Rule2024-14925
Registration for Index-Linked Annuities and Registered Market Value Adjustment Annuities; Amendments To Form N-4 for Index-Linked Annuities, Registered Market Value Adjustment Annuities, and Variable Annuities; Other Technical Amendments
Primary source
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Published
July 24, 2024
Effective
September 23, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting rule and form amendments to provide a tailored form to register the offerings of registered index-linked annuities ("RILAs"). Specifically, the Commission is amending 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 amending certain filing rules and making other related amendments. These changes will implement the requirements relating to RILAs contained in the Consolidated Appropriations Act, 2023. The Commission is also extending the registration, filing, and disclosure requirements that the Commission is adopting for RILA offerings to the offerings of registered market value adjustment annuities. Further, the Commission is adopting other amendments to Form N-4 that will apply to all issuers that use that form. The Commission is applying to RILA and registered market value adjustment annuity advertisements and sales literature a current Commission rule that provides guidance as to when sales literature is materially misleading under the Federal securities laws. Finally, the Commission is adopting technical amendments to Forms N-6 and N-3 to correct errors from prior Commission rulemakings.
Full Text
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[Federal Register Volume 89, Number 142 (Wednesday, July 24, 2024)]
[Rules and Regulations]
[Pages 59978-60162]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14925]
[[Page 59977]]
Vol. 89
Wednesday,
No. 142
July 24, 2024
Part II
Securities and Exchange Commission
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17 CFR Parts 230, 232, 239, et al.
Registration for Index-Linked Annuities and Registered Market Value
Adjustment Annuities; Amendments To Form N-4 for Index-Linked
Annuities, Registered Market Value Adjustment Annuities, and Variable
Annuities; Other Technical Amendments; Final Rule
Federal Register / Vol. 89 , No. 142 / Wednesday, July 24, 2024 /
Rules and Regulations
[[Page 59978]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, and 274
[Release No. 33-11294; 34-100450; IC-35273; File No. S7-16-23]
RIN 3235-AN30
Registration for Index-Linked Annuities and Registered Market
Value Adjustment Annuities; Amendments To Form N-4 for Index-Linked
Annuities, Registered Market Value Adjustment Annuities, and Variable
Annuities; Other Technical Amendments
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting rule and form amendments to provide a tailored form to
register the offerings of registered index-linked annuities
(``RILAs''). Specifically, the Commission is amending 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 amending certain
filing rules and making other related amendments. These changes will
implement the requirements relating to RILAs contained in the
Consolidated Appropriations Act, 2023. The Commission is also extending
the registration, filing, and disclosure requirements that the
Commission is adopting for RILA offerings to the offerings of
registered market value adjustment annuities. Further, the Commission
is adopting other amendments to Form N-4 that will apply to all issuers
that use that form. The Commission is applying to RILA and registered
market value adjustment annuity advertisements and sales literature a
current Commission rule that provides guidance as to when sales
literature is materially misleading under the Federal securities laws.
Finally, the Commission is adopting technical amendments to Forms N-6
and N-3 to correct errors from prior Commission rulemakings.
DATES:
Effective date: This rule is effective September 23, 2024.
Compliance dates: The applicable compliance dates are discussed in
section II.J of this Release.
FOR FURTHER INFORMATION CONTACT: Pamela Ellis, Alexis Hassell, Rachael
Hoffman, Michael Khalil, Amy Miller, or Gregory Scopino, 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; Min Oh, Senior
Counsel; or Elizabeth Bentzinger or Michael Kosoff, Senior Special
Counsels, Disclosure Review and Accounting Office, at (202) 551-6921,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is amending the following
rules and forms:
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\1\ 15 U.S.C. 77a et seq.
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Commission reference CFR citation (17 CFR)
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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 433.............................................. Sec. 230.433.
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-3.............................................. Sec. 239.17a and 274.11b.
Form N-4.............................................. Sec. 239.17b and 274.11c.
Form N-6.............................................. Sec. 239.17c and 274.11d.
Form 24F-2............................................ Sec. 239.66 and Sec. 274.24.
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Table of Contents
I. Introduction and Background
A. Overview of RILA Features
B. Overview of Registered MVA Annuity Features
C. Current Registration Requirements for RILAs and Registered
MVA Annuities
D. Developments and Analysis Informing Final Amendments
1. Investor Testing Informing Final Amendments
2. Analysis of Comments on Recurring Disclosure Topics Informing
Final Amendments
E. Overview of the Final Amendments
II. Discussion
A. Use of Form N-4 for RILAs
B. Use of Form N-4 for Registered MVA Annuities
C. Contents of Form N-4
1. Front and Back Cover Pages (Item 1)
2. Overview of the Contract (Item 2)
3. Key Information Table (Item 3)
4. Principal Disclosure Regarding Index-Linked Options and MVA
Options (Items 6 and 17)
5. Principal Risks of Investing in the Contract (Item 5)
6. Addition of Contract Adjustments and Other Amendments to Fee
and Expense Disclosures (Items 4, 7, and 22)
7. Information About Contracts With Index-Linked and/or MVA
Options (Item 31A)
8. Other Amendments and Provisions
9. Remaining Form N-4 Items
10. Inline XBRL
D. Option To Use a Summary Prospectus
1. Overview--Use of Summary Prospectus for Non-Variable
Annuities
2. Initial Summary Prospectus
3. Updating Summary Prospectus
[[Page 59979]]
4. Online Accessibility of Contract Statutory Prospectus and
Certain Other Documents Relating to the Contract
5. Other Requirements for Summary Prospectus and Other Contract
Documents
E. Accounting (Items 16 and 26)
F. 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
G. Communication Rules Applicable to Non-Variable Annuities
Sales Literature (Rule 156)
2. Free Writing Prospectuses and Advertisements (Rules 433 and
482)
H. Existing Commission Letters
I. Technical Amendments to Forms N-3 and N-6
J. Effective and Compliance Dates
III. Other Matters
IV. 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 Considered
1. Creating an Entirely New Registration Form for RILAs
2. Alternatives to Specific Form N-4 Amendments
3. Limiting Scope of Structured Data Requirements
V. Paperwork Reduction Act
A. Rule 498A
B. Form N-4
C. Form 24F-2
D. Investment Company Interactive Data
VI. Regulatory Flexibility Act Certification Statutory Authority
I. Introduction and Background
The Commission is adopting rule and form amendments (``final
amendments'') that are designed to help investors make informed
decisions regarding RILAs. To modernize and enhance the registration
and disclosure framework for RILAs, we are adopting amendments that
will require offerings of RILAs to be registered on Form N-4, the
registration form for most variable annuities, as well as adapt that
form to accommodate RILAs. These amendments finalize rule and form
amendments that the Commission proposed in September 2023.\2\
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\2\ See Registration for Index-Linked Annuities; Amendments to
Form N-4 for Index-Linked and Variable Annuities, Investment Company
Act Release No. 35028 (Sept. 29, 2023) [88 FR 71088 (Oct. 13, 2023)]
(``Proposing Release'' or ``proposal''). The Commission voted to
issue the Proposing Release on September 29, 2023. The release was
posted on the Commission website that day, and comment letters were
received beginning the same day. The comment period closed on
November 28, 2023. We have considered all public comment received
through May 28, 2024. The comment letters on the Proposing Release
are available at <a href="https://www.sec.gov/comments/s7-16-23/s71623.htm">https://www.sec.gov/comments/s7-16-23/s71623.htm</a>.
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The amendments implement Congress' directive to the Commission in
Division AA, Title I of the Consolidated Appropriations Act, 2023
(``RILA Act'') to adopt a new registration form for RILAs within 18
months of enactment.\3\ 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.
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\3\ Publix Law 117-328; 136 Stat. 4459 (Dec. 29, 2022). The RILA
Act provides that, if the Commission fails to adopt the form within
18 months of enactment, RILA issuers can begin registering RILA
offerings on existing Form N-4.
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The Commission's amendments will result in disclosure requirements
for RILAs that are tailored to the particular characteristics of RILAs
and comparable to variable annuity disclosure. We are also adopting
related amendments to various Commission rules to effectuate the new
disclosure requirements for RILAs and for further consistency in the
registration, filing, and disclosure framework for RILAs compared to
other similar annuity products. These amendments include, among other
things: amendments permitting RILA issuers to use summary prospectuses;
amendments that will result in the same requirements for RILAs and
variable annuities in terms of updating the issuer's prospectus each
year; and amendments that address how RILAs will register and pay for
new shares, as well as other aspects of the registration and offering
process. Furthermore, we are adopting amendments to extend the
registration, filing, and disclosure approach we are adopting for RILAs
to annuity contracts that offer fixed investment options and apply
market value adjustments (``MVAs'') to amounts withdrawn from a fixed
option before the end of the fixed option's term, where the offering is
required to be registered with the Commission because of the MVA
(``registered MVA annuities'' and, collectively with RILAs, ``non-
variable annuities'').\4\ We are additionally adopting other amendments
to Form N-4 that will apply to all issuers that use that form, which
are informed by the staff's historical experience in administering the
form and relevant investor testing.\5\ We are also adopting amendments
that will apply a current Commission rule--which provides guidance as
to when sales literature is materially misleading under the Federal
securities laws--to RILA and registered MVA annuity advertisements and
sales literature. Finally, we are adopting technical amendments to
Forms N-6 and N-3 to update certain references used in those forms.
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\4\ See facing page of final Form N-4 in final Form N-4; see
also infra footnote 16 and accompanying text (discussing the
operation of MVAs); Section II.B (discussing the final amendments'
requirement for registered MVA annuities to register on Form N-4).
The term ``non-variable annuities'' distinguishes these annuities
from variable annuities whose offerings are registered on Form N-4,
in which investors allocate their purchase payments to a range of
investment options--typically mutual funds--and the investor's
account value changes depending on the performance of the investment
options selected. We understand that this term is understood in the
industry to refer to annuities other than variable annuities.
\5\ See infra section I.D.1.
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The Commission received comments on the proposal from a variety of
interested parties, including life insurance companies, professional
and trade associations, a public interest advocacy organization, and
individuals.\6\ Commenters broadly supported the proposal, including
the proposed approach of requiring insurance companies to use Form N-4
to register RILA offerings, the amendments that would permit the use of
summary prospectuses, and the amendments to filing and fee-payment
rules. Some commenters suggested modifications and additions to the
proposed approach, including changes to some of the specific
disclosures that Form N-4 would require for RILAs. Others suggested we
include registered MVA annuities (which currently, like RILAs, register
on Forms S-1 and S-3) and certain other insurance products among those
required to register on Form N-4. Some commenters also urged the
Commission to extend rule 482 under the Securities Act, which addresses
investment company advertising, to RILAs.
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\6\ Some commenters raised topics that relate to various
insurance product issues but not to the proposed rulemaking. See,
e.g., Comment Letter of the Committee of Annuity Insurers (Nov. 28,
2023) (``CAI Comment Letter'') (suggesting the Commission adopt
amendments for life insurance products that are similar to RILAs).
Another commenter sought clarification on topics related to variable
and non-variable annuities that are unrelated to the proposed
amendments. VIP Working Group Comment Letter (e.g., seeking guidance
on the application of Regulation D to certain offerings of variable
and non-variable annuities). These comments are beyond the scope of
this rulemaking.
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After consideration of the comments received, we are adopting the
proposed
[[Page 59980]]
amendments, with certain modifications. The final amendments retain
each of the key elements of the proposed rules--the required
registration of RILA offerings on Form N-4, the core aspects of the
proposed disclosure requirements, the optional use of summary
prospectuses by RILAs, the amendments to filing and fee-payment rules,
and the amendments addressing materially misleading RILA sales
literature. The resulting framework implements the RILA Act's mandate
while making the RILA offering process similar to that for other
insurance investment products, enhancing the information insurance
companies disclose about RILAs, and extending certain antifraud
guidance to RILA advertisements. However, we have modified certain
proposed disclosure requirements and other aspects of the proposal to
address the comments the Commission received. Additionally, the final
amendments, in a change from the proposal and in response to comments
received addressing the Commission's requests for comment about the
registration of offerings of registered MVA annuities, will require
these offerings to register on Form N-4. This, along with other
amendments we are adopting extending the registration, filing, and
disclosure framework we are adopting for RILAs to registered MVA
annuities, and extending certain antifraud guidance to registered MVA
annuity advertisements and sales literature, will result in greater
uniformity in the regulation of non-variable annuities.
A. Overview of RILA Features
A RILA is one of several types of annuity contracts that insurance
companies offer.\7\ 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''). A RILA may be offered on a
standalone basis with various index-linked investment options (``index-
linked options'') that investors may choose.\8\ Alternatively, an
insurance company may 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'') or fixed
investment options, including fixed options subject to an MVA (``MVA
options'').\9\ The market for RILAs has grown significantly in recent
years, with annual RILA sales of $47.4 billion in 2023 alone, 15%
higher than in the prior year, and more than quintupling since
2017.\10\
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\7\ 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.
\8\ Depending on the context, this Release uses the term
``RILA'' to refer collectively to 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.'' One commenter suggested that the
Commission should use a term other than ``RILA,'' as the term
``registered'' in ``RILA'' may serve to confuse investors because
there are other investment products that are registered under both
the Securities Act and the Investment Company Act of 1940 (the
``Investment Company Act'') that do not include the term
``registered'' (e.g., variable annuities, mutual funds, and
exchange-traded funds). See Comment Letter of VIP Working Group
(Nov. 10, 2023) (``VIP Working Group Comment Letter''). We continue
to use the term ``RILA'' in the final amendments and in this Release
for consistency with the RILA Act, as well as our understanding of
common industry practice. See, e.g., The Design and Regulatory
Framework of Registered Index-Linked Annuities, ALI CLE Conference
on Life Insurance Products 2022.
\9\ 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, 8, and
accompanying text (describing the key features of variable annuity
contracts and variable life insurance contracts (together,
``variable contracts'')). 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.
\10\ See LIMRA, ``LIMRA: Record-High 2023 Annuity Sales Driven
by Extraordinary Growth in Independent Distribution,'' news release
(Mar. 12, 2024) (reporting 2023 RILA sales of $47.4 billion),
available at <a href="https://www.limra.com/en/newsroom/news-releases/2024/limra-record-high-2023-annuity-sales-driven-by-extraordinary-growth-in-independent-distribution/">https://www.limra.com/en/newsroom/news-releases/2024/limra-record-high-2023-annuity-sales-driven-by-extraordinary-growth-in-independent-distribution/</a> (stating that high annuity sales were
``largely due to broader engagement with independent distribution''
and that ``[r]ising interest rates have made annuities very
attractive to a larger group of investors''). The fourth quarter of
2023 marked the first time RILA product sales surpassed variable
annuity sales. See also 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), available at <a href="https://www.limra.com/en/newsroom/news-releases/2018/limra-secure-retirement-institute-total-annuity-sales-continued-to-decline-in-2017/">https://www.limra.com/en/newsroom/news-releases/2018/limra-secure-retirement-institute-total-annuity-sales-continued-to-decline-in-2017/</a>.
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RILAs are complex financial products that are sold to retail
investors.\11\ The Proposing Release describes 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.\12\ 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 a specified index, rate, or
benchmark (e.g., the S&P 500).\13\ One aspect of RILAs' complexity
involves the various ways that interest may be credited, and how
contract features that affect how interest is credited work together.
The Proposing Release details RILAs' traditional bounded return
structure, which typically limits investors' ability to participate in
upside index performance (through features such as ``cap rates'' and/or
``participation rates,'' collectively ``limits on gains''), and also
limits investors' losses if the performance of the index goes down in
value (through features such as ``buffers'' or ``floors,'' collectively
``limits on losses'').\14\ For many RILAs, the investor pays no direct
or explicit ongoing fees and expenses under the RILA, and this is
sometimes a feature communicated in RILA marketing materials. However,
the RILA's bounded return structure requires investors to agree to
tradeoffs that come with their own economic costs. That is, RILAs limit
or reduce downside risk, but also limit upside performance. In exchange
for some protection against losses if the index goes down in value,
investors must also agree to contractual provisions limiting the gains
they will receive if the index goes up in value. RILAs allow investors
some ability to customize a level of risk with which they are
comfortable.\15\ But 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.
