[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Proposed Rules]
[Pages 71088-71259]
[FR Doc No: 2023-21986]

Vol. 88

Friday,

No. 197

October 13, 2023

Part II

Securities and Exchange Commission

-----------------------------------------------------------------------

17 CFR Parts 230, 232, 239, and 274

Registration for Index-Linked Annuities; Amendments to Form N-4 for
Index-Linked and Variable Annuities; Proposed Rule

Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 /
Proposed Rules

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, and 274

[Release No. 33-11250; 34-98624; IC-35028; File No. S7-16-23]
RIN 3235-AN30

Registration for Index-Linked Annuities; Amendments to Form N-4
for Index-Linked and Variable Annuities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rule and form amendments to provide a tailored form to
register the offerings of registered index-linked annuities
(``RILAs''). Specifically, the Commission is proposing to amend the
form currently used by most variable annuity separate accounts, Form N-
4, to require issuers of RILAs to register offerings on that form as
well. To facilitate this amendment, the Commission is also proposing to
amend certain filing rules and make other related amendments. These
changes would, if adopted, implement the requirements relating to RILAs
contained in Division AA, Title I of the Consolidated Appropriations
Act, 2023. Further, the Commission is proposing other amendments to
Form N-4 that would apply to all issuers that would use that form under
the proposal. The Commission is also proposing to apply to RILA
advertisements and sales literature a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws. The Commission is proposing a
technical amendment to Form N-6 to correct an error from a prior
Commission rulemaking. Finally, the Commission requests comment as to
whether to require the registration of market-value adjustments
associated with certain annuities on Form N-4 as well.

DATES: Comments should be submitted on or before November 28, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/2023/09/rila); or
     Send an email to [email protected]. Please include
File Number S7-16-23 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-16-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/2023/09/rila). Comments are also available for website viewing and printing
in the Commission's Public Reference Room, 100 F Street NE, Washington,
DC 20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's public
reference room. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. Retail investors seeking to comment on their experiences
with annuities generally and RILAs in particular may want to submit a
short Feedback Flyer, available at Appendix D.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
    A summary of the proposal of not more than 100 words is posted on
the Commission's website (https://www.sec.gov/rules/2023/09/rila).

FOR FURTHER INFORMATION CONTACT: Christian Corkery, Michael Khalil,
Rachael Hoffman, James Maclean, Amy Miller, or Laura Harper Powell,
Senior Counsels; Bradley Gude, Branch Chief; Amanda Hollander Wagner,
Senior Special Counsel; or Brian McLaughlin Johnson, Assistant
Director, Investment Company Regulation Office, at<PHONE_NUMBER>;
Elisabeth Bentzinger or Min Oh, Senior Counsels; Michael Kosoff, Senior
Special Counsel, Disclosure Review and Accounting Office, at (202) 551-
6921, Division of Investment Management, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the following rules and forms:
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 77a et seq.

----------------------------------------------------------------------------------------------------------------
                   Commission reference                                     CFR citation (17 CFR)
----------------------------------------------------------------------------------------------------------------
Securities Act of 1933 (``Securities Act''): \1\
    Rule 156..............................................  Sec.   230.156
    Rule 172..............................................  Sec.   230.172
    Rule 405..............................................  Sec.   230.405
    Rule 415..............................................  Sec.   230.415
    Rule 424..............................................  Sec.   230.424
    Rule 456..............................................  Sec.   230.456
    Rule 457..............................................  Sec.   230.457
    Rule 485..............................................  Sec.   230.485
    Rule 497..............................................  Sec.   230.497
    Rule 498A.............................................  Sec.   230.498A
Regulation S-T:
    Rule 313 of Regulation S-T............................  Sec.   232.313
    Rule 405 of Regulation S-T............................  Sec.   232.405
Forms:
    Form N-4..............................................  Sec.   239.17b and 274.11c
    Form N-6..............................................  Sec.   239.17c and 274.11d

    Form 24F-2............................................  Sec.   239.66 and Sec.   274.24
----------------------------------------------------------------------------------------------------------------

Table of Contents

I. Introduction and Background
    A. Typical RILA Features
    B. Current Registration Process
    C. Evidence of Investor Views and Areas of Potential Confusion
    D. Overview of Proposal
II. Discussion
    A. Use of Form N-4
    B. Contents of Form N-4
    1. Front and Back Cover Pages (Item 1)
    2. Key Information Table (Item 3)
    3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
    4. Principal Risks of Investing in the Contract (Item 5)
    5. Addition of Contract Adjustments and Other Amendments to Fee
and Expense Disclosures (Items 4, 7, and 22)
    6. Information About Contracts With Index-Linked Options (Item
31A)
    7. Other Amendments and Provisions
    8. Remaining Form N-4 Items
    9. Inline XBRL
    C. Option To Use a Summary Prospectus
    D. Accounting (Items 16 and 26)
    E. Filing and Prospectus Delivery Rules
    1. Fee Payment Method and Amendments to Form 24F-2
    2. Post-Effective Amendments and Prospectus Supplements
    3. Prospectus Delivery
    F. Materially Misleading Statements in RILA Sales Literature
    G. Existing Commission Letters
    H. Registered Market-Value Adjustment Annuities
    I. Technical Amendment to Form N-6
    J. Compliance Period
    K. General Request for Comment From Retail Investors
III. Economic Analysis
    A. Introduction
    B. Baseline
    1. Affected Parties
    2. Current Regulatory Requirements
    3. Market Practice
    C. Benefits and Costs
    1. Benefits
    2. Costs
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
    1. Creating an Entirely New Registration Form for RILAs
    2. Alternatives to Specific Form N-4 Amendments
    3. Require the Use of Form N-4 for Registered MVAs
    4. Limiting Scope of Structured Data Requirements
    F. Request for Comment
IV. Paperwork Reduction Act
    A. Rule 498A
    B. Form N-4
    C. Form 24F-2
    D. Investment Company Interactive Data
    E. Request for Comment
V. Regulatory Flexibility Certification
VI. Consideration of Impact on the Economy
Statutory Authority

I. Introduction and Background

    An annuity contract (``annuity'' or ``contract'') is a type of
insurance product in which an investor makes a lump-sum payment or a
series of payments in return for future payments from the insurance
company to meet retirement and other long-term financial goals. A RILA
is one of several types of annuity contracts offered by insurance
companies. An investor in a RILA allocates purchase payments to one or
more investment options under which the investor's returns (both gains
and losses) are based at least in part on the performance of an index
or other benchmark (collectively, ``indexes''), over a set period of
time (``crediting period'').\2\ In some cases, insurance companies
offer RILAs on a standalone basis with various index-linked investment
options (``index-linked options'') for investors to choose from. In
other cases, insurance companies offer ``combination'' annuity
contracts that provide index-linked options together with other
investment options, such as mutual funds (``portfolio companies'')
offered as investment options under a variable annuity (``variable
options'').\3\ An investor purchasing a combination contract, for
example, may have the ability to allocate purchase payments under the
contract to index-linked options; variable options that pass on the
returns of mutual funds selected by the investor; and/or fixed account
options for which the insurance company promises to pay a fixed and
stated minimum rate of interest. The market for RILAs has grown
significantly in recent years, with annual RILA sales of $41.1 billion
in 2022 alone, more than tripling since 2017.\4\ We understand that
RILAs are predominantly sold by broker-dealers, although investment
advisers may also provide advice on RILAs, and insurance companies also
may offer RILAs directly.
---------------------------------------------------------------------------

    \2\ Insurance companies frequently refer to crediting periods as
``investment terms'' or sometimes simply ``terms.'' See, e.g.,
Investor Testing Report on Registered Index Linked Annuities, Office
of Investor Advocate Division (``OIAD Report'') at Section 2, RILAs:
Structure of Contracts and Investment Options, Investment Terms. As
noted in OIAD's report, investor testing suggested that investors
consistently struggled with this terminology, and a number of
participants seemed to equate ``investment term'' or ``term'' with
the length of the insurance contract rather than the length of the
investment product options within the RILA contract, leading them to
misunderstand the operation of the RILA. Id. at Section 5,
Qualitative Testing, Results from Round 1. In an effort to mitigate
that confusion, we have opted to use the term crediting period in
this release and in the proposed amendments to Form N-4. The most
common crediting periods are one, three, and six years. See id. at
Section 3, Overview of the RILA Market and Simulated Performance
over Historical Periods, RILA Indexes, Investment Terms, and
Insurance Features, Figure 2.
    \3\ Variable annuity contracts and variable life insurance
contracts (together, ``variable contracts'') combine both investment
and insurance features. Investors generally allocate their purchase
payments to a range of investment options, typically mutual funds
which are separately registered and have their own prospectuses. The
investor's account value changes depending on the performance of the
investment options selected. Variable annuities allow investors to
receive periodic payments for either a definite period (e.g., 20
years), or for an indefinite period (e.g., the life of the
investor). See Updated Disclosure Requirements and Summary
Prospectus for Variable Annuity and Variable Life Insurance
Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020)
[85 FR 25964 (May 1, 2020)] (``VASP Adopting Release'') at nn.4-5
and n.8 and accompanying text.
    \4\ See LIMRA, ``LIMRA: Record Annuity Sales in 2022 Expected to
Continue Into First Quarter 2023,'' news release, Mar. 8, 2023
(reporting 2022 RILA sales of $41.1 billion), https://www.limra.com/en/newsroom/news-releases/2023/limra-record-annuity-sales-in-2022-expected-to-continue-into-first-quarter-2023/ and LIMRA, ``LIMRA
Secure Retirement Institute: Total Annuity Sales Continued to
Decline in 2017,'' news release, Feb. 21, 2018 (reporting 2017 sales
of structured annuity products, i.e., RILAs, of $9.2 billion),
https://www.limra.com/en/newsroom/news-releases/2018/limra-secure-retirement-institute-total-annuity-sales-continued-to-decline-in-2017/.
---------------------------------------------------------------------------

    RILAs are securities for purposes of the Securities Act of 1933
(``Securities Act'').\5\ Unlike variable annuity contracts for which
the Commission has adopted a specific registration form tailored to
those products, insurance companies currently register offerings of
RILAs on Securities Act registration

Forms S-1 or S-3.\6\ In 2022, Congress enacted Division AA, Title I of
the Consolidated Appropriations Act, 2023 (``RILA Act''), directing the
Commission to adopt a new registration form for RILAs within 18 months
of enactment.\7\ The RILA Act requires the Commission to design the
form to ensure that a purchaser using the form receives the information
necessary to make knowledgeable decisions, taking into account (1) the
availability of information; (2) the knowledge and sophistication of
that class of purchasers; (3) the complexity of the RILA; and (4) any
other factor the Commission determines appropriate. The RILA Act also
requires the Commission to engage in investor testing as part of its
rulemaking process and to incorporate the results of the testing in the
design of the form, with the goal of ensuring that key information is
conveyed in terms that a purchaser is able to understand. If the
Commission fails to adopt the form within 18 months of enactment, the
RILA Act provides that RILA issuers can begin registering RILA
offerings on existing Form N-4.
---------------------------------------------------------------------------

