that would require variable contract registrants to submit certain
information in the Inline XBRL format.\615\ We believe that the
public's access to this data will be facilitated by making the data
available in Inline XBRL, a format with which they will already be
familiar as a result of reviewing and analyzing other disclosures in
Inline XBRL. Variable contract registrants would be required to embed a
part of the Interactive Data File \616\ within an HTML document using
Inline XBRL and to include the rest in an exhibit to that document. The
portion filed as an exhibit to the filing will contain contextual
information about the XBRL tags embedded in the filing. The information
as tagged will continue to be required to satisfy all other
requirements of rule 405 under Regulation S-T, including the technical
requirements in the EDGAR Filer Manual.
---------------------------------------------------------------------------

    \615\ Proposed General Instruction 3.C.(h) of Forms N-3, N-4,
and N-6; proposed amendments to rules 485 and 497 under the
Securities Act; proposed amendments to rules 11 and 405 of
Regulation S-T.
    \616\ Regulation S-T defines the term ``Interactive Data File''
to mean the machine-readable computer code that presents information
in XBRL electronic format pursuant to rule 405 of Regulation S-T and
as specified by the EDGAR Filer Manual. 17 CFR 232.11; 17 CFR
232.405. The EDGAR Filer Manual sets forth the technical formatting
requirements for the presentation and submission of electronic
filings through the EDGAR system.
---------------------------------------------------------------------------

    For filers, Inline XBRL can enhance the efficiency of review, yield
savings in time and cost of preparing machine-readable data, and
potentially enhance the quality of the data over other machine-readable
standards because certain errors will be easier to identify and correct
because the data is also human-readable. For investors and other data
users, requiring information to be tagged in a structured format could
facilitate analysis and comparison of variable contracts. In addition,
making the data available in Inline XBRL should enhance the usability
and ease of accessibility to the disclosures because users will not
have to access two different documents (one machine-readable and one
human-readable) for the same data, and users can leverage the enhanced
search and filtering capabilities of the Commission's Inline XBRL
Viewer. Moreover, given the complexity of variable contracts, we
believe that tagging certain sections within the statutory prospectus
in Inline XBRL format could provide greater transparency regarding the
products' features and risks in the marketplace.
    Filings to be tagged. Like mutual funds and ETFs, registrants would
be required to submit to the Commission in Inline XBRL certain
information discussed below in registration statements or post-
effective amendments filed on Forms N-3, N-4, and N-6, and forms of
prospectuses filed pursuant to rule 497(c) or rule 497(e) under the
Securities Act that include information that varies from the
registration statement.
    Information to be tagged. We are proposing that registrants tag the
following prospectus disclosure items using Inline XBRL: The Key
Information Table, Fee Table, Principal Risks of Investing in the
Contract, Other Benefits Available Under the Contract, and Investment
Options Available Under the Contract in the statutory prospectus, and
for Form N-3 registrants, Additional Information About Investment
Options Available Under the Contract.\617\ We believe that these
items--which provide important information about a variable contract's
key features, costs, and risks--would be most suited to being tagged in
a structured format and be of greatest utility for investors and other
data users that seek structured data to analyze and compare variable
contracts.
---------------------------------------------------------------------------

    \617\ See General Instruction C.3.(h) to Forms N-3, N-4, and N-
6; see also proposed Items 3, 4, 5, 12, 19, 20 of Form N-3; proposed
Items 3, 4, 5, 11, and 18 of Form N-4; proposed Items 3, 4, 5, 11,
and 18 of Form N-6. This information largely parallels similar
information contained in the Form N-1A risk/return summary. See Item
2 of Form N-1A (Risk/Return Summary: Investment Objectives/Goals);
Item 3 of Form N-1A (Risk/Return Summary: Fee Table); Item 4 of Form
N-1A (Risk/Return Summary: Investments, Risks and Performance).
---------------------------------------------------------------------------

    We would require registrants to tag the Key Information Table,
which provides a concise summary of fees and expenses, risks,
restrictions, taxes, and conflicts of interest. We are also proposing
to include the Fee Table, which provides detailed information about the
variable contract's costs. We believe that tagging could facilitate
analysis of the costs associated with variable contracts, and allow
investors and their investment professionals to compare the costs of a
particular contract with the costs of other variable contracts or other
investment products, such as mutual funds.
    We are also proposing to require Principal Risks to be tagged so
investors and their investment professionals can analyze a contract's
risks alongside the contract's features and benefits. We would also
require registrants to tag Other Benefits Available Under the Contract
because these optional product features may be easier to analyze and
compare if information pertaining to those features is available in a
structured data format. Finally, we are proposing to require
registrants to tag Investment Options Available Under the Contract, as
this may allow investors and their investment professionals to more
easily compare the mutual funds or other investment options that are
offered by different variable contracts and assess whether a particular
contract's investment options meet the investor's needs or goals.
    Submission of Interactive Data File. In a framework similar to that
for mutual funds and ETFs under the recently adopted Inline XBRL
regime,\618\ we would require variable contract registrants to submit
Interactive Data Files as follows:
---------------------------------------------------------------------------

    \618\ See Inline XBRL Adopting Release, supra note 613.

     For post-effective amendments filed pursuant to
paragraph (b)(1)(i), (ii), (v), or (vii) of rule 485, and in the
case of registrants on Forms N-4 or N-6, paragraph (b)(1)(vi) of
rule 485,\619\ Interactive Data Files must be filed either
concurrently with the filing or in a subsequent amendment that is
filed on or before the date that the post-effective amendment that
contains the related information becomes effective; \620\
---------------------------------------------------------------------------

    \619\ To help facilitate efficiencies in the variable contract
post-effective amendment filing process, we propose to permit
variable contracts to submit Interactive Data Files concurrently
with these post-effective amendments because post-effective
amendments filed pursuant to these paragraphs of rule 485 generally
are not subject to further revision.
    \620\ Proposed General Instruction C.3.(h)(i)(B) of Forms N-3,
N-4, and N-6; cf. General Instruction C.3.(g)(i)(B) of Form N-1A.
---------------------------------------------------------------------------

     for initial registration statements and post-effective
amendments filed other than pursuant to paragraph (b)(1)(i), (ii),
(v), or (vii) of rule 485, and in the case of registrants on Forms
N-4 or N-6, paragraph (b)(1)(vi) of rule 485, Interactive Data Files
must be filed

in a subsequent amendment on or before the date the registration
statement or post-effective amendment that contains the related
information becomes effective; \621\ and
---------------------------------------------------------------------------

    \621\ Proposed General Instruction C.3.(h)(i)(A) to Forms N-3,
N-4, and N-6; cf . General Instruction C.3.(g)(i)(A) of Form N-1A.
---------------------------------------------------------------------------

     for any form of prospectus filed pursuant to rule
497(c) or (e), Interactive Data Files must be submitted concurrently
with the filing.\622\
---------------------------------------------------------------------------

    \622\ Proposed General Instruction C.3.(h)(ii) to Forms N-3, N-
4, and N-6; cf. General Instruction C.3.(g)(ii) of Form N-1A.

    We believe this approach will facilitate the timely availability of
important information in a structured format for investors, their
investment professionals, and other data users yielding substantial
benefits. For data aggregators responding to investor demand for the
data, the availability of the required disclosures in the Inline XBRL
format concurrent with filing or before the date of effectiveness would
allow them to quickly process and share the data and related analysis
with investors. Therefore, we are not proposing to provide variable
contract registrants with a filing period to submit Interactive Data
Files.
    Identification of Classes. The Interactive Data File would be
required to be submitted in such a manner that would permit the
information for each contract (and, for any information that does not
relate to all of the classes in a filing, each class of the contract)
to be separately identified.\623\
---------------------------------------------------------------------------

    \623\ Proposed General Instruction C.3.(h)(iii) to Forms N-3, N-
4, and N-6.
---------------------------------------------------------------------------

    Consequence of failure to submit required Interactive Data File.
Similar to the framework for mutual funds and ETFs, we are proposing to
amend rule 485 under the Securities Act to provide that if a registrant
does not submit a required Interactive Data File, the registrant's
ability to file post-effective amendments to its registration statement
under subparagraph (b) of the rule will be automatically suspended
until the required Interactive Data File is submitted.\624\
---------------------------------------------------------------------------

    \624\ Proposed rule 485(c)(3).
---------------------------------------------------------------------------

    Availability of hardship exemptions. Variable contract registrants
could request temporary and continuing hardship exemptions for the
inability to timely file electronically the Interactive Data File.\625\
---------------------------------------------------------------------------

    \625\ See rule 201 Regulation S-T (temporary hardship exemption)
and rule 202 of Regulation S-T (continuing hardship exemption).
---------------------------------------------------------------------------

    We request comment generally on the proposed amendments to require
the use of Inline XBRL, and specifically on the following issues:

     Should we adopt rules that make the submission of
structured data in the Inline XBRL format mandatory for variable
contract registrants? Should the requirements for variable contracts
generally mirror the recently adopted Inline XBRL requirements for
mutual funds and ETFs as we have proposed, or do variable contracts
present different issues and considerations from mutual funds and
ETFs? To what extent, or how, should registration statements and
other filings for contracts operating in the manner that the Staff
Letters describe, as discussed in section II.C above, be required to
submit information in Inline XBRL?
     Should any category of variable contract registrants be
exempt from the proposed Inline XBRL requirements? If so, which
ones, and explain why. If we were to exempt any such filers from the
Inline XBRL requirements, should they be permitted to voluntarily
file in the Inline XBRL format? What would be the effects on data
quality and usability to investors and other data users associated
with exempting such filers from the Inline XBRL requirements?
     Should we otherwise take a different approach for
variable contracts, and if so, what would that be? For example,
should we require instead that information be submitted in reports
filed on Form N-CEN? Would submission on Form N-CEN ensure that
current structured data for all variable contracts, including those
operating in the manner that the Staff Letters describe, as
discussed in section II.C above, would be available under a common
submission framework for all variable contracts? Would such a filing
framework provide a less burdensome means of submitting the same
structured data to the Commission? What would be the effects on data
quality and usability to investors and other data users of having
the information available in Form N-CEN's XML format instead of the
proposed Inline XBRL format?
     Should variable contract registrants be required to use
Inline XBRL to tag the proposed sections of the contract (Key
Information Table, Fee Table, Principal Risks of Investing in the
Contract, Other Benefits Available Under the Contract, and/or
Portfolio Companies [Investment Options] Available Under the
Contract) for Forms N-3, N-4, and N-6? Should only one or both Items
19 (Investment Options Under the Contract) and 20 (Additional
Information About Investment Options Available Under the Contract)
of Form N-3 be required to be tagged? Should other or different
information be required to be tagged in Inline XBRL?
     What costs or other burdens (e.g., related to
personnel, systems, operations, compliance, etc.) would the proposed
Inline XBRL requirements impose on variable contract registrants?
Please provide quantitative estimates to the extent available.
     How long is it likely to take for vendors and filers to
develop solutions for tagging variable contract submissions in
Inline XBRL?
     As outlined in Section II.G below, we are proposing a
similar compliance date of 18 months after the effective date of any
final rules for the summary prospectus framework for all variable
contracts to submit to the Commission the required information in
Inline XBRL. Is this period appropriate, or should the requirement
to submit the required information in Inline XBRL be subject to a
compliance date later than the compliance date for any final rules
for the summary prospectus framework? Should we adopt a phase-in
schedule for the implementation of Inline XBRL for variable contract
registrants based on certain factors, such as registrant size (or
otherwise)?
     In the case of post-effective amendment filings made
pursuant to paragraphs (b)(1)(i), (ii), (v), and (vii) of rule 485
under the Securities Act, and in the case of registrants on Forms N-
4 or N-6, paragraph (b)(1)(vi) of rule 485, should we, as proposed,
permit registrants to file the Inline XBRL document concurrently
with the related filing? Why or why not? For example, is there a
risk that investors may be confused by information that is tagged in
Inline XBRL and filed before effectiveness of the related filing?
Should we also permit registrants to submit tagged data information
concurrently with the related filing in the case of initial
registration statements and post-effective amendments made pursuant
to other paragraphs of rule 485? Why or why not? Should we instead
require that Interactive Data Files only be submitted in a
subsequent amendment to the initial registration statement or any
post-effective amendment? Why or why not?
     We are not proposing to provide a filing period for
registrants to submit the Interactive Data Files. Instead,
registrants would be required to submit Interactive Data Files on or
prior to the effectiveness of a related initial registration
statement or post-effective amendment, or concurrently with the
filing of a related form of prospectus pursuant to rule 497. Are
there costs or other burdens that may be incurred by filers if there
is no filing period? Should we instead provide a filing period, and
if so, what is the appropriate time period (e.g., 1 day, 5 days, 10
days, 20 days, 30 days)? In lieu of a filing period that would be
available indefinitely, should we instead provide for a filing
period that would be available for a temporary transitional period
after the effectiveness of any final rules? If so, what should that
transitional period be (e.g., the filing period would only be
available for two years after effectiveness of any final rules, and
thereafter, registrants would submit Interactive Data Files no later
than the effectiveness of the related initial registration statement
or post-effective amendment, or concurrently with the filing of a
related form of prospectus pursuant to rule 497, as under the
proposed rules)? If there is a filing period, would investors and
other data users find the structured data to be as useful as if it
had been as proposed?
     To what extent do investors and other market
participants find information that is available a structured format
useful for analytical purposes? Is information that is narrative,
rather than numerical, useful as an analytical tool? Would investors
and other market participants find variable contract information
that is available in a structured format useful for analytical
purposes? To what ends would they find that information useful?
     Are any other amendments necessary or appropriate to
require the submission of the