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\11\ We understand that RILAs are predominantly sold by broker-
dealers.
\12\ See Proposing Release at Section I.A. This paragraph and
the paragraphs that follow summarize the RILA features that Section
I.A of the Proposing Release discusses.
\13\ 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.
\14\ See Proposing Release at paragraph accompanying n.10. A cap
rate places an upper limit on an investor's ability to participate
in the index's upside performance directly. A participation rate
sets an investor's return to some specified percentage of the
index's return. A buffer limits the investor's exposure to losses up
to a fixed percentage. A floor places a lower limit on the
investor's exposure to loss.
\15\ See infra Section IV.B.3.
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Charges and penalties for early withdrawals are another prevalent
feature of RILAs. Investors can lose significant money if they withdraw
their money early from an investment option or from the contract. This
can arise in
[[Page 59981]]
several circumstances: (1) ``surrender charges'' that apply when an
investor withdraws money from the contract within a certain period
following the investor's last premium payment; (2) ``interim value
adjustments'' (or ``IVAs''), which adjust the investor's contract value
if amounts are withdrawn (for instance, because of movements to a
different investment option, movements out of the contract, or payment
of certain benefits) from an index-linked option before the end of its
crediting period; \16\ and (3) a positive or negative MVA (collectively
with IVAs, a ``contract adjustment'') to the amount paid to the
investor resulting from changes in interest rates if the investor
partially or fully withdraws amounts from the contract or from certain
fixed options.\17\ Contract adjustments can occur 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. These adjustments also can negatively affect
other values under the contract, such as the surrender value and death
benefit. Moreover, these fees and adjustments are not always mutually
exclusive.\18\ As a result of these charges and penalties, the investor
could lose a significant amount of money in a RILA investment, even if
the index has a gain at the time of the withdrawal.
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\16\ See id. at n.11 and accompanying paragraph. 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.
\17\ MVAs can apply to RILAs, but, as discussed below, they also
can apply to a fixed option available under an annuity contract. See
infra Sections I.B and II.B.
\18\ See Proposing Release at n.13 and accompanying paragraph.
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.
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In addition to the complexities that RILAs' bounded return
structure and potential charges and penalties for early withdrawals
entail, under virtually all RILA investments the insurance company may
change or remove key features of index-linked options, such as the cap
rates, floors, or even the index.\19\ 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. Furthermore, special tax rules
generally apply to RILAs and other annuities, with both tax advantages
and potential adverse tax impacts in certain circumstances.\20\
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\19\ See id. at paragraph following n.13.
\20\ See id. at n.14 and accompanying paragraph.
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For all of these reasons, 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.
B. Overview of Registered MVA Annuity Features
Registered MVA annuities are annuity contracts that offer fixed
investment options (where the insurance company promises to pay a fixed
and stated minimum rate of interest) and apply MVAs to amounts
withdrawn before the end of the fixed option's term.\21\ The insurance
company might apply an MVA, for example, when an investor withdraws
money from the contract, transfers money among investment options, or
annuitizes the contract. For these annuities, fixed options are either
offered on their own or in a combination contract with index-linked
options and/or variable options.
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\21\ See Proposing Release at Section II.H. The Proposing
Release referred to registered MVA annuities as ``registered MVAs.''
For clarity and parallelism with the terms ``RILA'' and ``variable
annuity'' (which also refer to different types of annuities), we
refer to these products instead as ``registered MVA annuities'' in
this Release.
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As the Commission explained in the Proposing Release, RILAs and
registered MVA annuities differ only with respect to the manner in
which interest is calculated and credited.\22\ Interest in a RILA
contract is calculated and credited at the end of the crediting period
based at least in part on the performance of an index or other
benchmark, whereas interest in a registered MVA annuity is guaranteed
and typically credited daily at a fixed rate.\23\ Registered MVA
annuities, however, like RILAs, apply contract adjustments upon
withdrawals prior to term maturity. An investor in a RILA or registered
MVA annuity therefore can lose money--and potentially a significant
amount of money--due to a contract adjustment, and the way in which
these adjustments are calculated may be complex.
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\22\ See id. One commenter stated that it largely agrees with
this characterization. See CAI Comment Letter. No commenters
disagreed with this characterization. See also infra section II.B
(discussing more broadly the comments received on the Commission's
request for comment in the Proposing Release on whether to require
insurance companies to register the offerings of registered MVA
annuities on Form N-4).
\23\ See id.; see also CAI Comment Letter (agreeing with the
Commission's statement in the Proposing Release that RILAs and
registered MVA annuities differ only with respect to the manner in
which interest is calculated and credited).
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Existing disclosure for registered MVA annuities has many
similarities to disclosure for RILAs. Like RILA disclosure, registered
MVA annuity disclosure describes the operation of contract adjustments
and the risks associated with such contract adjustments.\24\ Disclosure
for registered MVA annuities, like disclosure for RILAs and other
annuity contracts, also describes basic annuity features (including, as
for RILAs, information about surrender charges and applicable tax
treatment) and the issuer's financial strength.\25\
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\24\ See CAI Comment Letter.
\25\ See id.
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C. Current Registration Requirements for RILAs and Registered MVA
Annuities
RILAs are securities for purposes of the Securities Act.\26\ Unlike
variable annuity contracts for which the Commission has adopted a
specific tailored registration form, insurance companies currently
register offerings of RILAs on Securities Act registration Forms S-1 or
S-3.\27\ As the Proposing Release describes in detail and this Release
summarizes, the current requirements for issuers offering RILAs and
variable annuities (that is, the requirements prior to the amendments
[[Page 59982]]
the Commission is adopting in this Release) differ in many respects,
both in terms of the disclosure issuers must provide and the
registration process.\28\
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\26\ Under the final amendments, the final Form N-4 will not
register the RILA or registered MVA annuity issuers themselves, only
the offering of RILA or registered MVA annuity securities. Unlike
separate accounts which register variable annuities, RILA and
registered MVA annuity issuers are not investment companies, and
thus need not register with the Commission as an investment company
as separate accounts do. 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 and registered MVA annuities do not fall
within this exemption due, in large part, to the shifting of a
significant level of investment risk from the issuer to the
investor. RILAs and index-linked options, 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 the RILA Act. Similarly, registered MVA annuities and MVA
fixed account options, as used in this release, refer only to
annuities that are securities for the purposes of the Securities
Act. See infra footnote 29 and accompanying text.
\27\ 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''). The registration forms
for variable annuity contracts are Form N-3 (for variable annuity
separate accounts structured as management investment companies) and
Form N-4 (for variable annuity separate accounts structured as unit
investment trusts). See Proposing Release at n.6 and accompanying
text. 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 most variable annuity contracts.
\28\ See Proposing Release at Section I.B.
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Registered MVA annuities also are securities for purposes of the
Securities Act. They are securities because the MVA feature imposes
certain investment risks on purchasers.\29\ Like RILA offerings,
offerings of registered MVA annuities are currently registered on Forms
S-1 or S-3. While this section of the Release discusses the
registration requirements for RILAs, the current registration
requirements for registered MVA annuities are the same as those for
RILAs and present the same considerations.
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\29\ 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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In general, the disclosure requirements of Forms S-1 and S-3 are
not specifically tailored to particular kinds of securities given the
wide range of securities offerings that issuers can register on these
forms.\30\ Forms S-1 and S-3 thus do not include specific line-item
requirements addressing disclosures about RILAs and their complex
features. These forms also require issuers to disclose information
about the offering itself as well as extensive information about the
registrant issuing the securities that a RILA investor may view as less
important than information about the contract's features. Domestic
registrants also must include financial statements prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\31\
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\30\ See Proposing Release at nn.15-17 and accompanying
paragraph.
\31\ 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 Proposing
Release at n.20.
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The Form N-4 disclosure requirements for variable annuities, on the
other hand, are tailored for variable annuities.\32\ Form N-4's
disclosure requirements are designed to provide investors with key
information relating to a variable contract's provisions, benefits, and
risks, along with information about the insurance company and the
offering. In addition, rule 498A and Form N-4 together implement 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.\33\ Structured data requirements for RILA and
variable annuity disclosure also differ.\34\
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\32\ See Proposing Release at nn.18-20 and accompanying
paragraph.
\33\ 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. See id. at n.20 and
accompanying text.
\34\ See Proposing Release at n.25 and accompanying text, and
text following n.26.
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The Proposing Release also details key differences in the current
registration process for RILAs versus variable annuities.\35\ While
insurance companies pay registration fees at the time they register the
offer and sale of RILA securities, a separate account that registers
under the Investment Company Act and offers variable annuity securities
on Form N-4 pays registration fees based on the net issuance of
securities, no later than 90 days after each fiscal year end.\36\
Updates to RILA offering registration statements occur by filing a
post-effective amendment to a Form S-1 registration statement (which
must be declared effective, typically by staff acting pursuant to
delegated authority) or by the filing of the insurance company's annual
report on Form 10-K containing audited financial statements, which
operates as a post-effective amendment to a registration statement on
Form S-3.\37\ In contrast, a variable annuity registration statement on
Form N-4 may be updated by filing an immediately-effective post-
effective amendment under rule 485. This permits the efficient
registration of continuous offerings of variable annuities.
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\35\ See id. at paragraphs accompanying nn.21-26.
\36\ See id. at nn.21 and 26 and accompanying text.
\37\ See id. at nn.22-24 and accompanying text.
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D. Developments and Analysis Informing Final Amendments
1. Investor Testing Informing Final Amendments
In addition to the RILA Act's requirements described above, 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 new registration form for RILAs, with the
goal of ensuring that key information is conveyed in terms that a
purchaser can understand. Consistent with the RILA Act, the Commission
received feedback on individuals' comprehension and views on RILA
disclosure through investor testing. Specifically, the Commission's
Office of the Investor Advocate (``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. The results of the two rounds of qualitative testing
then helped inform a round of quantitative testing with approximately
2,500 participants.
This investor testing, which the Proposing Release and a report
describing investor testing that OIAD conducted describe in detail,
helped us to identify areas of Form N-4 that we proposed to amend to
help ensure that a RILA purchaser receives key information that the
purchaser is able to understand.\38\ 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
disclosure that could appear in select rows of the ``Key Information
Table'' (or ``KIT'') in RILA registration statements. 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. Although 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.
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\38\ Office of Investor Advocate Division, Investor Testing
Report on Registered Index-Linked Annuities (OIAD Working Paper
2023-01), (Sep. 2023) (``OIAD Investor Testing Report'') available
at <a href="https://www.sec.gov/files/rila-report-092023.pdf">https://www.sec.gov/files/rila-report-092023.pdf</a>; see also
Proposing Release at Section I.C.
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The investor testing successfully identified a range of barriers to
investor understanding of RILAs and associated disclosure. However,
with few exceptions, the variations in RILA disclosures presented to
participants did not result in significant improvements in investor
[[Page 59983]]
comprehension.\39\ The Commission incorporated the investor testing
results in its design of the proposed Form N-4 amendments, endeavoring
to give particular attention to: (1) disclosure variations that
resulted in statistically significant improvements in investor
comprehension (specifically, the use of Q&A KIT format); and (2) areas
of identified investor confusion while leveraging existing disclosure
requirements.\40\ Because investor testing did not, for the most part,
provide persuasive evidence of superior disclosures, the Commission
proposed largely to utilize the existing Form N-4 disclosures that have
been developed over time, and with which staff, investors, and RILA
issuers are already familiar.
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\39\ See Proposing Release at n.58 and accompanying text, and
paragraphs following n.58.
\40\ See id. (stating that the Q&A KIT format demonstrated a
statistically significant, albeit quantitatively small, improvement
over the non-Q&A KIT format, and stating that investor testing
successfully identified a range of barriers to investor
understanding of RILAs and associated disclosures).
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The Commission sought comment on this proposed approach, and it
also sought comment throughout the Proposing Release on specific areas
for improvement that would aid investor comprehension. Furthermore, the
Commission requested specific input from the retail investor community
through a short feedback flyer seeking input on their experiences with
annuities generally and RILAs specifically (``Feedback Flyer'').\41\
Commenters did not generally address the investor testing that informed
the proposed approach, and the Commission received no Feedback Flyer
responses.\42\
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\41\ See id. at n.59 and accompanying text; see also Feedback
Flyer available at <a href="https://www.sec.gov/files/rules/proposed/2023/rila-feedback-flyer.pdf">https://www.sec.gov/files/rules/proposed/2023/rila-feedback-flyer.pdf</a>.
\42\ One commenter, while not commenting on the investor testing
substantively, discussed the RILA trends that the OIAD Investor
Testing Report described, as discussed in more detail below. See
infra footnote 305 and accompanying text.
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The Commission's Investor Advocate also provided comments
discussing the investor testing process and supporting the proposed
rules, stating the belief that the proposed RILA registration form
would make it easier for investors to understand RILAs.\43\ The
Investor Advocate stated that the proposed rule's registration form
would be more helpful for investors than the forms currently used for
RILA registration. The Investor Advocate also stated that modified Form
N-4 ``is likely to improve investor comprehension related to the
features, costs, and risks of RILAs.''
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\43\ See Comment Letter of Cristina Martin Firvida, SEC Investor
Advocate (Dec. 22, 2023) (``Investor Advocate Comment Letter'').
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In addition to these statements, the Investor Advocate suggested
areas in which ``more work can be done to help investors make well-
informed decisions about RILAs and other complex financial products.''
The Investor Advocate stated that the proposed rule's registration form
for RILAs, while informed by investor testing efforts, was not tested
itself, and that this represents a missed opportunity in the
Commission's rulemaking process. While the RILA Act directed the
Commission to ``engage in investor testing'' when developing the
registration form for RILAs, the Act did not require that the entirety
of the form be investor tested, and doing so would have been
impracticable under the circumstances due to the statutory rulemaking
timeline, taking into account the time it takes to develop and execute
well-designed and probative investor testing. As a result, investor
testing efforts necessarily entailed strategic choices about topics on
which to focus. These timing factors also required consideration of
disclosure areas where maximizing comprehension could be particularly
impactful.
For these reasons, investor testing of RILA registration statement
disclosure focused primarily on a sample of RILA-related disclosures
that could appear in the KIT, if Form N-4 were amended to address RILA
offerings.\44\ As discussed in the Proposing Release and below, the
KIT--which provides summary disclosure in a specific sequence and in a
standardized presentation--appears in variable annuity prospectuses,
and the Commission proposed to include KIT disclosure in RILA
prospectuses.\45\ The required ordering, contents, and standardization
of KIT disclosure made the sample RILA-related disclosure especially
amenable to investor testing, as these structural aspects made it
possible to test variations on required disclosure elements easily. The
summary disclosure in the KIT covers core features and risks of the
annuity that the registration statement describes, with more detail
elsewhere in the registration statement. For this reason, using the KIT
to determine areas where investor comprehension could be enhanced was
particularly impactful, as knowledge gained from this investor testing
could be applied to disclosure in multiple other areas of the
registration statement. The KIT is one of the first disclosure items
that appears not only in the statutory prospectus, but also in the
summary prospectus for issuers that choose to use summary prospectuses.
It is also formatted in a manner that is designed to enhance
readability. The investor testing therefore focused on disclosure that
could have maximal impact in terms of investor attention.
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\44\ See OIAD Investor Testing Report.
\45\ See Proposing Release at Section II.B.2; see also Item 2 of
current Form N-4 (current KIT requirements); infra Section II.C.3
(describing amendments to current KIT requirements).
