to be included in an electronic submission. Insurers commonly use
type 1 modules for the inclusion of a set of financial statements
that will be included as part of multiple registration statement
filings.
    \1004\ On June 10, 2019, EDGAR was upgraded to allow filers to
reference modules and segments constructed in either ASCII or HTML
format in their HTML submission documents, including Types 1 and 2.
See Chapter 5 (Constructing Attached Documents and Document Types),
Chapter 6 (Interactive Data), and Appendix A (Messages Reported by
EDGAR) of the EDGAR Filer Manual, Volume II: ``EDGAR Filing.''
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    A third commenter advocated for a 36-month compliance period,
consistent with the amount of time small fund groups were given to
comply with the 2018 Inline XBRL requirements.\1005\ The commenter
asserted that insurers are similarly situated to, but less prepared
than, small funds with respect the transition to Inline XBRL. Unlike
mutual funds and ETFs, insurers have not been required to tag variable
product registration statements using XBRL, and the greater complexity
of variable product disclosures could make such documents more
difficult to tag than fund disclosures.\1006\
---------------------------------------------------------------------------

    \1005\ See CAI Comment Letter; see also Inline XBRL Adopting
Release, supra note 892.
    \1006\ See CAI Comment Letter.
---------------------------------------------------------------------------

    After considering commenters' suggestions, we are extending the
proposed compliance period by an additional year. Registrants must
comply with the Inline XBRL tagging requirements in all required
filings made on or after January 1, 2023. We believe that this
compliance date will provide sufficient time for filers, filing agents,
and software vendors to transition to Inline XBRL.\1007\ We decline to
extend the compliance period to a 36-month period, as on commenter
suggested, because due to registrants updating their registration
statements by May 1 of each year, this would effectively delay the
compliance period by an additional year until 2024. The extended
compliance period will also provide time to adopt a new taxonomy, and
to implement and pilot iXBRL, make any necessary taxonomy or EDGAR
changes resulting from the pilot, and ensure compatibility of modules
and iXBRL.
---------------------------------------------------------------------------

    \1007\ Because operating companies and mutual funds must
transition to Inline XBRL no later than June 2021, we expect that
many filing agents and software vendors will have already developed
the Inline XBRL-related expertise necessary to assist variable
contract registrants with meeting Inline XBRL requirements under the
final rules.
---------------------------------------------------------------------------

    Similar to our transition approach with requiring Inline XBRL for
operating companies, mutual funds, and ETFs, variable contract
registrants will be permitted to file using Inline XBRL prior to the
compliance date. Filers will be able to file in Inline XBRL once EDGAR
has been modified to accept submissions in Inline XBRL for all forms
subject to the amendments. Notice of EDGAR system readiness to accept
filings in Inline XBRL will be provided in a manner similar to notices
of taxonomy updates and EDGAR Filer Manual updates. We believe that
offering filers the option to file using Inline XBRL before the
compliance date will enable filers that are ready to transition to
Inline XBRL to begin realizing the benefits of Inline XBRL sooner. It
will also enable vendors and filing agents used by early Inline XBRL
adopters to gain valuable expertise that may help facilitate the
transition to Inline XBRL for variable contract registrants that
transition to Inline XBRL at a later time.
Commission Position With Respect to Alternative Disclosure Contracts
    Consistent with the proposal, the Staff Letters will be withdrawn
as of July 1, 2020. Additionally, the Commission is taking a position
that if an issuer of a contract that is discontinued as of July 1, 2020
that provides alternative disclosures does not file post-effective
amendments and does not provide updated prospectuses to existing
investors, this would not provide a basis for enforcement action so
long as investors are provided the Alternative Disclosures or
modernized alternative disclosures) and the registrant meets all
specified conditions of the Commission position as of July 1,
2020.\1008\
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    \1008\ See Section II.E.3.d. above for further discussion of
this compliance date.
---------------------------------------------------------------------------

III. Other Matters

    Pursuant to the Congressional Review Act,\1009\ the Office of
Information and Regulatory Affairs has designated this rule a ``major
rule,'' as defined by 5 U.S.C. 804(2). If any of the provisions of
these rules, or the application thereof to any person or circumstance,
is held to be invalid, such invalidity shall not affect other
provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
---------------------------------------------------------------------------

    \1009\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    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 rule and form amendments, including the benefits and
costs to investors and other market participants as well as the broader
implications of the rule for efficiency, competition, and capital
formation.

A. Introduction

    New rule 498A allows insurers the option to satisfy prospectus
delivery requirements for variable contracts by providing investors
with a summary prospectus while making the statutory prospectus and
other disclosure documents available online. The approach involves the
use of two types

of summary prospectus: 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 new
disclosure framework permits issuers to satisfy portfolio company
prospectus delivery obligations by, among other conditions, posting the
portfolio company summary and statutory prospectus at a website address
specified on the variable contract summary prospectus.
    The Commission is amending the registration forms for variable
contracts to update and enhance the disclosure regime for these
investment products. Additionally, our rule and form amendments require
registrants to use Inline XBRL for the submission of certain
disclosures contained in the contract statutory prospectus with the
Commission with respect to contracts currently offered to new
investors. We are also taking the position that if an issuer of a
discontinued contract that is discontinued as of July 1, 2020 that
provides Alternative Disclosures does not file post-effective
amendments to update a variable contract registration statement and
does not provide updated prospectuses to existing investors, this would
not provide a basis for enforcement action so long as investors are
provided the Alternative Disclosures or certain modernized alternative
disclosures discussed above.\1010\ Finally, we are also adopting
certain technical and conforming amendments to our rules and forms,
including amendments to rules relating to variable life insurance
contracts, and rescinding certain related rules and forms.\1011\
---------------------------------------------------------------------------

    \1010\ See supra Section II.E.
    \1011\ With respect to those amendments intended to reflect new
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 amendments to rule 498A
and the registration forms. In addition, we do not believe there are
any economic effects of the technical amendments regarding certain
variable life insurance rules, since market participants have
already adjusted to the changes enacted by NSMIA that the amendments
reflect in the rules. Similarly, we do not believe there are any
economic effects of the 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.
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B. Economic Baseline

1. Overview of Variable Products Market
    In 2019 there were a total of 3,534 unique variable products
offered by 73 insurance companies.\1012\ Total assets were $1,714
billion \1013\ held in 25.9 million accounts.\1014\ Average contract
value was $66,400.\1015\ Also in 2019, insurance companies sold
1,289,500 contracts \1016\ with sales totaling $132.1 billion.\1017\
Our understanding is that investors typically purchase variable
products through various distribution channels.\1018\
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    \1012\ Based on Form N-CEN reports filed in calendar year 2019.
The 3,534 variable products consist of 2,491 variable annuity
products and 1,043 variable life insurance products.
    \1013\ Id. The total assets of $1,714 billion consist of $1,576
billion of variable annuity assets and $138 billion of variable life
insurance assets.
    \1014\ Id. The 25.9 million accounts consist of 22.2 million
variable annuity accounts and 3.7 million variable life insurance
accounts.
    \1015\ Id. Average contract value for variable annuity products
and variable life insurance products was $71,100 and $37,800,
respectively.
    \1016\ Id. The 1,289,500 contracts consisted of 1,189,100
variable annuity contracts and 100,400 variable life insurance
accounts.
    \1017\ Id. The $132.1 billion in sales (after rounding)
consisted of $122.2 billion for variable annuity products and $10.0
billion for variable life insurance products.
    \1018\ See IRI Fact Book, supra note 7, at 161. For example, in
2018, investors purchased variable annuities across various
distribution channels--independent broker-dealers, 23.9 percent of
total sales; career agents, 20.6 percent; independent agents, 20.2
percent; banks, 18.9 percent; regional broker-dealers, 9.0 percent;
full service national broker-dealers, 4.6 percent; and direct
response 2.8 percent.
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    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.\1019\ Separate accounts may be registered
as management companies or UITs. As of 2019, there were five separate
accounts registered as management companies and 670 structured as
UITs.\1020\
---------------------------------------------------------------------------

    \1019\ Id. at 167. In 2018, the average number of portfolio
companies per registered variable annuity contract was 60.
    \1020\ Based on Form N-CEN reports filed in 2019. Of the 670
separate accounts organized as UITs, 426 were variable annuity
separate accounts and 246 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.
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    Eighty-six percent of individual annuity investors purchased their
first annuity before age 65, including 47 percent who were between the
ages of 50 and 64 years old.\1021\ The average age of investors at
first purchase of an annuity is 51.\1022\ The average current age of
annuity investors is 70.\1023\ Eighty percent of individual annuity
investor households have incomes under $100,000.\1024\ Sixty percent of
household incomes are below $75,000, and 35 percent are below
$50,000.\1025\
---------------------------------------------------------------------------