proposed required information in Inline XBRL? If so, what are they?
     In what ways might the Commission enhance the access to
Inline XBRL data submitted by filers?
     Should we require other types of information to be
submitted in the Inline XBRL format? If so, what other types of
information would be suitable for the Inline XBRL format and why?
Are there other means of embedding structured data into the human-
readable format of filings that we should consider?
     Are the proposed hardship exemptions appropriate for
variable contract registrants? Do variable contract participants
have unique challenges that would impede them from being able to
comply with the proposed filing requirements? If so, what are they?

F. Technical and Conforming Amendments to, and Requests for Comment on,
Other Aspects of the Regulatory Framework for Variable Contracts

Proposed Conforming Amendments, and Requests for Comment, To Reflect
Proposed Rule 498A and Amended Registration Forms
    We are proposing conforming amendments to various cross-references
in our rules to reflect proposed rule 498A, and the proposed amendments
to Forms N-3, N-4, and N-6. These cross-references are reflected in our
proposed amendments to: Rules 159A, 421, 431, 482, 485, 497, and 498
under the Securities Act; rules 11 and 405 of Regulation S-T; and rule
14a-16 under the Exchange Act. We request comment generally on whether
the proposed conforming amendments are appropriate. Should they be
modified in any way or are additional conforming amendments needed?
Rescission of Form N-1
    We are proposing to rescind Form N-1 under the Securities Act and
the Investment Company Act. In 1984, the Commission prescribed Form N-1
as the registration form to be used by open-end management investment
companies that are separate accounts of insurance companies for
registering under the Investment Company Act and for registering their
securities under the Securities Act.\626\ In 1985, Form N-3 superseded
Form N-1 for open-end management investment companies that are separate
accounts of insurance companies issuing variable annuity
contracts.\627\ As a result, only an open-end management investment
company that is a separate account of an insurance company offering
variable life insurance contracts would use Form N-1.\628\ Today, it
appears that all separate accounts issuing variable life insurance
contracts are organized as unit investment trusts. For that reason, we
do not believe any registrants continue to use Form N-1.\629\
---------------------------------------------------------------------------

    \626\ Form N-1 Amendments, Investment Company Act Release No.
14084 (Aug. 7, 1984) [49 FR 32058 (Aug. 10, 1984)].
    \627\ Forms N-3 and N-4 Adopting Release, supra note 28, at
26156.
    \628\ When Form N-3 was adopted, separate accounts funding
variable annuity contracts were permitted to continue to use Form N-
1 if they no longer offered the contracts to new purchasers. Forms
N-3 and N-4 Adopting Release, supra note 28, at 26156. The
Commission is not aware of any such variable annuity registrants
that continue to use Form N-1.
    \629\ Based on a review of EDGAR filings, it appears that Form
N-1 has not been used in more than 20 years. When Form N-6 was
proposed in 1998, the Commission sought comment on whether to
rescind Form N-1. Form N-6 Proposing Release, supra note 445, at
section II.G. One commenter noted that at that time several
contracts registered on Form N-1 were still in existence, but not
actively marketed. Because of this continuing need for the form, the
Commission decided at that time to retain Form N-1. See Separate
Accounts Offering Variable Life Release, supra note 54, at section
I.C.
---------------------------------------------------------------------------

    We request general comment on rescinding Form N-1 and whether there
is any continuing need for the form. In addition, we request specific
comment on the following:

     Are there currently any insurance company separate
accounts offering variable life insurance contracts that are
organized as management investment companies? Do any insurers have a
present intention of establishing such a separate account?
     Would any registrants, including any variable annuity
or variable life insurance registrants, be affected by the
rescission of Form N-1? If so, how?
     If Form N-1 is rescinded, should the Commission
prescribe another registration form for use by open-end management
investment companies that are separate accounts of insurance
companies issuing variable life insurance contracts? If so, should a
new form be used for this purpose, or should an existing form be
used and what changes should be made to the suggested form to adapt
it for this category of registrants? If a new form should be used,
what should that form look like?
Proposed Technical Amendments to, and Rescission of, Certain Rules and
Forms Governing Variable Life Insurance Contracts and Variable Annuity
Contracts
    We are proposing certain technical amendments to rules relating to
variable life insurance contracts. Rule 6e-2 under the Investment
Company Act, which was adopted in 1976, covers variable life insurance
contracts having scheduled premium payment plans.\630\ Rule 6e-3(T)
under the Investment Company Act (together with rule 6e-2, the ``VLI
Rules''), which was adopted in 1984, covers variable life insurance
contracts offering flexible premium payment plans.\631\ Rule 6e-2 was
last substantively amended in 1983,\632\ and rule 6e-3(T) in 1987.\633\
---------------------------------------------------------------------------

    \630\ Separate Accounts of Life Insurance Companies Funding
Certain Variable Life Insurance Contracts, Investment Company Act
Release No. 9482 (Oct. 18, 1976) [41 FR 47023 (Oct. 27, 1976)].
    \631\ Separate Accounts Funding Flexible Premium Variable Life
Insurance Contracts, Investment Company Act Release No. 14234 (Nov.
14, 1984) [49 FR 47208-01 (Dec. 3, 1984)].
    \632\ See Exemptive Relief for Mutual Funds Underlying Variable
Life Insurance Separate Accounts, Investment Company Act Release No.
13688 (Dec. 23, 1983) [49 FR 1476-01 (Jan. 12, 1984)]. Among other
things, these amendments provided relief to variable life insurance
separate accounts, and to portfolio companies underlying those
accounts, from minimum capital requirements already being provided
by rule 14a-2 under the Investment Company Act to variable annuity
separate accounts and to portfolio companies underlying those
accounts.
    \633\ See Separate Accounts Funding Flexible Premium Variable
Life Insurance Contracts, Investment Company Act Release No. 15651
(Mar. 30, 1987) [52 FR 11187-02 (Apr. 8, 1987)]. These amendments
revised the calculation of charges subject at the time to rate
regulation under section 27 of the Investment Company Act.
    In 2002, the Commission issued a release making technical
amendments to the VLI Rules, among others, to correct statutory
references in those rules following the enactment of then recent
legislation affecting those statutes. See Technical Amendments to
Rules and Forms Due to the National Securities Markets Improvement
Act of 1996 and the Gramm-Leach-Bliley Act, Investment Company Act
Release No. 25621 (June 24, 2002) [67 FR 43534-01 (July 8, 2002)].
---------------------------------------------------------------------------

    Some provisions of these rules, specifically the detailed
regulation of sales loads and other fees and charges required by
sections 26 and 27 of the Investment Company Act, no longer follow
statutory requirements as a consequence of amendments to those sections
enacted by the National Securities Market Improvement Act of 1996
(``NSMIA'').\634\ We are proposing to amend the VLI Rules and other
rules under the Investment Company Act, as well as rescind certain
other rules and forms under the Investment Company Act, to reflect the
effect of these NSMIA amendments.\635\
---------------------------------------------------------------------------

    \634\ National Securities Market Improvement Act of 1996 (Pub.
L. 104-290, 110 Stat. 3416 (1996). In particular, NSMIA amended
sections 26 and 27 of the Investment Company Act to replace specific
limits on the amount, type, and timing of charges applicable to
variable life insurance contracts with a requirement that fees and
charges be reasonable when considered in the aggregate.
    \635\ In addition to the VLI Rules, we are proposing technical
amendments to rules 0-1, 6c-7, 6c-8, 11a-2, 14a-2, 26a-1, and 27c-1
under the Investment Company Act. Rule 27c-1, relating to the
redeemability of variable contracts, would be renamed as rule 27i-1,
since as a result of NSMIA, the redeemability requirement addressed
in the rule is now described in section 27(i) of the Investment
Company Act. We are also proposing to make permanent temporary rule
6e-3(T) under the Investment Company Act, which would be renamed
rule 6e-3.
    As part of these technical amendments, we are proposing to
rescind rules 26a-2, 27a-1, 27a-2, 27a-3, 27d-2, 27g-1, and 27h-1
under the Investment Company Act. We are also proposing to rescind
Forms N-27I-1 and N-27I-2 under the Investment Company Act.

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

    Among other things, these amendments would remove the detailed rate
regulatory provisions in the VLI Rules and other rules and forms under
the Investment Company Act. In addition, these technical amendments
would remove the detailed definitions of sales charges in those rules,
as these definitions are not necessary to implement the reasonableness
in the aggregate standard instituted by NSMIA. These amendments would
also remove the numerical load limit on front end sales loads on
variable annuities that had been included in rule 11a-2 when it was
adopted in 1983--before NSMIA had been enacted--to incorporate the load
limit in section 27(a), and make appropriate cross-referencing
revisions to related rules. Separate from sales charge related changes,
these amendments would additionally remove certain minimum capital
conditions for insurers to qualify for exemptions from section 14(a) of
the Investment Company Act, since NSMIA amended section 26 to mandate
that any insurer serving as a separate account depositor have that
level of minimum capital.\636\
---------------------------------------------------------------------------

    \636\ Section 14(a) requires that registered investment
companies have at least $100,000 in net worth. Under the VLI Rules,
managed separate accounts and portfolio companies that are
established by an insurer and are sold only to variable life
insurance contract investors are exempt from the requirement if the
insurer has at least $1,000,000 in combined capital and surplus (or
unassigned surplus in the case of a mutual life insurer). See rules
6e-2(b)(6), 6e-2(b)(15)(v), 6e-3(T)(b)(6), and 6e-3(T)(b)(15)(iv)
under the Investment Company Act. Section 26(f)(2)(B), enacted by
NSMIA, prohibits any insurance separate account (or the depositor
insurer) from selling any variable contract unless, among other
things, the insurer has at least that amount in combined capital and
surplus (or unassigned surplus in the case of a mutual life
insurer).
    The $1,000,000 requirement in section 26(f)(2)(B) is a condition
required for sales of both variable life insurance contracts and
variable annuity contracts. Accordingly, in addition to proposing
this amendment to the VLI Rules, we are also proposing a conforming
amendment to rule 14a-2 under the Investment Company Act, which has
a similar minimum capital condition applicable to depositors of
separate accounts offering variable annuities to qualify for a
similar exemption from section 14(a).
---------------------------------------------------------------------------

    We seek comment on our proposed technical amendments to the VLI
Rules, and proposed technical amendments and rescission of other rules
and forms under the Investment Company Act intended to reflect the
effect of the NSMIA amendments. Specifically:

