options?,'' is intended to focus on the general risk of poor investment
performance.\100\ Currently, the KIT therefore requires the insurance
company to state that: (1) an investment in the contract is subject to
the risk of poor investment performance and can vary depending on the
performance of the investment options available under the contract; (2)
each investment option will have unique risks; and (3) the investor
should review these investment options before making an investment
decision. We are proposing conforming changes to the required statement
to refer to index-linked options now that RILAs are included on Form N-
4.\101\
---------------------------------------------------------------------------

    \100\ VASP Adopting Release at the text accompanying n.170.
    \101\ See proposed instruction 3(c) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    We also are proposing to require the insurance company to provide
additional information about any index-linked options offered under the
contract to highlight how the insurance company limits the investor's
participation in gains and losses of the index. For the risk of limited
upside, the insurance company would be required to (1) state that the
cap, participation rate, or some other rate or measure, as applicable,
will limit positive index returns (e.g., limited upside), (2) provide
an example for each type of limit imposed under the contract (e.g., if
the index return is 12% and the cap rate is 4%, the insurance company
will credit the investor 4% in interest at the end of the term), and
(3) prominently state that this may result in the investor earning less
than the index's return.\102\
---------------------------------------------------------------------------

    \102\ See proposed instruction 3(c)(A) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    For the risk of limited protection in the case of market decline,
the insurance company would be required to (1) state that the floor,
buffer, or some other rate or measure, as applicable, will limit
negative index returns (e.g., limited protection in the case of market
decline), (2) provide an example for each type of limit imposed under
the contract (e.g., ``if the Index return is -25% and the buffer rate
is -10%, we will credit -15% (the amount that exceeds the buffer rate)
at the end of the crediting period''), and (3) prominently state that
even after limiting a negative index return, investors could still lose
up to XX% of their investment.\103\ The disclosure in this row of the
KIT is designed to highlight that each investment option, including an
index-linked option, will have unique risks. The proposed disclosure on
index-linked options would highlight one of the central economic
tradeoffs index-linked options present: that an investor will sacrifice
the potential for returns if the index goes up in exchange for some
protection from loss if the index goes down.
---------------------------------------------------------------------------

    \103\ See proposed instruction 3(c)(B) to Item 3 of Form N-4.
---------------------------------------------------------------------------

    Insurance Company Risks. The fourth line item under the Risk
heading, ``Is there any chance the insurance company won't pay amounts
due to me under the contract?,'' is meant to alert investors that any
obligations, guarantees, or benefits under the contract that may be
subject to the claims-paying ability of the insurance company will
depend on the financial solvency of the insurance company.\104\ Form N-
4 therefore currently requires the insurance company to include a
statement to this effect in this row of the KIT and either to provide
the insurance company's financial strength ratings or state, if
applicable, that they are available upon request. We propose to require
a RILA issuer to provide the same statement, with a conforming change
to include index-linked options as an obligation of the insurance
company.\105\
---------------------------------------------------------------------------

    \104\ See VASP Adopting Release at section II.A.1.c.ii.(ii); see
also proposed Instruction 3(d) to Item 2 of Form N-4 (``State that
an investment in the Contract is subject to the risks related to the
Insurance Company, including that any obligations (including under
any Fixed Options and Index-Linked Options), guarantees, or benefits
are subject to the claims-paying ability of the Insurance
Company.'').
    \105\ See proposed instruction 3(d); see also infra section
II.B.7(b) (discussing changes of Form N-4's defined terms, including
replacing ``depositor'' with ``insurance company,'' to facilitate
inclusion of RILAs on the form).
---------------------------------------------------------------------------

(c) Restrictions
    Investments. We propose to require RILA issuers to include the
disclosure required by the first line item under the heading
``Restrictions,'' ``Are there limits on the Investment Options?'' This
current item would be modified to require the insurance company to
state whether there are any restrictions that may limit the investment
options that an investor may choose, as well as any limitations on the
transfer of contract value among investment options.\106\ As these
limitations can exist for RILAs, we propose to require RILA issuers to
make

this disclosure so that investors can assess that disclosure in
determining whether the RILA is an appropriate investment for them.
---------------------------------------------------------------------------

    \106\ See proposed instruction 4(a) to Item 3 of Form N-4. The
current item requires the insurance company to state whether there
are any restrictions that may limit the investments that an investor
may choose, as well as any limitations on the transfer of contract
value among portfolio companies. Consistent with the corresponding
changes made to defined terms, we would also clarify that this item
applies to any investment option, not just the portfolio companies
available as investment options under a variable option. See infra
section II.B.7.
---------------------------------------------------------------------------

    Currently, the form also generally requires the insurance company
to state that it reserves the right to remove or substitute portfolio
companies as investment options, if applicable. Insurance companies
typically reserve the right to change the index-linked options that are
available under a contract as well as key features of available index-
linked options. To alert investors that the available index-linked
options and key terms of those index-linked options may change in the
future we are proposing to require the insurance company to state any
reservation of its rights under the contract, including, if applicable,
the right to (1) add or remove index-linked options, (2) change the
features of an index-linked option from one crediting period to the
next, including the changes to the index and the current limits on
gains and limits on index losses (subject to contractual minimum
guarantees), and (3) substitute the index of an index-linked option
during its crediting period. We are also proposing to require that
insurance companies disclose any right to stop accepting additional
purchase payments, which may be significant to investors given the
impact this reservation can have on investors' ability to accumulate
contract value for retirement, grow the death benefit, and increase
optional benefit values.
    Contract Benefits. The second line item under ``Restrictions,''
``Are there any restrictions on contract benefits?'' requires a
statement about whether there are any restrictions or limitations
relating to benefits offered under the contract, and/or whether a
benefit may be modified or terminated by the insurance company. It also
requires a statement that withdrawals that exceed limits specified by
the terms of a contract benefit may affect the availability of the
benefit by reducing the benefit by an amount greater than the value
withdrawn and/or could terminate the benefit. We are proposing that
this item be broadened to include disclosure on restrictions or
limitations relating to any benefit under the contract, not just
optional benefits (as currently required). While a benefit under the
contract might be characterized as standard, it could have restrictions
that should be disclosed in the KIT because of the benefit's importance
to the investor's rights under the contract, such as a proportionate
withdrawal calculation under a standard death benefit.\107\ We propose
to require RILA issuers to include this disclosure, as such disclosure
is equally applicable to RILAs as it is to variable annuities.
---------------------------------------------------------------------------

    \107\ See proposed instruction 4(b) to Item 3 of Form N-4.
Similarly, we are proposing a change to the discussion in the
overview of the contract item about contract features that would
broaden that discussion to cover both optional and standard contract
benefits. See proposed Item 2(c) of Form N-4.
---------------------------------------------------------------------------

(d) Taxes
    We also propose to require RILA issuers to include the line item
under the heading ``Taxes,'' ``What are the Contract's tax
implications?'' \108\ This line item is designed to alert investors to
the tax implications of variable contracts and, as we propose to amend
this item, of RILAs. It currently requires a statement that an investor
should consult with a tax professional to determine the tax
implications of an investment in, and purchase payments received under,
the contract. The insurance company must also state that there is no
additional tax benefit to the investor if the contract is purchased
through a tax-qualified plan or individual retirement account
(``IRA''), and that withdrawals will be subject to ordinary income tax
and may be subject to tax penalties. We propose to subject RILAs to
this requirement because the same tax considerations apply.
---------------------------------------------------------------------------

    \108\ See proposed instruction 5 to Item 3 of Form N-4.
---------------------------------------------------------------------------

(e) Conflicts of Interest
    Investment Professional Compensation. We propose to require RILA
issuers to include the first line item under the heading ``Conflicts of
Interest,'' ``How are investment professionals compensated?'' \109\
This current line item for variable contracts is designed to alert
investors to the existence of compensation arrangements for investment
professionals and the potential conflicts of interest arising from
these arrangements.\110\ It requires issuers to disclose that an
investment professional may be paid for selling the contract to
investors. An issuer must describe the basis upon which such
compensation is typically paid (e.g., commissions, revenue sharing,
compensation from affiliates and third parties). An issuer providing
the required disclosure also must state that investment professionals
may have a financial incentive to offer or recommend the contract over
another investment. The same compensation arrangements and potential
conflicts are relevant for RILAs, and we therefore are proposing to
require an insurance company registering a RILA to provide the same
disclosure.
---------------------------------------------------------------------------

    \109\ See proposed instruction 6(a) to Item 3 of Form N-4.
    \110\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------

    Exchanges. We propose to require RILA issuers to include the second
line item under the heading ``Conflicts of Interest,'' ``Should I
exchange my Contract?,'' with conforming changes.\111\ This current
line item for variable contracts is designed to alert investors to
potential conflicts of interest that may arise from contract sales that
stem from exchanges.\112\ It requires issuers to state that some
investment professionals may have a financial incentive to offer a new
contract in place of the one owned by the investor. An issuer must
further state that investors should only exchange their contract if
they determine, after comparing the features, fees, and risks of both
contracts, that it is preferable to purchase the new contract rather
than continue to own the existing contract. These same considerations
apply to an investor considering an exchange involving a RILA. In a
change that would apply to variable annuities and RILAs, and to put
investors on notice that there may also be costs or charges associated
with terminating an existing contract, we are also proposing that
issuers disclose in this legend that investors should consider any fees
or penalties to terminate the existing contract in considering whether
to exchange a contract.
---------------------------------------------------------------------------

    \111\ See proposed instruction 6(b) to Item 3 of Form N-4; see
also infra section II.B.7.
    \112\ See VASP Adopting Release at section II.A.1.c.ii.(v).
---------------------------------------------------------------------------

(f) Requests for Comment on Key Information Table
    We request comment generally on the proposed amendments to the KIT,
and specifically on the following issues.
    14. Should we require all issuers to provide the ``Overview of the
Contract'' disclosure before the KIT, as proposed? Would this provide
relevant context for an investor to help understand the KIT disclosure
or, conversely, would it detract from the KIT's efficacy in conveying
key information about the contract up front in a consistent format? Are
there other reasons to precede the KIT disclosure with the current
``Overview of the Contract'' disclosure? Alternatively, should we allow
issuers to maintain the current order of disclosure and include new
rows in the KIT to provide contract overview disclosure to investors?
Would this be a more effective way to provide context for investor to
understand the KIT, or