    \1021\ Gallup Survey, supra note 7, at 8.
    \1022\ Id.
    \1023\ Id.
    \1024\ Id. at 8 and 9.
    \1025\ Id. at 9. According the U.S. Census Bureau, in 2018 70
percent of households had incomes of less than $100,000, 57 percent
had incomes of less than $75,000, and 40 percent had incomes of less
than $50,000. See U.S. Census Bureau, U.S. Income and Poverty in the
United States: 2018 (Sept. 2019), available at https://www.census.gov/data/tables/2019/demo/income-poverty/p60-266.html.
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2. Statutory and Regulatory Disclosure Requirements
    Currently, the default method for delivering the variable contract
prospectus and the underlying portfolio company prospectuses is
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.\1026\ 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.
---------------------------------------------------------------------------

    \1026\ 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 percent of contract owners have affirmatively
consented to electronic delivery.\1027\ Another industry source
estimated in a 2016 report that approximately five percent of annuity
investors had opted for electronic delivery at that time.\1028\ Based
on these

estimates, and with consideration for the general increase in
electronic delivery rates over time demonstrated in other investment
products,\1029\ we estimate that currently 15 percent of variable
contract statutory prospectuses and portfolio company summary
prospectuses are delivered electronically.\1030\
---------------------------------------------------------------------------

    \1027\ Comment Letter of the Committee of Annuity Insurers on
Proposed Rule 30e-3 (July 22, 2016), available at https://www.sec.gov/comments/s7-08-15/s70815-612.pdf.
    \1028\ See Broadridge, Digital Transformation of Insurance
Communications (2016), available at https://www.broadridge.com/_assets/pdf/digital-transformation-ins-comm.pdf.
    \1029\ 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).
    \1030\ 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.E 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 distributing certain
alternative disclosures to investors. We estimate that as of the end of
calendar year 2019, approximately 13 percent of existing variable
annuity contracts and 49 percent of variable life contracts were
Alternative Disclosure Contracts.\1031\
---------------------------------------------------------------------------

    \1031\ Of the 1,061 Form N-4 variable annuity registration
statements on file, 584 registration statements appear to be for
Alternative Disclosure Contracts. Of the 584, there are four Staff
Letters concerning contracts where the number of contract owners
exceeds 5,000. As a result, we estimate that these 580 registration
statements represent a maximum of 2.9 million investors. Staff
estimates that the remaining four registration statements represent
at most 90,542 investors. See supra note 930. As a result, we
estimate that up to 2.99 million (= 90,542 + (580 * 5,000))
investors may hold Alternative Disclosure Contracts (13 percent of
the total number of contracts = 2.99 million/22.2 million). Of the
583 variable life registration statements on file, 360 registration
statements appear to be for Alternative Disclosure Contracts. We
estimate that these registration statements represent at most 1.8
million (= 360 * 5,000) contracts, or 49 percent (= 1.8 million/3.7
million) of the total number of contracts.
---------------------------------------------------------------------------

C. Benefits and Costs of the Rule and Form Amendments

    Where possible, we have attempted to quantify the costs, benefits,
and effects on efficiency, competition, and capital formation expected
to result from the rule and form amendments. 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.\1032\ Similarly, summary prospectuses
could reduce the amount of time and effort investors require making an
investment decision. Also, summary prospectuses could facilitate
investor comparison of different variable product contracts. 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 to compare different variable product contracts,
or the value of that time and effort to investors.\1033\ In those
circumstances in which we do not have the requisite data to assess the
impact of the rule and form amendments quantitatively, we have
qualitatively analyzed the economic impact of the rule and form
amendments.
---------------------------------------------------------------------------

    \1032\ 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 will
actually be more likely to read a variable contract summary
prospectus relative to a statutory prospectus.
    \1033\ Id. The survey results do not provide data on the extent
to which a variable contract summary prospectus will actually reduce
the amount of time and effort required to make an investment
decision using summary prospectuses rather than statutory
prospectuses.
---------------------------------------------------------------------------

    Direct costs incurred by insurers discussed below may, to some
extent, be absorbed by the insurance company or be passed on to
investors in the form of increased fees. The share of these costs borne
by insurers and investors depends on multiple factors, including the
nature of competition among insurers and investors' relative
sensitivity to changes in fees.
1. Optional Summary Prospectus Regime
    New rule 498A creates a choice for insurers. Insurers 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 the statutory prospectus and
other required documents available online. Those insurers that expect
to benefit by providing summary prospectuses will choose to rely on the
rule to meet their prospectus delivery obligations.\1034\ Those
insurers that do not expect to benefit from this optional prospectus
delivery regime will choose to continue to provide statutory
prospectuses to investors.\1035\
---------------------------------------------------------------------------

    \1034\ 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.
    \1035\ 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 will take any such
competitive effects into account when assessing the costs of using
summary prospectuses.
---------------------------------------------------------------------------

    Insurers' choices of delivery methods will not reduce the
information available to investors. If insurers choose to meet their
prospectus delivery obligations by delivering summary prospectuses to
investors, with other documents available online, investors will have a
choice. Under the rule's layered disclosure framework, 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 choose to 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 contract summary
prospectus regime and associated new optional delivery method for
portfolio company prospectuses.
a. Benefits and Costs for Investors
i. 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.\1036\ Variable contract prospectuses
(particularly those that include optional benefits) are typically
lengthy and complex,\1037\ 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 one or more 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.
---------------------------------------------------------------------------

    \1036\ 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 will, under the 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.
    \1037\ One commenter stated that variable annuity contracts are
among the most complex investment products sold. The commenter also
analyzed variable annuity contracts in terms of reading level
assessment and stated that variable annuity contracts are written in
language that requires an advanced degree or at least a college
level of comprehension. See Cardozo Clinic Comment Letter.
---------------------------------------------------------------------------

    We believe investors will benefit from the simplification of
disclosure associated with initial summary prospectuses.\1038\ 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 may make it more difficult for
investors to distinguish between contract features and options that
apply to them and those that do not.\1039\
---------------------------------------------------------------------------

    \1038\ One commenter, citing academic research, stated that to
the extent summary disclosure reduces information overload, it
could, in turn, increase financial literacy. See ACLI Comment
Letter; Julie Agnew & Lisa Szykman, Annuities, Financial Literacy
and Information Overload (Pension Research Council WP 2010-33, Nov.
11, 2010) available at https://ssrn.com/abstract=1707659. Three
commenters were skeptical that certain aspects of the proposed
initial summary prospectus would result in better investor
comprehension of how a variable contract works, and recommended that
we engage in investor testing to validate our assumptions. See supra
note 38.
    \1039\ Existing research notes that individuals bear costs in
absorbing information and that the ability of individuals to process
information is not unbounded. See Richard Nisbett & Lee Ross, HUMAN
INFERENCE: STRATEGIES AND SHORTCOMINGS OF SOCIAL JUDGMENT (1980);
David Hirshleifer & Siew Hong Teoh, Limited Attention, Information
Disclosure, and Financial Reporting, 36 J. ACCT. & ECON. 337 (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.
    Whereas statutory prospectuses may describe contracts and features
no longer offered to new investors in addition to contracts currently
offered to investors, the new initial summary prospectus is limited to
describing only the contract and features currently available under the
statutory prospectus. We believe this narrower focus will 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. We
believe the concise content provided in the initial summary prospectus,
presented in a standardized manner, will also facilitate investors'
comparison of contracts at the time of investment and re-evaluation of
contracts during the free look period.\1040\ This could reduce the risk
of investors selecting variable contracts that do not align with their
needs or inefficient matching of investors to variable contracts.
---------------------------------------------------------------------------

