[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Proposed Rules]
[Pages 61730-61943]
[FR Doc No: 2018-24376]

Vol. 83

Friday,

No. 231

November 30, 2018

Part II

Book 2 of 2 Books

Pages 61729-62240

Securities and Exchange Commission

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

17 CFR Parts 230, 232, 239, et al.

Updated Disclosure Requirements and Summary Prospectus for Variable
Annuity and Variable Life Insurance Contracts; Proposed Rule

Federal Register / Vol. 83 , No. 231 / Friday, November 30, 2018 /
Proposed Rules

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, 240, 270, and 274

[Release Nos. 33-10569; 34-84508; IC-33286; File No. S7-23-18]
RIN 3235-AK60

Updated Disclosure Requirements and Summary Prospectus for
Variable Annuity and Variable Life Insurance Contracts

Agency: Securities and Exchange Commission.

Action: Proposed rule.

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

Summary: The Securities and Exchange Commission is proposing rule and
form amendments that are intended to help investors make informed
investment decisions regarding variable annuity and variable life
insurance contracts. The proposal would modernize disclosures by using
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 presentation, with access to more
detailed information available online and electronically or in paper
format on request. The proposed new rule would permit a person to
satisfy its prospectus delivery obligations under the Securities Act of
1933 for a variable annuity or variable life insurance contract by
sending or giving a summary prospectus to investors and making the
statutory prospectus available online. The proposed rule also would
consider a person to have met its prospectus delivery obligations for
any portfolio companies associated with a variable annuity or variable
life insurance contract if the portfolio company prospectuses are
posted online. In addition, we are proposing amendments to the
registration forms for variable annuity and variable life insurance
contracts to update and enhance the disclosures to investors in these
contracts, and to implement the proposed summary prospectus framework.
We are further proposing to require variable contracts to use the
Inline eXtensible Business Reporting Language (``Inline XBRL'') format
for the submission of certain required disclosures in the variable
contract statutory prospectus. We are also proposing certain technical
and conforming amendments to our rules and forms, including amendments
to rules relating to variable life insurance contracts, as well as
rescission of certain related rules and forms. Lastly, we are seeking
comments regarding parallel amendments to rules governing mutual fund
summary prospectuses and registration forms applicable to other types
of registered investment companies.

Dates: Comments should be submitted on or before February 15, 2019.

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include
File No. S7-23-18 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-23-18. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Room 1580,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information you wish to make available publicly.
Investors wishing to provide comments regarding the proposed summary
prospectus may wish to submit our Feedback Flier, available at Appendix
C.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:  Daniel K. Chang, James Maclean, Amy
Miller, Senior Counsels; Amanda Hollander Wagner, Branch Chief; Michael
C. Pawluk, Senior Special Counsel, Investment Company Regulation
Office, at<PHONE_NUMBER>; Keith Carpenter or Michael Kosoff, Senior
Special Counsels, Disclosure and Review Office, at<PHONE_NUMBER>,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:  The Securities and Exchange Commission
(``Commission'') is proposing new rule 498A [proposed rule 17 CFR
230.498A] under the Securities Act. The Commission is also proposing
amendments to the following rules:

----------------------------------------------------------------------------------------------------------------
                   Commission reference                                     CFR citation (17 CFR)
----------------------------------------------------------------------------------------------------------------
Regulation S-T [17 CFR 232.10 through 232.903]:
    Rule 11...............................................  Sec.   232.11.
    Rule 405..............................................  Sec.   232.405.
Securities Act of 1933 (``Securities Act''): \1\
    Rule 159A.............................................  Sec.   230.159A.
    Rule 421..............................................  Sec.   230.421.
    Rule 431..............................................  Sec.   230.431.
    Rule 482..............................................  Sec.   230.482.
    Rule 485..............................................  Sec.   230.485.
    Rule 497..............................................  Sec.   230.497.
    Rule 498..............................................  Sec.   230.498.
Securities Exchange Act of 1934 (``Exchange Act''): \2\
    Rule 14a-16...........................................  Sec.   240.14a-16.
Investment Company Act of 1940 (``Investment Company
 Act''): \3\
    Rule 0-1..............................................  Sec.   270.0-1.

    Rule 6c-7.............................................  Sec.   270.6c-7.
    Rule 6c-8.............................................  Sec.   270.6c-8.
    Rule 6e-2.............................................  Sec.   270.6e-2.
    Rule 6e-3(T)..........................................  Sec.   270.6e-3(T).
    Rule 11a-2............................................  Sec.   270.11a-2.
    Rule 14a-2............................................  Sec.   270.14a-2.
    Rule 26a-1............................................  Sec.   270.26a-1.
    Rule 27c-1............................................  Sec.   270.27c-1.
Securities Act and Investment Company Act:
    Form N-3..............................................  Sec.   239.17a and 274.11b.
    Form N-4..............................................  Sec.   239.17b and 274.11c.
    Form N-6..............................................  Sec.   239.17c and 274.11d.
----------------------------------------------------------------------------------------------------------------

    Finally, the Commission is proposing to rescind:
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 80a et seq.