---------------------------------------------------------------------------
While the Investor Advocate states that there is no ``data to
indicate whether the registration form effectively conveys the
information necessary for investors to make well-informed investment
decisions about RILAs,'' the sample KIT disclosure did include topics
that comprise the primary features and risks of RILAs, and the investor
testing did identify aspects of this disclosure that investors may find
particularly challenging to understand. This in turn provided helpful
input in identifying the disclosure areas where clear language, and
enhanced focus in the registration statement, could help investors
understand unique, and often complex, aspects of RILAs. We discuss
these disclosure areas in more depth in Section II below.
The Investor Advocate further stated that, although the Commission
has ``made commendable efforts to improve the clarity and conciseness
of disclosure provided to investors within the existing regulatory
disclosure infrastructure,'' new and innovative approaches to
disclosure are encouraged to significantly reduce investors' disclosure
burden. The Investor Advocate encouraged the Commission ``to explore
more significant departures from the status quo in the realm of
disclosure related to RILAs and other complex products.'' We agree that
exploring innovative disclosure approaches could enhance the investor
experience for investors in complex products.\46\ A wholesale
reimagining of disclosure for funds and other registered investment
products, however, is outside of the scope of this rulemaking and
impracticable in the context of this rulemaking given statutory time
constraints. We also believe that requiring RILAs to use Form N-4, and
adapting the current disclosure approach for variable annuities to
RILAs, is consistent with the RILA Act's mandate as discussed
below.\47\
[[Page 59984]]
Furthermore, we agree that continuing to test specific Commission-
mandated disclosures, including to assess how investors respond to
these disclosures, as well as continuing to analyze the Commission's
approach to its disclosure regime generally, are important complements
to our regulatory program. We encourage Commission staff to incorporate
these investor testing principles not only in the course of
recommending new disclosure requirements, but also in continuing to
develop its investor testing program outside of the confines of
particular rulemaking actions.
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\46\ The Commission is continually considering ways to enhance
disclosure and the retail investor experience. 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'').
\47\ See infra Section II.A.
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In addition to investor testing focused specifically on sample RILA
disclosure, our final amendments--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.\48\ The Commission has historically received feedback
showing that investors generally prefer concise, layered
disclosure.\49\ 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.\50\ 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 the final
amendments' approach to RILA disclosure.
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\48\ 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.
\49\ See, e.g., Investor Experience RFC; see also Proposing
Release at n.61 (discussing feedback in comments on the Investor
Experience RFC, generally showing that retail investors prefer
concise, layered disclosure and feel overwhelmed by the volume of
information they currently receive, and reflecting a preference for
shorter summary disclosures, with additional information available
online or upon request).
\50\ See Proposing Release at n.62.
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2. Analysis of Comments on Recurring Disclosure Topics Informing Final
Amendments
The proposed amendments collectively were designed to provide
investors with disclosures tailored to RILAs and to highlight key
information about these complex products, building on the Commission's
layered disclosure framework for variable annuities. The proposed
requirements were developed with consideration for clear, concise, and
understandable disclosure about RILA features and risks. Certain
commenters expressed concern, however, that the proposed disclosure
requirements included ``excessive repetition,'' especially with respect
to certain topics.\51\ Commenters stated that excessive repetition adds
to the length of the prospectus without commensurate value to
investors, obscures new information that investors should be focusing
on, and is not consistent with plain English principles. In addition to
general concerns about repetition in the proposed requirements,
commenters expressed concerns about specific disclosure areas where
they viewed the proposed requirements as resulting in particularly
repetitive disclosure.\52\
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\51\ See CAI Comment Letter; see also Comment Letter of Ova
Datop (Oct. 25, 2023) (``Datop Comment Letter'').
\52\ See CAI Comment Letter (discussing proposed maximum
potential loss disclosure requirements); Datop Comment Letter
(discussing proposed risk warnings).
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We agree that no disclosure should be repeated simply for the sake
of repetition, and we also agree that repetition in disclosure can have
negative effects on investor understanding as commenters expressed. As
discussed below, the final form amendments take commenters' concerns
into account. There are certain areas where the final amendments reduce
the discussion of the same or similar topics in multiple locations,
where this reduction could appropriately be made while continuing to
promote the goal of highlighting key information about RILAs and
enhancing understanding of RILA features and risks.\53\
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\53\ See, e.g., discussion below about changes from the proposal
to remove some of the numeric examples illustrating maximum
potential loss that, as proposed, would have appeared in multiple
locations throughout the prospectus (at infra Sections II.C.2 and
II.C.4).
---------------------------------------------------------------------------
The final amendments, like the proposal, continue to incorporate
the principle of layered disclosure. Layered disclosure aims to provide
investors with key information relating to an investment's features,
benefits, and risks in a concise and reader-friendly presentation, with
more-detailed or technical information available to those investors who
find the information valuable. The use of layered disclosure means that
the disclosure requirements we are adopting necessarily address
particular topics in more than one location in the registration
statement. Where this occurs, the disclosure requirements intentionally
include summary disclosure in the first ``layer,'' and additional
details building on the summary in the second ``layer.'' \54\ This
approach is designed to help investors with different informational
needs access the information that will be most useful to them.
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\54\ For example, the KIT will put investors on notice of the
existence and general impact of a contract adjustment, while other
disclosure later in the prospectus discusses contract adjustments in
detail, including a brief discussion in simple terms of the manner
in which contract adjustments are determined. See Items 3 and 7(e)
of final Form N-4. If an investor wants more details about the
specific formulas that are used to calculate contract adjustments,
this information is available in the SAI. See Item 22(d) of final
Form N-4.
---------------------------------------------------------------------------
Additionally, and as discussed in more detail below, there are
certain disclosure requirements in Form N-4 as amended that address
similar topics as other disclosure requirements, where investors could
benefit from considering these topics in several different contexts.
This also reflects that, except with respect to certain disclosure
items that are designed to be read in tandem, RILA investors may not
necessarily read a prospectus from cover to cover, but instead may
choose to read sections of the prospectus about topics where they are
seeking particular information.\55\ For instance, in addition to the
numeric examples illustrating maximum potential loss, the final
disclosure requirements include narrative discussion of a RILA's
maximum potential loss from poor index performance in several locations
in the prospectus. This is intentional. RILAs are frequently marketed
as a product that will protect against investment losses through loss-
limiting features. Information about maximum potential loss is relevant
in the contexts of the contract overview and KIT, as well as in
considering principal risks and more in-depth disclosure about the
investment options a contract offers.\56\ Therefore, disclosure that is
designed to enhance understanding of this aspect of a RILA contract, in
varying contexts, will help investors make informed decisions that take
into account this often-misunderstood aspect of investing in a
RILA.\57\
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\55\ As discussed below, we anticipate that investors will read
the Overview and KIT sections of the prospectus together. See infra
Sections II.C.2 and II.C.3.
\56\ See, e.g., infra Sections II.C.2, II.C.3, II.C.4, and
II.C.5.
\57\ See, e.g., Proposing Release at Section I.C.
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[[Page 59985]]
E. Overview of the Final Amendments
We are adopting rule and form amendments that modernize and enhance
the registration, filing, and disclosure framework for RILAs by
adapting the existing framework that is familiar to investors and
issuers for variable annuity separate accounts to accommodate RILAs.
The final amendments implement the RILA Act's mandate.
<bullet> Use of Form N-4 to Register RILA Offerings. As proposed,
we are amending Form N-4 so that issuers seeking to register the
offering of RILAs must use that form. To accommodate this, we are also
adopting amendments to Form N-4 that specifically address the features
and risks of RILAs, with certain modifications from the proposal in
consideration of comments received. These modifications address, among
other things, disclosure relating to the potential for investment loss
from an investment in a RILA, current limits on index gains, and
guaranteed limits on index losses or gains. Further, because the
insurance company will register the offering of a RILA on Form N-4
under the final amendments, it will be subject to the requirements in
the form related to financial statements. This includes, as proposed,
the form instruction that currently permits variable annuity issuers to
file insurance company SAP financial statements in certain
circumstances. Generally as proposed, the final amendments require RILA
issuers to tag certain information in Inline eXtensible Business
Reporting Language (``Inline XBRL'') format.
<bullet> Use of Form N-4 for Registered MVA Annuities. In a change
from the proposal, the final amendments extend the registration,
filing, and disclosure requirements we are adopting for RILA offerings
to offerings of registered MVA annuities on Form N-4.
<bullet> Form N-4 Amendments for Variable Annuity Offerings. We are
adopting form amendments that are applicable to offerings of variable
annuities. These 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.\58\ We are
adopting these amendments generally as proposed, with some
modifications in consideration of comments received.
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\58\ See id. at n.63 and accompanying paragraph.
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<bullet> Summary Prospectus. Consistent with the inclusion of RILAs
on Form N-4 and generally as proposed, we are adopting amendments that
permit RILA issuers to make use of the summary prospectus framework
available to variable annuity registrants on Form N-4. In a
modification from the proposal, issuers of registered MVA annuities
also will be able to use the summary prospectus framework, consistent
with the inclusion of registered MVA annuities on Form N-4.
<bullet> Updates to the Filing Rules. To accommodate RILA and
registered MVA annuity offering registrations on Form N-4, we are
adopting amendments that require issuers of these securities to pay
fees in arrears on Form 24F-2, as well as amendments to address RILAs
and registered MVA annuities in the rules that variable annuities use
to file post-effective amendments and to update prospectuses. We are
adopting these amendments as proposed with conforming amendments to
address the inclusion of registered MVA annuities on Form N-4.
<bullet> Communications Rules Applicable to Non-Variable Annuities.
The final amendments, as proposed, require RILA issuers to comply with
rule 156, which provides guidance as to when sales literature is
materially misleading under the Federal securities laws. We are
adopting conforming amendments to rule 156 to address the inclusion of
registered MVA annuities on Form N-4. Additionally, in a change from
the proposal, we are also making a technical amendment to rule 433 to
allow those non-variable annuity issuers that can meet the rule's
conditions to continue to use a free writing prospectus without it
needing to be preceded or accompanied by a prospectus that satisfies
the requirements of section 10 of the Securities Act.
II. Discussion
A. Use of Form N-4 for RILAs
Most variable annuity issuers register variable annuity offerings
on Form N-4, which the Commission designed to provide investors with
product-specific information about annuity contracts, and which
utilizes the summary prospectus layered disclosure framework the
Commission adopted in 2020 for variable contracts.\59\ As proposed, we
are requiring insurance companies to register RILA offerings on Form N-
4, leveraging the form's existing insurance-product specific
disclosures and framework while incorporating revised disclosures
informed by investor testing and staff experience to assist investors
in making knowledgeable decisions about RILA offerings.\60\
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\59\ 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 Proposing Release at n.20. 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
approximately 40 years ago. See Registration Forms for Insurance
Company Separate Accounts that Offer Variable Annuity Contracts,
Investment Company Act Release No. 14575 (June 14, 1985) [50 FR
26145 (June 25, 1985)] (``Forms N-3 and N-4 Adopting Release'').
\60\ See the facing page of final Form N-4 (Form N-4 is ``to be
used by insurance companies to register the offerings of registered
index-linked annuity contracts . . . under the Securities Act'').
Accordingly, following the compliance date for the final amendments,
insurance companies will no longer be permitted to register RILA
offerings on Forms S-1 or S-3, as they do today.
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Commenters broadly supported registering RILA offerings on Form N-
4.\61\ A number of commenters agreed that proposed Form N-4 would
provide RILA investors with more meaningful and helpful disclosures as
compared to the disclosures required on the registration forms
currently used by RILAs that are not tailored to RILA features.\62\
Some commenters emphasized that the proposed disclosures about the
contract and its features and the incorporation of Form N-4's layered
disclosure would be of particular benefit to investors.\63\
Additionally, one commenter suggested that requiring RILAs to register
on forms that are not tailored for RILA offerings has impeded the
ability of RILA investors to find and understand the information that
is most relevant to their investment decisions, and has also slowed
product development and impeded the entry of new issuers to the RILA
marketplace.\64\ Commenters suggested that investors also would benefit
from registering RILAs and variable annuity contracts on the same
registration form because it would facilitate the ability of investors
to
[[Page 59986]]
compare and contrast different RILA and variable annuity offerings.\65\
One of these commenters also stated that, by leveraging the experience
of investors, registrants, and Commission staff with the existing Form
N-4 framework, the proposal would help achieve greater regulatory
uniformity, simplify the registration of RILA and variable annuity
combination products, and reduce the burdens insurance companies face
in preparing RILA registrations.\66\
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\61\ See Comment Letter of the American Council of Life Insurers
(Nov. 28, 2023) (``ACLI Comment Letter''); Comment Letter of Better
Markets, Inc. (Nov. 28, 2023) (``Better Markets Comment Letter'');
CAI Comment Letter; Comment Letter of Gainbridge Life Insurance
Company and Delaware Life Insurance Company (Nov. 28, 2023)
(``Gainbridge Comment Letter''); Investor Advocate Comment Letter;
Comment Letter of the Insured Retirement Institute (Nov. 28, 2023)
(``IRI Comment Letter''). No commenters disagreed with the proposed
use of Form N-4 to register RILA offerings.
\62\ See id. One of these commenters stated that it would object
to the inclusion on Form N-4 of additional company-related
disclosures applicable to registrations under Forms S-1 and S-3
because those disclosures are less relevant to RILA offerings. See
CAI Comment Letter.
\63\ See Better Markets Comment Letter; CAI Comment Letter;
Gainbridge Comment Letter; IRI Comment Letter; Investor Advocate
Comment Letter.
\64\ See IRI Comment Letter.
\65\ See CAI Comment Letter; Gainbridge Comment Letter.
\66\ See CAI Comment Letter.
---------------------------------------------------------------------------
After considering these comments, we are adopting a registration
framework that requires the registration of RILA offerings on Form N-4
as proposed. Consistent with the views expressed by commenters,
registering RILA offerings on final Form N-4 should benefit investors
by requiring tailored disclosures relevant to RILA investors and
facilitating the ability of investors to compare similar products.
Registering RILA offerings on final Form N-4 also provides greater
regulatory uniformity, reducing burdens for both RILA issuers in
preparing RILA registration statements and Commission staff in
reviewing them.
Finally, one commenter requested the Commission provide guidance
regarding the ability of certain RILA contracts currently registered on
Form S-3 to rely on 17 CFR 240.12h-7 (``rule 12h-7'') following their
transition to Form N-4.\67\ Rule 12h-7 provides an exemption from
Exchange Act reporting applicable to insurance companies with respect
to certain securities, including RILAs, that are registered under the
Securities Act and regulated under State law. In order to be eligible
for this exemption, among other conditions, the issuer of the
securities must take steps reasonably designed to ensure that a trading
market for the securities does not develop, including requiring written
notice to, and acceptance by, the issuer prior to any assignment or
other transfer of the securities and reserving the right to refuse
assignments or other transfers at any time on a non-discriminatory
basis (``anti-assignment clause'').\68\ One commenter suggested that
there are a number of RILA contracts that do not have an anti-
assignment clause because the issuing insurance companies have chosen
to register the offerings on Form S-3 and therefore have not relied on
rule 12h-7 because Form S-3 is only available to issuers subject to
Exchange Act reporting requirements. This commenter suggested that
unilaterally adding an anti-assignment clause now to already-issued
contracts previously registered on Form S-3 would violate State law.
Now that RILA offerings will be registered on Form N-4, this commenter
suggested that issuers of these RILA contracts would like to rely on
rule 12h-7. As the Commission explained in rule 12h-7's adopting
release, the anti-assignment clause requirement is an important
condition of the exemption from Exchange Act reporting because it
ensures that the issuer will take steps reasonably designed to preclude
the development of a trading market in the contracts.\69\ Although all
issuers relying on rule 12h-7 are required to take such reasonable
steps, rule 12h-7 provides that an anti-assignment clause is not
required where it is prohibited by State law.\70\ Under that rule,
where an issuer of a RILA contract that is currently registered on Form
S-3 is seeking now to rely on rule 12h-7, that issuer would not need to
modify the contract to include an anti-assignment clause where
including such a clause is prohibited by State law.\71\ Whether
including an anti-assignment clause is prohibited under State law is
based on the facts and circumstances and laws of each applicable State.