    \5\ Depending on the context, ``RILA'' is also used in this
release to collectively refer to both stand-alone RILAs and the
index-linked options available in a combination contract. When
referring to the entity registering the RILA, we use the term ``RILA
issuer'' or ``insurance company.'' Index annuities that meet the
requirements of section 989J of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111-203) or section 3(a)(8) of
the Securities Act are treated as exempt securities for purposes of
the Securities Act, but RILAs do not fall within this exemption due,
in large part, to the shifting of a significant level of investment
risk from the RILA issuer to the investor. RILAs and index-linked
option, as used in this release, refer only to those index annuities
that are securities for the purposes of the Securities Act. See,
e.g., sections 101(a)(5) and (6) of Division AA, Title I of the
Consolidated Appropriations Act, 2023.
    \6\ The registration forms for variable annuity contracts are
Form N-3 (for variable annuity separate accounts structured as
management companies) and Form N-4 (for variable annuity separate
accounts structured as unit investment trusts). The separate account
established by the sponsoring insurance company is the legal entity
that registers its securities. Separate accounts are typically
registered as investment companies under the Investment Company Act.
See section 2(a)(37) of the Investment Company Act. The Commission
first adopted the registration form for variable annuities over 30
years ago. See Registration Forms for Insurance Company Separate
Accounts that Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 14, 1985) [50 FR 26145] (June 25,
1985)]. In this release, we focus only on Form N-4, and not Form N-
3, because Form N-4 is the registration form identified in the RILA
Act and the form used to register the majority of variable annuity
contracts.
    \7\ Public Law 117-328; 136 Stat. 4459 (Dec. 29, 2022).
---------------------------------------------------------------------------

    We are proposing to amend Form N-4 to require RILA issuers to
register RILA offerings, including associated features of the RILA such
as any contract adjustments, on that form and to tailor the form's
requirements accordingly.\8\ We also are proposing to amend other rules
related to the securities offering process to allow these issuers to
conduct RILA offerings in the same way issuers conduct offerings of
variable annuities. Consistent with the RILA Act, these proposed
amendments collectively are designed to provide investors disclosures
tailored to RILAs and highlight key information about these complex
products, building on the Commission's layered disclosure framework in
place for variable annuities. We are also proposing certain amendments
to Form N-4 that would apply to offerings of variable annuities, based
on our experience with the form since its last amendment and the
investor testing conducted in connection with this rulemaking.\9\ In
addition, we are proposing to apply a current Commission rule that
provides guidance as to when sales literature is materially misleading
under the Federal securities laws to RILA advertisements and sales
literature. Finally, we are proposing a technical amendment to Form N-6
to correct an error from a prior Commission rulemaking.
---------------------------------------------------------------------------

    \8\ Under this proposal, the amended Form N-4 will not register
the RILA issuers themselves, only the offering of RILA securities.
Unlike separate accounts which register variable annuities, RILA
issuers are not investment companies, and thus need not register
with the Commission as an investment company as separate accounts
do.
    \9\ See VASP Adopting Release.
---------------------------------------------------------------------------

A. Typical RILA Features

    RILAs are complex financial products that are sold to retail
investors. The following are some of the most prevalent features that
contribute to this complexity, and that might make it challenging for
an investor to assess the features, risks, and possible return profile
of a RILA. These features also are important ones for financial
professionals to consider when recommending that an investor purchase a
RILA.
     Bounded Return Structure. Under a RILA, the insurance
company will credit positive or negative ``interest'' to the investor's
contract value at the end of each crediting period. The amount credited
is based, in part, on the performance of the specified index (e.g., the
S&P 500).\10\ The amount of any positive interest credited will also
depend on whether the contract includes provisions such as a ``cap
rate'' or ``participation rate.'' A cap rate places an upper limit on
an investor's ability to participate in the index's upside performance
directly (e.g., with a current cap rate of 5%, if the index is up 10%
at the end of the crediting period, the investor's contract value will
be credited with only 5% positive interest). A ``participation rate''
sets an investor's return to some specified percentage of the index's
return (e.g., an 80% participation rate would result in an investor
receiving positive interest of 80 cents on the dollar of gains in the
index). The contract generally will include one of these limits on how
much the insurance company will credit the investor if the performance
of the index goes up in value by the end of the crediting period
(collectively ``limits on gains''). Similarly, the contract generally
will include terms limiting the investor's losses to some extent if the
performance of the index goes down in value. This might include a
``buffer'' (which limits the investor's exposure to losses up to a
fixed percentage), or a ``floor'' (which places a lower limit on the
investor's exposure to loss) (collectively ``limits on losses''). For
example, with a ``buffer'' of -5%, if the index is down 2%, that
investor will not lose anything, but if the index is down 7% the
investor will lose 2% (the difference between the loss and the buffer
rate). With a ``floor'' of -5%, if the index is down 2%, the investor
will lose 2%, but if the index is down 7%, the investor will only lose
5%. These limits can be complex and overlapping, and may change at the
beginning of each new crediting period, subject to certain minimum
guarantees stated in the contract. Over time, the investor's contract
value will increase or decrease, depending on the performance of the
index and the particular contract provisions (such as the bounded
return structure). Despite the bounded return structure, a RILA is not
necessarily a low-risk investment product as the investor could lose a
significant amount of money if the index performs poorly.
---------------------------------------------------------------------------

    \10\ Insurance companies typically choose indexes for the RILA
contract where any gains in the value of the index do not include
dividends paid on the securities that make up the index.
---------------------------------------------------------------------------

     Fees and Expenses. For many RILAs, the investor pays no
direct or explicit ongoing fees and expenses under the RILA, and this
is sometimes a feature disclosed in RILA marketing materials. However,
the RILA's bounded return structure requires investors to agree to
tradeoffs that come with their own economic costs. In exchange for some
protection against losses if the index goes down in value, investors
must also agree to contractual provisions limiting the amount of gains
they will receive if the index goes up in value. A RILA's upside limits
on gains can reduce an investor's return in the same way that a direct
fee can and can help make the RILA more profitable to the insurance
company.
     Charges and Penalties for Early Withdrawals. Investors
also can lose significant money if they withdraw their money early from
an investment option or from the contract. This can arise in several
circumstances. First, a RILA typically will specify a period of time
during which a ``surrender charge'' will apply, for example nine years
following an investor's last premium payment. Typically, this charge is
greatest in the first year of the surrender period, decreasing each
year until the end of the surrender period. An investor who

withdraws money during this period will pay a fee, such as 9% of the
amount withdrawn. Second, an insurance company may make an adjustment,
either to the investor's contract value or to the amount paid to the
investor, if amounts are withdrawn from an index-linked option before
the end of its crediting period or from the contract before the end of
a specified period. For example, when an investor in a RILA chooses a
particular index-linked option, the RILA may provide that the index-
linked option's crediting period is one year. If amounts are removed
from that index-linked option before the end of this one-year crediting
period, typically for any reason, the insurance company will apply an
``interim value adjustment'' or ``IVA.'' The IVA will adjust the
contract value based, generally, on a complex formula where the IVA may
change daily and can be positive or negative.\11\ As a result, the
investor could lose a significant amount of money, even if the index
has a gain at the time of the withdrawal.
---------------------------------------------------------------------------

    \11\ Common methods of calculating this adjustment include
prorating the crediting method based on the number of days that have
elapsed since the start of the crediting period, employing a market-
based formula designed to approximate the present value of the index
and/or employing interest-rate-based MVAs to offset certain insurer
losses and costs, or some combination of these two. See Clifford E.
Kirsch, Variable Annuities and Other Insurance Investment Products
(Third Edition 2022) at 29-8, available at https://plus.pli.edu/Details/Details?start=0&rows=50&fq=%7e2B%7etitle_id%7e3A282B22%7e240085%7e2229%7e&fq=%7e2B%7eid%7e3A282B22%7e240085-CH29%7e2229%7e&sort=s_date+desc&origin=title.
---------------------------------------------------------------------------

    Similarly, the insurance company might apply a positive or negative
``market value adjustment'' or ``MVA'' (collectively with IVAs, a
``contract adjustment'') to the contract value if the investor
partially or fully withdraws amounts from the contract. Contract
adjustments could be made in response to a number of contract
transactions, such as a surrender, withdrawal, payment of the death
benefit, or the start of annuity payments, and an investor could
experience a negative contract adjustment even when the investor takes
an otherwise permissible withdrawal, such as under a guaranteed living
benefit.\12\ These adjustments can also negatively impact other values
under the contract, such as the surrender value and death benefit.
Moreover, these fees and adjustments are not always mutually exclusive.
Indeed, under the terms of certain RILA contracts, an investor could
experience a decrease in contract value from a negative interim value
adjustment and a negative market value adjustment, depending on the
timing of the withdrawal, and also pay a surrender charge. An investor
may also be subject to income taxes and face a Federal income tax
penalty if the investor withdraws money before a certain age.\13\
---------------------------------------------------------------------------

    \12\ Id. at 29-13. Under these benefits, RILA investors are
permitted to take a certain amount of guaranteed withdrawals from
their contract each year without reducing the value of guaranteed
withdrawals for future years. These can be a standard feature or an
optional rider chosen by an investor. Id. at 29-12.
    \13\ See Updated Investor Bulletin: Indexed Annuities, SEC's
Office of Investor Education and Advocacy, July 31, 2020, https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_indexedannuities.
Staff reports and other staff documents (including those cited
herein) represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person.
---------------------------------------------------------------------------

     Changes by Insurer. Crediting periods for an index-linked
option in a RILA contract generally range from one to six years. The
insurance company may change or remove key features of index-linked
options, such as the cap rates, floors, or even change the index. These
changes may often be made at the insurance company's discretion and
renewal provisions can and do change over time. Also, RILA contracts
typically state that an investor will be automatically renewed at the
end of a crediting period into the same or substantially similar index-
linked option, often with a new limit on gains. If the same index-
linked option is unavailable, the terms of the contract generally
provide that the insurance company may place the investor into a more
conservative investment option as a default, such as a fixed account or
an index-linked option with a 0% floor.
     Taxes. Special tax rules generally apply to RILAs and
other annuities, with both tax advantages and potential adverse tax
impacts in certain circumstances. For example, assets within a RILA
generally grow tax-deferred. As discussed above, however, investors may
face a Federal income tax penalty if money is withdrawn before the
investor reaches a certain age.\14\
---------------------------------------------------------------------------

    \14\ For these and other reasons, insurance companies generally
advertise RILAs as a long-term investment. This is similar to the
treatment of variable annuities. See VASP Adopting Release at n.14
and accompanying text.
---------------------------------------------------------------------------

    Providing investors with key information is particularly important
in the context of RILAs, since their features are typically complex and
their risks may not be apparent or easily understood by prospective
investors absent clear disclosure. Form N-4's existing disclosure
requirements regarding features of annuities would complement the
proposed RILA-specific disclosures, such that the amended Form N-4
would provide investors with key information both about the annuity
contract and the associated registered index-linked or variable
investment options.

