SEC Adopts Rule to Simplify Variable Annuity Disclosures

The U.S. Securities and Exchange Commission (SEC) has adopted a new rule and related regulatory amendments to simplify and streamline disclosures for investors about variable annuities and variable life insurance contracts.

SEC Chairman Jay Clayton says the changes permit the use of “a concise, reader-friendly prospectus designed to improve investors’ understanding of the contracts’ features, fees and risks.” He says the new framework’s use of “layered disclosure and technology” will provide investors with a roadmap so they can more easily access the information they need to make an informed investment decision.

“With today’s technology and the benefits of layered disclosure, investors should not have to work through hundreds of pages of disclosure to understand these products’ risks, fees and features in order to make informed investment decisions,” Clayton says in a statement published alongside the final rule.

Under this framework, detailed information about a variable annuity or variable life insurance contract must still be made available online, and an investor can choose to have that information delivered in paper or electronic format at no charge.

Clayton says the framework builds on the commission’s experience with a similar layered disclosure approach developed for mutual funds. To implement the improved disclosure framework, the commission adopted amendments to the registration forms and related rules for variable annuity and variable life insurance contracts. Variable annuities and variable life insurance contracts may begin using the modernized layered disclosure approach as early as July 1.

Technically, the SEC has introduced a new Rule 498A under the Securities Act, which permits the use of two distinct types of contract summary prospectuses. These are an “initial summary prospectus” covering variable contracts currently offered to new investors and an “updating summary prospectus” for existing investors.

According to an SEC fact sheet, the initial summary prospectus must include the following features: a table summarizing certain key information about the contract’s fees, risks and other important considerations; an overview of the contract; and more detailed disclosures relating to fees, purchases, withdrawals and other contract benefits. The updating summary prospectus, in turn, must include a brief description of certain changes to the contract that occurred during the previous year, as well as the key information table from the initial summary prospectus.

The SEC’s action is timely considering the Setting Every Community Up for Retirement Enhancement (SECURE) Act has established a fiduciary safe harbor for annuity provider selection for retirement plan sponsors. The safe harbor addresses one concern plan sponsors have had about offering annuities within defined contribution (DC) plans, and some think it will open the door for more plan sponsors to do so. Another concern plan sponsors had is the ability to understand—and to communicate to participants—these complex products.

The initial financial services industry reaction to the SEC’s action seems to be positive. For example, the Insured Retirement Institute (IRI) shared supportive comments upon the SEC’s announcement.

“This is a major leap forward in the ability to provide consumers with information they need to make educated investment decisions about financial products that can be essential to ensure a secure and dignified retirement,” says Jason Berkowitz, IRI chief legal and regulatory affairs officer. “We are carefully scrutinizing the final rule with our members to fully understand its ramifications and to ensure that it allows for a more rational disclosure of important consumer information versus today’s required book-length paper versions delivered by U.S. mail. We are deeply appreciative of the commission’s thoughtful and inclusive process in this rulemaking.”