---------------------------------------------------------------------------
\67\ See CAI Comment Letter. Under the final amendments, RILAs
that have previously registered offerings of securities on Forms S-1
or S-3 prior to the Compliance Date will need to file a post-
effective amendment to their registration statement pursuant to rule
485(a) by May 1, 2026 using Form N-4. See infra Section II.J.
\68\ See rule 12h-7(e).
\69\ See Indexed Annuities and Certain Other Insurance
Contracts, Exchange Act Release No. 34-59221 (Jan. 8, 2009) [74 FR
3138 (Jan. 16, 2009)] (``12h-7 Adopting Release'') at Section
III.B.2.
\70\ See rule 12h-7(e). Consistent with rule 12h-7(e), by
``State law'' we mean the law of any State or action of the
insurance commissioner, bank commissioner, or any agency or officer
performing like functions of any State.
\71\ Of course, an issuer seeking to rely on rule 12h-7 would
also need to comply with the rule's other requirements, including
that it takes steps reasonably designed to ensure that a trading
market for the securities does not develop. See rule 12h-7(e).
---------------------------------------------------------------------------
B. Use of Form N-4 for Registered MVA Annuities
We are adopting amendments to require the offerings of registered
MVA annuities to be registered on Form N-4 and, as a result, extend the
registration and disclosure requirements we are adopting for RILAs to
registered MVA annuities. Similar to the amendments we are adopting for
RILAs, these amendments will benefit investors by providing a tailored
disclosure regime with clear, relevant, and layered disclosure.
Further, by including registered MVA annuities on Form N-4 along with
RILAs and variable annuities, investors should benefit from being able
to compare and contrast different types of annuity contracts. Both
issuers and investors will also benefit by leveraging their existing
familiarity with the form.
In the Proposing Release, we solicited comment on whether to
require insurance companies to register the offerings of registered MVA
annuities on Form N-4, and we detailed the various changes to
disclosure that would be necessary to accommodate this change.\72\
Commenters that spoke to this issue supported registering offerings of
registered MVA annuities on Form N-4,\73\ suggesting that investors in
registered MVA annuities would benefit from a comparable disclosure
regime that provides clear, relevant, and layered disclosure.\74\ One
of these commenters stated that registered MVA annuities are a
significantly simpler product than RILAs and present a subset of
identical risks to investors as RILAs.\75\ Commenters also stated that
many of the disclosures that would be required for RILAs on Form N-4
would also be appropriate for registered MVA annuities, such as
disclosures on the operation of contract adjustments and the risks
associated with such contract adjustments.\76\ One commenter stated
that only minor modifications to the disclosures for RILAs would be
required to reflect that an investor's return in a RILA is based on the
performance of an index while the return of a registered MVA annuity is
based on a stated rate of interest.\77\ Further, this commenter stated
that registered MVA annuities
[[Page 59987]]
may be offered in combination products with variable annuities and/or
RILAs that will be registered on Form N-4. Given that such products
will have one prospectus, this commenter stated that investors,
issuers, and the Commission would benefit from such products
registering on Form N-4, rather than registering on both Form N-4 (for
the variable annuity or RILA component) and Form S-1 or Form S-3 (for
the registered MVA annuity component).
---------------------------------------------------------------------------
\72\ Proposing Release at Section II.H.
\73\ No commenters opposed using Form N-4 to register MVA
annuity offerings, although one commenter urged that using Form N-4
should be optional in certain circumstances discussed below. See
infra footnote 79. One commenter stated that contingent deferred
annuities (``CDAs'') could be considered covered by the RILA Act and
insurers should be permitted to use Form N-4 for these annuities
under the provision in that Act allowing insurers to use Form N-4
for RILAs if the Commission does not provide a new registration form
for RILAs by the statutory deadline. See VIP Working Group Comment
Letter. We disagree. The RILA Act covers annuities that, among other
things, have returns based on the performance of a benchmark index
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. CDA lifetime payment guarantees are not
based on a benchmark or index and are not subject to such market
value adjustments. Additionally, because CDAs are substantially
different products than RILAs, significant modifications to Form N-4
would be required to accommodate offerings of CDAs.
\74\ See CAI Comment Letter; IRI Comment Letter; VIP Working
Group Comment Letter.
\75\ CAI Comment Letter.
\76\ See IRI Comment Letter; CAI Comment Letter.
\77\ CAI Comment Letter.
---------------------------------------------------------------------------
At the same time, some commenters generally stated that registered
MVA annuities should be permitted, but not required, to register on
Form N-4.\78\ Specifically, one commenter stated that, in particular,
registration on Form N-4 should be optional for ``closed blocks,'' or
registered MVA annuity offerings that no longer involve the issuance of
new contracts.\79\
---------------------------------------------------------------------------
\78\ CAI Comment Letter; IRI Comment Letter.
\79\ CAI Comment Letter. This commenter urged that if such
closed blocks were required to register on Form N-4, the compliance
period be extended from 12 months to 24 months to provide the
necessary time to convert an additional class of contract to the new
registration form. See infra Section II.J. for a discussion of
effective and compliance dates for all rules and forms associated
with the final amendments.
---------------------------------------------------------------------------
After considering comments, we have determined to require insurance
companies to register offerings of registered MVA annuities on Form N-4
to provide investors with the tailored information necessary to make an
investment decision, as discussed above.\80\ Further, given the
parallels outlined above between RILAs and registered MVA annuities and
the use of combination contracts that can offer RILAs, registered MVA
annuities, and variable annuities, registering offerings of registered
MVA annuities on Form N-4 will be efficient for investors, insurance
companies, and the Commission. As a result, we are requiring, not just
permitting, the use of Form N-4 for registered MVA annuities.
Permitting insurance companies to register offerings of closed block
registered MVA annuities on Forms S-1 or S-3 would not provide these
investor benefits or efficiencies. It also would hamper comparability
if different registered MVA annuities provided materially different
disclosure. However, the Commission administers the requirements for
prospectuses included in registration statements on Form N-4 in a way
that allows variances in disclosure or presentation--including now
those relating to closed blocks of registered MVA annuities--if
appropriate for the circumstances involved while remaining consistent
with the objectives of the form.\81\
---------------------------------------------------------------------------
\80\ See supra Sections I.B. and I.C.
\81\ See final Form N-4, General Instruction C.1.(d). This
rulemaking does not affect the Commission position on existing
variable contracts whose issuers provide alternative disclosures to
investors as stated in the VASP Adopting Release at Section II.E.3.
---------------------------------------------------------------------------
As a result of this change, registered MVA annuities must make the
disclosures required in Form N-4 to the extent applicable. For example,
they must meet the requirements of the front and back cover pages to
the extent the disclosures apply to the offering of registered MVA
annuities being registered.\82\ As outlined in the Proposing Release,
we also are adopting a number of specific disclosure requirements for
registered MVA annuities designed to accommodate their inclusion on the
form and provide investors disclosures tailored to registered MVA
annuity products and highlight key information about these
products.\83\
---------------------------------------------------------------------------
\82\ See, e.g., infra Section II.C.1.
\83\ See Proposing Release at Section II.H.
---------------------------------------------------------------------------
Table 1 outlines the key amendments, including certain conforming
amendments, we are adopting to Form N-4 to accommodate offerings of
registered MVA annuities:
Table 1--Overview of Form N-4 for Registered MVA Annuities
----------------------------------------------------------------------------------------------------------------
Substantive changes from
Item Description the current form Discussion
----------------------------------------------------------------------------------------------------------------
Prospectus (Part A)
----------------------------------------------------------------------------------------------------------------
N/A................................ Facing Page and Added registered MVA Section II.C.8(a),
General Instructions. annuity contracts to list Section II.C.8(b).
of permissible uses.
N/A................................ General Instructions.. Added definition of Section II.C.8(b).
``Contract Adjustment'' to
account for MVA fixed
account options.
6.................................. Description of the New contract adjustment Section II.C.4(a).
Insurance Company, disclosures for MVA fixed
Registered Separate account options.
Account, and
Investment Options.
7.................................. Charges and New contract adjustment Section II.C.6(b).
Adjustments. disclosures applicable to
MVA fixed account options.
17................................. Investment Options New contract adjustment Section II.C.4(b).
Available Under the disclosures for MVA fixed
Contract. account options.
----------------------------------------------------------------------------------------------------------------
Statement of Additional Information (Part B)
----------------------------------------------------------------------------------------------------------------
26................................. Financial Statements.. Providing that insurance Section II.E.
companies can use the
relevant instructions with
regard to offerings of
registered MVA annuities
and adding requirements
relating to changes in and
disagreements with
accountants for registered
MVA annuities.
----------------------------------------------------------------------------------------------------------------
Other Information (Part C)
----------------------------------------------------------------------------------------------------------------
31A................................ Information about New disclosure of Section II.C.7.
contracts with Index- registered MVA annuity
Linked Options and specific information.
Fixed Options Subject
to a Contract
Adjustment.
----------------------------------------------------------------------------------------------------------------
[[Page 59988]]
In addition to these changes to Form N-4, we are providing to
registered MVA annuities the same offering and filing framework we are
extending to RILAs for the same reason as we are making these changes
for RILAs as discussed in more detail below.\84\ This includes, for
example, amendments permitting registered MVA annuities to use a
summary prospectus, pay securities fees annually based on net sales,
and use the same process to update their registration statements that
will apply to RILAs. To implement the inclusion of registered MVA
annuities in the amendments to the rules under the Securities Act, we
also are adding a defined term ``registered market value adjustment
annuity'' to rule 405 that is consistent with the amendments to Form N-
4.\85\ We are also extending the same requirements as to the use of
Inline XBRL to registered MVA annuities for the same reasons we are
extending these requirements to RILAs.\86\
---------------------------------------------------------------------------
\84\ See infra Sections II.C, D, E, and F.
\85\ ``Registered market value adjustment annuity'' is defined
as an annuity or an option available under an annuity, that is not a
registered index-linked annuity, and (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) that is not issued by an investment company; and
(5) whose contract value may reflect a positive or negative
adjustment (based on calculations using a predetermined formula, a
change in interest rates, or some other factor or benchmark) if
amounts are withdrawn before the end of a specified period. This
definition mirrors that of ``registered index-linked annuity'' we
are adding to rule 405 for RILAs, other than the last provision
which is based on the definition of ``contract adjustment'' we are
adding to Form N-4.
\86\ See infra Section II.C.10.
---------------------------------------------------------------------------
C. Contents of Form N-4
Consistent with the proposal, many items of current Form N-4 will
apply to RILAs in final Form N-4. These existing items of current Form
N-4 will also apply to registered MVA annuities. We are also adopting
amendments to Form N-4 to require disclosures specific to RILAs as well
as amendments that also will apply to offerings of variable annuities.
Some of these disclosures will also apply to registered MVA annuities.
Table 2 outlines the substantive amendments we are adopting to Form N-
4.\87\
---------------------------------------------------------------------------
\87\ Some of the final amendments 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 discussed in the
following table but are instead discussed in Sections II.C.8 and
II.C.9 infra.
Table 2--Overview of Form N-4
----------------------------------------------------------------------------------------------------------------
Substantive changes from
Item Description the current form Discussion
----------------------------------------------------------------------------------------------------------------
Prospectus (Part A)
----------------------------------------------------------------------------------------------------------------
1.................................. Front and Back Cover Adding new legends and Section II.C.1.
Pages. other standardized
disclosures.
2.................................. Overview of the New non-variable annuity- Section II.C.2.
Contract. specific disclosures;
moving order of appearance
up.
3.................................. Key Information....... New non-variable annuity- Section II.C.3.
specific 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.C.6(a).
disclosure.
5.................................. Principal Risks of Providing more detailed Section II.C.5.
Investing in the disclosures applicable to
Contract. all issuers.
6.................................. Description of the New non-variable annuity- Section II.C.4(a).
Insurance Company, specific disclosures and
Registered Separate one new item regarding
Account, and variable options.
Investment Options.
7.................................. Charges and New disclosures related to Section II.C.6(b).
Adjustments. contract adjustments;
renamed item.
8.................................. General Description of No substantive change...... Section II.C.9(b).
Contracts.
9.................................. Annuity Period........ No substantive change...... Section II.C.9(b).
10................................. Benefits Available No substantive change...... Section II.C.9(b).
Under the Contract.
11................................. Purchases and Contract No substantive change...... Section II.C.9(b).
Value.
12................................. Surrenders and No substantive change...... Section II.C.9(b).
Withdrawals.
13................................. Loans................. No substantive change...... Section II.C.9(b).
14................................. Taxes................. No substantive change...... Section II.C.9(b).
15................................. Legal Proceedings..... No substantive change...... Section II.C.9(c).
16................................. Financial Statements.. No substantive change (but Section II.E.
see Item 26).
17................................. Investment Options New non-variable annuity- Section II.C.4(b).
Available Under the specific disclosures.
Contract.
----------------------------------------------------------------------------------------------------------------
Statement of Additional Information (Part B)
----------------------------------------------------------------------------------------------------------------
18................................. Cover Page and Table No substantive change...... Section II.C.9(b).
of Contents.
19................................. General Information No substantive change...... Section II.C.9(c).
and History.
20................................. Non-Principal Risks of No substantive change...... Section II.C.9(b).
Investing in the
Contract.
21................................. Services.............. No substantive change...... Section II.C.9(b).
22................................. Purchase of Securities New disclosure of specific Section II.C.6(c).
Being Offered. contract adjustment
information.
[[Page 59989]]
23................................. Underwriters.......... No substantive change...... Section II.C.8(c).
24................................. Calculation of Clarifying only applies to Section II.C.8.
Performance Data. variable options.
25................................. Annuity Payments...... No substantive change...... Section II.C.9(b).
26................................. Financial Statements.. Providing that insurance Section II.E.
companies can use the
relevant instructions
relating to financial
statements and adding
requirements relating to
changes in and
disagreements with
accountants for non-
variable annuities.
----------------------------------------------------------------------------------------------------------------
Other Information (Part C)
----------------------------------------------------------------------------------------------------------------
27................................. Exhibits.............. Adding power of attorney Section II.C.8(d).
for all issuers and
accountant letters for non-
variable annuity issuers
as exhibits.
28................................. Directors and Officers No substantive change...... Section II.C.9(c).
of the Insurance
Company.
29................................. Persons Controlled or No substantive change...... Section II.C.9(c).
Under Common Control
with the Insurance
Company or the
Registrant.
30................................. Indemnification....... No substantive change...... Section II.C.9(c).
31................................. Principal Underwriters No substantive change...... Section II.C.9(c).
31A................................ Information about New disclosure of non- Section II.C.7.
contracts with Index- variable annuity specific
Linked Options and information.
Fixed Options Subject
to a Contract
Adjustment.
32................................. Location of Accounts No substantive change...... Section II.C.8.
and Records.
33................................. Management Services... No substantive change...... Section II.C.9(b).
34................................. Fee Representation and Adding new non-variable Section II.C.8(d).
Undertakings. annuity undertakings.
----------------------------------------------------------------------------------------------------------------
1. Front and Back Cover Pages (Item 1)
Currently, issuers using Form N-4 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.\88\ We are adopting amendments to
require insurance companies registering offerings of non-variable
annuities to include this general information on the front and back
cover pages of the prospectus, as well as non-variable annuity--
specific disclosures on the front cover page. We are adopting these
amendments substantially as proposed, with modifications in response to
comments. The following table summarizes the cover page requirements,
as amended:
---------------------------------------------------------------------------
\88\ See current Form N-4, Item 1.