     Should we adopt the technical amendments to the VLI
Rules and other rules as proposed? Are other amendments necessary to
reflect the effect of the NSMIA amendments?
     We are proposing to rescind rules 26a-2, 27a-1, 27a-2,
27a-3, 27d-2, 27g-1, and 27h-1, and related Forms N-27I-1 and N-27I-
2, because these rules and forms were rendered moot as a result of
the NSMIA amendments. Should we rescind these rules and forms as
proposed, or are these rules and forms still necessary despite the
NSMIA amendments?
Rescission of Rules 27e-1 and 27f-1 and Related Forms
    We also propose to rescind rules 27e-1 and 27f-1 under the
Investment Company Act and related Forms N-27E-1 and N-27F-1. These
rules and forms were promulgated to prescribe the form of notices
required by sections 27(d) and (e) of the Investment Company Act
relating to refund and withdrawal rights of periodic payment plan
certificate holders, including those certificates not issued by
insurance company separate accounts. We are proposing to rescind these
rules and forms because since 2006, section 27(j) of the Investment
Company Act has barred new certificate issuances,\637\ and notice
rights of holders of certificates issued before then have long since
expired.
---------------------------------------------------------------------------

    \637\ Section 27(j) was enacted into law by the Military
Personnel Financial Services Protection Act (Pub. L. 109-290, 120
Stat. 127) (2006).
---------------------------------------------------------------------------

    We request comment generally on our proposal to rescind rules 27e-1
and 27f-1 and related Forms N-27E-1 and N-27F-1, and specifically on
the following issues:

     Are any periodic payment plans currently outstanding?
If so, how many?
     Would any outstanding periodic payment plans be
affected if we rescind the rules and forms as proposed? If so, how
would they be affected?
     In lieu of rescinding these rules and forms, should we
modify them in any way?
General Request for Comment on VLI Rules
    Finally, we are considering whether it would be appropriate to
update other provisions of the VLI Rules. Certain provisions of the VLI
Rules, such as exemptions allowing insurers, under certain
circumstances, to disregard voting instructions on matters submitted to
policy holders in compliance with sections 13 and 15 of the Investment
Company Act, may not be necessary.\638\ In addition, it may be
appropriate to update other provisions of the VLI Rules, such as the
exemptions provided to insurance companies and affiliated persons from
section 9(a) of the Investment Company Act, to reflect industry
experience with the operation of those rules.\639\ We request general
comment on the continued utility of the exemptions the VLI Rules
provide and the extent to which those rules should be harmonized with
the regulation of variable annuity issuers and of other investment
companies. We also request specific comment on the following:
---------------------------------------------------------------------------

    \638\ In the release proposing rule 6e-2, the Commission stated
that these exemptions were proposed ``to assure the solvency of the
life insurer and performance of its contractual obligations by
enabling an insurance regulatory authority or the life insurer to
act when certain proposals reasonably could be expected to increase
the risks undertaken by the life insurer.'' Notice of Proposal to
Adopt Rule 6e-2 under the Investment Company Act of 1940 Relating to
Separate Accounts Formed by Life Insurance Companies to Fund Certain
Variable Life Insurance Contracts, Investment Company Act Release
No. 9104 (Dec. 30, 1975) [41 FR 2256 (Jan. 15, 1976)], at 10-11.
Since the adoption of rule 6e-2 over forty years ago, however, we
are not aware of an instance where an insurer relied on these
exemptions to disregard investors' voting instructions.
    \639\ As to section 9(a), the language in the rules provides
exemptions in circumstances for which no instance of reliance could
be identified. For example, the rules conditionally allow separate
account depositors employing an ineligible person to serve as an
adviser or underwriter of an underlying fund, but depositors
generally do not themselves serve in those roles. See rules 6e-
2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) under the Investment Company
Act. More broadly, many of the provisions in the VLI Rules cover
exemptions provided to registered managed separate accounts, but
there have been no filings by those accounts issuing variable life
insurance contracts at least since EDGAR filings became mandatory
for all filers in 1996.

     To what extent are issuers of variable life insurance
contracts relying on the exemptions and other conditions of the VLI
Rules? For example, do insurers rely on the exemptions to disregard
voting instructions?
     To what extent, if any, should limits in the VLI Rules
on the parties to whom portfolio company shares underlying UIT
separate accounts may be sold, or the conditions under which they
may be sold, be changed?
     To what extent, if any, should the minimum capital
requirement imposed by NSMIA on separate accounts offering variable
insurance contracts, and on insurers sponsoring those accounts, be
changed?
     In light of NSMIA's replacement of specific limits on
sales charges and administrative expenses with a reasonableness
standard for all fees and charges in the aggregate, would it be
appropriate to consider any limitations on deferred sales loads to
address concerns that those loads might present a burden on
redemption? For example, how should those concerns be reflected in
rule 6c-8 under the Investment Company Act governing deferred sales
loads on variable annuity contracts?
     The VLI Rules provide an exemption from the
redeemability provisions of the Investment Company Act generally for
``established administrative procedures of the life insurer''
relating to, among others, issuance, transfer, and redemptions of
variable life insurance contracts. What procedures have developed
since the rules were adopted for which an exemption is appropriate?
     Should the VLI Rules be amended to eliminate exemptions
for managed separate

accounts? Should they be combined into a single rule relating to all
variable life insurance contracts, or instead framed as separate
exemptions from one or more provisions of the Investment Company Act
or rules that would apply both to variable annuity and variable life
insurance contracts?
     Should the VLI Rules be amended in any other manner to
reflect current legal requirements and industry practice, and if so,
how?

G. Compliance Date

    The Commission proposes to provide a transition period after the
effective date of the amendments to give registrants sufficient time to
update their prospectuses and to prepare new registration statements
under the amendments. We would require all initial registration
statements on Forms N-3, N-4, and N-6, and all post-effective
amendments that are annual updates to effective registration statements
on these forms, filed 18 months or more after the effective date, to
comply with the proposed amendments. A registrant could rely on rule
498A to satisfy its obligations to deliver a variable contract's
statutory prospectus beginning on the effective date of the rule
provided that the registrant is also in compliance with the amendments
to Forms N-3, N-4, or N-6 (as applicable). We would also require
variable contract registrants to submit to the Commission certain
specified disclosures in Inline XBRL within the same 18-month
compliance period. Further, our position with respect to Alternative
Disclosure Contracts and/or any final rules associated with
discontinued contracts would come into effect as of the effective date
of rule 498A.
    We request comment on the proposed compliance date, including
whether the compliance date for using Inline XBRL to file certain
specified disclosures should be different (if so, why), and whether the
Commission should adopt a transition period after the effective date of
the amendments for its position with respect to Alternative Disclosure
Contracts if a summary prospectus framework is adopted.

III. Economic Analysis

A. Introduction

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the
Securities Act, and section 2(c) of the Investment Company Act state
that when the Commission is engaging in rulemaking under such titles
and is required to consider or determine whether the action is
necessary or appropriate in (or, with respect to the Investment Company
Act, consistent with) the public interest, the Commission shall
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors. Further,
section 23(a)(2) of the Exchange Act requires the Commission to
consider, among other matters, the impact such rules would have on
competition and states that the Commission shall not adopt any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The following
analysis considers, in detail, the potential economic effects that may
result from the proposed rule, including the benefits and costs to
investors and other market participants as well as the broader
implications of the proposal for efficiency, competition, and capital
formation.
    The proposed rule allows insurers to satisfy prospectus delivery
requirements for variable contracts by providing investors with a
summary prospectus while making statutory prospectuses and other
documents available online. The proposed approach contemplates the use
of two types of summary prospectuses: An initial summary prospectus to
be provided to new investors, and an updating summary prospectus to be
provided to existing investors. To help investors make informed
investment decisions, each type of summary prospectus uses a layered
disclosure approach designed to provide investors with key information
relating to the contract's terms, benefits, and risks in a concise and
more reader-friendly format, with access to more detailed information
available online and electronically or in paper format on request. The
proposed rule would permit satisfaction of any portfolio company
prospectus delivery obligations if, among other conditions, the
portfolio company summary and statutory prospectuses are posted at the
website address specified on the variable contract summary prospectus.
    We are also proposing to amend the registration forms for variable
contracts to update and enhance the disclosure regime for these
investment products. Additionally, we are proposing to require
registrants to use Inline XBRL when filing certain disclosures
contained in the contract statutory prospectus with the Commission.
Finally, if the proposed summary prospectus framework is adopted, the
Commission would take the position that if an issuer of an existing
contract does not file post-effective amendments to update a variable
contract registration statement and does not provide updated
prospectuses to existing investors, under certain circumstances, this
would not provide a basis for enforcement action so long as investors
receive certain alternative disclosures (the Commission's position on
``Alternative Disclosure Contracts,'' as discussed above \640\).\641\
---------------------------------------------------------------------------

    \640\ See supra section II.C. Under the Commission's position,
the Commission would permit ``Alternative Disclosure Contracts,''
i.e., contracts operating in the manner described in the Staff
Letters discussed in section II.C supra as of the effective date of
any final summary prospectus rules, to continue to operate in such
manner. For all other contracts, the Commission's position would not
be applicable, and therefore variable contract issuers would be
required to file post-effective amendments to update their
registration statements and provide updated prospectuses under
current regulatory requirements, and could avail themselves of the
summary prospectus framework as adopted.
    \641\ As noted above, the Commission is proposing certain
technical and conforming amendments. With respect to those intended
to reflect proposed rule 498A and the amendments to the registration
forms, we do not believe there are any economic effects of these
amendments that can be separated from the economic effects of
proposed rule 498A and the proposed amendments to the registration
forms. In addition, we do not believe there are any economic effects
of the proposed technical amendments regarding certain variable life
insurance rules, since market participants have already adjusted to
the changes enacted by NSMIA that the amendments would reflect in
the rules. Similarly, we do not believe there are any economic
effects of the proposed rescission of certain rules and forms
relating to the rights of periodic payment plan certificate holders,
as the 2006 amendments to section 27 of the Investment Company Act
barred new issuances of such certificates, and we believe the notice
rights of holders of certificates issued before those amendments
have since expired. For those reasons, the economic effects of these
technical and conforming amendments are not addressed separately in
this section.
---------------------------------------------------------------------------

    We note that, where possible, we have attempted to quantify the
costs, benefits, and effects on efficiency, competition, and capital
formation expected to result from the proposed rule. In some cases,
however, we are unable to quantify the economic effects because we lack
the information necessary to provide a reasonable and reliable
estimate. For example, because summary prospectuses offer a less
lengthy, less complex disclosure alternative compared to statutory
prospectuses, we expect that readership of variable contract disclosure
would increase. We do not have data on the extent to which the use of
summary prospectuses enhances readership compared to a scenario in
which variable contract investors were only to receive a statutory
prospectus and not a summary prospectus.\642\ Similarly, summary

prospectuses could reduce the amount of time and effort investors
require making an investment decision. We do not have data on the
extent to which variable contract summary prospectuses would reduce the
amount of time and effort investors require to make an investment
decision, or the value of that time and effort to investors.\643\ In
those circumstances in which we do not have the requisite data to
assess the impact of the proposal quantitatively, we have qualitatively
analyzed the economic impact of the proposed rule.
---------------------------------------------------------------------------

    \642\ Prior to the Commission's 2009 adoption of mutual fund
summary prospectus rules, the Commission engaged a consultant to
conduct focus group interviews and a telephone survey concerning
investors' views and opinions about various disclosure documents
filed by companies, including mutual funds. During this process,
investors participating in focus groups were asked questions about a
hypothetical Summary Prospectus. Investors participating in the
telephone survey were asked questions relating to several disclosure
documents, including mutual fund prospectuses. See Abt SRBI, Inc.,
Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May
2008), available at https://www.sec.gov/comments/s7-28-07/s72807-142.pdf. Although the results from the investor testing reflect
stated investor preferences, they do not provide us with information
with respect to the extent to which variable contract investors
would actually be more likely to read a variable contract summary
prospectus relative to a statutory prospectus.
    \643\ Id. The survey results do not provide data on the extent
to which a variable contract summary prospectus would actually
reduce the amount of time and effort required to make an investment
decision using summary prospectuses rather than statutory
prospectuses.
---------------------------------------------------------------------------