    \1040\ One commenter stated that the proposed summary prospectus
requires too high a level of comprehension. Their analysis of the
proposed initial summary prospectus concluded that it would require
a college level of comprehension to understand. See Cardozo Clinic
Comment Letter. We drew on our investor testing efforts in
developing the summary prospectus framework and believe the adopted
summary prospectus framework will help investors make an informed
investment decision. Also, one commenter, citing academic research,
questioned the relevance of the free look period to decision making,
stating that choice-supportive bias is likely to cause consumers to
ascribe benefits to their purchases in order to confirm that they
made the right decision, and that this tendency increases with age.
See CFA Comment Letter; Mara Maher & Marci Johnson, Choice-
Supportive Source Monitoring: Do Our Decisions Seem Better to Us as
We Age?, 15 Psychol. & Aging 596 (2000). We acknowledge that certain
investors may not re-evaluate contracts during the free look period,
but for those investors that do, we believe the concise content
provided in the initial summary prospectus will facilitate their re-
examination of the contract.
---------------------------------------------------------------------------

    To facilitate investor understanding and investor comparison of
contract, the initial summary prospectus is designed to provide
investors with key information relating to the contract's terms,
benefits, and risks. 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,\1041\ including: (1) Risk of loss of principal and/or lack of
guarantees of income; (2) fees, including surrender charges; (3)
illiquidity prior to the pay-out period; (4) tax consequences; (5)
death benefits; and (6) conflicts of interest.\1042\ The overview
describes the parties to the contract (the issuer and investor), and
provides readers with basic information about the purpose of the
contract, phases of the contract (for variable annuity contracts),
premiums (for variable life insurance contracts), and contract
features. We are also requiring registrants to summarize standard and
optional benefits available to the investor under the contract.
---------------------------------------------------------------------------

    \1041\ See supra note 108.
    \1042\ See supra Section II.A.1.c.ii.(a).
---------------------------------------------------------------------------

    Later sections of the initial summary prospectus provide investors
more detailed information about the cash flows related to contract
purchase. One section provides 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. Also, 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.
    Initial summary prospectuses also include additional information
about fees and expenses investors will pay when buying, owning, and
surrendering the contract, as well as those paid each year during the
time the investor owns the contract. Finally, initial summary
prospectuses include an appendix that provides summary information in a
tabular form about the portfolio companies or investment options
offered under the contract.
    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.\1043\ 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.\1044\ 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.\1045\
---------------------------------------------------------------------------

    \1043\ There is evidence that the summarization of key
information is useful to consumers. See, e.g., Sumit Agarwal et al.,
Regulating Consumer Financial Products: Evidence from Credit Cards,
(Nat'l Bureau of Econ. Research, 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 U.S.
credit card users $20.8 billion annually; see also Robert Clark et
al., Can Simple Informational Nudges Increase Employee Participation
in a 401(k) Plan?, (Nat'l Bureau of Econ. Research, 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.
    \1044\ See John Beshears et al., How Does Simplified Disclosure
Affect Individuals' Mutual Funds Choices?, in Explorations in the
Economics of Aging, 75 (David A. Wise ed., 2011), available at
https://www.nber.org/chapters/c11933.pdf. 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 . . .'' Id. at 13.
    \1045\ See 2012 Financial Literacy Study, supra note 108.
Commenters also stated that their own client research found that
investors prefer summary disclosure. See IRI Comment Letter I and
WFA Comment Letter.
---------------------------------------------------------------------------

    Further, investors allocate their attention selectively,\1046\ 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).\1047\ 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.\1048\ 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.\1049\
---------------------------------------------------------------------------

    \1046\ See George Loewenstein et al., Disclosure Psychology
Changes Everything, 6 Ann. Rev. Econ. 391 (2014).
    \1047\ See supra note 548.
    \1048\ See supra note 1032.
    \1049\ Review of the complaints database maintained by the
Commission's Office of Investor Education and Advocacy 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.\1050\
---------------------------------------------------------------------------

    \1050\ See Troy Paredes, Blinded by the Light: Information
Overload and Its Consequences for Securities Regulation, 81 Wash. U.
Law Rev. 417 (2003).
---------------------------------------------------------------------------

    These benefits are potentially magnified given the demographic
profile of variable contract investors. The average age of annuity
investors is 70.\1051\ 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.\1052\ 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.\1053\
---------------------------------------------------------------------------

    \1051\ See supra note 1023 and accompanying text.
    \1052\ See e.g., David Schroeder & Timothy Salthouse, Age
Related Effects on Cognition Between 20 and 50 Years of Age, 36
Personality & Individual Differences 393 (2004); Timothy Salthouse,
Aging and Measures Of Processing Speed, 54 Biological Psychology 35
(2000); Ray Fair, How Fast Do Old Men Slow Down?, 76 Rev. Econ. &
Stat. 103 (1994); Ulman Lindberger & Paul B. Baltes, Sensory
Functioning and Intelligence in Old Age: A Strong Correlation, 9
Psychol. & Aging 339 (1994); Ulman Lindberger & Paul B. Baltes,
Intellectual Functioning in Old and Very Old Age: Cross-Sectional
Results From the Berlin Aging Study, 12 Psychol. & Aging 410 (1997);
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 & Doug Shadel, AARP Foundation National
Fraud Victim Study (2011).
    \1053\ 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 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.\1054\ For example, the new
rule requires insurers to distill certain key product information into
tables, which could facilitate comparison across different products.
The effect of the 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.\1055\
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    \1054\ 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.,
Christopher Hsee et al., Preference Reversals between Joint and
Separate Evaluations of Options: A Review and Theoretical Analysis,
125 Psychol. Bull. 576 (1999); see also Jeffrey Kling et al.,
Comparison Friction: Experimental Evidence from Medicare Drug Plans,
127 Q. J. Econ. 199 (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 percent in the
intervention group, but only 17 percent in the comparison group, and
the intervention caused an average decline in predicted consumer
cost of about $100 a year among letter recipients.
    \1055\ However, we expect the requirement to file certain
information from variable contract statutory prospectuses in Inline
XBRL will facilitate data collection by third-party aggregators and
financial analysts, as well as facilitate investors' comparison of
variable products. See infra Section IV.C.3.
---------------------------------------------------------------------------

    Additionally, the framework for variable contract summary and
statutory prospectuses also includes design elements to facilitate
investor use. In particular, the new rule includes requirements for
linking within the electronic versions of the contract statutory
prospectus and SAI that are available online, and also for linking
between electronic versions of contract summary and statutory
prospectuses that are available online. The linking requirements permit
investors who use the electronic versions of contract prospectuses to
quickly navigate between a table of contents of the contract statutory
prospectus or SAI and the related sections of that document, as well as
each section of the summary prospectus and any related section of the
contract statutory prospectus and contract SAI that provides additional
detail.\1056\ Further, the new rule also requires 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 should facilitate understanding of terms that may be
confusing or unfamiliar among investors viewing the documents online.
---------------------------------------------------------------------------

    \1056\ The Commission recently adopted rules 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 17 CFR 29.601 (Item 601 of
Regulation S-K) or under Form F-10 or Form 20-F. In connection with
this rulemaking, commenters indicated 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 (Mar. 1, 2017) [82 FR 14130 (Mar. 17,
2017)] at nn.85 and 86. In 2019, the Commission adopted amendments
to its investment company registration forms, including Forms N-3,
N-4, and N-6, to require hyperlinks to exhibits required to be filed
with the registration statement. See FAST Act Adopting Release,
supra note 501.
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    Finally, the new rule requires 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. 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 new 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 a large amount 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 new rule, the updating summary prospectus includes a
concise description of important changes affecting the statutory
prospectus disclosure relating to certain topics that occurred within
the prior year--namely the availability of portfolio companies (or
investment options under a variable annuity registered on Form N-3)
under the contract, the Key Information Table, the overview of the
contract, the Fee Table, purchases and contract value (or premiums for
variable life insurance contracts), lapse (for variable life insurance
contracts), surrenders and withdrawals, the standard death benefit (for
variable life insurance contracts), and the benefits available under
the contract. We believe that these are the topics most likely to be
important to investors because they affect how investors evaluate
variable contracts and are relevant to investors when considering
additional investment decisions. The 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 forgoing the repetition
of most information that had remained unchanged.\1057\
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    \1057\ Unlike with the initial summary prospectus, the new 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 will 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 will 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 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 includes the Key Information
Table. The inclusion of this disclosure will benefit investors by
reminding them of key facts about the variable contract, including the
contract's fees and expenses, risks, restrictions, tax implications,
and conflicts of interest. Finally, the updating summary prospectus
includes 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 providing them information to inform 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
    Should insurers opt to use summary prospectuses, we believe that
the majority of investors will benefit from their disclosures; however,
certain investors may also incur costs. For example, although research
indicates that investors generally prefer to receive summary
disclosures,\1058\ there may be investors who prefer to rely on
statutory prospectuses when making investment decisions. While
statutory prospectuses will 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 may
need to manually enter a hyperlink from a paper updating summary
prospectus or open an email link to a website containing the statutory
prospectus.\1059\ 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.\1060\ Even
for those investors with home internet access, there may be some
resistance to taking the additional step of accessing the statutory
prospectus online.\1061\
---------------------------------------------------------------------------