Table 3--Information Required by Item 1 of Form N-4 As Amended
----------------------------------------------------------------------------------------------------------------
Item No. Disclosure Cover Changed from proposal?
----------------------------------------------------------------------------------------------------------------
Identifying Information
----------------------------------------------------------------------------------------------------------------
Item 1(a)(1)................... Registered separate Front.................... No.
account's name.
Item 1(a)(2)................... Insurance company's name.... Front.................... No.
Item 1(a)(3)................... Types of contracts offered Front.................... No.
(e.g., group, individual,
etc.).
Item 1(a)(4)................... Name and class of contract.. Front.................... No.
Item 1(a)(5)................... List of types of investment Front.................... No.
options offered under the
contract with cross
references to the appendix
with further information
about those options.
Item 1(a)(9)................... Date of prospectus.......... Front.................... No.
Item 1(b)(4)................... EDGAR identifier number..... Back..................... No.
----------------------------------------------------------------------------------------------------------------
Legends
----------------------------------------------------------------------------------------------------------------
Item 1(a)(6)................... Statement that the contract Front.................... Yes. Revised
is a complex investment and statements about
involves risks, including potential for
potential loss of principal. investment loss,
For contracts that include manner in which the
an index-linked option:. insurance company
A prominent statement, as a determines the
percentage, of the maximum maximum loss due to
amount of loss that an negative index
investor could experience performance, and
from negative index minimum limits on
performance after taking index gains and
into account the current losses.
limits on index loss, which
may include a range of the
maximum amount of loss if
the contract offers
different limits on index
loss.
[[Page 59990]]
Prominent disclosure of any
minimum limits on index
losses that will always be
available under the
contract or, alternatively,
a prominent statement that
the insurance company does
not guarantee that the
contract will always offer
index-linked options that
limit index losses, which
would mean risk of loss of
the entire amount invested.
A prominent statement that
the insurance company
limits the amount an
investor can earn on an
index-linked option. A
prominent statement, for
each type of limit offered
(e.g., cap, participation
rate, etc.), of the lowest
limit on index gains that
may be established under
the contract.
Item 1(a)(7)................... Statement that the contract Front.................... No.
is not a short-term
investment and is not
appropriate for an investor
who needs ready access to
cash. Statement that
withdrawals could result
in, among other things,
surrender charges and
negative contract
adjustments, including a
prominent disclosure
stating, as a percentage,
the maximum potential loss
resulting from a negative
contract adjustment, if
applicable.
Item 1(a)(8)................... Statement that the insurance Front.................... No.
company's obligations under
the contract are subject to
its financial strength and
claims-paying ability.
Item 1(a)(10).................. Statement that the Front.................... No.
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 additional Front.................... No.
information about the
contract is available on
<a href="http://Investor.gov">Investor.gov</a>.
Item 1(a)(12).................. A legend that states that if Front.................... No.
you are a new investor, you
may cancel your contract
within 10 days of receiving
it without paying fees or
penalties with some details
about the operation of this
process including whether a
contract adjustment will be
applied to the returned
amount.
----------------------------------------------------------------------------------------------------------------
Other Information
----------------------------------------------------------------------------------------------------------------
Item 1(b)(1)................... Statement that the SAI Back..................... No.
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 whether and Back..................... No.
from where information is
incorporated by reference.
Item 1(b)(3)................... Statement that reports and Back..................... Yes. Applied this
other information about the requirement to
registered separate insurance companies
accounts and, if in addition to
applicable, the insurance separate accounts.
company, are available on
the Commission's website
and that copies of this
information may be obtained.
----------------------------------------------------------------------------------------------------------------
We proposed to make several changes to the front cover page,
including four additional disclosures in Item 1(a).\89\ Certain
proposed changes received no comments and we are adopting them as
proposed:
---------------------------------------------------------------------------
\89\ See Proposing Release at Section II.B.1.
---------------------------------------------------------------------------
(1) Changes to Item 1(a)(1) to require disclosure of ``the
registered separate account's name'' whereas this item previously asked
for ``the registrant's name.''
(2) Changes to Item 1(a)(2) to require disclosure of ``the
insurance company's name'' instead of the current requirement for ``the
depositor's name.''
(3) Changes to Item 1(a)(3) to require disclosure of the types of
contracts offered by the prospectus (e.g., group, individual, single
premium immediate, flexible premium deferred), as opposed to the
current form, which requires disclosure of the types of variable
annuity contracts offered by the prospectus.
(4) New Item 1(a)(5), which requires disclosure of the types of
investment options under the contract and a cross reference to the
prospectus appendix providing additional information about each option.
(5) We also are moving certain items to different locations on the
front cover page without changing the content of the required
disclosure.\90\
---------------------------------------------------------------------------
\90\ Specifically, on Form N-4, current Item 1(a)(5), which
requires disclosure of the date of the prospectus, is moving to
final Item 1(a)(9); current Item 1(a)(6), which requires a statement
required by rule 481(b)(1) under the Securities Act, is moving to
final Item 1(a)(10); current Item 1(a)(7), which requires a
statement that additional information about certain investment
products, including variable and non-variable annuities, has been
prepared by Commission staff and is available at investor.gov, is
moving to final Item 1(a)(11); and current Item 1(a)(8), which
requires a legend stating that new investors to the contract may be
able to cancel the contract within 10 days without paying fees or
penalties, is moving to final Item 1(a)(12).
---------------------------------------------------------------------------
We are adding new Items 1(a)(6) and (7) to the front cover page of
final Form N-4, which we are adopting with modifications from the
proposal, as discussed below. The four items on the back cover page--
Item 1(b)--are largely unchanged with the exception of extending the
disclosure requirements (suggested by a commenter) of Item 1(b)(3) to
include the insurance company, if applicable.\91\
---------------------------------------------------------------------------
\91\ See CAI Comment Letter. The modification to Item 1(b)(3) is
discussed in further detail below. Current Item 1(b)(3) indicates
that reports and information about the registered separate account
are available on the Commission's website. That language has been
retained in final Form N-4. The statement would address available
reports about the insurance company only if applicable.
---------------------------------------------------------------------------
In addition, and as proposed, the additional disclosures on the
front cover page also will be required for
[[Page 59991]]
registration statements relating to offerings of variable annuities
filed on that form to the extent relevant.\92\ Specifically, these are
disclosures relating to the complexity of the investment and potential
loss of principal, that the contract is not a short-term investment and
the appropriateness of that investment, and that an insurance company's
obligations under the contract are subject to its financial strength
and claims paying abilities.\93\ While these disclosures are important
for investors in non-variable annuities, they also are relevant in many
cases to investors in variable annuities.
---------------------------------------------------------------------------
\92\ See Proposing Release at Section II.B.1. Commenters did not
specifically address the inclusion of these disclosures for variable
annuity offerings.
\93\ See final Form N-4, Item 1(a)(6), (7), and (8).
---------------------------------------------------------------------------
The comments that we received on the proposed cover page
requirements were mixed. One commenter generally supported these
disclosures, stating that the proposal ensured that the most important
disclosures about RILAs appear on the cover page.\94\ Another commenter
suggested that, other than the disclosures related to maximum loss, the
proposed cover page disclosures were, for the most part, designed to
result in short, concise, and sensible cover page disclosures.\95\
Other commenters, however, raised concerns.\96\
---------------------------------------------------------------------------
\94\ See Better Markets Comment Letter.
\95\ See CAI Comment Letter.
\96\ Commenters suggested that, should the Commission extend the
use of Form N-4 to registered MVA annuities, their comments would
also apply to disclosures related to those securities. See, e.g.,
CAI Comment Letter (supporting some aspects of the proposal but
criticizing the maximum loss disclosure on the cover page); VIP
Working Group Comment Letter.
---------------------------------------------------------------------------
First, some commenters raised concerns about the volume of
disclosures proposed to be included on the cover pages, particularly
those related to the maximum losses.\97\ One such commenter suggested
that the inclusion of all of these disclosures could cut against the
form's layered disclosure approach.\98\ These cover page disclosures
are generalized statements designed to put an investor on notice of key
considerations to help an investor make informed decisions. In
particular, they are designed to highlight the complexities and certain
associated risks of non-variable annuities for investors, and including
this key information on the cover page helps ensure that an investor
has information about these key aspects of a non-variable annuity at
the outset. The number of specific features and risks highlighted on
the cover page is driven by the complex nature of the non-variable
annuity being registered. Further, because these points are generalized
on the cover page but discussed in more detail later in the prospectus,
they are consistent with the concept of layered disclosure. These
disclosures also should help investors better understand the nature of
the various investment options available under the contract.
---------------------------------------------------------------------------
\97\ See CAI Commenter Letter; VIP Working Group Comment Letter.
\98\ See CAI Comment Letter.
---------------------------------------------------------------------------
Second, commenters addressed certain specific items the Commission
proposed to include on the front cover page. Commenters raised
particular concerns with the proposed requirement to 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.\99\
Commenters objected to this disclosure because, in their view: (1)
requiring RILA issuers to disclose this percentage was unnecessary
because the chance of investors experiencing this maximum loss was
extremely remote,\100\ (2) the cover page lacks appropriate context for
this percentage and instead RILA issuers should include a narrative
(not numeric) disclosure stating that an investor could lose a
significant amount of money by investing in an index-linked
option,\101\ and (3) such maximum potential loss disclosure was
unwarranted because other issuers of securities are not required to
include this information on the cover pages of their prospectuses.\102\
Separately, some commenters similarly opposed the proposed requirement
to disclose, as a percentage, the maximum potential loss resulting from
a negative contract adjustment as such a maximum loss would also be
unlikely.\103\
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\99\ Proposed Form N-4, Item 1(a)(6).
\100\ VIP Working Group Comment Letter (stating that the
analysis done by OIAD in the OIAD Investor Testing Report suggested
that losses on these products over the long term have historically
been remote); Comment Letter of Benji Johnson (Oct. 31, 2023)
(``Johnson Comment Letter''); CAI Comment Letter; Datop Comment
Letter; see also ACLI Comment Letter.
\101\ CAI Comment Letter.
\102\ VIP Working Group Comment Letter; Johnson Comment Letter;
Datop Comment Letter.
\103\ Proposed Form N-4, Item 1(a)(7). See CAI Comment Letter;
VIP Working Group Comment Letter. Several commenters also suggested
that these two maximum potential loss disclosures, one from index
performance and the other from contract adjustments, could cause
investors to mistakenly believe that such losses are likely. CAI
Comment Letter; VIP Working Group Comment Letter; Johnson Comment
Letter.
---------------------------------------------------------------------------
In response to comments opposing the proposed requirement to
disclose as a percentage the maximum amount of loss from negative index
performance or from a contract adjustment that an investor could
experience, the final disclosure requirements are designed to reflect
that the risk that an investor could lose a substantial amount of money
due to negative index performance is a key risk of a RILA.\104\
Similarly, loss related to negative contract adjustments is a key risk
of all non-variable annuities. Providing the maximum possible loss in
these circumstances on the front cover page will alert investors to
these risks in concrete terms. Moreover, disclosure of a maximum
``potential'' loss is not intended to suggest the maximum loss is
likely to occur. The form does not prevent the insurance company from
providing additional appropriate context.
---------------------------------------------------------------------------
\104\ VIP Working Group Comment Letter; Johnson Comment Letter;
CAI Comment Letter; Datop Comment Letter; see also ACLI Commenter
Letter.
---------------------------------------------------------------------------
Although issuers of other securities like mutual funds and ETFs do
not disclose the maximum potential loss associated with those
securities, such products also are not generally structured to provide
loss protection. For RILAs, in contrast, loss protection is a central
feature of the product and an emphasis in RILA marketing.\105\ Numeric
disclosure of the potential maximum loss helps an investor understand
the extent to which a given RILA provides loss protection in simple
terms. This is particularly important because investor testing has
shown that investors struggled with the mechanics of loss protection
and the consequences of withdrawals.\106\ Placing this disclosure on
the front cover page is designed to put investors on notice that those
loss protections can, in the context of RILAs, have limitations and
highlight, in the context of all non-variable annuities, a potential
consequence of withdrawals. A numeric example is well suited for the
cover page because it communicates the extent of loss protection
briefly and
[[Page 59992]]
concretely, and additional context will be available elsewhere in the
prospectus.
---------------------------------------------------------------------------
\105\ One commenter raising concern with this disclosure's
placement in the cover page ``acknowledge[d] that the risk of loss
associated with RILAs is an important concept to convey [and that]
[u]nlike most other investments, RILAs provide a level of downside
protection, and an investor should therefore understand the limits
of that protection.'' CAI Comment Letter.
\106\ OIAD Investor Testing Report at Section 5, Qualitative
Testing, Results from Round 1. See Proposing Release at n.75 and
accompanying text (investor testing participants struggled to
understand loss limiting features, such as buffers), and at n.33 and
accompanying text (investor testing participants often did not
understand that there are multiple aspects of a typical RILA
contract that could negatively affect an investor's contract value
or the amount that the investor could withdraw from the contract
(e.g., surrender charges, interim value adjustments, and tax
penalties)).
---------------------------------------------------------------------------
Commenters also raised concerns with various proposed disclosure
requirements' reference to ``minimum guaranteed'' limits on index loss
(or gain), including raising this concern with respect to the cover
page.\107\ Another commenter sought clarification regarding whether a
similar disclosure requirement referring to guaranteed minimums for the
life of the contract was intended to require insurance companies to
establish such minimums.\108\
---------------------------------------------------------------------------
\107\ See VIP Working Group Comment Letter (stating that
contracts do not include a minimum guaranteed limit on losses); CAI
Comment Letter.
\108\ CAI Comment Letter. See Proposing Release at Section
II.B.1. for a discussion of the proposed disclosure requirement.
---------------------------------------------------------------------------
We understand that not all RILAs provide minimum guaranteed limits
on index loss for the life of the contract that could be used to
calculate the proposed maximum possible loss due to negative index
performance. After considering comments, we are modifying the language
of this disclosure requirement to reflect this fact. Under the final
amendments, the insurance company must prominently state as a
percentage the maximum amount of loss from negative index performance
that an investor could experience after taking into account the current
limits on index loss provided by the index-linked options under the
contract.\109\ The insurance company may provide a range of the maximum
amount of loss if the contract offers different limits on index loss.
Basing this disclosure on the contract's actual current limits on index
losses is designed to address commenters' concerns about RILAs without
guaranteed limits, and permitting the insurance company to provide a
range of losses allows the insurance company to reflect the range of
loss protection offered under the contract.
---------------------------------------------------------------------------
\109\ We understand that, unlike the current limits on index
gain, current limits on index loss do not change often, if at all,
during the life of the contract. See infra Sections II.C.2 and
II.C.3.a (discussing concerns raised by commenters relating to the
disclosure of current limits on index gain).
---------------------------------------------------------------------------
We are modifying the proposed language of this disclosure
requirement to specify that an insurance company that does not disclose
a minimum limit on index loss that will always be available under the
contract must prominently state that it does not guarantee that the
contract will always offer index-linked options that limit index loss,
which would mean risk of loss of the entire amount invested. We are
requiring this disclosure because RILAs are long-term investments, with
an investor's returns determined by the economic terms available both
at the time of investment and during future crediting periods. The
guaranteed minimum limits on index losses that always will be
available--or the fact that the insurance company makes no guarantee at
all--are key considerations for an investor considering a RILA that
should be disclosed on the cover page. The final amendments' approach
therefore incorporates the proposed requirement to disclose on the
front cover page the maximum loss from negative index performance
taking into account guaranteed minimum limits on index losses but, in
response to comments, provides information on any guaranteed minimum
limits without assuming that each RILA offers them.\110\
---------------------------------------------------------------------------
\110\ These changes, which are contained in Item 1(a)(6)(a), are
mirrored in Instruction 3(a) to Item 3 and Item 5(a). See, e.g.,
infra at footnote 386.
