, the impact such rules would have on
competition and states that the Commission shall not adopt any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
We are proposing amendments to our rules designed to carry out the
requirements of Section 101(b) Division AA, Title I of the Consolidated
Appropriations Act, 2023, to establish a registration form for RILAs.
The Commission is proposing to amend the form currently used by most
variable annuity separate accounts, Form N-4, to require issuers of
RILAs to register offerings on that form as well. To facilitate this
amendment, the Commission is also proposing to amend certain filing
rules and make other related amendments. In addition, we are proposing
other amendments to Form N-4 that would apply to all issuers that use
that form. We are also proposing to apply a current Commission rule
that provides guidance as to when sales literature is materially
misleading under the Federal securities laws to RILA advertisements and
sales literature.
While the Commission has developed a set of specific registration
forms for variable insurance contracts, RILA issuers cannot use those
forms because a RILA issuer is not an investment company. Currently,
insurance companies register the offerings of RILAs on the Securities
Act registration forms that are typically used to register traditional
debt or equity offerings, Forms S-1 and S-3. Because Forms S-1 and S-3
are not tailored to the particular characteristics of RILAs (or indeed
insurance products more generally), these forms include a number of
disclosure requirements that may be less material to investors when
[[Page 71147]]
evaluating an insurance product like a RILA and do not include line-
item requirements mandating RILA-specific information that is of
importance to investors in these products. The inclusion of disclosures
that are of little relevance to investors and the omission of
information that is of importance to investors limits the usefulness of
the information investors currently receive about RILAs and thus their
ability to make informed investment decisions. In addition, Forms S-1
and S-3 require the use of GAAP financial statements, rather than the
SAP financial statements that the State insurance regulators require.
SAP financial statements, which focus on an issuer's ability to meet
its obligations under its insurance contracts, as regulated by State
law, appear to provide sufficient material information for investors
evaluating RILAs. Investors may also benefit from the lower cost
burdens on issuers provided by the use of SAP financial statements, to
the extent that those savings are passed along to investors. The
proposed rule would increase the usefulness of the information provided
to current and prospective investors in RILAs by:
Adapting the existing registration and disclosure
framework for variable insurance contracts to accommodate RILAs;
Requiring RILA-specific disclosure requirements in Form N-
4, including disclosures specific to the underlying investment options,
such as, for each available index-linked option, the index, crediting
period, and index crediting methodology;
Proposing amendments to Form N-4 based on our experience
in administering the form and in reaction to our observations of
investor testing, which would be applicable to all issuers that use
this registration form and which are designed to improve disclosures;
Switching the order of the Key Information Table and
Overview of the Contract items;
Utilizing a question and answer format for the Key
Information Table;
Removing an instruction that permits registrants to omit
additional disclosure in the prospectus that repeats information
disclosed in the Overview of the Contract or the Key Information Table;
and
Extending the current rule providing factors to be weighed
in considering whether a statement involving a material fact is or
might be misleading in the specific context of investment company sales
literature to RILAs, in order to address misleading statements about
RILA fees, product features, and certain performance presentations in
RILA sales literature.
We have considered the potential costs and benefits that would
result from the proposed rules, as well as the potential effects on
efficiency, competition, and capital formation. Certain potential
economic effects of the proposed rule would stem from the statutory
mandate, while others would stem from the discretion we are exercising.
We discuss the potential economic effects of the proposed amendments in
section III.C. We also consider certain alternatives to our proposed
approach to implementing the statutory mandate, as discussed in section
III.E. We note that, where possible, we have attempted to quantify the
costs, benefits, and effects on efficiency, competition, and capital
formation expected to result from the proposed rule. In some cases,
however, we are unable to quantify the economic effects because we lack
the information necessary to provide a reasonable and reliable
estimate. Nevertheless, as described more fully below, the Commission
is providing both a qualitative assessment and quantified estimate of
the economic effects, where feasible. The Commission invites commenters
to include estimates and data that could help it form useful estimates
of the economic effects of the proposed amendments.
B. Baseline
1. Affected Parties
The proposed rule would affect issuers of and investors in RILAs,
as well as issuers of and investors in variable annuities that are
registered on Form N-4.
a. The Market for Annuity Products
As of January 2023, there were 90 RILAs registered with the
Commission issued by 23 insurance companies.\376\ Among the 90 RILAs,
50 are stand-alone RILA products, while 40 are combination contracts
that offer index-linked options as well as variable options. The number
of RILAs registered with the SEC on Form S-1 is 52, while the remaining
38 are registered on Form S-3. A little over half of the registered
RILAs (47 RILAs) report SAP financials, with the remainder (43 RILAs)
reporting GAAP financials.\377\
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\376\ Based on analysis of Forms S-1, S-3 and POS AM filed by
RILA issuers.
\377\ EDGAR Database. Certain Commission letters, or portions
thereof, exempt insurance companies from the requirement to provide
financial statements prepared in accordance with GAAP in connection
with the registration of an offering of RILAs on Form S-1. See
Section II.G.
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RILA contracts currently offer a variety of index-linked options.
Specifically, RILA contracts that are currently registered with the
Commission offer index-linked options whose returns are linked, in
part, to between two and nine indices with an average among RILAs of
4.3 indices.\378\ The indices associated with current RILA contracts
commonly include the S&P 500, Russell 2000, and NASDAQ-100. RILA
contracts offer index-linked options with less well known indices and
ETFs as well, but with much less frequency.\379\
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\378\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
\379\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
---------------------------------------------------------------------------
As discussed in Section I, index-linked options whose returns are
based, in part, on the same index may nevertheless have different
elements that contribute to an investor's returns. Notably, different
index-linked options whose returns are linked to the same index may
offer different crediting periods (the set length of time for measuring
growth of contract value based on the performance of the linked index--
for example, one or three years), crediting methodologies, and buffer
or floor levels. RILAs that are currently registered with the
Commission offer between 4 and 64 index-linked options, with an average
of 22.8 index-linked options. Common crediting periods include one,
two, three, and six years, with one year being most common. In the
past, index-linked options with terms as long as 10 years have been
offered, although the longest index-linked option term currently
offered is six years. For those ``combination'' contracts that offer
index-linked options and variable options, the number of variable
options ranges from 1 to 100, with an average of 10.4 variable options.
The most common variable option is a money market fund--in all
instances of combination contracts, a money market fund (or, in one
case, a similar liquid investment) is offered as a variable option.
Table 9 provides information on the dollar amount of RILA sales
from 2016 to 2022.\380\ RILA sales have increased from $7.3 billion in
2016 to $41.1 billion in 2022, which represents a 463% increase between
these two years.
---------------------------------------------------------------------------
\380\ Fact Tank: Sales Data, Life Insurance Marketing and
Research Association, https://www.limra.com/en/newsroom/fact-tank/
(using data from the U.S. Individual Annuity Sales surveys for Q4
for each year from 2016 through 2022).
[[Page 71148]]
Table 9--Sales of RILAs, 2016-2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sales of RILAs ($ billions)...... 7.3 9.0 11.2 17.4 24.1 38.7 41.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Fact Tank: Sales Data, Life Insurance Marketing and Research Association, https://www.limra.com/en/newsroom/fact-tank/ (using data from the U.S.
Individual Annuity Sales surveys for Q4 for each year from 2016 through 2022).
A recent survey of insurers found that 85% of respondents believed
in 2021 that RILA sales would increase by 10% or more over the next
three years, 10% believed that RILA sales would increase by less than
10%, while 5% believed that RILA sales would remain the same over that
time period. No respondents indicated that they believed RILA sales
would decrease.\381\ When surveyed about the factors driving the growth
in RILA sales, the three most commonly cited reasons were: (1)
increased understanding of RILAs among advisers and broker-dealers
(85%), (2) the entrance of large, reputable insurers into the RILA
market (80%), and (3) increased supply due to the entrance of large
issuers and distributors of RILAs (80%).\382\ Respondents also
indicated that they expected to see the largest increases in sales
among the following distribution channels: independent agents or
broker/dealers, captive insurance agents, regional broker/dealers, and
wirehouses.\383\ RILAs were also the product most insurers indicated
had ``tremendous'' growth potential over the near term.\384\
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\381\ Cerulli Associates & Insured Retirement Institute, Custom
Key Findings, U.S. Annuity Markets 2021: Acclimating to Industry
Trends and Changing Demand Ex. 1 (2021) (``Cerulli Report''),
available at https://www.irionline.org/wp-content/uploads/2022/02/IRI-Key-Findings_2021_Final_12622.pdf.
\382\ Id. at Exhibit 2.
\383\ Id. at Exhibit 3. Other RILA distribution channels
include: brokerage general agencies/independent marketing
organizations, registered investment advisers, and direct sales.
\384\ Cerulli Report at Exhibit 5.
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As of 2019, there were a total of 2,396 unique variable annuity
products offered by a total of 33 companies.\385\ Net assets totaled
$2,018.0 billion. Also in 2019, variable annuity sales totaled $98.3
billion.\386\ Of the total sales, $62.8 billion (64% of total sales)
were annuities within qualified plans and $35.5 (36%) were non-
qualified annuities.\387\ Investors purchased annuities across various
distribution channels--captive agents, $34.5 billion, (35% of total
sales); independent financial planners/NASD firms, $39.2 billion (40%);
banks/credit unions, $9.2 billion (9%); wirehouses/regional broker-
dealers, $12.6 billion (13%); and direct response, $2.8 billion
(3%).\388\
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\385\ See Insured Retirement Institute Retirement Fact Book 2020
(``IRI Fact Book''). In 2018 (the last year for which this
information is available in the 2020 edition), the total number of
variable annuity contracts in force was 17.9 million, with an
average individual contract value of $113,053.
\386\ Id.
\387\ Id.
\388\ Id.
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b. Issuing Insurance Companies
The number of insurance companies currently offering securities
registered as RILAs with the Commission is 23, from 19 insurance
company complexes. Out of these 23 insurance companies, 15 of them
register RILAs on Form S-1, while the remaining 8 use Form S-3.\389\
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\389\ Data obtained from Forms S-1, S-3 and POS AM filed by RILA
issuers.
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Insurance companies offer, on average, 4 RILA contracts, ranging
from a maximum of 11 RILAs to a minimum of 1 RILA. The top two issuers
offer 21 RILAs in total, or 29% of the number of existing RILA
products.\390\
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\390\ Calculated using data obtained from Forms S-1, S-3 and POS
AM filed by RILA issuers.
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c. Investors
In 2021 there were an estimated 83 million individuals aged 45-64
and 56 million individuals aged 65 or older in the United States,
representing 25 percent and 17 percent of the total population,
respectively.\391\ The number of individuals age 65 or older is
projected to be 65 million (19 percent of the total projected
population) in 2025, 78 million (21 percent of the projected
population) in 2035, 83 million (22 percent of the projected
population) in 2045, and 90 million (24 percent of the projected
population) in 2055.\392\
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\391\ Annual Estimates of the Resident Population for Selected
Age Groups by Sex for the United States: Apr. 1, 2020, to July 1,
2021 (NC-EST2021-AGESEX). We do not have demographic data on RILA
investors. A 2013 survey found that 86 percent of individual annuity
investors purchased their first annuity before age 65, including 47%
who were between the ages of 50 and 64 years old. The average age of
investors at first purchase of an annuity is 51. The average current
annuity investor age is 70. See The Gallup Organization and Mathew
Greenwald & Associates for The Committee of Annuity Insurers, Survey
of Ownership of Individual Annuity Contracts (2013).
\392\ Projected Age Groups and Sex Composition of the
Population: Main Projections Series for the United States, 2017-
2060. U.S. Census Bureau, Population Division: Washington, DC.
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Individuals that are planning for, or are already in, retirement
face increasing challenges with respect to achieving their income goals
for retirement. First, people are living longer. Second, traditional
defined-benefit retirement systems that provide guaranteed income are
being replaced with defined-contribution systems that require people to
accumulate their own retirement savings.\393\ Evidence suggests that,
on average, individuals may not be saving appropriately to meet their
retirement goals. For example, one survey found that while 74 percent
of individuals are saving for retirement: (1) 51 percent of older
individuals have less than $50,000 saved for retirement, (2) 57 percent
of individuals save less than 10 percent of their income, and (3) 33
percent of individuals save less than 5 percent of their income.\394\
In addition to the finding that individuals may not be saving an
appropriate amount for retirement, there is also concern that
individuals may not be taking on an appropriate amount of financial
risk.\395\
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\393\ John Y. Campbell, Restoring Rational Choice: The Challenge
of Consumer Financial Regulation (NBER Working Paper No, 22025,
2016), available at https://www.nber.org/papers/w22025 (``Campbell
Paper'').
\394\ Insured Retirement Institute, Retirement Readiness Among
Older Workers 2021 (2021) (``IRI Survey''), available at https://www.irionline.org/wp-content/uploads/legacy/default-document-library/iri-retirement-readiness-2021_fullreport.pdf.
\395\ See Campbell Paper. Campbell argues that individuals take
too little financial risk and that the willingness to take financial
risk varies with wealth--individuals with greater wealth are willing
to take on more financial risk than individuals with less wealth.
---------------------------------------------------------------------------
Investors may not be saving appropriately to meet their retirement
goals for several reasons. For example, individuals may face meaningful
burdens (e.g., search costs) when trying to identify appropriate
investments or savings products. Once identified, investors may face
additional burdens (e.g., acquiring and analyzing large amounts of
information) to determine which specific investments or saving products
among the ones identified allow investors to best meet their savings
goals.\396\ Second, improving
[[Page 71149]]
technology has permitted the development of more complex and confusing
financial products.\397\ As a result of the burden associated with
identifying appropriate investments, as well as the burden of acquiring
and analyzing information to choose among the set of appropriate
investments, investors may spend less time and effort (i.e., resources)
than is required to make appropriate investment decisions.
---------------------------------------------------------------------------
\396\ John Y. Campbell, Howell E. Jackson, Brigitte C. Madrian,
and Peter Tufano, Consumer Financial Protection, 25 J. Econ.
Perspectives 91 (2011) (``Campbell et al. Paper''). Campbell et al.
note that making decisions about financial products often requires
considerable information on terms and conditions, particularly for
financial decisions that are undertaken only infrequently.
\397\ See Campbell Paper.
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Investors may not be saving appropriately for other reasons, as
well. For example, some investors may not make the appropriate
decisions for themselves even if they were presented with all the
information that was required to make a decision. Decision making
limitations may be particularly problematic in the context of saving
for retirement because learning from experience is difficult. Investing
in retirement products is only done infrequently and the outcomes from
investing decisions are delayed, perhaps for decades, and are subject
to large random shocks, so that personal experience is slow to
accumulate and is contaminated by noise. Also, financial innovation can
reduce the relevance of an investor's prior experiences. For example,
prior experience investing in investment vehicles with unbounded
returns would be less relevant for investing in RILAs (which have
bounded returns) than it would be for investing in variable annuities
(which have unbounded returns).\398\ Another possibility is that
investors may have preferences that lead them to favor present
consumption over future consumption (``present-biased preferences'')
and, as a result, they save an inappropriate amount for
retirement.\399\ Finally, many people have a limited financial capacity
to save, particularly individuals already burdened with student loans
and mortgages.
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\398\ See Campbell et al. Paper. The Campbell Paper identifies
five aspects of ``financial ignorance'' that may lead to poor
investor decision making. First, investors may lack understanding of
basic concepts necessary to make appropriate decisions. For example,
investors appear to lack an understanding of diversification and the
tradeoff between risk and return. Second, investors may not
understand the terms of financial contracts. Third, it appears that,
rather than using all available historical data to form views about
future returns on alternative strategies, investors rely on their
own specific experiences to form an opinion. Fourth, individuals
appear to not understand their own difficulties with financial
decision making. Finally, investors appear to not understand the
incentives faced by other parties and the effect these incentives
have on their strategic behavior. Other studies suggest poor
investment decisions may result from investor uncertainty and lack
of investor familiarity with different assets. For example,
individuals may not invest appropriately because individuals are
unable, given historical experience, to form precise estimates of
how they expect assets to perform in the future. See, e.g., Raymond
Kan and Guofu Zhao (2007). Optimal Portfolio Choice with Parameter
Uncertainty, Journal of Financial and Quantitative Analysis, 27(3),
621-656. Rather than being unable to form precise estimates of how
they expect assets to perform in the future, investors may not have,
perhaps due to not having the requisite experience, the ability to
form any expectation about how they expect an asset to perform in
the future. If investors' ambiguity is great enough, they simply may
choose not to invest in particular assets. See, e.g., David Easley
and Maureen O'Hara (2009). Ambiguity and Nonparticipation: The Role
of Regulation, Review of Financial Studies, 22(5), 1817-1843.
Finally, investors may make poor investment decisions because they
choose to overweight investment in assets with which they are
familiar, and underweight, or exclude, investment assets with which
they are less familiar. See, e.g., Gur Hubberman (2001). Familiarity
Breeds Investment, Review of Financial Studies, 14(3), 659-680 and
Massimo Massa and Andrei Simonov (2006). Hedging, Familiarity, and
Portfolio Choice, Review of Financial Studies, 19(2), 633-685.
\399\ See Campbell et al. Paper. Campbell et al. note that
individuals with present-biased preferences favor present
consumption which can lead an individual to make decisions today
that reduce their future welfare in a way that the individual later
regrets.
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2. Current Regulatory Requirements
As discussed in section I above, RILAs are securities for purposes
of the Securities Act, and public offerings of RILAs, therefore, must
be registered with the Commission.\400\ Unlike variable annuity
contracts for which the Commission has adopted a specific registration
form tailored to those products, insurance companies register RILA
offerings on Form S-1 or Form S-3.
---------------------------------------------------------------------------
\400\ See supra footnote 5 and accompanying text.
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Form S-1 is available to any issuer (except foreign governments and
issuers of asset-backed securities) to register securities for which no
other registration form is authorized or prescribed. A registration
statement on Form S-1 contains extensive disclosure about all aspects
of the issuer's business and financial condition and consists of two
parts: a prospectus (Part I), and additional information not required
to be included in the prospectus (Part II), but that is publicly
available on the Commission's EDGAR website. Form S-1 allows
incorporation by reference only on a very limited basis. The prospectus
must contain financial statements meeting the requirements of
Regulation S-X, which generally includes audited financial statements
prepared in accordance with GAAP.\401\ Currently, disclosures about
RILA offerings are largely unstructured. The audited financial
statements in the prospectus, if prepared in accordance with GAAP, must
be tagged in Inline XBRL if the Form S-1 contains a price or a price
range.\402\ Form S-1 must be declared effective by the Commission
before any sales of the registered securities may be made. The time
required for Commission review will depend on the number and complexity
of Commission comments and the issuer's ability to adequately address
those comments. The issuer must pay the Commission registration fee
before it files a Form S-1. The amount of the fee is based on the
proposed maximum aggregate offering price.\403\ The issuer must
indicate the amount of each type of security being registered and
calculate the fee payable for each security.
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\401\ Certain Commission letters, or portions thereof, exempt
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1. As discussed in
Section III.B.1.a, 47 RILAs report SAP financials.
\402\ See 17 CFR 229.601(b)(101)(i)(B).
\403\ Generally, Form S-1 (or S-3) fees paid for a withdrawn
registration statement are available to the issuer for use with its
future registration statements. The amount available for use as an
offset under rule 429 under the Securities Act equals the portion of
the filing fee paid that is associated with any unsold securities of
the same class registered on an earlier registration statement. Once
a filing fee has been used as an offset, those unsold securities on
the earlier registration statement are deemed deregistered. RILAs
are continuously offered to investors, who in many cases are long-
term investors that may make additional allocations or other
investment decisions with respect to an investment in a RILA.
Because RILA investors may make additional allocations or other
investment decisions with respect to an investment, unless a prior
RILA offering is completely unsold, RILA issuers may have increased
difficulty in using filing fees associated with unsold securities of
a prior offerings.
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Form S-3 is a ``short-form'' registration statement under the
Securities Act that can be used by companies that have been subject to
reporting obligations under the Exchange Act for at least one year and
that satisfy certain other requirements.\404\ Reporting obligations
under the Exchange Act include audited financial statements prepared in
[[Page 71150]]
accordance with GAAP and structured in Inline XBRL. A registration
statement on Form S-3 contains extensive disclosure about all aspects
of the issuer's business and financial condition and consists of two
parts: a prospectus which includes, either directly or incorporated by
reference from the issuer's Exchange Act filings, detailed information
about the issuer (Part I), and additional information not required to
be included in the prospectus (Part II), but that is publicly available
on the Commission's EDGAR website.
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\404\ The issuer must be either organized under U.S. law with
its principal business operations in the United States or a foreign
private issuer that reports under the Exchange Act using the
domestic reporting forms. The issuer must have a class of securities
registered under section 12(b) or 12(g) of the Exchange Act, or be
required to file reports under section 15(d) of the Exchange Act.
The issuer must have been subject to the reporting requirements of
the Exchange Act and have filed all reports and materials required
under sections 13, 14, and 15(d) of the Exchange Act for the 12
calendar months preceding the filing of Form S-3, and, with certain
exceptions, must have timely filed all such reports and other
materials required to be filed during the 12 calendar months and any
portion of a month immediately preceding the filing of the
registration statement. An issuer that meets all of the requirements
of Form S-3 and that has a public float of $75 million or more
(i.e., ``seasoned issuers'') may use Form S-3 to register any
offering of debt or equity for cash.
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Registration using Form S-3 offers issuers advantages over
registration using Form S-1. First, Form S-3 allows significant
incorporation by reference, which allows for shorter prospectuses and
makes Form S-3 easier to complete. Also, Form S-3 also allows for
forward incorporation by reference, eliminating the need to file post-
effective amendments to keep registration statements current.
A Form S-3 filed by a non-WKSI must be declared effective by the
Commission. A Form S-3 receives either a full review, a targeted review
of one or more sections of the registration statement, or no review.
Commonly, a full review takes approximately 30 days with targeted
reviews taking less time. The time to resolve any Commission comments
will depend on the number and complexity of the Commission's comments.
An issuer must pay Commission filing fees before it files Form S-3. The
amount of the filing fee is based on the proposed maximum aggregate
offering price.
Under the Federal securities laws applicable to all securities
(including RILA offerings), it is unlawful for any person to use
materially misleading communications in connection with the offer or
sale of any security.\405\ Rule 156 is an interpretive rule that
provides factors to be weighed in considering whether a statement
involving a material fact is or might be misleading in the specific
context of investment company sales literature, including literature
relating to the sale of variable annuities.
---------------------------------------------------------------------------
\405\ See 15 U.S.C. 77q(a); 15 U.S.C. 78j(b); 17 CFR 240.10b-5.
---------------------------------------------------------------------------
As discussed in section I above, in 2022 Congress enacted the RILA
Act directing the Commission to adopt a new registration form for RILAs
within 18 months of enactment (i.e., the end of June 2024). If the
Commission fails to adopt the form by the end of June 2024, the RILA
Act provides that issuers can begin registering the offering of RILAs
on Form N-4.
3. Market Practice
Annuities can play a role in helping investors save for retirement
and receive guaranteed lifetime income during retirement.\406\ There
are multiple types of annuities available to help investors who have
different financial goals or tolerances for risk save for retirement:
fixed annuities, variable annuities, and RILAs. Fixed annuities offer
investors preservation of their investment by guaranteeing a minimum
rate of return, but with little opportunity for asset growth. During
the accumulation phase,\407\ a traditional (i.e., book value) fixed
annuity offers investors a fixed rate of return (known in advance) for
a given period of time.\408\ A market value adjusted annuity (see
section II.H) is similar to a traditional annuity, but the assets are
subject to a market value adjustment based on interest rate
changes.\409\ Fixed index annuities guarantee a certain rate of
return,\410\ but also provide the potential for (limited) additional
returns based on the performance of a specified market index.\411\
---------------------------------------------------------------------------
\406\ Id. The IRI Fact Book argues that annuities give investors
the ability to create their own pensions. The IRI Fact Book also
argues that, unlike mutual funds, annuities offer a wide variety of
guarantees to protect an investor's investment. For example, death
benefits provide principal protection in the event that an investor
dies during a market downturn.
\407\ During the accumulation phase, also called the savings
phase, capital builds up. In this phase, the investor pays premiums
into the contract to accumulate assets. See IRI Fact Book.
\408\ Id. The IRI Fact Book also notes that fixed annuities
involve less investment risk because they offer a guaranteed minimum
rate of interest. The minimum rate is not affected by fluctuations
in market interest rates.
\409\ Id. The IRI Fact Book contends that fixed index annuities
are designed for investors who want to partake in the benefits of a
market-linked vehicle with a protected investment floor if there is
a downturn in the index.
\410\ Currently, insurance companies with a minimum A.M. Best
Insurance Ratings of A- offer fixed rate annuities that guarantee
between 3.70% and 5.40% for a three-year period, and between 3.20%
and 5.25% for a ten-year period. Multi-Year Guarantee Annuities
(MYGA), ANNUITY ADVANTAGE (accessed Aug. 17, 2023, and filtered by
``State'' of ``- All''; ``Min AM Best'' of ``A-''; ``Years'' of
``10''; and ``Range'' of ``Exact''), https://www.annuityadvantage.com/annuity-rates-quotes/multi-year-guarantee-annuities/?rating=4&years=10&pos=300&sort=guarantee_period_yield&limit=all.
\411\ IRI Fact Book.
---------------------------------------------------------------------------
Variable annuities accumulate savings based on the performance of
the underlying investment options chosen by an investor. Typically,
investors are able to choose among investment options that pass on the
returns of a wide variety of mutual funds such as equity funds, bond
funds, funds that combine equities and bonds, actively managed funds,
index funds, domestic funds, and international funds.\412\ Depending on
the investment options chosen, variable annuities can offer investors
the greatest opportunity for asset growth, but they also can involve
the greatest amount of investment-based risk, compared to other types
of annuities.\413\
---------------------------------------------------------------------------
\412\ Id.
\413\ Additionally, variable annuities often involve direct
fees, such as insurance charges, and indirect expenses, including
management and other fees and expenses associated with the
underlying mutual funds in which the variable annuity subaccounts
invest. See IRI Fact Book.