    \1058\ See supra note 10455.
    \1059\ Investors may also call or email to obtain the statutory
prospectus.
    \1060\ According to the most recent U.S. census data,
approximately 81.9 percent of U.S. households had some form of
internet access in their home in 2016, and 89.3 percent had a
computer (e.g., desktop, laptop, tablet or smartphone). See Camille
Ryan, Computer and Internet Usage in the United States: 2016 (Aug.
2018), available at https://www.census.gov/content/dam/Census/library/publications/2018/acs/ACS-39.pdf. According to data provided
by the Pew Research Center, in 2019 90 percent of U.S. adults use
the internet with usage varying by age with 88 percent of U.S.
adults between the ages of 50 and 64 using the internet and 73
percent of U.S. adults 65 and older using the internet. See
Internet/Broadband Fact Sheet, available at https://www.pewresearch.org/internet/fact-sheet/internet-broadband/#who-uses-the-internet. See also Sarah Holden, Daniel Schrass & Michael
Bogdan, Ownership of Mutual Funds, Shareholder Sentiment, and Use of
the Internet, 2019, 25:8 ICI Res. Perspective (Oct. 2019), available
at https://www.ici.org/pdf/per25-08.pdf (``In 2019, 94 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 2019''); 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).
    \1061\ One commenter urged us to require paper delivery as the
default delivery of their prospectuses or summary prospectuses
unless the retail investor has affirmatively chosen to receive these
documents electronically. That commenter noted that in 2012 they
commissioned a national survey of over 1,000 retirement plan
participants and found that 66 percent of respondents ages 25-49 and
84 percent of those 50 plus preferred paper document delivery. See
AARP Comment Letter, supra note 33. Investors who prefer paper
delivery of the statutory prospectus may request paper copies from
the insurer. To the extent that investors request paper copies of
the statutory prospectus, insurers will incur associated printing
and mailing costs. See infra Section IV.C.1.b.i.
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    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 \1062\), will not be able to elect paper delivery of statutory
prospectuses on a going-forward basis. Rather, they will 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 his or her preferred format and ultimately receiving less
information than they would like about their contract.\1063\ 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.
---------------------------------------------------------------------------

    \1062\ See supra Section II.A.5.
    \1063\ This outcome is suggested by research which finds that
investors can experience a ``status quo bias.'' See, e.g., Richard
H. Thaler & Shlomo Bernatzi, Save More Tomorrow\TM\: Using
Behavioral Economics to Increase Employee Saving, 112 J. Pol. Econ.
S164 (2004); Richard H. Thaler & Cass R. Sunstein, Libertarian
Paternalism, 93 Am. Econ. Rev. 175 (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.
---------------------------------------------------------------------------

    Also, the rule requires that a current version of each of the
required contract documents remain available online for at least 90
days after the date of delivery of a security or communication in
reliance on the rule. Some investors may not have the flexibility to
access this online information within 90 days after receiving the
summary prospectus. As discussed above, however, because variable
contracts (and their underlying portfolio companies) are generally
continuously offered, a current contract prospectus and related
documents would likely remain online for longer than 90 days. As a
result, we believe any loss of flexibility to access online information
more than 90 days after receiving a summary prospectus would be
minimal.
ii. Portfolio Company Prospectus Delivery
    As described in Section IV.C.1.b below, we anticipate that the new
optional delivery method for portfolio company prospectuses will result
in cost savings from reduced printing expenses. To the extent that a
portfolio company bears the printing expenses associated with portfolio
company prospectuses, we expect that the reductions will 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 will
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.\1064\
---------------------------------------------------------------------------

    \1064\ 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 expect the benefit in terms of lower pricing of variable
contracts will be small. One commenter estimated a unit cost of
$6.00 to print and mail a statutory prospectus to new investors and
$2.20 to existing investors, inclusive of summary prospectuses for
all portfolio companies offered by the contract. The commenter also
estimated that portfolio company summary prospectuses would make up
300 pages of the 400-page mailing that includes the variable
contract statutory prospectus and portfolio company prospectuses.
See Broadridge Comment Letter. The average value of a variable
contract investor's investment is $66,400.
---------------------------------------------------------------------------

    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 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
will be required to request paper delivery of those prospectuses on an
ad hoc basis which could, in turn, delay investor review of those
prospectuses.\1065\ Further, to the

extent that investors prefer paper copies of prospectuses, but do not
request a paper copy or access the document online, there will be no
investor review of those prospectuses.
---------------------------------------------------------------------------

    \1065\ As we discuss in Section IV.C.3 below, 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 will continue under the adopted
framework, and that sales agents will 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 adopted framework to
yield lower costs and higher benefits for investors.
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b. Benefits and Costs for Insurers
i. 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 new 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 forgoing the printing
and mailing costs. Accordingly, to estimate the potential cost
reduction associated with the rule, as noted above, we assume that 15
percent of the contract investors currently elect electronic delivery
of the statutory prospectus both at sale, and annually
thereafter.\1066\ Moreover, we assume that at least 15 percent of
variable contract investors will elect electronic delivery of the
summary prospectus going forward.
---------------------------------------------------------------------------

    \1066\ We lack verifiable data on current electronic delivery
election rates among variable contract investors but are estimating
15 percent 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 1027 through 1029. 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 amendments will 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 amendments will be lower than
estimated here.
---------------------------------------------------------------------------

    To estimate the overall impact of the rule 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 90 percent of contracts \1067\ that are not
Alternative Disclosure Contracts.\1068\
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    \1067\ 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 layered
disclosure framework for variable contracts is not identical to the
corresponding framework for mutual funds and the creation of initial
and updating 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 percent of mutual funds have
adopted layered disclosure with summary prospectuses, and our
anticipation that the rule will provide costs savings to insurers,
we believe it is appropriate to assume that 90 percent of insurers
will choose delivery of summary prospectuses.
    \1068\ See supra note 1066 and accompanying text.
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     Issuers of Alternative Disclosure Contracts provide
alternative disclosures in lieu of statutory prospectuses.\1069\ Based
on staff analysis, approximately 57 percent of variable contract
registration statements are for Alternative Disclosure Contracts, and
these registration statements apply to up to approximately 18 percent
of variable contracts.\1070\ We further assume that each investor in an
Alternative Disclosure Contract owns exactly one contract issued under
a registration statement for an Alternative Disclosure Contract.
---------------------------------------------------------------------------

    \1069\ See supra note 928 and accompanying text.
    \1070\ (2.99 million variable annuity contracts + 1.8 million
variable life contracts)/25.9 million variable contracts.
---------------------------------------------------------------------------

     We assume 15 percent of investors elect electronic
delivery of prospectuses.
    Together with the baseline estimate of 25.9 million contracts in
force at the end of 2019, these assumptions imply that insurers will no
longer send approximately 16.1 million statutory prospectuses each
year.\1071\
---------------------------------------------------------------------------

    \1071\ 25.9 million x (1-18 percent) x 90 percent x (1-15
percent) = 16.1 million contracts.
---------------------------------------------------------------------------