------------------------------------------------------------------------
         Commission reference                CFR citation (17 CFR)
------------------------------------------------------------------------
Investment Company Act:
  Rule 26a-2.........................  Sec.   270.26a-2.
  Rule 27a-1.........................  Sec.   270.27a-1.
  Rule 27a-2.........................  Sec.   270.27a-2.
  Rule 27a-3.........................  Sec.   270.27a-3.
  Rule 27d-2.........................  Sec.   270.27d-2.
  Rule 27e-1.........................  Sec.   270.27e-1.
  Rule 27f-1.........................  Sec.   270.27f-1.
  Rule 27g-1.........................  Sec.   270.27g-1.
  Rule 27h-1.........................  Sec.   270.27h-1.
  Form N-27E-1.......................  Sec.   274.127e-1.
  Form N-27F-1.......................  Sec.   274.127f-1.
  Form N-27I-1.......................  Sec.   274.302.
  Form N-27I-2.......................  Sec.   274.303.
Securities Act and Investment Company
 Act:
  Form N-1...........................  Sec.   239.15 and 274.11.
------------------------------------------------------------------------

Table of Contents

I. Introduction and Background
    A. Overview of Variable Annuities and Variable Life Insurance
Products
    B. Prospectus Disclosure and Delivery
    1. Requirements for Variable Contract Prospectus Disclosure and
Delivery
    2. Evolution of Layered Disclosure and Delivery of Information
to Investors
    C. Rulemaking Proposal Overview
II. Discussion
    A. New Option To Use a Summary Prospectus for Variable Contracts
    1. Initial Summary Prospectus
    2. Updating Summary Prospectus
    3. Legal Effect of Use of Summary Prospectus for Variable
Contracts
    4. Online Accessibility of Contract Statutory Prospectus and
Certain Other Documents Relating to the Contract
    5. Other Requirements for Summary Prospectus and Other Contract
Documents
    6. Incorporation by Reference
    7. Filing Requirements for the Summary Prospectus
    8. Definitions in the Proposed Rule
    B. Optional Method To Satisfy Portfolio Company Prospectus
Delivery Requirements
    1. Current Delivery Practices for Portfolio Company Prospectuses
    2. New Option To Satisfy Prospectus Delivery Requirements
    C. Discontinued Variable Contracts
    D. Proposed Amendments to Registration Forms
    1. General Instructions
    2. Part A (Information Required in a Prospectus)
    3. Part B (Information Required in a Statement of Additional
Information)
    4. Part C (Other Information)
    5. Guidelines
    E. Inline XBRL
    F. Technical and Conforming Amendments to, and Requests for
Comment on, Other Aspects of the Regulatory Framework for Variable
Contracts
    G. Compliance Date
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview of Variable Products Market
    2. Statutory and Regulatory Disclosure Requirements
    C. Benefits and Costs of the Proposed Rule
    1. Optional Summary Prospectus Regime
    2. Treatment of Discontinued Variable Contracts
    3. Changes to Forms N-3, N-4, and N-6
    4. Inline XBRL
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
    1. Mandating Summary Prospectuses
    2. Summary Prospectuses Delivered With Statutory Prospectuses
    3. Contract-Specific Updating Summary Prospectuses
    4. Do Not Provide Updating Summary Prospectuses
    5. Inline XBRL
    6. Alternatives to Form N-3, N-4, and N-6 Amendments
    7. Requiring All Variable Contracts (Including Currently
Discontinued Contracts) To Prepare Updated Registration Statements
and Deliver Statutory or Summary Prospectuses
    8. Alternatives to Commission's Position on Alternative
Disclosure Contracts
    F. Request for Comments
IV. Paperwork Reduction Act
    A. Form N-3
    B. Form N-4
    C. Form N-6
    D. Registered Investment Company Interactive Data
    E. Proposed Rule 498A
    F. Request for Comments
V. Regulatory Flexibility Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority and Text of Proposed Amendments

Appendices

Appendix A: Hypothetical Initial Summary Prospectus
Appendix B: Hypothetical Updating Summary Prospectus
Appendix C: Feedback Flier--Variable Annuity Summary Prospectus

I. Introduction and Background

    To meet life insurance needs and other financial goals, investors
may consider variable annuity and variable life insurance contracts
(together, ``variable contracts'' or ``contracts'') as a way of
combining insurance guarantees with the potential for long-term
investment appreciation.\4\ Variable contracts are generally more
complex than other retail investment products, such as mutual funds, in
a variety of ways. These investment products combine both investment
and insurance features. They frequently offer a menu of optional
benefits that an investor may select to customize the contract to meet
his or her individual needs. In addition, most have two-level fee
structures, where fees are assessed at both the contract level by the
issuer (including any additional charges for optional benefits selected
by the investor) and at the underlying investment option level. Further
transactional charges may also apply, some of which could be
substantial, for example, in the case of withdrawals made from a
contract prior to a specified number of years.\5\ Special tax rules
also apply to variable products, with both tax advantages and potential

adverse tax impacts in certain circumstances.\6\
---------------------------------------------------------------------------