---------------------------------------------------------------------------
One commenter stated that it found confusing the proposed
requirement to state that the potential for investment loss could be
significantly greater than the potential for investment gain.\111\
After considering comments we have determined not to require the
proposed disclosure because an investor's potential inability to recoup
prior losses due to limits on gains is a nuanced concept that is
challenging to articulate in concise cover page disclosure. We are
instead requiring the insurance company to disclose information about
the contract's limits on participation in positive index performance,
not only because these limits are central features of a RILA, but also
because they can limit an investor's ability to recoup losses (which
the proposed disclosure item was designed to convey). We therefore are
requiring the insurance company to prominently state, for each type of
limit offered (e.g., cap, participation rate, etc.), the lowest limit
on index gains that may be established under the contract.\112\ This
information is particularly important for an investor considering a
RILA because RILAs are long-term investments and the investor's returns
are driven not just by the economic terms available at the time of
investment, but also in future crediting periods. In another change
from the proposal, we are not adopting the proposed Item 1(a)(6)
requirement to state that an investor could lose a significant amount
of money if the index declines in value. We are doing so because the
required disclosure in this item, and elsewhere on the form, of the
maximum possible loss due to declines in index performance make clear
that investors face the potential for losses in these
circumstances.\113\
---------------------------------------------------------------------------
\111\ See Johnson Comment Letter; see also proposed Form N-4,
Item 1(a)(6).
\112\ See final Form N-4, Item 1(a)(6)(b).
\113\ See also, e.g., final Form N-4, Instruction 3(a) to Item
3.
---------------------------------------------------------------------------
Finally, one commenter suggested that we amend a current back cover
page disclosure requirement regarding the availability of additional
information to apply to RILAs.\114\ This sub-item currently requires
variable annuity prospectuses to state that reports and other
information about a registered separate account may be found on the
Commission's website.\115\ The commenter suggested applying this
requirement to insurance companies that issue RILAs to the extent that
they provide reports and other information to the Commission through
their regular reporting under the Exchange Act. We agree that some
investors might find the information and reports about the insurance
companies useful when making investment decisions and have adjusted
this requirement in the final form accordingly.\116\
---------------------------------------------------------------------------
\114\ CAI Comment Letter.
\115\ Current Form N-4, Item 1(b)(3).
\116\ See final Form N-4, Item 1(b)(3). Because registered MVA
annuities are also issued by an insurance company, not a registered
separate account, this change will also apply to registration
statements relating to offerings of those securities.
---------------------------------------------------------------------------
2. Overview of the Contract (Item 2)
We are, largely as proposed, amending the requirements for the
Overview of the Contract (``Overview'') to include RILAs generally,
require disclosure about certain key elements of any index-linked
option offered under the contract, and highlight any contract
adjustments. Consistent with the inclusion of registered MVA annuities
on Form N-4, the Overview also will discuss these annuities, as
applicable. As discussed below, this section will precede the KIT.\117\
---------------------------------------------------------------------------
\117\ Because we are requiring the Overview to appear before the
KIT, current Item 3 (Overview of the Contract) will be renumbered as
Item 2. See infra Section II.C.3.
---------------------------------------------------------------------------
Under the final amendments, insurance companies that are
registering non-variable annuities must provide the same Overview
disclosures that are currently required for variable annuities,
modified to include certain RILA-specific disclosures. All contracts
registered on the form must provide an Overview with a concise
description of the contract, including information about: (1) the
contract's purpose; (2) the phases of the contract, including a
discussion of the available investment options; (3) the primary
features of the contract; and (4) contract
[[Page 59993]]
adjustments.\118\ We are adopting these amendments as proposed. Because
offerings of registered MVA annuities will be registered on Form N-4,
these requirements also will apply to offerings of registered MVA
annuities, as applicable. No substantive changes from the proposed
approach, however, were necessary to address registered MVA annuities.
---------------------------------------------------------------------------
\118\ Final Form N-4, Item 2(a)-(d).
---------------------------------------------------------------------------
In addition to information about the purpose of the contract, under
the final amendments, a prospectus that offers index-linked options
must include in the Overview (as part of the discussion of the phases
of the contract): (1) 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; (2) a statement that an investor could lose a
significant amount of money if the index declines in value; (3) 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 and an example of the manner in which such returns may be
limited; and (4) disclosure of guaranteed minimum limits on index
losses or gains.\119\ We are adopting the amendments described in (1)-
(3) generally as proposed. We are adopting changes to the language of
the proposed disclosure requirements addressing minimum limits on index
losses and gains, which will be parallel to changes we are adopting to
this language throughout Form N-4, as discussed in more detail
below.\120\ Specifically, we are changing the language of the proposed
disclosure requirement addressing minimum limits on index losses to
specify that an insurer that does not offer a minimum guaranteed limit
on index losses must disclose that fact. We are adopting changes to the
proposed language of the requirement for disclosing minimum limits on
index gains to specify that insurers must prominently state, for each
type of limit offered (e.g., cap, participation rate, etc.), the lowest
limit on index gains that may be established under the contract.\121\
---------------------------------------------------------------------------
\119\ Final Form N-4, Items 2(b)(2)(i)-(iv).
\120\ Final Form N-4, Item 2(b)(2)(iii).
\121\ Final Form N-4, Items 2(b)(2)(iii) and (iv).
---------------------------------------------------------------------------
As proposed, the Overview also will provide, if applicable, a
discussion of contract adjustments that must include a statement that
an investor could lose a significant amount of money due to the
contract adjustment if amounts are removed from an investment option or
from the contract prior to the end of a specified period, accompanied
by a brief description of the transactions subject to a contract
adjustment.\122\ In a change from the proposal, we are not adopting the
proposed requirement to include in the Overview numeric risk of loss
disclosures associated with negative index performance or contract
adjustments, as discussed further below.
---------------------------------------------------------------------------
\122\ Final Form N-4, Item 2(d). Although one commenter
suggested that we relocate the proposed disclosure item for contract
adjustments under the sub-item for index-linked option disclosures,
we are not making this change because contract adjustments are not
specific to index-linked options; they apply to MVA annuity options
as well. In a change from the proposal, we are replacing ``index-
linked option'' with ``investment option'' to convey contract
adjustments are associated with other types of investment options in
addition to index-linked options.
---------------------------------------------------------------------------
As proposed, the Overview will precede the KIT. We are reordering
these sections based on investor testing results indicating that
investors reviewing sample KIT disclosure had difficulty understanding
the basic features and concepts of RILA contracts, for example,
``index,'' ``investment term,'' ``interim value adjustment,'' and
``buffer.'' \123\ The Overview provides general information about the
contract and important context about the information summarized in the
KIT. In particular, the Overview will, as discussed below, require
descriptions and examples to help investors understand these RILA
features, including contract adjustments, which we anticipate will
provide a basis for better understanding the issues that the KIT
disclosures address. Based on our observations of investor testing,
investors may generally benefit from having more context in order to
understand the KIT disclosures. Placing the Overview first may
similarly provide context for the issues flagged in variable annuity
KITs.
---------------------------------------------------------------------------
\123\ See, e.g., OIAD Investor Testing Report at Section 5,
Qualitative Testing, Results from Round 1, Summary of Qualitative
Testing, Section 6, Quantitative Testing, Summary of Quantitative
Testing.
---------------------------------------------------------------------------
We received one comment on this proposed reordering in Form N-4.
The commenter stated that the repetition of certain information in both
the Overview and the KIT undermines our rationale for proposing to
reorder the two sections.\124\ We disagree that covering some of the
same topics in the Overview and the KIT is inconsistent with changing
the order of these disclosures. The KIT is designed to identify, in a
consolidated location, key risks and features of the contract it
describes.\125\ Certain of this information is also included in the
high-level contract summary provided in the Overview. The disclosure is
included in both locations to allow the reader to understand the
contract at a high level (in the Overview of the Contract), as well as
key features and risks of the annuity whose offering is being
registered (in the KIT). Further, KIT requirements that address the
same topic in different contexts may aid investor understanding of
complex disclosure, and this approach is consistent with a layered
disclosure approach.
---------------------------------------------------------------------------
\124\ See CAI Comment Letter.
\125\ See VASP Adopting Release at paragraph following n.106.
---------------------------------------------------------------------------
In terms of the proposed content requirements for the Overview
section, one commenter generally supported the proposed
amendments.\126\ This commenter not only stated that the proposed
amendments to the Overview were generally appropriate (including
requirements applicable to RILAs and variable annuities), but also that
the proposed disclosure requirements regarding the index-linked options
``cover most of the key aspects that investors should be aware of to
understand the cyclical nature of the index-linked options,'' and
``strike the right balance by providing investors with the proper level
of summary disclosure, with additional information appearing later in
the prospectus.'' While no commenter generally opposed our proposed
changes, several requested modifications to some of the specific
proposed disclosures.
---------------------------------------------------------------------------
\126\ CAI Comment Letter.
---------------------------------------------------------------------------
As discussed above, some commenters raised general concerns about
disclosure that appears in both the Overview and the KIT and suggested
that we reduce or eliminate perceived duplicative disclosure in those
two sections to simplify and streamline the prospectus.\127\ Such
comments largely concerned the proposed narrative and numeric risk of
loss disclosures for index-linked options and contract adjustments. One
commenter stated it did not oppose the inclusion of narrative and
numeric risk of loss disclosure in the Overview for end-of-term index
declines and negative contract adjustments because ``the generally
free-writing nature of the Overview allows the registrant to provide
appropriate context for the reader.'' \128\ Conversely, two commenters
generally opposed the proposed risk of loss disclosures for negative
index performance and
[[Page 59994]]
contract adjustments on the grounds that RILA issuers should not be
required to make disclosures that are not required of variable
annuities, and cited concerns that such disclosures incorrectly portray
such products as high-risk investments.\129\
---------------------------------------------------------------------------
\127\ CAI Comment Letter; ACLI Comment Letter.
\128\ CAI Comment Letter.
\129\ ACLI Comment Letter; Gainbridge Comment Letter.
---------------------------------------------------------------------------
One of these commenters stated that the proposal to require RILA
issuers to disclose that an investor could lose a ``significant amount
of money'' is inconsistent with existing disclosure for variable
annuity products, which requires a statement that ``an investor can
lose money by investing in the Contract.'' \130\ This commenter stated
that a RILA investor is at no greater risk of losing a more substantial
amount of money than a variable annuity investor, and that if all
performance variables were equal, a RILA investor has reduced risk of
loss compared to a variable annuity investor because RILAs have the
added benefit of downside protection. This commenter also objected to
the proposed requirement to disclose in the Overview that an investor
could lose a ``significant'' amount of money due to an index decline or
a contract adjustment, viewing that term as subjective. Another
commenter asked that we modify the proposed narrative risk of loss
disclosure for negative contract adjustments to state that losses could
be significant under ``extreme market conditions.'' \131\ This
commenter also opposed requiring numeric risk of loss disclosure
associated with a negative contract adjustment on the grounds that the
narrative disclosure ``is sufficient without including a numeric
figure.'' One commenter asked that we clarify that the proposed numeric
risk of loss disclosure for contract adjustments could be modified to
avoid any implication that the risk of loss is greater than 100%.\132\
---------------------------------------------------------------------------
\130\ ACLI Comment Letter.
\131\ VIP Working Group Comment Letter.
\132\ CAI Comment Letter.
---------------------------------------------------------------------------
We are adopting the Overview's narrative risk of loss disclosures
largely as proposed.\133\ These disclosures, each of which is a single
sentence, are appropriate in light of the fact that RILAs, unlike
variable annuities and other investment companies, are structured
products that have unique features and risks despite contract
similarities to variable annuities. Unlike variable annuities, index-
linked options offer downside protection from market declines--and are
marketed on that basis. The disclosures we are adopting will alert RILA
investors that there are limits to those protections. Moreover, we are
retaining the proposed requirement to state that an investor could lose
money, with the ``significant'' descriptor designed to put investors on
notice of losses they might not anticipate, given that investor testing
revealed that investors tend to overestimate loss protection.\134\
Significant losses associated with index-linked options may be
infrequent, but they can and do happen, and investors should be aware
of the possibility. We also are not modifying the proposed disclosure
requirement to state that significant losses associated with contract
adjustments may only occur under ``extreme market conditions'' because
an investor who withdraws from a contract before the end of the
crediting period may suffer significant losses relative to the value of
the initial investment, regardless of market conditions. Nevertheless,
the form does not prohibit an insurer from accompanying the required
statement with contextual disclosure that explains when significant
losses associated with contract adjustments might occur.
---------------------------------------------------------------------------
\133\ Final Form N-4, Items 2(b)(2)(ii) and 2(d). The only
change we are adopting to the narrative risk of loss disclosure
requirements is a revision to Item 2(d), replacing ``Index-Linked
Option'' with ``Investment Option,'' to clarify that contract
adjustments may apply to options other than index-linked options.
\134\ See OIAD Investor Testing Report at Section 5, Qualitative
Testing (qualitative interviews suggested confusion with RILA terms
and concepts relating to, for example, loss limiting features such
as buffers).
---------------------------------------------------------------------------
While we are adopting the narrative risk of loss disclosures as
proposed, in a change from the proposal and in response to comments
raising concerns about duplicative disclosure, we are not adopting the
proposed numeric risk of loss disclosures associated with index
declines or contract adjustments in the Overview. This change
recognizes that the proposed numeric disclosures appear on the cover
page, as well as the KIT, and, as one commenter observed, the Overview
and the KIT are designed to be read together.\135\ Requiring narrative-
only risk of loss disclosure in the Overview is sufficient to flag this
potential risk for investors because it will be immediately followed by
the KIT, which will require the numeric risk of loss disclosure.\136\
Although one commenter suggested we require numeric disclosure in the
Overview rather than the KIT, as discussed further below, the brevity
of the numeric disclosure is well suited to the KIT.\137\
---------------------------------------------------------------------------
\135\ CAI Comment Letter.
\136\ Final Form N-4, Instructions 2(a) and 3(a) to Item 3.
\137\ CAI Comment Letter. See also infra footnote 174 and
accompanying paragraph for related discussion.
---------------------------------------------------------------------------
Some commenters sought clarification regarding whether our proposal
to require insurers to disclose guaranteed minimum limits on index
losses or gains effectively seeks to impose a substantive requirement
for insurance companies to offer minimum limits.\138\ One commenter
asked whether a prospectus for a contract that does not offer minimum
limits may omit the proposed disclosure.\139\ The proposal--and the
final amendments we are adopting--are designed to result in clear
disclosure of minimum limits that are an inherent feature of the
contract, not to dictate contract terms or prescribe specific minimum
limits.
---------------------------------------------------------------------------
\138\ CAI Comment Letter; VIP Working Group Comment Letter;
Gainbridge Comment Letter.
\139\ VIP Working Group Comment Letter; Gainbridge Comment
Letter.
---------------------------------------------------------------------------
For downside protection, we understand some RILA issuers may not
offer index-linked options with minimum limits on index losses that
will always be available under the contract. Because downside
protection is one of the chief selling points for index-linked options,
a particular RILA not offering minimums on index losses that will
always be available under the contract is material information that
must be prominently disclosed in the prospectus. Without downside
protection, investors are at risk of losing their entire investment due
to poor index performance. And without a minimum rate of downside
protection that will always be available under the contract, an
investor is considering making a long-term investment without certainty
as to the amount of downside protection that will apply to future
crediting periods. Likewise, without disclosing a minimum limit on
index gains that will always be available under the contract, an
investor would not know the extent to which investments in future
index-linked options would result in credited interest when there is
positive index return. To help ensure that investors have this
information while also responding to comments requesting clarification,
we are modifying the proposed requirement to disclose guaranteed
minimums on index losses. Instead, the final amendments require the
insurer to prominently disclose any minimum limits on index losses that
will always be available under the contract, or, alternatively,
prominently state that the insurer does not guarantee that the contract
will always offer index-linked
[[Page 59995]]
options that limit index losses.\140\ In addition, largely as proposed,
we are adopting a requirement for insurers to disclose the minimum
limits on index gains guaranteed for the life of the contract, with
some changes to the proposed language to address commenters' requests
for clarification.\141\
---------------------------------------------------------------------------
\140\ Final Form N-4, Item 2(b)(2)(iii).