    Next, we estimate the number of statutory prospectuses that will no
longer be provided to investors in paper in connection with new
contract purchases. In 2019, there were 25.9 million contracts in
force.\1072\ Total sales of variable annuity contracts during 2019 was
1,289,500 contracts. Based on these estimates, we further estimate that
among investors who elect to receive paper copies of prospectuses, the
new option to use a summary prospectus will be applied to 986,000 new
contracts annually.\1073\
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    \1072\ See supra Section IV.B.1.
    \1073\ See supra note 1071. The number of new contracts falling
within the proposed regime is calculated as: 1,289,500 contracts x
(1-0.15) x 0.90 = 986,468 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.\1074\ In the
Proposing Release, we estimated that printing and mailing expenses for
statutory prospectuses are $0.53 per statutory prospectus. We received
additional information on printing and mailing expenses from a
commenter that persuaded us to revise our estimate.\1075\ In a change
from the proposal, we estimate that printing and mailing expenses for
statutory prospectuses are $1.50 per statutory prospectus for new
investors and $0.55 for existing investors.\1076\ Also in a change from
the

proposal, we estimate that printing and mailing expenses for initial
summary prospectuses and updating summary prospectuses to be $1.20 and
$0.55, respectively.\1077\ Assuming the 2019 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 will decline by up to $4,845,000.\1078\
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    \1074\ 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
333. As a result, we assume updating prospectuses will be delivered
annually.
    \1075\ See Broadridge Comment Letter.
    \1076\ See id. The commenter assumes the use of First Class or
Priority Mail for documents mailed to new investors and the use of
Standard Class ``bulk'' mail for documents mailed to existing
investors. The commenter estimates the cost of printing and mailing
expenses of statutory prospectuses, inclusive of summary
prospectuses for each of the funds the contract offers, to be $6.00
for new investors and $2.20 for existing investors. The commenter
also estimates that the variable contract prospectus constitutes 25
percent of the printed and mailed material and summary prospectuses
for each of the portfolio companies offered constituting the other
75 percent. As a result, we estimate the cost of printing and
mailing variable contract prospectuses to be $1.50 (= $6.00 x 25
percent) for new investors and $0.55 (= $2.20 x 25 percent) for
existing investors. Also, we estimate the cost of printing and
mailing summary prospectuses for each of the portfolio companies
offered by the contract to be to be $4.50 (= $6.00 x 75 percent) for
new investors and $1.65 (= $2.20 x 75 percent) for existing
investors.
    \1077\ See id.
    \1078\ Calculated as ($1.50-$1.20) x 16,148,735 = $4,844,621.
The calculation only includes initial disclosures as the printing
and mailing costs of providing updated disclosure with respect to
existing investors is assumed to be the same, $0.55. See supra note
1076.
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    As noted earlier in this section, another key component of costs
that insurer will consider when determining whether to provide summary
prospectuses under the new rule is the cost of producing the initial
and updating summary prospectuses. Insurers choosing to provide summary
prospectuses will 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.\1079\ We estimate the aggregate
cost to prepare initial and updating summary prospectuses to be
$3,299,285.\1080\
---------------------------------------------------------------------------

    \1079\ 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.
    \1080\ See infra note 1230.
---------------------------------------------------------------------------

    Insurers that choose to provide summary prospectuses are required
to make statutory prospectuses and other materials available
online.\1081\ We estimate the annual burden to comply with the website
posting requirements of the rule for documents relating to variable
contracts will be 1,217 hours,\1082\ at an internal cost equivalent of
$301,816.\1083\
---------------------------------------------------------------------------

    \1081\ 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 new rule harmonizes certain requirements, this could
create efficiencies for contracts organized as UITs. This efficiency
will not apply to Form N-3 registrants, which do not have underlying
portfolio companies due to a single-tier investment company
structure.
    \1082\ See infra note 1234.
    \1083\ See infra note 1235.
---------------------------------------------------------------------------

    Insurers are also required to include inter- and intra-document
linking and special terms definitions. One linking requirement will
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 will
correspond with the item requirements of the forms. We estimate that
Form N-3 registrants will require 33 back-and-forth internal links,
Form N-4 registrants will require 27, and Form N-6 registrants will
require 28. The other linking requirement will 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 for the statutory prospectus
or SAI, and vice versa. For our analysis, we assume direct links 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 seven sections and an initial summary
prospectus for a Form N-6 registrant includes nine sections. However,
the Key Information Table has instructions stating that a registrant
should provide cross-references or links to the location in the
statutory prospectus where the subject matter is described in greater
detail, or should provide a means of facilitating access to that
information through equivalent methods or technologies. There are 12
sections of the Key Information Table. Therefore, we estimate that
there will be 18 back-and-forth links between Form N-3 and Form N-4
registrant initial summary prospectuses and statutory prospectuses, and
20 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 12 sections. One section is the ``Updated Information
About Your Contract'' section. The number of links in this section will
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 18.
    The rule will 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 will 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
requirement to include inter- and intra-document linking and special
terms definitions as described above will include 3,812 burden hours
and a cost of $508,320 annually.\1084\
---------------------------------------------------------------------------

    \1084\ These burden hours and cost estimates are a portion of
the overall burden and cost estimates associated with the collection
of information for rule 498A discussed below in Section V.E. 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 1056. We estimated the burden of including
hyperlinks to be between one and four hours with 75 percent of the
burden carried by the registrant internally and 25 percent 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 percent of the burden carried by the registrant
internally and 25 percent of the burden carried by outside
professionals at an average cost of $400 per hour. In the proposal,
based on 726 registrants, we estimated total burden hours to be
5,518 with 4,138 hours burden hours being carried by registrants
internally and the cost of the burden carried by outside
professionals to be $552,000. We are revising our estimates to
reflect the number of registrants, 706], that filed during 2019.
Revising our estimate of the number of registrants to 706, we
estimate the total burden hours to be 5,083 = (706 registrants) x
(90 percent relying on rule) x (8 burden hours per registrant). We
estimate the burden hours carried by the registrants internally to
be 3,807 = 5,083 x .75. We estimate the cost of the burden carried
by outside professionals to be $508,320 = (5,083 x .25) x $400.

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

    Finally, insurers 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 will be $500 per
registrant.\1085\ We estimate that the aggregate annual costs
associated with printing and mailing statutory prospectuses will be
$304,200.\1086\
---------------------------------------------------------------------------

    \1085\ See infra note 1233.
    \1086\ See infra note 1236.
---------------------------------------------------------------------------

ii. Portfolio Company Prospectus Delivery Option
    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.\1087\ 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 will typically be passed along to investors.
---------------------------------------------------------------------------

    \1087\ See supra Section II.B. This new delivery option will not
be available to Form N-3 registrants because they do not have
underlying portfolio companies. As of the end of calendar 2019, 700
of 706 (99 percent) registrants were either Form N-4 registrants
(477) or Form N-6 registrants (223).
---------------------------------------------------------------------------

    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 percent of investors currently receive paper copies of
these documents.\1088\
---------------------------------------------------------------------------

    \1088\ 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
rule), there may be a disincentive for portfolio companies to use a
summary prospectus, as concerns about costs of printing and mailing
the statutory prospectus will be reduced. However, the 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, will be minimal. See
2009 Summary Prospectus Adopting Release, supra note 17.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that printing and mailing
expenses for summary prospectuses for underlying portfolio companies
would be $0.53 per summary prospectus. We received additional
information from a commenter that persuaded us to revise our
estimate.\1089\ In a change from the proposal, we estimate that
printing and mailing expenses for summary prospectuses for underlying
portfolio companies to be $4.50 per set of prospectuses for new
investors and $1.65 for existing investors.\1090\ Assuming the 2019
level of contracts in force and contract purchases remains stable, we
estimate the printing and mailing cost will decline by $4,439,000 for
new investors and $26,645,000 for existing investors,\1091\ for
aggregate cost savings of $31,085,000.\1092\ 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 rule. We
estimate the annual burden to comply with the website posting
requirements of the rule for documents relating to portfolio companies
will be 1,206 hours,\1093\ at an internal cost equivalent of
$299,088.\1094\
---------------------------------------------------------------------------

    \1089\ See Broadridge Comment Letter.
    \1090\ See supra note 1076.
    \1091\ Calculated as $4.50 x 986,468 = $4,439,104 for new
investors and $1.65 x $16,148,735 = $26,645,413 for existing
investors.
    \1092\ Calculated as $4,439,104 + $26,645,413 = $31,084,517.
    \1093\ See infra note 1234.
    \1094\ Id. 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
will be costs associated with the summary prospectus requirement.
Those costs will 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 will be
small, however. For example, the content of a mutual fund summary
prospectus consists of Items 2 through 8 of Form N-1A, with the
cover page as specified by rule 498.
---------------------------------------------------------------------------

    Insurers and portfolio companies may incur costs in connection with
the requirement to provide summary prospectuses for underlying
portfolio companies upon request of an investor. We estimate that the
annual cost associated with printing and mailing these prospectuses
will be $500 per registrant.\1095\ We estimate that the aggregate
annual costs associated with printing and mailing portfolio summary
prospectuses will be $301,500.\1096\
---------------------------------------------------------------------------

    \1095\ See infra note 1241. 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 will be minimal.
    \1096\ $500 x 90 percent x (477 Form N-4 registrants + 223 Form
N-6 registrants) = $315,000.
---------------------------------------------------------------------------

    Thus, we estimate a reduction of costs related to delivery of
portfolio company summary prospectuses of $30,479,000.\1097\
---------------------------------------------------------------------------