    \4\ For an overview of variable annuities and variable life
insurance contracts, see infra section I.A.
    \5\ A contract may impose a ``surrender charge'' if, after
purchase payments are made, an investor withdraws money from the
contract during a stated period typically ranging from six to ten
(or even more) years.
    \6\ For example, assets within a variable contract grow tax-
deferred, and transfers between investment options under the
contract are not taxable events. However, investors may face a 10%
federal income tax penalty if money is withdrawn before the investor
reaches 59\1/2\ years old. For these and other reasons, a variable
contract generally is sold as a long-term investment.
---------------------------------------------------------------------------

    Investors should understand the features, risks, and charges
associated with any potential investment. Providing investors with key
information is particularly important in the context of variable
contracts, since their structure is typically more complex than other
types of investment products. The operation and terminology associated
with these products can be difficult for investors to understand.
Moreover, variable contract prospectuses are often quite lengthy
(frequently more than a hundred pages), particularly in the case of
products that include optional benefits. It is also common for insurers
to describe different versions of the contract in one prospectus, some
of which may no longer be available to new investors, leaving investors
to wade through a lengthy document to find disclosures relevant to the
particular contract that they purchased or are considering purchasing.
    In addition, variable contract investors generally allocate their
purchase payments to a range of investment options. For most variable
contracts, these investment options typically are mutual funds, which
are separately registered and have their own prospectuses.\7\ Because
insurers issuing variable contracts typically bundle prospectuses for
the underlying portfolio companies together with the variable contract
prospectus, the disclosures that investors receive at the time of the
initial purchase and on an annual basis thereafter can be
voluminous.\8\
---------------------------------------------------------------------------

    \7\ For purposes of this release, we refer to these entities as
``portfolio companies.''
    \8\ For example, variable annuity contracts offer an average of
59 investment options, with some contracts offering more than 250
investment options. See Insured Retirement Institute, IRI Fact Book
2018 (``IRI Fact Book''), at 170. Furthermore, variable life
insurance contracts offer an average of 64 investment options, with
some contracts offering more than 300 investment options. These
variable life figures are based on June 2018 data obtained from
Morningstar Direct.
---------------------------------------------------------------------------

    We are concerned that the volume, format, and content of
disclosures in the variable contract context may make it difficult for
some investors to find and understand key information that they need to
make an informed investment decision. To improve the current disclosure
framework and update the manner in which variable contract investors
receive and review prospectuses and related information, we are
proposing new rule 498A under the Securities Act that permits the use
of a summary prospectus to satisfy statutory prospectus delivery
obligations, along with other rule and form amendments intended to
implement the summary prospectus framework. Investors would continue to
have access to the contract statutory prospectus and other information
about the contract online (and could receive paper or electronic copies
upon request), which would continue to provide more-detailed
information about the contract.
    Specifically, the approach under the proposed new rule contemplates
the use of two types of summary prospectuses: An ``initial summary
prospectus'' to be provided to new investors, and an ``updating summary
prospectus'' to be provided to existing investors. To help investors
make an informed investment decision, 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 presentation, with website
addresses or hyperlinks to more detailed information posted online and
delivered electronically or in paper format on request. In proposing
new rule 498A, we are considering approaches that could affect, and
raise the possibility of future amendments to, certain parallel
provisions of rule 498 and certain of our registration forms applicable
to other types of registered investment companies.

A. Overview of Variable Annuities and Variable Life Insurance Products

    Variable contracts are contracts between an investor and an
insurance company that provide investors with exposure to the
securities markets while also offering certain insurance protections,
such as protection against market losses, protection against outliving
their assets, or assurances that their beneficiaries will receive a
certain amount upon death.\9\ Unlike traditional annuities and life
insurance contracts, variable contracts have an investment component
that allows investors the possibility of increasing their potential
benefits.\10\ Variable contracts also offer tax benefits such as tax-
deferral on investment earnings until distribution. This combination of
insurance guarantees and tax-deferred investment may be appealing to
investors.
---------------------------------------------------------------------------