B. Current Registration Process

    The current requirements for issuers offering RILAs and variable
annuities differ in many respects, both in terms of the disclosure
issuers must provide, and with respect to the registration process. We
highlight here some of these key differences.
    On required disclosure, because the Commission currently does not
have a specific registration form for RILAs, insurance companies
register the offerings of RILAs on Forms S-1 or S-3.\15\ Although
specific disclosure requirements apply for certain securities such as
capital stock or debt, the forms' disclosure requirements are not
specifically tailored to particular kinds of securities given the wide
range of securities offerings that can be registered on the forms.\16\
Forms S-1 and S-3 thus do not include specific line-item requirements
addressing disclosures about RILAs and their complex features, such as
how limits on gains operate or the application of contract adjustments.
These forms also require issuers to disclose information about the
offering itself as well as extensive information about the registrant
issuing the securities that may be less material to a RILA investor
than information about the contract's features. Required information
about the registrant includes, for example, management's discussion and
analysis of financial condition and results of operations (``MD&A''),
which requires a narrative discussion of the registrant's financial
statements, and disclosure about executive compensation. Domestic
registrants also must include financial statements prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\17\
---------------------------------------------------------------------------

    \15\ See, e.g., General Instruction I of Form S-1 (``This Form
shall be used for the registration under the Securities Act of 1933
(`Securities Act'); of securities of all registrants for which no
other form is authorized or prescribed'').
    \16\ See Item 9 of Forms S-1 and S-3 and 17 CFR 229.202
(providing specific disclosure requirements for certain securities
such as capital stock, debt, warrants or rights, and directing
issuers of other types of securities to include a brief description
that is comparable to that required for the specified kinds of
securities).
    \17\ See 17 CFR 210.4-01(a)(1) (stating that financial
statements filed with the Commission which are not prepared in
accordance with GAAP will be presumed to be misleading or inaccurate
unless the Commission has otherwise provided). See also infra
footnote 20.

---------------------------------------------------------------------------

    Most variable annuities, in contrast, are registered on Form N-
4.\18\ This form is designed for variable annuities and has disclosure
requirements tailored to these investments. Providing investors with
key information in a reader-friendly format is particularly important
in the context of variable annuity contracts because their structure is
complex. Accordingly, Form N-4's disclosure requirements are designed
to provide investors with key information relating to a variable
contract's provisions, benefits, and risks in a concise and reader-
friendly presentation, along with targeted information about the
insurance company and the offering. Form N-4's disclosure requirements
thus focus more on the specific features of variable annuities than on
the issuing insurance company. This presentation is designed to
highlight the most important information for an investor in a variable
annuity, so that the only matters included in the prospectus are those
for which there is a substantial likelihood that a reasonable investor
would consider them important in deciding whether to invest.\19\ This
focus on the provisions of the variable contract itself, rather than
certain details about the operation of the insurance company, reflects
that a variable annuity contract is not a direct investment in the
capital stock or debt of the insurance company, but rather a contract
with the insurance company under which the investor's exposure to the
insurance company generally is limited to the company's ability to
honor any guarantees associated with the contract. In addition, rule
498A together with Form N-4 implements a layered disclosure approach
for variable annuities by permitting insurance companies and others to
use a summary prospectus framework for variable annuities while making
the more-detailed statutory prospectus, as well as the contract's
statement of additional information (``SAI''), available online. Form
N-4 also provides a limited exception for insurance companies to file
financial statements prepared in accordance with statutory accounting
principles (``SAP''), referred to as ``statutory requirements'' in the
form instructions, rather than GAAP. Specifically, insurance companies,
which act as the depositors of variable annuity separate accounts
registered on Form N-4, may use SAP financials solely when the
insurance company does not otherwise prepare GAAP financial statements
or GAAP financial information for use by a parent in the parent's
Securities Exchange Act of 1934 (``Exchange Act'') reports or the
parent's registration statements filed under the Securities Act.\20\
---------------------------------------------------------------------------

    \18\ According to Form N-CEN filings received through March 23,
2023, there were 419 variable annuity separate accounts registered
as unit investment trusts (``UITs'') in 2022.
    \19\ The Commission has long sought to tailor disclosures for
annuity products. See Registration Forms for Insurance Company
Separate Accounts, Investment Company Act Release No. 13689 (Dec.
23, 1983) [49 FR 614 (Jan. 5, 1984)] (``Form[] N-4 would permit
shorter and simpler prospectuses than are required under current
practice, . . . by incorporating many of the reduced disclosure
requirements of Form N-1A. Separate account disclosure requirements
that experience has shown are unnecessary also would be eliminated,
as well as certain disclosure requirements that are holdovers from
the requirements applicable to non-separate account unit investment
trust.''); Registration Form Used By Open-End Management Investment
Companies, Investment Company Act Release No. 12927 (Dec. 27, 1982)
[48 FR 813 (Jan. 7, 1983)] (``In order to shorten and simplify the
prospectus for mutual funds, the Commission has concluded that it is
necessary to eliminate certain types of information from the
prospectus, so that only matters of fundamental importance to most
mutual fund investors will be included in the prospectus'').
    \20\ See, e.g., Instruction 1 to Item 31(b) in Form N-3 and
Instruction 1 to Item 26(b) in Form N-4. In addition, although Form
S-1 requires GAAP financial statements, exemptions have been granted
pursuant to 17 CFR 210.3-13 that permit insurance companies to
substitute SAP financials in lieu of GAAP financials when
registering RILAs on Form S-1 in circumstances permitted by Form N-
4. See, e.g., Letter from Jenson Wayne, Chief Accountant, Division
of Investment Management, to Stephen E. Roth, Eversheds Sutherland
(US) LLP, regarding Fidelity & Guaranty Life Insurance Company and
Fidelity & Guaranty Life Insurance Company of New York (Mar. 17,
2023) (available at https://www.sec.gov/files/fidelity-guaranty-031723.pdf) (``F&G Life Letter'').
---------------------------------------------------------------------------

    With respect to the registration process, insurance companies
registering an offering of RILA securities are required under the
Securities Act to pay a registration fee to the Commission at the time
of filing a registration statement.\21\ This means that they pay
registration fees at the time they register the offer and sale of the
securities, regardless of when (or if) they sell them. The registration
statement for the RILA offering also must include current financial
information, including any annual update required by section 10(a)(3)
of the Securities Act.\22\ An insurance company registering a RILA
offering on Form S-1 must provide any section 10(a)(3) update to the
registration statement by filing a post-effective amendment which must
be declared effective, typically by the staff acting pursuant to
delegated authority.\23\
---------------------------------------------------------------------------

    \21\ Section 6(b)(1) of the Securities Act [15 U.S.C.
77f(b)(1)]. Certain ``well-known seasoned issuers'' or ``WKSIs'' can
use a different registration process than what is described here.
See generally Securities Offering Reform, Investment Company Act
Release No. 26993 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
(``Offering Reform Release''). None of the insurance companies
offering RILAs are WKSIs, however, and we generally do not
anticipate that RILA issuers will meet the conditions to operate as
a WKSI. We therefore do not generally discuss the WKSI registration
process in this release. Even if a RILA issuer were to qualify as a
WKSI, the Securities Act rules that provide a streamlined offering
process for WKSIs generally would be inapplicable to RILA offerings
on Form N-4, as proposed. For example, although a WKSI can file an
automatic shelf registration statement, this would not be applicable
under the proposal because Form N-4 does not permit a shelf
registration statement and an automatic shelf registration statement
must be filed on Forms S-3, F-3, or N-2. See rule 405 (definition of
``automatic shelf registration statement''). As another example,
WKSIs are permitted to use the ``pay-as-you-go'' method of paying
securities registration fees, but the registration fees for RILA
offerings would be paid annually in arrears under the proposal. See
17 CFR 230.456(b).
    \22\ Section 10(a)(3) of the Securities Act provides that when a
prospectus is used more than nine months after the effective date of
the registration statement, the information contained therein shall
be as of a date not more than sixteen months prior to such use. 15
U.S.C. 77j.
    \23\ See Section 8(c) of the Securities Act [15 U.S.C. 77h(c)]
and 17 CFR 230.462 (``rule 462'').
---------------------------------------------------------------------------

    If the offering is registered on Form S-3, the insurance company's
annual report on Form 10-K containing audited financial statements will
operate as a post-effective amendment to the registration statement for
purposes of section 10(a)(3).\24\ The insurance company is required to
provide a complete set of its financial statements, certain schedules,
and executive compensation disclosures in a structured data format
using Inline XRBL, but is not otherwise required to provide other
information in the registration statement as structured data.\25\
Insurance companies offering RILAs also are not required to deliver
prospectuses to investors because they can rely on the Commission's
``access equals delivery'' framework in rule 172, although in practice
we understand that insurance companies typically deliver prospectuses
to accompany or precede other communications.
---------------------------------------------------------------------------

    \24\ An issuer filing a registration statement on Form S-3 will
incorporate by reference information in reports under the Exchange
Act filed after the registration statement has become effective,
including the issuer's annual report on Form 10-K. Accordingly,
certain information required to be included in the prospectus may be
included directly in the prospectus or included in an Exchange Act
report that is incorporated by reference into the prospectus.
    \25\ See rule 405(b) of Regulation S-T.
---------------------------------------------------------------------------

    When an insurance company registers a variable annuity separate
account on Form N-4, in contrast, it pays registration fees based on
the net issuance of securities, no later than 90 days after each fiscal
year end.\26\ The insurance company can update its registration
statement to include updated financial information required by section
10(a)(3) by filing an immediately effective post-effective amendment
under rule 485. These

provisions together are designed to allow insurance companies to
efficiently conduct continuous offerings of variable annuities. The
insurance company also must structure certain key information in Inline
XBRL to enhance the utility of that information to investors and must
deliver a prospectus to investors because the ``access equals
delivery'' framework in rule 172 is not available for variable
annuities.
---------------------------------------------------------------------------

    \26\ See 17 CFR 270.24f-2 (``rule 24f-2'').
---------------------------------------------------------------------------

C. Evidence of Investor Views and Areas of Potential Confusion

    Consistent with the RILA Act, the Commission received feedback on
individuals' comprehension and views on RILA disclosure through
investor testing. Specifically, we received feedback through
qualitative investor testing interviews, as well as quantitative
testing designed to assess whether the design of certain hypothetical
RILA disclosure provided to participants affects their comprehension of
the disclosed information. Each of these aspects of investor testing
was designed by the Commission's Office of the Investor Advocate
(``OIAD''). As described in more detail in section II.B below, this
feedback helped us to identify areas of Form N-4 that we propose to
amend to help ensure that a RILA purchaser receives key information
that the purchaser is able to understand.
    OIAD conducted two rounds of qualitative interviews with a mix of
investors across demographic characteristics, locations, and levels of
financial literacy who either already owned annuities or had expressed
interest in investing in an annuity product.\27\ These interviews aimed
to generate hypotheses about certain content areas in RILA disclosure--
specifically, disclosure that could appear in select rows of the ``Key
Information Table'' (or ``KIT'') in RILA registration statements, as
discussed below--that may cause confusion and lead to impediments to
investor understanding of key information.\28\ These interviews
concentrated on assessing: (1) potential RILA disclosure, focusing on a
hypothetical KIT, for areas of confusion or misunderstanding; and (2)
participants' mental models regarding the way RILA products function,
including potential benefits, drawbacks, and risks of a RILA
investment. The interviews also included hypothetical scenarios.\29\
---------------------------------------------------------------------------

    \27\ OIAD's qualitative testing consisted of two rounds of in-
depth hour-long interviews with twenty participants, using a semi-
structured, open-ended format so that participants could express
their reactions and beliefs, regardless of whether they are
accurate, in order to assess the reasoning of a sampling of
investors regarding RILA products, and their reactions to potential
RILA disclosures. See OIAD Report at Section 5, Qualitative Testing,
Methods.
    \28\ OIAD Report at Section 1, Introduction and Executive
Summary.
    \29\ See OIAD Report at Section 5, Qualitative Testing, Methods.
---------------------------------------------------------------------------

    Feedback from both rounds of qualitative interviews generally
showed that the interview participants did not have much, if any,
familiarity with RILAs. Furthermore, interviews in both rounds
illustrated that many participants struggled to understand the details
of the RILA contract presented in sample KIT disclosure.\30\
---------------------------------------------------------------------------