    \1097\ $31,084,517-$304,200-$301,500 = $30,478,817.
---------------------------------------------------------------------------

2. Changes to Forms N-3, N-4, and N-6
a. Benefits and Costs for Investors
    The amendments to Forms N-3, N-4, and N-6 are intended to reflect
the evolution of variable contract features including, in particular,
the prevalence of optional benefits that insurers offer under these
contracts, and to provide greater consistency among the forms. For
example, the amended forms require additional information about
standard and optional benefits that a contract may offer. There is no
current form requirement regarding optional benefits.
    The amended forms also increase consistency of disclosure
presentation requirements among variable contracts that register on
different form types. This increased consistency could help investors
compare variable contracts that register on different form types.
Certain investors who are considering variable annuities may also be
considering variable life insurance (and vice versa). We believe a
consistent presentation and common disclosure of elements that we
consider useful in explaining variable contracts' features and risks
could reduce investor confusion and promote investor understanding
across types of variable products. Also, we believe that more

uniformity of disclosures across variable contract types may make it
easier for investors to compare similar products.
    We are amending the General Instructions of Forms N-3, N-4, and N-6
regarding the preparation and filing of registration statements. First,
these amendments prescribe the ordering and location of the Key
Information Table, the Overview of the Variable Annuity Contract, and
the Fee Table. In particular, the amendments place this information at
the beginning of the prospectus, benefitting investors to the extent
that this placement makes information about a variable contract's key
features, costs, and risks more readily available. We do not anticipate
that these changes will impose substantial costs on investors. We
acknowledge that investors familiar with the current ordering of
information on Forms N-3, N-4, and N-6 could bear one-time costs
associated with adjusting to the presentation of information on these
forms.
    Second, we are amending the General Instructions to provide new
guidance in each of the forms that addresses when a single prospectus
may be used to describe multiple contracts and when multiple
prospectuses may be included in a single registration statement. To the
extent that ensuring that prospectuses and registration statements
cover contracts with similar features, costs, and risks facilitates
investors' understanding of contract characteristics, these amendments
may benefit investors. While we do not have information available to
quantify these benefits, we believe that these amendments are
consistent with current industry practice and we therefore do not
expect these benefits to be substantial. We do not anticipate that
these changes will impose substantial costs on investors. We
acknowledge that to the extent that the guidance results in
presentation of information that investors are unaccustomed to,
investors may bear one-time costs associated with adjusting to a new
presentation of variable contract information.
    In a change from the proposal, we have decided to eliminate AUV
tables currently in Forms N-3 and N-4 in their entirety.\1098\
Eliminating AUV tables may impose costs on current and potential
investors, to the extent that such investors could make use of
historical summary performance information as part of their decision to
make additional investments or their decision to choose between
insurers or variable products. We believe these costs are substantially
mitigated, however, because investors can get summary information with
respect to the net performance of an individual option from the
Appendix to the summary prospectus.
---------------------------------------------------------------------------

    \1098\ See supra Section II.C.2.e.
---------------------------------------------------------------------------

b. Benefits and Costs for Insurers
    The form amendments will increase consistency of disclosure
presentation requirements among variable contracts that are registered
on different form types. We anticipate that this increased consistency
among Forms N-3, N-4, and N-6 could have the benefit of reducing costs
among sponsors that register variable contracts on multiple
registration form types. For example, we anticipate that this will make
the production of registration statements simpler, in that form
instructions and content requirements will in many cases be the same
(except in cases where structural differences or product differences
that the different form types indicate will lead to requirements that
will differ across the form types).\1099\
---------------------------------------------------------------------------

    \1099\ In 2019, 73 insurers filed Form N-CEN reports for
separate accounts with registrations on Forms
    N-3, N-4, and N-6. 5 of the 73 (7 percent) insurers filed Form
N-CEN reports for all three form types (N-3, N-4, and N-6). 58 of
the 73 (79 percent) issuers filed Form N-CEN reports for two form
types. Overall, 63 (86 percent) insurers filed Form N-CEN reports
for more than one form type.
---------------------------------------------------------------------------

    In a change from the proposal and as discussed above, we have
decided to eliminate AUV tables currently in Forms N-3 and N-4 in their
entirety. For registrants utilizing these forms, we believe the
amendments will reduce the costs related to preparing registration
statement disclosure of information relating to the contract's
accumulation unit values. We estimate the implementation costs for each
of the three registrant types, while netting the reduced burden for
Form N-3 and Form N-4 registrants, below.
    Form N-3 Estimates. We estimate that there are currently six
insurer separate accounts that file on Form N-3. We estimate the total
annual hour burden to comply with amended Form N-3 to be 2,836 hours,
at an internal time cost equivalent of $762,884.\1100\ We also estimate
the total external cost burden to comply with amended Form N-3 to be
$123,114.\1101\
---------------------------------------------------------------------------

    \1100\ See infra note 1172.
    \1101\ See infra note 1173.
---------------------------------------------------------------------------

    Form N-4 Estimates. We estimate that there are currently 477
insurer separate accounts that file on Form N-4. We estimate the total
annual hour burden to comply with amended Form N-4 to be 300,937 hours,
at an internal time cost equivalent of $80,952,053.\1102\ We also
estimate the total external cost burden to comply with amended Form N-4
to be $30,342,168.\1103\
---------------------------------------------------------------------------

    \1102\ See infra note 1183.
    \1103\ See infra note 1184.
---------------------------------------------------------------------------

    Form N-6 Estimates. We estimate that there are currently 223
insurer separate accounts that file on Form N-6. We estimate the total
annual hour burden to comply with amended Form N-6 to be 65,123 hours,
at an internal time cost equivalent of $17,518,087.\1104\ We also
estimate the total external burden to comply with amended Form N-6 to
be $7,840,000.\1105\
---------------------------------------------------------------------------

    \1104\ See infra note 1194.
    \1105\ See infra note 1195.
---------------------------------------------------------------------------

    In addition to these implementation costs, the form amendments
could impose costs related to changes in presentation of information.
In particular, the amendments may impose costs on insurers to the
extent that they limit insurers' flexibility in choosing the placement
of information within the statutory prospectuses. While we do not have
data necessary to quantify these costs, we do not expect them to be
substantial.
3. Inline XBRL
    Generally as proposed, except as discussed below, we are requiring
certain information from variable contract statutory prospectuses to be
filed with the Commission in Inline XBRL. Inline XBRL is a
specification of XBRL that is both human-readable and machine-readable
for purposes of validation, aggregation, and analysis.
    The Inline XBRL requirement is expected to benefit investors
directly by facilitating and enhancing the analysis and comparison of
variable contracts by investors and by investment professionals working
on their behalf, and indirectly by facilitating the analysis of
variable contracts by financial analysts, data aggregators, Commission
staff, variable contract issuers, and others. For example, we expect
that investors will benefit from more accurate and timely information
provided by data aggregators as a result of the Inline XBRL
requirement.
    These benefits are expected to be greatest in instances of filings
by a large number of registrants and for information from variable
contract disclosures that is not aggregated by data aggregators today
and therefore requires greater effort to extract and analyze on the
part of investors. To the extent that some of the variable contract
investors and other data users also review disclosures of mutual funds
and ETFs, those investors and other data users will have familiarity
with using Inline XBRL to view and analyze disclosures from having
reviewed

prospectus risk/return summaries filed in Inline XBRL under the
recently adopted Inline XBRL requirements for mutual funds and
ETFs.\1106\
---------------------------------------------------------------------------

    \1106\ See Inline XBRL Adopting Release, supra note 892.
---------------------------------------------------------------------------

    For contracts being sold to new investors, variable contract
registrants will incur costs to tag and review the required information
in Inline XBRL. Some filers may perform the tagging in-house while
others may retain outside service providers. We expect the outside
service providers to pass along their costs to filers. Various XBRL
preparation solutions have been developed and used by operating
companies and open-end fund filers, and some evidence suggests that,
for operating companies, XBRL tagging costs have decreased over
time.\1107\ Because Inline XBRL allows filers to embed XBRL data
directly into an HTML document, we expect costs to be even lower than
with XBRL since Inline XBRL eliminates the need to tag a copy of the
information in a separate XBRL exhibit. For filers that currently
report information in Inline XBRL for other investment products they
offer, such as open-end funds, filing variable contract information in
Inline XBRL under the amendments will likely incur lower costs of
compliance than filers adopting Inline XBRL for the first time.
---------------------------------------------------------------------------