    \9\ The average contract value for individual variable annuities
is approximately $106,187. See IRI Fact Book, supra note 8, at 170.
Americans who own annuities have a median annual household income of
$64,000 (80% have total annual household incomes below $100,000).
Most individual annuity owners are retired. Although the average age
of an annuity owner is 70, the average age at which owners purchased
their first annuity is 51. See The Gallup Organization and Mathew
Greenwald & Associates for The Committee of Annuity Insurers, Survey
of Owners of Individual Annuity Contracts (2013) (``Gallup
Survey''), at 8-9. There is limited data available regarding
variable life insurance contracts, but based upon the data that is
available, the Commission believes that the demographics of
investors for those products are likely comparable.
    \10\ Variable contracts generally are treated as annuity or
insurance contracts under state insurance laws and securities under
the federal securities laws. Although section 3(a)(8) of the
Securities Act exempts from the Act any insurance or endowment
policy or annuity contract issued by a corporation subject to the
supervision of the insurance commissioner of any State or Territory
of the United States or the District of Columbia, we have
determined, and the courts have held, that variable annuities are
securities under the federal securities laws and are not, therefore,
entitled to this exemption. See, e.g., SEC v. Variable Annuity Life
Ins. Co. of Am., 359 U.S. 65 (1959) (variable annuity contracts are
securities, and not insurance policies or annuity contracts within
the meaning of the Act's exemption because the issuer of a variable
annuity contract has no element of fixed return and does not assume
any investment risk, which is inherent in the concepts of insurance
and annuity contracts); see also Adoption of Rule 3c-4 Under the
Investment Company Act of 1940, Investment Company Act Release No.
7644, 1 SEC Docket 17 (Jan. 31, 1973) (because the contract holder
participates directly in the investment experience of the separate
account and bears an investment risk, a variable life insurance
contract is a security, not entitled to the exemption set forth in
section 3(a)(8) of the Securities Act).
---------------------------------------------------------------------------

    When an investor purchases a variable contract, he or she makes a
purchase payment (in either a lump sum or a series of payments), and in
return, the insurance company promises to pay a stream of periodic
income payments, either immediately or at some future date. Variable
annuities allow investors to receive periodic payments for either a
definite period (e.g., 20 years), or for an indefinite period (e.g.,
the life of the investor), and also provide a basic death benefit to
protect the investor's beneficiaries. The investor may allocate the
cash value of the purchase payments to a range of investment options
available under the contract, including to portfolio companies and, in
some cases, to a fixed account option that pays a fixed or minimum rate
of interest. The investor's account value changes depending on the
performance of the investment options the investor has selected.
    Similar to variable annuities, variable life insurance contracts
offer a death benefit to the investor, as well as the ability to
accumulate cash value.\11\ Also

like variable annuities, a variable life insurance contract permits the
investor to allocate insurance premiums to a variety of portfolio
companies, and may also offer a fixed account investment option.
Because an investor will generally allocate the insurance premiums to
portfolio companies, the cash value (and in some cases, the death
benefit \12\) will vary with the performance of these investments.
---------------------------------------------------------------------------

    \11\ Unlike other types of life insurance, variable life
insurance exposes the investor to greater market risk (the cash
value can decrease), but also offers the potential for long-term
returns that can grow the cash value. An investor may access the
cash value of his or her contract by taking out loans (or
withdrawals), which may be subject to surrender charges and are
taxable under certain circumstances. Taking a loan or withdrawal
reduces the policy's cash value and death benefit, and may require
additional premium payments to keep the policy in force.
    \12\ The death benefit can vary based on optional benefit
features that the contract investor selects. See infra paragraph
accompanying note 17.
---------------------------------------------------------------------------

    Investors bear a number of ongoing fees, expenses, and other
charges when investing in a variable contract, including mortality and
expense risk charges,\13\ administrative fees, fees for optional
benefits selected by the investor, and portfolio company fees and
expenses.\14\ Investors may also bear certain transaction-based
charges, including surrender charges.\15\ Variable life insurance
contracts also impose an additional insurance charge to cover the cost
of the death benefit.\16\
---------------------------------------------------------------------------

    \13\ The mortality and expense (``M&E'') risk charge, which is
based on an investor's account value, compensates the insurance
company for offering certain contract features (e.g., death benefit
or annuitization) and is sometimes used to pay the insurance
company's costs to sell the contract (e.g., commissions). Typical
M&E charges are approximately 1.25% of account value per year for
variable annuities, and 0.90% for variable life insurance. See IRI
Fact Book, supra note 8, at 55.
    \14\ Investors indirectly bear the operating fees and expenses
of the portfolio companies they select as the underlying investments
in their variable contracts.
    \15\ See supra note 5.
    \16\ These additional insurance charges are determined at the
time of the contract is written and vary based on the insured's
personal characteristics, such as age and health. These charges are
in addition to the M&E risk charge discussed above. See supra note
13.
---------------------------------------------------------------------------

    Variable contracts commonly offer optional benefit features as
riders to the contract with their own terms and conditions. Riders
commonly provide enhanced death benefits, as well as ``living
benefits'' that may be designed to provide protection against
investment losses or longevity risk, or to cover financial losses that
result from illness, incapacity, or injury. These optional riders have
become increasingly popular with variable contract investors.\17\
Typically, there is a separate charge for each rider.
---------------------------------------------------------------------------

    \17\ See, e.g., IRI Fact Book, supra note 8, at 83 (``Just under
$2 trillion of VA assets were held by insurance companies as of the
fourth quarter of 2017, with an estimated $800 billion having a
living benefit.''); Gallup Survey, supra note 9, at 21 (stating that
``[n]early eight in ten annuity owners (79%) who own a variable
annuity report that their contract has a guaranteed lifetime
withdrawal benefit.'').
---------------------------------------------------------------------------