    \30\ Several participants in Round 2 were ``significantly more
sophisticated than the average investor,'' with some having worked
in a financial field or had over $1 million in retirement assets,
and these participants also ``struggled to correctly apply the
concepts discussed in the KIT.'' OIAD Report at Section 5,
Qualitative Testing, Results from Round 2.
---------------------------------------------------------------------------

    With regard to the first round specifically, participants indicated
significant confusion about the features and fees associated with
RILAs, and often cited certain specific terminology, such as ``index
option,'' ``interim value adjustment,'' ``buffer,'' and ``investment
term,'' as confusing to them.\31\ For example, many participants
mistakenly conflated ``investment term'' with the length of the entire
insurance contract, leading them incorrectly to conclude that they
could avoid any fees or charges if they liquidated their investment at
the end of an initial one-year investment period.\32\ Participants
often did not appear to understand that there are multiple aspects of a
typical RILA contract that could negatively affect an investor's
contract value or the amounts an investor could withdraw from the
contract (e.g., the fact that a withdrawal could be subject to a
surrender charge, interim value adjustment, and tax penalty).\33\ Some
participants expressed that a chart or graph would be useful to help
them understand certain information presented about a RILA contract,
such as surrender periods or how the contract's bounded return
structure would function.\34\ Additionally, some participants indicated
they would need more specific information--besides the information in
the hypothetical KIT rows shared with them--to evaluate the
appropriateness of a RILA.\35\
---------------------------------------------------------------------------

    \31\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1. As noted above, supra footnote 2, to alleviate the
confusion generated by ``investment term,'' we use the term
``crediting period'' in this release and in the proposed amendments
to Form N-4.
    \32\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1.
    \33\ See OIAD at Section 5, Qualitative Testing, Results from
Round 1.
    \34\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
    \35\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------

    While first-round interview participants may not have been able to
understand RILA features and economic tradeoffs fully after reviewing
sample KIT disclosure, some were able to identify certain potential
drawbacks and explain certain aspects of RILA contracts following their
review of this sample disclosure. This was demonstrated in
participants' responses to sample scenarios, where the interview
facilitator presented facts about a hypothetical investor's background,
and participants were asked to provide their opinions about whether a
RILA contract would be an appropriate investment option for those
investors and discuss their reasoning. For instance, participants in
the first-round interviews could generally identify that a RILA
contract could present particular risks for individuals without a long
time horizon.\36\ On the other hand, as noted above, these participants
often identified only a single charge or penalty that would apply even
in scenarios where, for example, a surrender charge, early withdrawal
tax penalty, and interim value adjustment might all apply.\37\ Some
participants were able to identify that a RILA contract could be
appropriate for an individual in light of factors such as desire to
protect against losses in the stock market, taking into account
considerations such as age, investment time horizon, and other sources
of liquid funds.\38\ Some interview participants also demonstrated that
they could use the KIT disclosure to discern quickly that they would
not be interested in purchasing a RILA contract, for example because of
liquidity needs or relatively short investment time horizons.\39\
---------------------------------------------------------------------------

    \36\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1. However, OIAD's report also notes that in the second round
of testing, many participants did not understand that RILAs are
intended as a retirement savings vehicle, and that there may be tax
penalties for withdrawal prior to age 59\1/2\. See id., Results from
Round 2. Similarly, only 12.6% of participants in the quantitative
testing correctly identified that RILAs are investing vehicles that
are intended purely as retirement savings vehicles. Id., Section 6,
Quantitative Testing, Results, Summary of Quantitative Testing.
    \37\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
    \38\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
    \39\ OIAD Report at Section 5, Qualitative Testing, Results from
Round 1.
---------------------------------------------------------------------------

    Commission staff used this feedback to update sample KIT disclosure
in between qualitative interview rounds. In particular, in the second
round, sample

KITs were modified to include: (1) the phrase ``investment term''
rather than ``term,'' (2) a table to show how investment term interacts
with contract length, (3) graphics to provide more information about
RILA loss limitation features such as floors and buffers, and (4)
expanded links to additional information to indicate that more
information could be available.\40\ Following these changes,
participants demonstrated modestly improved comprehension in certain
limited areas. For example, the sample KIT disclosure used in the
second-round of qualitative testing emphasized that contract
adjustments can substantially reduce the value of an investment if
investors withdraw money before the end of an investment term.
Participants who viewed this modified disclosure had greater success in
identifying the potential financial impact of this feature, with some
expressing concern about the potential magnitude of the contract
adjustment.\41\ Additionally, some second-round participants who viewed
the KIT contract adjustment disclosure also asked for more specific
information about how the adjustment is calculated, which suggests that
layered disclosure might be useful for these concepts.\42\ Even though
these participants were unable to define certain terms relevant to
contract adjustments (e.g., interim value adjustment), most second-
round participants seemed to understand that RILAs are not a short-term
investment and should only be used if an investor will not need to make
early withdrawals.\43\
---------------------------------------------------------------------------

    \40\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Appendix C.
    \41\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
    \42\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
    \43\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------

    The second round of testing also introduced a table in the sample
KIT disclosure that attempted to help illustrate how fees were charged
over the surrender period of the contract, the difference between the
investment term (i.e., the crediting period) and the contract length,
and how the surrender charge and potential contract adjustments could
vary over different time frames.\44\ Nonetheless, participants in the
second round of testing still had difficulty distinguishing between
surrender charges and contract adjustments or understanding that both
can apply cumulatively to reduce an investor's contract value in cases
of early withdrawal.\45\ Most participants in the second round of
testing also continued to struggle with the mechanics of ``buffers,''
despite the inclusion of graphics in the hypothetical KITs designed to
illustrate how buffers work.\46\ There were a number of areas where
participants wanted information that was not part of the KIT rows being
tested, such as the specific index-linked options available under the
contract, and some participants with more investing experience wanted
information about past returns on the RILA, as well as additional
information on fees and charges--particularly regarding caps on gains
and other bounded return features--in order to understand the ways in
which insurance companies profit from RILAs.\47\
---------------------------------------------------------------------------

    \44\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 1, and Results from Round 2.
    \45\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
    \46\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
    \47\ See OIAD Report at Section 5, Qualitative Testing, Results
from Round 2.
---------------------------------------------------------------------------

    Following the qualitative interviews, OIAD conducted quantitative
testing designed to assess comprehension of key concepts about RILAs
and the extent to which the organization of disclosures affected
participants' comprehension of the disclosed information.\48\
Approximately 2,500 participants completed OIAD's quantitative testing
study, which was fielded over an eight-day period and targeted groups
who were more likely to have some experience with financial
products.\49\ Participants received focused portions of a hypothetical
KIT to test disclosures. For example, participants were randomly
assigned to one of two formats for the sample KIT disclosure, one with
a Q&A format and one with a statement-based format.\50\ Overall, the
results of OIAD's quantitative testing suggest that most investors
experience challenges in understanding RILAs.\51\ This round of testing
reviewed overall comprehension of participants as well as whether
participants were able to assess four sub-scores: (1) appropriateness
of RILAs for investors based on their characteristics, (2) how a RILA
works, (3) how the charges and penalties associated with RILAs affect
liquidity, and (4) the insurance protections offered by RILAs.\52\
Across all participants, the average percentage of questions scored
correct was 58%, which, while higher than the expected score for people
randomly guessing (50%), was lower relative to what might be considered
a well-informed purchaser of a RILA product.\53\ However, the results
of the sub-scores varied, specifically 57% for appropriateness, 49% for
how a RILA works, 57% for insurance, and 62% for liquidity.\54\
Comprehension varied depending on the particular concept tested. For
example, 80.7% of participants were able to correctly identify that
RILA investors cannot access their money whenever they need it at no
cost, suggesting that the tested disclosures were sufficient to put
participants on notice to the potential for contract adjustments and
surrender charges.\55\ Conversely, only 12.6% of participants correctly
identified that RILAs are intended purely as retirement savings
vehicles, rather than a product appropriate for other, shorter-term
investing goals (e.g., education and home purchasing), suggesting
continued investor confusion on this topic.\56\ Additionally,
participants in the quantitative testing were classified into three
groups based on their experience with investing. Not surprisingly,
increased investment experience correlated with greater overall
comprehension, with non-investors (those with no existing investments)
averaging slightly less than 50% correct, 11.7 percentage points lower
than the average for the group with the most investment experience.\57\
The Q&A KIT format demonstrated a statistically significant, albeit
quantitatively small, improvement over the non-Q&A KIT format,
particularly with regard to the non-investor group, who saw a 5.7
percentage points increase in comprehension in connection with the Q&A
format with regard to overall comprehension.\58\
---------------------------------------------------------------------------

    \48\ OIAD Report at Section 6, Quantitative Testing.
    \49\ OIAD Report at Section 6, Quantitative Testing, Methods.
    \50\ OIAD Report at Section 6, Quantitative Testing, Study
Design and Overview.
    \51\ OIAD Report at Section 6, Quantitative Testing, Summary of
Quantitative Testing.
    \52\ OIAD Report at Section 6, Quantitative Testing,
Comprehension Measures.
    \53\ OIAD Report at Section 6, Quantitative Testing, Results.
    \54\ OIAD Report at Section 6, Quantitative Testing, Results,
Table 6.
    \55\ OIAD Report at Section 6, Quantitative Testing, Results.
    \56\ OIAD Report at Section 6, Quantitative Testing, Results.
    \57\ See OAID Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
    \58\ See OIAD Report at Section 6, Quantitative Testing,
Results, Subgroup Analysis, Investor Status.
---------------------------------------------------------------------------

    Overall, investor testing successfully identified a range of
barriers to investor understanding of RILAs and associated disclosures.
However, with the few

exceptions noted above, variations in disclosures did not result in
significant improvements in investor comprehension in the investor
testing. Accordingly, while OIAD's investor testing has been successful
in identifying specific areas of investor confusion regarding RILAs,
those results were largely inconclusive in terms of determining
specific disclosures that are relatively more successful in addressing
the identified confusion.
    We have incorporated those results in our design of the proposed
Form N-4 amendments, endeavoring to give particular attention to areas
of identified investor confusion while leveraging existing disclosure
requirements. Because investor testing did not, for the most part,
provide persuasive evidence of superior disclosures, we are proposing
to largely utilize the existing Form N-4 disclosures which have been
developed over time, and with which staff, investors, and RILA issuers
are already familiar. Building upon these existing disclosures has
additional benefits, because combination contracts offering both
variable and index-linked options will be required to comply with Form
N-4, making it more efficient to build on the form's requirements for
both types of investment options. We seek comment throughout this
release on specific areas for improvement that can aid investor
comprehension. Further, we are requesting specific input from the
retail investor community, through a short Feedback Flyer, relating to
their experiences with annuities generally and RILAs specifically.\59\
---------------------------------------------------------------------------

    \59\ See infra section II.K; Appendix D.
---------------------------------------------------------------------------

    Further, in addition to investor testing focused specifically on
sample RILA disclosure, our proposal--and the current disclosure
requirements in Form N-4 that we are building upon--also draw on the
Commission's past investor testing efforts, outreach, and other
empirical research concerning investors' preferences. This includes,
for example, information about summary content and layered disclosure
approaches.\60\ The Commission has historically received feedback
showing that investors generally prefer concise, layered
disclosure.\61\ Investors participating in certain past quantitative
and qualitative investor testing initiatives on the Commission's behalf
have also expressed preferences for, wherever possible, the use of a
summary containing key information about an investment product or
service written in clear, concise, and understandable language and
presented in an accessible format.\62\ Each of these sources of
evidence of investor preferences, understanding, and behaviors in
response to disclosures specific to RILAs and other investment products
more generally has provided important context and support for our
proposal's approach to RILA disclosure.
---------------------------------------------------------------------------