B. Economic Baseline

    We are concerned that the volume, format, and content of
disclosures in the variable contract context may make it difficult for
investors to find and understand key information that they may want to
make an informed investment decision. Section III.B.1 below provides an
overview of the variable products market, including discussion of total
assets, sales, organizational structures, and investor demographics.
Our view of this market is based on statistics that describe the
variable annuity market because we have not identified a reliable data
source of information on the variable life insurance market. We invite
commenters to provide data to assist us in forming a more complete
understanding of the variable life insurance portion of the overall
variable products market. Section III.B.2 provides an overview of
existing statutory and regulatory disclosure requirements for variable
products.
1. Overview of Variable Products Market
    In 2017 there were a total of 2,327 unique variable annuity
products offered by a total of 33 companies.\644\ The average number of
portfolio companies offered per registered contract was 59.\645\ The
total number of variable annuity contracts in force was 18.7 million,
with an average individual contract value of $106,187.\646\ Net assets
totaled $1,985.7 billion.\647\
---------------------------------------------------------------------------

    \644\ IRI Fact Book, supra note 8, at 170.
    \645\ Id.
    \646\ Id.
    \647\ Id.
---------------------------------------------------------------------------

    Also in 2017, variable annuity sales totaled $91.8 billion.\648\ Of
the total sales, $59.3 billion (65% of total sales) were to qualified
plans and $32.5 billion (35%) were to non-qualified plans.\649\
Investors purchased variable annuities across various distribution
channels--captive agents, $34.6 billion (38% of total sales);
independent financial planners/NASD firms, $33.4 billion (36%); banks/
credit unions, $8.7 billion (10%); wirehouses/regional broker-dealers,
$12.0 billion (13%); and direct response, $3.1 billion (3%).\650\
---------------------------------------------------------------------------

    \648\ Id. at 167.
    \649\ Id.
    \650\ Id. at 169. The IRI Fact Book defines (1) a ``captive
agent'' as a career or general agent who typically only sells
products issued by an affiliated company, (2) ``independent
financial planners/NASD firms'' as independent firms not affiliated
with major national banks, regional banks, or captive firms, and (3)
wirehouses as large, national full service firms. Under direct
response, the investor purchases directly without relying on a third
party. See Lee Covington, ``The Impact of Third-Party Distribution
Channels,'' presented at the National Association of Insurance
Commissioners and the Center for Insurance Policy and Research State
of the Life Insurance Industry Symposium on October 25, 2012,
available at http://irionline.org/docs/default-source/default-document-library/the-impact-of-third-party-distribution-channels-.pdf?sfvrsn=0).
---------------------------------------------------------------------------

    A variable contract investor may allocate his or her contract
purchase payments to a range of options offered through an insurance
company's separate account. Separate accounts may be registered as
management companies or UITs. As of the end of calendar year 2017,
there were five separate accounts registered as management companies
and 723 structured as UITs.\651\
---------------------------------------------------------------------------

    \651\ Of the 723 separate accounts organized as UITs, 435 were
variable annuity separate accounts and 288 were variable life
separate accounts. This information is based on registration
statement filings on Form N-3, Form N-4, and Form N-6 with the
Commission.
---------------------------------------------------------------------------

    Eighty-six percent of individual annuity investors purchased their
first annuity before age 65, including 47% who were between the ages of
50 and 64 years old.\652\ The average age of investors at first
purchase of an annuity is 51.\653\ The average current age of annuity
investors is 70.\654\ Eighty percent of individual annuity investor
households have incomes under $100,000.\655\ Sixty percent of household
incomes are below $75,000, and 35% are below $50,000.\656\
---------------------------------------------------------------------------

    \652\ Gallup Survey, supra note 9, at 8.
    \653\ Id.
    \654\ Id.
    \655\ Id. at 8 and 9.
    \656\ Id. at 9. Also, according the U.S. Census Bureau, in 2016
72% of households had incomes of less than $100,000, 60% had incomes
of less than $75,000, and 43% had incomes of less than $50,000. See
U.S. Census Bureau, U.S. Income and Poverty in the United States:
2016 (Sept. 2017), available at https://www.census.gov/data/tables/2017/demo/income-poverty/p60-259.html.
---------------------------------------------------------------------------

2. Statutory and Regulatory Disclosure Requirements
    Currently, the default method for delivering the variable contract
prospectus and the underlying portfolio company prospectuses is by
printing and mailing paper copies of the documents to investors. While
the costs of providing paper copies of variable contract prospectuses
are borne by the insurer, the allocation of the costs of printing and
mailing the portfolio company prospectuses depends on the terms of the
participation agreement between the insurance company and the portfolio
company.\657\ We understand that most insurers also offer investors the
option to elect to receive the variable contract prospectus and
portfolio company prospectuses electronically. Investors who have opted
for electronic delivery of prospectuses typically receive an email from
the insurer containing a link to a website where the materials are
available.
---------------------------------------------------------------------------

    \657\ We expect that costs borne by insurers and portfolio
companies in supplying variable contracts to the market will,
ultimately, be borne by contract investors through the fees that
investors pay.
---------------------------------------------------------------------------

    Because insurers are not required to report investors' delivery
elections to the Commission, we lack verifiable data on the percentage
of variable contract prospectuses that are currently delivered
electronically. In a 2016 letter to the Commission, one commenter
estimated based on a survey of insurers conducted in 2015 that,
generally, less than 15% of contract owners have affirmatively
consented to electronic delivery.\658\ Another industry source
estimated in a 2016 report that approximately 5% of annuity investors
had opted for electronic delivery at that time.\659\ Based on these
estimates, and with consideration for the general increase in
electronic delivery rates over time demonstrated in other investment
products,\660\ we estimate that currently

15% of variable contract statutory prospectuses and portfolio company
summary prospectuses are delivered electronically.\661\
---------------------------------------------------------------------------

    \658\ Comment Letter of the Committee of Annuity Insurers on
Proposed Rule 30e-3 (Jul. 22, 2016), available at https://www.sec.gov/comments/s7-08-15/s70815-612.pdf.
    \659\ See Broadridge, Digital Transformation of Insurance
Communications (2016), available at https://www.broadridge.com/_assets/pdf/digital-transformation-ins-comm.pdf.
    \660\ See, e.g., Memorandum from the Division of Investment
Management re: Meeting with Broadridge (Sept. 27, 2017) (including
attachments thereto containing the survey data presented), available
at https://www.sec.gov/comments/s7-08-15/s70815-2604201-161127.pdf
(demonstrating increasing rates of electronic delivery in investment
company fund reports).
    \661\ We understand that variable contract investors typically
make a single delivery method election that applies to both the
variable contract statutory prospectus and the portfolio company
prospectuses.
---------------------------------------------------------------------------

    As discussed in section II.C above, Commission staff has issued a
series of no-action letters, referred to in this release as the ``Staff
Letters,'' stating that the staff would not recommend enforcement
action if issuers did not update the variable contract registration
statement and deliver updated prospectuses to existing investors, so
long as certain conditions were met, including sending alternative
disclosures to investors. We estimate that as of the end of calendar
year 2017, approximately 14% of existing variable annuity contracts had
issuers that were operating in the manner that the Staff Letters
describe (hereinafter, we refer to contracts whose issuers are
currently operating in the manner that the Staff Letters describe as
``In-Force Alternative Disclosure Contracts'').\662\
---------------------------------------------------------------------------

    \662\ Of the 1,021 variable annuity registration statements on
file, 521 registration statements appear to be for In-Force
Alternative Disclosure Contracts. Of the 521, we understand that 517
are for contracts whose issuers are operating in the manner
described in letters in which the staff stated that a circumstance
associated with its determination not to recommend enforcement
action was that the relevant registration statement have 5,000 or
fewer existing investors. We understand that the remaining four
registration statements are for contracts whose issuers are
operating in the manner described in letters in which the number of
existing investors described by the staff was greater than 5,000.
While there is no data in the registration statements regarding the
number of current investors, we assume that registrants are
operating in the manner described in the Staff Letters entailing
circumstances in which a contract has 5,000 or fewer investors. As a
result, we estimate that these 517 registration statements represent
a maximum of 2.59 million investors. Staff estimates that the
remaining four registration statements represent at most 90,542
investors. See supra footnote 366. As a result, we estimate that up
to 2.68 million investors may hold In-Force Alternative Disclosure
Contracts (14% of the total number of contracts). Because we lack
reliable data on the variable life insurance market, we have not
estimated the proportion of existing variable insurance contracts
that are In-Force Alternative Disclosure Contracts.
---------------------------------------------------------------------------

C. Benefits and Costs of the Proposed Rule

1. Optional Summary Prospectus Regime
    The proposed rule would create a choice for insurers. They may
continue to meet their prospectus delivery obligations by providing the
statutory prospectus, or they may satisfy these obligations by
providing a summary prospectus and making statutory prospectuses and
other required documents available online. Those insurers that expect
to benefit by providing summary prospectuses will choose to rely on the
proposed rule to meet their prospectus delivery obligations.\663\ Those
insurers that do not expect to benefit from this optional prospectus
delivery regime will choose to continue to provide statutory
prospectuses to investors.\664\
---------------------------------------------------------------------------

    \663\ If the expected costs of using summary prospectuses exceed
the expected benefits of doing so, insurers could simply choose to
maintain the status quo and continue to deliver statutory
prospectuses to investors.
    \664\ Insurers that do not use summary prospectuses could be at
a competitive disadvantage if investors choose variable products
based on a preference for summary prospectuses, either because
investors prefer summary prospectuses or because insurers that use
summary prospectuses have lower expenses due to savings of printing
and mailing costs. We expect that insurers would take any such
competitive effects into account when assessing the costs of using
summary prospectuses.
---------------------------------------------------------------------------

    If insurers choose to meet their prospectus delivery obligations by
delivering summary prospectuses to investors, with other documents
available online, investors will then have a choice as well. Under the
layered disclosure framework we are proposing, investors will receive
information in the form of a summary prospectus, with more detailed
information available online if the investor chooses to access it.
Thus, investors can continue to review the statutory prospectuses by
accessing them online, or they may request paper or electronic delivery
of statutory prospectuses on an ad hoc basis. Alternatively, investors
may choose only to consult the summary prospectuses. Further, if
investors want to rely on some combination of summary and statutory
prospectuses to receive information about the contract, that choice is
available to them as well.
    We expect a vast majority of insurers will choose to use summary
prospectuses. Thus, we expect that the vast majority of investors will
have the option to use both summary prospectuses and statutory
prospectuses in their decision-making, in whatever proportion investors
think is best for their preferences. We discuss below the benefits and
costs to both investors and insurers of the new options presented by
the proposed contract summary prospectus regime and associated new
optional delivery method for portfolio company prospectuses.
a. Benefits and Costs for Investors
i. Proposed Summary Prospectus for Variable Contracts
(a) Benefits
(1) Initial Summary Prospectus
    Should insurers choose to use summary prospectuses, investors may
benefit in a number of ways.\665\ Variable contract prospectuses
(particularly those that include optional benefits) are typically
lengthy and complex, and they also may describe different versions of
the contract in one prospectus, some of which may no longer be
available to new investors. In addition, investors generally allocate
their purchase payments to a range of portfolio companies, each of
which also has its own prospectus. Because industry practice is to
bundle all portfolio company prospectuses with the variable contract
prospectus, the disclosure documents that are delivered to investors at
purchase and on an annual basis can be voluminous.
---------------------------------------------------------------------------

    \665\ Some investors may prefer to read statutory prospectuses,
and therefore, the advantages associated with summary disclosure, as
described in this section, may not apply to those investors. Because
the statutory prospectus would, under the proposed rule, be
available online and in paper or electronic format upon request, we
recognize that the need to take additional action to review a
statutory prospectus imposes some costs for these investors, which
are discussed below.
---------------------------------------------------------------------------

    First, investors are likely to benefit from the simplification of
disclosure associated with initial summary prospectuses. We understand
that contract statutory prospectuses may include disclosure about
contract features and options that the registrant may no longer offer
to new investors. Aggregating disclosures for multiple contracts, or
currently-offered and no-longer-offered features and options of a
single contract, creates complexity that can hinder investors from
distinguishing between contract features and options that apply to them
and those that do not.\666\
---------------------------------------------------------------------------