would it lead to disclosure that is too lengthy for the KIT format and
potentially duplicate disclosure in the Overview of the Contract
section of the prospectus? Alternatively, should we require the
Overview of the Contract to precede the KIT only in prospectuses
offering annuity contracts with index-linked options, rather than for
all issuers?
    15. Should we add disclosure to the KIT regarding whether index-
linked options offered under the contract are based on a price return
index (i.e., an index that only reflects price movements of the
security) or a total return index (i.e., one that includes additionally
factors like dividends), so that, where appropriate, investors
understand whether or not they can expect their account value to
increase as a result of dividends?
    16. Should we add any additional headings and sub-headings to the
KIT, for example, a new heading ``Contract Overview,'' with related
line items or sub-headings ``What is the purpose of the contract?,''
``What is the time period for measuring growth (or loss) on my contract
value?,'' and/or ``Who may the contract be appropriate for?''? Would
this information be helpful to an investor in providing context for the
KIT disclosure or, conversely, would these requirements lead to lengthy
disclosure that makes the KIT less investor friendly?
    17. Would rephrasing the topics of the KIT line items in a question
format and requiring the descriptions in the right-hand column of the
KIT to be presented in an answer format, as proposed, be helpful for
investors making an initial purchase of an annuity contract? Should we
make the Q&A format mandatory for all issuers that use Form N-4? Or
should we instead require that issuers state the line items in the
left-hand column as brief descriptions of the topics to be detailed in
the right-hand column of the KIT, as is currently required? Should any
of the required line items or sub-headings be worded in a different
way, or using different terminology, than the proposal would require?
    18. Should we allow issuers to change the wording of the line item
questions in circumstances where the changes would not impede investor
comprehension and clear, consistent disclosure? Could this undermine
standardized disclosures and investors' ability to make comparisons of
certain disclosure topics among RILA and variable annuity prospectuses,
or would issuers' ability to customize the disclosure lead to more
informed investor decisions about that particular RILA?
    19. Should we require issuers to add a new column in the KIT
labeled ``Location in the Prospectus'' or similar caption, and place it
next to the relevant disclosure presented in the table to provide
hyperlinked cross-references directly to the location in the statutory
prospectus where the investor can find more detailed information about
the subject matter or should we, as proposed, continue to permit
issuers to provide cross-references either within the table row or
presented as an additional column? Are there any particular sub-
headings or captions that would help investors identify where to find
information?
    20. Should we mandate particular examples or illustrations in the
KIT? For example, should we require a chart of historical index
performance with the guaranteed minimum cap overlaid? Should we require
a table showing examples of the dollar amounts of losses and gains,
without fees, an investor would face in a variable annuity as compared
to RILAs with various floors, buffers, and caps over a four-year period
assuming various index movements? \113\ Are there other useful examples
or illustrations currently provided by RILAs that help to illustrate
their structure effectively to investors that we should include in the
KIT? For example, should we require a graphic in the KIT to illustrate
surrender charges and contract adjustments during different time
periods of the contract? If so, what should the requirements for these
graphics or illustrations be? Should we require illustrations in the
KIT showing how caps, floors, and/or buffers could affect an investor's
returns across different market scenarios? If so, what should these
scenarios be? As another example, we request comment below on requiring
insurance companies to disclose the difference between a hypothetical
$100,000 investment in an index-linked option and the value, or the
cost to assemble, the economic components underlying the index-linked
option.\114\ Should that disclosure be required in the KIT?
---------------------------------------------------------------------------

    \113\ See N.Y. Comp. Codes R. & Regs. tit. 11, App. 28.8 (2023).
    \114\ See Section II.B.3.b.
---------------------------------------------------------------------------

    21. We have proposed that insurance companies include disclosures
in the KIT regarding any limits on gains the RILA imposes, including an
illustrative example demonstrating the operation of those limits. Would
this disclosure be improved by requiring that the example conform to
any specific parameters? Would other examples be helpful? For example,
should we require that the example use the most common limit on gains
offered under the RILA for the previous year? Should we require that
the example disclose the amount of gains an investor would have given
up due to the limit over the prior ten years, based on the index's
performance during that time and assuming the limit on gains discussed
in the example applied during each of those ten years? Should we
require that the example use only round numbers?
    22. Should we allow or require issuers to provide cross-references
to charts or other graphics designed to facilitate investor
understanding of RILAs, including, e.g., educational resources designed
by the Commission staff? Should we require issuers to provide these
hyperlinked cross-references in the current right-hand column of the
KIT directly after the relevant sentence of disclosure? Would the KIT
be more succinct and easier to read if the hyperlinked cross-references
were placed on the cover page of the prospectus instead of the KIT?
Would requiring the registrant to state ``More information can be found
at:'' before or after these cross-references help investors easily find
the information they may need to make an informed investment decision?
Should we require cross-references to other prospectus sections to
include a specific page number in the prospectus where an investor
could find the information?
    23. Besides hyperlinks, are there other technological tools that
would help an investor find information that is cross-referenced in the
KIT or on the cover page of the prospectus, such as QR codes or other
technological tools?
    24. Is the level of detail of the disclosure that we propose in
each line item of the KIT appropriate? Does it strike the right balance
between providing enough information to alert an investor to the most
salient facts (including ongoing implicit fees, expenses, risks, and
conflicts) of the RILA contract, but not too much, or too detailed
information? If not, how should we modify the table and/or the
instructions? Are there other key features of RILA contracts that RILA
issuers should disclose in the KIT to help investors make an informed
investment decision?
    25. RILAs are frequently marketed as a way to protect against
investment losses through loss-limiting features such as buffers and
floors. Should we require RILA issuers to provide more detailed
disclosures about how these loss-limiting features have affected RILA
investors historically? For example, would investors be better
positioned to

make informed decisions if we were to require RILA issuers to disclose:
(a) the total number of investor crediting periods (across all
investors and index-linked options) that utilized a loss-limiting
feature for a certain historical period (e.g., the past five years);
(b) the percentage of those investor crediting periods where an
investor's contract value benefited from a loss-limiting feature
(because the feature eliminated or reduced a negative credit resulting
from the performance of the index-linked option); and (c) the
percentage of those investor crediting periods where an investor's
contract value was not impacted by a loss-limiting feature. Should a
RILA issuer have experience with a certain minimum number of crediting
periods in order to be subject to this disclosure? What should a RILA
issuer disclose if their experience with loss-limiting features does
not meet the minimum threshold? Where in the prospectus would be the
appropriate location for this information? For example, if we require
this disclosure, do commenters feel it would be best positioned as part
of the KIT, in Item 6 (in the Limits on Index Losses section), or in
the Contract Overview? Are there other disclosures that commenters
would recommend in the alternative as a way to increase investor
knowledge about the utility of loss-limiting features and their ability
to positively affect investors' contract values? Whether or not we
require more detailed disclosures about the historical effects of loss-
limiting features, should we require similar disclosure about the
historical effects of limits on gains (i.e., upper limits on an
investor's ability to participate in an index-linked option's upside
performance)? Should we require disclosure comparing the economic
effects of the limits on gains to the limits on losses? For example,
should we require disclosure of the number of periods in which each
limit would have actually limited an investor's losses or capped an
investor's gains? Should we require disclosure of the dollar value of
losses an investor would be protected against compared to gains an
investor would give up over a prescribed period of time, such as the
past 10 years?
    26. Are there any particular legends that should be included in the
KIT, e.g., ``We will not return your money at the end of the crediting
period unless you tell us to,'' ``The contract adjustment applies in
addition to any surrender charge,'' ``You may earn less than the
index's return,'' and/or ``You may lose up to [X]% of your investment
if you withdraw your money before the end of a crediting period. This
loss can be greater if there is a surrender charge, taxes, and/or tax
penalties''? If so, what legends and why?
    27. Is the process of what happens at the end of the crediting
period adequately highlighted in the proposed KIT? Should insurance
companies be required to provide more specific details, either in the
KIT or elsewhere in the prospectus, about how investors can choose an
investment option at the end of the crediting period and the
limitations on those choices?
    28. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Fees and Expenses'' line items convey the
appropriate amount of information to investors and concisely alert
investors to the most important fees, charges, penalties, and expenses
associated with the RILA contract?
    29. Should the proposed ``Fees and Expenses'' line item, ``Are
there charges for early withdrawals?,'' include disclosure both about
the surrender charges and contract adjustments, as proposed? Would this
disclosure sufficiently alert investors to the typical contract
adjustment of a contract and its impact in reducing contract value (in
addition to any surrender charge) if the investor withdraws money
before the expiration of a specified period? Alternatively, should we
sub-divide this line item into two line items, with the one focused on
surrender charges and the other titled (for example) ``Are there
penalties for mid-term withdrawals?,'' focused on contract adjustments?
Would this help an investor to understand both concepts better? Or
would sub-dividing the line item cause confusion, for example by making
it seem as if a surrender charge and a contract adjustment could not
apply simultaneously? If so, should we require an explicit disclosure
that they could apply simultaneously?
    30. Would the Minimum and Maximum Annual Fee and Lowest and Highest
Cost tables assist investors in understanding the costs of their
investment and help them compare the costs of different investment
options and optional benefits in the RILA context? Should we modify the
proposed disclosure or require other additional information to
accompany the tables?
    31. Would the proposed disclosure that an issuer would provide
about contracts that do not impose ongoing fees and expenses adequately
convey the implicit ongoing fees of contracts with index-linked options
that have features that limit positive index return? If not, should we
modify the proposed disclosure or require additional information from
issuers?
    32. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Risks'' line items adequately convey an
overview of the risks of investing in a contract with an index-linked
option? Are there other risks of investing in these contracts that we
should require a registrant to disclose in the proposed KIT? For
example, should we require RILA issuers to state that an investor can
lose money by investing in these contracts including a loss of
principal? Alternatively, should we require all issuers to state this,
not just RILA issuers?
    33. Would the disclosure that a RILA issuer would provide in
response to the proposed ``Restrictions'' line items convey the
appropriate amount of information about certain restrictions that
various contract options may entail, in light of the goals of the
proposed KIT and the unique nature of a RILA? Should an issuer be
required to disclose information about restrictions in the KIT other
than those associated with the contract's investment options and
benefits? If so, what? Instead, should we provide flexibility by
permitting issuers to disclose other restrictions at their discretion?
Do commenters agree that our proposal to require disclosure about
restrictions on contract benefits generally (as opposed to the current
requirement which is limited to optional benefits) is appropriate?
    34. Is the disclosure that a RILA issuer (along with other issuers
that use Form N-4) would be required to provide in response to the
proposed ``Taxes'' line item appropriate, in light of the goals of the
proposed KIT? Given that some investors in these products may not have
the means or ability to consult a tax professional, should we require
additional disclosures in addition to the required statement that
investors should consult a tax professional? For example, should a RILA
issuer be required to consider which tax consequences are most likely
be faced by retail investors and to provide general information
regarding those consequences? For example, should an issuer be required
to emphasize more prominently that withdrawals will be subject to
ordinary income tax, and not the capital gains rates? Should the line
item require disclosure of the specific tax penalties and requirements
that investors in annuity contracts may incur (e.g., penalties for
withdrawal before age 59\1/2\, or that purchases through a tax-
qualified plan may be subject to required minimum distribution each
year beginning at age 70\1/2\)?

