On October 30, 2018 the Securities and Exchange Commission announced amendments to rules and forms designed to improve disclosures made to clients regarding variable annuities and variable life insurance contracts. According to the SEC, the purpose of the proposed amendments is to assist investors in comprehending the characteristics of variable annuities and variable life insurance contracts and the risks associated with those investment products. The proposed amendments would allow financial institutions who offer variable annuities and variable life insurance contracts to give a summary prospectus to investors, which would satisfy the financial institutions’ disclosure obligations. The SEC has invited the public to comment on both the proposed amendments and the hypothetical summary prospectus samples created and included in the proposed rule. The comment period will run through February 15, 2019.
According to the SEC, variable annuities and variable life insurance contracts are both popular methods for investors to obtain life insurance and satisfy financial goals. Variable contracts, however, tend to have a more complicated structure than other investment products. Because of this, the SEC considers disclosure to investors about variable contracts to be of particular importance. However, variable contract prospectuses are often quite lengthy and can contain terminology that can be difficult for the average investor to understand.
In response to these concerns, the SEC proposed a new Rule 498A under the Securities Act. This proposed rule provides that financial institutions who offer variable contracts can meet their disclosure obligations by providing a summary prospectus to investors. New investors should be provided with an “initial summary prospectus,” which would explain the features of the variable contracts they can currently choose from. Investors who are already customers of the variable contract providers would be provided an updating summary prospectus, which would detail any changes to the variable contracts that occurred in the last year.
The cover of the summary prospectus would feature a website address which would direct investors to the full statutory prospectus. Alternatively, investors can request the statutory prospectus in either paper or electronic format.
The proposed rules and amendments also include mandatory amendments to the variable contract registration forms: Forms N-3, N-4, and N-6. For example, one proposed amendment would require the registration forms to highlight changes in the variable contract industry. The proposed amendments would also obligate financial institutions who offer variable products to use the Inline eXtensible Business Reporting Language, or XBRL, format for certain disclosures in a variable contract’s statutory prospectus. In addition, the proposed amendments contain some technical amendments that are designed to accommodate the delivery of summary prospectuses.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.