    \666\ Existing research notes that individuals exhibit limited
ability to absorb and process information. See Nisbett RE & Ross L.
Human Inference: Strategies and Shortcomings of Social Judgment
(1980); David Hirshleifer & Siew Hong Teoh, Limited attention,
information disclosure, and financial reporting, Journal of
Accounting and Economics 36, 337-386 (Dec. 2003).
---------------------------------------------------------------------------

    For example, a separate account could offer different contracts
over time, but with the contracts having substantially similar names.
Likewise, separate accounts could offer different contracts at a single
point in time, but with the contracts also having substantially similar
names. Thus, contract investors reviewing lengthy statutory
prospectuses may find it difficult,

confusing, and time-consuming to identify disclosures related to
contract terms and features that are relevant to their investments.
These characteristics of existing variable contract statutory
prospectuses could result in a risk of inefficient allocation of funds
among portfolio companies in variable contracts or inefficient matching
of investors to variable contracts. Incomplete information about the
variable contracts made available to investors may cause them to over-
or underinvest in variable contracts or to misallocate parts of their
investment portfolio held outside of variable contracts.
    In contrast, the proposed initial summary prospectus would be
limited to describing only the contract and features currently
available under the statutory prospectus. We believe this narrower
focus could facilitate investors' understanding of their variable
contract's features and risks and make these features and risks more
salient. In reviewing the more targeted information in the initial
summary prospectus, investors will be able to more easily and more
efficiently understand the product they are investing in, leading to
more informed investment choices.
    Moreover, the initial summary prospectus is designed to provide
investors with key information relating to the contract's key terms,
benefits, and risks. The overview would describe the parties to the
contract (the issuer and investor), and provide readers with basic
information relevant to the cash flows of the contract, such as premium
payments and benefits. Further, the Key Information Table includes
aspects of variable contracts that investors have most frequently
stated that they failed to fully understand according to the complaints
database maintained by the Commission's Office of Investor Education
and Advocacy,\667\ including: (1) Fees, including surrender charges;
(2) risk of loss of principal and/or lack of guarantees of income; (3)
illiquidity prior to the pay-out period; (4) tax consequences; (5)
death benefits; and (6) compensation of investment professionals.\668\
---------------------------------------------------------------------------

    \667\ See supra note 105.
    \668\ See supra section II.A.1.c.ii(b). The Commission's Office
of Investor Education and Advocacy offers online resources designed
to enhance investor understanding of variable contract investments.
See, e.g., https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-variable-annuities%E2%80%94-introduction.
---------------------------------------------------------------------------

    Later sections of the initial summary prospectus would provide
investors more detailed information about the cash flows related to
contract purchase. One section would provide information about cash
flows to the insurer, such as initial and subsequent purchase and
premium payments. Other sections discuss cash flows investors can
expect to receive, such as death benefits and other benefits. The
initial summary prospectus for variable life insurance contracts also
includes a section on how a contract could lapse, and thereby reduce
payouts to investors. Finally, a section on withdrawal and surrenders
discusses how accessing the money in a variable contract early affects
the payouts that an investor should expect to receive. This basic
information about cash flows would help investors value a variable
contract and determine whether the contract would help them meet their
financial goals. Taken together, the concise content provided in the
initial summary prospectus could facilitate investors' evaluation and
comparison of contracts at the time of investment and re-evaluation of
contracts during the free look period. This could reduce the risk of
inappropriate investments in variable contracts or inefficient matching
of investors to variable contracts.
    In addition, given the time required to review a statutory
prospectus, investors may benefit from summary prospectuses because
they offer a shorter alternative to statutory prospectus disclosure.
Indeed, there is evidence that suggests that consumers benefit from
summary disclosures.\669\ Within the specific context of investing,
there is evidence from related contexts that suggests that summary
prospectuses allow investors to spend less time and effort to arrive at
the same portfolio decision as if they had relied on a statutory
prospectus.\670\ This research is consistent with the 2012 Financial
Literacy Study, which showed that at least certain investors favor a
layered approach to disclosure with the use, wherever possible, of
summary documents containing key information about an investment
product or service.\671\
---------------------------------------------------------------------------

    \669\ There is evidence that the summarization of key
information is useful to consumers. See, e.g., Agarwal S,
Chomsisengphet S, Mahoney N, Stroebel J., Regulating consumer
financial products: Evidence from credit cards, NBER Working Paper
19484 (2013). The authors find that a series of requirements in the
CARD Act, including provisions designed to promote simplified
disclosure, has produced decreases in both over-limit and late fees,
saving US credit card users $20.8 billion annually; see also Clark
R, Maki J, Morrill M.S., Can simple informational nudges increase
employee participation in a 401(k) plan?, NBER Working Paper 19591
(2013). The authors find that a flyer with simplified information
about an employer's 401(k) plan, and about the value of
contributions compounding over a career, had a significant effect on
participation rates.
    \670\ Beshears Paper, supra note 43. We note, however, that
while the authors find evidence that investors spend less time
making their investment decision when they are able to use summary
prospectuses, there is no evidence that the quality of their
investment decisions is improved. In particular, ``On the positive
side, the Summary Prospectus reduces the amount of time spent on the
investment decision without adversely affecting portfolio quality.
On the negative side, the Summary Prospectus does not change, let
alone improve, portfolio choices. Hence, simpler disclosure does not
appear to be a useful channel for making mutual fund investors more
sophisticated . . .'' (p. 13).
    \671\ See 2012 Financial Literacy Study, supra note 39.
---------------------------------------------------------------------------

    Further, investors allocate their attention selectively,\672\ and
the sheer volume of disclosure that investors receive about variable
contracts and the underlying portfolio companies may discourage
investors from reading contract statutory prospectuses (and the
prospectuses of the underlying portfolio companies).\673\ The
observations of a telephone survey conducted on behalf of the
Commission with respect to mutual fund statutory prospectuses (which
are typically shorter than variable contract statutory prospectuses)
are consistent with the view that the volume of disclosure may
discourage investors from reading statutory prospectuses.\674\ That
survey observed that many mutual fund investors do not read statutory
prospectuses because they are long, complicated, and hard to
understand. To the extent summary prospectuses increase readership of
variable contract disclosures, they could improve the efficiency of
portfolio allocations made on the basis of disclosed information for
those investors who otherwise would not have read the statutory
prospectus.\675\
---------------------------------------------------------------------------

    \672\ See Loewenstein, George, Cass R. Sunstein, and Russell
Golman, Disclosure Psychology Changes Everything, 6 Annual Review of
Economics 391-419 (2014).
    \673\ See supra note 344.
    \674\ See supra note 642.
    \675\ Review of the complaints database maintained by the
Commission's Office of Investor Advocacy and Education revealed that
the most common type of complaint submitted by variable contract
investors involved an investor's belief that a sales agent had made
misrepresentations about the variable contract and/or recommended a
variable contract despite the product being unsuitable for the
investor. To the extent that summary prospectuses increase
readership of variable contract disclosures, they may also
facilitate stronger investor protection.
---------------------------------------------------------------------------

    Moreover, potential variable contract investors that choose to read
disclosures despite their length may face ``information overload,''
causing them to make inefficient decisions about the size of their
variable contract positions, their selection of optional benefits, or
the

allocation of funds across underlying portfolio companies.\676\
---------------------------------------------------------------------------

    \676\ See Paredes, Troy A., Blinded by the light: Information
overload and its consequences for securities regulation, 81 Wash. U.
Law Rev. 417 (2003).
---------------------------------------------------------------------------

    We note that these benefits are potentially magnified given the
demographic profile of variable contract investors. The average age of
annuity investors is 70.\677\ Studies indicate that exposure to
financial harms may increase with age, potentially exacerbated by a
decline in the capacity to process financial information for some
individuals.\678\ To the extent that summary prospectuses allow
investors to spend less time and effort to understand their investments
and arrive at investment decisions, that benefit is magnified in the
context of variable contracts given the demographic profile of the
underlying investor base.\679\
---------------------------------------------------------------------------

    \677\ See supra note 652.
    \678\ See e.g., Schroeder, David H., and Timothy A. Salthouse,
``Age-related effects on cognition between 20 and 50 years of age,''
Personality and individual differences 36.2 (2004): 393-404;
Salthouse, Timothy A., ``Aging and measures of processing speed,''
Biological psychology 54.1-3 (2000): 35-54; Fair, Ray C., ``How Fast
Do Old Men Slow Down?'' The Review of Economics and Statistics
(1994): 103-118; Ulman Lindberger and Paul B. Baltes, ``Sensory
functioning and intelligence in old age: A strong correlation,''
Psychology and Aging, 9 (1994): 339-355; Ulman Lindberger and Paul
B. Baltes, ``Intellectual functioning in old and very old age:
Cross-sectional results from the Berlin Aging Study,'' Psychology
and Aging, 12, (1997): 410-432; Patricia D. Struck, ``NASAA
Statement at SEC Seniors Summit'', available at http://www.nasaa.org/860/nasaa-presidents-statement-at-sec-seniors-summit/;
Karla Pak and Doug Shadel, ``AARP Foundation National Fraud Victim
Study'', (2011).
    \679\ If there are investors who would choose to rely on
statutory prospectuses, one option available to them is to access
the statutory prospectuses in electronic form online. If older
investors are less likely to use the internet, that would attenuate
the overall benefits of the rule for the older demographic.
---------------------------------------------------------------------------

    The presentation proposed for the initial summary prospectus may
also reduce the investor effort required to compare variable products
when an investor considers a new investment. Information provided in a
concise, user-friendly presentation could allow investors to compare
information across products and as a result, may lead investors to make
decisions that better align with their investment goals.\680\ For
example, the proposed rule requires insurers to distill certain key
product information into tables, which could facilitate comparison
across different products. The effect of the proposed initial summary
prospectus alone on the ability of the investor to compare products may
be limited, however, by the extent to which variable contracts are sold
through agents.\681\
---------------------------------------------------------------------------

    \680\ Research suggests that individuals are generally able to
make more efficient decisions when they have comparative information
that allows them to assess relevant trade-offs. See, e.g., Hsee
C.K., Loewenstein G.F., Blount S, Bazerman M.H., Preference
reversals between joint and separate evaluations of options: A
review and theoretical analysis, 125 Psychological Bulletin 576-90
(1999); see also Kling J.R., Mullainathan S., Shafir E., Vermeulen
L.C., Wrobel M.V., Comparison friction: Experimental evidence from
Medicare drug plans, 127 Quarterly Journal of Economics 199-235
(2012). In a randomized field experiment, some senior citizens
choosing between Medicare drug plans were randomly selected to
receive a letter with personalized, standardized, comparative cost
information. Plan switching was 28% in the intervention group, but
only 17% in the comparison group, and the intervention caused an
average decline in predicted consumer cost of about $100 a year
among letter recipients.
    \681\ However, we expect the proposed requirement to file
certain information from variable contract statutory prospectuses in
Inline XBRL would facilitate data collection by third-party
aggregators and the trade press as well as facilitate investors'
comparison of variable products. See infra section III.C.4.
---------------------------------------------------------------------------

    Additionally, the proposed framework for variable contract summary
and statutory prospectuses also includes design elements to facilitate
investor use. In particular the proposed rule includes requirements for
linking both within the electronic version of a contract statutory
prospectus and between the electronic versions of the contract
statutory prospectus and the contract summary prospectus. The linking
requirement would permit investors who use the electronic versions of
contract prospectuses to quickly navigate between related sections
within the contract statutory prospectus and back and forth between
related sections of the contract summary prospectus and the contract
statutory prospectus.\682\ Further, the proposed rule would also
require that investors either be able to view the definition of each
special term used in an online summary prospectus upon command, or to
move directly back and forth between each special term and the
corresponding entry in any glossary or list of definitions that the
summary prospectus includes. This requirement would facilitate
understanding of terms that may be confusing or unfamiliar among
investors viewing the documents online.
---------------------------------------------------------------------------

    \682\ In response to a recent rulemaking proposal requiring
registrants to include a hyperlink to each exhibit identified in the
exhibit index in any registration statement or report that is
required to include exhibits under Item 601 of Regulation S-K or
under Form F-10 or Form 20-F, commenters agreed that hyperlinking
would make it easier and reduce the amount of time required for
investors to navigate to related documents. See Exhibit Hyperlinks
and HTML Format Release No. 34-80132 (March 1, 2017) [82 FR 14130
(March 17, 2017)] at nn.85 and 86.
---------------------------------------------------------------------------