    \60\ See Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts,
Investment Company Act Release No. 33286 (Oct. 30, 2018) [83 FR
61730 (Nov. 30, 2018)] (VASP Proposing Release) at paragraphs
accompanying nn.38-43.
    \61\ See, e.g., Request for Comment on Fund Retail Investor
Experience and Disclosure, Investment Company Act Release No. 33113
(June 5, 2018) [83 FR 26891] (June 11, 2018] (``Investor Experience
RFC''). Feedback in comment letters generally showed that retail
investors prefer concise, layered disclosure and feel overwhelmed by
the volume of information they currently receive. Multiple comment
letters reflected a preference for shorter summary disclosures, with
additional information available online or upon request. See, e.g.,
Comment Letter of C. Scott (July 26, 2018) (expressing preference
for shorter summary disclosures, and suggesting disclosures ``trim
the fat and replace the text-heavy disclosures with something that
is clear, succinct, and transparent''); Comment Letter of Helena
Krus (July 29, 2018) (noting a preference to receive shorter summary
disclosures, with additional information available online or upon
request, and suggesting that the option should be available for all
documents over 5 pages).
    \62\ See supra footnote 61; see also, e.g., SEC Staff, Study
Regarding Financial Literacy Among Investors (Aug. 2012). The key
information that investors found useful and relevant before
purchasing an investment product includes information on fees and
expenses, investment performance, principal risks, and investment
objectives. With respect to the presentation of disclosure, the
study indicates that investors preferred disclosures being ``written
in clear, concise, understandable language, using bullet points,
tables, charts, and/or graphs.'' Materials relating to this study,
including the staff's report, are available at http://www.investor.gov/publications-research-studies/sec-research.
---------------------------------------------------------------------------

D. Overview of Proposal

    We are proposing to modernize and enhance the registration and
disclosure framework for RILAs by adapting the existing registration
and disclosure framework that is familiar to investors and issuers for
variable annuity separate accounts to accommodate RILAs.
     Use of Form N-4. We are proposing to amend Form N-4 so
that issuers seeking to register the offering of RILAs must use that
form. To accommodate this, we are also proposing amendments to that
form that specifically address the features and risks of RILAs. For
example, we are proposing amendments to the form's ``Key Information
Table'' that highlight key features of RILAs that should be disclosed
so that investors may determine whether a RILA is an appropriate
investment for them. In particular, the KIT highlights key features of
a RILA contract that may be substantially different from the features
of investment products investors may be more familiar with, and that
investor testing suggests may not be readily apparent to investors.
Further, because the insurance company would register the offering of a
RILA on Form N-4 under the proposal, it would be subject to the
requirements in the form related to financial statements, including the
form instruction that currently permits variable annuity issuers to
file insurance company SAP financial statements in certain
circumstances.
     Form N-4 Amendments for All Issuers. In addition to adding
RILAs to Form N-4, we are also proposing amendments to the form that
would be applicable to offerings of variable annuities. These proposed
amendments are informed by the staff's historical experience in
administering the form and respond to observations from investor
testing relevant to variable annuity offerings. For example, one
takeaway from investor testing was that the complicated jargon of RILA
contracts was a consistent impediment to investor comprehension of KIT
disclosures.\63\ To address this confusion, we are proposing to switch
the order of the Key Information Table and Overview of the Contract
items to introduce investors earlier to the terminology and concepts
underlying annuity contracts, in the hopes that this context will
improve investor comprehension of KIT disclosures. Because variable
annuities are also complicated investment products, we are proposing to
switch the order for these products as well, so that variable annuity
investors also have the benefit of this additional context.
---------------------------------------------------------------------------

    \63\ See OIAD Report at Section 6, Quantitative Testing, Summary
of Quantitative Testing.
---------------------------------------------------------------------------

     Summary Prospectus. Consistent with the inclusion of RILAs
on Form N-4, we are proposing to permit RILA issuers to make use of the
summary prospectus framework available to variable annuity registrants
on Form N-4.
     Updates to the Filing Rules. To accommodate RILA
registrations on Form N-4, we are proposing to require RILA issuers to
pay fees in arrears on Form 24F-2 and we are proposing amendments to
address RILAs in the rules that variable annuities use to file post-
effective amendments and to update prospectuses.
     Materially Misleading Statements in Sales Literature. The
proposed amendments would require RILA issuers to comply with rule 156,
which provides guidance as to when sales literature is materially
misleading under the Federal securities laws.
    Our proposal, if adopted, would implement the RILA Act's mandate.

II. Discussion

A. Use of Form N-4

    We propose to require insurance companies to use Form N-4 to
register the offering of RILAs, as well as amendments to the form to
require disclosures specific for these securities.\64\ As discussed
above, the registration forms currently used by RILA issuers do not
include line-item disclosure requirements addressing the unique aspects
of RILAs, like limits on gains or the application of contract
adjustments. They also require information about the issuer, such as
MD&A, that may be less important to annuity investors, given that they
are not making a direct investment in the insurance company, and that
the Commission has not determined to require for variable annuities.
Conversely, most variable annuity issuers already use Form N-4 to
register their securities and the form is designed to provide investors
with product-specific information about annuity contracts.\65\
Requiring insurance companies to register RILA offerings on Form N-4
therefore leverages the form's existing insurance-product specific
disclosure requirements, including disclosure requirements that help
effectuate the relatively new summary prospectus layered disclosure
framework the Commission adopted in 2020 for variable contracts. With
the RILA-specific disclosures we are proposing to add to Form N-4, we
intend that the form will provide investors with the information
necessary to make informed decisions about RILAs.
---------------------------------------------------------------------------

    \64\ See proposed General Instruction B.1 of Form N-4. Form N-4,
as we propose to amend it, would provide that Form N-4 is ``to be
used by insurance companies to register index-linked annuity
contracts under the Securities Act of 1933.'' Insurance companies
therefore would not be permitted to register RILA offerings on Forms
S-1 or S-3, as they do today.
    \65\ Variable annuities register on Form N-3 if they are issued
by separate accounts that are organized as management investment
companies. However, most variable annuities are issued by separate
accounts that are organized as unit investment trusts and therefore
use Form N-4. See supra footnote 6.
---------------------------------------------------------------------------

    Including RILAs on Form N-4 also could provide further benefits to
investors by facilitating not only investor comparison among RILAs, but
also the comparison of index-linked options to variable options in the
same annuity contract. For example, investors would be able to review
summary information of all the available investment options of an
annuity contract--index-linked options, variable options, and fixed
options--and compare these options in one place in the prospectus
appendix required by Form N-4.\66\ Currently, we understand that
approximately 44% of the RILAs offered in the marketplace are offered
as index-linked options through combination products.\67\ Registering
the offerings of RILAs on Form N-4, rather than a new or different
form, also would be more efficient for insurance companies and
Commission staff. In this regard, insurance companies would benefit
from using a single form, with tailored disclosure requirements, to
register the offerings of both RILAs and combination contracts with
index-linked options. In addition, many of the insurance companies
issuing RILAs also issue variable annuity contracts and therefore are
familiar with the requirements of Form N-4. Using Form N-4 for RILAs
also would be efficient for our staff because the disclosure
requirements for variable contracts and RILAs would be consolidated in
one place. Further, because Congress has authorized RILA issuers to use
Form N-4 if the Commission fails to adopt a registration form for RILAs
within 18 months of the RILA Act's enactment, we believe that requiring
insurance companies to use the form is consistent with congressional
intent.
---------------------------------------------------------------------------

    \66\ See infra section II.B.3(c).
    \67\ Based on an informal Commission staff review of RILA
filings on the EDGAR system as of May 2, 2023.
---------------------------------------------------------------------------

    Requiring insurance companies to register RILA offerings on Form N-
4 under the proposal would result in changes to RILA disclosure, in
that they would have to comply with the current Form N-4 disclosure
requirements in addition to the proposed new RILA-specific disclosure
requirements. While Form N-4 contains some of the issuer- and offering-
specific disclosures required by Forms S-1 and S-3, it does not contain
them all. Specifically, Form N-4 does not include many of the
disclosures relating to the mechanics of the offering (e.g., use of
proceeds, dilution, etc.); offering participants other than the issuer,
such as selling securities holders; and certain details of the issuer
(e.g., descriptions of property, executive compensation, etc.). These
disclosures may be more useful to an investor considering an investment
in the capital stock or debt securities of the insurance company rather
than an investment in a RILA issued by the insurance company. Unlike an
investor in the insurance company itself, a RILA investor's direct
investment exposure to the insurance company is limited to the
insurance company's claims-paying ability, which also is supported by
State insurance regulations and supervision designed to ensure that
insurance companies are able to satisfy their obligations under their
insurance contracts. Requiring insurance companies to register RILA
offerings on Form N-4 would leverage that form's annuity-focused
requirements to ensure that investors receive those disclosures that
would be the most important in the RILA context.
    To accommodate the offering of RILAs on Form N-4 and to provide a
consistent framework for all offerings registered on the form, we are
proposing, as discussed in more detail below, changes to certain rules
and requirements such that RILA issuers would be subject to the same
process requirements as variable annuities.\68\ For example, similar to
the current offering processes for issuers of variable annuities,
insurance companies registering RILA offerings would be permitted to
use a streamlined summary prospectus and required to pay fees to
register their securities annually rather than at the time of filing a
registration statement.\69\ These changes would provide efficiencies
for insurance companies and Commission staff in establishing consistent
requirements for offerings registered on Form N-4. It would, however,
result in some trade-offs for RILA issuers. For example, insurance
companies currently registering RILA offerings on Form S-3 would lose
the ability to update their registration statement by incorporating by
reference their annual report but would be able to update their
registration statement annually with an immediately effective
amendment. On balance, and as discussed in more detail throughout this
release, requiring insurance companies registering RILA offerings to
follow the offering processes proposed in this release should result in
efficiencies for insurance companies and our staff. We anticipate that
requiring RILA offerings to be registered on Form N-4 will also benefit
investors by leveraging the form's annuity-specific disclosure
requirements and extending the variable annuity summary prospectus to
RILAs. Having a common registration form also should make it easier for
investors deciding between an investment in a RILA or a variable
annuity to compare the offerings.
---------------------------------------------------------------------------

    \68\ See infra sections I.C and II.E.
    \69\ See also infra section II.E.3 (discussing proposed changes
to rule 172).
---------------------------------------------------------------------------