    35. Are the disclosures that a RILA issuer (along with other
issuers that use Form N-4) would be required to provide in response to
the proposed ``Conflicts of Interest'' line items appropriate, in light
of the goals of the proposed KIT? Would these disclosures adequately
apprise investors of the potential conflicts that arise when their
investment professional is compensated for recommending an investment
into a new, or an exchange from, an existing RILA contract or variable
annuity contract? Should we revise these proposed disclosure
requirements, and if so, how?
    36. Do the instructions associated with each of the proposed line
items clearly explain what an issuer would be required to disclose? In
keeping with the structured format of a tabular presentation, we sought
to promote concise disclosure by largely directing issuers to state,
rather than to explain, certain information in response to the required
line items. Should the instructions prescribe specific language or
should issuers have flexibility in drafting their responses? Are there
any particular instructions that we should include or modify in any
way, for clarity or for any other reason?
    37. Should we require particular terms in the KIT (e.g., those that
are defined in a related glossary or list of definitions that the
insurance company chooses to include) to be formatted in a way that
will emphasize them, or indicate that they are defined elsewhere in the
prospectus, for example by using bold and/or italic font?
    38. Should we apply the structural changes we are proposing to the
KIT in other variable insurance contract registration forms, that is,
Forms N-3 and N-6? The principles we outlined above regarding the
potential efficacy of these changes could be just as applicable in the
context of those forms as in the context of Form N-4. For example,
should we apply the proposed requirements for Forms N-3 and N-6 issuers
to present all disclosures in the KIT in a Q&A format and to begin each
response with a ``yes'' or ``no'' in bold text when answering a
question presented in a given row of the KIT, unless the context
otherwise requires? Similarly, should we require in those forms that
issuers include in their required legends on contract exchanges that
investors consider any fees or penalties to terminate the existing
contract before exchanging their contracts?
3. Principal Disclosure Regarding RILAs (Items 2, 6, and 17)
    We are proposing amendments to Form N-4 to provide investors with
the principal disclosures regarding RILAs and the index-linked options
available under the contract in three items of the form. First,
investors would receive a concise description of the basic information
about any index-linked option available under the contract as well as
any contract adjustments in Item 2 (Overview of the Contract), which,
as discussed above, would appear before the KIT.\115\ Second, investors
would be provided with detailed information about the index-linked
options available under the contract in Item 6 (Description of the
Insurance Company, Registered Separate Account, and Investment
Options). Lastly, investors would be provided with a summary
information table, with legends highlighting risks, that outlines the
available index-linked options in Item 17 (Investment Options Available
Under the Contract). These amendments build on the existing disclosure
requirements in each item to help ensure that investors have key
information about the annuity contract and available investment
options, regardless of whether the contract is a variable annuity, a
RILA, or combination contract offering both variable and index-linked
options.
---------------------------------------------------------------------------

    \115\ Because we propose to require the KIT to appear before the
Overview of the Contract, current Item 3 (Overview of the Contract)
would be renumbered as Item 2.
---------------------------------------------------------------------------

(a) Overview of the Contract (Item 2)
    We are proposing to amend Item 2 (Overview of the Contract) to
include information about RILAs generally and require the insurance
company to provide an overview of certain key elements of any index-
linked options offered under the contract and to highlight any contract
adjustments. This item is designed to describe certain basic and
introductory information about the contract and its benefits.\116\ It
currently requires a concise description of the contract. This
description must include information about (1) the contract's purpose
(e.g., to help the investor accumulate assets through an investment
portfolio), (2) the phases of the contract (the accumulation (savings)
and annuity (income) phases) including a discussion of the investment
options available under the contract, and (3) the primary features of
the contract (such as death benefits).
---------------------------------------------------------------------------

    \116\ See VASP Adopting Release at text accompanying n.207.
---------------------------------------------------------------------------

    We would require insurance companies to provide this existing
disclosure when registering RILA offerings, adjusted to account for the
specifics of RILAs, because it is equally relevant for these types of
annuity contracts. In particular, in addition to the general
information about the contract already required by Form N-4, the
following information would be required with respect to any index-
linked option offered under the contract:
     A statement that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index;
     A statement that an investor could lose a significant
amount of money if the index declines in value and prominent disclosure
of the maximum amount of loss (as a percentage) an investor could
experience from negative index performance, after taking into account
the minimum guaranteed limit on index loss provided under the contract;
and
     An explanation that the insurance company limits the
negative or positive index returns used in calculating interest
credited to an index-linked option at the end of its crediting period,
accompanied by a brief description of the manner in which such returns
may be limited, along with an example and disclosure of the minimum
limit on index losses guaranteed for the life of the contract for any
index-linked option.\117\
---------------------------------------------------------------------------

    \117\ See proposed Item 2(b)(2)(i) through(iv) of Form N-4.
---------------------------------------------------------------------------

    We also are proposing to require the insurance company to state, if
applicable, that an investor could lose a significant amount of money
due to the contract adjustment if amounts are removed from an index-
linked option or from the contract prior to the end of a specified
period.\118\ The issuer would also provide a brief description of the
transactions subject to a contract adjustment. We would require a
prominent statement, as a percentage, of the maximum amount of loss an
investor could experience from a negative contract adjustment and that
this loss could be greater due to surrender charges and tax
consequences.
---------------------------------------------------------------------------

    \118\ See proposed Item 2(d) of Form N-4.
---------------------------------------------------------------------------

    These disclosures, together, are designed to highlight upfront some
of the key elements of a RILA. The required disclosure about any index-
linked option offered under the contract would highlight for investors
the key

features of these investment options in general: that returns are based
in part on an index, that investors could still lose a significant
amount of money under the contract, and that there are limits on both
positive and negative index performance. The required disclosure on
contract adjustments would highlight a separate but important
consideration for an investor considering investing in a RILA: that in
addition to any losses from poor index performance, the investor also
can lose a significant amount of money if the investor takes money out
of an index-linked option or the contract early. These disclosures
collectively also would provide context for the KIT, which immediately
follows this item under the proposal, as well as context for more
detailed disclosures that would appear elsewhere in the prospectus.
    In addition to these items that are specific to RILAs, we also are
proposing to expand the current requirements for disclosures regarding
optional benefits in Form N-4. Currently, when summarizing a contract's
primary features, the form requires a discussion of any optional
benefits.\119\ A benefit under the contract, such as a non-optional
guaranteed living benefit, might be characterized as a standard (i.e.,
not optional) benefit but nonetheless be a key feature of the contract
that should be highlighted for investors in the overview section of the
prospectus. We are therefore proposing to require that the discussion
of benefits cover all of the primary contract benefits, not just
optional benefits.\120\ This requirement would apply to all contracts
registered on the form.
---------------------------------------------------------------------------

    \119\ See current Item 3(c) of Form N-4.
    \120\ See proposed Item 2(c) of Form N-4; see also supra
footnote 107 and accompanying text.
---------------------------------------------------------------------------

    We request comment on the proposed summary disclosures contained in
Item 2.
    39. Is the proposed information on index-linked options and
contract adjustments appropriate? Is there other or different
information we should require? For example, we are proposing to require
RILA issuers to include examples of how limits on gains and downside
protection operate but do not mandate a form of presentation. Should we
require these examples be provided in a graphical presentation, or
require only a narrative example? Should we require the examples be
converted into a dollar amount? Would investors understand the examples
more readily if we did this? As another example, should we require RILA
issuers to briefly summarize the index crediting methodologies
available under the contract?
    40. Should we require the proposed disclosures for index-linked
options and contract adjustments in Item 2, including the existing
disclosure to be provided in the context of a RILA? Is this information
necessary for investors to understand the other disclosures in the
prospectus?
    41. Should we, as proposed, broaden the current discussion of the
primary contract features to include a discussion of contract benefits
generally, not just optional benefits (the current focus of the
disclosure requirement)?
(b) Description of Insurance Company, Registered Separate Account, and
Investment Options (Item 6)
    We propose to amend Item 6 of Form N-4 to modify certain existing
disclosure requirements and to expand the item to include new
disclosures for RILAs. Proposed Item 6(d), discussed further below,
would set forth most of the substantive new disclosure requirements for
contracts that include index-linked options. We would also include new
disclosures for any fixed options provided as part of the contract. The
information that would be required by the proposed amendments is
designed to convey key aspects of each index-linked option offered
under the contract to investors.
    As an initial matter, the proposed amendments to Item 6 would
largely retain the existing requirement to provide a concise discussion
about the insurance company, registered separate account, and variable
options, subject to certain modifications in nomenclature to implement
definitional changes and minor restructuring to accommodate the
addition of RILAs to the form.\121\ Specifically, these changes would
incorporate the proposed changes to certain defined terms and revise
existing disclosures to clarify the entities that should be associated
with certain disclosures (e.g., because the insurance company would be
obligated to pay all amounts promised to investors under the contracts
subject to its financial strength and claims-paying ability, we would
require disclosure about this topic to be framed in terms of the
insurance company, not the registered separate account, as the
requirement is currently worded).\122\
---------------------------------------------------------------------------

    \121\ See proposed Item 6(a) through (c) of Form N-4.
    \122\ We also propose to add an instruction requiring the
insurance company to indicate whether it is relying upon the
exemption provided by 17 CFR 240.12h-7 (``rule 12h-7''), consistent
with the requirements of that rule. See proposed Instruction to Item
6(a) of Form N-4; see also rule 12h-7(f) (requiring issuers of
securities subject to insurance regulation that rely on the
exemption from the duty to file section 13(a) reports with respect
to securities registered under the Securities Act to provide a
statement indicating that fact in the relevant prospectus).
---------------------------------------------------------------------------

    We are proposing to require one new disclosure item for contracts
that offer variable options, which would be similar to a proposed
disclosure for index-linked options, discussed below. Specifically, the
prospectus for such contracts would be required to include a statement
indicating that ``contract value allocated to a Variable Option will
vary based on the investment experience of the corresponding Portfolio
Company in which the Variable Option invests,'' and ``there is a risk
of loss of the entire amount invested.'' \123\ The risk of loss
inherent in a variable annuity is currently disclosed in the form's
``Key Information Table,'' and we are proposing to mandate this
disclosure in Item 6 as well to warn that an investor can lose the
entire amount invested in a variable option. In addition to informing
investors about investment risks in a variable option generally, where
an annuity contract offers both variable and index-linked options, this
disclosure also would help to explain the different nature of the
investment risks posed by each kind of investment option. In that case
the prospectus would disclose the maximum loss associated with the
index-linked options while also disclosing that, for the variable
options, the investor could lose the entire amount invested.
---------------------------------------------------------------------------

    \123\ See proposed Item 6(c)(1) of Form N-4.
---------------------------------------------------------------------------

Description of Index-Linked Options
    We are proposing to require the insurance company to disclose
information about the key features of the index-linked options
currently offered under the contract.\124\ These proposed disclosures
are designed to complement other proposed disclosures in the prospectus
about index-linked options generally by providing investors specific
information about each index-linked option's features and risks, akin
to the information that is currently available to investors about
variable options in the prospectuses for the mutual funds underlying
those options. Specifically, the insurance company would be required to
describe the index-linked options currently offered under the contract
as well as information about how interest is calculated and credited
for each index-linked option, specifically: (1) limits on index losses;
(2) limits on index gains; (3) crediting period; (4) crediting
methodology and

examples; (5) relevant indexes; (6) maturity; and (7) other material
features of the index-linked option. These disclosures are intended in
part to address points that investors found to be confusing in investor
testing.\125\ Further, some investors in the qualitative interviews
indicated that they would prefer more information about these points
relative to the KIT disclosures.\126\
---------------------------------------------------------------------------

    \124\ See proposed Item 6(d) of Form N-4.
    \125\ See OIAD Study at Section 7, Conclusions, Summary of
Findings and Discussion.
    \126\ See OIAD Study at Section 5, Qualitative Testing, Summary
of Qualitative Testing.
---------------------------------------------------------------------------

Description of the Index-Linked Options Currently Offered
    Under the proposed amendments, RILA issuers would be required to
describe the index-linked options currently offered under the contract,
including statements indicating that the insurance company will credit
positive or negative interest at the end of a crediting period to
amounts allocated to an index-linked option based, in part, on the
performance of the index.\127\ To dispel potential investor confusion
relating to the reference to an index, we are proposing to require RILA
issuers to state that an investment in an index-linked option is not an
investment in the index or in any index fund.
---------------------------------------------------------------------------

    \127\ See proposed Item 6(d)(1) of Form N-4.
---------------------------------------------------------------------------