\141\ Proposed Form N-4, Item 2(b)(2)(iv) would have required
insurers to ``[d]isclose the minimum limit on Index gains guaranteed
for the life of the Contract for any Index-Linked Option,'' whereas
final Form N-4, Item 2(b)(2)(iv) will require insurers to
``[p]rominently state, for each type of limit offered (e.g., cap,
participation rate, etc.), the lowest limit on Index gains that may
be established under the Contract.''
---------------------------------------------------------------------------
These changes from the proposal are intended to clarify that this
requirement is designed to seek disclosure on the minimum limit on
index gains that will always be available under the contract for each
type of limit offered. The final amendments also conform this
disclosure requirement with our understanding of current practices and
the nature of RILA investments--that is, while an insurance company may
not offer loss protection, a RILA inherently involves some degree of
participation in index gains. The insurance company therefore must
disclose the minimum extent to which investors can participate in index
gains under the contract. Specifically, the final rule will require the
insurer to prominently state, for each type of upside limit being
offered (e.g., cap, participation rate, etc.), the lowest limit on
index gains that may be established under the contract.\142\
---------------------------------------------------------------------------
\142\ Final Form N-4, Item 2(B)(2)(iv). We are requiring
parallel disclosure in other Items of final Form N-4 relating to
disclosure of minimum limits on index losses and/or gains that will
always be available under the contract. See also final Form N-4,
Item 1(a)(6); Item 5(a); Item 6(d)(2)(i)(B); and Item 17(b).
---------------------------------------------------------------------------
3. Key Information Table (Item 3)
The KIT requirements in Form N-4 currently require a brief
description of key facts about a variable annuity to appear in the
prospectus, in a specific sequence and in a standardized
presentation.\143\ The KIT functions as an integral part of the layered
disclosure in Form N-4 by identifying key considerations upfront, with
more detail to follow later in the prospectus. We are adopting the
final amendments generally as proposed with modifications to address
comments we received. As proposed, we are requiring that insurance
companies provide a KIT in registration statements relating to RILA
offerings, as is currently done with variable annuities, and in a
modification from the proposal are extending this requirement to
offerings of registered MVA annuities.\144\ We are adopting amendments
to the current KIT requirements to highlight key features of non-
variable annuities, with some modifications from the proposal in
response to comments. These amendments are informed by investor testing
and are designed to build on the existing KIT disclosure framework and
highlight important considerations related to non-variable annuities,
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.\145\ In addition, as proposed, we are adopting amendments to
the KIT that will apply to both non-variable and variable annuities
that are designed to provide investors with a better understanding of
these products.
---------------------------------------------------------------------------
\143\ For variable annuity issuers who rely on rule 498A to
provide summary prospectuses to investors, the KIT currently appears
as a disclosure item in the summary prospectus.
\144\ See final Form N-4, General Instruction B.1 and
Instruction 1(a)-1(c) to Item 3.
\145\ See, e.g., OIAD Investor Testing 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 Investor Testing 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).
---------------------------------------------------------------------------
Commenters generally supported the proposed requirement that
insurance companies provide a KIT in RILA registration statements.\146\
Comments on the proposed amendments affecting the KIT's specific format
and disclosure requirements, however, were mixed.\147\ One commenter
supported the proposed amendments to the KIT.\148\ This commenter
stated that the disclosure required to appear in the KIT provides
investors with a complete picture of RILA risks in a prominent place.
In contrast, other commenters supported a portion of the proposed
amendments to the KIT but also opposed certain of the proposed
amendments, as discussed further below.\149\ Commenters suggested that,
should the Commission extend the use of Form N-4 to registered MVA
annuities, their comments would also apply to disclosures related to
those securities, to the extent applicable.\150\
---------------------------------------------------------------------------
\146\ See, e.g., Gainbridge Comment Letter (stating that the KIT
requirement for RILA issuers will allow investors to readily compare
RILAs to each other and to variable annuities); Better Markets
Comment Letter (stating that a RILA-tailored KIT is key to helping
investors understand the RILA-specific risks presented to them).
\147\ See, e.g., Better Markets Comment Letter; CAI Comment
Letter.
\148\ See Better Markets Comment Letter.
\149\ See CAI Comment Letter (stating that the SEC has generally
struck the correct balance in the KIT, with some exceptions); ACLI
Comment Letter (stating that it supports CAI's comments and opposing
the KIT amendments requiring a Q&A format and repetition of Overview
disclosure).
\150\ See, e.g., CAI Comment Letter.
---------------------------------------------------------------------------
The overall format of the final KIT is depicted below:
Table 4--Key Information Table as Adopted
------------------------------------------------------------------------
------------------------------------------------------------------------
Fees, Expenses, and Adjustments:
------------------------------------------------------------------------
Are There Charges or Adjustments 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?
What are the Risks Related to the
Insurance Company?
------------------------------------------------------------------------
Restrictions:
------------------------------------------------------------------------
Are There Restrictions on the
Investment Options?
[[Page 59996]]
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. Formatting of the KIT
Form N-4 currently prescribes format requirements for the KIT to
enhance the readability and comparability of the disclosure.\151\ As
proposed, we are adopting amendments to Form N-4 to require these
current format requirements to apply to all offerings registered on
Form N-4, including non-variable annuity offerings.\152\ Specifically,
the final amendments will require insurance companies to disclose
required KIT 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 the instructions
otherwise provide. Insurance companies will 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. Insurance companies also
will be required to provide cross-references to the location in the
statutory prospectus where the subject matter is described in greater
detail, and in the case of electronic versions of the prospectus, to
make those references accessible either by direct electronic link or
through equivalent methods or technologies, as required for variable
annuity KIT disclosure. Insurance companies will include these cross-
references adjacent to the relevant disclosure, either within the table
row, or presented in an additional table column. All disclosures in the
KIT should be short and succinct, consistent with the limitations of a
tabular presentation.
---------------------------------------------------------------------------
\151\ See current Form N-4, Instruction 1 to Item 2.
\152\ See final Form N-4, Instruction 1(a)-(c) to Item 3.
---------------------------------------------------------------------------
Commenters generally supported the application of the current KIT
format requirements to RILA offerings.\153\ In response to one of the
Proposing Release's requests for comment, one commenter stated that the
KIT should continue to permit insurance companies to cross-reference
relevant sections of the prospectus either within the applicable row of
the KIT or as an additional column rather than requiring issuers to add
a new column in the KIT labeled ``Location in the Prospectus.'' \154\
We agree and are maintaining the current requirements for cross-
reference location because staff, investors, and RILA issuers are
familiar with these requirements, and investor testing did not identify
any concerns with this aspect of the KIT.\155\
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\153\ See Better Markets Comment Letter (expressing that the
proposed KIT requirements present RILA risks in a format that
investors will easily understand); CAI Comment Letter (stating that
the proposed KIT presentation is similar to the presentation
currently used by insurance companies for combination RILA/variable
annuity offerings and that this presentation will work equally well
for combination and standalone RILAs registered on Form N-4).
\154\ See CAI Comment Letter.
\155\ See generally Proposing Release at Section 1.C.
---------------------------------------------------------------------------
We are adopting, as proposed, three amendments to the KIT
formatting and presentation requirements in Form N-4 that will apply to
registration statements both for non-variable and 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 adopting, generally as proposed, a
requirement that issuers present information in the KIT in a question-
and-answer (``Q&A'') format.\156\ As a result of this change, the
various line items of the KIT will be rephrased as questions (e.g.,
``Are There Charges or Adjustments for Early Withdrawals?'' instead of
``Charges for Early Withdrawals or Adjustments''). The instructions
will further require that, unless the context otherwise requires,
issuers must begin the response with a ``Yes'' or ``No'' in bold text
when answering a question presented in a given row of the KIT.
---------------------------------------------------------------------------
\156\ See final Form N-4, Instruction 1(d) to Item 3.
---------------------------------------------------------------------------
Comments on the Q&A format were mixed.\157\ One commenter expressed
that the Q&A format may be helpful and more accessible to some
investors but may also result in a less concise and simple KIT.\158\
Another commenter opposed the Q&A format on the grounds that it would
result in more narrative responses, which would make comparisons
between products more difficult for investors.\159\ This commenter
favored retaining the current wording.
---------------------------------------------------------------------------
\157\ See ACLI Comment Letter; CAI Comment Letter.
\158\ See CAI Comment Letter.
\159\ See ACLI Comment Letter.
---------------------------------------------------------------------------
After considering comments received, we are adopting the Q&A format
generally as proposed, except for the Charges or Adjustments for Early
Withdrawals and the Risks Related to the Insurance Company line items,
each of which we discuss in further detail below. Rephrasing the
current line items in a Q&A format should more effectively convey the
KIT information to investors and will therefore help non-variable and
variable annuity investors make informed investment decisions. As
stated in the Proposing Release, the Q&A format should improve investor
comprehension of non-variable annuity-specific topics based on the
results of our quantitative investor testing.\160\ Because our investor
testing showed that the Q&A format impacted overall comprehension more
for non-investors than independent investors, the Q&A format should
particularly improve comprehension for less-experienced investors.\161\
Because the KIT disclosures as amended continue to be brief by their
nature, we anticipate that any negative impact the Q&A format
[[Page 59997]]
may have on comparability or conciseness will be justified by the
benefit that investors will gain from understanding complex non-
variable annuity-specific information.
---------------------------------------------------------------------------
\160\ See Proposing Release at Section II.B.2.
\161\ See Proposing Release at n.78 and accompanying text. 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 Investor Testing Report at Section 6,
Quantitative Testing, Subgroup Analysis, Investor Status.
---------------------------------------------------------------------------
Second, we are adopting, as proposed, amendments changing the order
in which the KIT (Item 2 of current Form N-4) appears relative to the
Overview of the Contract (Item 3 of current Form N-4), as discussed
above.\162\
---------------------------------------------------------------------------
\162\ See supra Section II.C.2. The current instructions to Form
N-4 require that, notwithstanding 17 CFR 230.421(a), the KIT,
Overview of the Contract, and Fee Table must be disclosed in the
numerical order in which they appear in Form N-4. The final form
changes this instruction to reflect the change in order. See final
Form N-4, General Instruction C.3(a). The change in order will also
apply to summary prospectus disclosure location under the final
amendments to rule 498A.
---------------------------------------------------------------------------
Third, as proposed, we are deleting Form N-4's general instruction
stating that where the discussion of information required by the
Overview of the Contract or KIT 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.\163\
Comments on the deletion were mixed.\164\ One commenter stated that
there is value in ``strategically locating certain disclosures in
multiple places to help investors.'' \165\ Another commenter opposed
this deletion because it would lead to certain information appearing
more than once in the prospectus.\166\
---------------------------------------------------------------------------
\163\ See final Form N-4, General Instruction C.3(a).
\164\ See ACLI Comment Letter; CAI Comment Letter.
\165\ See CAI Comment Letter.
\166\ See ACLI Comment Letter.
---------------------------------------------------------------------------
In administering Form N-4, we have observed that this instruction
has led to confusion on the part of registrants. Moreover, as discussed
above, the layered disclosure framework requires certain disclosure
topics to be discussed in multiple locations.\167\ This framework is
designed to help ensure both that the KIT contains key disclosures and
that the more-detailed sections to which investors are directed contain
all of the key information about the given topic.\168\ This approach is
particularly important for RILAs in light of the challenges our
investor testing showed investors have in understanding these products,
in that investors will see key disclosures in one place--the KIT--
regardless of whether they review targeted sections of the prospectus.
---------------------------------------------------------------------------
\167\ See supra Section I.D.2.
\168\ For example, while both the KIT and Item 5 require
disclosures about principal risks, the KIT currently 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. See
current Form N-4, Instruction 1(b) to Item 2. This instruction
remains unchanged in the KIT of the final Form N-4. See final Form
N-4, Instruction 1(b) to Item 3. 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. See
Proposing Release at n.86 and accompanying text (``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.'').
---------------------------------------------------------------------------
b. Fees, Expenses, and Adjustments
Non-variable annuities typically have implicit fees, expenses,
charges, and adjustments for early or mid-term withdrawals that can be
confusing or surprising to investors. This was observed in our investor
testing regarding RILAs.\169\ We anticipate that investors will benefit
from tailored disclosure about certain unique features of a non-
variable annuity's fee and expense structure as described below to help
them make informed decisions.
---------------------------------------------------------------------------
\169\ See supra Section I.D.1.
---------------------------------------------------------------------------
Early Withdrawal Charges and Adjustments. The first line item in
the ``Fees, Expenses, and Adjustments'' section of the amended KIT,
``Are There Charges or Adjustments for Early Withdrawals?,'' addresses
surrender charges and contract adjustments. Because non-variable
annuities may have surrender charges, we are adopting, as proposed, a
requirement that insurance companies provide the existing KIT surrender
charge disclosure in this first line item so that 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).\170\ 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 requiring, as
proposed, that insurance companies 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.
---------------------------------------------------------------------------
\170\ Final Form N-4, Instruction 2(a) to Item 3.
---------------------------------------------------------------------------
We also are requiring specific disclosure on contract adjustments,
which can result in investor losses if the investor withdraws money
from an investment option, or withdraws money from the non-variable
annuity entirely, before the end of a specified period.\171\ We are
adopting these requirements as proposed except that they will apply to
contract adjustments applicable to registered MVA annuities as well as
RILAs. Specifically, if the contract includes contract adjustments, the
insurance company will be required to include a statement that if all
or a portion of contract value is removed from an investment option or
from the contract before the expiration of a specified period, the
insurance company will apply a contract adjustment, which may be
negative. This statement will include the maximum potential loss (as a
percentage of the investment) resulting from a negative adjustment. The
insurance company also will be required to provide an example of the
maximum negative adjustment that could be applied (in dollars) assuming
a $100,000 investment. We are also adopting, as proposed, a requirement
that the insurance company 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.
---------------------------------------------------------------------------
\171\ 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.
---------------------------------------------------------------------------
Commenters generally opposed one or more of the amendments to the
early withdrawal charges line. One commenter specifically opposed the
inclusion in the KIT of numeric maximum potential loss disclosure (as a
percentage of an investment) due to a negative contract adjustment on
the grounds that the KIT's design would not provide adequate context
for the disclosure and could therefore lead investors to believe that
such losses are likely, even when the risk of loss is remote.\172\ This
commenter suggested instead that the KIT should contain only narrative
statements regarding the risk of loss. The commenter also opposed the
inclusion in the KIT of this numeric loss disclosure because it is
included in other parts of the prospectus. While we
[[Page 59998]]
are adopting changes to this proposed disclosure elsewhere in the
prospectus, we are adopting amendments to this first line item of the
KIT as proposed.\173\ While we appreciate that this disclosure appears
elsewhere in the prospectus, including the numeric maximum potential
loss disclosure in the KIT in particular is appropriate because the
brevity of numeric disclosure and its effectiveness in communicating
this key risk of loss is well suited for the KIT. In this regard, the
KIT was designed to ``provide a brief description of key facts'' and be
``easy to read and navigate.'' \174\ Further, additional context for
the numeric disclosure will be provided by cross-references to other
parts of the prospectus.\175\ As discussed above,\176\ the inclusion of
numeric loss disclosure in both the KIT and elsewhere in the prospectus
is consistent with a layered disclosure approach and is designed to
help investors make more informed investment decisions. Also, as
discussed above, the form does not prevent the insurance company from
providing additional appropriate context.\177\
---------------------------------------------------------------------------
\172\ See CAI Comment Letter.
\173\ See supra Section II.C.2.