    We request comment on the proposed requirement to register RILA
offerings on Form N-4.
    1. As proposed, should we require RILA issuers to use Form N-4? Is
another existing registration form more

appropriate for RILAs? If so, which registration form and why?
    2. Given that any existing registration form would require RILA-
specific amendments, should the Commission instead develop a new form
specifically for RILAs?
    3. Is it appropriate to require an annuity that offers different
types of investment options (e.g., variable options as well as index-
linked options) to address these different types of investment options
on the same registration form? Would requiring different registration
forms for annuities offering different types of investment options be
more or less efficient for insurance companies that offer variable
annuities, RILAs, and combination contracts?
    4. Is there any information currently required by Forms S-1 or S-3
that we should also require RILA issuers to disclose?
    5. Would requiring RILAs to follow the same filing and other
process requirements as variable annuities (such as requirements for
paying registration fees, and the ability to use a summary prospectus)
be efficient for insurance companies because they could use the same
processes to pay registration fees and update registration statements
for variable annuities, RILAs, and combination contracts?
    6. Do commenters believe that there are any disclosures from Forms
S-1 and S-3 we are not including in the proposed Form N-4, particularly
the MD&A and executive compensation disclosures, that could be of
material relevance to RILA investors? If so, please explain their
relevance to RILA investors.
    7. Do commenters agree with our estimate that approximately 44% of
RILA securities offered in the marketplace are offered as index-linked
options through combination products? If not, what percentage do
commenters think more accurately reflects RILA securities offered as
index-linked options through combination products, and what is the
basis for this estimate?
    8. Should Form N-4, as amended, be the only form that insurance
companies could use to register RILA offerings? Should we permit the
continued use of Forms S-1 and S-3 in addition to the amended Form N-4?
Would this be appropriate, given that RILA issuers can already use
those forms? How would we ensure that investors receive the information
necessary to make informed decisions through use of those forms,
including the benefit of the proposed RILA-specific disclosure
requirements informed by investor testing?
    9. Do commenters expect that any RILA issuers will meet the
conditions to operate as a WKSI, and if so, what is the basis for this
expectation?
    10. Do commenters agree that leveraging Form N-4's annuity specific
disclosure requirements and summary prospectus regime would benefit
investors? Would registering RILA offerings on Form N-4 make it easier
for RILA investors to compare RILA offering with variable annuity
offerings? Are there any other potential benefits or disadvantages to
investors in registering RILA offerings on Form N-4 as compared to
other forms?

B. Contents of Form N-4

    As proposed, many items of current Form N-4 would apply to RILAs.
We are also proposing updates to Form N-4 to include disclosures
specific to RILAs. In certain circumstances, we propose changing the
disclosures provided on the form that would apply to both RILAs and
variable annuities. The chart in Table 1 below outlines these items and
any substantive changes we are proposing.\70\ We discuss these changes
in more detail in the sections that follow.
---------------------------------------------------------------------------

    \70\ Some proposed changes entail a non-substantive change such
as a change to a defined term or specifying that the provision would
continue to be applicable only to a registered separate account or
variable option. These are not flagged in the following table but
are instead discussed in section II.B.7 supra.

                                     Table 1--Overview of Proposed Form N-4
----------------------------------------------------------------------------------------------------------------
                Item                       Description           Substantive changes            Discussion
----------------------------------------------------------------------------------------------------------------
                                               Prospectus (Part A)
----------------------------------------------------------------------------------------------------------------
1..................................  Front and Back Cover    Adding new legends and       Section II.B.1.
                                      Pages.                  other standardized
                                                              disclosures applicable to
                                                              all issuers.
2..................................  Overview of the         New RILA-specific            Section II.B.3(a).
                                      Contract.               disclosures; moving order
                                                              of appearance up.
3..................................  Key Information.......  New RILA-specific            Section II.B.2.
                                                              disclosures; changing to a
                                                              question-and-answer
                                                              format; moving order of
                                                              appearance down; change
                                                              discussion of restrictions
                                                              on optional benefits to
                                                              cover all benefits.
4..................................  Fee Table.............  New contract adjustment      Section II.B.5.
                                                              disclosure.
5..................................  Principal Risks of      Providing more detailed      Section II.B.4.
                                      Investing in the        disclosures applicable to
                                      Contract.               all issuers.
6..................................  Description of the      New RILA-specific            Section II.B.3(a).
                                      Insurance Company,      disclosures and one new
                                      Registered Separate     item regarding variable
                                      Account, and            options.
                                      Investment Options.
7..................................  Charges...............  New disclosures related to   Section II.B.5.
                                                              contract adjustments.
8..................................  General Description of  No substantive change......  Section II.B.8(b).
                                      Contracts.
9..................................  Annuity Period........  No substantive change......  Section II.B.8(b).
10.................................  Benefits Available      No substantive change......  Section II.B.8(b).
                                      Under the Contract.
11.................................  Purchases and Contract  No substantive change......  Section II.B.8(b).
                                      Value.
12.................................  Surrenders and          No substantive change......  Section II.B.8(b).
                                      Withdrawals.
13.................................  Loans.................  No substantive change......  Section II.B.8(b).
14.................................  Taxes.................  No substantive change......  Section II.B.8(b).
15.................................  Legal Proceedings.....  No substantive change......  Section II.B.8(c).
16.................................  Financial Statements..  No substantive change (but   Section II.D.
                                                              see Item 26).

17.................................  Investment Options      New RILA-specific            Section II.B.3(b).
                                      Available Under the     disclosures.
                                      Contract.
----------------------------------------------------------------------------------------------------------------
                                  Statement of Additional Information (Part B)
----------------------------------------------------------------------------------------------------------------
18.................................  Cover Page and Table    No substantive change......  Section II.B.8(b).
                                      of Contents.
19.................................  General Information     No substantive change......  Section II.B.8(c).
                                      and History.
20.................................  Non-Principal Risks of  No substantive change......  Section II.B.8(b).
                                      Investing in the
                                      Contract.
21.................................  Services..............  No substantive change......  Section II.B.8(b).
22.................................  Purchase of Securities  New disclosure of specific   Section II.B.5.
                                      Being Offered.          contract adjustment
                                                              information.
23.................................  Underwriters..........  No substantive change......  Section II.B.8(c).
24.................................  Calculation of          Clarifying only applies to   Section II.B.7.
                                      Performance Data.       variable options.
25.................................  Annuity Payments......  No substantive change......  Section II.B.8(b).
26.................................  Financial Statements..  Providing that RILA issuers  Section II.D.
                                                              can use the relevant
                                                              instructions and adding
                                                              requirements relating to
                                                              changes in and
                                                              disagreements with
                                                              accountants for RILAs.
----------------------------------------------------------------------------------------------------------------
                                           Other Information (Part C)
----------------------------------------------------------------------------------------------------------------
27.................................  Exhibits..............  Adding power of attorney     Section II.B.7(d).
                                                              for all issuers and
                                                              accountant letters for
                                                              RILA issuers as exhibits.
28.................................  Directors and Officers  No substantive change......  Section II.B.8(c).
                                      of the Insurance
                                      Company.
29.................................  Persons Controlled or   No substantive change......  Section II.B.8(c).
                                      Under Common Control
                                      with the Insurance
                                      Company or the
                                      Registrant.
30.................................  Indemnification.......  No substantive change......  Section II.B.8(c).
31.................................  Principal Underwriters  No substantive change......  Section II.B.8(c).
31A................................  Information about       New disclosure of RILA       Section II.B.6.
                                      contracts with Index-   specific information.
                                      Linked Options.
32.................................  Location of Accounts    No substantive change......  Section II.B.7.
                                      and Records.
33.................................  Management Services...  No substantive change......  Section II.B.8(b).
34.................................  Fee Representation and  Adding new RILA              Section II.B.7(d).
                                      Undertakings.           undertakings.
----------------------------------------------------------------------------------------------------------------

1. Front and Back Cover Pages (Item 1)
    We propose to require RILA issuers to include the information Form
N-4 currently requires on the front and back cover pages of the
prospectus. Currently, issuers are required to include on the front and
back cover pages basic identifying information about the issuer and the
contract, information on how to review the document (e.g., what the SAI
is and where to find it), as well as certain legends, for example, one
relating to the ability for an investor to cancel the contract within
10 days.\71\ The table below outlines these existing disclosures that
RILAs would be required to include if applicable.
---------------------------------------------------------------------------

    \71\ One change specific to this legend would be to indicate
whether the insurance company will apply a contract adjustment on
any money returned during this period. Contract adjustments are a
defining element of a RILA, but can apply in other circumstances.
Nonetheless, given the context of this legend, we believe that it is
important for investors to know whether they will be subject to this
charge if they elect to have their money returned. See supra
sections II.B.5 (discussing contract adjustments generally) and II.F
(discussing that it could be materially misleading to advertise that
investors can receive their money back during a period of time
without indicating that a contract adjustment could apply).

      Table 2--Existing Information Required by Item 1 of Form N-4
                       [With proposed adjustments]
------------------------------------------------------------------------
           Item No.                   Disclosure              Cover
------------------------------------------------------------------------
                         Identifying Information
------------------------------------------------------------------------
Item 1(a)(2)..................  Insurance company's     Front.
                                 name.
Item 1(a)(3)..................  Types of contracts      Front.
                                 offered (e.g., group,
                                 individual, etc.).
Item 1(a)(4)..................  Name and class of       Front.
                                 contract.
Item 1(a)(9)..................  Date of prospectus....  Front.
Item 1(b)(4)..................  EDGAR identifier        Back.
                                 number.
------------------------------------------------------------------------

                                 Legends
------------------------------------------------------------------------
Item 1(a)(10).................  Statement that the      Front.
                                 Commission has not
                                 approved or
                                 disapproved of the
                                 securities or passed
                                 upon the accuracy or
                                 adequacy of the
                                 disclosure in the
                                 prospectus and that
                                 any contrary
                                 representation is a
                                 criminal offense (as
                                 required in 17 CFR
                                 230.481(b)(1)).
Item 1(a)(11).................  Statement that          Front.
                                 additional
                                 information about the
                                 contract is available
                                 on Investor.gov.
Item 1(a)(12).................  A legend that states    Front.
                                 that if you are a new
                                 investor, you may
                                 cancel your contract
                                 within 10 days of
                                 receiving it with
                                 some details about
                                 the operation of this
                                 process.
------------------------------------------------------------------------
                            Other Information
------------------------------------------------------------------------
Item 1(b)(1)..................  Statement that the SAI  Back.
                                 contains additional
                                 information, that it
                                 is available to
                                 investors, and how
                                 investors may obtain
                                 the SAI or make
                                 inquiries about their
                                 contracts.
Item 1(b)(2)..................  Statement about         Back.
                                 whether and from
                                 where information is
                                 incorporated by
                                 reference.
------------------------------------------------------------------------

    In addition, we are proposing to add several new disclosures to the
cover page to accommodate RILAs. The first proposed amendment would
require the insurance company to identify the types of investment
options offered under the contract and cross-reference the prospectus
appendix that provides additional information about each option.\72\
Given the addition of investment options beyond variable options to the
form, this would help investors better understand what investment
options are available under the contract.
---------------------------------------------------------------------------

    \72\ See proposed Item 1(a)(5) of Form N-4.
---------------------------------------------------------------------------

    The other proposed amendments to the cover page would require
additional new disclosures that highlight RILAs' complexities and
certain associated risks. These include RILA's limitation on gains and
potential for loss, that they are not short-term investments, and that
payments under the contract are subject to the insurance company's
financial strength and claims-paying ability. The proposed legends
would require issuers to include statements on the front cover
disclosing the following:
    (1) The contract is a complex investment and involves risks,
including the potential loss of principal;
    (2) For contracts that include index-linked options, a prominent
statement that the insurance company limits the amount the investor can
earn, the potential for investment loss could be significantly greater
than the potential for investment gain, an investor could lose a
significant amount of money if the index declines in value, and a
prominent statement disclosing as a percentage the maximum amount of
loss from negative index performance that an investor could experience
after taking into account the minimum guaranteed limit on index loss
provided under the contract;
    (3) The contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash, and
withdrawals could result in surrender charges, negative contract
adjustments, taxes, and tax penalties as applicable with a prominent
statement of the maximum potential loss resulting from a contract
adjustment, if applicable; and
    (4) The insurance company's obligations under the contract are
subject to its financial strength and claims paying ability.\73\
---------------------------------------------------------------------------