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RILAs are an index-linked product that can be purchased by
individual investors as part of both qualified and non-qualified
retirement accounts.\414\ RILAs combine features of fixed-index
annuities and variable annuities. RILAs limit or reduce downside risk
in return for an investor accepting limited upside performance. In
exchange for giving up the complete protection of principal offered by
fixed annuities, a RILA investor is potentially afforded greater upside
potential than that provided by fixed annuities, though typically less
than the potential upside of investing in the same index within a
variable annuity.\415\ RILAs allow investors some ability to customize
a level of risk with which they are comfortable.\416\ Like other
annuities, RILAs have an accumulation phase followed by a payout phase.
The accumulation phase is divided into one or more crediting
periods.\417\ Also like other annuities, after a ``surrender charge''
period (generally, 3 to 10 years following an investor's last premium
payment), investors can usually surrender their contract at the end of
any crediting period and receive full account value.\418\ Investors,
however, may lose money if they withdraw early from an investment
option or from the contract, as explained in section I.A above.
---------------------------------------------------------------------------
\414\ Thorsten Moenig, It's RILA Time: An Introduction to
Registered Index-Linked Annuities, 89 J. Risk & Ins. 339 (2022)
(``Moenig Paper'').
\415\ See IRI Fact Book.
\416\ Id. The IRI Fact Book also contends that historically
investors generally fell into one of two camps: those willing to
exchange safety of principal for modest returns, and those able to
tolerate the higher risk of being invested in securities in exchange
for greater upside potential. RILAs address a developing demand for
products that allow investors some ability to customize a level of
risk with which they are comfortable. Structured annuities (i.e.,
RILAs) meet the needs of the in-between investor who wants some
degree of certainty but also desires some upside potential.
\417\ Id.
\418\ Id.
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At the end of a crediting period, the issuer credits a RILA
investor's contract value with ``interest'' (which can be either
positive or negative) that is based on the performance of a specified
index,
[[Page 71151]]
subject to restrictions on the upside, through a cap and/or
``participation rate,'' as well as some form of downside
protection.\419\ If the index declines, the credited loss is lessened
by either a floor (a maximum loss percentage), a buffer (index losses
are credited to the RILA investor's contract value only when they
exceed a certain threshold), or a downside participation rate (the loss
credited to contract value is a certain percentage of the index
loss).\420\ RILA downside protection mechanisms typically do not change
over time, whereas issuers may, and likely will, change upside limits
on gains for both new contracts as well as existing contracts to
reflect changing market conditions.\421\ If a RILA contract offers
downside protection in the form of a floor, then the increased
volatility would expose the issuer to greater downside risk. To offset
the increased downside risk, an issuer might choose to reduce its
upside risk by lowering cap rates.\422\ If the RILA contract offers
downside protection in the form of a buffer, then increased volatility
would expose the issuer to reduced downside risk. The reduced downside
risk might cause issuers to increase cap rates.\423\
---------------------------------------------------------------------------
\419\ Id.
\420\ Id. The Moenig Paper argues that RILAs are structurally
similar to fixed-index annuities except that RILAs may credit
negative returns. A fixed-index annuity can be viewed as a special
case of a RILA with a floor of 0%. The insurer provides full
protection on the index return in exchange for a low cap rate
(commonly between 2% and 4%).
\421\ See Moenig Paper.
\422\ Id.
\423\ Id.
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Also, unlike variable annuities, most RILAs do not include any
direct ongoing fees or charges to the investor. Insurance companies,
however, can benefit from offering RILAs in at least three ways. First,
insurance companies can benefit from a favorable imbalance between the
downside protections that a RILA contract offers, and the upside limits
the contract offers.\424\ That is, insurance companies set the level of
upside limits such that their value (to the issuer) exceeds the cost of
providing the downside protection mechanism to investors.\425\ One
study estimates an average annual cost to investors from the imbalance
between the downside protections that a RILA contract offers and the
upside limits is approximately 0.17% of the RILA investment
amount.\426\ To assess if the findings of the study continue to be
relevant for the current RILA market, the staff conducted an
independent analysis of RILA contract terms. Specifically, staff
examined 24 one-year term rates linked to the S&P 500 index, Nasdaq 100
index, Russell 2000 index, and MSCI EAFE.\427\ These rates were offered
by three insurance companies across a two-week interval.\428\ In
particular, staff calculated the fair value of the portfolio, composed
of a risk-free zero-coupon bond with one-year maturity and a collection
of hypothetical index options with one-year expiration that would
replicate the promised payoff for each contract.\429\ Staff used the
Black-Scholes formula for European options to derive fair prices of
these hypothetical index options. In estimating the implied volatility
for each specific strike price, staff utilized an estimated one-year
volatility surface.\430\ The volatility surface estimates the values
for implied volatility across a range of standardized options with
varying implied strike prices, including both calls and puts. Staff
then linearly interpolated between the implied volatilities with
implied strikes adjacent to the strike price of each hypothetical
option to obtain the implied volatility. This implied volatility is
used as an input in the Black-Scholes formula to derive the fair values
of the options.\431\ Staff assumed that the options expire in exactly
one year. The annual cost of each contract is defined as the difference
between the par value and the calculated risk-neutral fair price of the
contract, divided by the par value.\432\
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\424\ Id.
\425\ We understand that for shorter crediting periods and for
common indexes such as the S&P 500, insurance companies are able to
use exchange-traded derivative securities to closely approximate the
insurer's liabilities from a RILA contract at the end of each
crediting period. For example, for a RILA with both a floor and a
cap, the insurance company can hedge its liability by purchasing a
call option (with an appropriate strike price given the floor) and
selling a call (with a higher strike price that is dependent on the
cap). The insurance company can offer a cap such that the proceeds
from selling the call with the higher strike price exceed the cost
of purchasing the call option with the lower strike price. For a
RILA with a downside buffer (as opposed to a floor) and a cap, the
process for insurance companies to hedge their liabilities is
similar, but with a different mix of options. In the case of a RILA
with a downside buffer and a cap, the insurance company would
purchase a call option, sell a call option (with a higher strike
price), and selling a put option (with a lower strike price, as
appropriate given the downside buffer). In this case, the insurance
company can offer a cap such that the proceeds from selling the call
and the put exceed the cost of the call option with the lower of the
two strike prices.
\426\ See Moenig Paper; Public Filings on EDGAR.
\427\ The staff obtained the term rates from Rates: Current
rates for Allianz Index Advantage ADV Variable Annuity, Allianz,
https://www.allianzlife.com/what-we-offer/Annuities/registered-index-linked-annuities/index-advantage-adv/rates (visited Sept. 14,
2023); Variable Annuities, Equitable, https://equitable.com/retirement/products/variable-annuities (click ``View Performance Cap
Rates'') (visited Sept. 14, 2023); Nationwide Defender Annuity,
Nationwide (Sept. 1, 2023), (visited Sept. 14, 2023).
\428\ Each contract designates a distinct set of buffer and cap
rates with no additional features. The sample period spans from
September 5 to 15, 2023. The Moenig Paper cited an industry survey
as a source for the data in its analysis. We understand that the
industry survey cited does not contain updated product-level
contract-level details beyond the data cited in the Moenig Paper. We
request comment on data sources (e.g., pricing vendors) that should
be considered for these calculations. See infra section III.F.
\429\ More specifically, the options position encompasses a long
At-the-Money (ATM) call option, coupled with a short Out-the-Money
(OTM) call option with strike price equal to the index value
increased by a factor of the cap rate and a short OTM put option
with strike price equal to the index value decreased by a factor of
the buffer rate.
\430\ The volatility surface data is obtained through IvyDB
OptionMetrics.
\431\ The other model inputs--the end-of-day S&P 500 index value
and the risk-free interest rate--are obtained through IvyDB
OptionMetrics.
\432\ The staff incorporated any explicit annual product fee
charged by the insurance company into the cost calculation. This
analysis could be extended to incorporate several additional factors
that differentiate the RILA from the replicating strategy that would
be priced in a market. For example, it does not consider any
effective difference to the investor in liquidity because of early
withdrawal charges or penalties, differences in portfolio value
prior to maturity, death benefits, or specific crediting methods. We
request comment on these aspects of pricing of RILA contracts below.
See infra section III.F.
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Table 10 presents the mean and median annual costs for each of the
twenty-four contracts during the sample period. The annual costs hover
around zero for all contracts. The mean annual costs are positive for
nearly all of the contracts, ranging from 0.04% for contract 22 and
0.93% for contract 20, but negative for others, such as contract 1,
contract 2, contract 3, and contract 16. These results are consistent
with the Moenig Paper's findings of a mean cost of 0.17%.
Table 10--Pricing of Twenty-Four Sample RILA Contracts
------------------------------------------------------------------------
Mean (%) Median (%)
------------------------------------------------------------------------
Contract 1.............................. -0.30 -0.30
Contract 2.............................. -0.64 -0.64
[[Page 71152]]
Contract 3.............................. -0.30 -0.29
Contract 4.............................. 0.57 0.61
Contract 5.............................. 0.34 0.34
Contract 6.............................. 0.37 0.50
Contract 7.............................. 0.42 0.44
Contract 8.............................. 0.39 0.40
Contract 9.............................. 0.60 0.58
Contract 10............................. 0.72 0.74
Contract 11............................. 0.51 0.46
Contract 12............................. 0.09 0.09
Contract 13............................. 0.22 0.22
Contract 14............................. 0.24 0.25
Contract 15............................. 0.35 0.36
Contract 16............................. -0.08 -0.11
Contract 17............................. 0.16 0.11
Contract 18............................. 0.12 0.13
Contract 19............................. -0.08 -0.22
Contract 20............................. 0.93 0.93
Contract 21............................. 0.63 0.64
Contract 22............................. 0.04 0.04
Contract 23............................. 0.33 0.33
Contract 24............................. 0.38 0.38
------------------------------------------------------------------------
Note: The table summarizes the annual costs for each of the twenty-four
contracts offered by three insurance companies during a two-week
interval. See Rates: Current rates for Allianz Index Advantage ADV
Variable Annuity, Allianz, https://www.allianzlife.com/what-we-offer/Annuities/registered-index-linked-annuities/index-advantage-adv/rates
(visited Sept. 14, 2023); Variable Annuities, Equitable, https://equitable.com/retirement/products/variable-annuities (click ``View
Performance Cap Rates'') (visited Sept. 14, 2023); Nationwide Defender
Annuity, Nationwide (Sept. 1, 2023), https://nationwidefinancial.com/media/pdf/VAM-3629AO.pdf (visited Sept. 14, 2023). At the end of each
business day, we employ a market price approach to compute the fair
value of each contract. We then compare the fair value to the par
value to derive the annual cost and incorporate any explicit product
fee. Subsequently, we compute the mean and median annual costs for
each contract over the two-week measurement period.
Also, we understand that, generally, insurance companies can
benefit from offering RILAs by investing RILA proceeds into fixed-
income securities such as corporate bonds, thereby earning a ``credit
risk premium.'' Further, insurance companies can benefit when a RILA
offers index-linked options whose index for measuring performance is a
price-based index that does not account for dividend payments. For
example, if an investor chooses an index-linked option whose
performance is based, in part, on the S&P 500 Price Return Index, the
credited return may be based on the point-to-point change in the S&P
500, which does not include the dividend payments of the underlying
stocks.\433\ The excluded dividends can act as an implicit ``fee'' on
investors with the magnitude of the implicit fee being comparable to
average dividend rates among the underlying index stocks.\434\
---------------------------------------------------------------------------
\433\ See supra footnote 431.
\434\ Id. The Moenig Paper provides the following example. If
stock prices rise by 7% on average over the crediting period, in
addition to paying 2% in dividends, then the RILA account would be
credited 7%, even though investors in the underlying stocks would
earn a 9% return. Omitting dividend payments benefits insurers by
reducing the cost of providing a given amount of downside protection
(e.g., through lower option prices).
---------------------------------------------------------------------------
While most RILAs do not include any explicit ongoing fees or
charges to the investor, RILAs typically have charges for early or mid-
term withdrawals. As discussed in section II.B.2.a, charges for early
or mid-term withdrawals could include, surrender charges, contract
adjustments, and transaction charges (separate from surrender
charges).\435\
---------------------------------------------------------------------------
\435\ See also supra footnote 431.
---------------------------------------------------------------------------
RILAs differ from other annuity contracts in other ways as well.
Variable annuities involve a direct investment of premiums into
subaccount(s) that correspond to one, or more, of many mutual funds.
RILA premiums, on the other hand, are not directly invested into the
assets of the underlying index, and typically investors can only choose
among index-linked options whose returns are based on a small number of
mainstream indexes.\436\ Also, the financial guarantees common to
variable annuities are long term and are only applied when the contract
terminates, either at maturity or due to the investor's death, or if
the account value reaches zero due to guaranteed withdrawals.\437\
These factors make variable annuity guarantees difficult to value and
hedge due to their long-term nature (potentially 25 years, or
more).\438\ The guarantees that RILA contracts offer as part of their
bounded return structure, on the other hand, are short-term (i.e., they
are limited to the crediting period of the index-linked option the
investor selects, which is usually one, two, three, or six years) and
tied to the performance of a common index, so that issuers can hedge
the embedded liabilities accurately through the financial markets.\439\
---------------------------------------------------------------------------
\436\ See Moenig Paper.
\437\ Id.
\438\ Id.
\439\ Id.
---------------------------------------------------------------------------
Further, guarantees that RILA contracts offer may be much less
dependent on investor behavior than variable annuity guarantees.
Variable annuity investors may have a strong incentive to surrender or
exchange their policy when an embedded guarantee loses its value (i.e.,
moves ``out of the money'').\440\ The guarantees RILA contracts offer
reset with the end of the crediting period of the index-linked option
the investor selects, so such guarantees are more commonly ``at the
money'' and investors do not have as strong of an incentive to
surrender or exchange their policies.\441\
---------------------------------------------------------------------------
\440\ Thorsten Moenig and Nan Zhu (2018). Lapse-and-Reentry in
Variable Annuities, Journal of Risk and Insurance, 85(4), 911-938
(``Moenig and Zhu Paper'').
\441\ See Moenig Paper.
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[[Page 71153]]
Additionally, RILAs and variable annuities differ with respect to
their use of proceeds. As discussed in Section II.B.4, variable annuity
proceeds are held in separate accounts and, therefore, insulated from
the issuer's creditors. Variable annuity proceeds in unitized sub-
accounts must be invested as the investor chooses and returns are
credited to the account directly. Like variable annuity proceeds, RILA
proceeds are placed into a (non-unitized) separate account. As a
result, the proceeds are not insulated from the issuer's creditors.
Also, RILA proceeds can be invested as the issuer sees fit.
We understand that for index-linked options offering shorter
crediting periods, and whose returns are based on common indexes such
as the S&P 500 Index, insurance companies are able to invest RILA
proceeds in exchange-traded derivative securities that closely
approximate the issuer's liabilities from a RILA contract at the end of
each crediting period.\442\ In doing so, insurance companies are able
to hedge away their risk at a low cost. Further, we understand that
insurance companies can, and do, invest the remaining proceeds into
fixed-income securities (e.g., corporate bonds) that allow them to earn
a ``credit risk premium.'' \443\ The credit risk premium can be an
important source of benefits to issuers.\444\
---------------------------------------------------------------------------
\442\ Id.
\443\ Id.
\444\ Id.
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C. Benefits and Costs
1. Benefits
a. Use of Form N-4
Unlike variable annuity offerings that are registered on Form N-4,
insurance companies register RILA offerings on Forms S-1 or S-3. These
forms include a number of disclosure requirements that are specific to
the insurance company issuing the RILA that the Commission does not
require in the registration statements for offerings of variable
annuities.
We are proposing that insurance companies use Form N-4 to register
the offering of RILAs and we are proposing to adapt Form N-4 for that
purpose.\445\ Because it is an existing form, we believe RILA issuers
and investors are familiar with Form N-4. As a result of expanding the
scope of Form N-4 to address RILAs, RILA offerings would be registered
on the same form as variable annuities. Requiring that insurance
companies register RILA offerings on Form N-4 would leverage insurance-
product specific disclosure requirements reflected in the form and also
would permit the summary prospectus layered disclosure framework the
Commission adopted in 2020 for variable annuities.
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\445\ See proposed General Instruction B.1 of Form N-4.
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The following sections discuss the specific benefits deriving from
the contents and requirements of the form in detail. In addition to
these benefits, expanding the scope of Form N-4 to include RILAs would
benefit investors by making it easier for them to evaluate and compare
RILAs, and also to compare other annuity products with RILAs. For
example, investors may require less effort to evaluate and compare
annuity products that register using the same form. To the extent that
investors require less effort to evaluate and compare these annuity
products, investors may be more likely to make decisions that better
align with their investment goals.
b. Contents of Form N-4
The proposal is designed to facilitate the Commission's goal it
sought to achieve in adopting Form N-4, namely to help investors make
an informed investment decision regarding the annuity products that are
registered on that form. The registration process on Form N-4 uses a
layered disclosure approach designed to provide investors with key
information relating to the contract's terms, benefits, and risks in a
concise and more reader-friendly presentation, with access to more
detailed information for those investors who want it. Providing
investors with key information is particularly important in the context
of annuity contracts since their structure is typically more complex
than other types of investment products commonly sold to retail
investors.
Specifically, the proposal would update the contents of Form N-4 to
specifically address RILAs, including by: (1) amending the form's
general instructions; (2) amending the requirements for front and back
cover pages; (3) updating the Key Information Table; (4) providing new
principal disclosures regarding RILA investment options; and (5)
providing for new contract adjustment and fee disclosures. The proposal
would also include certain other technical and conforming amendments to
Form N-4 and related rules designed to accommodate the inclusion of
RILA offerings on that form as well as requiring the insurance company
to provide disclosure in response to the remaining items on Form N-4 to
the extent applicable.
(1) General Instructions
The proposal would require RILA offerings registered on Form N-4 to
comply with the general instructions of that form, including
requirements related to: (1) using document design techniques that
promote effective communication, (2) organizing information to make it
easier for investors to understand, (3) including information in the
prospectus or SAI not otherwise required so long as the additional
information is not incomplete, inaccurate, or misleading, and does not
obscure or impede understanding of the information that is required,
(4) requiring Form N-4 filers to define special terms used in the
prospectus in any presentation that clearly conveys meaning to
investors, (5) allowing insurance companies to describe multiple
contracts that are essentially identical in a single prospectus, (6)
making available the dates of both the prospectus and SAI, (7)
providing an interactive data file related to certain information on
the form, (8) requiring insurance companies to include active
hyperlinks, or other means of facilitating access that leads directly
to the relevant website, for an electronic version of the prospectus,
and (9) the use of incorporation by reference. The general instructions
are designed to require clear and consistent disclosure to investors
about annuity contracts currently registered on the form and to make
clear how filers must prepare and file their registration statements.
We believe clear disclosure benefits investors by making it easier
for investors to evaluate and compare offerings. Concise and decision-
useful disclosures can help facilitate the investment decision-making
process. Also, the presentation of information in a consistent manner
could facilitate not only the evaluation and comparison among RILA
offerings, but also could facilitate the comparison of RILAs to other
annuity products.\446\ Further, certain investors, while aware of
variable annuities, simply may not be aware of RILAs as an investment
option. Presentation of information in a consistent manner on Form N-4
could increase investor awareness of RILAs as an investment option.
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\446\ The consistent presentation of information also could
facilitate information collection by third parties such as
investment advisers and data aggregators who could then, in turn,
provide information to investors.
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(2) Front and Back Cover Pages
The proposal would make certain changes to information currently
required on the front and back pages of
[[Page 71154]]
a prospectus for all registrants on Form N-4. Like variable annuities
registered on Form N-4, RILAs would be required to present certain
information on the front and back cover pages of the prospectus. The
proposal would require several new cover page disclosures for all Form
N-4 issuers. One of these would provide additional information
distinguishing among the investment options available in the annuities
registering on Form N-4 and cross-reference the prospectus appendix
that provides additional information about each option. These changes
could help investors better understand what investment options are
available under the contract, in an easily identifiable location. Also,
the proposal would require the inclusion of three new legends that
highlight risks that are particularly prevalent in RILAs. The new
legends that highlight risk that are particularly prevalent in RILAs
should benefit investors by putting them on notice of these key
considerations at the outset, helping the investor make informed
decisions.
(3) Key Information Table
As required for current Form N-4 issuers, the proposal would
require RILA issuers to provide a Key Information Table in their
registration statements. The KIT includes a summary of five areas: (1)
fees and expenses, (2) risks, (3) restrictions, (4) taxes, and (5)
conflicts of interest. The KIT is important summary disclosure for
investors that is included in the prospectus, and the proposed
amendments to the KIT requirements are intended to highlight important
considerations related to RILAs, including certain unique and/or opaque
aspects of RILAs.\447\ Consistent with our layered disclosure approach
for variable annuities registered on Form N-4, RILA issuers would be
required to provide cross-references in the KIT to the location in the
statutory prospectus where the subject matter is described in greater
detail. Certain of the amended KIT requirements would apply to all Form
N-4 issuers. In particular, in a change from the current KIT
requirements for Form N-4 issuers, the amendments would require that
responses in an item be presented in a Q&A format.\448\ In a change for
all Form N-4 issuers, the proposal also would change the order in which
the KIT appears relative to the Overview of the Contract disclosures in
the prospectus.
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\447\ Many of the summary points presented in the KIT are
discussed in greater detail in other parts of the form. In this way,
the KIT is an integral part of the layered disclosure approach the
Commission traditionally has taken with annuity products. To ensure
that the KIT serves this function effectively, we also are proposing
to delete Form N-4's general instruction stating that where the
discussion of information required by the Overview of the Contract
(currently Item 3) or KIT (currently Item 2) also responds to the
disclosure requirements in other items of the prospectus,
registrants need not include additional disclosure in the prospectus
that repeats the information disclosed in the Overview of the
Contract or the KIT. See infra footnote 84 and accompanying text.
\448\ Currently, such format is suggested but not required. See
General Instruction C.3.(c) of Form N-4.
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Overall, the proposed KIT requirements (like the current KIT
requirements for variable annuities) are designed to provide a brief
description of key facts about a RILA in a specific sequence and in a
standardized presentation that is designed to be easy to read and
navigate. We believe that a standardized presentation that is designed
to be easy to read and navigate benefits investors by making it easier
for investors to evaluate and compare RILA offerings. Also, the
standardized presentation of information could facilitate not only the
evaluation and comparison among RILA offerings, but also could
facilitate the comparison of RILAs to other annuity products.
(4) Principal Disclosure Regarding RILA Offerings
The proposal would amend Form N-4 to require disclosure that would
provide investors with information about all annuities whose offerings
are registered on Form N-4 as well as with specific information about
RILAs and the index-linked options available under the RILA contracts.
With regard to Form N-4 issuers generally, the proposal would require
registrants to disclose investment option risk, early withdrawal risk,
contract benefits risk, insurance company risk, and the risk of
contract changes. With regard to specific information about RILAs, the
proposal includes requirements related to: (1) information about RILAs
generally and an overview of certain key elements of any index-linked
option offered under the contract; (2) a more in-depth description of
index-linked investment options available under the contract; (3) the
inclusion of an appendix that consolidates certain summary information
related to index-linked options and fixed options available under the
contract (which would accompany similar information about variable
options offered under a ``combination'' contract); and (4) certain
principal risk disclosures relating to investing in the RILA contract
that the prospectus describes.
The proposed disclosure requirements are designed to provide
additional information regarding the risk of investing in Form N-4
issuers generally, as well as the unique aspects of RILAs and certain
summary and detailed information about index-linked options available
under a RILA contract. The information could benefit investors by
making it easier for investors to evaluate and compare variable annuity
products registered on Form N-4. The required disclosure relating to
index-linked and fixed options available under a contract could benefit
investors by facilitating the comparison of these investment options to
other investment options available under the contract, as well as to
investment options that other RILA contracts offer.
(5) Addition of Contract Adjustments and Other Amendments to Fee and
Expense Disclosures
RILA investors have the ability to take a withdrawal or transfer
out their money before the end of a crediting period. If amounts are
removed from an investment option before the end of a crediting period,
typically an insurance company will apply an interim value adjustment
to the investor's contract value. The IVA, which will adjust the
contract value based on a formula, can move up and down as market
conditions change throughout the crediting period and may adjust daily.
The IVA is irrelevant if the investor does not move money from an
investment option until the end of the crediting period, but it becomes
relevant if the investor withdraws or transfer the money before the end
of a crediting period. Similarly, a positive or negative market value
adjustment could apply if amounts are partially or fully withdrawn from
the contract before the end of a specified period. These contract
adjustments, whose calculation varies by insurance company, may have a
positive or negative effect on the value of the contract.
We propose amendments to Form N-4 to require specific disclosures
with respect to contract adjustments. Currently, Form N-4 requires
variable annuity registrants to provide comprehensive information on
the fees and expenses that investors will pay when buying, owning, and
surrendering a contract, including expenses paid each year during the
time the investor owns the contract. Although RILAs typically do not
charge the explicit fees and expenses common to variable annuities,
they do typically utilize contract adjustments. Since negative
adjustments may result in substantial costs to investors, we believe
that it is important to include a detailed description of
[[Page 71155]]
contract adjustments in the registration statement.
Specifically, we are proposing to expand current disclosure
requirements to address contract adjustments that could affect
investors' contract value when buying, owning, and surrendering or
making withdrawals from an investment option. We are also proposing
certain other specific disclosures about contract adjustments, such as
requiring disclosures about the maximum potential loss that an investor
could experience in connection with a negative contract adjustment.
We believe that these disclosures would benefit investors since
they would be able to better evaluate the costs of purchasing and
owning annuity contracts, including RILAs. In addition, these
disclosures can make less-informed investors aware of RILAs' unique
characteristics, which could increase investor understanding of RILAs
as an investing option.