    Finally, the proposed rule would additionally require that contract
documents required to be posted online remain available on the website
for at least 90 days. This requirement mirrors the online availability
requirement for the mutual fund summary prospectuses used by most
portfolio companies. As a result, investors who prefer to access the
disclosure documents online could be certain that the documents for
both the contract and the portfolio companies would be available for
the same period of time.
(2) Updating Summary Prospectus
    The proposed updating summary prospectus will have many of the same
benefits for investors associated with the initial summary prospectus
discussed above associated with presenting key information in an easier
and less time-consuming manner for investors. Specifically, because
many terms of the variable contract do not change from year-to-year,
the contract statutory prospectus may contain large amounts of
disclosure that is duplicative of disclosure that the investor has
previously received. Those changes that do occur may be important to
investors, but the disclosure about these changes could be difficult
for the investor to identify given the volume of prospectus disclosure
that investors currently receive, and the current lack of a requirement
to identify new or changed information.
    Under the proposed rule, the updating summary prospectus would
include a concise description of important changes affecting the
statutory prospectus disclosure relating to certain topics that
occurred within the prior year--namely the Fee Table, the standard
death benefit, other benefits available under the contract, and
portfolio companies available under the contract. We believe that these
are topics that are most likely to entail contract changes and, for the
reasons previously noted, are the types of contract changes most likely
to be important to investors because they affect how investors evaluate
variable contracts and are relevant to investors when making additional
investment decisions or otherwise monitoring their contract. The
proposed updating summary prospectus, if used by insurers to satisfy
their prospectus delivery obligations, would likely reduce the burden
on investors and increase their understanding of their contract by
highlighting certain changes to the contract made during the previous
year, while foregoing the repetition of most information that had
remained unchanged.\683\
---------------------------------------------------------------------------

    \683\ Unlike with the initial summary prospectus, the proposed
rule permits insurers to describe multiple contracts in the updating
summary prospectus. However, given the limited number of changes in
each contract on an annual basis, we do not believe that permitting
multiple contracts in the updating summary prospectus will create
significant confusion for investors or reduce any of the benefits
associated with the description of key changes for each contract.
    We further recognize that the changes highlighted in the
updating summary prospectus are only those relative to the
immediately preceding updating summary prospectus and statutory
prospectus. Accordingly, if an investor wanted to understand the
changes to his or her contract since he or she initially purchased
the contract, the investor would need to review all of the updating
summary prospectuses (or each updated statutory prospectus).
However, we have designed the updating summary prospectus to allow
investors to better focus their attention on new or updated
information relating to the contract. As noted above, we believe
that existing investors in a variable contract would benefit more
from a brief summary of changes that have occurred in the contract
than a document like the initial summary prospectus, which is
designed for someone making an initial investment decision.
Therefore, we believe that requiring the proposed updating summary
prospectus to only provide information on the most recent changes
strikes the appropriate balance between increasing investor's
understanding of and access to information about changes in the
updated statutory prospectus and imposing additional costs on
insurers to create more tailored updating disclosures comparing the
current state of the contract to the original contract for each
contract holder.

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

    The updating summary prospectus also would include the Key
Information Table. The inclusion of this key information could benefit
investors by reminding them of the most important features of the
contract, including the contract's fees and expenses, risks,
restrictions, tax implications, and investment professional
compensation. Finally, the updating summary prospectus would include an
appendix that provides summary information about the portfolio
companies that the registrant offers under the contract. The inclusion
of this portfolio company information could benefit investors by
reminding them of one of the most important decisions they face during
the lifecycle of a contract--that is, whether and where to reallocate
funds among the portfolio companies or investment options available to
them.
(b) Costs
    While we believe that, should insurers opt to use summary
prospectuses, the majority of investors would benefit from their
disclosures, certain investors may incur costs. For example, although
research indicates that investors generally prefer to receive summary
disclosures \684\ there may be investors who prefer to rely on
statutory prospectuses when making investment decisions. While
statutory prospectuses will continue to be available online and in
paper or electronic copy upon request, access to those statutory
prospectuses will require investors to take additional steps, imposing
some burden. For example, investors choosing to access the statutory
prospectus online rather than requesting a paper copy will need to
manually enter a hyperlink from a paper updating summary prospectus or
click on a link to a website containing the statutory prospectus.\685\
To the extent that internet access and use among variable contract
investors is not universal, those investors without home internet
access might experience a reduction in their ability to quickly and
easily access statutory prospectus information.\686\ Even for those
investors with home internet access, there may be some resistance to
taking the additional step of accessing the statutory prospectus
online.
---------------------------------------------------------------------------

    \684\ See supra note 671.
    \685\ Investors may also call or email the insurer to obtain the
statutory prospectus.
    \686\ According to the most recent U.S. census data,
approximately 77.2% of U.S. households had some form of internet
access in their home in 2015, and 86.8% had a computer (e.g.,
desktop, laptop, tablet or smartphone). See Camille Ryan & Jamie M.
Lewis, Computer and internet Usage in the United States: 2015 (Sept.
2017), available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf; see also Sarah Holden,
Daniel Schrass & Michael Bogdan, Ownership of Mutual Funds,
Shareholder Sentiment, and Use of the internet, 2017 (Oct. 2017),
available at https://www.ici.org/pdf/per23-07.pdf (``[i]n mid-2017,
95 percent of households owning mutual funds had internet access, up
from about two-thirds in 2000'' and ``86 percent of mutual fund-
owning households with a household head aged 65 or older had
internet access in mid-2017''); Andrew Perrin & Maeve Duggan,
Americans' internet Access: 2000-2015 (June 2015), available at
http://www.pewinternet.org/2015/06/26/americans-internet-access-2000-2015/ (finding in 2015, 84 percent of all U.S. adults use the
internet).
---------------------------------------------------------------------------

    Moreover, those investors who prefer paper copies of statutory
prospectuses and do not have ready access to the internet (and the
ability to print out the statutory prospectus that is made available
online \687\), would not be able to elect paper delivery of statutory
prospectuses on a going-forward basis. Rather, they would need to make
an ad hoc request for paper delivery of the statutory prospectus each
time one is made available. This may delay their review of the
statutory prospectus as they await paper delivery, or, in some cases,
if the investor does not take the additional step to request paper
delivery, may result in the investor not receiving the statutory
prospectus in their preferred format and ultimately receiving less
information than they would like about their contract.\688\ We believe
that possibility is unlikely in this circumstance, however. We believe
investors who prefer statutory prospectuses rather than summary
prospectuses are likely investors who are willing to seek out detailed
information to inform their investment decisions. We believe that for
these investors, the additional effort required to access the statutory
prospectus online or request paper or electronic statutory prospectuses
would be incrementally minimal.
---------------------------------------------------------------------------

    \687\ See supra section II.A.4.
    \688\ This outcome is suggested by research which finds that
investors can experience a ``status quo bias.'' See, e.g., Richard
H. Thaler and Shlomo Bernatzi, Save More Tomorrow\TM\: Using
Behavioral Economics to Increase Employee Saving, 112:1 Journal of
Political Economy, S164-S187 (2004); Richard H. Thaler and Cass R.
Sunstein, Libertarian Paternalism, 93:2 The American Economic Review
175-179 (2003). Thaler and Sunstein argue that a ``status quo'' bias
results in the continuance of existing arrangements even if better
options are available. The authors illustrate their argument with
higher rates of initial enrollments in employee savings plans when
enrollment is automatic as compared to when employees must first
complete an enrollment form.
---------------------------------------------------------------------------

ii. Proposed Approach to Portfolio Company Prospectus Delivery
    As described in section III.C.1.b below, we anticipate that the new
optional delivery method for portfolio company prospectuses will result
in cost savings from reduced printing and mailing expenses. To the
extent that a portfolio company bears the printing and mailing expenses
associated with portfolio company prospectuses, we expect that the
reductions would benefit the portfolio company, as well as variable
contract investors who have allocated contract value to the portfolio
company (except perhaps in certain circumstances such as where the
portfolio company is operating under an expense limitation
arrangement). To the extent that the insurance company bears these
costs, we expect that the reductions would benefit the insurance
company, which may pass on such cost savings to existing variable
contract investors and to new variable contract investors in the
pricing of variable contracts offered in the future.\689\
---------------------------------------------------------------------------

    \689\ Because the fees charged under variable contracts
investors are typically fixed when the contract is purchased, we
recognize that cost savings realized by the insurance company may
not be passed along to existing investors except in the case of
contracts offered by mutualized insurance companies, which return
any profits they make to their investors.
    We note that we expect the benefit in terms of lower pricing of
variable contracts would be small. We estimate the cost saving, per
prospectus mailed, for the underlying portfolio company prospectuses
to be $0.18. See supra note 700. The average value of a variable
contract investor's investment is $106,187.
---------------------------------------------------------------------------

    While we believe that the proposed framework may benefit investors
through reduced costs, certain investors may incur additional costs.
While the portfolio company prospectuses will be available online and
in paper or

electronically upon request on an ad hoc basis, investors may
experience additional burdens when accessing the prospectuses. As with
the proposed summary prospectus for variable contracts discussed above,
investors who prefer to review paper copies of the portfolio company
prospectuses will be required to either affirmatively request delivery
of paper copies, or bear the costs of printing the electronic versions
of documents accessed through the website.
    Also, as discussed with respect to variable contract prospectuses
above, internet access is not universal among variable contract
investors, and investors who would prefer paper copies of prospectuses
would be required to request paper delivery of those prospectuses on an
ad hoc basis which could, in turn, delay investor review of those
prospectuses.\690\ Further, to the extent that investors prefer paper
copies of prospectuses, but do not request a paper copy or access the
document online, there would be no investor review of those
prospectuses.
---------------------------------------------------------------------------

    \690\ As we discuss in section II.B.2 above, we understand that
sales agents assist investors by providing information about
underlying portfolio companies and sometimes recommending that
investors allocate their contract value into specific portfolio
companies. We anticipate that this would continue under the proposed
framework, and that sales agents would assist investors in
understanding key facts about the portfolio companies, obtaining
portfolio company prospectuses, and understanding the proposed
portfolio company prospectus delivery framework. For this reason, to
the extent that sales agents continue to play a significant role in
providing information about portfolio companies to investors, even
if investors were to no longer automatically receive paper copies of
portfolio company prospectuses, we expect the proposal to yield
lower costs and higher benefits for investors.
---------------------------------------------------------------------------

b. Benefits and Costs for Insurers
i. Proposed Summary Prospectus for Variable Contracts
    The total cost of providing disclosure in any particular framework
is the sum of costs associated with producing the disclosure materials,
including labor and legal fees, and the costs associated with delivery
of the disclosure materials, including printing and mailing costs and
costs of making the disclosures available on a website. Insurers will
benefit from the options provided by the proposed rule, to the extent
that providing layered disclosure through a summary contract prospectus
regime (including costs of producing and delivering initial summary and
updating summary prospectuses and of making statutory prospectuses,
portfolio company prospectuses, and other documents available online)
is less expensive than providing statutory prospectuses to new
investors and updated statutory prospectuses to existing investors
annually, along with portfolio company prospectuses and other related
documents.
    As discussed later in this section, because we expect a primary
driver of the benefit for insurers providing summary prospectuses to be
cost savings associated with no longer printing and mailing lengthy
statutory prospectuses for investors that currently receive these
documents in paper, the magnitude of the benefit depends in part on the
extent to which investors currently elect electronic delivery of
materials associated with their variable contract. The higher the
percentage of investors currently electing electronic delivery rather
than paper, the smaller the benefit derived from foregoing the printing
and mailing costs. Accordingly, to estimate the potential cost
reduction associated with the proposed rule, as noted above, we assume
that 15% of the contract investors currently elect electronic delivery
of the statutory prospectus both at sale, and annually thereafter.\691\
Moreover, we assume that at least 15% of variable contract investors
will continue to elect electronic delivery going forward.
---------------------------------------------------------------------------