    \73\ See proposed Item 1(a) of Form N-4.
---------------------------------------------------------------------------

    This cover page disclosure is designed to put an investor on notice
of these key considerations to help the investor make informed
decisions.
    While these proposed additional disclosures are important for
investors in RILAs, they are also relevant in many cases to investors
in variable annuities. For example, while RILAs are complex
investments, variable annuities are complex as well. Variable
annuities, like RILAs, also are not short-term investments. As a
result, we are proposing to apply the proposed new disclosures to all
Form N-4 issuers to ensure that investors in both RILAs and variable
annuities receive appropriate disclosures.
    We request comment on the requirement of RILAs to include the
information in Item 1 of Form N-4 on their registration statement and
the inclusion of new legends for all Form N-4 filers, as applicable, on
the front cover of the registration statement.
    11. Would the new legends be effective in helping investors make
informed decisions with regards to RILAs? Do commenters agree that it
is appropriate to require the legends for variable annuities? Are the
disclosures in the Overview of the Contract, Key Information Table, and
elsewhere in the prospectus--as discussed later in this release--
sufficient such that these legends are not necessary? Conversely, are
legends effective in alerting investors to key concepts for a RILA or
variable annuity on the cover page of the prospectus? Are there
additional legends that are appropriate in light of the complexity of
RILAs and variable annuities? For example, should a legend be required
that specifically discloses a contract's upside limitation, such as due
to a participation rate or cap rate?
    12. Are there any examples or illustrations of how RILAs operate
that we should require on the front or back cover pages? Are examples
or illustrations more effective communication tools than legends on the
cover page of the prospectus? Should examples or illustrations be
provided in addition to legends?
    13. Is there any other information we should require on the front
or back cover pages?

2. Key Information Table (Item 3)
    RILA issuers, like variable annuities issuers currently, would be
required to provide a Key Information Table in their registration
statements under the proposal. We also are proposing amendments to the
KIT's disclosure requirements to address key RILA features, as well as
other amendments that would apply to all Form N-4 issuers.
    The KIT provides summary prospectus disclosure, including a brief
description of key facts about a variable annuity in a specific
sequence and in a standardized presentation.\74\ Specifically, the KIT
currently includes a summary of five topic areas: (1) fees and
expenses; (2) risks; (3) restrictions; (4) taxes; and (5) conflicts of
interest. The KIT functions as an integral part of the layered
disclosure approach in Form N-4 by identifying key considerations
upfront, with more detail to follow later in the prospectus. The
proposed amendments to the KIT, which are informed by investor testing,
are intended to build on this framework and highlight important
considerations related to RILAs, including certain aspects of RILAs
that our investor testing observed are difficult for investors to
understand and thus require clear disclosure in order to help investors
make informed investment decisions.\75\
---------------------------------------------------------------------------

    \74\ See VASP Adopting Release at section II.A.1.c.ii; see also
infra section II.C.
    \75\ See, e.g., OIAD Report at Section 5, Qualitative Testing
(following two rounds of in-depth interviews to assess potential
RILA KIT disclosure for areas of confusion or misunderstanding,
qualitative interviews suggested confusion with RILA terms and
concepts relating to, for example, contract adjustments such as
interim value adjustments and loss limiting features such as
buffers); OIAD Report at Section 6, Quantitative Testing, Results,
Subgroup Analysis (noting 5.7 percentage point effect of the Q&A KIT
structure on overall comprehension for ``non-investors'' during
quantitative testing).
---------------------------------------------------------------------------

    Form N-4 currently prescribes format requirements for the KIT to
enhance the readability and comparability of the disclosure that also
would apply to RILA offerings under the proposal.\76\ Specifically,
RILA issuers would be required to disclose the required information in
the tabular presentation reflected in the instructions, in the order
specified, without any modification or substitution with alternate
terminology of the title, headings, and sub-headings for the tabular
presentation, unless otherwise provided. Consistent with the form's
current requirements, RILA issuers, however, would be permitted to
exclude any disclosures (other than the title, headings, and sub-
headings for this tabular presentation) in the KIT that are not
applicable, or modify any of the statements required to be included, so
long as the modified statement contains comparable information. RILA
issuers also would be required to provide cross-references to the
location in the statutory prospectus where the subject matter is
described in greater detail, either accessed by direct electronic link
or through equivalent methods or technologies, as required for variable
annuity KIT disclosure. Consistent with current requirements, RILA
issuers would include these cross-references adjacent to the relevant
disclosure, either within the table row, or presented in an additional
table column. As currently is required, all disclosures for the KIT
should be short and succinct, consistent with the limitations of a
tabular presentation.
---------------------------------------------------------------------------

    \76\ See proposed instruction 1 to Item 3 of Form N-4.
---------------------------------------------------------------------------

    We are proposing three modifications that would apply to
registration statements both for RILAs and for variable annuities.
These changes are designed to provide investors with a better
understanding of these products, and are informed in part by the
results of investor testing. First, we are proposing to require issuers
to present the information in the KIT in a question-and-answer
(``Q&A'') format.\77\ As a result of this change, the various line
items of the KIT would be rephrased as questions (e.g., ``Are there
charges for early withdrawals?'' instead of ``Charges for Early
Withdrawals''). The instructions would further require that, unless the
context otherwise requires, issuers should begin the response with a
``Yes'' or ``No'' in bold text when answering a question presented in a
given row of the KIT. Consistent with the directional results of the
quantitative investor testing, we anticipate that the Q&A format may
improve investor comprehension of RILA-specific topics. Because the
effect of the Q&A KIT structure on overall comprehension was larger for
non-investors than independent investors, this format may particularly
improve comprehension for less-experienced investors.\78\ We also
expect that rephrasing the current line items in a Q&A format would
more clearly convey the importance of the KIT information to help RILA
and variable annuity investors make informed investment decisions.\79\
---------------------------------------------------------------------------

    \77\ Proposed instruction 1(d) to Item 3 of Form N-4.
    \78\ For purposes of investor testing, participants were
classified into three groups: those with no investments in stocks,
bonds, mutual funds, or other securities (non-investors); those with
investments exclusively in retirement savings accounts (retirement
only); and those with investments outside of retirement accounts
(independent investors). See OIAD Report at Section 6, Quantitative
Testing, Subgroup Analysis, Investor Status. The report noted a 5.7
percentage point effect of the Q&A KIT structure on overall
comprehension for ``non-investors''. Id.
    \79\ The Commission's proposed Q&A format is consistent with
previous rulemaking experience. See Form CRS Relationship Summary;
Amendments to Form ADV, Investor Act Release No. 5247 (June 5, 2019)
[84 FR 33492 (June 12, 2019)] (adopting question-and-answer format
in response to feedback from surveys and studies and commenters who
noted that ``the question-and-answer format is a more effective
design for consumer disclosures because it focuses on questions to
which a consumer wants answers and allows a consumer to skim quickly
and understand where to get more information.''). The proposed
format is also supported by prior surveys and studies to help design
effective disclosures to retail investors. See, e.g., Angela A.
Hung, et al., RAND Corporation, Investor Testing of Form CRS
Relationship Study (2018), available at https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf, at p. 23 (reporting that about 60% of respondents
favored a question-and-answer format over the sample relationship
summary format presented in the survey); Kleimann Communication
Group, Inc., Report on Development and Testing of Model Client
Relationship Summary, Presented to AARP and Certified Financial
Planner Board of Standards, Inc. (Dec. 5, 2018), available at
https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf, at
p. 4 (``Readers ask questions when they read, especially of
functional documents. . . . For good design, we want to build upon
this tendency by identifying key questions investors should or are
likely to ask and featuring them prominently in the text, thus
easing the cognitive task for readers. As a result, we used
questions in the headings to introduce each section's major
topic.''); Susan Kleimann, Making Disclosures Work for Consumers,
Presentation to the SEC's Investor Advisory Committee (June 14,
2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf (encouraging
the use of question-and-answer format, the use of headings to make
structure clear, and a strong design grid to organize elements,
among other disclosure design principles, to promote readability),
cited in VASP Adopting Release at n.112 and accompanying text. See
also Office of Investor Education and Assistance, U.S. Securities
and Exchange Commission, A Plain English Handbook (Aug. 1998) (``You
can make complex information more understandable by giving your
readers an example using one investor. This technique explains why
`question and answer' formats often succeed when a narrative
abstraction fails.'').
---------------------------------------------------------------------------

    Second, we propose to change the order in which the KIT (current
Item 2) appears relative to the Overview of the Contract (current Item
3) disclosures.\80\ The Overview of the Contract disclosures provide
general information about the contract and important context about the
information summarized in the KIT. Based on our observations of
investor testing, we believe RILA investors may generally benefit from
more context to understand

the KIT disclosures. For example, interview participants generally
found certain RILA-specific terminology confusing, such as ``index,''
``investment term,'' ``interim value adjustment,'' and ``buffer.'' \81\
Further, investor testing indicated that investors had difficulty in
understanding the basic features and concepts of RILA contracts.\82\
The proposed Overview of the Contract disclosures would require
descriptions and examples to help investors understand these RILA
features and provide a basis for better understanding the issues
flagged by the KIT disclosures.\83\ Thus, based on investor testing, we
propose to change the location of the KIT so that it appears after
(rather than before) the Overview of the Contract section. Placing the
Overview of the Contract section first may similarly provide context of
the issues flagged in variable annuity KITs.
---------------------------------------------------------------------------

    \80\ The current instructions to Form N-4 require that,
notwithstanding 17 CFR 230.421(a), the KIT, Overview, and Fee Table
must be disclosed in numerical order. General instruction C.3(a) of
Form N-4. The proposal would change this instruction to reflect the
change in order.
    \81\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Summary of Qualitative Testing, Section 6,
Quantitative Testing, Summary of Quantitative Testing.
    \82\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Summary of Qualitative Testing, Section 6 and 7 Quantitative
Testing, Summary of Quantitative Testing, Section 7, Conclusions,
Summary of Findings.
    \83\ See, e.g., proposed Item 2(b)(2) of Form N-4.
---------------------------------------------------------------------------

    Third, we propose to delete Form N-4's general instruction stating
that where the discussion of information required by the Overview of
the Contract (currently Item 3) or KIT (currently Item 2) also responds
to the disclosure requirements in other items of the prospectus,
registrants need not include additional disclosure in the prospectus
that repeats the information disclosed in the Overview of the Contract
or the KIT.\84\ In administering Form N-4, we have observed that this
instruction has led to confusion on the part of registrants. For
example, while both the KIT and Item 5 require disclosures about
principal risks, the KIT expressly contemplates that more detailed
information will be repeated later in the prospectus, specifically
requiring registrants to provide cross-references to the more detailed
prospectus discussion.\85\ Item 5 requires registrants to summarize the
principal risks of the contract in one place, and was not intended to
permit an insurance company to omit principal risks from that section
if those risks were also disclosed in the KIT.\86\ Moreover, the
layered disclosure framework requires a degree of repetition to ensure
both that the KIT contains key disclosures and that the detailed
sections that follow contain all of the key information about the given
topic. We believe this is particularly important for RILAs in light of
the challenges our investor testing suggests investors have in
understanding these products. This way, investors will see the key
risks regardless of whether they review targeted sections of the
prospectus.
---------------------------------------------------------------------------