\174\ See VASP Adopting Release at paragraph following n.106.
\175\ See final Form N-4, Instruction 1(b) to Item 3.
\176\ See supra Sections III.A.2, II.C.1, and II.C.2 (discussing
numeric loss disclosure in the context of the prospectus's layered
disclosure approach, cover page, and Overview, respectively).
\177\ See supra Sections II.C.1, and II.C.2.
---------------------------------------------------------------------------
One commenter suggested that the example of the maximum negative
adjustment that could be applied (in dollars) assuming a $100,000
investment should not be required if the maximum potential loss (as a
percentage of an investment) due to a negative adjustment is
retained.\178\ This commenter expressed that, where the percentage
maximum potential loss is 100% under a RILA, a typical investor would
understand the dollar amount associated with that loss and would not
need the example. We are retaining this example because it illustrates
how an investment can be impacted by a negative contract adjustment in
dollar figures, which may be more salient to some investors than a
percentage.
---------------------------------------------------------------------------
\178\ See CAI Comment Letter. The instructions to this line item
provide an example of this disclosure that includes the statement
that the loss ``will be greater if you also have to pay a surrender
charge, taxes, and penalties.'' One commenter recommended that, if
the Commission does require an example of maximum negative
adjustments, the Commission should ensure that the form instructions
do not require insurance companies to state or imply that the loss
could be greater than 100% due to other factors, such as surrender
charges. See CAI Comment Letter. The language in the form relating
to greater losses due to these other factors is an example provided
in a specific context, and insurance companies will not be required
to make this disclosure where it is not correct.
---------------------------------------------------------------------------
One commenter stated that requiring disclosure relating to interim
value adjustments under the ``Fees and Expenses'' heading is
inappropriate because interim value adjustments are not fees but are
instead the approximate fair market value of the investments
underpinning the RILA.\179\ We are retaining negative contract
adjustment disclosure under the heading of the KIT that addresses fees
and expenses. Interim value adjustments operate like an implicit fee in
that they have a similar impact on an investor as an explicit fee or
expense by decreasing the amount of an investor's investment. Further,
including information about interim value adjustments under this
heading may aid investors' understanding of their potential effects
since investor testing showed that investors struggled to understand
the concept of interim value adjustments in general.\180\ To address
the commenter's concern that the disclosure could imply that a contract
adjustment is a conventional fee or expense, we have renamed this
section of the KIT ``Fees, Expenses, and Adjustments'' and changed the
question in the left-hand column of the early withdrawal charges and
adjustments line item to read ``Are There Charges or Adjustments for
Early Withdrawals?'' (italics indicating text in final Form N-4 that
has been added to the proposed text).\181\
---------------------------------------------------------------------------
\179\ See VIP Working Group Comment Letter.
\180\ See OIAD Investor Testing Report at Section 5, Qualitative
Testing.
\181\ See also infra Section II.C.6.a (regarding similar changes
relating to the transaction expense table).
---------------------------------------------------------------------------
Transaction Charges. The second line item in the ``Fees, Expenses,
and Adjustments'' section of the amended KIT, ``Are There Transaction
Charges?,'' will 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-end loads,
charges for transferring cash value between investment options,
etc.).\182\ This line item is designed to provide a simple narrative
description to alert investors that surrender charges and contract
adjustments are not the only charges they could pay when they engage in
certain contract transactions. We did not receive comments on this line
item, and we are adopting these requirements as proposed.
---------------------------------------------------------------------------
\182\ Final Form N-4, Instruction 2(b) to Item 3.
---------------------------------------------------------------------------
Ongoing Fees and Expenses. The third line item in the ``Fees,
Expenses, and Adjustments'' section, ``Are There Ongoing Fees and
Expenses?,'' is designed to alert investors that they 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.\183\ We are adopting amendments requiring insurance
companies to provide this disclosure with respect to RILAs, as
proposed, and registered MVA annuities, in a change from the
proposal.\184\
---------------------------------------------------------------------------
\183\ See current Form N-4, Instruction 2(c) to Item 2. 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).
\184\ See final Form N-4, Instruction 2(c) to Item 3.
---------------------------------------------------------------------------
We also are adopting, largely as proposed, amendments requiring
that, where a contract imposes limits on gains on the amount an
investor can earn on an index-linked option, insurance companies must
disclose that they impose these limits on gains and that they can act
as an implicit ongoing fee.\185\
---------------------------------------------------------------------------
\185\ See final Form N-4, Instruction 2(c)(i)(G) to Item 3.
---------------------------------------------------------------------------
Specifically, insurance companies must disclose that: (1) there is
an implicit ongoing fee on index-linked options to the extent that an
investor's participation in index gains is limited by the insurance
company through the use of a cap, participation rate, or some other
rate or measure; (2) this means that the investor's returns may be
lower than the index's returns; (3) in return for accepting this limit
on index gains, an investor will receive some protection from index
losses; and (4) this implicit ongoing fee is not reflected in the
tables below. In a change from the proposal, we are modifying the first
statement to provide that there is an implicit ongoing fee on index-
linked options to the extent that an investor's participation in index
gains is limited by the insurance company through the use of a cap,
participation rate, or some other rate or measure.\186\ In another
change from the proposal, insurance companies will be required to
provide both a statement to the effect that this implicit fee means
that the investor's returns may be lower
[[Page 59999]]
than the index's returns and also a statement that the implicit fee is
not reflected in the fee and cost tables. This disclosure replaces the
proposed statement that the limit on index gains helps the insurance
company generate a profit on the index-linked option, as we discuss in
more detail later in this section of the release. As proposed, the
disclosure will be required to precede the minimum and maximum fee
table if the contract offers index-linked options and imposes ongoing
fees and expenses.
---------------------------------------------------------------------------
\186\ See final Form N-4, Instruction 2(c)(i)(G) to Item 3
(emphasis added); see proposed Form N-4, Instruction 2(c)(i)(G) to
Item 3.
---------------------------------------------------------------------------
Also as proposed, in the case of a contract that offers an index-
linked option subject to limits on gains but does not impose any
explicit ongoing fees or expenses under the contract, the insurance
company will include the disclosure in lieu of such tables.\187\ That
is, the disclosure will take the place of the fee and cost tables
rather than precede them. Where there are no explicit ongoing fees,
minimum and maximum annual fee and cost tables showing zero fees would
tend to mislead investors because an index-linked option imposing
limits on gains has implicit fees inherent in limiting upside index
participation. The substance of the required disclosure will be largely
the same as the disclosure discussed above but will not include the
statement that the ``implicit ongoing fee is not reflected in the
tables below'' since no tables will follow this disclosure.\188\
---------------------------------------------------------------------------
\187\ See final Form N-4, Instruction 2(c)(iii) to Item 3; see
proposed Form N-4, Instruction 2(c)(iii) to Item 3.
\188\ See final Form N-4, Instruction 2(c)(iii) to Item 3. The
proposed disclosure in lieu of the tables was identical to the
proposed disclosure preceding the tables. See proposed Form N-4,
Instruction 2(c)(iii) to Item 3.
---------------------------------------------------------------------------
Lastly in this line item, we are adopting, as proposed, amendments
revising the last sentence in the required legend in the lowest and
highest annual cost table to include the italicized 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.'' \189\ This will further alert
investors to the cost impact of a contract adjustment if they withdraw
money early.
---------------------------------------------------------------------------
\189\ See final Form N-4, Instruction 2(c)(ii)(A) to Item 3.
Currently, this legend only refers to surrender charges, not
negative contract adjustments.
---------------------------------------------------------------------------
Commenters generally opposed one or more of the amendments to the
Ongoing Fees and Expenses line item. One commenter expressed concerns
that excluding disclosures of any ongoing fees that may be implicit to
index-linked options in the KIT, but requiring variable options to
disclose ongoing fees, could result in disparate treatment of these two
types of annuities. Specifically, the commenter stated that this will
produce unequal disclosure between the two products, which would not be
appropriate in light of the similar profit margins to insurance
companies generated by the fees.\190\ The commenter did not suggest a
specific alternative approach to quantify and disclose these implicit
costs. We requested comment on whether it would be appropriate to
develop a standardized methodology or calculation for accurately
determining these costs.\191\ Two commenters raised challenges with
accurately determining these types of costs.\192\ After considering
comments regarding the challenges, we are not requiring numeric
disclosure of implicit ongoing index-linked fees, but continue to
welcome feedback from market participants and others on the feasibility
of establishing a standardized approach to disclose these implicit
fees.
---------------------------------------------------------------------------
\190\ See VIP Working Group Comment Letter.
\191\ See, e.g., Proposing Release at request for comment number
48.
\192\ See ACLI Comment Letter; CAI Comment Letter.
---------------------------------------------------------------------------
One commenter assumed the Commission intended that the lowest and
highest annual cost table would only be disclosed in registration
statements relating to variable options because the table's
instructions reference ``portfolio company fees and expenses,'' which
are relevant only to variable options.\193\ The commenter therefore
suggested that we amend the instructions to clarify that the table
should be omitted if a prospectus is not offering variable options, and
suggested that we not include references to ``negative Contract
Adjustments'' in the legend preceding the table because variable
options are not subject to contract adjustments. This table is not
intended to be limited to variable options but rather applies to all
investment options where ongoing fees are charged. While non-variable
options sometimes do not have explicit ongoing fees, where ongoing fees
are charged in connection with a non-variable option, they must be
disclosed in this table. In addition, if the contract does not have a
contract adjustment, insurance companies should revise the legend
accordingly. Similarly, insurance companies would not include
references to portfolio company fees and expenses in the minimum and
maximum annual fee table and the assumptions in the lowest and highest
annual cost table if the contract does not offer variable options.
---------------------------------------------------------------------------
\193\ See CAI Comment Letter.
---------------------------------------------------------------------------
Some commenters opposed one or more of the required statements
describing implicit fees.\194\ Some of these commenters believed
describing insurance company limits on the amount an investor can earn
in a RILA as an ``implicit ongoing fee'' is inaccurate.\195\ One
commenter viewed such limits as factors that contribute to the pricing
of RILA contracts.\196\ Other commenters stated that these limits may
not be triggered to actually limit an investor's credited
interest.\197\ These commenters expressed that, for index-linked
options with caps, if index returns are positive and less than the cap,
there is no limitation on an investor's credited interest, and for
index-linked options with participation rates, there is often no upper
limit on the credited interest even though the investor may receive
only a percentage of the index return as credited interest.
---------------------------------------------------------------------------
\194\ See ACLI Comment Letter; CAI Comment Letter; Gainbridge
Comment Letter.
\195\ See ACLI Comment Letter; CAI Comment Letter.
\196\ See Gainbridge Comment Letter.
\197\ See ACLI Comment Letter; CAI Comment Letter.
---------------------------------------------------------------------------
We also received comments that characterizing limits on credited
interest as fees could confuse investors about how RILAs operate
because investors understand fees as money collected from them, but a
limit on credited interest is not money collected from investors.\198\
One commenter stated that these limits are not like fees as they are
not applied in all circumstances, such as when an index's returns are
below these limits, and thus act more like an opportunity cost rather
than like a fee.\199\
---------------------------------------------------------------------------
\198\ See ACLI Comment Letter; Gainbridge Comment Letter.
\199\ See CAI Comment Letter.
---------------------------------------------------------------------------
While contractual limits placed on an investor's gains, such as a
cap rate or participation rate, are not fees or charges in a
conventional sense, these limits can have the effect of reducing
investment returns (e.g., where the index outperforms a cap or a
participation rate is less than 100%).\200\ As a result, it is
appropriate to characterize these contractual limits as ongoing
implicit fees given they have the same impact on investors. We
recognize, however, that these contractual limits may not act to reduce
an investor's credited interest in any given case. Accordingly, after
considering comments, we are modifying the proposed statement that the
imposition of limits on gains will act as an implicit ongoing fee.
Instead, we
[[Page 60000]]
are requiring disclosure that there is an implicit ongoing fee on
index-linked options to the extent that an investor's participation in
index gains is limited by the insurance company through the use of a
cap, participation rate, or some other rate or measure. The addition of
the qualifying language ``to the extent'' is designed to communicate to
investors that a contractual limit acts as an implicit fee once it is
triggered, but not before. After considering comments, we have
determined that describing these limits as involving an implicit
``fee'' communicates the concept of reducing an investor's credited
interest more effectively than ``potential opportunity cost,'' as
suggested by a commenter, which is a less concrete concept and
therefore potentially more confusing for investors. Moreover, the
modification discussed above regarding when these limits on gains will
reduce an investor's credited interest, together with the
characterization of the effect of these limits on gains as acting as an
``implicit'' ongoing fee, also will make clear these limits can have an
effect akin to that of a fee.
---------------------------------------------------------------------------
\200\ Dodie C. Kent and Ronal Coenen, Jr., Variable Annuities
and Other Insurance Investment Products (Third Edition), Registered
Index-Linked Annuity Contracts (``Kent and Coenen'') at sec. 29:2.2.
---------------------------------------------------------------------------
Some commenters opposed requiring insurance companies to disclose
that limiting the amount an investor can earn on an index-linked option
helps the insurance company make a profit on the option.\201\ These
commenters stated that they believe the statement is misleading because
insurance companies generate profit in other ways (or in other ways in
addition to the limits), including through the use of derivative
instruments. One commenter indicated that, even though other registered
securities products generate revenue, not every form requires
information about how revenue and profit is generated.\202\ After
further consideration, we are not adopting the profit statement because
the two replacement statements discussed above in this section more
clearly explain to investors how limits on index gains may decrease the
amount earned on a contract. Specifically, the final disclosure alerts
investors to opportunity costs associated with a contract by
illustrating that limits can result in lower returns for investors as
compared to the contract's underlying index. Further, alerting
investors that the implicit fee is not reflected in the cost and fee
tables is designed to help investors understand that the explicit
ongoing fees that are reflected in these tables do not fully capture
the complete costs that investors may incur under the contract.
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\201\ See ACLI Comment Letter; CAI Comment Letter; Gainbridge
Comment Letter.
\202\ See ACLI Comment Letter.
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One commenter opposed the amendments requiring insurance companies
to disclose that in return for accepting a limit on index gains, an
investor will receive some protection from index losses.\203\ This
commenter expressed that limits on gains sometimes do not actually
limit an investor's credited interest, but an investor nevertheless
receives protection from losses and, in such scenarios, characterizing
the protection from index loss as received in exchange for accepting a
limit on gains is inaccurate. We are including the ``in return for''
statement in the disclosure as proposed. An investor that accepts a
limit on index gains in the form of a crediting rate (e.g., a cap) and
also receives some downside protection from index losses (e.g., a
buffer) is receiving the protection in exchange for accepting the
limit, even if the limit is never triggered and therefore does not
decrease the investor's credited interest. RILA industry experts have
made similar statements.\204\
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\203\ See id.
\204\ See Dodie C. Kent and Ronald Coenen Jr., The Design and
Regulatory Framework of Registered Index-Linked Annuities, ALI CLE
Conference on Life Insurance Products 2022 (stating that the
potential limit on upside performance is the trade-off that
investors make for potential downside protection).
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c. Risks
Risk of Loss. We are adopting amendments to the instructions to the
line item entitled ``Is There a Risk of Loss from Poor Performance?''
with some modifications from the proposal. Form N-4 currently requires
disclosure on risk of loss in connection with variable options, and we
proposed to extend this risk of loss requirement to index-linked
options. As proposed, insurance companies will be required to state, in
the context of both index-linked or variable options, that an investor
can lose money by investing in the contract. Index-linked options, like
variable options, are subject to the risk of investment loss from poor
performance.\205\ In a change from the proposal, we are adopting
amendments 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 current limits on index
loss provided under the contract.\206\ The proposal required disclosure
of maximum loss from negative index performance after taking into
account the minimum guaranteed limit on index loss. In another change
from the proposal, the instructions will specify that an insurance
company may give a range of the maximu
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