    Other cautionary statements regarding the index-linked options
offered would include that the potential for investment loss could be
significantly greater than the potential for investment gain, and that
an investor could lose a significant amount of money if the index
declines in value. To illustrate the potential scope of such a loss,
RILA issuers would have to prominently state (as a percentage) the
maximum amount of loss an investor could experience from negative index
performance over a crediting period, after taking into account the
minimum guaranteed limit on index loss provided under the contract.
Because index-linked options are often marketed as a way to limit
investment losses, this disclosure is designed to convey to investors
that they could still lose a significant amount on an index-linked
option, despite having a floor or buffer.
    To emphasize the substantial risks associated with an early
withdrawal from an index-linked option, RILA issuers would be required
to state that an investor could lose a significant amount of money due
to the contract adjustment if amounts are removed from an index-linked
option prior to the end of its crediting period. To further underscore
the risk, RILA issuers would also prominently state (as a percentage)
the maximum amount of loss an investor could experience from a negative
contract adjustment, and that this loss could be greater due to
surrender charges and tax consequences.
    To inform investors of the possibility that their investment
options could be unilaterally changed without action on their part, the
insurance company would be required to state, if applicable, that it
can add or remove index-linked options and change the features of an
index-linked options from one crediting period to the next, including
the index and current limits on gains and limits on index losses,
subject to contractual minimum guarantees.
    Similar to the current requirement for prospectuses for contracts
that offer variable options, the insurance company would be required to
state that certain information regarding the features of each currently
offered index-linked option is available in an appendix to the
prospectus,\128\ and to provide a cross-reference to that appendix. An
instruction would permit this statement to be modified if needed to
conform to the corresponding table in the appendix.\129\ As described
further below, the appendix would also be amended to include a table
listing the index-linked options currently available under the
contract.\130\
---------------------------------------------------------------------------

    \128\ See proposed Item 17 of Form N-4.
    \129\ See infra footnote 164 and accompanying text.
    \130\ See infra at section II.B.3(b) (describing proposed
amendments to Item 17 (Portfolio Companies Available Under the
Contract) to include parallel provisions for RILAs).
---------------------------------------------------------------------------

How Interest Is Calculated and Credited
    To aid investors in making informed investment decisions, we
propose to require RILA issuers to describe how interest is calculated
and credited for each index-linked option.\131\ As part of this
description, the insurance company would be required to disclose any
limits on index losses and/or index gains, the crediting periods
available under the contract (e.g., 1, 3, and 6 years), a description
of an index-linked option's index crediting methodology, information
about each index, what happens when an index-linked option matures, and
any other material features associated with index-linked options. We
discuss each of these requirements in turn.
---------------------------------------------------------------------------

    \131\ See proposed Item 6(d)(2) of Form N-4.
---------------------------------------------------------------------------

How Interest Is Calculated and Credited--Limits on Index Losses and
Gains
    We are proposing to require the insurance company to describe, as a
primary element of a RILA contract, the limits on index losses and
gains for each index-linked option.\132\ In each case, and as
applicable, the insurance company would be required to state that such
limits apply and describe how index losses and gains would be limited
(for example, through the use of a floor or buffer to limit losses, or
a cap or participation rate to limit gains). We also are proposing to
require the insurance company to provide examples to help investors
understand how these limits work in practice. To illustrate the limits
on index losses, the prospectus would include an example showing how
the limit on index losses could operate to limit a negative return
(e.g., if the index return is -25% and the buffer is -10%, the
insurance company will credit -15% (the amount that exceeds the buffer)
at the end of the term, meaning the investor's contract value will
decrease by 15%). The prospectus similarly would include an example of
how the limit on gains could operate to limit a positive return (e.g.,
if the index return is 12% and the cap rate is 4%, the insurance
company will credit 4% in interest at the end of the term, meaning the
investor's contract value will increase by 4%).
---------------------------------------------------------------------------

    \132\ See proposed Item 6(d)(2)(i) and (ii) of Form N-4.
---------------------------------------------------------------------------

    We also propose to require the insurance company to disclose, for
each index-linked option, current limits on index losses and gains, as
well as the minimum limits on losses and gains that are guaranteed for
the life of the contract.\133\ The guaranteed minimum limits tend to be
lower than those currently provided for in the contract but will not
change for the life of the contract, whereas the actual limits for an
index-linked option will vary from crediting period to crediting
period. However, at no point will these limits be lower than the
guaranteed minimums. Both pieces of information are important to
understanding the potential returns of an index-linked option because
one of the central economic tradeoffs a RILA presents is an investor's
consideration of whether to sacrifice potential gains in exchange for
protection against potential losses. An investor therefore will not
only need to consider the guaranteed limits, but also understand that
the actual limits can vary over the life of the contract.\134\

We also propose to require the insurance company to state that current
limits on gains and limits on index losses will not change during the
index-linked option's crediting period. This would help investors
understand that although the current limits on gains and limits on
losses--unlike the minimum guaranteed limits--can change from crediting
period to crediting period, they will not change during any given
crediting period.
---------------------------------------------------------------------------

    \133\ Proposed Items 6(d)(2)(i)(B) and 6(d)(2)(ii)(B) of Form N-
4.
    \134\ This information about minimum guaranteed index gain
limits is also set forth in the appendix, which is part of the
summary prospectus. See proposed Instruction 7 to Item 17(b);
proposed rule 498A(b)(5)(ix). We are also proposing to require RILAs
to publish online limits on gains. See infra section II.B.3.c.
Although changes to an index-linked option, including current limits
on gains, are material, we recognize that these limits in particular
can change from time to time. Therefore, insurance companies may
update current limits on gains using a prospectus supplement filed
pursuant to rule 497 under the Securities Act. See infra section
II.E.2.
---------------------------------------------------------------------------

    Because an insurer can generally set rates at its discretion and
may take into account a number of factors in setting those rates, we
are proposing that the insurance company explain how it selects rates
for limiting index losses and gains to help investors understand how
the features of a particular index-linked option will impact that
option's risk/return profile. In particular, we are proposing to
require the insurance company to describe the factors it considers in
determining the current limits on losses and gains for an index-linked
option (e.g., long-term interest rates, market volatility, the cost of
option contracts supporting the index-linked option guarantees,
etc.),\135\ and how that choice may impact other features of the option
set by the insurance company.
---------------------------------------------------------------------------

    \135\ Similar disclosure has been required in other contexts.
See, e.g., Item 9(a) of Form N-4 (requiring disclosure of material
factors that determine the level of annuity benefits); see also
Instruction 2 to Item 7(a) of Form N-6 (requiring the identification
of factors that determine the applicable cost of insurance rate).
---------------------------------------------------------------------------

    Giving investors information about the factors the insurer
considers in determining current limits--which are key features of an
index-linked option--may help manage their expectations regarding how
the product operates. If an investor sees that last year's cap on an
index-linked option was 22% and this year the cap is 17%, the proposed
disclosure may help them understand why the insurer's rates have
changed.\136\ If an insurer discloses that it takes various specified
factors into consideration, but ultimately sets rates at its own
discretion, the investor should know that as well.
---------------------------------------------------------------------------

    \136\ For example, an insurer might disclose that caps and
participation rates may vary depending on factors such as market
volatility, hedging strategies and investment performance, the
investor's index effective date, or interest rates, among others.
---------------------------------------------------------------------------

    The proposed disclosure about how the current limits on index gains
or losses may impact other aspects of the index-linked option is
designed to explain the inverse relationship between various features
of the index-linked option. For example, the insurance company could
include an explanation regarding how the limit on index losses for an
index-linked option could impact the current limit on index gains. This
could help an investor understand, for example, that if the insurance
company determines to increase the extent to which the index-linked
option will protect against loss, the insurance company may then reduce
the amount of upside index participation the investor could receive.
The prospectus would also require an explanation of the factors an
investor should consider regarding limits on index losses or gains
before selecting an index-linked option for investment. This disclosure
should assist an investor in choosing among the index-linked options
available under the contract, such as by explaining the difference
between a floor and a buffer, or by highlighting index-linked options
with features that assume more risk in return for higher potential
return, or vice versa.
How Interest Is Calculated and Credited--Crediting Period
    We are proposing to require the insurance company to generally
describe the crediting periods of the index-linked options available
under the contract (e.g., 1, 3, and 6 years), along with the factors an
investor should consider regarding different crediting period lengths
before selecting an index-linked option.\137\ An example of one such
factor an insurance company could include as part of this disclosure
would be that crediting periods introduce timing risk that forces
investors to take losses at the end of a crediting period, and shorter
crediting periods might increase this risk.\138\ The insurance company
also would be required to prominently state that amounts must remain in
an index-linked option until the end of its crediting period to be
credited with all or partial interest, as applicable, and to avoid a
possible contract adjustment in addition to potential surrender charges
and tax consequences. This discussion would also include a description
of the transactions subject to a contract adjustment (e.g., living
benefits), with appropriate cross-references to related disclosures in
the prospectus. These disclosures collectively are designed to help an
investor make an informed investment decision when selecting an index-
linked option, taking into account that withdrawing money before the
end of the applicable crediting period can have adverse consequences.
---------------------------------------------------------------------------

    \137\ See proposed Item 6(d)(2)(iii) of Form N-4.
    \138\ See OIAD Report at Section 2, RILAs: Structure of
Contracts and Investment Options, Investment Terms (``The role of
[crediting periods] also creates a situation that may be unique for
RILA purchasers relative to other investments they hold. In
particular, RILA investors periodically realize gains or losses at
the end of each [crediting period]. In contrast, a mutual fund
investor (for example) could wait to sell the fund during down
markets, avoiding realizing those losses. Thus, the [crediting
period] feature adds a 'timing risk` for RILA investors relative to
certain other investments.'').
---------------------------------------------------------------------------

How Interest Is Calculated and Credited--Methodology and Examples
    Each index-linked option has an ``index crediting methodology''
that explains how interest is calculated and credited to the contract.
For example, one index crediting methodology is ``point-to-point,''
that is, the amount credited to the contract is based upon a comparison
of the index's performance at two points in time (such as at the
beginning and end of the crediting period). We- propose to require
insurance companies to explain the index crediting methodologies used
in the index-linked options available under the RILA contract, along
with numerical examples about how these methodologies work. We further
propose to require insurance companies to provide a bar chart that
illustrates the annual total return of each index along with
hypothetical examples of index return after applying standardized
limitations on index gains and losses.
    Specifically, insurance companies would be required to describe,
for each index crediting methodology,\139\ how interest is calculated
and credited at the end of a crediting period based on the interest
crediting formula or performance measure.\140\ Form N-4, as we propose
to amend it, would provide examples of common crediting methods that
the insurance company would describe if applicable, such as point-to-
point, step-up calculations, and enhanced performance.\141\ To help

investors understand how these crediting methods work, we also are
proposing to require the insurance company to include a numeric example
to illustrate the mechanics of each index crediting methodology.\142\
The examples would be required to show, in a clear, concise, and
understandable manner, how each crediting method functions when the
index has positive returns as well as negative returns to help
investors understand how the crediting method functions in both
circumstances.
---------------------------------------------------------------------------