(6) Other Amendments to Form N-4
The proposal would include certain other amendments to Form N-4 and
related rules designed to accommodate the inclusion of RILA offerings
on Form N-4. These include amendments to Form N-4's facing sheet,
definitions, exhibit list, and required representations, as well as
amendments to certain Securities Act rules that help to implement the
proposal. Because these other amendments to Form N-4 and related rules
are designed to accommodate the inclusion of RILA offerings on Form N-
4, the benefits that could accrue as a result of these other amendments
are those that result from RILA issuers registering offerings on Form
N-4 rather than Form S-1 or Form S-3.
The proposal would also amend Form N-4's required exhibits list to
add new Item 27(p) for all issuers, which would require the filing of
any power of attorney included pursuant to rule 483(b). While this
exhibit is already required to be filed with a Form N-4 registration
statement under rule 483(b), practices differ in regard to the
placement of a required power of attorney exhibit within the exhibit
list. This amendment would benefit investors in comparing these
exhibits for all annuity products whose offerings are registered using
Form N-4 by standardizing the location of these exhibits in the
registration statement. Facilitating the comparison of annuity products
could benefit investors by helping them to invest in RILAs in a manner
that is consistent with their overall financial needs and objectives.
We are also proposing to add new Item 31A in Form N-4 to require
census-type information on RILAs offered in connection with the
applicable registration statement. Under this proposed new item, an
insurance company would have to provide information regarding any RILA
offered through the registration statement, as of the most recent
calendar year-end, including (1) the name of each contract; (2) the
number of contracts outstanding; (3) the total value of investor
allocations attributable to index-linked options; (4) the number of
contracts sold during the prior calendar year; (5) the gross premiums
received during the prior calendar year; (6) the amount of contract
value redeemed during the prior calendar year; and (7) whether the
contract is a combination contract. The information in new Item 31A
would help the Commission and staff in identifying trends in insurance
companies' offerings of RILAs and have a more complete understanding of
the marketplace for annuity securities.
We also propose amendments to Item 34 of Form N-4 to require RILA
issuers to include two specific undertakings in their registration
statements on Form N-4: (1) to file, during any period in which offers
or sales are made, through a post-effective amendment to its
registration statement, any prospectus required by section 10(a)(3) of
the Securities Act and, (2) that, for the purposes of determining
liability under the Securities Act, each post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. These proposed
undertakings are the same as two undertakings RILA issuers currently
provide in registration statements. We believe that it remains
appropriate for RILA issuers to continue to furnish these
representations concerning post-effective amendments to a registration
statement as, under the proposed amendments, RILAs may be continuously
offered on a registration statement for an indefinite amount of time.
(7) Remaining Items
The proposal would require RILA issuers to provide disclosure in
response to the remaining items on Form N-4 to the extent applicable.
These are items that we have previously determined are relevant in the
context of variable annuity offerings. Requiring RILA filers to provide
disclosure in response to the remaining items on Form N-4 to the extent
applicable would help ensure that comparable information is provided in
a standardized, consistent manner for all filers using Form N-4.
We believe standardized, consistent disclosure of comparable
information benefits investors by making it easier for investors to
evaluate and compare RILA offerings. Also, the presentation of
information in a standardized, consistent manner across all filers
using Form N-4 could facilitate not only the evaluation and comparison
among RILA offerings, but also could facilitate the comparison of RILAs
to variable annuities. Further, certain investors, while aware of
variable annuities, simply may not be aware of RILAs as an investment
option. Presentation of information in a standardized, consistent
manner on Form N-4 could increase investor awareness of RILAs as an
investing option. Facilitating the comparison of annuity products could
benefit investors by helping them to invest in RILAs in a manner that
is consistent with their overall financial needs and objectives.
(8) Inline XBRL
The proposal would require many of the newly added disclosures on
Form N-4 to be structured (i.e., tagged) in Inline XBRL, a structured,
machine-readable data language.\449\ In addition, RILA issuers would
have to tag those prospectus disclosures that Form N-4 currently
requires to be tagged.
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\449\ See supra section II.B.9.
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Currently, disclosures about RILA offerings are largely
unstructured; only the insurance company's financial statements, if
reported in GAAP and included in a registration statement that includes
a price or price range, are required to be tagged in Inline XBRL.\450\
Certain of the existing disclosures on Form N-4 are required to be
tagged in Inline XBRL.\451\
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\450\ See supra footnote 402.
\451\ Currently tagged disclosures include: Item 2 (Key
Information), Item 4 (Fee Table), Item 5 (Principal Risks of
Investing in the Contract), Item 10 (Benefits Available under the
Contract), and Item 17 (Portfolio Companies under the Contract). See
Instruction C.3.h of Form N-4; 17 CFR 232.405(b)(2)(iii).
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The proposed tagging requirements are designed to make the tagged
disclosures more readily accessible for aggregation, comparison,
filtering, and other analysis. As a point of comparison, XBRL
requirements for public operating company financial statement
disclosures have been observed to improve investor understanding of the
disclosed
[[Page 71156]]
information.\452\ While those observations are specific to operating
company financial statement disclosures (including footnotes), and not
to disclosures on Form N-4, they indicate that the proposed Inline XBRL
requirements would provide investors with increased insight into key
features of the contract that is described in the Form N-4 registration
statement. For example, the data tagging could allow third parties such
as financial data aggregators to efficiently compare and otherwise
process the disclosed information into analyses accessible to
investors.
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\452\ See, e.g., Birt, J., Muthusamy, K. & P. Bir, XBRL and the
Qualitative Characteristics of Useful Financial Information, 30
Account. Res. J. 107 (2017) (finding ``financial information
presented with XBRL tagging is significantly more relevant,
understandable and comparable to non-professional investors'');
Cahan, S.F., Chang, S., Siqueira, W.Z. & K. Tam, The roles of XBRL
and processed XBRL in 10-K readability, J. Bus. Fin. Account. (2021)
(finding 10-K file size reduces readability before XBRL's adoption
since 2012, but increases readability after XBRL adoption,
indicating ``more XBRL data improves users' understanding of the
financial statements''); Efendi, J., Park, J.D. & C. Subramaniam,
Does the XBRL Reporting Format Provide Incremental Information
Value? A Study Using XBRL Disclosures During the Voluntary Filing
Program, 52 Abacus 259 (2016) (finding XBRL filings have larger
relative informational value than HTML filings).
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c. Option To Use a Summary Prospectus
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations. Investors would
continue to have access to the RILA statutory prospectus and other
information about the RILA contract online, with paper or electronic
copies of this information upon request. The current summary prospectus
rule for variable contracts uses a layered disclosure approach designed
to provide investors directly with key information relating to the
contract's terms, benefits, and risks in a concise and reader-friendly
presentation, with more detailed information available elsewhere. The
proposed amendments to rule 498A would broaden the scope of the rule to
address RILA contracts.
As discussed in section II.C above, the proposed amendments to rule
498A would involve the use of two distinct types of summary
prospectuses for RILA contracts, employing the same approach the rule
currently uses for variable contracts. An ``initial summary
prospectus,'' covering contracts offered to new investors, would
include certain key information about the contract's most salient
features, benefits, and risks, presented in plain English in a
standardized order. The rule amendments would also require ``updating
summary prospectuses'' to be provided to existing investors in RILA
contracts. The updating summary prospectus would include a brief
description of certain changes to the contract that occurred during the
previous year, as well as a subset of the information required to
appear in the initial summary prospectus. Certain key information about
the index-linked options that the contract offers as investment options
would be provided in both the initial summary prospectus and updating
summary prospectus.
The proposed rule would create a choice for insurance companies.
They may meet their prospectus delivery obligations by providing the
statutory prospectus, or they may satisfy these obligations by
providing a summary prospectus and making statutory prospectuses and
other required documents available online. Those insurance companies
that expect to benefit by providing summary prospectuses would choose
to rely on the proposed amendments to meet their prospectus delivery
obligations. Those insurance companies that do not expect to benefit
from this optional prospectus delivery regime would choose to continue
to provide statutory prospectuses to investors.
The presentation proposed for the initial summary prospectus may
also reduce the investor effort required to compare RILA contracts, to
consider different index-linked options that a RILA offers, or to
compare RILA contracts with each other and with variable annuity
contracts, when an investor considers a new investment. Information
provided in a concise, user-friendly presentation could allow investors
to compare information across contracts and as a result, may lead
investors to make decisions that better align with their investment
goals.\453\
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\453\ Research suggests that individuals are generally able to
make more efficient decisions when they have comparative information
that allows them to assess relevant trade-offs. See, e.g.,
Christopher K. Hsee, George F. Loewenstein, Sally Blount, Max H.
Bazerman (1999). Preference Reversals Between Joint and Separate
Evaluations of Options: A Review and Theoretical Analysis,
Psychological Bulletin, 125(5), 576-90; see also Jeffrey R. Kling,
Sendhil Mullainathan, Eldar Shafir, Lee Vermeulen, Marian V. Wrobel
(2012). Comparison Friction: Experimental Evidence from Medicare
Drug Plans, Quarterly Journal of Economics, 127(1), 199-235. In a
randomized field experiment, some senior citizens choosing between
Medicare drug plans were randomly selected to receive a letter with
personalized, standardized, comparative cost information. Plan
switching was 28% in the group that received a letter with
personalized, standardized, comparative cost information, but only
17% in the comparison group, and the intervention caused an average
decline in predicted consumer cost of about $100 a year among letter
recipients.
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If insurance companies choose to meet their prospectus delivery
obligations by delivering summary prospectuses to investors, with other
documents available online, investors would then have a choice as well.
Under the layered disclosure framework we are proposing for RILAs,
investors would receive information in the form of a summary
prospectus, with more detailed information available online if the
investor chooses to access it.\454\ Thus, investors can continue to
review the statutory prospectuses by accessing them online, or they may
request paper or electronic delivery of statutory prospectuses on an ad
hoc basis. Alternatively, investors may choose only to consult the
summary prospectuses. Further, if investors want to rely on some
combination of summary and statutory prospectuses to receive
information about the contract, that choice is available to them as
well. Given the Commission's experience administering the optional
summary prospectus regime for variable annuities, we expect a majority
of RILA issuers would choose to use summary prospectuses. Thus, we
expect that the vast majority of investors will have the option to use
both summary prospectuses and statutory prospectuses in their decision-
making, in whatever proportion investors think is best for their
preferences.
---------------------------------------------------------------------------
\454\ During investor testing, several participants felt they
would need information beyond the information contained in the KIT
to make a decision about a RILA. See OIAD Report at Section 5,
Qualitative Testing, Results from Round 1.
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Initial Summary Prospectus. Should insurance companies issuing
RILAs choose to use summary prospectuses, investors may benefit in a
number of ways.\455\ The proposed initial summary prospectus for RILAs
would be limited to describing only the contract and features currently
available under the statutory prospectus. This focus could make more
salient the features and risks of a RILA, thereby facilitating
investors' evaluation of those features and risks.
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\455\ Some investors may prefer to read statutory prospectuses,
and therefore, the advantages associated with summary disclosure, as
described in this section, may not apply to those investors. The
statutory prospectus would, under the proposed rule, be available
online and in paper or electronic format upon request.
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We are proposing a standardized presentation for RILA initial
summary prospectuses to require certain disclosure items that would be
most relevant to investors to appear at the beginning of the initial
summary prospectus, followed by supplemental
[[Page 71157]]
information. An initial summary prospectus must contain the information
required by the rule, and only that information, in the order specified
by the rule.\456\ The information would be required to appear in the
same order, and under relevant corresponding headings, as the rule
specifies. The required presentation could also facilitate comparisons
of different RILA contracts, as well as comparisons between RILA
contracts and variable annuities.
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\456\ Proposed rule 498A(b)(5).
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We believe standardized, consistent disclosure of comparable
information benefits investors by making it easier for investors to
evaluate and compare RILA offerings. Also, the presentation of
information in a standardized, consistent manner could facilitate not
only the evaluation and comparison among RILA offerings, but also could
facilitate the comparison of RILAs to other variable annuities.
Further, certain investors, while aware of variable annuities, simply
may not be aware of RILAs as an investment option. Presentation of
information in a standardized, consistent manner in an initial summary
prospectus could increase investor awareness of RILAs as an investing
option.
In addition, given the time required to review a statutory
prospectus, RILA investors may benefit from summary prospectuses
because they offer a shorter alternative to statutory prospectus
disclosure. There is evidence that suggests that consumers benefit from
summary disclosures.\457\ Within the specific context of investing,
there is evidence from related contexts that suggests that summary
prospectuses allow investors to spend less time and effort to arrive at
the same portfolio decision as if they had relied on a statutory
prospectus.\458\ This research is consistent with the 2012 Financial
Literacy Study, which showed that at least certain investors favor a
layered approach to disclosure with the use, wherever possible, of
summary documents containing key information about an investment
product or service.\459\
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\457\ There is evidence that the summarization of key
information is useful to consumers. See, e.g., Sumit Agarwal,
Souphala Chomsisengphet, Neale Mahoney, Johannes Stroebel,
Regulating Consumer Financial Products: Evidence from Credit Cards
(NBER Working Paper No. 19484, rev. 2014), available at https://www.nber.org/papers/w19484. The authors find that a series of
requirements in the CARD Act, including provisions designed to
promote simplified disclosure, has produced decreases in both over-
limit and late fees, saving US credit card users $20.8 billion
annually; see also Robert L. Clark, Jennifer A. Maki & Melinda
Sandler Morrill, Can Simple Informational Nudges Increase Employee
Participation in a 401(k) Plan? 80 S. Econ. J. 677 (2014). The
authors find that a flyer with simplified information about an
employer's 401(k) plan, and about the value of contributions
compounding over a career, had a significant effect on participation
rates.
\458\ See John Beshears, James J. Choi, David Laibson & Brigitte
C. Madrian, How Does Simplified Disclosure Affect Individuals'
Mutual Funds Choices?, in Explorations in the Economics of Aging 75
(David A. Wise ed., 2010) (``Beshears Paper''), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices. We note, however,
that while the authors find evidence that investors spend less time
making their investment decision when they are able to use summary
prospectuses, there is no evidence that the quality of their
investment decisions is improved. In particular, ``On the positive
side, the Summary Prospectus reduces the amount of time spent on the
investment decision without adversely affecting portfolio quality.
On the negative side, the Summary Prospectus does not change, let
alone improve, portfolio choices. Hence, simpler disclosure does not
appear to be a useful channel for making mutual fund investors more
sophisticated . . .'' Id. at 13 (manuscript page).
\459\ See 2012 Financial Literacy Study.
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Also, investors allocate their attention selectively,\460\ and the
sheer volume of disclosure in a statutory prospectus may discourage
some investors from reading contract statutory prospectuses. The
observations of a telephone survey conducted on behalf of the
Commission with respect to mutual fund statutory prospectuses (which
are typically shorter than variable contract statutory prospectuses,
and shorter than RILA statutory prospectuses are expected to be under
the proposal) are consistent with the view that the volume of
disclosure may discourage investors from reading statutory
prospectuses.\461\ That survey observed that many mutual fund investors
do not read statutory prospectuses because they are long, complicated,
and hard to understand. Responses to investor surveys in other
contexts, also suggest that shareholders may be more likely to read
more concise shareholder reports.\462\
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\460\ See George Loewenstein, Cass R. Sunstein & Russell Golman.
(2014) Disclosure Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014).
\461\ Prior to the Commission's 2009 adoption of mutual fund
summary prospectus rules, the Commission engaged a consultant to
conduct focus group interviews and a telephone survey concerning
investors' views and opinions about various disclosure documents
filed by companies, including mutual funds. During this process,
investors participating in focus groups were asked questions about a
hypothetical Summary Prospectus. Investors participating in the
telephone survey were asked questions relating to several disclosure
documents, including mutual fund prospectuses. See Abt SBI, Inc.,
Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May
2008), available at https://www.sec.gov/comments/s7-28-07/s72807-142.pdf. Although the results from the investor testing reflect
stated investor preferences, they do not provide us with information
with respect to the extent to which RILA investors would actually be
more likely to read a RILA summary prospectus relative to a
statutory prospectus.
\462\ Tailored Shareholder Reports Adopting Release.
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To the extent summary prospectuses increase readership of RILA
contract disclosures, they could improve the quality and efficiency of
portfolio allocations made on the basis of disclosed information for
those investors who otherwise would not have read the statutory
prospectus.
The presentation proposed for the initial summary prospectus may
also reduce the investor effort required to compare RILA contracts, to
consider different index-linked options that a RILA offers, or to
compare RILA contracts with each other and with variable annuity
contracts, when an investor considers a new investment. Information
provided in a concise, user-friendly presentation could allow investors
to compare information across contracts and as a result, may lead
investors to make decisions that better align with their investment
goals.\463\ For example, the proposed amendments would require
insurance companies to distill certain key product information into
tables, which could facilitate comparison across different products.
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\463\ See supra footnote 453.
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Further, the proposed framework for RILA contract summary and
statutory prospectuses also includes design elements to facilitate
investor use. In particular, the proposed amendments include
requirements for linking both within the electronic version of a
contract statutory prospectus and between the electronic versions of
the contract statutory prospectus and the contract summary prospectus.
The linking requirement would permit investors who use the electronic
versions of contract prospectuses to quickly navigate between related
sections within the contract statutory prospectus and back and forth
between related sections of the contract summary prospectus and the
contract statutory prospectus. Further, the proposal would also require
that investors either be able to view the definition of each special
term used in an online summary prospectus upon command, or to move
directly back and forth between each special term and the corresponding
entry in any glossary or list of definitions that the summary
prospectus includes. This requirement would facilitate understanding of
terms that may be confusing or unfamiliar among investors viewing the
documents online.
Updating Summary Prospectus. As under current rule 498A, we are not
proposing that RILA issuers send an
[[Page 71158]]
updated initial summary prospectus to investors each year. Instead, any
RILA issuer that relies on rule 498A would send an updating summary
prospectus, which would provide a brief description of certain changes
with respect to the contract that occurred within the prior year.\464\
The updating summary prospectus would also include certain of the
information required in the initial summary prospectus that we consider
most relevant to investors when considering additional investment
decisions.\465\ Further, updating summary prospectuses for RILA
contracts, like initial summary prospectuses, would include specific
disclosure items appearing in a prescribed order, under relevant
corresponding headings.\466\ An updating summary prospectus for a RILA
contract would have to contain the information required by the rule,
and only that information, in the order specified by the rule.
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\464\ Proposed rule 498A(c)(1).
\465\ See supra footnote 285 and accompanying text.
\466\ Proposed rule 498A(c)(6).
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The proposed updating summary prospectus for RILAs would have many
of the same benefits for investors associated with the initial summary
prospectus discussed above, with respect to presenting key information
in an easier and less time-consuming manner for investors.
Specifically, because many terms of the RILA contract do not change
from year-to-year, the contract statutory prospectus may contain large
amounts of disclosure that is duplicative of disclosure that the
investor has previously received. Those changes that do occur may be
important to investors, but the disclosure about these changes could be
difficult for the investor to identify given the volume of prospectus
disclosure that investors would otherwise receive, and the current lack
of a requirement to identify new or changed information.
Under the proposed amendments, the updating summary prospectus
would include a concise description of important changes affecting the
statutory prospectus disclosure relating to certain topics that
occurred within the prior year--namely: (1) the availability of
investment options under the contract, (2) the overview of the
contract, (3) the KIT, (4) certain information about fees, (5) benefits
available under the contract, (6) purchases and contract value, and (7)
surrenders and withdrawals. These are topics that are most likely to
entail contract changes and, for the reasons previously noted, are the
types of contract changes most likely to be important to investors
because they affect how investors evaluate RILA contracts and are
relevant to investors when considering whether to continue in the
existing option (if available) or transfer funds to a different option.
The proposed updating summary prospectus, if used by issuers to satisfy
their prospectus delivery obligations, would likely reduce the burden
on investors and increase their understanding of their contract by
highlighting certain changes to the contract made during the previous
year, while foregoing the repetition of most information that had
remained unchanged.
d. Use of Statutory Accounting
The proposal would permit RILA issuers to provide financial
statements on amended Form N-4 in the same way that insurance companies
currently do on Form N-4.\467\ As a result of this change, the
financial statements filed in connection with a RILA registration
statement could be prepared in SAP to the same extent as currently
permitted for insurance companies' financial statements filed on that
form. We expect this approach to appropriately recognize the cost
burdens if we were to require GAAP financial statements in cases where
the insurance company is not otherwise required to prepare financial
information in accordance with GAAP. In addition, SAP financial
statements, which focus on an issuer's ability to meet its obligations
under its insurance contracts, as regulated by State law, appear to
provide sufficient material information for investors evaluating RILAs.
As a result, permitting insurance companies to provide SAP financial
statements when registering the offering of a RILA to the same extent
as they can in connection with variable annuities on Form N-4 would be
consistent with investor protection. Also, investors could benefit to
the extent the reduced cost burdens provided by SAP financial
statements are passed along to investors.
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\467\ Certain Commission letters, or portions thereof, exempt
insurance companies from the requirement to provide financial
statements prepared in accordance with GAAP in connection with the
registration of an offering of RILAs on Form S-1. As discussed in
Section III.B.1.a, among RILA contracts that are currently
registered with the Commission, 47 RILAs report SAP financials and
43 RILAs report GAAP financials.
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The proposal also would require RILAs to provide information
relating to changes in and disagreements with accountants on accounting
and financial disclosure as detailed in 17 CFR 229.304 (``Item 304 of
Regulation S-K''). Further, RILAs would be required to provide as an
exhibit any letter from the insurance company's former independent
accountant regarding its concurrence or disagreement with the
statements made by the insurance company in the registration statement
concerning the resignation or dismissal as the insurance company's
principal accountant. These items are currently provided by RILAs on
Forms S-1 and S-3 and are designed to address the practice of ``opinion
shopping'' for an auditor willing to support a proposed accounting
treatment designed to help a company achieve its reporting objectives
even though that treatment might frustrate reliable reporting.\468\
Because the requirements for Form N-4 filers under the proposal are the
same as for Form S-1 and Form S-3 filers currently, we would not expect
any additional benefits from the requirement to provide information
relating to changes in and disagreements with accountants on accounting
and financial disclosure.
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\468\ See Disclosure Amendments to Regulation S-K, Form 8-K and
Schedule 14A Regarding Changes in Accountants and Potential Opinion
Shopping Situations, Investment Company Act Release No. 16358 (Apr.
12, 1988) [53 FR 12924 (Apr. 20, 1988)]; see also item 11(i) of Form
S-1.
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e. Filing Rules
Fee Payment Method and Amendments to Form 24F-2. The proposal would
require RILA issuers to pay registration fees for RILAs using the same
method that other filers on Form N-4 currently use. Issuers registering
the offerings of RILAs on amended Form N-4 would be deemed to be
registering an indeterminate amount of RILAs upon effectiveness of the
registration statement. These issuers would then be required to pay
registration fees annually based on their net sales of these
securities, no later than 90 days after the issuer's fiscal year ends,
on the form that is used by current Form N-4 filers to pay registration
fees (Form 24F-2). The proposal would further specify the calculation
method for paying RILA registration fees, consistent with the fee
calculation methodology that applies to current Form N-4 filers. The
proposal would also indicate when issuers can take credits for RILA
redemptions that pre-date their use of that form and when expiring
annuity contracts are rolled over into a new crediting period as well
as other minor technical amendments.
The proposed filing rules would provide benefits to insurance
companies. Rather than registering a specific amount of securities,
insurance companies would register an indefinite amount of securities
upon the effective date of their registration statement. Registering an
indefinite amount of
[[Page 71159]]
securities benefits insurance companies by eliminating the risk that a
RILA issuer may inadvertently oversell securities with respect to a
registration statement on Form N-4. The payment of fees on an annual
net basis furthermore should lead to a reduction in overall filing fees
relating to RILAs. To the extent that there are cost savings for
issuers, some of those savings may potentially be passed on to
investors.
Post-Effective Amendments and Prospectus Supplements. As discussed
in section II.E, the proposal would require RILA issuers to use the
same framework for filing post-effective amendments to the registration
statement as is currently used by other filers on Form N-4. First, the
proposal would amend rule 485 under the Securities Act to require RILA
issuers to use that rule when amending RILA registration statements on
Form N-4. Requiring RILA issuers to use that rule when amending RILA
registration statements on Form N-4 would permit RILA issuers to file
post-effective amendments that become automatically effective under
rule 485(a) after a specified period of time after the filing or, in
certain enumerated circumstances, immediately effective under rule
485(b). Issuers may benefit to the extent automatic effectiveness
allows issuers to tap favorable windows of opportunity in the RILA
market, to structure terms of RILAs on a real-time basis to accommodate
investor demand, and to determine or change the plan of distribution in
response to changing market conditions.
Second, the proposal would require RILA issuers to apply rule 497
under the Securities Act when appropriate to file RILA prospectuses and
prospectus supplements with the Commission. Under the proposed
amendments, a RILA issuer would be required to file every prospectus
relating to a RILA offering that varies in form from a previously filed
prospectus before it is first used. This approach--rather than
requiring filing only if the issuer makes substantive changes from or
additions to a previously-filed prospectus--may benefit both investors
and issuers. The requirement that insurance companies file every
prospectus that varies in form from a previously filed prospectus
before it is first used could facilitate investor evaluation and
comparison by making publicly available the most timely information
currently available to investors. We would expect this benefit to be
minimal, however, because rule 424 under the Securities Act requires
RILA issuers only to file prospectuses that contain substantive
changes. Prospectuses required to be filed under rule 497 that would
not be required to file under rule 424, then, would be prospectuses
updated with minor, non-substantive changes and likely of limited
informational benefit to investors.
As discussed above, certain issuers use a short-form registration
statement on Form S-3, which requires less information than Form S-1
and allows for significant incorporation by reference. Certain issuers
also can rely on rule 430B under the Securities Act to omit certain
information from the ``base'' prospectus when the registration
statement becomes effective and later provide that information in a
subsequent Exchange Act report (forward) incorporated by reference, a
prospectus supplement, or a post-effective amendment. Issuers
registering annuity product offerings on Form N-4, on the other hand,
have limited ability to incorporate information by reference into their
registration statements and cannot forward incorporate information from
subsequently filed Exchange Act reports. Issuers registering annuity
product offerings on Form N-4 also cannot rely on rule 430B to omit
certain information from the base prospectus. Under the proposal, then,
RILA investors would have all the information available in one location
rather than needing to separately access the information on a website
or request the incorporated materials. As a result, costs to investors
for assembling and assimilating necessary information could decrease,
with a potentially stronger effect for investors that may not have the
technical capabilities or monetary resources to search efficiently
through multiple information sources.