B. Prospectus Disclosure and Delivery

1. Requirements for Variable Contract Prospectus Disclosure and
Delivery
    The prospectus delivery requirements for variable contracts arise
from the legal structure of these products. The ``separate account''
\18\ established by the sponsoring insurance company is the legal
entity that registers its securities. The separate account is an
account that is owned by the insurance company.\19\ Separate accounts
are typically registered as investment companies under the Investment
Company Act \20\ and also register their securities under the
Securities Act by filing a registration statement with the Commission.
---------------------------------------------------------------------------

    \18\ See section 2(a)(37) of the Investment Company Act
(defining ``separate account'' to mean an account established and
maintained by an insurance company pursuant to state law under which
income, gains and losses from assets allocated to that account are
credited against the account without regard to other income, gains
or losses of the insurance company). In addition to directing all or
part of their purchase payments to the investment options (typically
mutual funds) available under the separate account, investors may
also direct their purchase payments to a fixed account that pays a
fixed, or minimum, rate of interest. The fixed account is part of
the insurance company's general account, which, unlike the separate
account, is subject to the insurance company's claims-paying ability
and creditor reach.
    \19\ The assets of the separate account are segregated from the
other assets of the insurance company (such as the insurance
company's general account) and are therefore insulated from the
claims of the insurance company's creditors. See rule 26a-2 under
the Investment Company Act (providing exemptions from certain
provisions of the Act to permit the insurance company that sponsors
a separate account to hold the assets of the separate account).
    \20\ In general, an insurance company's separate account is an
investment company under the Investment Company Act. See Prudential
Ins. Co. v. SEC, 326 F.2d 383, 388 (3d Cir. 1964) (concluding that
the insurer's separate account, which was a completely segregated
account devoted to investing in securities, the cash for which was
derived from payments made by the purchaser of the variable annuity
contract, and the proceeds from which were held for the sole benefit
of the annuitant, was separable from the insurance company and
should be deemed the ``investment company'' for purposes of the
Act). Not all variable contract separate accounts are investment
companies; exclusions may apply to certain separate accounts that
rely, for example, on sections 3(c)(1), (7), or (11) of the
Investment Company Act.
---------------------------------------------------------------------------

    Separate accounts may be organized either as management companies
\21\ or unit investment trusts (``UITs'').\22\ Variable annuity
separate accounts that are management companies file registration
statements on Form N-3,\23\ while those that are UITs file registration
statements on Form N-4. Most variable annuity contracts sold today are
offered by Form N-4 registrants.\24\ Variable life separate accounts,
which also are typically organized as UITs, file registration
statements on Form N-6.\25\
---------------------------------------------------------------------------

    \21\ See section 4(3) of the Investment Company Act (defining
``management company'' to mean any investment company other than a
face-amount certificate company or a unit investment trust).
    \22\ See section 4(2) of the Investment Company Act (defining
``unit investment trust'' to include an investment company that is
organized under a trust indenture, does not have a board of
directors, and only issues redeemable securities, each of which
represents an undivided interest in a unit of specified securities).
    \23\ Form N-3 filers register as management investment companies
because the active management of the investment portfolio occurs at
the separate account level. During the early years of variable
product history, this was the predominant type of separate account.
However, by 2017, only five variable annuity separate accounts were
registered as management investment companies on Form N-3.
    \24\ In 2017, 435 variable annuity separate accounts registered
as UITs on Form N-4.
    \25\ In 2017, 238 variable life insurance separate accounts
registered as UITs on Form N-6.
---------------------------------------------------------------------------

    Form N-4 (variable annuity) and N-6 (variable life) registrants are
sometimes referred to as ``two-tier'' investment company structures.
The top tier, which is the separate account established by the insurer
and registered with the Commission as a UIT, is itself divided into
``subaccounts,'' each of which invests in the shares of an underlying
portfolio company (e.g., a mutual fund or exchange-traded fund
(``ETF'')) that serves as an investment option under the variable
contract. In this structure, the insurer's separate account, not the
variable contract investor, is the legal owner of the underlying fund
shares.\26\
---------------------------------------------------------------------------

    \26\ Variable contract investors do not hold legal title to the
assets of the insurance company's separate account. See supra note
19. However, certain legal rights, such as voting rights, generally
pass through to variable contract investors.
---------------------------------------------------------------------------

    Section 5(b)(2) of the Securities Act makes it unlawful to carry or
cause to be carried a security for purposes of sale or for delivery
after sale ``unless accompanied or preceded'' by a prospectus that
meets the requirements of section 10(a) of the Act.\27\ For purposes of
section 5 of the Securities Act, each additional purchase payment under
a variable contract is considered a ``sale'' requiring delivery of a
current prospectus.\28\
---------------------------------------------------------------------------

    \27\ See section 10(a) of the Securities Act (generally
requiring a prospectus relating to a security to contain the
information contained in the registration statement). For purposes
of this release, a prospectus meeting the requirements of a section
10(a) prospectus is referred to as a ``statutory prospectus.''
    \28\ See Registration Forms for Insurance Company Separate
Accounts that Offer Variable Annuity Contracts, Investment Company
Act Release No. 14575 (June 14, 1985) [50 FR 26145 (June 25, 1985)]
(``Forms N-3 and N-4 Adopting Release'') at n.14 and accompanying
text.