    \139\ We understand that many index-linked options use the same
crediting methodology. If all index-linked options offered by a RILA
contract use the same crediting methodology, the prospectus would
only include one example of that crediting methodology. If, however,
the index-linked options in a RILA contract offer more than one
crediting method, or if different index-linked options in a RILA
contract offer different crediting methods, this would affect the
number of examples to be provided. The number of examples to be
provided depends on the number of crediting methodologies, not the
number of index-linked options.
    \140\ See proposed Item 6(d)(2)(iv)(A) of Form N-4.
    \141\ As noted above, a point-to-point crediting methodology
compares the index's performance at two points in time (such as at
the beginning and end of the crediting period). Step-up calculations
guarantee a given rate if the index's returns are positive,
regardless of the index's actual performance, subject to certain
conditions. ``Enhanced performance'' increases a positive index
return, such as by offering a participation rate of more than 100%.
    \142\ See proposed Item 6(d)(2)(iv)(C) of Form N-4.
---------------------------------------------------------------------------

    Specifically, we would require numeric examples that reflect a
positive return above the limit on index gains, and a negative return
below the limit on index losses for each methodology. The examples also
would be required to assume hypothetical returns and limits that are
reasonable based on current and anticipated market conditions and sales
of the contract, and to reflect any charges subtracted from interest
credited to or deducted from contract value in the index-linked option
to allow investors to understand the impact of these charges on their
return. Additional examples, charts, graphs, or other presentations
would be permitted if they are clear, concise, understandable. Any
additional presentations that assume hypothetical returns and limits
also should assume hypothetical returns and limits that are reasonable
based on current and anticipated market conditions and sales of the
contract. We would also require insurance companies to include a
legend, in the format specified in the form, that (1) these examples
illustrate how the insurance company calculates and credits interest
under each index crediting methodology assuming hypothetical index
returns and hypothetical limits on index gains and losses and (2) the
examples assume no withdrawals.
    We also are proposing to require a bar chart for each index
available under the currently-offered index-linked options showing the
index's annual return for the last 10 calendar years (or for the life
of the index, if less than 10 years), with the corresponding numerical
performance adjacent to each bar.\143\ Further, insurance companies
would be required to provide a hypothetical example alongside each
index return that reflects the return after applying a 5% cap and a -
10% buffer. If there are no caps or buffers offered under the contract
(if, for example, the contract includes a floor rather than a buffer),
insurance companies would be permitted to reflect a rate or measure
used to limit index gains or losses under the contract that is
comparable. Insurance companies would not be permitted to include
additional performance presentations, or historical index performance
that precedes the inception of the index. Further, insurance companies
would be required to provide two footnotes to this table, if
applicable, that disclose (1) that the index return does not reflect
dividends paid on the assets in the index, and (2) that the index
provider deducts fees and costs when calculating index return.
---------------------------------------------------------------------------

    \143\ See proposed Item 6(d)(2)(iv)(B) of Form N-4.
---------------------------------------------------------------------------

    These bar charts would also be accompanied by the following legend
in the format specified in the form:

    The bar chart shown below provides the Index's annual returns
for the last 10 calendar years (or for the life of the Index if less
than 10 years), as well as the Index returns after applying a
hypothetical 5% cap and a hypothetical -10% buffer. The chart
illustrates the variability of the returns from year to year and
shows how hypothetical limits on Index gains and losses may affect
these returns. Past performance is not necessarily an indication of
future performance.
    The performance below is NOT the performance of any Index-Linked
Option. Your performance under the Contract will differ, perhaps
significantly. The performance below may reflect a different return
calculation, time period, and limit on Index gains and losses than
the Index-Linked Options, and does not reflect Contract fees and
charges, including surrender charges and the Contract Adjustment,
which reduce performance.

    This information is intended to provide context for the index-
linked options that the RILA contract offers and would better inform an
investor when deciding whether to invest in a RILA. For example, if an
index-linked option provides that the investor will experience at least
5% of the upside performance of an index, investors may view the
tradeoffs of this investment differently if the index historically has
returned, for example, 10% per year (thus capping gains at 5% during
those past periods) or 1% per year. Similarly, if an index-linked
option offers a -10% buffer, the investor could compare that against
the index performance in the bar chart and assess the extent to which
the buffer would have provided downside protection against market
losses in negative return years.
    We appreciate, however, that historical index presentation alone,
without the addition of hypothetical caps and buffers, may mislead
investors into thinking that these historical rates of index
performance are what investors would have received under the contract
if they invested in a particular index-linked option. As we discuss in
more detail below, we are concerned that presenting historical RILA
performance without additional context can be potentially misleading
given that investors cannot access the same RILA terms as were
available historically. Relatedly, we are concerned that statements in
RILA advertisements are being made without sufficient context so that
investors can understand the qualifications to those statements.\144\
As an example of how historical index performance could confuse
investors, consider an investor who has selected an index-linked option
with performance based on the performance of XYZ Index and a one-year
crediting period, and this investor has allocated contract value to
that index-linked option over 10 consecutive crediting periods. This
investor's RILA contract value after 10 years likely will differ from
the XYZ Index's 10-year performance. Reasons for this likely difference
include, for example, that the index-linked option only provides a
portion of the performance of the index because of a cap rate, buffer,
or floor.
---------------------------------------------------------------------------

    \144\ See also infra section II.F.
---------------------------------------------------------------------------

    Accordingly, we are proposing to require insurance companies to
provide historical index information to investors, but with important
qualifications so that investors will not confuse this index
information for the historical performance of the RILA itself. In
particular, the overlay of hypothetical caps and buffers is designed to
help investors understand better how those limits can cause RILA
performance to differ from that of the index. Further, the legends we
are proposing also are designed to put investors on notice that the
presented performance is not the RILA's performance.
    The proposed bar chart, including the proposed 10-calendar-year
period, is modeled on the risk/return bar chart in Item 4(b)(2) of Form
N-1A. Form N-4 also currently requires variable annuity issuers to show
10-years of performance in the portfolio company appendix. We
preliminarily believe that 10 calendar years is an appropriate time to
illustrate the performance of the index over the long term to help
guide investors. We are proposing to require a 5% cap rate and -10%
buffer rate to help investors understand how caps and buffers affect
the index return, but without using values that are so high or so low
that they will bear no resemblance to the

level of gains and losses that is being offered. The illustrative rates
are designed to achieve this effect because they are higher than
typical guaranteed levels of caps and floors, but lower than typical
currently offered levels.
How Interest Is Calculated and Credited--Indexes
    The index underlying an index-linked option is a central feature of
the investment, as the investor's return will be based on the index's
performance, subject to applicable limits on gains and losses. We
therefore are proposing to require the insurance company to provide for
each index a brief description of the types of investments that compose
the index and where the investor can find more information about the
index.\145\ Where there is more than one version of an index (for
example a total return version and a price return version), the
disclosure would clearly state which version of the index relates to
the index-linked option. If the index is an exchange-traded fund
(``ETF''), the disclosure would have to clarify whether the index's
performance for purposes of determining the amounts credited in the
index-linked option is based on the ETF's net asset or closing value
and, if the performance is based on the ETF's share price, the impact
of using the share price as opposed to total return. These disclosures
collectively are designed to help ensure that investors understand the
applicable indexes. The disclosure would also state, if applicable,
that the index does not reflect dividends paid on its underlying
securities, or that the index deducts fees and costs when calculating
index performance, which will reduce index performance. This is
important disclosure because an index that does not reflect dividends
paid on underlying securities, or that deducts fees and costs, will
have a lower return, all else equal, than an index that includes
dividends and does not deduct fees and costs.
---------------------------------------------------------------------------

    \145\ See proposed Item 6(d)(2)(v)(A) of Form N-4.
---------------------------------------------------------------------------

    We also propose to require the insurance company to state that it
reserves the right to substitute an index prior to the end of the
crediting period.\146\ This would put investors on notice that the
index associated with a particular index-linked option--which is a key
driver of the investor's return--could change in the middle of a
crediting period. The insurance company also would be required to
disclose all circumstances that could necessitate a substitution, how
the insurance company would choose a replacement index, when and how
investors would be notified of this change, how index return will be
calculated at the end of the crediting period, and what would happen if
a suitable replacement index were not found, including whether the
index-linked option will be discontinued prior to the end of the
crediting period. This information would allow an investor to better
understand the likelihood of the insurance company making a
substitution and its potential effects.
---------------------------------------------------------------------------

    \146\ See proposed Item 6(d)(2)(v)(B) of Form N-4. Insurers
generally reserve the right to change the index in the middle of the
crediting period if the index is discontinued or there is a
substantial change in the calculation of the index. Based on staff
experience, such changes are exceedingly rare.
---------------------------------------------------------------------------

How Interest Is Calculated and Credited--Maturity and Other Material
Features
    To help investors anticipate what may happen at the end of an
index-linked option's crediting period, the insurance company also
would be required to state whether an investor would receive advanced
notice of a maturing index-linked option, how an investor might provide
instructions regarding the reallocation of the contract value rate at
the end of the crediting period, and any automatic default allocation
in the absence of such instructions.\147\ In describing these matters,
the prospectus must also explain how investors will be informed of the
index-linked option available for allocation at the end of a crediting
period, including any changes to the currently-offered index-linked
options and the discontinuance or addition of index-linked options.
---------------------------------------------------------------------------

    \147\ See proposed Item 6(d)(2)(vi) of Form N-4.
---------------------------------------------------------------------------

    Finally, we propose to require the insurance company to describe
any other material aspects of the index-linked option to ensure that
any other item not discussed above that could affect an investment
decision is disclosed.\148\ This would include disclosure related to
limitations on transfers to or from index-linked options, rate holds,
``bail-out'' provisions, start dates, and holding accounts.\149\ We
would also require a brief description of how charges may impact the
index-linked option's value if applicable as part of this discussion.
---------------------------------------------------------------------------

    \148\ See proposed Item 6(d)(2)(vii) of Form N-4.
    \149\ A ``rate hold'' locks in interest at the current cap (or
other rate limiting index gains) for the period between which the
insurance company receives the investor's annuity application and
the time the investor's premium payment is allocated to the index-
linked option. A bail-out provision is a contract provision that
provides if a current cap (or other rate limiting index gains) is
set below a specified value, the investor may withdraw value from
that index-linked option or RILA without a contract adjustment (and
in some cases without a surrender charge) during a specified period
after the start of the crediting period. A holding account is
typically a conservative investment option (typically a money market
fund or a fixed option) where amounts allocated to the index-linked
option are held until the next index-linked option start date. This
is used for index-linked options that start on a particular day each
month (e.g., the 15th of the month).
---------------------------------------------------------------------------

Fixed Options
    In addition to variable options and index-linked options, annuity
contracts commonly include fixed investment options, such as
traditional, unregistered fixed options and unregistered index
options.\150\ In the variable annuity context, a fixed option provides
an alternative for investors who wish to avoid the market risk of
investing in a variable option. A fixed option can also serve as the
holding account for amounts that are pending allocation to a particular
investment option. In addition, a fixed option may be the default
allocation vehicle at the end of an index-linked option's crediting
period.
---------------------------------------------------------------------------

    \150\ See proposed Item 6(e) of Form N-4. Interests in fixed
account options are exempt securities under Section 3(a)(8) of the
Securities Act.
---------------------------------------------------------------------------