Issuers may benefit from applying rule 497 as well. The proposed
rule would facilitate a uniform post-effective amendment and prospectus
filing framework for all Form N-4 filers, which would provide insurance
companies with more consistent filing requirements across similar
products. This, in turn, could benefit insurance companies by making it
easier to execute such offerings and may decrease compliance costs.
f. Materially Misleading Statements in RILA Sales Literature
The proposal would amend rule 156 to make its provisions applicable
to RILA sales literature. Rule 156 is an interpretive rule that
provides factors to be weighed in considering whether a statement
involving a material fact is or might be misleading in the specific
context of investment company sales literature, including literature
relating to the sale of variable annuities. Proposed amendments to rule
156 would indicate that whether a statement involving a material fact
is misleading in RILA sales literature would depend on an evaluation of
the context in which it is made, with the rule providing non-exhaustive
factors to guide in this determination.
For example, rule 156(b)(1)(ii) currently provides that a statement
could be misleading because of the absence of explanations,
qualifications, limitations or other statements necessary or
appropriate to make such statement not misleading. This provision,
where made applicable to RILA sales literature, would generally require
an insurance company to consider whether an advertisement would be
materially misleading if it markets the investment as a growth
investment, a loss-avoidance vehicle, or a customizable product in the
absence of qualifying explanations or statements. Similarly, if sales
literature advertises a particular feature of the product's bounded
return structure that is not available for the life of the product or
the full term of any surrender charge period, the provision as made
applicable to RILA sales literature would require consideration of
whether the statement is misleading without providing additional
context as to the issuer's discretion to make changes.
Further, rule 156(b)(4) currently provides that representations
about fees or expenses associated with an investment in a fund could be
misleading because of statements or omissions made involving a material
fact, including situations where portrayals of the fees and expenses
associated with an investment in the fund omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading. We are proposing to
amend this provision also to address representations about the fees or
expenses associated with a RILA contract. In the context of RILA sales
literature, this provision as amended would require consideration about
whether representations or portrayals either of a RILA's costs or
charges, or optional benefits that are subject to a contract
adjustment, would require qualifying statements or explanations
regarding the economic costs to the investor to receive an advertised
benefit or those generally associated with the RILA.
Also, rule 156(b)(2)(i) currently states that representations about
past or future investment performance could be misleading because of
statements or omissions made involving a material fact. This includes
situations where
[[Page 71160]]
portrayals of past income, gain, or growth of assets convey an
impression of the net investment results achieved by an actual or
hypothetical investment which would not be justified under the
circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading. This provision,
where made applicable to RILA sales literature, would require
consideration of whether illustrations about the operation of a RILA or
its features could be misleading because, for example, they use
assumptions that are not currently offered or exceed what could be
reasonably anticipated or use ``cherry picked'' data.
By reducing the potential for misleading or fraudulent statements
in RILA sales literature, applying rule 156 to RILAs would provide
investors with protections and help ensure that investors receive the
information necessary to make informed decisions about these products.
Ensuring that investors receive the information necessary to make
informed decisions could benefit investors by facilitating investor
evaluation of RILAs as well as investor comparison of RILAs to other
annuity products.
2. Costs
The proposal could lead to certain additional costs for insurance
companies. These costs would likely vary across insurance companies,
depending on their existing lines of business. Costs may also vary
depending on the extent to which insurance companies create
prospectuses that vary in form from previously filed prospectuses and
the frequency of certain events, such as changes in accountants and
disagreements with accountants on accounting and financial disclosure.
Generally, the costs would be lower for insurance companies that
currently offer products that register on Form N-4, for those insurance
companies that do not change or remove key features of RILAs
frequently, and for those insurance companies that do not experience
changes in, and disagreements with, accountants on accounting and
financial disclosure.
We anticipate that the costs to insurance companies would be
comprised of both direct compliance costs and indirect costs. Direct
costs for insurance companies would consist of internal costs (for
compliance attorneys and other non-legal staff, such as computer
programmers, to prepare and review the required disclosure) and
external costs (including filing fees, outside legal and accounting
fees, as well as any costs associated with outsourcing all or a portion
of the Form N-4 filing responsibilities to a filing agent, software
consultant, or other third-party service provider).
The proposal could lead to certain costs for investors as well. Any
portion of additional costs that is not borne by insurance companies
would ultimately be passed on to RILA investors. Investors also may
bear costs associated with certain proposed changes such as the
proposed change in filing rules as well as an insurance company's
option to use a summary prospectus.
a. Direct Costs
Form N-4. We believe that the direct costs associated with the
proposed amendments would be most significant for the first Form N-4
registration statement that an insurance company would be required to
prepare and file because the insurance company would need to
familiarize itself with the new registration form and may need to
configure its systems to efficiently gather the required information.
In subsequent periods, we anticipate that insurance companies would
incur significantly lower costs because much of the work involved in
the initial registration statement preparation and filing is non-
recurring and because of efficiencies realized from system
configuration and reporting automation efforts accounted for in the
initial filing period. The costs associated with preparing and filing a
new registration statement (on Form N-4 as opposed to Forms S-1/S-3)
would be ameliorated to the extent an insurance company currently has
experience and systems in place to prepare and file registration
statements on Form N-4 (e.g., the insurance company currently offers
variable annuities whose offerings are registered on Form N-4). We
estimate the aggregate additional annual internal time cost to be
$16,133,834 and the aggregate annual external cost burden to be
$2,914,740.\469\
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\469\ See infra Table 13.
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Insurance companies would also incur compliance costs to tag many
of the newly required Form N-4 disclosures (as well as those prospectus
disclosures that Form N-4 currently requires to be tagged) in Inline
XBRL. Various XBRL and Inline XBRL preparation solutions have been
developed and used by operating companies and investment companies to
fulfill their structuring requirements, and some evidence suggests
that, for smaller operating companies, XBRL compliance costs have
decreased over time.\470\ We estimate the total aggregate additional
annual internal time cost for XBRL compliance would be $308,560 and the
aggregate annual external cost burden to be $63,000.\471\ In addition,
22 of the 23 insurers that issue RILAs also offer variable products
registered on Forms N-3, N-4, or N-6, all of which are currently
structured, or otherwise have experience tagging registration
statements.\472\
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\470\ An AICPA survey of 1,032 public operating companies with
$75 million or less in market capitalization in 2018 found an
average cost of $5,850 per year, a median cost of $2,500 per year,
and a maximum cost of $51,500 per year for fully outsourced XBRL
creation and filing, representing a 45% decline in average cost and
a 69% decline in median cost since 2014. See AICPA, XBRL Costs for
Small Companies Have Declined 45% since 2014 (2018), available at
https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/xbrl-costs-for-small-companies.pdf. Note that this survey was limited to small
operating companies. Additionally, a NASDAQ survey of 151 listed
issuers and other respondents in 2018 found an average XBRL
compliance cost of $20,000 per quarter, a median XBRL compliance
cost of $7,500 per quarter, and a maximum XBRL compliance cost of
$350,000 per quarter in XBRL costs per quarter. See Letter from
Nasdaq, Inc. (Mar. 21, 2019); Request for Comment on Earnings
Releases and Quarterly Reports, Securities Act Release No. 10588
(Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)].
\471\ See infra Table 16.
\472\ Based on analysis of Forms S-1, S-3, and POS AM filed by
RILA issuers.
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As such, to the extent these companies comply with Inline XBRL
requirements internally rather than outsourcing to an external service
provider, they may already be familiar with Inline XBRL software and
may be able to leverage existing Inline XBRL preparation processes and/
or expertise in complying with the new tagging requirements. This would
limit the compliance costs arising from the new tagging requirements
for these issuers to only those costs related to selecting additional
Inline XBRL tags for those new disclosures proposed to be tagged, and
reviewing the tags selected for those disclosures. Accordingly, we do
not anticipate that the costs associated with Form N-4 tagging would be
significant enough to deter insurance companies from entering the
market for RILAs. As such, we do not expect that the new and modified
tagging requirements in this proposal would decrease competition in the
market for RILAs.\473\
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\473\ See also infra section III.D.
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Option to Use a Summary Prospectus. Issuers will benefit from the
option to use a summary prospectus to the extent that providing layered
disclosure through a summary prospectus regime (including costs of
producing and delivering initial summary and updating summary
prospectuses and of making statutory prospectuses, and other
[[Page 71161]]
documents available online) is less expensive than providing statutory
prospectuses to new investors and updated statutory prospectuses to
existing investors annually. Insurance companies choosing to provide
summary prospectuses would bear a one-time cost of preparing both the
initial summary prospectus and the updating summary prospectus, as well
as costs associated with preparing updated versions the updating
summary prospectus in the future on at least an annual basis. We
estimate the average annual burden to prepare initial and updating
summary prospectuses to be $5,000 per registration.\474\
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\474\ See Table 11, Rule 498A PRA Estimates.
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Insurance companies that choose to provide summary prospectuses are
required to make statutory prospectuses and other materials available
online. We estimate the aggregate cost to comply with the proposed
website posting requirements of the rule for documents relating to
RILAs to be $772 per registrant.\475\ However, some of these costs may
have already been incurred by issuers of ``combination'' contracts
offering variable options as well as index-linked options.
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\475\ See Table 11, Rule 498A PRA Estimates.
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Insurance companies that rely on rule 498A to use summary
prospectuses for variable annuities are also required to include inter-
and intra-document linking and special terms definitions. One linking
requirement would allow the reader to move back and forth between a
table of contents of the contract statutory prospectus or SAI, and the
related sections of each document. Although prospectuses and SAIs are
not required to have individual headings corresponding to the items in
the registration forms, we assume that the sections of a prospectus or
SAI would correspond with the item requirements of the forms. We
estimate that Form N-4 filers would require 27 back-and-forth internal
links. The other linking requirement would allow the reader to move
back and forth between each section of the summary prospectus and any
related section of the contract statutory prospectus and SAI that
provides additional detail. This back-and-forth movement could occur
either directly from the summary prospectus to the relevant section of
the statutory prospectus or SAI, or indirectly by linking from the
summary prospectus to a table of contents in the statutory prospectus
or SAI. For our analysis, we assume direct links as those will tend to
be more costly when compared with indirect linking through a table of
contents.
An initial summary prospectus for a Form N-4 issuer includes eight
sections. The Key Information Table has instructions stating that,
wherever feasible, a registrant should provide cross-references or
links to the location in the statutory prospectus where the subject
matter is described in greater detail. There are 12 sections of the Key
Information Table. Therefore, we estimate that there would be 18 back-
and-forth links between initial summary prospectuses and statutory
prospectuses for a Form N-4 issuer.
An updating summary prospectus for a Form N-4 issuer includes three
sections, one of which, the Key Information Table, includes 12
sections. One section is the ``Updated Information About Your
Contract'' section. The number of links in this section would depend on
the number of updates discussed. For example, assuming discussion of
four updates, we estimate the number of back-and-forth links between a
Form N-4 issuer's updating summary prospectus and statutory prospectus
to be 16.
The proposed rule amendments would also require that RILA investors
either be able to view the definition of each special term used in an
online summary prospectus upon command (e.g., by ``hovering'' the
computer's pointer or mouse over the term), or to move directly back-
and-forth between each special term and the corresponding entry in any
glossary or list of definitions that the summary prospectus includes.
We assume that RILA issuers could replicate links to a glossary or the
computer code required to implement access to definitions by
``hovering'' over a term with little or no burden, but that there would
be a burden associated with creating the requisite link or code for
each special term. Accordingly, we estimate the cost to comply with the
proposed requirement to include inter- and intra-document linking and
special terms definitions as described above would include 6 burden
hours and a cost of $800 annually, per registrant.\476\
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\476\ See VASP Adopting Release at n.1084.
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Filing the Prospectus. As discussed in section II.E, RILA issuers
follow different processes to file prospectuses than current Form N-4
filers. For example, a RILA issuer is required to file a prospectus
only if the issuer makes substantive changes or additions to a
previously-filed prospectus, whereas current Form N-4 filers are
required to file every prospectus that varies from any previously-filed
prospectus. Accordingly, under the proposed amendments, a RILA issuer
would be required to file every prospectus relating to a RILA offering
that varies in form from a previously filed prospectus before it is
first used. The proposed requirement could increase the number of
prospectuses required to be filed by RILAs which could, in turn,
increase costs for issuers.\477\ For each additional prospectus
required to be filed by RILAs, we estimate an addition internal cost
burden of $113,659.70 and an external cost burden of $24,000.\478\
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\477\ The potential increase in cost could be greater for Form
S-3 filers than for Form S-1 filers. Form S-3 requires less
information than Form S-1. Also, Form S-1 allows incorporation by
reference only on a very limited basis. Form S-3 allows for forward
incorporation by reference. Form S-3 filers may need to produce
incrementally more information to file on Form N-4 than Form S-1
filers. Transitioning to Form N-4 could be more expensive for Form
S-3 filers than for Form S-1 filers, as a result.
\478\ See Table 11, Rule 498A PRA Estimates. As discussed in
footnote 477, these costs could be greater for Form S-3 filers than
for Form S-1 filers. Also, we estimate an additional internal time
cost of $2,436 for each additional prospectus required to be filed
by separate account registrants.
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Materially Misleading Statements in RILA Sales Literature. The
proposal would amend rule 156 to make its provisions applicable to RILA
sales literature. The cost of the proposed amendments would include the
direct cost of analyzing advertising materials in light of the guidance
rule 156 provides. This may require review and approval of
advertisements beyond what occurs currently, particularly because
determining whether a statement involving a material fact is misleading
in RILA sales literature would depend on an evaluation of the context
in which it is made. We expect some of these costs to be borne in the
first year after the rule adoption. That is, these costs would be
transition costs and not sustained beyond the first year. We estimate
that the transition costs associated with the proposed advertising rule
amendments would be $5,715.\479\ Also, ongoing sales literature
activity may require internal review and approval of advertisements. We
estimate that the costs associated with ongoing sales literature
activity would be $1,905, annually.\480\ These costs would be borne
[[Page 71162]]
by issuers and third parties who prepare RILA advertisements.
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\479\ We estimate an initial burden of 15 hours, per
advertisement, to review existing advertising materials at a blended
cost of $381 ($5,715 = 15 x $381). See Tailored Shareholder Reports
for Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements adopting release at footnote 744.
\480\ We estimate an initial burden of 5 hours, per
advertisement, to review existing advertising materials at a blended
cost of $381 ($5,715 = 15 x $381). See Tailored Shareholder Reports
for Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements adopting release at footnote 745.
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b. Indirect Costs
Form N-4. While the prospectuses and other registration statement
disclosure required by the proposal would likely facilitate investor
evaluation and comparison of RILAs, investors could experience certain
transition costs under the proposal, and some investors may experience
other ongoing costs. Transition costs would include the costs of the
inconvenience to some investors of adapting to the new materials and to
the changes in the presentation of information. Investors would also
bear a one-time cost of the inconvenience of adjusting to the changes
in the disclosures they receive. These costs are likely to be
relatively lower for investors with less experience investing in RILAs.
Option to Use a Summary Prospectus. While we expect that, should
insurance companies opt to use summary prospectuses, the majority of
investors would benefit from their disclosures, certain investors may
incur costs. For example, although research indicates that investors
generally prefer to receive summary disclosures there may be RILA
investors who prefer to rely on statutory prospectuses when making
investment decisions. While RILA statutory prospectuses would continue
to be available online and in paper or electronic copy upon request,
access to those statutory prospectuses would require investors to take
additional steps, imposing some burden. For example, investors choosing
to access the statutory prospectus online rather than requesting a
paper copy would need to manually enter a hyperlink from a paper
updating summary prospectus or click on a link to a website containing
the statutory prospectus. To the extent that internet access and use
among RILA investors is not universal, those investors without home
internet access might experience a reduction in their ability to
quickly and easily access statutory prospectus information.\481\ Even
for those investors with home internet access, there may be some
resistance to taking the additional step of accessing the statutory
prospectus online.
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\481\ According to the most recent U.S. census data,
approximately 85% of U.S. households had some form of broadband
internet access in their home in 2018, and 92% had a computer (e.g.,
desktop, laptop, tablet or smartphone). See Michael Martin, Computer
and internet Usage in the United States: 2018, U.S. Census Bureau
(Apr. 21, 2021), available at https://www.census.gov/library/publications/2021/acs/acs-49.html; see also Pew Research Center,
internet/Broadband Fact Sheet (Apr. 7, 2021), available at https://www.pewresearch.org/internet/fact-sheet/internet-broadband/
(``Today, 93% of American adults use the internet.'' and ``Today,
roughly three-quarters of American adults have broadband internet
service at home.''); see also Ani Petrosyan, internet Usage in the
United States--Statistics & Facts, Statista (Aug. 31, 2023),
available at https://www.statista.com/topics/2237/internet-usage-in-the-united-states/#topicOverview (``Today, over 90 percent of
Americans have access to the internet'').
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Use of Statutory Accounting Principles. The proposal would permit
RILA issuers to provide financial statements on amended Form N-4 in the
same way that insurance companies currently do on Form N-4. One
consequence of this change would be that the financial statements filed
in connection with a RILA registration statement could be prepared in
SAP to the same extent as currently permitted for insurance companies'
financial statements filed on that form. The proposed rule would create
a choice for certain insurance companies. They may prepare their
registration statements in SAP, or they may prepare their registration
statements in GAAP. Those insurance companies that expect to benefit
from preparing their registration statements in SAP (e.g., through
reduced costs) would choose SAP. Those insurance companies that do not
expect to benefit from the option to prepare their registration
statements in SAP would continue to prepare their registration
statements in GAAP. Because the proposed rule would, for certain
issuers, create the option, but not the obligation, to prepare their
registration statements in SAP, we do not believe this provision of the
proposed rule would create additional costs.
Filing and Prospectus Delivery Rules. As discussed in section II.E,
when a RILA issuer seeks to amend a RILA registration statement on Form
S-1, the issuer must file a post-effective amendment that is typically
declared effective by Commission staff acting pursuant to delegated
authority on such date as the Commission may determine. To the extent
that investors previously benefited from the Commission staff's review
of these filings before they become effective, allowing filings of RILA
offerings to become automatically effective may eliminate such reviews
and, as a result, possibly increase the costs to investors. However,
issuers would still face liability under the Federal securities laws
for registration statement disclosures (e.g., sections 12 and 17 of the
Securities Act and section 10(b) and rule 10b-5 under the Exchange
Act), which may ameliorate the potential costs associated with reduced
staff review. Moreover, rule 485 only permits updates to become
immediately effective in limited, enumerated circumstances, in order to
provide an opportunity for staff review for all other changes.
As discussed in section II.E.3, we understand that RILA issuers
typically deliver prospectuses to accompany or precede other
communications, such as annuity applications. It is possible that
providing layered disclosure through a summary contract prospectus
regime (including costs of delivering initial summary and updating
summary prospectuses and making statutory prospectuses and other
documents available online) could result in reduced costs for
issuers.\482\
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\482\ See VASP Adopting Release. In the VASP Adopting Release we
estimate that printing and mailing expenses are $0.18 less for
initial and updating summary prospectuses than for statutory
prospectuses. Because we understand RILA prospectuses to not be as
long as variable annuity prospectuses, we would expect savings among
RILA issuers to be less than the VASP Adopting Release savings, but
we do not have a basis for believing savings for RILA issuers will
be of an order of magnitude less than the VASP Adopting Release
savings. We therefore believe savings for RILA issuers will be
between approximately $.02 and $.18. We estimate the internal cost
time of online posting of contract documents to be $772. See infra,
Table 11.
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Materially Misleading Statements in RILA Sales Literature. Issuers
and third parties involved in preparing or disseminating investment
company advertisements may incur costs to comply with the proposed
advertising rule amendments. While reducing the potential for
misleading or fraudulent statements in RILA sales literature would
provide investors with protections and help ensure that investors
receive the information necessary to make informed decisions about
these products, investors could bear the costs of these amendments
through increased expenses that funds would incur to implement the
proposal. Alternatively, if the cost of compliance with these proposed
amendments were significant, some RILAs might reduce advertising to
lower the extra costs of compliance. If this were to occur, investors
who would otherwise rely on advertisements to make investment decisions
about RILAs or compare RILAs with other investment products might have
less complete information for these purposes.
D. Effects on Efficiency, Competition, and Capital Formation
Efficiency. To investors, the costs of purchasing a RILA are more
than just the dollar cost of the contract and include the value of an
individual's time spent evaluating the contract and its various
aspects. Further, for those
[[Page 71163]]
investors who do not gain a full understanding of the contract, there
could be a cost stemming from a potential mismatch between an
investor's goals and the purchased contract. Depending on the size of
an individual's potential purchase, certain of these additional costs
could be considerable in comparison to the monetary costs associated
with contract purchase and could discourage investors from considering
RILAs even in circumstances where investment in a RILA would be
beneficial.
For their part, insurance companies only supply RILAs to the extent
they expect the benefits derived from providing the contracts to be
greater than the costs of supplying the contract. For issuers, costs
include not only those costs associated with producing and servicing
RILAs, but also those costs associated with meeting various statutory
and regulatory obligations.
These costs borne by both insurance companies and individuals are
examples of market ``frictions.'' Market frictions have the effect of
reducing the benefits from (i.e., the efficiency of) contracting
between market participants.\483\ Rules that reduce costs for
investors, issuers, or both, reduce market frictions and potentially
enhance the benefits from contracting between market participants. By
facilitating investor evaluation and comparison of RILAs as well as
facilitating the comparison of RILAs to other annuity contracts, the
proposed rule could reduce frictions for investors. Requiring insurance
companies to use a single registration form and filing process for all
RILAs as well as all variable annuity separate accounts that are
structured as unit investment trusts, as well as allowing RILA issuers
to provide financial statements on amended Form N-4 in the same way
that insurance companies currently do on Form N-4, may also reduce
certain compliance burdens for insurance companies. In addition,
requiring RILA issuers to tag certain key information in Inline XBRL
would enable investors, third-party information providers, Commission
staff, and other data users to capture and analyze that information
more quickly and efficiently than is possible when the same information
is provided solely in a static, text-based format.
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\483\ If market frictions are sufficiently large, market
frictions could eliminate exchange altogether.
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These increases in efficiency could lead investors to save more
appropriately to meet their retirement goals. For example, for existing
RILA investors the proposal may increase the likelihood that investors
choose to invest more or less money in RILAs in a manner that is
consistent with their overall financial needs and objectives--a level
that may be higher or lower than current levels. Similarly, the
proposal may lead existing investors to choose to allocate their money
into different investment options that the RILA offers, or different
RILAs (or other insurance products like variable annuities) that best
meet their needs. The proposal also may help promote investment in
RILAs by investors who currently do not invest in RILAs, to the extent
such investments are appropriate for them. Finally, access to clearer
information about the contract provisions may reduce the chances that
an investor makes mid-crediting period withdrawals or transfers or
surrenders a RILA when the costs of doing so does not justify the
benefits.
Competition. If the proposed rule increases efficiency of exchange
in the RILA market, then we may observe a change in investment in
RILAs. For example, if there are individuals who currently do not
invest in RILAs (or invest less than they would have) because the costs
other than the price of the contract are too high (including the effort
to gain sufficient understanding of the product) or they are not aware
of RILAs as an investment, then to the extent the proposed rule lowers
those costs or makes investor more aware of RILAs, we would expect to
observe more investors entering the RILA market. Conversely, there may
be RILA investors who, because of the burden, choose not to read
statutory prospectuses. To the extent those investors are more likely
to read summary prospectuses, those investors may decide, as a result,
that other investments or products are better suited to their
investment goals. This could result in fewer investments in RILAs. If
there are insurance companies who limit their participation in the RILA
market as a result of the requirement to register RILA offerings on
Form S-1 or Form S-3 or because of the costs of current prospectus
delivery requirements, those insurance companies may increase
participation in the RILA market. To the extent that competition in a
market is related to the size of the market, the net effect of these
potential changes in investor demand for, and issuer supply of, RILAs
could affect competition in the RILA market.
The proposed rule could also affect competition by requiring that
information about RILAs be presented in a concise, user-friendly way,
which could allow investors to compare information across products.
Requiring RILA issuers to tag certain key information in Inline XBRL
could further facilitate comparisons of information across registrants
by making it easier for investors (directly or through third-party data
aggregators) to extract and aggregate information through automated
means for analysis and comparison, which could increase competition
among RILA issuers for investor capital. For example, the proposed rule
requires issuers to distill certain key product information into
tables. The presentation of this information in a table facilitates
evaluation among different RILAs as well as comparison to variable
annuities. Greater comparison among different RILAs as well as
comparison to variable annuities could lead to greater competition.
Furthermore, by reducing the costs associated with aggregating data
across RILAs, the proposed Inline XBRL requirement could reduce
barriers to entry for third-party data aggregators and induce
competition among firms that supply information about RILAs to
investors, including other third-party aggregators and sales agents.
The effect on competition between insurance companies could be
limited, however, to the extent RILA investors rely on an agent to help
them select their RILA contract and the investment options under the
contract and do not have access to broad comparisons across different
RILAs (or among different investment options that the RILA offers) at
the time of sale.\484\ Agents generally only provide their customers
with a subset of all RILAs available in the general marketplace. Thus,
while the product information in summary prospectuses would facilitate
comparison across products offered by the agent, the effect would
likely be limited to the agent's set of products rather than to the
broader market.
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\484\ We do not have data on the extent to which investors rely
on agents when purchasing RILAs. In 2019, $95.5 billion of total
variable annuity sales of $98.3 billion (97%) were through a
distribution channel involving an agent. If investors rely on agents
when purchasing RILAs to the same extent they do when purchasing
variable annuities, then the vast majority of RILA investors rely on
agents when purchasing RILAs.