    \691\ We lack verifiable data on current electronic delivery
election rates among variable contract investors but are estimating
15% based, in part, on the range of estimates provided by commenters
and with consideration for the general increase in electronic
delivery rates over time demonstrated in other investment products.
See supra notes 656, 659, and 660. If variable contract investors
exhibit lower electronic delivery rates today than we estimate, the
cost savings from reducing the amount of paper mailings under the
proposed amendments would be higher than estimated here. If variable
contract investors exhibit higher electronic delivery rates today
than we have estimated, the cost savings from reducing the amount of
paper mailings under the proposed amendments would be lower than
estimated here.
---------------------------------------------------------------------------

    To estimate the overall impact of the proposed rules on insurers'
cost of prospectus delivery, we begin by estimating the number of
variable contract statutory prospectuses delivered in paper format.
This requires a number of assumptions:

     We estimate that insurers will ultimately use summary
prospectuses for 95% of contracts \692\ that do not operate in the
manner that the Staff Letters describe.\693\
---------------------------------------------------------------------------

    \692\ In response to the 2012 Financial Literacy Study, the
Committee of Annuity Insurers submitted a comment letter in which it
states that ``The Committee believes the Commission should embrace
the use of layered disclosure for variable annuities (and other
retail products, including other SEC-registered annuities), as it
has done for mutual funds.'' According to its comment letter, the
Committee of Annuity Insurers ``represent more than 80% of the
annuity business in the United States.'' Although the proposed
layered disclosure framework for variable contracts is not identical
to the corresponding framework for mutual funds and the creation of
initial and updated summary prospectuses may be more costly for
variable contracts than the creation of mutual fund summary
prospectuses, we nevertheless anticipate that choosing to deliver
summary prospectuses will provide cost savings for insurers. Given
expressed industry support for layered disclosure with summary
prospectuses, our experience that approximately 95% of mutual funds
have adopted layered disclosure with summary prospectuses, and our
anticipation that the proposed rule will provide costs savings to
insurers, we believe it is appropriate to assume that 95% of
insurers will choose delivery of summary prospectuses.
    \693\ See supra note 364 and accompanying text.
---------------------------------------------------------------------------

     Issuers of In-Force Alternative Disclosure Contracts
provide alternative disclosures in lieu of statutory
prospectuses.\694\ Based on staff analysis, 54% of variable contract
registration statements are for In-Force Alternative Disclosure
Contracts, and these registration statements apply to up to 14% of
variable annuity contracts.\695\ We further assume that each
investor in an In-Force Alternative Disclosure Contract owns exactly
one policy issued under a registration statement for an In-Force
Alternative Disclosure Contract.
---------------------------------------------------------------------------

    \694\ See supra note 374 and accompanying text.
    \695\ See supra note 662.
---------------------------------------------------------------------------

     We assume 15% of investors elect electronic delivery of
prospectuses.

Together with the baseline estimate of 18.7 million contracts in force
at the end of 2017, these assumptions imply that insurers would no
longer send approximately 13 million statutory prospectuses each
year.\696\
---------------------------------------------------------------------------

    \696\ 18.7 million x (1 - 14%) x 95% x (1 - 15%) = 13.0 million
contracts.
---------------------------------------------------------------------------

    Next, we estimate the number of statutory prospectuses that would
no longer be provided to investors in paper in connection with new
contract purchases. In 2017, there were 18.7 million contracts in
force.\697\ Total sales of variable annuity contracts for 2017 were
$91.8 billion. Assuming that the average size of each variable contract
sold in 2017 is similar to the average size of all variable contracts
in force, we estimate the number of new contracts sold in 2017 was
865,000 contracts. Based on these estimates, we further estimate that
among investors who elect to receive paper copies of prospectuses, the
proposed new option to use a summary prospectus would be applied

to 13 million existing contracts and 698,000 new contracts
annually.\698\
---------------------------------------------------------------------------

    \697\ See supra section III.B.1.
    \698\ See supra note 696. The number of new contracts falling
within the proposed regime is calculated as: 865,000 contracts x (1
- 0.15) x 0.95 = 698,488 contracts.
---------------------------------------------------------------------------

    We next estimate the cost difference, per prospectus, of sending
summary prospectuses (initial summary prospectuses, as well as updating
prospectuses) rather than statutory prospectuses.\699\ We estimate that
printing and mailing expenses for statutory prospectuses are $0.53 per
statutory prospectus.\700\ We estimate that printing and mailing
expenses for initial summary prospectuses and updating summary
prospectuses are $0.35.\701\ Assuming the 2017 level of contracts in
force and contract purchases remains stable, we estimate the printing
and mailing cost to insurers of meeting their disclosure requirements,
as they relate to the delivery of disclosure documents, using initial
and updating prospectuses would decline by up to $108,180 and
$2,340,000,\702\ respectively, for aggregate cost savings of
approximately $2,465,640.\703\
---------------------------------------------------------------------------

    \699\ Variable contract issuers generally maintain current
prospectuses for their products through the filing of annual post-
effective amendments to the registration statements. See supra note
29. As a result, we assume updating prospectuses would be delivered
annually.
    \700\ In response to the Investment Company Reporting
Modernization rulemaking proposal in which we solicited information
with respect to the cost of printing and mailing investment company
shareholder reports, a commenter estimated that the cost of printing
and mailing the reports to be $0.53. See Comment Letter of
Broadridge Financial Solutions, Inc. on Investment Company Reporting
Modernization, File No. S7-08-15 (Aug. 11, 2015) (``Broadridge
Comment Letter''). Although those documents are different from
documents at issue here, we do not have specific data regarding how
the cost of printing and mailing those two sets of documents would
differ. We inferred the $0.53 estimate from Broadridge's estimates
as follows. Broadridge estimates total savings from using summary
reports to be $130 million and savings per report to be $0.18. We
use these two numbers to infer the total number of reports used in
calculations to be approximately 722 million. Broadridge also
estimates the total cost (FY18 estimate) of printing and mailing
shareholder reports to be $382 million. Therefore, we infer the
cost, per report, to be $0.53 (= 382/722).
    \701\ Broadridge Comment Letter. The commenter estimates summary
reports are $0.18 cheaper to print and mail. $0.53 - $0.18 = $0.35.
Although initial summary prospectuses and updating summary
prospectuses are different documents, we do not have specific data
regarding how the cost of printing and mailing those two documents
would be different. Therefore, we infer the cost, per summary
prospectus to be $0.35.
    \702\ Calculated as $0.18 x 13 million = $2,340,000 for updating
summary prospectuses, and $0.18 x 698,000 = $125,640 for initial
summary prospectuses. These calculations assume investors do not
make ad hoc requests for paper prospectus delivery. As a corollary,
insurers that choose to deliver initial summary prospectuses and
updating summary prospectuses would incur delivery costs of
approximately $4,550,000 for updating summary prospectus delivery,
calculated as $0.35 x 13 million, and $244,300 for initial summary
prospectus delivery, calculated as $0.35 x 698,000.
    \703\ Calculated as $2,340,000 + $125,640 = $2,465,640.
---------------------------------------------------------------------------

    As noted earlier in this section, another key component of costs
that insurer will consider when determining whether to provide summary
prospectuses under the proposed rules is the cost of producing the
initial and updating summary prospectuses. Insurers choosing to provide
summary prospectuses would bear a one-time cost of preparing both the
initial summary prospectus and the updating summary prospectus, as well
as costs associated with preparing updated versions of both documents
in the future on at least an annual basis.\704\ We estimate the
aggregate cost to prepare initial and updating summary prospectuses to
be $4,908,960.\705\
---------------------------------------------------------------------------

    \704\ We understand that even those contracts with existing
initial summary prospectuses may have changes that need to be
reflected in an initial summary prospectus sent to new investors,
which will require modifications to the existing initial summary
prospectus. However, we believe that once an initial summary
prospectus is drafted for a particular contract, that document can
serve as a basis for future versions of the initial summary
prospectuses sent to new investors of the contract. Thus, we believe
that drafting an ``updated'' initial summary prospectus will be less
costly than drafting the original initial summary prospectus.
Similarly, we believe that preparing subsequent updating summary
prospectuses will be less costly than preparing the original
updating summary prospectus.
    \705\ See infra note 842.
---------------------------------------------------------------------------

    Insurers that choose to provide summary prospectuses are required
to make statutory prospectuses and other materials available
online.\706\ We estimate the aggregate cost to comply with the proposed
website posting requirements of the rule for documents relating to
variable contracts to be $329,581.\707\
---------------------------------------------------------------------------

    \706\ The requirement that contract disclosure materials be
available online for a period of 90 days mirrors the online
availability requirement for disclosure materials associated with
mutual funds using summary prospectuses, including most portfolio
companies. While there are operational differences between the
variable contract and mutual fund summary prospectus regimes, to the
extent that the proposed rule harmonizes certain requirements, this
could create efficiencies for contracts organized as UITs.
    \707\ See infra note 848.
---------------------------------------------------------------------------

    Insurers are also required to include inter- and intra-document
linking and special terms definitions. One linking requirement would
allow the reader to move back and forth between a table of contents of
the contract statutory prospectus or SAI, and the related sections of
each document. Although prospectuses and SAIs are not required to have
individual headings corresponding to the items in the registration
forms, we assume that the sections of a prospectus or SAI would
correspond with the item requirements of the forms. We estimate that
Form N-3 filers would require 33 back-and-forth internal links, Form N-
4 filers would require 27, and Form N-6 would require 28. The other
linking requirement would allow the reader to move back and forth
between each section of the summary prospectus and any related section
of the contract statutory prospectus and SAI that provides additional
detail. This back-and-forth movement could occur either directly from
the summary prospectus to the relevant section of the statutory
prospectus or SAI, or indirectly by linking from the summary prospectus
to a table of contents in the statutory prospectus or SAI. For our
analysis, we assume direct links as those will tend to be more costly
when compared with indirect linking through a table of contents.
    An initial summary prospectus for a Form N-3 registrant or a Form
N-4 registrant includes eight sections and an initial summary
prospectus for a Form N-6 registrant includes nine sections. However,
the Key Information Table has instructions stating that, wherever
feasible, a registrant should provide cross-references or links to the
location in the statutory prospectus where the subject matter is
described in greater detail. There are 11 sections of the Key
Information Table. Therefore, we estimate that there would be 18 back-
and-forth links between Form N-3 and Form N-4 registrant initial
summary prospectuses and statutory prospectuses, and 19 back-and-forth
links between Form N-6 registrant initial summary prospectuses and
statutory prospectuses.
    An updating summary prospectus for a Form N-3, Form N-4, or Form N-
6 registrant includes three sections, one of which, the Key Information
Table, includes 11 sections. One section is the ``Updated Information
About Your Contract'' section. The number of links in this section
would depend on the number of updates discussed. For example, assuming
discussion of four updates, we estimate the number of back-and-forth
links between a Form N-3, Form N-4, or Form N-6 registrant's updating
summary prospectus and statutory prospectus to be 16.
    The proposed rule would also require that investors either be able
to view the definition of each special term used in an online summary
prospectus upon command (e.g., by ``hovering'' the computer's pointer
or mouse over the term), or to move directly back-and-forth between
each special term and the corresponding entry in any glossary or list
of definitions that the summary

prospectus includes. We assume that registrants could replicate links
to a glossary or the computer code required to implement access to
definitions by ``hovering'' over a term with little or no burden, but
that there would be a burden associated with creating the requisite
link or code for each special term. Accordingly, we estimate the
aggregate cost to comply with the proposed requirement to include
inter- and intra-document linking and special terms definitions as
described above would include 4,138 burden hours and a cost of $552,000
annually.\708\
---------------------------------------------------------------------------