    \84\ General Instruction C.3.(a) of Form N-4.
    \85\ See instruction 1(b) to Item 2 of Form N-4.
    \86\ See Item 5 of Form N-4; VASP Adopting Release at text
following n.689 (``The principal risks section is designed to
provide a consolidated presentation of principal risks which can be
cross-referenced by registrants to reduce repetition that might
otherwise occur if the same principal risks are repeated in
different sections of the prospectus.'').
---------------------------------------------------------------------------

    The proposed overall format of the KIT is depicted below:

                 Table 3--Proposed Key Information Table
------------------------------------------------------------------------

------------------------------------------------------------------------
Fees and Expenses:
    Are There Charges for Early
     Withdrawals?
    Are There Transaction Charges?
    Are There Ongoing Fees and Expenses?
Risks:
    Is There a Risk of Loss From Poor
     Performance?
    Is this a Short-Term Investment?
    What are the Risks Associated with the
     Investment Options?
    Is There Any Chance the Insurance
     Company Won't Pay Amounts Due to Me
     Under the Contract?
Restrictions:
    Are There Restrictions on the
     Investment Options?
    Are there any Restrictions on Contract
     Benefits?
Taxes:
    What are the Contract's Tax
     Implications?
Conflicts of Interest:
    How are Investment Professionals
     Compensated?
    Should I Exchange My Contract?
------------------------------------------------------------------------

(a) Fees and Expenses
    RILA contracts typically have implicit fees, expenses, and charges
for early or mid-term withdrawals that can be confusing or surprising
to investors, as observed in our investor testing.\87\ We anticipate
that investors would benefit from tailored disclosure about certain
unique features of a RILA contract's fee and expense structure as
described below to help them make informed decisions.
---------------------------------------------------------------------------

    \87\ See, e.g., OIAD Report at Section 5, Qualitative Testing,
Results from Round 1, Results from Round 2.
---------------------------------------------------------------------------

    Early Withdrawal Charges. As RILAs may have surrender charges, we
propose to require RILA issuers to provide the existing KIT surrender
charge disclosure in this first line item under the ``Fees and
Expenses'' heading so that RILA investors understand how surrender
charges are assessed (e.g., that if they make a withdrawal within a
specified period after their last premium payment, they may pay a
significant surrender charge that will reduce the value of their
investment).\88\ This disclosure must include the maximum surrender
charge, the maximum number of years that a surrender charge may be
assessed, and an example of the maximum surrender charge an investor
could pay in dollars based on a $100,000 investment. In a change to the
current form requirements, we also are proposing to require that
offerings of both variable annuities and RILAs disclose that this loss
will be greater if there is a negative contract adjustment, taxes, or
tax penalties, to make clear that an investor may lose more than just
the surrender charge upon an early withdrawal.
---------------------------------------------------------------------------

    \88\ Proposed instruction 2(a) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    We also are proposing to require specific disclosure on contract
adjustments, which can result in investor losses if the investor
withdraws

money from an index-linked option, or withdraws money from the RILA
entirely before the end of a specified period.\89\ Specifically, if the
contract includes contract adjustments, the insurance company would be
required to include a statement that if all or a portion of account
value is removed from an index-linked option or from the contract
before the expiration of a specified period, the insurance company will
apply a contract adjustment, which may be negative. Similar to the
disclosures relating to surrender charges, this statement would include
the maximum potential loss (as a percentage of the investment)
resulting from a negative adjustment (e.g., ``[y]ou could lose up to
XX% of your investment due to the contract adjustment''). The insurance
company also would be required to provide an example of the maximum
negative adjustment that could be applied (in dollars) assuming a
$100,000 investment (e.g., ``[i]f you allocate $100,000 to an
investment option with a 3-year crediting period and later withdraw the
entire amount before the 3 years have ended, you could lose up to
$90,000 of your investment. This loss will be greater if you also have
to pay a surrender charge, taxes, and tax penalties.''). We also
propose to require the insurance company to provide a brief narrative
description of the contract transactions subject to a contract
adjustment (e.g., withdrawals, surrender, annuitization, etc.) as part
of the response to this item to make clear to investors the range of
transactions that could result in a contract adjustment.
---------------------------------------------------------------------------

    \89\ As noted above, contract adjustments include adjustments
made when amounts are removed prematurely from an index-linked
option, often referred to as interim value adjustments, as well as
adjustments made when amounts are removed prematurely from the
contract, often referred to as market value adjustments. Thus, a
specified period would include index-linked option crediting periods
(which again, are typically referred to by insurance companies as
``investment terms'' or ``terms''), as well as any specified period
relating to a market value adjustment.
---------------------------------------------------------------------------

    Transaction Charges. The second line item in the ``Fees and
Expenses'' section of the proposed amended KIT, ``Are there transaction
charges?,'' would require registrants to disclose that the investor may
also be charged for other transactions in addition to surrender charges
(and now contract adjustments), along with a brief narrative
description of the types of such charges (e.g., front loads, charges
for transferring cash value between investment options, etc.).\90\ This
line item is designed to provide a simple narrative description to
alert investors that surrender charges and contract adjustments are not
the only transaction charges they could pay. We are proposing to
require RILA issuers to provide this disclosure.
---------------------------------------------------------------------------

    \90\ Proposed instruction 2(b) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    Ongoing Fees and Expenses. The third line item in the ``Fees and
Expenses'' section, ``Are there ongoing fees and expenses?,'' is
designed to alert investors that they also will bear recurring fees on
an annual basis. This item currently requires the insurance company to
disclose (1) a minimum and maximum annual fee table and (2) a lowest
and highest annual cost table, both along with applicable legends.\91\
The minimum and maximum annual fee table is designed to consolidate the
more detailed information in the Fee Table that appears later in the
prospectus, in order to minimize the need for investors to perform
complex calculations to understand the fees they will pay.\92\ The
lowest and highest annual cost table is designed to provide investors
with a high-level cost illustration that will give investors a tool to
understand the basic cost framework of the contract.\93\ We are
proposing to require RILA issuers to provide this disclosure.\94\
---------------------------------------------------------------------------

    \91\ See instruction 2(c) to Item 2 of Form N-4. The minimum and
maximum annual fee table requires a tabular description of the fees
and expenses that an investor may pay each year, depending on the
investment options chosen. This includes minimum and maximum
percentages for: base contract fees; portfolio company fees and
expenses; and optional benefits available for an additional charge.
The lowest and highest annual cost table requires a tabular
description of the lowest and highest cost an investor could pay
each year, based on current charges and a set of standardized
assumptions (e.g., $100,000 investment and 5% annual appreciation).
    \92\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.144
and accompanying text; see also Item 4 of Form N-4.
    \93\ See VASP Adopting Release at section II.A.1.c.ii.(i), n.147
and accompanying text.
    \94\ See proposed instruction 2(c) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    We also are proposing to require that where a contract imposes
limits on gains on the amount an investor can earn on an index-linked
option, insurance companies disclose that they impose these limits on
gains and that they serve as an implicit ongoing fee.\95\ In other
words, as a result of limits on gains imposed under a contract, an
investor is sacrificing the potential for investment gains that exceed
the cap or other limit on upside performance. Specifically, insurance
companies would prominently state that they impose an implicit ongoing
fee on index-linked options by limiting, through the use of a cap,
participation rate, or some other rate or measure, the amount an
investor can earn on an index-linked option. Further, insurance
companies would state that imposing this limit helps the insurance
company make a profit on the index-linked option, and that, in return
for accepting this limit on index gains, an investor will receive some
protection from index losses. This disclosure would be required to
precede the minimum and maximum annual fee table. If the contract
offers an index-linked option subject to limits on gains but does not
impose any explicit ongoing fees or expenses under the contract, and
thus there would be no need to include the minimum and maximum annual
fee and lowest and highest cost tables, the insurance company would
include this disclosure in lieu of such tables.\96\ Where there are no
explicit ongoing fees, minimum and maximum annual fee and cost tables
showing zero fees could mislead investors because an index-linked
option imposing limits on gains has implicit fees inherent in limiting
upside index participation.
---------------------------------------------------------------------------

    \95\ See proposed instruction 2(c)(i)(G) to Item 3 of Form N-4.
    \96\ Proposed instruction 2(c)(iii) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    Lastly in this line item, we propose to revise the last sentence in
the required legend in the lowest and highest annual cost table to
include the underlined language: ``This estimate assumes that you do
not take withdrawals from the Contract, which could add surrender
charges and negative Contract Adjustments that substantially increase
costs.'' \97\ This would further alert investors to the cost impact of
a contract adjustment if they withdraw money early.
---------------------------------------------------------------------------

    \97\ See proposed Instruction 2(c)(ii)(A) to Item 3 of Form N-4.
Currently, this legend only refers to surrender charges, not
negative contract adjustments.
---------------------------------------------------------------------------

(b) Risks
    Risk of Loss. Under the first line item in the amended KIT under
the heading ``Risks,'' ``Is there a risk of loss from poor
performance?,'' we would, as required by an existing instruction in the
form, require RILA issuers to state that an investor can lose money by
investing in the contract. RILAs, like variable annuities, are subject
to the risk of investment loss. We also are proposing to amend this
instruction to provide that, if an annuity contract offers an index-
linked option, the insurance company must disclose, as a percentage,
the maximum amount of loss an investor could experience from negative
index performance, after taking into account the minimum guaranteed
limit on index loss provided under the

contract.\98\ For example, with a guaranteed buffer of -10%, a
registrant would disclose that investors could lose up to 90% of their
investment in an index-linked option due to poor index performance even
with the loss limitation feature. This amendment is designed to make
clear to investors investing in an index-linked option that they can
still lose money even though index-linked options typically include
features designed to limit investment loss.
---------------------------------------------------------------------------

    \98\ See proposed Instruction 3(a) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    Short-Term Investment. The second line item under the Risks
heading, ``Is this a short-term investment?,'' currently requires a
statement that the contract is not a short-term investment and is not
appropriate for an investor who needs ready access to cash along with a
brief explanation. This statement and an accompanying brief explanation
is equally applicable to RILAs and we therefore would require RILA
issuers to make the same disclosure.\99\ We also are proposing to amend
this item to require issuers of RILAs and variable annuities to state
that (1) amounts withdrawn from the contract may result in surrender
charges, taxes, and tax penalties; and (2) if applicable, that amounts
removed from an index-linked option or the contract before a specified
period may also result in a negative contract adjustment and loss of
positive index performance. These disclosures are designed to make
clear to investors some of the key reasons why these investments are
not short-term investments. These disclosures are particularly
important for an investor considering a RILA in light of the potential
negative consequences if the investor withdraws money early from a
particular index-linked option or the contract. We are not limiting
these disclosures to contracts with index-linked options, however,
because these disclosures may be equally material for a variable
annuity. To further illustrate that index-linked options are not short-
term investments even though they may have a short crediting period, we
also propose new risk disclosure for index-linked options that would
require issuers offering such investment options to state that contract
value will be reallocated at the end of the crediting period according
to the investor's instructions, and to disclose the default
reallocation in the absence of such instructions.
---------------------------------------------------------------------------

    \99\ See proposed instruction 3(b) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    Risks Associated with Investment Options. The third line item under
the Risk heading, ``What are the risks associated with the investment