    Form N-4 generally requires registrants to describe the fundamental
features and risks of an annuity contract, including those, like fixed
options, that are distinct from the variable options offered through
the registered separate account.\151\ The form also currently requires
specific disclosure about fixed options in the KIT and the Contract
Overview.\152\ Because we are proposing to include disclosures relating
to index-linked options in Item 6, we are also proposing to require
disclosures on this other type of investment option available to
annuity contract investors so that they have a complete understanding
of what they may invest in through that contract, either actively, or
by default. This approach is designed to increase investor
comprehension by ensuring that substantive information about all of the
available investment options is presented in the same location in the
prospectus.
---------------------------------------------------------------------------

    \151\ General Instruction C.1.(a) of Form N-4 (stating that
``[a] Registrant's prospectus should clearly disclose the
fundamental features and risks of the [Contracts], using concise,
straightforward, and easy to understand language.'').
    \152\ Items 2 and 3 of Form N-4.
---------------------------------------------------------------------------

    The proposed disclosures for fixed options would be similar to
those provided for index-linked options, tailored for the specifics of
a fixed option. Specifically, registrants would be required to describe
the fixed options currently offered under the contract and state that
information regarding the features of each currently-offered fixed
option, including its name, term, and

minimum guaranteed interest rate is available in an appendix with
cross-references.\153\ Further, registrants would be required to
describe how interest is calculated and when it is credited for each
fixed option as well as the length of the term and minimum guaranteed
interest rate (stated as a numeric rate, rather than referring to any
minimums permitted under State law). As with index-linked options, the
registrant also would be required to state whether an investor would
receive advance notice of a maturing fixed option, including what steps
an investor might take to provide instructions regarding the
reallocation of contract value at the end of the term, and any
automatic default allocation in the absence of such instructions. In
describing these matters, the registrant must also explain how
investors will be informed of the fixed options available for
allocation at the end of a term, including any changes to the currently
offered fixed options and the discontinuance or addition of fixed
options. Also as with index-linked options, we would require disclosure
of any other material aspect of the fixed options, including
limitations on transfers to or from the fixed options, rate holds,
start dates and holding accounts.
---------------------------------------------------------------------------

    \153\ As discussed below, we are also proposing to require
disclosure relating to any fixed options currently offered under the
contract in the Item 17 appendix.
---------------------------------------------------------------------------

Request for Comment
    We request comment generally on the proposed amendments to Item 6
of Form N-4, and specifically on the following issues:
    42. Should we require each of the specific disclosures (e.g.,
disclosures relating to limits on index losses and gains, crediting
period, etc.) relating to the RILAs and index-linked options as
proposed? Would all of these proposed amendments provide information
that would be important to investors? Should we modify or expand any of
these proposed disclosure requirements?
    43. Should we make any other changes to the required prospectus
disclosures addressing index-linked options? For example, we are
proposing to require numeric examples, charts, graphs, or other
presentations, as appropriate, to illustrate the mechanics of each type
of index crediting methodology.\154\ Would the proposed requirement be
likely to provide useful information for investors? If not, why not?
Would the inclusion of such examples, charts, and graphs be likely to
confuse investors about how index-linked options work? Is there a
concern that insurance companies would utilize these examples to over-
emphasize the benefits of RILAs relative to their risks? If so, how
could this be remedied? Should such examples be included in the
prospectus in response to Item 6, or would they be better located
elsewhere in the prospectus, for example, in Items 3 or 17? Given the
potential length of such examples, should they be included in an
appendix to the prospectus?
---------------------------------------------------------------------------

    \154\ Proposed Item 6(d)(2)(iv) of Form N-4.
---------------------------------------------------------------------------

    44. Should the current limits on gains and losses be required in
the statutory prospectus, as proposed? If not, where should such
disclosure be located? Should insurance companies update current limits
on gains as they change from time to time by filing a rule 497
prospectus supplement, or should a rule 485 post-effective amendment be
required?
    45. Should we require the proposed disclosures relating to the
risks of investing in variable options?
    46. Should we require that the historical performance of indexes be
disclosed as proposed? Is the proposed bar chart an effective or
appropriate presentation approach, or should we instead require another
presentation approach, such as a line graph or the 1-, 5-, and 10 year
table required in the Form N-1A? If so, why? Are there any concerns
that investors would confuse the inclusion of historical index
information with the performance of the index-linked option itself? If
so, are our proposed requirements to provide a hypothetical example of
a 5% cap and -10% buffer and a legend sufficient to make clear that the
performance illustrated by the bar chart does not show or suggest how
an investment in the contract will perform for the investor? Are the 5%
cap and -10% buffer appropriate limits to use in the hypothetical
examples? Instead of prescribing a specific cap and buffer, should we
require or permit issuers to include the current and/or guaranteed
limits as an overlay to the bar chart, or would this provide too much
visual clutter for investors, or be misleading in any way? Is 10
calendar years of index performance the right amount of time to
present?
    47. Should we require discussion of fixed investment options
currently offered under the contract? Are the proposed disclosure items
appropriate for these types of investment options?
    48. Is there other information we should require insurance
companies to disclose to help investors better understand the economic
tradeoffs associated with an index-linked option? For example, issuers
of structured notes that offer bounded returns similar to RILAs
disclose the issuer's valuation of the note, based on the value of (1)
the embedded derivatives; and (2) a fixed-income bond. This disclosure
allows investors to understand the difference between the issuer's
valuation and the original issue price that they are paying for the
structured note. Would a similar disclosure for RILAs, provided with
respect to each permutation of an index-linked option, be helpful to
investors? Would the difference between a hypothetical $100,000
investment in an index-linked option and the value, or the cost to
assemble, the economic components underlying the index-linked option be
informative to investors? Would it appropriately reflect the implied
cost the investor is paying when investing in that index-linked option?
If we were to require this disclosure, should it be expressed in
dollars, as a percentage of a hypothetical $100,000 investment, or
both? Should we require the insurance company to annualize the costs
over a stated period of time to express the cost as more akin to an
annual expense? Recognizing that RILAs are intended to be long-term
investments, what would be an appropriate period of time (e.g., 10, 20,
or 30 years)?
    49. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require the
insurance company to compare a hypothetical $100,000 investment in the
index-linked option to the value, or cost, of the following components:
derivatives that would provide the index-linked option's investment
exposure; a fixed-income component; and the standard insurance features
offered with the index-linked option?
    50. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we require that
the insurance company value or price the derivatives using exchange-
listed derivatives, such as exchange-traded options, and based on
prices on the exchange, except in cases where exchange-listed
derivatives could not efficiently provide the index-linked option's
investment exposure? Would that approach provide for consistent and
reliable pricing? In practice are insurance companies typically
constructing and hedging index-linked options' investment exposure
using exchange-listed options or other derivatives where feasible?
    51. If we were to require insurance companies to provide the
disclosure described in request for comment 48, in determining the
value of the derivatives underlying an index-linked option, should we
require insurance companies

to use a collection of hypothetical index options with an expiration
equal to the crediting period, consistent with our analysis in section
III.B.3? \155\
---------------------------------------------------------------------------

    \155\ See infra footnote 429 and accompanying text.
---------------------------------------------------------------------------

    52. If we were to require insurance companies to provide the
disclosure described in request for comment 48, what calculation would
be appropriate for the fixed-income component of an index-linked
option? Should we, for example, provide that the insurance company
should use the $100,000 hypothetical investment discounted by the rate
of interest the insurance company is crediting, or would credit, on
fixed annuities with a term equal to the duration of the crediting
periods of the index-linked option? Conversely, should we require the
insurance company to use the value of a risk-free zero-coupon bond with
a time to maturity equal to the crediting period of the index-linked
option, consistent with our analysis in section III.B.3?
    53. If we were to require insurance companies to provide the
disclosure described in request for comment 48, how should the
insurance company value, or determine the cost of purchasing
separately, the standard insurance features? Do insurance companies
maintain internal pricing information that could be used for this
purpose where those features are not offered separately rather than in
connection with annuities or other financial products sold by the
insurance company? Should the cost or value of insurance be based on
amounts insurance companies are required to reserve in connection with
those insurance obligations? Should we require additional disclosure
related to early withdrawal charges, fees, or penalties? For example,
should we require more prominent placement of these features on
marketing or other materials, or should we require a comparison of
these features to potential benefits of the RILA to clarify for
investors possible trade-offs?
    54. If we were to require insurance companies to provide the
disclosure described in request for comment 48, should we, in addition
to requiring the disclosure of this cost figure, also require the
insurance company separately to disclose the costs or values associated
with each component underlying the index-linked option?
    55. If we were to require insurance companies to provide the
disclosure described in request for comment 48, where should insurance
companies place it in the registration statement? Would this
information be most helpful to investors if it were included in the
disclosure required by Item 6, which provides more detailed information
on each index-linked option, or in the summary prospectus appendix
identifying the RILA's investment options? Alternatively, should it be
disclosed the KIT as a range based on the available index-linked
options? If this information were in the summary prospectus, would it
change frequently and result in a high number of prospectus supplements
delivered to investors? If we were to further require the disclosure of
the underlying components and pricing assumptions used to determine the
cost to investors disclosure, would the SAI be an appropriate place for
that disclosure? Should these disclosures be structured using inline
XBRL as proposed for other additional disclosures?
(c) Appendix: Investment Options Available Under the Contract (Item 17)
    We propose to amend Item 17 to include a discussion of the index-
linked options and fixed options available under the contract. This
item currently requires a variable annuity issuer to include in an
appendix to the prospectus a table that consolidates certain summary
information about each portfolio company offered under the contract.
The current appendix is designed to provide investors with an overview
of variable options available under the contract in a uniform, tabular
presentation that promotes comparison, because the investment
experience of an investor in a variable annuity will largely depend on
the underlying investments available under the contract.\156\
Similarly, we anticipate that an overview of the index-linked options
available to investors in a RILA, as well as any fixed option currently
available under the contract, would help investors understand and
compare the various investment options offered under the contract.
Consolidating this summary information about the contract's investment
options--equivalent to what is currently provided for variable
options--into a concise, easy to read tabular presentation should
enhance the ability of investors to understand, evaluate, and compare
all the investment options available under the contract.
---------------------------------------------------------------------------

    \156\ VASP Adopting Release at n.267 and accompanying text.
---------------------------------------------------------------------------

    To reflect the expanded scope of the appendix, we would amend the
current heading to ``Investment Options Available Under the Contract.''
\157\ We would provide a new instruction that explains that issuers may
modify this new heading as appropriate under the contract. For example,
if there are only variable options offered under the contract, an
issuer could change the heading to ``Portfolio Companies Available
Under the Contract,'' consistent with the current requirements of the
form. Because variable options, fixed options, and index-linked options
can vary by benefit offered under the contract, we also propose to move
the restrictions table currently required for variable annuities by
instruction 1(f) of Item 17 to be a separate requirement for all
investment options, with no other changes.\158\
---------------------------------------------------------------------------

    \157\ ``Investment options'' are defined as any variable option,
index-linked option, or fixed option available under the contract.
See infra section II.B.7(b).
    \158\ Proposed Item 17(d) of Form N-4.
---------------------------------------------------------------------------

Index-Linked Options
    To accommodate the inclusion of index-linked options in the
appendix, we propose to add a new table titled ``Index-Linked
Options.'' \159\ As part of our approach to layered disclosure, the
information to be supplied in the table for index-linked options would
summarize certain prospectus disclosures required elsewhere in the
prospectus.\160\
---------------------------------------------------------------------------

    \159\ See proposed Item 17(b) of Form N-4.
    \160\ See, e.g., proposed Item 6(d) of Form N-4.
---------------------------------------------------------------------------

