SEC Adopts Final Rule on Variable Contract Disclosure, Effective July 1, 2020

The SEC recently adopted new Rule 498A under the Securities Act, including various supporting amendments, to “simplify and streamline” the disclosure framework for variable annuities and variable life insurance contracts. As Bates Group described when the rule was first proposed (and subsequently thereafter – see here and here), the new rule allows for a plain-English, easy to read, concise “summary prospectus” to satisfy obligations under the securities laws concerning variable product prospectus delivery.

The summary prospectus is intended to help investors understand variable contracts through a “layered approach to disclosure” similar to the approach which has been in use for mutual funds since 2009. Under that approach, issuers of variable contracts will be able to provide essential information to consumers directly, and then must provide on-line links to additional and more detailed information (e.g., the full prospectus, underlying fund summaries and shareholder reports).  For current contract holders, issuers will be able to provide an “updated summary prospectus” which would contain a brief description of changes to the contract that occurred during the previous year along with all the basic information contained in the new summary.

In a simplified fact sheet, the SEC described that the summary prospectus must include key information, including an overview of the contract, details about fees and risks (which must appear in table format) and other disclosures related to fees, purchases, withdrawals and other contract benefits. As described in the rule package, however, this information can be complex. Variable contracts can have multi-level fee structures, e.g. mortality and expense risk issuer assessments, administrative fees, optional benefits fees, transactional charges and other insurance charges to name a few (at p.10). The SEC acknowledges this complexity, noting: “because variable contracts typically include a number of optional benefits and underlying investment options, a summary could not, by its nature, include all relevant aspects and details regarding each of these contract features.” That said, the summary prospectus is intended “to be a succinct summary of the contract’s key terms and benefits and most significant risks” (at p.14).

It is expected that these summaries and this layered approach will be far more clear and consumer-friendly, and will allow investors in these products to understand them and make more informed decisions. As Chair Jay Clayton stated upon the adoption of the rule: “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.”

The 700-plus-page final rule contains numerous technical and conforming amendments and modifies or revokes superseded existing rules and forms. For example, the rule amends the registration forms for variable contracts (Forms N-3, N-4, and N-6) in order to improve the content, format and presentation of information to investors. The rule also (i) requires that statutory prospectuses be available for free on a public website and (ii) provides other specifications on, for example, the use of the Inline eXtensible Business Reporting Language format for the submission of necessary disclosures.

The new disclosure framework on variable annuities and variable life insurance contracts becomes effective July 1, 2020. (For variable contracts that are discontinued by that date, issuers will not have to update their registration statements or provide updated prospectuses to existing investors.) As of January 1st, 2022, all Form N-3, N-4 and N-6 registration statements, and corresponding updates, must comply with the rule.

For more information about Bates Group’s Insurance and Actuarial services, visit our Insurance and Actuarial Practice page or contact Greg Faucher, Bates Group Insurance Practice Leader.