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Capital Formation. As discussed in connection with the potential
effects of the proposed rule on competition, if the proposed rule
increases the efficiency of exchange in the RILA market, then we may
observe a change in investment in RILAs. As discussed in section
III.B.3, unlike variable annuities that involve a direct investment of
premiums into one or more mutual funds, which in turn invest in
underlying securities, RILA premiums are not directly invested into the
assets of the indexes that are
[[Page 71164]]
associated with the index-linked options offered under the contract,
but are typically invested into fixed-income securities such as
corporate bonds. To the extent that an increase or decrease in the
demand for RILAs is not driven by investors substituting either away
from, or into, variable annuities or other investment vehicles as an
alternative, we would not expect changing demand for RILAs to have any
effect on the underlying securities. An increase or decrease in the
demand for RILAs could, however, increase or decrease the demand for
fixed-income securities such as corporate bonds. To the extent the
proposed rule would cause investors to either substitute away from, or
into, variable annuities or another investment that entail investment
in underlying funds (which, in turn, invest in a portfolio of
securities), there could be an effect on capital formation. If
investors substitute away from variable annuities or other investment
vehicles into RILAs, there could be a reduction in the demand for the
underlying securities and, by extension, a reduction in capital
formation. If investors substitute away from RILAs and into variable
annuities or other investment vehicles, there could be an increase in
the demand for the underlying securities. To the extent issuers invest
RILA proceeds into fixed-income securities such as corporate bonds,
there could be an increase in the demand for those securities.
The proposed Inline XBRL requirements could increase the efficiency
of capital formation to the extent that making disclosures available in
a structured format reduces some of the information barriers that make
it costly for RILA issuers to find appropriate sources of new
investors. Smaller issuers in particular may benefit more from enhanced
exposure to investors. If tagging certain disclosures in a structured
format increases the availability, or reduces the cost, of collecting
and analyzing key information about RILAs, smaller RILA issuers may
benefit from improved coverage by third-party information providers and
data aggregators.
E. Reasonable Alternatives
1. Creating an Entirely New Registration Form for RILAs
The proposed rule would require the registration of RILA offerings
on Form N-4. Most variable annuities use Form N-4, which has disclosure
requirements tailored to these investments that provide investors with
key information about a variable annuity's terms, benefits, and risks
in a concise and reader-friendly presentation. Currently, insurance
companies register RILA offerings on Forms S-1 or S-3, which allow
registering general debt or equity offerings. Forms S-1 and S-3 require
issuers to disclose not only information about the offering itself, but
also extensive information about the registrant issuing the securities.
In addition, registrants must include financial statements prepared in
accordance with GAAP, unless an exemption has been granted pursuant to
17 CFR 210.3-13 that permit insurance companies to substitute SAP
financials in lieu of GAAP financials. Form N-4, on the other hand,
allows insurance companies to file financial statements prepared in
accordance with SAP if they do not otherwise prepare GAAP financial
statements. As an alternative, we could have required insurance
companies to register RILA offerings on an entirely new form.
Form N-4 was designed for investment companies, and RILA issuers
are not investment companies. A new form specifically tailored to RILAs
could be more beneficial than working to fit them into an existing
framework that was designed with a different structure in mind.
A completely new registration form for RILA offerings could
negatively affect investors' ability to compare different RILAs with
variable annuities that register on Form N-4 (including ``combination''
contracts that offer index-linked options as well as variable options).
Furthermore, given that we are proposing to amend Form N-4 to address
those aspects specific to RILAs, but many of the current form
requirements are relevant to the registration of RILA offerings, a
completely new and separate form for RILAs would not offer much (if
any) benefit to investors in terms of new information compared to the
proposed amendments to Form N-4. Since most variable annuity issuers
already use Form N-4 to register their securities, and many RILA
contracts are offered as ``combination'' contracts, the amended Form N-
4 would efficiently provide investors with product-specific information
about these combination contracts. As a result, investors would be able
to compare annuity products, and the investment options that these
products offer, with less time and effort. To the extent that investors
use less time and effort to compare annuity products and their
underlying investment options, investors may be more likely to make
decisions that align better with their investment goals.
We preliminarily believe that requiring RILA offerings to be
registered on Form N-4 rather than on an entirely new form would also
be more efficient for insurance companies since they would generally
follow the same procedures they already use for the registration of
variable annuities. Using Form N-4 to register variable annuities and
RILA offerings would also be less costly for insurance companies than
using Form N-4 for variable annuities and a completely new form for
RILAs since registrants are already familiar with Form N-4. It also
would be less costly because, if RILA offerings had to be registered on
a form other than Form N-4, combination contracts offering variable
options and index-linked options would have to use two separate
registration forms.
Commission staff would also benefit from using Form N-4 for RILAs
because the disclosure requirements for variable annuities and RILAs
would be located in one form only, and registration statements for
these products would be subject to the same filing and review
processes. This would reduce the use of resources by Commission staff
needed to review the registration statements of RILAs and variable
annuities.
2. Alternatives to Specific Form N-4 Amendments
The Commission is proposing amendments to Form N-4 so that
insurance companies can register RILA offerings using that form. While
the substance of many of the requirements in Form N-4 would not change
from the current version of the form, we are proposing to update some
items to include disclosures specifically tailored to RILAs. In certain
limited circumstances, we have changed the disclosure requirements
provided on the form for all filers, including those registering
variable annuities.
As an alternative, we could have proposed more or less tailoring
the form for RILAs. A larger number of amendments tailored to RILAs
than the number we propose would be more costly for insurance companies
registering RILA offerings because insurance companies that offer
combination contracts (or that otherwise register variable annuities on
Form N-4) would have to make more changes to their disclosure. For
example, we could have required insurance companies to provide a
diagram in the KIT to illustrate surrender charges and contract
adjustments during different time periods of the contract, or
illustrations showing how caps, floors, and/or buffers could affect an
investor's returns across different market scenarios.
Also, we could require insurance companies to provide information
related to the economic tradeoffs
[[Page 71165]]
associated with index-linked options. For example, we could require the
insurance company to compare a hypothetical investment in the index-
linked option to the value, or cost, of a combination of (i)
derivatives that would provide the index-linked option's investment
exposure; (ii) a fixed-income component; and (iii) the standard
insurance features offered with the index-linked option, similar to the
analysis in the Moenig Paper and the analysis conducted by the staff in
section III.B.3.\485\ In such a comparison, we could either require
that the insurance company should use the hypothetical investment
discounted by the rate of interest the insurance company is crediting,
or would credit, on fixed annuities with a term equal to the duration
of the crediting periods of the index-linked option, or we could
require the insurance company to use the value of a risk-free zero-
coupon bond with a time to maturity equal to the crediting period of
the index-linked option, consistent with our analysis in section
III.B.3.\486\ We could also consider requiring additional disclosure
related to the setting of early withdrawal charges or penalties and
their impact on such a comparison of hypothetical investments. For
example, we could require the calculation of a disclosure similar to
the analysis in the Moenig Paper and the analysis conducted by the
staff in section III.B.3 to explicitly include the impact of early
withdrawal charges or penalties on the liquidity of the investment. We
could also require more prominent placement of these features on
marketing or other materials, or we could require a comparison of these
features to potential benefits of the RILA to clarify for investors
possible trade-offs.
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\485\ See supra section II.B.3.b.
\486\ Id.
---------------------------------------------------------------------------
Conversely, a smaller number of amendments tailored to RILAs than
the number we propose would be less costly for insurance companies.
Since insurance companies already use Form N-4 to register variable
annuities, and most RILA issuers offer variable annuities registered on
Form N-4 (including, in many cases, combination contracts), we
preliminarily believe that the costs of complying with the disclosure
requirements of the amended form would not be substantial.
The amendments to Form N-4 that we propose would promote investor
understanding of RILA contracts by presenting information in a clear
and concise manner. Proposing a larger number of amendments tailored to
RILAs may add too much, or less relevant, information, which may
overwhelm investors who may not have the time or capacity to process
all the information.\487\ Proposing only a subset of amendments
tailored to RILAs, as compared with the proposed approach, could result
in less investor understanding relative to the understanding resulting
from the proposed amendments.
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\487\ See, e.g., Julie R. Agnew and Lisa R. Szykman (2005).
Asset Allocation and Information Overload: The Influence of
Information Display, Asset Choice, and Investor Experience, Journal
of Behavioral Finance, 6(2), 57-70, and Alejandro Bernales, Marcela
Valenzuela and Ilknur Zer (2023). Effects of Information Overload on
Financial Markets: How Much Is Too Much? International Finance
Discussion Papers 1372, Washington: Board of Governors of the
Federal Reserve System.
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3. Require the Use of Form N-4 for Registered MVAs
As discussed above, while we are not proposing to require insurance
companies to register offerings of registered MVAs on Form N-4, one
alternative would have been requiring insurance companies to register
the offering of registered MVAs on Form N-4.\488\ These offerings are
currently registered on Forms S-1 or S-3 but differ from RILAs only
with respect to the manner in which interest is calculated and
credited.\489\ As a result, many of the benefits and costs identified
above regarding RILAs would also be true in applying the same
registration and disclosure framework to offerings of registered MVAs,
including potentially a change to the filing fee process to file on
Form 24f-2 and requiring the issuers to follow rule 156. For example,
as with RILAs, expanding the scope of Form N-4 to include registered
MVAs would benefit investors by making it easier for them to compare
registered MVAs, and also compare registered MVAs with other annuity
product offerings registered using Form N-4.\490\ In particular,
because both RILAs and registered MVAs include contract adjustments,
the inclusion of specified disclosures about contract adjustments would
benefit investors since they would be able to better evaluate the costs
of purchasing and owning annuity contracts, including registered MVAs.
Requiring the registration of registered MVAs on Form N-4 also would
entail efficiency benefits to insurance companies that offer
combination contracts, for example ones that include both variable
annuities registered on Form N-4 and registered MVAs, as the use of the
same registration form for all of these products may reduce these
companies' compliance burdens.
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\488\ See supra section II.H.
\489\ Based on internal estimates, there are 45 registered MVAs
from 15 different insurance companies. 27 of these registered MVAs
are in combination contracts whereas 18 are standalone. 27 of these
registered MVAs use Form S-1 and 18 use Form S-3. Lastly, 26 of
these registered MVAs use GAAP financials and 19 use SAP.
\490\ See supra section III.C.1.
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Conversely, including registered MVAs on Form N-4 would also entail
similar costs to those outlined above for the proposed registration and
disclosure approach for RILAs. These would include direct costs to the
insurance company, for example filing fees, as well as outside legal
and account fees. Direct costs also would include costs associated with
filing the first Form N-4 registration statement in connection with the
registration of a registered MVA offering, where the insurance company
would be required to familiarize itself with the new registration form
and may need to configure its systems to efficiently gather the
required information. Further, investors would bear certain indirect
costs, such as the cost of adapting to new materials and the changes in
the presentation of information.
Ultimately, we determined not to propose to require insurance
companies to register offerings of registered MVAs on Form N-4 at this
time, but we request comment on this reasonable alternative.
4. Limiting Scope of Structured Data Requirements
The proposed rule would require many of the newly added disclosures
on Form N-4 to be tagged in Inline XBRL, and also would require RILA
issuers to tag those prospectus disclosures that Form N-4 currently
requires to be tagged. Alternatively, the Commission could have limited
the tagging requirement to only those disclosures being added to Items
of Form N-4 that are already tagged in Inline XBRL.\491\ Under this
alternative, disclosures relating to: the overview of the contract; the
description of the Insurance company, registered separate account, and
investment options; charges; purchases and contract value; purchase of
securities being offered; disagreements with and changes to
accountants; information about contracts with index-linked options and
fixed options subject to a contract adjustment; and fee representations
and undertakings would not be tagged.
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\491\ See supra footnote 451.
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Limiting the scope of tagging requirements in this manner would
result in reduced compliance burdens for insurance companies, which
would be required to apply fewer tags to their
[[Page 71166]]
disclosures on Form N-4 filings. However, the alternative would also
remove the informational benefits associated with making those
disclosures available in a machine-readable manner. Furthermore,
because Form N-4 filers already have Inline XBRL tagging obligations
with respect to certain of the form's disclosure requirements, the
burden reductions resulting from such an alternative would be limited.
F. Request for Comment
Throughout this release, we have discussed the anticipated benefits
and costs of the proposed rule and its potential effect on efficiency,
competition, and capital formation. While we do not have comprehensive
information on all aspects of RILA registration and reporting, we are
using the data currently available in considering the effects of the
proposed rule. We request and encourage any interested person to submit
comments regarding the proposed rule, our analysis of the potential
effects of the rules and other matters that may have an effect on the
proposed rules. We request that commenters identify sources of data and
information with respect to annuity contracts in general, but also with
respect to RILAs in particular, as well as provide data and information
to assist us in analyzing the economic consequences of the proposed
rules. We are also interested in comments on the qualitative benefits
and costs we have identified and any benefits and costs we may not have
discussed. We urge commenters to be as specific as possible.
Comments on the following questions are of particular interest.
153. What additional qualitative or quantitative information should
be considered as part of the baseline for the economic analysis of
these amendments?
154. Are the benefits and costs of proposed amendments accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account? If possible, please offer ways of estimating these benefits
and costs. What additional considerations can be used to estimate the
benefits and costs of the proposed amendments?
155. To the extent commenters believe any specific additional data
sources would help better quantify the benefits and costs of the
proposal, we request that commenters provide this data. In particular,
the following data could be particular informative: historical
information about current limits on index gains associated with the
index-linked options offered under a RILA, quantitative data about
contract adjustments incurred by investors who make withdrawals from an
index-linked option or from a RILA contract before the end of a
specified period, and/or data regarding the frequency with which RILA
contracts are annuitized.
156. Are the effects on competition, efficiency, and capital
formation arising from the proposal accurately characterized? If not,
why not?
157. Are there any other reasonable alternatives to the proposed
new rule that should be considered? Are there any additional benefits
or costs that should be associated with the reasonable alternatives
considered?
158. We indicate that insurance companies benefit from the sale of
RILAs in at least three ways. First, insurance companies can benefit
from a favorable imbalance between the downside protections that a RILA
contract offers, and the upside caps the contract offers. Second,
insurance companies invest RILA proceeds into fixed-income securities
such as corporate bonds, thereby earning a ``credit risk premium.''
Finally, insurance companies can benefit when a RILA offers index-
linked options whose index for measuring performance is a price-based
index that does not account for dividend payments. Are we correct in
our characterization of how insurance companies benefit from the sale
of RILAs? In what other ways, if any, do insurance companies benefit
from the sale of RILAs?
159. We characterize RILAs as combining features of fixed-index
annuities and variable annuities--limiting or reducing downside risk in
return for an investor accepting capped upside performance. In exchange
for giving up the complete protection of principal offered by fixed
annuities, a RILA investor is afforded greater upside potential than
that provided by fixed annuities, though typically less than the
potential upside of a variable annuity. Is our characterization of
RILAs, compared to other annuity products, correct? If not, how do
RILAs compare to other annuity products?
160. In Section III.B.3, we analyze the imbalance between the
downside protections that a RILA contract offers, and the upside limits
the contract offers. Does our analysis reflect a risk-neutral valuation
for a RILA with a cap and buffer or floor? What alternative
considerations should we include in calculating such a valuation? Do
the methodological assumptions (such as generating prices through the
linear interpolation of implied volatilities) create significant bias
or other problems for the analysis? How do RILAs set surrender charges
or other early withdrawal charges or penalties, and should these
charges or penalties be considered when performing this calculation
since they reduce the liquidity of the investment? Should we require
additional disclosure related to early withdrawal charges, fees, or
penalties? For example, should we require more prominent placement of
these features on marketing or other materials, or should we require a
comparison of these features to potential benefits of the RILA to
clarify for investors possible trade-offs? Are there other data sources
(e.g., pricing vendors) that should be considered for these
calculations? Are there certain time periods or types of contracts that
we should consider when doing these or similar calculations? What
considerations should be used in assessing whether the cost derived in
our analysis is large or small? Also, are other measures related to the
economic content of downside protections and upside limits that would
be beneficial for investors?
161. We indicate that for shorter crediting periods and for common
indexes such as the S&P 500, issuers are able to use exchange traded
derivative securities to closely approximate the issuer's liabilities
from a RILA contract at the end of each crediting period. Do issuers
use exchange derivative securities to approximate the issuer's
liabilities from a RILA contract? If not, how do issuers use the
proceeds from RILA sales?
162. Under the proposed rule, to what extent would insurance
companies choose to meet their disclosure obligation by providing
investors with summary prospectuses while making statutory and other
documents available on a website? As discussed above, we expect the
vast majority of investors will have the option to use both summary
prospectuses and statutory prospectuses in their decision-making, in
whatever proportion investors think is best for their preferences. To
what extent would investors in RILA contracts whose issuers elect to
rely on rule 498A request to receive statutory prospectuses in paper or
electronically, or seek access to statutory prospectuses online?
163. Would any positive or negative effect of the proposed rule on
investors be disproportionately greater for certain investors than for
others? If so, which investors would be disproportionately affected, to
what extent, and how would such effects manifest? What, if any,
additional measures could help mitigate any such disproportionate
effects?
[[Page 71167]]
Please provide supportive data to the extent available.
164. To what extent might reduced burdens (e.g., using SAP
accounting rather than GAAP accounting) borne by issuers be passed on
to existing investors? Under what circumstances, and in what form,
would insurance companies pass benefits through to existing investors?
165. To what extent would the proposed rule affect the ability of
investors to understand the investment risks of RILAs and to
efficiently allocate capital? Would investors be more likely to
allocate additional capital to RILAs? What would be the effect on
issuer competition for investor capital?
166. To what extent would investors realize benefits from Inline
XBRL tagging requirements for certain newly added disclosures on Form
N-4, as opposed to tagging requirements for only those disclosures
within currently tagged Form N-4 Items? How would this approach affect
costs for insurance companies? Would there be any cost saving?
167. To what extent would an increase or decrease in the demand for
RILAs be driven by investors substituting either away from, or into,
variable annuities or other investment vehicles? We assume that if
investors do substitute away from, or into, variable annuities or other
investment vehicles into RILAs, that the effect on capital formation
would be small. Is our assumption correct? If not, why would the effect
on capital formation be larger than what we assumed?
IV. Paperwork Reduction Act
We are proposing amendments to several rules and forms that would
modify the registration, offering, and communications processes for
RILAs under the Securities Act. We are also proposing amendments to
Form N-4 and related rules that would apply to all issuers of that
form.\492\ The proposed amendments, if adopted, would implement the
requirements relating to RILAs in the RILA Act.\493\ The proposed
amendments would have an impact on the current collections of
information burdens under the Paperwork Reduction Act of 1995 (``PRA'')
of the following rules and forms: Rule 498A, Form N-4, Investment
Company Interactive Data, and Form 24F-2. The titles for the existing
collections of information are: (1) ``Rule 498A Summary Prospectus for
Variable Annuity and Variable Life Insurance Contracts'' (OMB Control
No. 3235-0765), which we would retitle to ``Rule 498A Summary
Prospectus for Variable and Index-Linked Annuity and Variable Life
Insurance Contracts;'' (2) ``Form N-4, Registration Statement of
Separate Accounts Organized as Unit Investment Trust'' (OMB Control No.
3235-0318), which we would retitle to ``Form N-4, Registration
Statement of Separate Accounts Organized as Unit Investment Trust or of
Index-Linked Annuity Contracts;'' (3) ``Annual Notice of Securities
Sold Pursuant to Rule 24f-2.'' (OMB Control No. 3235-0456), which we
would retitle to ``Annual Notice of Securities Sold Pursuant to 17 CFR
270.24f-2 or 230.456(e);'' and (4) ``Investment Company Interactive
Data'' (OMB Control No. 3235-0642).
---------------------------------------------------------------------------
\492\ We are proposing amendments rules 485 and 497 of
Regulation C (OMB Control No. 3235-0074), which describes the
procedures to be followed in preparing and filing registration
statements with the Commission, and rule 405 of Regulation S-T (OMB
Control No. 3235-0424), which specifies the requirements that govern
the electronic submission of documents. The proposed amendments
would require RILA issuers to tag specified information in
registration statements filed on Form N-4 or post-effective
amendments thereto, as well as in forms of prospectuses filed
pursuant to rule 497(c) or 497(e) under the Securities Act that
include information that varies from the registration statement
using Inline XBRL These burdens are included in our estimates for
the Investment Company Interactive Data collection of information
discussed in section IV.D below.
\493\ See Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
---------------------------------------------------------------------------
The Commission is submitting these collections of information to
OMB for review and approval in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The hours and costs associated with preparing and filing
the forms constitute reporting and cost burdens imposed by each
collection of information. 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 OMB control number. We discuss
below the collection of information burdens associated with proposed
amendments to rule 498A and Investment Company Interactive Data, as
well as Forms N-4 and 24F-2, which are filed with the Commission and
are not kept confidential. A description of the proposed amendments,
including the need for the information and its proposed use, as well as
a description of the likely respondents, can be found in Section II
above, and a discussion of the economic effects of the proposed
amendments can be found in Section III above.
A. Rule 498A
We are proposing to amend rule 498A to permit RILA issuers, as well
as issuers of ``combination contracts'' offering a combination of
index-linked options and variable options, to use a summary prospectus
to satisfy statutory prospectus delivery obligations. Consistent with
current rule 498A, the proposed use of summary prospectuses for RILAs
would be voluntary, but the rule's requirements would be mandatory for
issuers that elect to send or give a summary prospectus in reliance
upon proposed rule 498A. We are also proposing to make certain
amendments to Form N-4 that would affect the variable annuity summary
prospectuses currently provided to investors. The proposed amendments
to rule 498A are part of a layered disclosure approach that is designed
to provide investors with a summary prospectus to help them make
informed investment decisions regarding RILAs, as discussed in more
detail above. These amendments would result in a change in our estimate
of the burdens associated with this collection of information,
specifically to account for these additional requirements for issuers
that use rule 498A currently and to add RILAs to the estimates.
The respondents to these collections of information would be RILA
issuers and registered variable annuity separate accounts. The
information provided under rule 498A will not be kept confidential.
In our most recent Paperwork Reduction Act submission for Rule
498A, we estimated for rule 498A a total aggregate annual hour burden
of 14,688 hours, and a total aggregate annual external cost burden of
$11,559,420.\494\ We estimate that 90 RILAs would be registered using
Form N-4 if the proposal was adopted and that that there are 419
registrants on current Form N-4 that would be impacted by the proposed
amendments.\495\ The summary prospectus is voluntary, so the percentage
of RILA issuers that will choose to utilize it is uncertain. Given this
uncertainty, we have assumed that insurance companies will choose to
use a summary prospectus for 90% of all RILAs, which is the same as our
current estimate for variable annuity separate accounts. The table
below summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to rule 498A.
---------------------------------------------------------------------------
\494\ On Nov. 13, 2020, the Office of Management and Budget
approved this collection of information estimate for rule 498A.
\495\ The RILA estimate is based on a review of RILA
registration statements filed with the Commission as of May 2023 and
the current Form N-4 registrants estimate is based on Form N-CEN
reports through Apr. 15, 2023.
[[Page 71168]]
Table 11--Rule 498A PRA Estimates
----------------------------------------------------------------------------------------------------------------
Internal Internal Annual
initial burden annual burden Wage rate \2\ Internal time external cost
hours hours costs burden
----------------------------------------------------------------------------------------------------------------
Proposed Estimates
----------------------------------------------------------------------------------------------------------------
Separate Account Registrants
----------------------------------------------------------------------------------------------------------------
Proposed Amendments.......... \1\ 9 \1\ 6 $425 (compliance $2,550 ..............
attorney).
Number of registrants \3\.... .............. x 419 x 419 ..............
Total annual burden.......... .............. 2,514 $1,068,450 ..............
Use of summary prospectus.... .............. x 90% x 90% ..............
Total new annual burden for .............. 2,262.60 $961,605 ..............
Reliance on Rule 498A.
----------------------------------------------------------------------------------------------------------------
RILA Registrants
----------------------------------------------------------------------------------------------------------------
Preparation and filing of 40 \4\ 24.67 $313 (blended $7,709.38 \8\ $5,000
Initial Summary Prospectus/ rate) \5\.
Updating Summary Prospectus.
Online Posting of Contract 2 \6\ 2.67 $289 (webmaster) $771.63 ..............
Documents.
Total burden per registrant.. .............. 27.34 8,481.01 $5,000
Number of registrants \7\.... .............. x 90 x 90 x 90
Total annual burden.......... .............. 2,460.60 $763,290.90 $405,000
Use of summary prospectus.... .............. x 90% x 90% x 90%
Total new annual burden for .............. 2,214.54 $686,961.81 $364,500
Reliance on Rule 498A.
----------------------------------------------------------------------------------------------------------------
Estimates for Printing and Mailing by RILA Registrants \9\
----------------------------------------------------------------------------------------------------------------
Initial Summary Prospectus...................................................................... $120,000
Updating Summary Prospectus..................................................................... $1,048,000
Total annual burden............................................................................. $1,168,000
Use of summary prospectus....................................................................... x 90%
Total new annual burden for Reliance on Rule 498A............................................... $1,051,200
----------------------------------------------------------------------------------------------------------------
Total Burdens
----------------------------------------------------------------------------------------------------------------
Responses Internal Internal External
hour hour cost cost
estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 676 14,688 $3,900,193 $11,559,420
burden estimates.
Aggregate proposed additional \10\ + 83 + 4,477.14 + 1,648,566.81 + $1,415,700
annual burden estimates.
Revised aggregate annual = 759 = 19,165.14 = 5,548,759.81 = $12,975,120
burden estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Burden estimates also include the burden associated with the proposed amendments for separate account
registrants that use a notice document as part of the modernized alternative disclosure framework in
connection with discontinued variable annuity contracts. See VASP Adopting Release at section II.E. Internal
annual burden hours represents initial burden estimates annualized over a three-year period plus three hours
of on-going annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets Association's Office Salaries in the
Securities Industry 2013. The estimated wage figures are modified by Commission staff to account for an 1,800-
hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and
adjusted to account for the effects of inflation. See Securities Industry and Financial Markets Association,
Report on Management & Professional Earnings in the Securities Industry 2013 (as adjusted to account for
inflation, the ``SIFMA Wage Report'').