Legends
    Similar to the requirements for variable annuities, the table for
index-linked options would be prefaced with a legend. Specifically, the
legend would state that the table lists index-linked options currently
available under the contract. Further, because insurance companies
typically change the index-linked options available over time, we would
require the legend to specify that the insurance company may change the
features of the index-linked options in the table (including the index
and the current limits on gains and limits on losses), offer new index-
linked options, or terminate existing index-linked options, and that
the insurance company will provide the investor with written notice
before making any of these changes.
    As discussed above, current limits on index gains for index-linked
options would be disclosed in the prospectus in response to Item 6, and
changes to current limits on index gains would be disclosed in
prospectus supplements.\161\ However, to avoid frequent updates to the
summary prospectus, insurance companies would not be required to
include current limits on index gains for index-linked options in the
appendix as

those limits can change frequently.\162\ Instead, and in addition to
the disclosure in Item 6, to ensure that investors have convenient
access to changes in current limits on index gains, which can
significantly affect an investor's returns on an index-linked option,
the proposed legend would require insurance companies to state that
current limits on gains are available at a website address.\163\ This
website address must be specific enough to lead investors directly to
current rates, rather than to the home page or other section of the
website on which the rates are posted. Requiring RILA issuers
separately to include information about current limits on gains on
their websites would benefit investors by making this information
easier to find and understand. Furthermore, because websites may be
updated quickly, website disclosure would be efficient for compiling
index-linked options' current limits on gains, given our understanding
that these rates can change often and that insurance companies
currently disclose current rates on their websites.
---------------------------------------------------------------------------

    \161\ See proposed Item 6(d)(2)(i)(B) of Form N-4 and supra
footnote 134.
    \162\ As discussed below, the proposed appendix would appear in
the summary prospectus, but Item 6 would not. See infra section
II.C; see also infra section II.E.1 (discussing proposal to amend
rules 485 and 497 for RILAs).
    \163\ Consistent with the current instructions to the form, any
website address, including this one, that is included in an
electronic version of the statutory prospectus would be required to
include an active hyperlink or other means of facilitating access
that leads directly to the relevant website address. However, this
requirement would not apply to an electronic summary prospectus that
is filed on EDGAR. See proposed General Instruction C.3.i of Form N-
4.
---------------------------------------------------------------------------

    Lastly, set off from the rest of the legend and with emphasis, we
would require a notation that if amounts are withdrawn from an index-
linked option before the end of its crediting period, the insurance
company may apply a contract adjustment and that this may result in a
significant reduction in the investor's contract value that could
exceed any protection from the index's loss that would be in place if
an investor held the option until the end of the term. We are proposing
this notation given the potential impact on an investor's returns if
amounts are withdrawn prior to the end of a crediting period.
    We propose to require the legend to include appropriate cross-
references to the section(s) of the prospectus that describe the
features of the index-linked options as well as the contract
adjustment. This approach is designed to help investors that are
interested in more detail about key aspects of the index-linked options
to locate that information quickly.
Table
    The legend would be followed by a table that lists and highlights
key elements of each index-linked option available under the contract.
Specifically, the table would require, in sequential columns, the
identification of (1) each index by name; (2) type of index; (3)
crediting period, indicating the duration of the index-linked option in
years; (4) index crediting methodology; (5) limits on index loss if
held to the end of the crediting period; and (6) guaranteed minimum
limit on index gain.
    The description of the type of index would be a brief statement of
which type of index it is (e.g., market index, exchange-traded fund,
etc.), or a brief statement describing the assets that the index seeks
to track (e.g., U.S. large-cap equities). The column indicating the
type of index crediting methodology used for each index-linked option
would only be required if the RILA utilizes multiple index crediting
methodologies under the contract (e.g., point-to-point, step-up,
enhanced upside, etc.).\164\ The disclosures regarding limits on index
loss would require an issuer to state the current percentage used in
the insurance company's interest credit methodology to limit the amount
of negative index return credited to the index-linked option and to
identify in the table whether this limit is a buffer, floor, or some
other rate or measure.\165\ In the last column, issuers would be
required to state the guaranteed minimum percentage that may be used to
limit the amount of positive index return credited to the index-linked
option and to identify in the table whether this limit is a cap,
participation rate, or some other rate or measure.\166\
---------------------------------------------------------------------------

    \164\ If all index-linked options offered by a RILA contract
used the same crediting methodology, the table would not include the
column. See, e.g., supra footnote 139.
    \165\ In contrast to current limits on index gain, we understand
that the current limits on index loss typically do not change
frequently.
    \166\ As discussed above, instead of also requiring a column for
current limits on index gains (in addition to the column for
guaranteed minimum limit on index gains), the legend would state
that information about current limits on index gains is available at
a specified website address.
---------------------------------------------------------------------------

    To ensure investors only receive disclosure relevant to them, RILAs
would only be permitted to include in the table those index-linked
options that are available under the contract. Further, to promote
disclosure in a consistent format to facilitate comparisons, issuers
would be allowed to add, modify, or exclude table headings only as
necessary to describe the material features of an index-linked option.
Insurance companies would also be required to indicate if any of the
index-linked options are restricted (e.g., because of a ``hard'' or
``soft'' close), consistent with the current disclosure requirements
for variable options. The proposed instructions also would state that
if an index provider calculates the index's return in a manner that
does not reflect the full investment performance of the assets tracked
by the index (e.g., the return does not reflect dividends paid on the
assets composing the index, the return reflects a fee or cost, etc.), a
footnote to the table must, if applicable, be included stating that the
index's return does not reflect the full investment performance of the
assets it tracks, which will reduce the index's performance. An
investor evaluating index-linked options may be more familiar with a
version of a given index that reflects the full performance of the
index constituents, and this disclosure would alert investors that the
index associated with a particular index-linked option will have
relatively lower returns.
Fixed Options
    Consistent with our proposed approach to the Item 6 disclosure
requirements, we are proposing to require in the appendix summary
information about fixed options currently available under the contract.
These disclosure requirements would be similar to the legend and table
for index-linked options discussed above, adjusted to reflect fixed
option details. The fixed option legend, in addition to identifying
that what follows is a list of fixed options currently available under
the contract, would indicate that the insurance company (1) may change
the features of the fixed options identified, offer new ones, and
terminate existing ones and (2) will provide the investor written
notice before doing so. The fixed option table would include columns
identifying (1) the name of the fixed option, (2) the term, and (3) the
minimum guaranteed interest rate.\167\ Insurance companies would be
instructed to include appropriate cross-references in the legend to the
sections of the prospectus that describe the features of fixed options.
As with index-linked options, insurance companies could add, modify, or
exclude table heading only as necessary to describe material features
of a fixed option.
---------------------------------------------------------------------------

    \167\ Consistent with the approach in Item 6, the minimum
guaranteed interest rate would be required to be stated as a numeric
rate rather than referring to any minimums permitted under State
law.

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

Request for Comment
    We request comment generally on the proposed inclusion of index-
linked option summary information in the appendix, and specifically on
the following issues:
    56. Should we require these new disclosures to be included in the
appendix? Are the proposed appendix disclosures for index-linked
options appropriate? Would they help investors to compare information
among index-linked options and generally understand the index-linked
options available? Is this information likely to be relevant and useful
to investors? Is there more or different information that we should
require? Should any of the information not be included? For example,
should we require current limits on gains to be disclosed in the
appendix, rather than requiring the appendix to include a website
address where information about current limits is available (as well as
requiring this information in the statutory prospectus)? Would
investors find it useful to have online access to information about
current limits on gains? Will investors find current limits on index
loss in the summary prospectus useful even if the current limits on
index gains are not included?
    57. We are proposing to require in the statutory prospectus numeric
examples, charts, graphs or other presentations to illustrate the
mechanics of each type of index crediting methodology.\168\ Should we
permit or require some or all of these examples for index-linked
options to be included in the appendix? Would the inclusion of these
examples add undue length or complexity to the appendix, or overwhelm
the disclosure for other investment options? Could these concerns be
ameliorated by only permitting or requiring a limited number of
examples (e.g., no more than 4), or by placing certain other
limitations on the inclusion of such examples? If so, how? If we were
to require examples for index-linked options to be included in the
appendix, should we also require the examples to be included in the
Item 6 disclosures, or should such disclosures only be required in a
single location (and if so, which one)?
---------------------------------------------------------------------------

    \168\ Proposed Item 6(d)(2)(iv) (Methodology and Examples) of
Form N-4. We are proposing to permit this information to be included
in an appendix. See supra section II.B.3(a).
---------------------------------------------------------------------------

    58. Should we include the proposed disclosure in the appendix
relating to fixed options currently available under the contract? Are
there any changes we should make to the specific proposed disclosure
requirements?
4. Principal Risks of Investing in the Contract (Item 5)
    An investment in a contract offering index-linked options exposes
investors to unique risks that may be different from those that are
common to other investment products, including contracts that solely
offer variable options. We propose to amend Item 5 to address certain
principal risks that are particularly relevant to investors in RILAs.
In addition to restructuring the current item to incorporate the
proposed risk disclosure requirements addressing index-linked options,
we propose certain structural changes that are designed to clarify
existing requirements but are not anticipated to result in
substantively different disclosure requirements for contracts offering
variable options. These proposed changes also would consolidate certain
risk disclosures insurance companies currently provide for variable
annuities in other sections of the prospectus. We are proposing to
require these disclosures in a single location to more consistently and
effectively communicate risks to investors. As the Commission has
previously explained, the principal risk disclosure in the prospectus
is designed to provide a consolidated presentation of principal risks,
which registrants can cross-reference to reduce repetition that might
otherwise occur if the same principal risks were repeated in different
sections of the prospectus.\169\
---------------------------------------------------------------------------

    \169\ See VASP Adopting Release at n. 690 and accompanying text.
---------------------------------------------------------------------------

    The principal risk disclosure item of Form N-4 currently consists
of a single paragraph requiring a registrant to summarize in the
prospectus the principal risks of purchasing a contract, including the
following risks: (1) poor investment performance, (2) that contracts
are unsuitable as short-term savings vehicles, (3) limitations on
access to cash value through withdrawals, and (4) the possibility of
adverse tax consequences. We propose to retain these substantive risk
disclosure requirements but would restructure the current single
paragraph into separate sub-items while also making certain minor
changes designed to clarify existing obligations.\170\ The proposed
sub-items are designed to be non-exclusive examples of the principal
risks of investing in the contract being registered. In addition to
existing disclosure requirements, these sub-items would also include
new risk disclosures specific to index-linked options, as
applicable.\171\ We are making parallel changes to the risk disclosures
most applicable to variable annuities to avoid any implication that
risk disclosure should be provided at a different level of detail than
the disclosures for RILAs. Most contracts offering variable options
that are currently registered on Form N-4 likely would not need to
revise their risk disclosure in response to the proposed amendments to
the risk disclosure requirements. In our experience, it is common
practice for these registrants currently to include the disclosures
that the proposal would require in their prospectuses as principal risk
disclosure (or elsewhere in their prospectuses).
---------------------------------------------------------------------------

    \170\ See proposed Item 5(a)-(b), (d)-f) of Form N-4.
    \171\ See proposed Item 5(c) of Form N-4.
---------------------------------------------------------------------------