    \1107\ See, e.g., XBRL Costs for Small Companies Have Declined
45%, According to AICPA Study (Aug. 15, 2018), available at https://www.aicpa.org/press/pressreleases/2018/xbrl-costs-have-declined-according-to-aicpa-study.html (stating that ``the cost of XBRL
formatting for small reporting companies has declined 45 percent
since 2014, according to an updated pricing survey. . . 68.6 percent
of the companies paid $5,500 or less on an annual basis (as compared
to 29.9 percent of companies in the 2014 survey) for fully
outsourced creation and filing solutions for their XBRL filings.
Meanwhile, 11.8 percent of the companies paid annual costs between
$5,500 to as much as $8,000 for their full-service outsourced
solutions.'').
---------------------------------------------------------------------------

    In a departure from the proposal, we are applying the Inline XBRL
requirement only to contracts that are being sold to new investors. As
discussed in further detail below, we believe the benefits of
structured data are less significant for contracts that are not being
sold to new investors and do not justify the additional yearly tagging
cost on filers of such contracts.\1108\ As a result, contracts that are
offered to new investors after the Inline XBRL compliance date will
include current structured data only until those contracts are no
longer offered to new investors, at which point the structured data
will no longer reflect any subsequent changes to the formerly tagged
disclosures. Investors that use this structured data could therefore
incur the cost of using potentially outdated information in their
analysis. However, because prospectus disclosures related to contracts
that are no longer sold to new investors are unlikely to materially
change from year to year, and because these contracts are not potential
investments for new investors comparing variable contract options, we
believe this cost is of low significance.
---------------------------------------------------------------------------

    \1108\ See infra Section IV.E.5.
---------------------------------------------------------------------------

    Similar to the risk/return summary requirements for mutual funds
and ETFs, (1) the amendments require variable contract registrants to
submit to the Commission in Inline XBRL certain information from
registration statements, post-effective amendments, and prospectuses
with certain information that varies from the registration statement,
and (2) the Interactive Data File will be submitted in post-effective
amendment filings to the registration statement, which may make the
filing incrementally more efficient than if the Interactive Data File
was submitted in a separate filing.
    Those registrants affected by the requirement that have not had
experience structuring disclosures in other contexts will likely incur
initial costs to acquire the necessary expertise and/or software as
well as ongoing costs of tagging required information in Inline XBRL,
and any fixed costs of complying with the Inline XBRL requirement may
have a relatively greater impact on smaller filers.\1109\ On an ongoing
basis, registrants are expected to expend time to review the tagged
information in Inline XBRL using their in-house staff. Some registrants
may also incur an initial cost to license filing preparation software
with Inline XBRL capabilities from a software vendor, and some may also
incur an ongoing licensing cost. Other registrants may incur an initial
cost to modify their existing filing preparation software to
accommodate Inline XBRL preparation. Some registrants will incur the
costs of filing agent services to rely on a filing agent to prepare
their Inline XBRL filings. Initial costs involving investments in
expertise and modifications to disclosure preparation solutions, or
switching to a different software vendor or outside service provider,
may result in a higher compliance cost during the first year of using
Inline XBRL than in subsequent years. While the costs of compliance
with the Inline XBRL requirement are likely to vary across registrants,
we estimate that the average annual internal burden for a variable
contract registrant on Forms N-3, N-4, and N-6 will be approximately
$20,880, $14,616, and $14,616 per year, respectively, and the average
external cost will be approximately $1,800, $900, and $900 per year,
respectively.\1110\
---------------------------------------------------------------------------

    \1109\ See supra note 897.
    \1110\ See infra Section V.D.
---------------------------------------------------------------------------

    The compliance dates under the amendments are expected to give
registrants additional time to obtain the necessary expertise and
software, and mitigate the impact of transition on all filers,
including smaller filers. However, we also expect that filers may
realize benefits from the Inline XBRL requirement to the extent that
making disclosures available in a structured format reduces some of the
information barriers that make it costly for variable contract
registrants to find new investors, as discussed in Section IV.D below.
    By making it easier to perform automated comparisons of disclosures
across variable contracts, the amendments also might affect sales
agents. Sales agents play a significant role in the distribution of
variable contract products. For non-captive sales agents that
independently compare variable contract products for recommendation to
investors and prepare their own sales materials, we believe that those
sales agents could benefit from the easier access and enhanced
usability of information about variable contracts in Inline XBRL.
Inline XBRL can facilitate faster search features across a larger set
of variable contracts, with the Inline XBRL Viewer providing enhanced
filtering and aggregation features. By using these features, sales
agents may be able to select variable contract offerings that are
better tailored to investors' demands. Similar benefits could also
accrue to captive sales agents, to the extent that Inline XBRL permits
them to more easily compare different variable contracts offered by a
single issuer compared to manual review. Because having the required
data in a structured format facilitates the analysis, aggregation, and
comparison of information about variable contracts, the amendments
might increase competition for investor capital among sales agents
offering variable contract products of individual insurers or a narrow
range of variable contract products.\1111\
---------------------------------------------------------------------------

    \1111\ Requiring variable contract registrants to file certain
key information in Inline XBRL could facilitate comparisons of
information across registrants which could increase competition
among variable contract registrants for investor capital. Also,
requiring variable contract registrants to file certain key
information in Inline XBRL could reduce barriers to entry for third-
party aggregators and induce competition among firms that supply
information about variable contracts to investors. These
possibilities are discussed in greater detail below.

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

4. Treatment of Discontinued Variable Contracts
    As discussed above, the Commission is taking the position that if
an issuer of an Eligible Contract that is discontinued as of July 1,
2020 that provides alternative disclosures does not file post-effective
amendments to update a variable contract registration statement and
does not provide updated prospectuses to existing investors, this would
not provide a basis for enforcement action so long as investors are
provided with the Alternative Disclosures or certain modernized
alternative disclosures.\1112\
---------------------------------------------------------------------------

    \1112\ See supra Section II.E.
---------------------------------------------------------------------------

    Issuers providing alternative disclosures currently experience
reductions in costs associated with updating registration statements
and delivering updated prospectuses, compared to other variable
contract issuers. In addition, the Commission position creates an
option for issuers of Eligible Contracts. In lieu of providing
financial statements and portfolio company prospectuses, issuers can
send a Notice Document and post the portfolio company prospectuses and
other required documents online. Issuers of Eligible Contracts will
benefit from this position to the extent preparing and sending the
Notice Document, in lieu of providing portfolio company prospectuses
and financial statements, is less costly than providing Alternative
Disclosures. This determination will be specific to agreements between
insurers and portfolio companies as well as the circumstances of each
contract, including the number of remaining contract investors, the
number of underlying portfolio companies, and the proportion of the
costs of printing and mailing the portfolio company prospectuses
allocated to the variable contract issuer.
    We acknowledge that there are certain other costs and burdens that
are currently reduced for issuers providing alternative disclosures,
but would not be similarly reduced under the rule and form amendments.
For example, a registrant relying on rule 498A will bear burdens of
maintaining and updating the contract registration statement,\1113\
preparing and filing updating summary prospectuses, delivering the
updating summary prospectus to investors annually, and making the
contract statutory prospectus and SAI and other required documents
available online. In addition, while the form amendments will simplify
certain current disclosure requirements,\1114\ in other instances they
will result in new or amended disclosures that, in the aggregate, we
anticipate will result in a net increase in the burden associated with
preparing an initial registration statement and post-effective
amendments thereto.\1115\
---------------------------------------------------------------------------

    \1113\ Even when there are not material updates to the contract,
the updating process still will 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).
    \1114\ For example, the amendments to Form N-3 and Form N-4
include certain changes that eliminate burdens related to preparing
and disclosing contract accumulation unit values. See supra Section
II.C.2.e.
    \1115\ See infra Section IV.C.2.b.
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    We estimate that approximately 4.79 million variable contracts are
currently providing alternative disclosures.\1116\ For those contracts,
the extent of the impact, compared to the baseline, of the Commission's
position with respect to Eligible Contracts will depend on the extent
to which insurers choose to provide modernized alternative disclosures.
If insurers choose to provide the Alternative Disclosures, the impact
would be minimal.\1117\ Alternatively, if issuers choose to provide
modernized alternative disclosures, we believe investors will receive
more useful information than the financial statements they currently
receive.
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    \1116\ See supra note 1031.
    \1117\ We note that insurers will have to file financial
statements with the Commission as described in Section II.E.3.a
above. See supra note 954.
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    With respect to insurers with variable contracts outstanding, the
Commission position 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. Those contracts may
experience 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, which, as discussed above,
may mitigate some of those costs.
    Many of the burdens that are currently reduced for issuers
providing alternative disclosures are also expected to be reduced under
the summary prospectus framework; in particular, we expect reductions
in costs associated with printing and mailing the contract summary
prospectus and underlying portfolio company prospectuses to
investors.\1118\ However, to the extent that the summary prospectus
framework does not reduce future costs to the same extent as currently
for issuers providing alternative disclosures, insurers may seek to
terminate contracts with few remaining investors.
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    \1118\ See supra Section IV.C.1.b.
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D. Effects on Efficiency, Competition, and Capital Formation