\3\ Estimate is based on a review of N-CEN reports through Apr. 15, 2023. In its most recently approved PRA
submission, the Commission estimated that 426 registrants on Form N-4 would be subject to the information
collection burden under current rule 498A. For the estimated burden of the proposed amendments to rule 498A,
we have taken into account updated data regarding the number of registrants on Form N-4.
\4\ Represents initial burden estimates annualized over a three-year period plus 11 hours of ongoing annual
burden hours.
\5\ Represents a blended wage rate of a compliance attorney ($425 per hour) and an intermediate accountant ($200
per hour). $313 is based on the following calculation: ($425 + $200)/2 = $313 rounded to the nearest whole
dollar.
\6\ Represents initial burden estimates annualized over a three-year period plus two hours of ongoing annual
burden hours.
\7\ This estimate is based on the number of RILAs, as estimated through review of RILA registration statements
filed with the Commission as of May 2023.
\8\ We estimate that each insurance company that chooses to rely on rule 498A with regards to a RILA will incur
a one-time collective external cost burden of $10,000 per registration statement to prepare both a new initial
summary prospectus and a new updating summary prospectus for offerings on Form N-4. We also estimate an on-
going collective burden of $2,500 per registration statement during each subsequent year to prepare updates to
these materials. The three-year average cost of these estimates is $5,000.
\9\ Costs associated with printing and mailing for separate account registrants are already accounted for in the
currently approved burdens for rule 498A. Estimates for RILA issuers printing and mailing costs are based on
the currently approved burdens for printing and mailing costs under rule 498A.
\10\ The estimated number of new responses is based on the total of the number of RILA responses under the
proposed amendments (90 responses) and the difference between the number of responses for registered separate
accounts under the current aggregate annual burden estimate (426 responses) and the proposed additional annual
burden estimates (419 responses). (90 RILA responses subtracted by 7 registered separate account responses).
B. Form N-4
Under the proposed amendments, RILA issuers would register
offerings on Form N-4, as amended to address the features and risks of
RILAs. We are also proposing other amendments to Form N-4 that would
apply to all issuers that use that form. For example, we are proposing
to switch the order of the Key Information Table and Overview of the
Contract items, require issuers to present information in the KIT in a
Q&A format, and to require more specific principal risk disclosures.
These amendments would result in a change in our estimate of the
burdens associated with this collection of information, specifically to
account for these additional requirements for issuers that use Form N-4
currently and to add RILAs to the estimates.
Form N-4 generally imposes two types of reporting burdens on
issuers that use the form: (1) the burden of preparing and filing the
initial registration statement; and (2) the burden of preparing and
filing post-effective amendments to a previously effective registration
statement. In our most recent Paperwork Reduction Act submission for
Form N-4, we estimated for Form N-4 a total aggregate annual hour
burden of 292,487 hours, and a total aggregate annual external cost
[[Page 71169]]
burden of $33,348,866.\496\ Compliance with the disclosure requirements
of Form N-4 is mandatory, and the responses to the disclosure
requirements will not be kept confidential. The respondents to these
collections of information would be RILA issuers and registered
variable annuity separate accounts. The purpose of the information
collection requirements on Form N-4 are to meet the filing and
disclosure requirements of the Securities Act and Investment Company
Act, as applicable, and to provide investors with information necessary
to evaluate an investment in an offering of securities registered on
the form.
---------------------------------------------------------------------------
\496\ On Oct. 26, 2021, the Office of Management and Budget
approved without change this burden estimate.
---------------------------------------------------------------------------
We estimate that 90 RILA respondents and 419 separate account
registrants would be subject to collection of information requirements
under the proposed amendments to Form N-4.\497\ The table below
summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to Form N-4.
---------------------------------------------------------------------------
\497\ For RILA registrants, this estimate is based on a review
of RILA registration statements filed with the Commission as of May
2023. For separate account registrants, this amount is based on Form
N-CEN reports through Apr. 15, 2023.
Table 12--Form N-4 PRA Estimates for Initial Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Internal Internal Annual
initial burden annual burden Wage rate \2\ Internal time external cost
hours hours costs burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Separate Account Registrants
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments............................. 12 \1\ 14 $406 (blended rate for compliance $5,684 ..............
attorney and senior programmer)
\3\.
Estimated number of annual responses \4\........ .............. x 42 .................................. x 42 ..............
Total new annual burden......................... .............. 588 .................................. $238,728 ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
RILA Issuers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments to Form N-4................. 300 \5\ 390.89 $406 (blended rate for compliance $158,701.34 \8\ $40,000
attorney and senior programmer)
\3\.
Website availability requirement \6\............ .............. 0.5 $286 (webmaster).................. $143 ..............
Estimated number of annual responses \7\........ .............. x 20 .................................. x 20 x 20
Total new annual burden......................... .............. 7,827.80 .................................. $3,176,886.80 $800,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Responses Internal hour Internal hour cost External cost
estimate estimate estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates....... 30 8,427 .................................. $2,494,716 $754,740
Aggregate proposed additional annual burden \9\ + 32 + 8,416.80 .................................. + $3,416,614.80 + $800,000
estimates.
Revised aggregate annual burden estimates....... = 62 = 16,843.80 .................................. = $5,911,330.80 = $1,554,740
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period, plus 10 hours of ongoing annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation.
\3\ The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386).
$406 is based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
\4\ The estimate of the annual number of registration statements filed on Form N-4 is based on the average annual number of filings received by the
Commission over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the Commission estimated that
separate accounts will make approximately 30 initial registration statement filings per year. For the estimated burden of the proposed amendments to
Form N-4, we have taken into account updated data regarding the number of initial filings on Form N-4.
\5\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 290.89 hours of ongoing annual burden hours.
The ongoing annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N-4 plus 10 hours of
ongoing annual burden hours.
\6\ The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites.
See Item 17 of proposed Form N-4.
\7\ This estimate is based on a review of Morningstar data regarding the number of new RILA product launches that occurred over the prior three calendar
years (2020-2022), rounded to the nearest ten. Current RILA registration statements would make their first filing on proposed Form N-4 as a post-
effective amendment. See supra footnote 195 and accompanying text.
\8\ We estimate that the external cost to prepare and file an initial registration statement on Form N-4 is $40,000 per filing.
\9\ The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (20 responses) and the
difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (30 responses) and the
proposed additional annual burden estimates (42 responses). (20 RILA responses plus 12 registered separate account responses).
Table 13--Form N-4 PRA Estimates for Post-Effective Amendment Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours costs cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Separate Account Registrants
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments............................. 12 \1\ 6 $406 (blended rate for compliance $2,436 ................
attorney and senior programmer)
\3\.
Estimated number of annual responses \4\........ .............. x 1,016 .................................. x 1,016 ................
Total new annual burden......................... .............. 6,096 .................................. $2,474,976 ................
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 71170]]
RILA Issuers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed amendments to Form N-4................. 210 \5\ 279.95 $406 (blended rate for compliance $113,659.70 \8\ $24,000
attorney and senior programmer)
\3\.
Website availability requirement \6\............ .............. 0.5 $286 (webmaster).................. $143 ................
Estimated number of annual responses \7\........ .............. x 90 .................................. x 90 x 90
Total new annual burden......................... .............. 25,240.50 .................................. 10,242,243 $2,160,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Responses Internal hour .................................. Internal hour External cost
estimate cost estimate estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates....... 1,366 + 284,060 .................................. $84,100,454 + $32,594,126
Aggregate proposed additional annual burden \9\-260 + 31,336.50 .................................. + $12,717,219 + $2,160,000
estimates.
Revised aggregate annual burden estimates....... = 1,106 = 315,369.50 .................................. = 96,817,673 = $34,754,126
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period, plus two hours of on-going annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage figures are modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation.
\3\ The $406 wage rate reflects current estimates of the blended hourly rate for an in-house compliance attorney ($425) and a senior programmer ($386).
$406 is based on the following calculation: ($425 + $386)/2 = $406 rounded to the nearest whole dollar.
\4\ The estimate of the annual number of post-effective amendments to registration statements on Form N-4 is based on the average annual number of
filings received by the Commission over the past three years (Jan. 1, 2020 to Dec. 31, 2022). In its most recently approved PRA submission, the
Commission estimated that separate accounts will make approximately 1,366 post-effective amendment filings per year on Form N-4. For the estimated
burden of the proposed amendments to Form N-4, we have taken into account updated data regarding the number of post-effective amendment filings on
Form N-4.
\5\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 207.95 hours of ongoing annual burden hours.
The ongoing annual burden is estimated to be equal to the currently approved ongoing annual burden for initial filings on Form N-4 plus an addition 2
hours of ongoing annual burden hours.
\6\ The proposed amendments would require RILA issuers to separately to include information about current contract limits on gains on their websites.
See Item 17 of proposed Form N-4.
\7\ This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
\8\ We estimate that the external cost to prepare and file a post-effective registration statement on Form N-4 is approximately $24,000 per filing.
\9\ The estimated number of new responses is based on the total of the number of RILA responses under the proposed amendments (90 responses) and the
difference between the number of responses for registered separate accounts under the current aggregate annual burden estimate (1,366 responses) and
the proposed additional annual burden estimates (1,016 responses). (90 RILA responses subtracted by 350 registered separate account responses).
Table 14--Total Burden Estimates for Form N-4
----------------------------------------------------------------------------------------------------------------
Internal
Responses annual burden Internal time Annual external
hours \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
Total Burden Estimates Including Amendments
----------------------------------------------------------------------------------------------------------------
Current aggregate annual burden estimates. 1,366 292,487 $86,595,170 $33,348,866
Aggregate proposed additional annual -228 + 39,753.30 + + $16,133,833.80 + $2,914,740
burden estimates.........................
Revised aggregate annual burden hours..... = 1,168 = 332,240.30 = $102,729,004 = $36,263,606
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ This estimate includes the initial burden estimates annualized over a three-year period.
C. Form 24F-2
Under the proposed amendments, insurance companies would be
required to pay applicable securities registration fees relating to
RILAs in arrears on Form 24F-2. Consistent with the other elements of
this proposal, these proposed amendments are designed to require
insurance companies to use the same framework to pay securities
registration fees for RILAs that they do for variable annuities. Form
24F-2 is the annual notice of securities sold by certain funds that
accompanies the payment of registration fees with respect to the
securities sold during the fiscal year, net of securities redeemed or
repurchased during the year. Compliance with Form 24F-2 is mandatory.
Responses to this form are not kept confidential.
In our most recent Paperwork Reduction Act submission for Form 24F-
2, we estimated for Form 24F-2 a total aggregate annual hour burden of
27,176 hours, and a total aggregate annual external cost burden of
$0.\498\ The likely respondents to the proposed amendments would
include RILA issuers and current Form 24F-2 filers, which open-end
investment companies, unit investment trusts, registered closed-end
investment companies that make periodic repurchase offers under 17 CFR
270.23c-3, and face-amount certificate companies. We estimate that 90
RILA respondents would be subject to these proposed amendments and
would file one Form 24F-2 filing each per year.\499\ The table below
summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to Form 24F-2.
---------------------------------------------------------------------------
\498\ On May 14, 2021, the Office of Management and Budget
approved this burden estimate.
\499\ This estimate is based on a review of RILA registration
statements filed with the Commission as of May 2023. We do not
believe that the proposed amendments to Form 24F-2 will affect the
estimated burdens associated with current Form 24F-2 filers. We have
not amended the currently approved burdens for current Form 24F-2
filers with more recent data for the purposes of this PRA estimate.
[[Page 71171]]
Table 15--Form 24F-2 PRA Estimates
----------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours costs cost burden
----------------------------------------------------------------------------------------------------------------
Proposed Estimates
----------------------------------------------------------------------------------------------------------------
Clerical work to file Form 3 \1\ 3 $82 (compliance $246 $0
24f-2. clerk).
Submission in a structured 3 \1\ 3 $316 $948 $0
data format. (programmer).
Total annual burden per .............. 6 ............... $1,194 .................
response.
Number of annual responses .............. x 90 ............... x 90 x 90
\3\.
Total new annual burden..... .............. 540 ............... $107,460 $0
----------------------------------------------------------------------------------------------------------------
Total Estimated Burdens Including Amendments
----------------------------------------------------------------------------------------------------------------
Responses Internal Internal time Annual external
annual burden costs cost burden
hours
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 6,794 27,176 ............... $4,633,508 $0
burden.
Aggregate proposed + 90 + 540 ............... + $107,460 + $0
additional annual burden
estimates.
Revised aggregate burden = 6,884 = 27,716 ............... = $4,140,968 = $0
estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The proposed estimate includes the initial burden estimates annualized over a three-year period, plus 2
hours of ongoing annual burden hours.
\2\ The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report. The estimated wage
figures are modified by Commission staff to account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation.
\3\ This estimate is based on a review of RILA registration statements filed with the Commission as of May 2023.
D. Investment Company Interactive Data
The Investment Company Interactive Data collection of information
references current requirements for certain registered investment
companies and BDCs to submit to the Commission in Inline XBRL certain
information provided in response to specified form and rule
requirements included in their registration statements and Exchange Act
reports. We are proposing amendments to Form N-4, as well as rule 405
of Regulation S-T, that would require certain new structured data
reporting requirements for RILA issuers.\500\ The proposed amendments
would require RILA issuers to tag specified information in registration
statements filed on Form N-4 or post-effective amendments thereto, as
well as in forms of prospectuses filed pursuant to rule 497(c) or
497(e) under the Securities Act that include information that varies
from the registration statement using Inline XBRL.\501\ The purpose of
the information collection is to make information regarding RILAs
easier for investors to analyze and to help automate regulatory filings
and business information processing, and to improve consistency across
all types of investment products offered on Form N-4 with respect to
the accessibility of information they provide to the market.
---------------------------------------------------------------------------
\500\ The Investment Company Interactive Data collection of
information do not impose any separate burden aside from that
described in our discussion of the burden estimates for this
collection of information.
\501\ See supra section II.B.9.
---------------------------------------------------------------------------
Insurance companies that use Form N-4 to register variable
annuities are currently required to tag certain registration statement
disclosure items using Inline XBRL.\502\ For the insurance companies
that would now be registering RILAs on Form N-4, our proposed data
tagging requirements would represent new burdens. Nevertheless, RILA
issuers generally do have prior experience submitting filings to the
Commission in Inline XBRL. The vast majority of insurance companies
that currently register RILAs on Forms S-1 and S-3 also separately file
Form N-4 to register variable annuities and variable life insurance
products or currently tag their RILA registration statements and are
thus familiar with the current Form N-4 tagging requirements.\503\ In
addition, insurance companies that register RILAs on Forms S-1 and S-3
that file GAAP financial statements must tag them using Inline
XBRL.\504\ Given this prior experience, we do not expect the proposed
tagging requirements to be as burdensome to many RILA issuers as it
would be for issuers that would be going through the Inline XBRL
tagging and submission process for the first time.
---------------------------------------------------------------------------
\502\ See General Instruction C.3(h) of current Form N-4. As
discussed above, some of the proposed items would also require
certain variable annuity issuers to provide a few additional
disclosures, which though relatively minor, would also have to
tagged.
\503\ Based on analysis of Forms S-1, S-3, and POS AM filed by
RILA issuers, 22 of the 23 insurance companies that issue RILAs also
offer variable products registered on Forms N-3, N-4, or N-6, all of
which are currently structured, or otherwise have experience tagging
registration statements.
\504\ See Inline XBRL Filing of Tagged Data, Securities Act
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
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In our most recent Paperwork Reduction Act submission for the
Investment Company Interactive Data collection of information, we
estimated a total annual hour burden of 323,724 hours, and a total
annual external cost burden of $16,041,450.\505\ Compliance with the
interactive data requirements is mandatory, and the responses will not
be confidential.
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\505\ This estimate is based on the last time the PRA renewal
for the Investment Company Interactive Data information collection
was approved in 2023. See ICR Reference No. 202212-3235-007,
available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202212-3235-007.
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The table below summarizes our PRA estimates for the burdens
associated with the proposed tagging requirements that would apply to
RILAs that file with the Commission on Form N-4.
Table 16--Investment Company Interactive Data
----------------------------------------------------------------------------------------------------------------
Internal Internal
initial burden annual burden Wage rate \2\ Internal time Annual external
hours hours \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
Proposed Burdens
----------------------------------------------------------------------------------------------------------------
Proposed disclosures for 1 \4\ 1 $406 (blended $406 \5\ $50
current N-4 filers \3\. rate for
compliance
attorney and
senior
programmer).
Number of current N-4 filers .............. x 400 ............... x 400 x 400
\6\.
[[Page 71172]]
Total new burden estimates .............. 400 ............... $162,400 $20,000
for current N-4 filers.
Proposed Form N-4 9 \8\ 4 $406 (blended $1,624 \9\ $700
disclosures for RILAs \7\. rate for
compliance
attorney and
senior
programmer).
Number of RILAs \10\........ .............. x 90 ............... x 90 x 90
Total new burden estimates .............. 360 ............... $146,160 $63,000
for RILAs.
Total new aggregate annual .............. \11\ 760 ............... \12\ $308,560 \13\ $63,000
burden.
----------------------------------------------------------------------------------------------------------------
Total Proposed Estimated Burdens Including Amendments
----------------------------------------------------------------------------------------------------------------
Responses Internal hour Internal hour External cost
estimate cost estimate estimate
----------------------------------------------------------------------------------------------------------------
Current aggregate annual 14,702 323,724 ............... $27,066,240 $16,041,450
burden estimates.
Proposed additional annual + 90 + 760 ............... + $308,560 + $63,000
burdens.
Revised aggregate annual 14,792 324,484 ............... $27,374,800 $16,124,450
burden estimates.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The PRA estimates assume that the types of professionals that will be involved in complying with the new
interactive data requirements. The Commission's estimates of the relevant wage rates are based on the SIFMA
Wage Report. The $406 wage rate reflects current estimates of the blended hourly rate for an in-house
compliance attorney ($425) and a senior programmer ($386). $406 is based on the following calculation: ($425 +
$386)/2 = $406. This estimate represents the average burden for a filer on Form N-4 that is currently subject
to interactive data requirements.
\3\ Estimated incremental burden for a variable annuity Form N-4 filer that is subject to the form's current
interactive data requirements.
\4\ Includes initial burden estimates annualized over a three-year period, plus 0.67 hour of ongoing annual
burden hours. The estimate of 1 hour is based on the following calculation: ((1 initial hour/3) + 0.67 hour of
additional ongoing burden hours) = 1 hour.
\5\ Estimated incremental external cost for Form N-4 variable annuity registrants that already submit certain
information using Inline XBRL.
\6\ Based on Form N-CEN filing data for 2022, we estimate that 400 variable annuity registrants file on Form N-
4.
\7\ Estimated average burden for a RILA that files on Form N-4 that is currently subject to interactive data
requirements on other Commission forms.
\8\ Includes initial burden estimates annualized over a three-year period, plus 1 hour of ongoing annual
burdens. The estimate of 4 hours is based on the following calculation: ((9 initial hours/3) + 1 hour of
additional ongoing burden hours) = 4 hours.
\9\ We estimate an incremental external cost for RILAs that would be newly filing on Form N-4 of $700 to reflect
one-time compliance and initial set-up costs. Because RILAs are currently subject to Inline XBRL tagging
requirements on other forms, we do not estimate any burdens related to one time-costs associated with becoming
familiar with structured data requirements (e.g., the acquisition of new software or the services of
consultants).
\10\ Estimated number of RILAs that currently file on Forms S-1 and S-3.
\11\ 760 hours = (400 variable annuity registrants x 1 hour = 400) + (90 RILAs x 4 hours = 360).
\12\ $308,560 internal time cost = (400 variable annuity registrants x $406 = $162,400) + (90 RILAs x $1,624 =
$146,160).
\13\ $63,000 annual external cost = (400 variable annuity registrants x $50 = $20,000) + (90 RILAs x $700 =
$63,000).
E. Request for Comment
We request comment on whether our estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
to: (1) evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology. Persons wishing to
submit comments on the collection of information requirements of the
proposed amendments should direct them to the OMB Desk Officer for the
Securities and Exchange Commission,
[email protected], and should send a copy to
Vanessa Countryman, Secretary, Securities and Exchange Commission, 100
F Street NE, Washington, DC 20549-1090, with reference to File No. S7-
16-23. OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this release;
therefore a comment to OMB is best assured of having its full effect if
OMB receives it within 30 days after publication of this release.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-16-23, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.
V. Regulatory Flexibility Certification
Section 3(a) of the Regulatory Flexibility Act of 1980
(``Regulatory Flexibility Act'') \506\ requires the Commission, when
issuing a rulemaking proposal, to prepare and make available for public
comment an initial regulatory flexibility analysis that describes the
impact of the proposed rule and form amendments on small entities
unless we certify that the rule and form amendments, if adopted, would
not have a significant economic impact on a substantial number of small
entities.\507\ Pursuant to 5 U.S.C. 605(b), we hereby certify that the
proposed amendments to Forms N-4 and 24F-2, rules 313 and 405 of
Regulation S-T, and rules 156, 172, 405, 415, 424, 456, 457, 485, 497,
and 498A under the Securities Act, would not, if adopted, have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\506\ 5 U.S.C. 603(a).
\507\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
We are proposing amendments to Form N-4 pursuant to the authority
set forth in the Securities Act, particularly sections 6, 7, 8, 10, 19,
and 28 thereof [15 U.S.C. 77f, 77g, 77h, 77j, 77s, and 77z-3], the
Exchange Act, particularly sections 3, 4, 10, 12, 13, 14, 15, 17, 23,
35A, and 36 thereof [15 U.S.C. 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78q,
78w, 78ll, and 78mm]; the Investment Company Act, particularly sections
8, 30, and 38 thereof [15 U.S.C. 80a-8, 80a-29, and 80a-37], and the
RILA Act, particularly section 101 thereof [Pub. L. 117-328, div. AA,
title I, 136 Stat. 4459 (2022)]. Form-N-4 is the registration form
currently used by most variable annuity separate accounts. These
proposed amendments would implement the requirements relating to RILAs
contained in the RILA Act by allowing Form N-4 to also be used for the
registration of RILAs.
The proposed amendments would add to Form N-4 new disclosure
requirements that specifically address
[[Page 71173]]
the features and risks of RILAs. Specifically, the proposal would amend
the contents of Form N-4, including the form's general instructions,
requirements for front and back cover pages, the key information table,
principal disclosures regarding RILA investment options, and contract
adjustment and fee disclosures. These amendments would apply only to
insurance companies registering RILAs. We are also proposing applying
the form's existing disclosure requirements to RILAs where appropriate.
For example, we are proposing to permit insurance companies to provide
financial statements on amended Form N-4 regarding RILAs in the same
way that that they do under the current Form N-4 for variable
annuities, including permitting the use of SAP to the same extent as
variable annuities.
In addition to adding RILAs to Form N-4, we are proposing
amendments to the form that would be applicable to all issuers, which
are designed to improve disclosures based upon our experience in
administering the form and feedback received in investor testing. For
example, we are proposing to switch the order of the key information
table and overview of the contract items in the prospectus to require
more specific principal risk disclosures. All Form N-4 filers would be
subject to these proposed amendments.
To facilitate to the inclusion of RILAs on Form N-4, we are
proposing amending Form 24F-2, rules 313 and 405 of Regulation S-T, and
rules 156, 172, 405, 415, 424, 456, 457, 485, 497, and 498A, pursuant
to authority set forth in the Securities Act, particularly sections 6,
7, 8, 10, and 19(a), and 28 thereof [15 U.S.C. 77e, 77f, 77g, 77h, 77j,
and 77s, and 77z-3(a)], the Exchange Act, particularly sections 3, 4,
10, 12, 13, 14, 15, 17, 23, 35A, and 36 thereof [15 U.S.C. 78c, 78d,
78j, 78l, 78m, 78n, 78o, 78q, 78w, 78ll, and 78mm]; the Investment
Company Act, particularly sections 8, 30, and 38 thereof [15 U.S.C.
80a-8, 80a-29, and 80a-37], and the RILA Act, particularly section 101
thereof [Pub. L. 117-328, div. AA, title I, 136 Stat. 4459 (2022)]. For
example, the proposed amendment to rule 498A would permit RILA issuers
to use a summary prospectus to satisfy statutory prospectus delivery
obligations, and the proposed amendments to rules 485 and 497 would
make those rules applicable to RILA issuers when amending RILA
registration statements on Form N-4 or when filing prospectuses and
prospectus supplements with the Commission.\508\ The proposed
amendments to Form 24F-2, Rule 313 of Reg S-T, and rules 456 and 457
would require insurance companies to pay securities registration fees
relating to RILA offerings according to the same method used for
variable annuities. Because we propose subjecting RILA offerings to an
investor communication framework similar to the framework applicable to
variable annuity offerings, the proposed amendments to rule 172 would
exclude RILA offerings from that rule's provisions. The proposed
amendment of rule 405 of Reg S-T would require inline XBRL tagging of
RILA-specific disclosures, while the proposed amendment of rule 405
would add a new defined term for RILAs to facilitate their registration
on Form N-4 and to simplify references to RILAs in our proposed rule
amendments. The proposed amendments to rule 156 would require RILA
issuers to comply with the rule's guidance as to when sales literature
is materially misleading under the Federal securities laws.
---------------------------------------------------------------------------
\508\ Relatedly, we propose amending rule 424 to specify that
RILA issuers must use rule 497 rather than rule 424 when filing
prospectuses and prospectus supplements, and making similar
amendments to rule 415 to exempt RILA offerings from its provisions,
consistent with the framework applied to existing N-4 issuers.