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

    Variable contract issuers generally maintain current prospectuses
for their products through the filing of annual post-effective
amendments to their registration statement and, as necessary,
supplementing or ``stickering'' the contract prospectus or statement of
additional information (``SAI'').\29\ Rather than bearing the expense
of sending a prospectus with each confirmation of an investor's
purchase of additional shares, which often occurs on a periodic basis
(e.g., monthly), most registrants instead send copies of the new
prospectus to all investors each time it is updated. It is our
understanding that this practice is similar to that followed by most
mutual funds.
---------------------------------------------------------------------------

    \29\ In addition to updating the registration statement for the
variable contract annually to include updated financial statements,
variable contract issuers also make amendments to the contract
registration statement (generally as part of this annual update
process), as necessary to reflect material or other changes to the
information disclosed. See section 10(a)(3) of the Securities Act
(requiring, among other things, that a prospectus used more than
nine months after the effective date of a registration statement be
updated so that the information contained therein shall not be more
than 16 months old). But see infra section II.C (discussing
circumstances in which certain variable contract issuers provide
alternative disclosures instead of the contract statutory
prospectus, as described in certain staff no-action letters). See
also section 11 of the Securities Act (providing a civil remedy for
a registration statement that contains ``an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading.''); rule 408 under the Securities Act [17 CFR
230.408(a)] (requiring registrants to include, in addition to the
information expressly required to be included in a registration
statement, such further material information, if any, as may be
necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading.).
    Additionally, portfolio companies may supplement or ``sticker''
their prospectus or SAI. See generally rule 497 under the Securities
Act.
---------------------------------------------------------------------------

    We understand that an insurer or the financial intermediary
distributing the variable contact will typically deliver the variable
contract prospectus upon issuance of the contract, in order to comply
with the requirements of section 5(b)(2).\30\ However, we also
understand that many insurers make it a practice to provide the
variable contract prospectus to potential investors, often as part of
the application package.
---------------------------------------------------------------------------

    \30\ Because the requirements of section 5(b)(2) of the
Securities Act are applicable to ``any person,'' its obligations are
applicable to financial intermediaries through whom variable
contracts are sold, as well as variable contract issuers.
---------------------------------------------------------------------------

    The Commission has interpreted section 5(b)(2) of the Securities
Act to require delivery of a portfolio company prospectus to an
investor in a variable contract who has allocated his or her purchase
payments to that portfolio company.\31\ We understand that today most
investors receive summary prospectuses (as opposed to statutory
prospectuses) for the underlying portfolio companies at the same time
they receive the statutory prospectus for the variable contract. Since
variable contracts generally offer exchange privileges permitting an
investor to reallocate all or a portion of his or her investment from
one underlying portfolio company to another, many insurance companies
deliver prospectuses for all underlying portfolio companies to simplify
the administrative task of tracking whether it delivered the
appropriate current prospectus. Other insurers have invested in systems
that enable the insurer to customize the delivery of underlying
portfolio company prospectuses such that investors only receive
prospectuses for the portfolio companies to which they have allocated
purchase payments.
---------------------------------------------------------------------------

    \31\ See Forms N-3 and N-4 Adopting Release, supra note 28, at
n.49 and accompanying text (``Of course, delivery of a prospectus of
an underlying company in which a contractowner actually invests will
be required pursuant to section 5(b)(2) under the 1933 Act (15
U.S.C. 77e(b)(2)).'').
---------------------------------------------------------------------------

    Although paper is the default format for delivery of contract
prospectuses, portfolio company prospectuses, and certain other
required disclosures, we understand that most insurers offer investors
the option to elect electronic delivery of these documents. The
Commission has provided guidance noting that electronic delivery may be
used to satisfy prospectus delivery requirements if: (1) The investor
has notice of the availability of the information; (2) the use of the
medium is not so burdensome that intended recipients cannot effectively
access the information being provided; and (3) the issuer has evidence
of delivery.\32\ Issuers relying on this guidance have typically
satisfied the ``evidence of delivery'' requirement by obtaining
informed consent to electronic delivery. Investors that have elected
electronic delivery of materials associated with their variable
contract typically receive an email that contains a link to the website
where the materials are available.
---------------------------------------------------------------------------

    \32\ See Use of Electronic Media for Delivery Purposes,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458
(Oct. 13, 1995)] (``1995 Release''); Use of Electronic Media by
Broker-Dealers, Transfer Agents, and Investment Advisers for
Delivery of Information; Additional Examples Under the Securities
Act of 1933, Securities Exchange Act of 1934, and Investment Company
Act of 1940, Investment Company Act Release No. 21945 (May 9, 1996)
([61 FR 24644 (May 15, 1996]) (``1996 Release''); Use of Electronic
Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65
FR 25843 (May 4, 2000)] (``2000 Release'').
---------------------------------------------------------------------------