    This section describes the effects we expect the rule and form
amendments to have on efficiency, competition, and capital formation.
    Efficiency. To investors, the costs of purchasing a variable
contract are more than just the dollar cost of the contract and include
the value of an individual's time spent gaining an understanding of the
contract as well as various aspects of the contract including optional
benefits and fee structures, both prior to contract purchase and during
the free look period following purchase. Further, for those investors
who do not gain a full understanding of the contract, there could be a
cost stemming from a potential mismatch between an investor's goals and
the purchased contract. Depending on the size of an individual's
potential purchase, certain of these additional costs could be
considerable in comparison to the monetary costs associated with
contract purchase and could discourage investors from considering
variable contracts even in circumstances where investment in a variable
contract would be beneficial.
    For their part, insurers only supply variable contracts to the
extent they expect the benefits derived from providing the contracts to
be greater than cost of supplying the contract.\1119\ For insurers,
costs include not only those costs associated with producing and
servicing variable contracts, but also those costs associated with
meeting various statutory and regulatory obligations.
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    \1119\ Insurers who expect the benefits derived from supplying
contracts to be equal to the cost of supplying the contract will be
indifferent between supplying and not supplying the contract.
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    These costs borne by both insurers and individuals are examples of
market ``frictions.'' Market frictions have the effect of reducing the
benefits from contracting between market participants.\1120\ Rules that
reduce costs for investors, insurers, or both, reduce market frictions.
The summary

prospectus framework offers the opportunity for both insurers and
investors to reduce their costs associated with variable contracts.
Summary prospectuses provide information in a concise, user-friendly
way that may allow investors to better understand variable products.
The summary prospectus framework offers opportunities for insurers to
reduce the costs of producing and delivering required disclosures to
investors.\1121\
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    \1120\ If market frictions are sufficiently large, market
frictions could eliminate exchange altogether.
    \1121\ For example, as discussed above, greater investor
understanding of variable products could lead to a better match
between investor goals and purchased variable contracts. In other
words, investment efficiency could increase.
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    Similarly, the amendments to the registration forms will make key
information more salient for investors and will make the presentation
of this information more consistent across variable contract types.
Additional consistency across forms will also reduce compliance burdens
for insurers that are required to file using multiple form types, as
will the amendments that reduce or eliminate certain disclosure
requirements such as the AUV table requirement. The resulting decrease
in market frictions should lead to greater efficiency by reducing
barriers that insurers may face in supplying variable contracts to
investors, and reducing barriers investors may face in evaluating
variable contracts sold to them by insurers, particularly during the
free look period.\1122\ In addition, requiring variable contract
registrants to file certain information in Inline XBRL will enable
investors to capture and analyze that information more quickly and
efficiently than is possible using the same information provided in a
static, text-based format. This improved functionality is expected to
also facilitate the analysis performed by other data users (such as
financial analysts, data aggregators, Commission staff, academics, and
financial journalists) to the ultimate benefit of investors.
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    \1122\ As noted above, there may be investors who prefer to rely
on statutory prospectuses when making an investment decision who may
not take the steps necessary to access the statutory prospectus. To
the extent there are both investors who prefer to rely on statutory
prospectuses when making an investment decision and who do not take
the steps necessary to access the statutory prospectus, the
increased barrier (the steps necessary to access the statutory
prospectus) could lead to reduced efficiency in investor evaluation
of variable contracts.
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    These increases in efficiency could manifest as a higher likelihood
that investors make investment decisions that are informationally
efficient. First, it may increase the likelihood that investors choose
a level of participation in variable contracts that is consistent with
their overall financial needs and objectives--a level that may be
higher or lower than current levels. The rule and form amendments may
help promote investment in variable contracts by investors who would
benefit from them. Second, more concise, user-friendly disclosure
facilitates comparison across variable contracts and could make it more
likely that investors choose the contracts that best meet their needs
and reject those that do not. We also note that in facilitating
comparison across variable products, concise, user-friendly disclosures
may promote competition among insurers on dimensions such as fees,
costs, and conflicts which could, in turn, improve investor welfare.
Third, improved access to information resulting from more concise
disclosure could facilitate more efficient investor allocation of
assets across portfolio companies within variable contracts. Finally,
access to clearer information about the contract terms may reduce the
chances that an investor surrenders a variable contract when the costs
of surrender do not justify the benefits of surrender.
    Furthermore, we considered the potential impact of our position on
Alternative Disclosure Contracts on efficiency. We recognize that our
position likely will cause insurers with non-Alternative Disclosure
Contracts outstanding to incur additional costs due to the disclosure
obligations that they may not have anticipated. To the extent that
these unexpected costs drive insurers to take actions to encourage
investors to exchange old contracts for new contracts or to buy out
existing contracts, the Commission's position may result in
inefficiencies. However, we believe that this reduction in efficiency
may be offset by the expected increase in informational efficiency
associated with the disclosures that will be afforded to contract
holders in lieu of the alternative disclosures described in the Staff
Letters.
    Competition. If the rule and form amendments increase efficiency of
exchange in the variable contracts market, then we may observe a change
in investment in variable contracts. For example, if there are
individuals who currently do not invest in variable contracts (or
invest less than they would have) because the costs other than the
price of the contract are too high, then to the extent the rule lowers
those costs we would expect to observe more people entering the
variable contract market. Conversely, there may be investors who,
because of the burden, choose not to read statutory prospectuses. To
the extent those investors are more likely to read summary
prospectuses, those investors may decide, as a result, that other
investments or products are better suited to their investment goals.
This could result in fewer investments in variable contracts. If there
are insurers who limit their participation in the variable contract
market, or limit the portfolio companies they offer as a result of the
costs of current prospectus delivery requirements, those insurers may
increase participation or increase the number of portfolio companies
they offer as a result of this rule. To the extent that competition in
a market is related to the size of the market, the net effect of these
potential changes in investor demand for, and insurer supply of,
variable contracts could affect competition in the variable contract
market.
    The rule could also affect competition by requiring that
information about the variable contract be presented in a concise,
user-friendly way in the summary prospectus, which enhances the ability
of investors to compare information across products. Requiring variable
contract registrants to file certain information in Inline XBRL will
further facilitate comparisons of information across contracts by
making it easier for investors (directly or through data aggregators)
to extract and aggregate information through automated means for
analysis and comparison, which could increase competition among
variable contract registrants for investor capital, particularly in
combination with the free look period.\1123\ For example, the rule and
form amendments require insurers to distill certain information into
tables. The presentation of this information in a table facilitates
comparison across different products. Greater comparison across
different variable products could lead to greater

competition on dimensions which could improve investor welfare.
Insurers could leverage the enhanced comparative capabilities arising
from the Inline XBRL requirement (as well as the broader informational
benefits arising from the summary prospectus and registration statement
updating requirements) to better survey the variable contract products
offered by their competitors and develop innovations to differentiate
their own products from those offered by their competitors.
Furthermore, the comparative benefits discussed above could increase
further to the extent third-party data aggregators enter the market and
use information disclosed in prospectuses to provide consolidated data
on variable products, as search and processing costs could be reduced
even further for investors. By reducing the costs associated with
aggregating data across variable contracts, the Inline XBRL
requirements could reduce barriers to entry for third-party data
aggregators and induce competition among firms that supply information
about variable contracts to investors, including other third-party
aggregators and sales agents.
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    \1123\ Competitive dynamics are more effective in areas where
comparisons can be more easily made. For example, we believe that in
the market for mutual funds and exchange-traded funds--particularly
index funds--the enhanced comparability provided by mutual fund
summary prospectuses and competition, among other factors, have
driven down fees significantly. Comparability among index funds that
follow the same market index is facilitated in part by their passive