---------------------------------------------------------------------------
For purposes of the Securities Act and the Regulatory Flexibility
Act, generally, an issuer, other than an investment company, will be
considered a small entity if it has net assets of $5 million or less as
of the end of its most recent fiscal year, and the issuer's offering
does not exceed $5 million.\509\ RILA issuers are not investment
companies and based on a review of EDGAR filings of existing RILA
issuers, we do not expect any RILA issuers will be treated as small
entities. The analysis is different for existing N-4 filers (i.e.,
variable annuity issuers), as the insurance company separate accounts
registering variable annuities are deemed to be investment companies.
Generally, for purposes of the Investment Company Act and the
Regulatory Flexibility Act, an investment company is a small entity if,
together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of
the end of its most recent fiscal year.\510\ Because State law
generally treats separate account assets as the property of the
sponsoring insurance company, rule 0-10 aggregates each separate
account's assets with the assets of the sponsoring insurance company,
together with assets held in other sponsored separate accounts.\511\ As
a result, the Commission expects few, if any, separate account to be
treated as small entities.
---------------------------------------------------------------------------
\509\ 17 CFR 230.157 (defining ``small business'' or ``small
organization'' under the Securities Act for purposes of the
Regulatory Flexibility Act); 15 U.S.C 77c(b)(1) (defining ``small
entity'' to mean ``small business,'' ``small organization,'' or
``small governmental jurisdiction'').
\510\ 17 CFR 270.0-10(a).
\511\ 17 CFR 270.0-10(b).
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For this reason, we believe that the proposed amendments would not,
if adopted, have a significant economic impact on a substantial number
of small entities.
The Commission encourages written comments on the certification. We
solicit comment as to whether the proposed form and rule amendments
could have an effect on small entities that has not been considered. We
ask that commenters describe the nature of any impact on small entities
and provide empirical data to support the extent of the impact.
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), the Commission must advise OMB whether a
proposed regulation constitutes a 184 ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results in or is
likely to result in:
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
Statutory Authority
The amendments contained in this release are being proposed under
the authority set forth in the Securities Act, particularly sections 6,
7, 8, 10, 19, and 28 thereof [15 U.S.C. 77a et seq.]; the Exchange Act,
particularly sections 3, 4, 10, 12, 13, 14, 15, 17, 23, 35A, and 36
thereof [15 U.S.C. 78a et seq.]; the Investment Company Act,
particularly, Sections 8, 30, and 38 thereof, and the
[[Page 71174]]
RILA Act, particularly section 101 thereof [Pub. L. 117-328, div. AA,
title I, 136 Stat. 4459 (2022)].
List of Subjects
17 CFR Part 230
Advertising, Confidential business information, Investment
companies, Reporting and recordkeeping requirements, Securities.
17 CFR Part 232
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Form Amendments
For reasons set forth in the preamble, we are proposing to amend
title 17, chapter II of the Code of Federal Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48
Stat. 78, 79, 81, and 85, as amended (15 U.S.C. 77f, 77h, 77j, 77s).
Sec. 230.457 also issued under secs. 6 and 7, 15 U.S.C. 77f and
77g.
* * * * *
0
2. Revise Sec. 230.156 to read as follows:
Sec. 230.156 Investment company and registered index-linked annuity
sales literature.
(a) Under the Federal securities laws, including section 17(a) of
the Securities Act of 1933 (15 U.S.C. 77q(a)) and section 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and Sec. 240.10b-5
of this chapter (Rule 10b-5) thereunder, it is unlawful for any person,
directly or indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, to use sales literature which is
materially misleading in connection with the offer or sale of
registered index-linked annuity (as defined in Sec. 230.405 (Rule
405)) securities or securities issued by an investment company. Under
these provisions, sales literature is materially misleading if it:
(1) Contains an untrue statement of a material fact; or
(2) Omits to state a material fact necessary in order to make a
statement made, in the light of the circumstances of its use, not
misleading.
(b) Whether or not a particular description, representation,
illustration, or other statement involving a material fact is
misleading depends on evaluation of the context in which it is made. In
considering whether a particular statement involving a material fact is
or might be misleading, weight should be given to all pertinent
factors, including, but not limited to, those listed below.
(1) A statement could be misleading because of:
(i) Other statements being made in connection with the offer of
sale or sale of the securities in question;
(ii) The absence of explanations, qualifications, limitations or
other statements necessary or appropriate to make such statement not
misleading; or
(iii) General economic or financial conditions or circumstances.
(2) Representations about past or future investment performance
could be misleading because of statements or omissions made involving a
material fact, including situations where:
(i) Portrayals of past income, gain, or growth of assets convey an
impression of the net investment results achieved by an actual or
hypothetical investment which would not be justified under the
circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading; and
(ii) Representations, whether express or implied, about future
investment performance, including:
(A) Representations, as to security of capital, possible future
gains or income, or expenses associated with an investment;
(B) Representations implying that future gains or income may be
inferred from or predicted based on past investment performance; or
(C) Portrayals of past performance, made in a manner which would
imply that gains or income realized in the past would be repeated in
the future.
(3) A statement involving a material fact about the characteristics
or attributes of an investment company or registered index-linked
annuity could be misleading because of:
(i) Statements about possible benefits connected with or resulting
from services to be provided or methods of operation which do not give
equal prominence to discussion of any risks or limitations associated
therewith;
(ii) Exaggerated or unsubstantiated claims about management skill
or techniques, characteristics of the investment company or registered
index-linked annuity or an investment in securities issued by such
company, services, security of investment or funds, effects of
government supervision, or other attributes; and
(iii) Unwarranted or incompletely explained comparisons to other
investment vehicles or to indexes.
(4) Representations about the fees or expenses associated with an
investment in the fund or registered index-linked annuity could be
misleading because of statements or omissions made involving a material
fact, including situations where portrayals of the fees and expenses
associated with an investment in the fund or registered index-linked
annuity omit explanations, qualifications, limitations, or other
statements necessary or appropriate to make the portrayals not
misleading.
(c) For purposes of this section, the term sales literature shall
be deemed to include any communication (whether in writing, by radio,
or by television) used by any person to offer to sell or induce the
sale of securities of any investment company or registered index-linked
annuity. Communications between issuers, underwriters and dealers are
included in this definition of sales literature if such communications,
or the information contained therein, can be reasonably expected to be
communicated to prospective investors in the offer or sale of
securities or are designed to be employed in either written or oral
form in the offer or sale of securities.
(d) Nothing in this section may be construed to prevent a business
development company or a registered closed-end investment company from
qualifying for an exemption under Sec. 230.168 or Sec. 230.169.
0
3. Amend Sec. 230.172 by revising paragraph (d) to read as follows:
Sec. 230.172 Delivery of prospectuses.
* * * * *
(d) Exclusions. This section shall not apply to any:
(1) Offering of any investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), other than a
registered closed-end investment company;
(2) A business combination transaction as defined in Sec.
230.165(f)(1);
(3) Offering registered on Form S-8 (Sec. 239.16b of this
chapter); or
[[Page 71175]]
(4) Offering of any registered index-linked annuity (as defined in
Sec. 230.405 (Rule 405)) securities.
0
4. Amend Sec. 230.405 by adding in alphabetical order definitions for
``Form available solely to investment companies registered under the
Investment Company Act of 1940'' and ``Registered index-linked
annuity'' to read as follows:
Sec. 230.405 Definitions of terms.
* * * * *
Form available solely to investment companies registered under the
Investment Company Act of 1940. A form available solely to investment
companies registered under the Investment Company Act of 1940 includes
the form used to register the offering of securities of a registered
index-linked annuity for purposes of the Securities Act of 1933.
* * * * *
Registered index-linked annuity. The term registered index-linked
annuity means an annuity or an option available under an annuity:
(1) That is deemed a security;
(2) That is offered or sold in a registered offering;
(3) That is issued by an insurance company that is the subject to
the supervision of either the insurance commissioner or bank
commissioner of any State or any agency or officer performing like
functions as such commissioner;
(4) That is not issued by an investment company; and
(5) Whose value, either during the accumulation period or after
annuitization or both, will earn positive or negative interest based,
in part, on the performance of any index, rate, or benchmark.
* * * * *
0
5. Amend Sec. 230.415 by revising paragraph (b) to read as follows:
Sec. 230.415 Delayed or continuous offering and sale of securities.
* * * * *
(b) This section shall not apply to any registration statement
pertaining to a registered index-linked annuity (as defined in Sec.
230.405 (Rule 405)), securities issued by a face-amount certificate
company, or redeemable securities issued by an open-end management
company or unit investment trust under the Investment Company Act of
1940 or any registration statement filed by any foreign government or
political subdivision thereof.
0
6. Amend Sec. 230.424 by revising paragraph (f) to read as follows:
Sec. 230.424 Filing of prospectuses, number of copies.
* * * * *
(f) This section shall not apply with respect to prospectuses of an
investment company registered under the Investment Company Act of 1940
(other than a registered closed-end investment company) or prospectuses
that pertain to a registered index-linked annuity (as defined in Sec.
230.405 (Rule 405)). References to ``form of prospectus'' in paragraphs
(a), (b), and (c) of this section shall be deemed also to refer to the
form of Statement of Additional Information.
* * * * *
0
7. Amend Sec. 230.456 by adding paragraph (e) to read as follows:
Sec. 230.456 Date of filing; timing of fee payment.
* * * * *
(e)(1) Notwithstanding paragraph (a) of this section, where a
registration statement relates to an offering of registered index-
linked annuity (as defined in Sec. 230.405 (Rule 405)) securities, an
issuer shall be deemed to register an offering of an indeterminate
amount of such securities and shall, not later than 90 days after the
end of any fiscal year during which it has publicly offered such
securities, pay a registration fee to the Commission calculated in
accordance with Sec. 230.457(u) (Rule 457(u)) and file Form 24F-2
(referenced in 17 CFR 274.24) with the Commission.
Instruction 1 to paragraph (e)(1): To determine the date on which
the registration fee must be paid, the first day of the 90-day period
is the first calendar day of the fiscal year following the fiscal year
for which the registration fee is to be paid. If the last day of the
90-day period falls on a Saturday, Sunday, or Federal holiday, the
registration fee is due on the first business day thereafter.
(2) When registering an offering of an indeterminate amount of
registered index-linked annuity securities pursuant to paragraph (e)(1)
of this section, the securities sold will be considered registered, for
purposes of section 6(a) of the Act, if the registration fee has been
paid and the issuer has filed a Form 24F-2 filing pursuant to paragraph
(e)(1) of this section not later than the end of the 90-day period.
(3) A registration statement filed in accordance with the
registration fee payment provisions of paragraph (e)(1) of this section
will be considered filed as to the securities identified in the
registration statement for purposes of this section and section 5 of
the Act when it is received by the Commission, if it complies with all
other requirements under the Act, including this part.
(4) For purposes of this section, if an issuer ceases operations,
the date the issuer ceases operations will be deemed to be the end of
its fiscal year. In the case of a liquidation, merger, or sale of all
or substantially all of the assets (``merger'') of the issuer, the
issuer will be deemed to have ceased operations for the purposes of
this section on the date the merger is consummated; provided, however,
that in the case of a merger of an issuer or a series of an issuer
(``Predecessor'') with another issuer or a series of an issuer
(``Successor''), the Predecessor will not be deemed to have ceased
operations and the Successor will assume the obligations, fees, and
redemption credits of the Predecessor incurred pursuant to this section
if the Successor:
(i) Had no assets or liabilities, other than nominal assets or
liabilities, and no operating history immediately prior to the merger;
(ii) Acquired substantially all of the assets and assumed
substantially all of the liabilities and obligations of the
Predecessor; and
(iii) The merger is not designed to result in the Predecessor
merging with, or substantially all of its assets being acquired by, an
issuer (or a series of an issuer) that would not meet the conditions of
paragraph (e)(4)(i) of this section.
(5) An issuer paying the fee required by paragraph (e)(1) of this
section or any portion thereof more than 90 days after the end of the
fiscal year of the issuer shall pay to the Commission interest on
unpaid amounts, calculated based on the interest rate in effect at the
time of the interest payment by reference to the ``current value of
funds rate'' on the Treasury Department's Bureau of Fiscal Service
internet site at https://fiscal.treasury.gov/, or by calling (202) 874-
6995, and using the following formula: I = (X) (Y) (Z/365), where: I =
Amount of interest due; X = Amount of registration fee due; Y =
Applicable interest rate, expressed as a fraction; Z = Number of days
by which the registration fee payment is late. The payment of interest
pursuant to this paragraph (e)(5) shall not preclude the Commission
from bringing an action to enforce the requirements of this paragraph
(e).
(6) An immaterial or unintentional failure to comply with a
requirement of this paragraph (e) will not result in a violation of
section 6(a) of the Act (15 U.S.C. 77f(a)), so long as:
[[Page 71176]]
(i) A good faith and reasonable effort was made to comply with the
requirement; and
(ii) In the case of a late payment of a registration fee, the
issuer pays the registration fee and any interest due thereon as soon
as practicable after discovery of the failure to pay the registration
fee.
0
8. Amend Sec. 230.457 by revising paragraph (u) to read as follows:
Sec. 230.457 Computation of fee.
* * * * *
(u) Where an issuer elects or is required to register an offering
of an indeterminate amount of exchange-traded vehicle securities in
accordance with Sec. 230.456(d) (Rule 456(d)) or registered index-
linked annuity securities (as defined in Sec. 230.405 (Rule 405)) in
accordance with Sec. 230.456(e) (Rule 456(e)), the registration fee is
to be calculated in the following manner:
(1) Determine the aggregate sale price of such securities sold
during the fiscal year.
(2) Determine the sum of:
(i) The aggregate redemption or repurchase price of such securities
redeemed or repurchased during the fiscal year; and
(ii) The aggregate redemption or repurchase price of such
securities redeemed or repurchased during a prior fiscal year that were
not used previously to reduce registration fees payable to the
Commission, if the prior fiscal year ended no earlier than August 1,
2021 in the case of exchange traded vehicle securities, or [EFFECTIVE
DATE OF THE FINAL RULE] in the case of registered index-linked annuity
securities.
(3) Subtract the amount in paragraph (u)(2) of this section from
the amount in paragraph (u)(1) of this section. If the resulting amount
is positive, the amount is the net sales amount. If the resulting
amount is negative, it is the amount of redemption credits available
for use in future years to offset sales.
(4) The registration fee is calculated by multiplying the net sales
amount by the fee payment rate in effect on the date of the fee
payment. If the issuer determines that it had net redemptions or
repurchases for the fiscal year, no registration fee is due.
0
9. Amend Sec. 230.485 by revising the section heading and paragraphs
(a)(1) and (b) introductory text to read as follows:
Sec. 230.485 Effective date of post-effective amendments filed by
certain registered investment companies or issuers offering registered
index-linked annuities.
(a) * * *
(1) Except as otherwise provided in this section, a post-effective
amendment to a registration statement filed by a registered open-end
management investment company, unit investment trust or, separate
account as defined in section 2(a)(37) of the Investment Company Act of
1940 [15 U.S.C. 80a-2(a)(37)] or to register an offering of a
registered index-linked annuity securities (as defined in Sec. 230.405
(Rule 405)) shall become effective on the sixtieth day after the filing
thereof, or a later date designated by the registrant on the facing
sheet of the amendment, which date shall be no later than eighty days
after the date on which the amendment is filed.
* * * * *
(b) Immediate effectiveness. Except as otherwise provided in this
section, a post-effective amendment to a registration statement filed
by a registered open-end management investment company, unit investment
trust or separate account as defined in section 2(a)(37) of the
Investment Company Act of 1940 [15 U.S.C. 80a-2(a)(37)] or to register
an offering of a registered index-linked annuity securities shall
become effective on the date upon which it is filed with the
Commission, or a later date designated by the registrant on the facing
sheet of the amendment, which date shall be not later than thirty days
after the date on which the amendment is filed, except that a post-
effective amendment including a designation of a new effective date
pursuant to paragraph (b)(1)(iii) of this section shall become
effective on the new effective date designated therein, Provided, that
the following conditions are met:
* * * * *
0
10. Amend Sec. 230.497 by revising the section heading and paragraphs
(c) and (e) to read as follows:
Sec. 230.497 Filing of investment company or registered index-linked
annuity prospectuses--number of copies.
* * * * *
(c) For investment companies filing on Sec. Sec. 239.15A and
274.11A of this chapter (Form N-1A), Sec. Sec. 239.17a and 274.11b of
this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this chapter
(Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter (Form N-
6), or an offering of registered index-linked annuities (as defined in
Rule 405 (Sec. 230.405)) being filed on Form N-4, 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, 10 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.
Investment companies filing on Forms N-1A, N-3, N-4, or N-6 and issuers
of registered index-linked annuities filing on Form N-4 must, if
applicable pursuant to General Instruction C.3.(g) of Form N-1A,
General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of
Form N-4, or General Instruction C.3.(h) of Form N-6, submit an
Interactive Data File (as defined in Sec. 232.11 of this chapter).
* * * * *
(e) For investment companies filing on Sec. Sec. 239.15A and
274.11A of this chapter (Form N-1A), Sec. Sec. 239.17a and 274.11b of
this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this chapter
(Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter (Form N-
6), or an offering of registered index-linked annuities being filed on
Form N-4, 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. Investment companies filing on Forms N-1A, N-3, N-4, or N-6
and issuers of registered index-linked annuities filing on Form N-4
must, if applicable pursuant to General Instruction C.3.(g) of Form N-
1A, General Instruction C.3.(h) of Form N-3, General Instruction
C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6, submit
an Interactive Data File (as defined in Sec. 232.11 of this chapter).
* * * * *
0
11. Revise Sec. 230.498A to read as follows:
Sec. 230.498A Summary Prospectuses for separate accounts offering
variable annuity and variable life insurance contracts, and contracts
offering registered index-linked options.
(a) Definitions. For purposes of this section:
Class means a class of a Contract that varies principally with
respect to distribution-related fees and expenses.
Contract means a Variable Annuity Contract, a Variable Life
Insurance Contract, or a RILA Contract as defined in this section,
respectively, as well as any Variable Annuity Contract or RILA Contract
that offers a combination of
[[Page 71177]]
Index-Linked Options, Variable Options, and/or Fixed Options.
Fixed Option means an Investment Option under a Contract pursuant
to which the value of the Contract (for a Form N-3 or Form N-4
Registrant, either during an accumulation period or after
annuitization, or both) will earn interest at a rate specified by the
Company, subject to a minimum guaranteed rate under the Contract.
Index-Linked Option means an Investment Option offered under a
Contract, pursuant to which the value of the Contract, either during an
accumulation period or after annuitization, or both, will earn positive
or negative interest based, in part, on the performance of a specified
index, rate, or benchmark (such as a registered exchange-traded fund
that tracks an index).
Initial Summary Prospectus means the initial summary prospectus
described in paragraph (b) of this section.
Insurance Company means the insurance company issuing the Contract,
which company is subject to State supervision. The Insurance Company
may also be the depositor or sponsor of any Registered Separate Account
in which the Contract participates.
Investment Option means a Fixed Option, an Index-Linked Option,
and/or a Variable Option, as applicable.
Portfolio Company means any company in which a Registrant on Form
N-4 or Form N-6 invests and which may be selected as a Variable Option
by the investor.
Portfolio Company Prospectus means the Statutory Prospectus of a
Portfolio Company and a summary prospectus of a Portfolio Company
permitted by Sec. 230.498.
Registered Separate Account means a separate account (as defined in
section 2(a)(14) of the Securities Act (15 U.S.C. 77b(a)(14)) that has
an effective registration statement on Sec. Sec. 239.17a and 274.11b
of this chapter (Form N-3), Sec. Sec. 239.17b and 274.11c of this
chapter (Form N-4), or Sec. Sec. 239.17c and 274.11d of this chapter
(Form N-6) and that has a current prospectus that satisfies the
requirements of section 10(a) of the Act (15 U.S.C. 77j(a)).
Registrant means, as applicable, a Registered Separate Account or
the Insurance Company.
RILA Contract means any accumulation contract or annuity contract,
any portion thereof, or any unit of interest or participation therein,
issued by an Insurance Company, that offers Index-Linked Options.
Statement of Additional Information means the statement of
additional information required by Part B of Form N-1A, Form N-3, Form
N-4, or Form N-6.
Statutory Prospectus means a prospectus that satisfies the
requirements of section 10(a) of the Act (15 U.S.C. 77j(a)).
Summary Prospectus refers to both the Initial Summary Prospectus
and the Updating Summary Prospectus.
Updating Summary Prospectus means the updating summary prospectus
described in paragraph (c) of this section.
Variable Annuity Contract means any accumulation contract or
annuity contract, any portion thereof, or any unit of interest or
participation therein, issued by an Insurance Company, pursuant to
which the value of the contract, either during an accumulation period
or after annuitization, or both, varies according to the investment
experience of a Portfolio Company.
Variable Life Insurance Contract means a life insurance contract,
issued by an Insurance Company, that provides for death benefits and
cash values that may vary with the investment performance of any
separate account.
Variable Option means:
(1) In the context of a Registrant on Form N-4 or Form N-6, an
Investment Option under any Contract pursuant to which the value of the
Contract (for a Form N-4 Registrant, either during an accumulation
period or after annuitization, or both) varies according to the
investment experience of a Portfolio Company;
(2) In the context of a Registrant on Form N-3, any portfolio of
investments in which a Registrant on Form N-3 invests and which may be
selected as an option by the investor.
(b) General Requirements for Initial Summary Prospectus. An Initial
Summary Prospectus that complies with this paragraph (b) will be deemed
to be a prospectus that is authorized under section 10(b) of the Act
(15 U.S.C. 77j(b)) and section 24(g) of the Investment Company Act (15
U.S.C. 80a-24(g)) for the purposes of section 5(b)(1) of the Act (15
U.S.C. 77e(b)(1)).
(1) Scope of Initial Summary Prospectus. An Initial Summary
Prospectus may only describe a single Contract (but may describe more
than one Class of the Contract) currently offered by the Registrant
under the Statutory Prospectus to which the Initial Summary Prospectus
relates.
(2) Cover Page or Beginning of Initial Summary Prospectus. Include
on the front cover page or the beginning of the Initial Summary
Prospectus:
(i) The Insurance Company's name;
(ii) The name of the Contract, and the Class or Classes if any, to
which the Initial Summary Prospectus relates;
(iii) A statement identifying the document as a ``Summary
Prospectus for New Investors'';
(iv) The approximate date of the first use of the Initial Summary
Prospectus;
(v) The following legend, which for Initial Summary Prospectuses of
Contracts registered on Form N-4 would be included along with the
statements described in Item 1(a)(6) through (8) of Form N-4:
This Summary Prospectus summarizes key features of the [Contract].
Before you invest, you should also review the prospectus for the
[Contract], which contains more information about the [Contract's]
features, benefits, and risks. You can find this document and other
information about the [Contract] online at [__]. You can also obtain
this information at no cost by calling [__] or by sending an email
request to [__].
You may cancel your [Contract] within 10 days of receiving it
without paying fees or penalties. In some states, this cancellation
period may be longer. Upon cancellation, you will receive either a full
refund of the amount you paid with your application or your total
contract value. You should review the prospectus, or consult with your
investment professional, for additional information about the specific
cancellation terms that apply.
Additional information about certain investment products, including
[variable annuities/registered index-linked annuities/variable life
insurance contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.
(A) A Registrant may modify the legend so long as the modified
legend contains comparable information.
(B) The legend must provide a website address, other than the
address of the Commission's electronic filing system; toll-free
telephone number; and email address that investors can use to obtain
the Statutory Prospectus and other materials, request other information
about the Contract, and make investor inquiries. The website address
must be specific enough to lead investors directly to the Statutory
Prospectus and other materials that are required to be accessible under
paragraph (h)(1) of this section, rather than to the home page or other
section of the website on which the materials are posted. The website
could be a central site with prominent links to each document. The
legend may indicate, if applicable, that the Statutory Prospectus and
other information are
[[Page 71178]]
available from a financial intermediary (such as a broker-dealer)
through which the Contract may be purchased or sold. If a Registered
Separate Account that has an effective registration statement on Form
N-3 relies on Sec. 270.30e-3 of this chapter to transmit a report, the
legend must also include the website address required by Sec. 270.30e-
3(c)(1)(iii) of this chapter if different from the website address
required by this paragraph (b)(2)(v)(B).
(C) The paragraph of the legend regarding cancellation of the
Contract may be omitted if not applicable. If this paragraph is
included in the legend, the paragraph must be presented in a manner
reasonably calculated to draw investor attention to that paragraph.
(D) The legend may include instructions describing how a
shareholder can elect to receive prospectuses or other documents and
communications by electronic delivery.
(3) Back Cover Page or Last Page of Initial Summary Prospectus.
(i) If a Registrant incorporates any information by reference into
the Summary Prospectus, include a legend identifying the type of
document (e.g., Statutory Prospectus) from which the information is
incorporated and the date of the document. If a Registrant incorporates
by reference a part of a document, the legend must clearly identify the
part by page, paragraph, caption, or otherwise. If information is
incorporated from a source other than the Statutory Prospectus, the
legend must explain that the incorporated information may be obtained,
free of charge, in the same manner as the Statutory Prospectus.
(ii) Include on the bottom of the back cover page or the last page
of the Initial Summary Prospectus the EDGAR contract identifier for the
contract in type size smaller than that generally used in the
prospectus (e.g., 8-point modern type).
(4) Table of Contents. An Initial Summary Prospectus may include a
table of contents meeting the requirements of Sec. 230.481(c).
(5) Contents of Initial Summary Prospectus. An Initial Summary
Prospectus must contain the information required by this paragraph
(b)(5) with respect to the applicable registration form, and only the
information required by this paragraph (b)(5), in the order provided in
paragraphs (b)(5)(i) through (ix) of this section, except that, for an
Initial Summary Prospectus related to a Contract registered on Form N-
4, provide the information provided in paragraph (b)(5)(ii) before the
information provided by paragraph (b)(5)(i).
(i) Under the heading ``Important Information You Should Consider
About the [Contract],'' the information required by Item 2 of Form N-3,
Item 3 of Form N-4, or Item 2 of Form N-6.