    \708\ In a separate rulemaking, we required registrants that
file registration statements and reports subject to the exhibit
requirements under Item 601 of Regulation S-K, or that file Forms F-
10 or 20-F, to include a hyperlink for each exhibit listed in the
exhibit index of these filings. See Exhibit Hyperlinks and HTML
Format Adopting Release, supra note 682. We estimated the burden of
including hyperlinks to be between one and four hours with 75% of
the burden carried by the registrant internally and 25% of the
burden carried by outside professionals retained by the registrant
at an average cost of $400 per hour. Filings for which we estimated
a burden of four hours had approximately 33 to 35 hyperlinks, on
average. We do not have data on extent to which providing the ``two-
way'' inter- and intra-document linking and special terms
definitions differs from providing ``one-way'' hyperlinks from one
document to another. We estimate the burden of including inter- and
intra-document linking and special terms definitions to be eight
hours with 75% of the burden carried by the registrant internally
and 25% of the burden carried by outside professionals at an average
cost of $400 per hour. We estimate the total burden hours to be
5,518 = (726 registrants) x (95% relying on rule) x (8 burden hours
per registrant). We estimate the burden hours carried by the
registrants internally to be 4,138 = 5,518 x .75. We estimate the
cost of the burden carried by outside professionals to be $552,000 =
(5,518 x .25) x $400.
---------------------------------------------------------------------------

    Finally, funds may incur costs in connection with the requirement
to provide a statutory prospectus and other documents upon request of
an investor. We estimate that the annual cost associated with printing
and mailing these documents would be $500 per registrant.\709\ We
estimate that the aggregate annual costs associated with printing and
mailing statutory prospectuses will be $344,850.\710\
---------------------------------------------------------------------------

    \709\ See infra note 849.
    \710\ See infra note 850.
---------------------------------------------------------------------------

ii. Proposed Approach to Portfolio Company Prospectus Delivery
    Form N-4 and Form N-6 registrants that use summary prospectuses may
also benefit from the option to provide prospectuses for all underlying
portfolio companies online.\711\ While there will be certain costs
associated with complying with the requirements for posting the
portfolio company materials online, as discussed below, we anticipate
that this new optional delivery method will result in overall reduced
costs due to a reduction in printing and mailing costs. To the extent
that insurers bear these costs, we expect the reductions will benefit
the insurance company, which may pass such cost savings on to new
variable contract investors in the pricing of variable contracts
offered in the future, and possibly to existing variable contract
investors. To the extent that a portfolio company bears these costs,
cost savings would typically be passed along to investors.
---------------------------------------------------------------------------

    \711\ See supra section II.B. This new delivery option would not
be available to Form N-3 registrants because they do not have
underlying portfolio companies. As of the end of calendar 2017,
3,385 of 3,422 (99%) registrants were either Form N-4 registrants
(2,393) or Form N-6 registrants (992).
---------------------------------------------------------------------------

    Moreover, as with the reduction in printing and mailing costs
associated with the delivery of the contract statutory prospectus, the
magnitude of these cost savings is dependent on the extent to which
investors currently elect to receive electronic versions of the
portfolio company prospectuses rather than receive them in paper. The
higher the percentage of investors who currently receive paper copies
of portfolio company prospectuses, the greater the reduction in
printing and mailing costs arising from the new delivery option. We
estimate that 85% of investors currently receive paper copies of these
documents.\712\
---------------------------------------------------------------------------

    \712\ We recognize that by permitting the satisfaction of
delivery obligations through the posting of portfolio company
statutory prospectuses online (under the conditions specified in the
proposed rule), there may be a disincentive for mutual funds to
produce a summary prospectus, as concerns about costs of printing
and mailing the statutory prospectus would be reduced. However, the
proposed rule requires, as a condition of relying on the new
delivery method, that the mutual fund summary prospectus be made
available online. In addition, the Commission continues to believe
that the costs of continuing to produce the mutual fund summary
prospectus, which reflects a portion of the statutory prospectus,
would be minimal. See 2009 Summary Prospectus Adopting Release,
supra note 33.
---------------------------------------------------------------------------

    We estimate that printing and mailing expenses for summary
prospectuses for underlying portfolio companies to be $0.53 per set of
prospectuses.\713\ Assuming the 2017 level of contracts in force and
contract purchases remains stable, we estimate the printing and mailing
cost to insurers of meeting their disclosure requirements, as they
relate to the delivery of disclosure documents, would decline by at
least $6,890,000,\714\ for aggregate cost savings of at least
$7,260,000.\715\ Registrants will incur costs associated with making
the underlying portfolio company summary prospectus, statutory
prospectus, SAI, and most recent shareholder reports available online
under the conditions set forth in the proposed rule. We estimate the
cost of making underlying portfolio summary prospectuses available
online to be $478 per registrant.\716\ In 2017, there were a total of
721 N-4 and N-6 registrants.\717\ Therefore, we estimate the aggregate
cost of making the underlying portfolio company summary prospectus,
statutory prospectus, SAI, and most recent shareholder reports
available online under the conditions set forth in the proposed rule to
be $345,000.\718\
---------------------------------------------------------------------------

    \713\ We estimate that the cost of printing and mailing a set of
summary prospectuses for a variable contract's underlying portfolio
companies is, on average, the same as the cost of printing and
mailing a single registrant statutory prospectus. See supra note
700. Although those documents are different, we do not have specific
data regarding how the cost of printing and mailing those two sets
of documents would differ and so we have used the same cost for
printing and mailing to arrive at a conservative estimate of cost
savings associated with the proposed rule. We solicit public
feedback to help refine these estimates.
    \714\ Calculated as $0.53 x 13 million = $6,890,000 for
portfolio company summary prospectuses associated with existing
contracts, and $0.53 x 698,000 = $369,940 for portfolio company
summary prospectuses associated with new sales.
    \715\ Calculated as $6,890,000 + $369,940 = $7,259,940.
    \716\ We estimate that the average burden to comply with the
proposed website posting requirements would be 2 hours per set of
documents. We estimate the average wage based on published rates for
webmasters to be $239. $478 = 2 x $239.
    Although we do not have data on the use of summary prospectuses
for the underlying portfolio companies offered in variable
contracts, we understand that delivery of summary prospectuses is
typical. To the extent that there are portfolio companies for which
no summary prospectus has been created, there would be costs
associated with the summary prospectus requirement. Those costs
would include the cost of creating the document, making sure that
the summary prospectus is structured appropriately, and costs
associated with filing the summary prospectus after it is first used
under rule 497. We believe that these costs would be small, however.
For example, the content of a mutual fund summary prospectus is just
Items 2 through 8 of Form N-1A, with the cover page as specified by
rule 498.
    \717\ 721 = (500 N-4 registrants) + (221 N-6 registrants).
    \718\ $478 x 721 = $344,638.
---------------------------------------------------------------------------

    Funds may incur costs in connection with the requirement to provide
summary prospectuses for underlying portfolio investments upon request
of an investor. We estimate that the annual cost associated with
printing and mailing these prospectuses would be $500 per
registrant.\719\ We estimate that the aggregate annual costs associated
with printing and mailing portfolio

summary prospectuses will be $342,475.\720\
---------------------------------------------------------------------------

    \719\ See infra note 854. Also, currently contract investors may
request paper copies of online documents related to portfolio
investments (e.g., SAIs). As a result, we estimate the cost of
updating systems to accommodate requests for paper copies of
prospectuses for portfolio investments would be minimal.
    \720\ $500 x 95% x (500 Form N-4 registrants + 221 Form N-6
registrants) = $342,475.
---------------------------------------------------------------------------

    Thus, we estimate a reduction of costs related to delivery of
portfolio company summary prospectuses of $6,573,000.\721\
---------------------------------------------------------------------------

    \721\ $7,259,940 - $344,638 - $342,475 = $6,572,827.
---------------------------------------------------------------------------

2. Treatment of Discontinued Variable Contracts
    As discussed above, if the proposed summary prospectus framework is
adopted, the Commission would take the position that Alternative
Disclosure Contracts (contracts operating in the manner described in
the Staff Letters as of the effective date of any final summary
prospectus rules) are permitted to continue to operate in such a
manner.\722\ This position on Alternative Disclosure Contracts would
recognize the industry's practice that has developed in light of the
Staff Letters, the costs and burdens that issuers of In-Force
Alternative Disclosure Contracts currently incur, and the costs and
burdens that issuers would incur under the proposed summary prospectus
framework. For all other contracts, the Commission's position would not
be applicable, and therefore variable contract issuers would be
required to file post-effective amendments to update their registration
statements and provide updated prospectuses under current regulatory
requirements, and could avail themselves of the summary prospectus
framework as adopted.
---------------------------------------------------------------------------

    \722\ See supra section II.C.
---------------------------------------------------------------------------

    The Commission's position on Alternative Disclosure Contracts
recognizes that the proposed rule and form amendments are expected to
significantly reduce certain burdens and costs associated with the
current contract and portfolio company prospectus framework.\723\ Most
notably, we anticipate that registrants that choose to rely on proposed
rule 498A could experience significant decreases in printing and
mailing costs, compared to their current costs to print and mail the
contract statutory prospectus.\724\ These decreases in printing and
mailing costs would be heightened to the extent that the registrant
relies on the proposed rule's new option to satisfy portfolio company
prospectus delivery requirements, because paper (or electronic) copies
of the portfolio company prospectuses no longer would be required to be
delivered to investors. Similar to the proposed rule, issuers of In-
Force Alternative Disclosure Contracts currently experience reductions
in printing and mailing costs associated with the contract prospectus,
compared to other variable contract issuers. Issuers of In-Force
Alternative Disclosure Contracts, however, would benefit from the
expected reductions in printing and mailing costs associated with
portfolio company prospectuses under the proposed rule.
---------------------------------------------------------------------------

    \723\ See supra section III.C.1; infra section III.C.3.
    \724\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    Furthermore, we acknowledge that there are certain other costs and
burdens that are currently reduced for issuers of In-Force Alternative
Disclosure Contracts, but would not be similarly reduced under the
proposed rule and form amendments. For example, a registrant that
relies on proposed rule 498A would still bear burdens of maintaining
and updating the contract registration statement,\725\ preparing and
filing updating summary prospectuses, delivering the updating summary
prospectus to investors annually, and making the contract statutory
prospectus and SAI available online. In addition, while the proposed
form amendments would simplify certain current disclosure
requirements,\726\ in other instances they would result in new or
amended disclosures that, in the aggregate, we anticipate would result
in a net increase in the burden associated with preparing an initial
registration statement and post-effective amendments thereto.\727\ The
Commission's position on Alternative Disclosure Contracts takes all of
the foregoing under consideration, including the significant time
period that the industry has operated in the manner that the Staff
Letters describe.
---------------------------------------------------------------------------

    \725\ Even when there are not material updates to the contract,
the updating process still would entail internal burdens (e.g., for
the registrant to confirm the continued accuracy of the information
in the registration statement and to update information about the
portfolio companies) and external expenses (e.g., for outside legal
and auditor services).
    \726\ For example, the proposed amendments to Form N-3 and Form
N-4 would include certain changes that would significantly reduce
burdens related to preparing and disclosing contract accumulation
unit values. See supra notes 546-554 and accompanying text.
    \727\ See infra section III.C.3.b.
---------------------------------------------------------------------------

    We estimate that approximately 2.68 million existing variable
annuity contracts were issued pursuant to registration statements for
In-Force Alternative Disclosure Contracts.\728\ For those contracts
whose issuers are currently operating in the manner that the Staff
Letters describe as of the effective date of final summary prospectus
rules, we believe the Commission's position with respect to Alternative
Disclosure Contracts will have minimal impact, compared to the
baseline, on either insurers or investors. Under the Commission's
position, insurers would continue to provide, and investors would
continue to receive, the same alternative disclosures that the Staff
Letters describe. We acknowledge, however, that insurers sponsoring
Alternative Disclosure Contracts would potentially benefit from the
Commission's position, because Commission action provides them with
greater certainty about future disclosure obligations than staff no-
action letters.
---------------------------------------------------------------------------

    \728\ See supra note 662.
---------------------------------------------------------------------------

    With respect to insurers with variable contracts outstanding and
those issuing new contracts, the Commission's position on Alternative
Disclosure Contracts likely will result in some costs. Existing
contracts whose issuers are not currently operating in the manner
described in the Staff Letters may have been structured or offered by
insurers with the expectation that the insurer could provide
alternative disclosures if a product launch is unsuccessful or the
number of investors diminishes over time. The Commission's position may
therefore result in those contracts experiencing unexpected future
costs associated with updating the registration statement and
delivering prospectuses under current regulatory requirements. However
those contracts could avail themselves of the summary prospectus regime
as adopted, which, as discussed above, may mitigate some of those