    The proposed approach would retain the current requirement for
registrants to explain the principal risks of purchasing a contract,
but would also require an explanation of the principal risks of
investing in an investment option, including the risks of poor
investment performance.\172\ Additionally, for index-linked options, a
registrant would disclose the maximum potential loss from negative
index performance over the crediting period, as a percentage. Although
disclosures that address certain risks of index-linked options would be
required in other locations in the prospectus, we are proposing that
RILA issuers include certain risk factors, such as this one, in the
consolidated summary of principal risks associated with the
contract.\173\ The maximum potential loss resulting from negative index
performance is a salient way to quantify potential returns for
particular investment options. For example, absent this disclosure, it
may not be apparent to investors that an index-linked option that
offers a -10% buffer still has the potential for 90% loss.\174\ This
statement would help

investors assess the particular risks associated with RILAs in the
context of the other required principal risk disclosures. The potential
risk of loss is particularly important for investors to understand
because RILAs are often presented to investors as having the benefit of
offering a balance between the opportunity for growth and the reduced
risk of loss relative to savings alone or more conservative
investments.\175\
---------------------------------------------------------------------------

    \172\ See proposed Item 5(a) of Form N-4.
    \173\ See proposed Item 1(a)(6) (Outside Front Cover Page)
(``Prominently disclose as a percentage the maximum amount of loss
from negative Index performance that an investor could experience
after taking into account the minimum guaranteed limit on Index loss
provided under the Contract.''); proposed Item 2(b)(ii) (Overview of
the Contract) (``[P]rominently state 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.''); proposed Item
6(d)(1)(ii) (Investment Options) (``Prominently state 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.'').
    \174\ We recognize that this example may suggest to some
investors that an option with a buffer is riskier than one with a
floor. In fact, the protection offered by a buffer is more likely to
be triggered than the protection offered by a floor. In general, a
buffer protects the investor from experiencing smaller, more common
losses on an index (as well a portion of any larger loses), while a
floor protects the investor from larger, less-common losses (but
does not protect against smaller losses). Insurers that offer both
buffers and floors should generally make this distinction clear to
investors in their Item 5 risk disclosures, as well as in response
to proposed Items 2(b)(2) and 6(d) of Form N-4.
    \175\ See OIAD Report at Section 4, Review of RILA Marketing.
---------------------------------------------------------------------------

    The next proposed sub-item, which concerns the risks of early
withdrawal, would retain the current requirement for registrants to
disclose that contracts are unsuitable as short-term savings vehicles
and to summarize the limitations on access to cash value through
withdrawals, including the possibility of adverse tax
consequences.\176\ We propose to expand this disclosure requirement to
specify that a summary of the limitations on access to cash value
through withdrawals may also include, if applicable, surrender charges,
as well as negative contract adjustments and loss of interest. These
are features of RILAs that implicate why they are not short-term saving
vehicles. In addition, insurance companies that offer index-linked
options would be required to state the maximum potential loss resulting
from a negative contract adjustment, as a percentage. Although this
last statement would be required to be provided in other locations in
the prospectus, we are proposing to include this risk disclosure in the
consolidated summary of principal risks because contract adjustments
can significantly affect contract value.\177\ Also, contract
adjustments are a distinctive feature of contracts with index-linked
options that we recognize (based on results of qualitative investors
interviews) investors can find difficult to understand. Quantifying
maximum potential loss resulting from a negative contract adjustment is
intended to illustrate the possible effects of these adjustments.
Further, unlike other types of losses, contract adjustments are
typically avoidable by investors. As a result, we anticipate that
showing the maximum loss possible would help investors evaluate whether
to take an action that would result in a contract adjustment. It also
would help investors understand the potentially significant risks that
they could face in a RILA, regardless of a RILA's bounded return
structure. Therefore, this statement would assist investors in
assessing unique risks associated with index-linked options in the
context of the other required principal risk disclosures.
---------------------------------------------------------------------------

    \176\ See proposed Item 5(b) of Form N-4.
    \177\ See proposed Item 1(a)(7) (Outside Front Cover Page)
(``Prominently state as a percentage the maximum potential loss
resulting from a negative Contract Adjustment, if applicable.'');
proposed Instruction 2(a) to Item 3 (Key Information Table)
(``Include in this statement the maximum potential loss (as a
percentage of the investment) resulting from a negative adjustment.
. . .''); proposed Item 4 (Fee Table--Transaction Expenses)
(``Contract Adjustment Maximum Potential Loss (as a percentage of
Contract value at the start of the Crediting Period or amount
withdrawn, as applicable)''); and proposed Instruction 1 to Item
7(e) (Contract Adjustment) (``State the maximum potential loss, as a
percentage, that could result from a negative Contract
Adjustment.'').
---------------------------------------------------------------------------

    The next proposed sub-item, which concerns the principal risks
associated with index-linked options, would include new risk disclosure
requirements tailored to address unique risks associated with these
investment options.\178\ Under these proposed requirements, a
registrant would have to describe the principal risks of investing in
any index-linked options offered under the contract (in addition to the
risks of potential loss from negative index performance, as discussed
above). The proposed sub-item would require the prospectus to include a
statement that an investor in an index-linked options is not invested
in the index or in the securities tracked by the index. This reflects
our concern, based on the results of qualitative investor interviews,
that investors may be confused about whether an investment in an index-
linked option is a direct investment in the index.
---------------------------------------------------------------------------

    \178\ See proposed Item 5(c) of Form N-4.
---------------------------------------------------------------------------

    To help ensure that RILA prospectuses address certain key risks,
the proposed instructions to this disclosure requirement would specify
that discussion of the principal risks related to index-linked options
would be required to include the principal risks relating to, as
applicable: (1) limiting positive index returns; (2) the possibility of
losses despite limits on negative index returns; (3) interest crediting
methodologies; (4) the impact of contract fees on the amount of
interest credited; and (5) the reallocation of contract value at the
end of an index-linked option's crediting period. We are also proposing
instructions specifying that this discussion would be required to
include, as applicable, principal index risks relating to: (1) the type
of index (e.g., market risk, small-cap risk, foreign securities risk,
emerging market risk, etc.); (2) the exclusion of dividends from index
return; and (3) market volatility. These instructions would require
RILA issuers to specify which risks relate to each index offered under
the contract, and to describe the principal risks related to the
possible substitution of the index before the end of an index-linked
option's term.
    An additional proposed new sub-item would require a description of
the principal risks associated with any contract benefits (e.g., death
benefits, living benefits), including the impact of excess withdrawals,
if applicable. These risks include, for example, investment
restrictions associated with a living benefit, which may limit
investment performance.\179\ As an additional example, there are risks
that withdrawals may substantially reduce the benefit, that some
guaranteed benefits are based on a contingency that may never occur
(e.g., the contract value falling to zero), that the rates for contract
benefits may change over time, and that certain benefits may be
discontinued prior to election. Because these risks could impact the
expected performance of the annuity, or in some cases could even
terminate the annuity, we are proposing to require issuers to disclose
them to in the prospectus.
---------------------------------------------------------------------------

    \179\ See proposed Item 5(d) of Form N-4.
---------------------------------------------------------------------------

    Another proposed new sub-item would require an explanation of the
principal risks associated with the insurance company's ability to meet
its guarantees under the contract, including risks relating to its
financial strength and claims-paying ability, which as described below
may be of particular concern for investors who allocate contract value
to index-linked options.\180\ We recognize that a summary of certain
insurance company risks is currently required to be disclosed in the
KIT.\181\ Moreover, although there is no corresponding disclosure
requirement that mandates the inclusion of insurance-company-related
risks in the principal risk disclosure in contract prospectuses, most
Form N-4 registrants already provide this disclosure. We therefore do
not expect that current Form N-4 registrants likely would have to
modify their disclosures to comply with the proposed requirement.
Nevertheless, we propose to require this disclosure to be included in
the consolidated principal risks section of the prospectus for

completeness, and to help ensure that a prospectus for a contract that
offers fixed options and index-linked options discloses the insurance
company's claims-paying ability with regard to its contractual
guarantees. In contrast to variable options, where amounts invested are
held in a separate account insulated from the insurance company's
general account and protected from general account creditors, assets
invested in an index-linked option are subject to the insurance
company's claims-paying ability for most RILAs.
---------------------------------------------------------------------------

    \180\ See proposed Item 5(e) of Form N-4.
    \181\ See current Instruction 3(d) to Item 2 of Form N-4.
---------------------------------------------------------------------------

    Lastly, we propose a final new sub-item, which would require a
description of the principal risks relating to any material reservation
of rights under the contract, including if applicable, (1) the right to
remove or substitute portfolio companies; (2) add or remove index-
linked options and change the features of an index-linked option from
one crediting period to the next; (3) stop accepting additional
purchase payments; and (4) impose investment restrictions or
limitations on transfers.\182\ We propose to require this disclosure
because the ability to discontinue contract features, alter an
investor's ability to participate in an index's upside performance, and
otherwise change features is important information for investors when
making an investment decision.
---------------------------------------------------------------------------

    \182\ See proposed Item 5(f) of Form N-4.
---------------------------------------------------------------------------

    We request comment generally on the proposed amendments to Item 5
of Form N-4, and specifically on the following issues:
    59. Do the proposed amendments to Item 5 appropriately describe the
types of principal risks that are typically associated with investing
in a contract that offers variable options and/or index-linked options?
Should different or additional principal risks be required to be
summarized in the prospectus?
    60. Do commenters agree with the proposed approach of amending Item
5 to restructure the current item into separate sub-items? For
contracts offering variable options, do commenters agree that the
proposed changes would clarify existing requirements, but would not
generally result in substantively different principal risk disclosure
requirements? Would the proposed changes to Item 5 require contracts
offering variable options that are currently registered on Form N-4 to
revise their current risk disclosure, or could they continue to use
their existing disclosures? Why or why not? To the extent that Form N-4
registrants are currently disclosing risks on topics that the proposed
changes address in other parts of the prospectus, would this current
risk disclosure be considered to be ``principal'' risk disclosure?
    61. Although we are proposing to require disclosure of specified
index-linked option-related principal risks to be provided in response
to the Item 5 disclosure requirements, we also propose to require
aspects of these risks to be disclosed in response to certain other
prospectus disclosure requirements, facilitating a layered disclosure
approach. Is this appropriate? What ``layers'' of risk disclosure are
appropriate for the summary prospectus, statutory prospectus, and SAI?
    62. Are the proposed additions to the current principal risk
disclosures appropriate? If not, why not? Should we, for example,
require a registrant specifically to disclose principal risks
associated with index-linked options, contract benefits, the insurance
company, and any material reservation of rights under the contract, as
proposed? If not, why not? Is an insurer's ability to discontinue
contract features, reduce index limits on gains and otherwise change
features likely to be inconsistent with an investor's reasonable
expectations, as we state above? Should we modify any of the aspects of
these proposed principal risk disclosure requirements?
5. Addition of Contract Adjustments and Other Amendments to Fee and
Expense Disclosures (Items 4, 7, and 22)
    We are proposing amendments to Form N-4 to require specific
disclosures regarding contract adjustments and other implicit RILA-
specific costs that can result in a significant erosion of investment
principal. The proposed disclosures are designed to provide investors
with a better understanding of the mechanics of these costs and the
associated potential for loss. Under the proposed approach, these
disclosure requirements would be set forth in Items 4, 7, and 22(d) of
Form N-4. We are also proposing revisions to the existing provisions of
these Items, applicable to all Form N-4 issuers, to clarify certain
terminology.