2. Evolution of Layered Disclosure and Delivery of Information to
Investors
    Our proposal builds on our experience with both layered disclosure
(under the mutual fund summary prospectus) \33\ and integrated
disclosure (enhanced over a decade ago with securities offering reform
for corporate issuers).\34\ It also draws on more than twenty years of
experience with the use of the internet as a medium to provide
information to investors.\35\
---------------------------------------------------------------------------

    \33\ Enhanced Disclosure and New Prospectus Delivery Option for
Registered Open-End Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)] (``2009 Summary Prospectus Adopting Release'') (permitting
the use of a summary prospectus by registered open-end management
investment companies).
    \34\ Securities Offering Reform, Securities Act Release No. 8591
(July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering
Reform'') at n.202 and accompanying text (allowing the use of free
writing prospectuses to provide information to investors and stating
that a free writing prospectus is a permitted prospectus for
purposes of section 10(b) of the Securities Act and, as such, can be
used without violating section 5(b)(1) of the Securities Act).
Additionally, Congress recently required the Commission to extend
securities offering reform to closed-end funds (see section 509 of
the Economic Growth, Recovery Relief, and Consumer Protection Act,
S. 2155, 115th Cong. (2017-2018)), and to business development
companies (see section 3 of the Small Business Credit Availability
Act, S. 2324, 115th Cong. (2017-2018)).
    \35\ See, e.g., 1995 Release, supra note 32 (providing
Commission views on the use of electronic media to deliver
information to investors, with a focus on electronic delivery of
prospectuses, annual reports, and proxy solicitation materials);
1996 Release, supra note 32 (providing Commission views on
electronic delivery of required information by broker-dealers,
transfer agents, and investment advisers); 2000 Release, supra note
32 (providing updated interpretive guidance on the use of electronic
media to deliver documents on matters such as telephonic and global
consent, issuer liability for website content, and legal principles
that should be considered in conducting online offerings).
    See also Securities Offering Reform, supra note 34 (adopting
rule 172 under the Securities Act providing an ``access equals
delivery'' framework under which issuers and intermediaries can
satisfy their final prospectus delivery obligations); Shareholder
Choice Regarding Proxy Materials, Investment Company Act Release No.
27911 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)] (``Shareholder
Choice Regarding Proxy Materials'') (adopting rule amendments
requiring issuers to post their proxy materials on a specified
website and provide shareholders with a notice of internet
availability of the materials).
---------------------------------------------------------------------------

    Through each of these sets of reforms, ``omitting prospectuses'' as
permitted by section 10(b) of the Securities Act have become a central
feature of various parts of our securities offering and disclosure
regime.\36\ In particular, our proposed approach for satisfying
prospectus

delivery obligations for variable contract prospectuses is generally
modeled on the Commission's mutual fund summary prospectus framework,
with some modifications that reflect the unique structure, features,
and risks of variable contracts. Likewise, our proposed approach for
satisfying portfolio company prospectus delivery requirements
incorporates aspects of the ``access equals delivery'' framework we
adopted in 2005, in instances where certain information has already
been provided to investors,\37\ as well as certain website posting
requirements from the mutual fund summary prospectus rule.
---------------------------------------------------------------------------

    \36\ See infra note 93 and accompanying text (discussing
omitting prospectuses as permitted by section 10(b) of the
Securities Act).
    \37\ Securities Offering Reform contemplated delivery of a
preliminary prospectus to investors purchasing during an initial
public offering, while our proposal would require delivery of
variable contract summary prospectuses, which would accompany or
precede delivery of the variable contract security and which would
contain certain key information about portfolio companies. See,
e.g., Securities Offering Reform, supra note 34; infra notes 120 and
192 and accompanying text (outlining certain portfolio company
information which would be disclosed in variable contract summary
prospectuses).
---------------------------------------------------------------------------

    Our proposal also draws on the Commission's investor testing
efforts, outreach, and other empirical research concerning investors'
preferences. This included information about summary content and
layered disclosure approaches as well as methods of delivery for
required disclosures and use of the internet for financial and other
purposes generally.\38\ Most recently, the Commission released a
request for comment on many of these same issues.\39\ Certain comments
that the Commission has received on its recent Form CRS Relationship
Summary proposal \40\ also reflect support for a disclosure regime that
leverages the benefits of layered disclosure.\41\
---------------------------------------------------------------------------