(ii) Under the heading ``Overview of the [Contract],'' the
information required by Item 3 of Form N-3, Item 2 of Form N-4, or Item
3 of Form N-6.
(iii) Under the heading ``Standard Death Benefits,'' the
information required by Item 10(a) of Form N-6.
(iv) Under the heading ``Benefits Available Under the [Contract],''
the information required by Item 11(a) of Form N-3 or Item 10(a) of
Form N-4. Under the heading ``Other Benefits Available Under the
[Contract],'' the information required by Item 11(a) of Form N-6.
(v) Under the heading ``Buying the [Contract],'' the information
required by Item 12(a) of Form N-3, Item 11(a) of Form N-4, or Item
9(a) through (c) of Form N-6.
(vi) Under the heading ``How Your [Contract] Can Lapse,'' the
information required by Item 14(a) through (c) of Form N-6.
(vii) Under the heading ``Making Withdrawals: Accessing the Money
in Your [Contract],'' the information required by Item 13(a) of Form N-
3, Item 12(a) of Form N-4, or Item 12(a) of Form N-6.
(viii) Under the heading ``Additional Information About Fees,'' the
information required by Item 4 of Form N-3, Item 4 of Form N-4, or Item
4 of Form N-6.
(ix) Under the heading ``Appendix: [Portfolio Companies]
[Investment Options/Portfolio Companies] Available Under the
Contract,'' include as an appendix the information required by Item 18
of Form N-3, Item 17 of Form N-4, or Item 18 of Form N-6.
Alternatively, an Initial Summary Prospectus for a Contract registered
on Form N-3 may include the information required by Item 19 of Form N-
3, under the heading ``Additional Information About Investment Options
Available Under the Contract.''
(c) General Requirements for Updating Summary Prospectus. An
Updating Summary Prospectus that complies with this paragraph (c) will
be deemed to be a prospectus that is authorized under section 10(b) of
the Act (15 U.S.C. 77j(b)) and section 24(g) of the Investment Company
Act (15 U.S.C. 80a-24(g)) for the purposes of section 5(b)(1) of the
Act (15 U.S.C. 77e(b)(1)).
(1) Use of Updating Summary Prospectus. A Registrant may only use
an Updating Summary Prospectus if the Registrant uses an Initial
Summary Prospectus for each currently offered Contract described under
the Statutory Prospectus to which the Updating Summary Prospectus
relates.
(2) Scope of Updating Summary Prospectus. An Updating Summary
Prospectus may describe one or more Contracts (and more than one Class)
described under the Statutory Prospectus to which the Updating Summary
Prospectus relates.
(3) Cover Page or Beginning of Updating Summary Prospectus. Include
on the front cover page or at the beginning of the Updating Summary
Prospectus:
(i) The Insurance Company's name;
(ii) The name of the Contract(s) and the Class or Classes, if any,
to which the Updating Summary Prospectus relates;
(iii) A statement identifying the document as an ``Updating Summary
Prospectus'';
(iv) The approximate date of the first use of the Updating Summary
Prospectus; and
(v) The following legend, which must meet the requirements of
paragraphs (b)(2)(v)(A), (B), and (D) of this section, as applicable,
and for Updating Summary Prospectuses of Contracts registered on Form
N-4 would be included along with the statements described in Item
1(a)(6) through (8) of Form N-4:
The prospectus for the [Contract] contains more information about
the [Contract], including its features, benefits, and risks. You can
find the current prospectus and other information about the [Contract]
online at [__]. You can also obtain this information at no cost by
calling [__] or by sending an email request to [__].
Additional information about certain investment products, including
[variable annuities/registered index-linked annuities/variable life
insurance contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.
(4) Back Cover Page or Last Page of Updating Summary Prospectus.
Include on the bottom of the back cover page or the last page of the
Updating Summary Prospectus:
(i) The legend required by paragraph (b)(3)(i) of this section; and
(ii) The EDGAR contract identifier(s) for each contract in type
size smaller than that generally used in the prospectus (e.g., 8-point
modern type).
(5) Table of Contents. An Updating Summary Prospectus may include a
table of contents meeting the requirements of Sec. 230.481(c).
[[Page 71179]]
(6) Contents of Updating Summary Prospectus. An Updating Summary
Prospectus must contain the information required by this paragraph
(c)(6) with respect to the applicable registration form, in the order
provided in paragraphs (c)(6)(i) through (iv) of this section.
(i) If any changes have been made with respect to the Contract
after the date of the most recent Updating Summary Prospectus or
Statutory Prospectus that was sent or given to investors with respect
to the availability of Investment Options (for Registrants on Form N-3)
or Portfolio Companies (for Registrants on Forms N-4 and N-6) under the
Contract (including, for RILA Contracts, a change to any of the
features of the Index-Linked Options disclosed in the table that Item
17(b) of Form N-4 requires), or the disclosure that the Registrant
included in response to Item 2 (Key Information), Item 3 (Overview of
the Contract), Item 4 (Fee Table), Item 11 (Benefits Available Under
the Contract), Item 12 (Purchases and Contract Value), or Item 13
(Surrenders and Withdrawals) of Form N-3; Item 2 (Overview of the
Contract), Item 3 (Key Information), Item 4 (Fee Table), Item 10
(Benefits Available Under the Contract), Item 11 (Purchases and
Contract Value), or Item 12 (Surrenders and Withdrawals) of Form N-4;
and Item 2 (Key Information), Item 3 (Overview of the Contract), Item 4
(Fee Table), Item 9 (Premiums), Item 10 (Standard Death Benefits), Item
11 (Other Benefits Available Under the Contract), Item 12 (Surrenders
and Withdrawals), or Item 14 (Lapse and Reinstatement) of Form N-6,
include the following as applicable, under the heading ``Updated
Information About Your [Contract]'':
(A) The following legend: ``The information in this Updating
Summary Prospectus is a summary of certain [Contract] features that
have changed since the Updating Summary Prospectus dated [date]. This
may not reflect all of the changes that have occurred since you entered
into your [Contract].''
(B) As applicable, provide a concise description of each change
specified in paragraph (c)(6)(i) of this section. Provide enough detail
to allow investors to understand the change and how it will affect
investors, including indicating whether the change only applies to
certain Contracts described in the Updating Summary Prospectus.
(ii) In addition to the changes specified in paragraph (c)(6)(i) of
this section, a Registrant may provide a concise description of any
other information relevant to the Contract within the time period that
paragraph (c)(6)(i) of this section specifies, under the heading
``Updated Information About Your [Contract].'' Any additional
information included pursuant to this paragraph (c)(6)(ii) should not,
by its nature, quantity, or manner of presentation, obscure or impede
understanding of the information that paragraph (c)(6)(i) of this
section requires.
(iii) Under the heading ``Important Information You Should Consider
About the [Contract],'' provide the information required by Item 2 of
Form N-3, Item 3 of Form N-4, or Item 2 of Form N-6.
(iv) Under the heading ``Appendix: [Portfolio Companies/Investment
Options/Portfolio Companies] Available Under the [Contract],'' include
as an appendix the information required by Item 18 of Form N-3, Item 17
of Form N-4, or Item 18 of Form N-6. Alternatively, an Updating Summary
Prospectus for a Contract registered on Form N-3 may include, under the
heading ``Additional Information About [Investment Options] Available
Under the [Contract],'' the information required by Item 19 of Form N-
3.
(d) Incorporation by Reference into a Summary Prospectus. (1)
Except as provided by paragraph (d)(2) of this section, information may
not be incorporated by reference into a Summary Prospectus. Information
that is incorporated by reference into a Summary Prospectus in
accordance with paragraph (d)(2) of this section need not be sent or
given with the Summary Prospectus.
(2) A Registrant may incorporate by reference into a Summary
Prospectus any or all of the information contained in the Registrant's
Statutory Prospectus and Statement of Additional Information, and any
information from the Registrant's reports under Sec. 270.30e-1 of this
chapter that the Registrant has incorporated by reference into the
Registrant's Statutory Prospectus, provided that:
(i) The conditions of paragraphs (b)(2)(v)(B), (c)(3)(v), and (h)
of this section are met;
(ii) A Registrant may not incorporate by reference into a Summary
Prospectus information that paragraphs (b) and (c) of this section
require to be included in an Initial Summary Prospectus or Updating
Summary Prospectus, respectively; and
(iii) Information that is permitted to be incorporated by reference
into the Summary Prospectus may be incorporated by reference into the
Summary Prospectus only by reference to the specific document that
contains the information, not by reference to another document that
incorporates such information by reference.
(3) For purposes of Sec. 230.159, information is conveyed to a
person not later than the time that a Summary Prospectus is received by
the person if the information is incorporated by reference into the
Summary Prospectus in accordance with paragraph (d)(2) of this section.
(e) Terms used in the Summary Prospectus. Define special terms used
in the Initial Summary Prospectus and Updating Summary Prospectus using
any presentation style that clearly conveys their meaning to investors,
such as the use of a glossary or list of definitions.
(f) Transfer of the Contract Security. Any obligation under section
5(b)(2) of the Act (15 U.S.C. 77e(b)(2)) to have a Statutory Prospectus
precede or accompany the carrying or delivery of a Contract security in
an offering registered on Form N-3, Form N-4, or Form N-6 is satisfied
if:
(1) A Summary Prospectus is sent or given no later than the time of
the carrying or delivery of the Contract security (an Initial Summary
Prospectus in the case of a purchase of a new Contract, or an Updating
Summary Prospectus in the case of additional purchase payments in an
existing Contract);
(2) The Summary Prospectus is not bound together with any materials
except Portfolio Company Prospectuses for Portfolio Companies available
as Variable Options under the Contract, provided that:
(i) All of the Portfolio Companies are available as investment
options to the person to whom such documents are sent or given; and
(ii) A table of contents identifying each Portfolio Company
Prospectus that is bound together, and the page number on which each
document is found, is included at the beginning or immediately
following a cover page of the bound materials.
(3) The Summary Prospectus that is sent or given satisfies the
requirements of paragraph (b) or (c) of this section, as applicable, at
the time of the carrying or delivery of the Contract security; and
(4) The conditions set forth in paragraph (h) of this section are
satisfied.
(g) Sending Communications. A communication relating to an offering
registered on Form N-3, Form N-4, or Form N-6 sent or given after the
effective date of a Contract's registration statement (other than a
prospectus permitted or required under section 10 of the Act) shall not
be deemed a
[[Page 71180]]
prospectus under section 2(a)(10) of the Act (15 U.S.C. 77b(a)(10)) if:
(1) It is proved that prior to or at the same time with such
communication a Summary Prospectus was sent or given to the person to
whom the communication was made;
(2) The Summary Prospectus is not bound together with any
materials, except as permitted by paragraph (f)(2) of this section;
(3) The Summary Prospectus that was sent or given satisfies the
requirements of paragraph (b) or (c) of this section, as applicable, at
the time of such communication; and
(4) The conditions set forth in paragraph (h) of this section are
satisfied.
(h) Availability of the Statutory Prospectus and Certain Other
Documents.
(1) The current Initial Summary Prospectus, Updating Summary
Prospectus, Statutory Prospectus, Statement of Additional Information,
and in the case of a Registrant on Form N-3, the Registrant's most
recent annual and semi-annual reports to shareholders under Sec.
270.30e-1 of this chapter, are publicly accessible, free of charge, at
the website address specified on the cover page or beginning of the
Summary Prospectuses, on or before the time that the Summary
Prospectuses are sent or given and current versions of those documents
remain on the website through the date that is at least 90 days after:
(i) In the case of reliance on paragraph (f) of this section, the
date that the Contract security is carried or delivered; or
(ii) In the case of reliance on paragraph (g) of this section, the
date that the communication is sent or given.
(2) The materials that are accessible in accordance with paragraph
(h)(1) of this section must be presented on the website in a format, or
formats, that:
(i) Are human-readable and capable of being printed on paper in
human-readable format;
(ii) Permit persons accessing the Statutory Prospectus or Statement
of Additional Information for the Contract to move directly back and
forth between each section heading in a table of contents of such
document and the section of the document referenced in that section
heading; provided that, in the case of the Statutory Prospectus, the
table of contents is either required by Sec. 230.481(c) or contains
the same section headings as the table of contents required by Sec.
230.481(c); and
(iii) Permit persons accessing a Summary Prospectus to move
directly back and forth between:
(A) Each section of the Summary Prospectus and any section of the
Statutory Prospectus and Contract Statement of Additional Information
that provides additional detail concerning that section of the Summary
Prospectus; or
(B) Links located at both the beginning and end of the Summary
Prospectus, or that remain continuously visible to persons accessing
the Summary Prospectus, and tables of contents of both the Statutory
Prospectus and the Contract Statement of Additional Information that
meet the requirements of paragraph (h)(2)(ii) of this section.
(iv) Permit persons accessing the Summary Prospectus to view the
definition of each special term used in the Summary Prospectus (as
required by paragraph (e) of this section) upon command (e.g., by
moving or ``hovering'' the computer's pointer or mouse over the term,
or selecting the term on a mobile device); or permits persons accessing
the Contract Summary Prospectus to move directly back and forth between
each special term and the corresponding entry in any glossary or list
of definitions in the Contract Summary Prospectus (as described in
paragraph (e) of this section).
(3) Persons accessing the materials specified in paragraph (h)(1)
of this section must be able to permanently retain, free of charge, an
electronic version of such materials in a format, or formats, that meet
each of the requirements of paragraphs (h)(2)(i) and (ii) of this
section.
(4) The conditions set forth in paragraphs (h)(1) through (3) of
this section shall be deemed to be met, notwithstanding the fact that
the materials specified in paragraph (h)(1) of this section are not
available for a time in the manner required by paragraphs (h)(1)
through (3) of this section, provided that:
(i) The Registrant has reasonable procedures in place to ensure
that the specified materials are available in the manner required by
paragraphs (h)(1) through (3) of this section; and
(ii) The Registrant takes prompt action to ensure that the
specified documents become available in the manner required by
paragraphs (h) through (3) of this section, as soon as practicable
following the earlier of the time at which it knows or reasonably
should have known that the documents are not available in the manner
required by paragraphs (h)(1) through (3) of this section.
(i) Other Requirements (1) Delivery upon request. If paragraph (f)
or (g) of this section is relied on with respect to a Contract, the
Registrant (or a financial intermediary through which the Contract may
be purchased) must send, at no cost to the requestor and by U.S. first
class mail or other reasonably prompt means, a paper copy of the
Contract Statutory Prospectus, Contract Statement of Additional
Information, and in the case of a Registrant on Form N-3, the
Registrant's most recent annual and semi-annual reports to shareholders
under Sec. 270.30e-1 of this chapter, to any person requesting such a
copy within three business days after receiving a request for a paper
copy. If paragraph (f) or (g) of this section is relied on with respect
to a Contract, the Registrant (or a financial intermediary through
which Contract may be purchased) must send, at no cost to the
requestor, and by email, an electronic copy of any of the documents
listed in this paragraph (i)(1) to any person requesting a copy of such
document within three business days after receiving a request for an
electronic copy. The requirement to send an electronic copy of a
document may be satisfied by sending a direct link to the online
document; provided that a current version of the document is directly
accessible through the link from the time that the email is sent
through the date that is six months after the date that the email is
sent and the email explains both how long the link will remain useable
and that, if the recipient desires to retain a copy of the document, he
or she should access and save the document.
(2) Greater prominence. If paragraph (f) or (g) of this section is
relied on with respect to a Contract, the Summary Prospectus shall be
given greater prominence than any materials that accompany the Summary
Prospectus.
(3) Convenient for reading and printing. If paragraph (f) or (g) of
this section is relied on with respect to a Contract:
(i) The materials that are accessible in accordance with paragraph
(h)(1) of this section must be presented on the website in a format, or
formats, that are convenient for both reading online and printing on
paper; and
(ii) Persons accessing the materials that are accessible in
accordance with paragraph (h)(1) of this section must be able to
permanently retain, free of charge, an electronic version of such
materials in a format, or formats, that are convenient for both reading
online and printing on paper.
(4) Website addresses. If paragraph (f) or (g) of this section is
relied on with respect to a Contract, any website address that is
included in an electronic version of the Summary Prospectus
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must include an active hyperlink or provide another means of
facilitating access through equivalent methods or technologies that
lead directly to the relevant website address. This paragraph (i)(4)
does not apply to electronic versions of a Summary Prospectus that are
filed on the EDGAR system.
(5) Compliance with this paragraph (i) not a condition to reliance
on paragraph (f) or (g) of this section. Compliance with this paragraph
(i) is not a condition to the ability to rely on paragraph (f) or (g)
of this section with respect to a Contract, and failure to comply with
this paragraph (i) does not negate the ability to rely on paragraph (f)
or (g) of this section.
(j) Portfolio Company Prospectuses--(1) Transfer of the Portfolio
Company security. Any obligation under section 5(b)(2) of the Act to
have a Statutory Prospectus precede or accompany the carrying or
delivery of a Portfolio Company security is satisfied if, and
information contained in the documents referenced in paragraph
(j)(1)(ii) of this section is conveyed for purposes of Sec. 230.159
when:
(i) An Initial Summary Prospectus is used for each currently
offered Contract described under the related registration statement;
(ii) A summary prospectus is used for the Portfolio Company (if the
Portfolio Company is registered on Form N-1A); and
(iii) The current summary prospectus, Statutory Prospectus,
Statement of Additional Information, and most recent annual and semi-
annual reports to shareholders under Sec. 270.30e-1 of this chapter
for the Portfolio Company are publicly accessible, free of charge, at
the same website address referenced in paragraph (h)(1) of this
section, and are accessible under the conditions set forth in
paragraphs (h)(1), (h)(2)(i) and (ii), and (h)(3) and (4) of this
section, with respect to the availability of documents relating to the
Contract.
(2) Communications. Any communication relating to a Portfolio
Company (other than a prospectus permitted or required under section 10
of the Act) shall not be deemed a prospectus under section 2(a)(10) of
the Act (15 U.S.C. 77b(a)(10)) if the conditions set forth in paragraph
(j)(1) of this section are satisfied.
(3) Other requirements. The materials referenced in paragraph
(j)(1)(iii) of this section must be delivered upon request, presented,
and able to be retained under the conditions set forth in paragraphs
(i)(1) and (3) of this section. Compliance with this paragraph (j)(3)
is not a condition to the ability to rely on paragraph (j)(1) or (2) of
this section, and failure to comply with this paragraph (j)(3) does not
negate the ability to rely on paragraph (j)(1) or (2) of this section.
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
12. The general authority citation for part 232 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-11, 7201 et seq.;
and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
13. Amend Sec. 232.313 by revising paragraphs (a) and (b) to read as
follows:
Sec. 232.313 Identification of investment company type and series
and/or class (or contract).
(a) Registered investment companies, business development
companies, and offerings of registered index-linked annuities must
indicate their investment company type, based on whether the
registrant's last effective registration statement or amendment (other
than a merger/proxy filing on Form N-14 (Sec. 239.23 of this chapter)
was filed on Form N-1 (Sec. Sec. 239.15 and 274.11 of this chapter),
Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), Form N-2
(Sec. Sec. 239.14 and 274.11a-1 of this chapter), Form N-3 (Sec. Sec.
239.17A and 274.11b of this chapter), Form N-4 (Sec. Sec. 239.17b and
274.11c of this chapter), Form N-5 (Sec. Sec. 239.24 and 274.5 of this
chapter), Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
Form S-1 (Sec. 239.11 of this chapter), Form S-3 (Sec. 239.13 of this
chapter), or Form S-6 (Sec. 239.16 of this chapter) in those EDGAR
submissions identified in the EDGAR Filer Manual.
(b) Registered investment companies or offerings of registered
index-linked annuities whose last effective registration statement or
amendment (other than a merger/proxy filing on Form N-14 (Sec. 239.23
of this chapter) was filed on Form N-1A (Sec. Sec. 239.15A and 274.11A
of this chapter), Form N-3 (Sec. Sec. 239.17A and 274.11b of this
chapter), Form N-4 (Sec. Sec. 239.17b and 274.11c of this chapter), or
Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter) must, under
the procedures set forth in the EDGAR Filer Manual:
(1) Provide electronically, and keep current, information
concerning their existing and new series and/or classes (or contracts,
in the case of separate accounts), including series and/or class
(contract) name and ticker symbol, if any, and be issued series and/or
class (or contract) identification numbers;
(2) Deactivate for EDGAR purposes any series and/or class (or
contract, in the case of separate accounts) that are no longer offered,
go out of existence, or deregister following the last filing for that
series and/or class (or contract, in the case of separate accounts),
but the registrant must not deactivate the last remaining series unless
the registrant deregisters; and
(3) For those EDGAR submissions identified in the EDGAR Filer
Manual, include all series and/or class (or contract) identifiers of
each series and/or class (or contract) on behalf of which the filing is
made.
* * * * *
0
14. Amend Sec. 232.405 by revising paragraphs (a)(3)(i) introductory
text, (a)(3)(ii), (b)(1) introductory text, (b)(2) introductory text,
(b)(2)(iii), and the final sentence of Note 1 to the section to read as
follows:
Sec. 232.405 Interactive Data File Submissions.
* * * * *
(a) * * *
(3) * * *
(i) If the electronic filer is not a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, and is not within one of the categories
specified in paragraph (f)(1)(i) of this section, as partly embedded
into a filing with the remainder simultaneously submitted as an exhibit
to:
* * * * *
(ii) If the electronic filer is a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
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Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, and is not within one of the categories
specified in paragraph (f)(1)(ii) of this section, as partly embedded
into a filing with the remainder simultaneously submitted as an exhibit
to a filing that contains the disclosure this section requires to be
tagged; and
* * * * *
(b) * * *
(1) If the electronic filer is not a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in Section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a registered index-linked annuity issuer as
defined in Rule 405 under the Securities Act (17 CFR 232.405), a
business development company as defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), a unit
investment trust as defined in Section 4(2) of the Investment Company
Act of 1940 (15 U.S.C. 80a-4), or a clearing agency that provides a
central matching service, an Interactive Data File must consist of only
a complete set of information for all periods required to be presented
in the corresponding data in the Related Official Filing, no more and
no less, from all of the following categories:
* * * * *
(2) If the electronic filer is an open-end management investment
company registered under the Investment Company Act of 1940, a separate
account (as defined in Section 2(a)(14) of the Securities Act)
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a registered index-linked annuity issuer as defined in Rule 405
under the Securities Act (17 CFR 232.405), a unit investment trust as
defined in Section 4(2) of the Investment Company Act of 1940 (15
U.S.C. 80a-4), or a clearing agency that provides a central matching
service, an Interactive Data File must consist of only a complete set
of information for all periods required to be presented in the
corresponding data in the Related Official Filing, no more and no less,
from the information set forth in:
* * * * *
(iii) Items 2(b)(2), 2(d), 3, 4, 5, 6(a) (instruction), 6(c)(1),
6(d), 7(e), 10, 17, 26(c), and 31A of Sec. Sec. 239.17b and 274.11c of
this chapter (Form N-4);
* * * * *
Note 1 to Sec. 232.405: * * * For an issuer that is a management
investment company or separate account registered under the Investment
Company Act of 1940 (15 U.S.C. 80a et seq.), a registered index-linked
annuity issuer as defined in Rule 405 under the Securities Act (17 CFR
232.405), a business development company as defined in Section 2(a)(48)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), or a
unit investment trust as defined in Section 4(2) of the Investment
Company Act of 1940 (15 U.S.C. 80a-4), General Instruction C.3.(g) of
Form N-1A, General Instruction I of Form N-2, General Instruction
C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, General
Instruction C.3.(h) of Form N-6, General Instruction 2.(l) of Form N-
8B-2 (Sec. 274.12 of this chapter), General Instruction 5 of Form S-6,
and General Instruction C.4 of Form N-CSR, as applicable, specifies the
circumstances under which an Interactive Data File must be submitted.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
15. The general authority citation for part 239 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a),
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24,
80a-26, 80a-29, 80a-30, 80a-37; and sec. 71003 and sec. 84001, Pub.
L. 114-94, 129 Stat. 1321, unless otherwise noted.
* * * * *
0
16. Revise Form N-4 (referenced in Sec. Sec. 239.17b and 274.11c).
Note: Form N-4 is attached as Appendix A to this document. Form
N-4 does not appear in the Code of Federal Regulations.
0
17. Amend Form N-6 (referenced in Sec. Sec. 239.17c and 274.11d) by
revising Instruction 3 to Item 30.
Note: Form N-6 is attached as Appendix B to this document. Form
N-6 will not appear in the Code of Federal Regulations.
18. Add Sec. 239.66 to read as follows:
Sec. 239.66 Form 24F-2, annual filing of securities sold pursuant to
registration of certain investment company securities and registered
index-linked annuities.
Form 24F-2 shall be used as the annual report filed by face amount
certificate companies, open-end management companies, unit investment
trusts, and registered index-linked annuities pursuant to Sec. Sec.
230.456, Sec. 230.457, or 270.24f-2 of this chapter for reporting
securities sold during the fiscal year.
0
19. Revise Form 24F-2 (referenced in Sec. Sec. 239.66 and 274.24).
Note: Form 24F-2 is attached as Appendix C to this document.
Form 24F-2 will not appear in the Code of Federal Regulations.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
20. The authority citation for part 274 continues 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, 80a-29, and 80a-37, unless
otherwise noted.
* * * * *
0
21. Revise Sec. 274.24 to read as follows:
Sec. 274.24 Form 24F-2, annual filing of securities sold pursuant to
registration of certain investment company securities and registered
index-linked annuities.
Form 24F-2 shall be used as the annual report filed by face amount
certificate companies, open-end management companies, unit investment
trusts, and registered index-linked annuities pursuant to Sec. Sec.
230.456, 230.457, or 270.24f-2 of this chapter for reporting securities
sold during the fiscal year.
By the Commission.
Dated: September 29, 2023.
Vanessa Countryman,
Secretary.
Note: The following appendices will not appear in the Code of
Federal Regulations.
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[FR Doc. 2023-21986 Filed 10-12-23; 8:45 am]
BILLING CODE 8011-01-C