    \38\ For example, in 2007, 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. The consultant's report
concerning the focus group testing and related transcripts are in
the comment file for this rule (available at https://www.sec.gov/comments/s7-08-15/s70815-1.pdf). The consultant's report concerning
the telephone survey is available at http://www.sec.gov/pdf/disclosuredocs.pdf (approximately 60% of investors believed mutual
fund prospectuses contained too much information and 56% of
investors who received mutual fund prospectuses but rarely, very
rarely, or never read them indicated that was because the
prospectuses were too complicated or hard to understand, or too long
and too wordy).
    In addition, in 2011, the Commission engaged a consultant to
conduct investor testing regarding shareholder reports. The
consultant's report concerning that testing (``Investor Testing of
Mutual Fund Shareholder Reports'') is in the comment file for this
rule (available at https://www.sec.gov/comments/s7-08-15/s70815-3.pdf). Separately, in 2012, Commission staff prepared a study of
investor financial literacy pursuant to section 917 of the Dodd-
Frank Act. See SEC Staff, Study Regarding Financial Literacy Among
Investors (Aug. 2012) (``2012 Financial Literacy Study''). Materials
relating to this study, including the staff's report, are available
at http://www.investor.gov/publications-research-studies/sec-research.
    \39\ See Request for Comment on Fund Retail Investor Experience
and Disclosure, Investment Company Act Release No. 33113 (June 5,
2018) [83 FR 26891 (June 11, 2018)] (``Request for Comment on Fund
Retail Investor Experience''). The comment file for this request for
comment is available at https://www.sec.gov/comments/s7-12-18/s71218.htm. Multiple comment letters that the Commission has
received to date on this request for comment reflect a preference
for shorter summary disclosures, with additional information
available online or upon request. See, e.g., Comment Letter of Carol
Palmer, File No. S7-12-18 (June 5, 2018); Comment Letter of Perry
Balke, File No. S7-12-18 (June 5, 2018); Comment Letter of Sara
Karlidag, File No. S7-12-18 (June 6, 2018); Comment Letter of Harold
Thomas, File No. S7-12-18 (June 8, 2018); Comment Letter of Carla
Rojas, File No. S7-12-18 (June 9, 2018).
    \40\ See Form CRS Relationship Summary; Amendments to Form ADV;
Required Disclosures in Retail Communications and Restrictions on
the Use of Certain Names or Titles, Investment Advisers Act Release
No. 4888 (Apr. 18, 2018) [83 FR 21416 (May 9, 2018)]. The comment
file for this proposal is available at https://www.sec.gov/comments/s7-08-18/s70818.htm.
    \41\ See, e.g., Comment Letter of the Insured Retirement
Institute, File No. S7-08-18 (Aug. 7, 2018); Comment Letter of
Massachusetts Mutual Life Insurance Company, File No. S7-08-18 (Aug.
7, 2018).
---------------------------------------------------------------------------

    Moreover, certain observations by the staff of the Commission's
Office of Investor Education and Advocacy as part of its 2012 Financial
Literacy Study show that investors generally favor a layered approach
to disclosure and, wherever possible, the use of a summary containing
key information about an investment product or service.\42\ Investors
may have a preference for certain efficiencies afforded by more concise
information, as research shows the introduction of a shorter and
simplified summary prospectus may allow investors to spend less time
and effort to arrive at the same portfolio decision they would have
come to after reading the statutory prospectus.\43\ For these same
reasons, we believe that variable contract investors would benefit from
the summary disclosures and layered approach contemplated by our
proposal, especially given the fact that variable contracts are
typically more complex than other types of investment products, in part
due to the two-tier structure that most use.
---------------------------------------------------------------------------

    \42\ See 2012 Financial Literacy Study, supra note 38, at v-xix.
The key information that investors found useful and relevant before
purchasing an investment product includes information on fees and
expenses, investment performance, principal risks, and investment
objectives. With respect to the presentation of disclosure, the 2012
Financial Literacy Study indicates that investors preferred
disclosures being ``written in clear, concise, understandable
language, using bullet points, tables, charts, and/or graphs.'' See
id. at iv.
    \43\ See John Beshears et al., How Does Simplified Disclosure
Affect Individuals' Mutual Funds Choices?, Explorations in the
Economics of Aging, 75, 76 (David A. Wise ed., 2011) (``Beshears
Paper''), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices.
---------------------------------------------------------------------------

    Based upon the foregoing, we believe that a summary prospectus
framework for variable contracts would benefit investors. The mutual
fund industry has widely adopted the use of summary prospectuses.\44\
We believe our proposed prospectus delivery approach would be similarly
widely adopted by issuers of variable contracts.\45\
---------------------------------------------------------------------------

    \44\ We estimate that as of December 31, 2017, approximately 95%
of mutual funds and ETFs use summary prospectuses. This estimate is
based on EDGAR data for the number of mutual funds and ETFs that
filed a summary prospectus in 2017 (10,686) and the Investment
Company Institute's estimated number of mutual funds and ETFs as of
12/31/2017 (11,253). See Investment Company Institute, 2018
Investment Company Fact Book, at 52, available at https://www.ici.org/pdf/2018_factbook.pdf.
    \45\ See infra section III.C (stating that we expect a vast
majority of insurers will choose to use summary prospectuses).
---------------------------------------------------------------------------

C. Rulemaking Proposal Overview

    We are proposing a new disclosure framework that, among other
things, would permit the use of summary prospectuses for variable
contracts, with additional information available to investors online.
To help investors make an informed investment decision, this proposal
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 presentation, with access to more
detailed information available online, or delivered in paper or
electronic format on request. We anticipate that the proposed framework
would improve investor understanding of variable contracts.
    The proposed rule builds upon our experience creating a summary
prospectus option for mutual funds in 2009, but with certain
differences intended to reflect the nature of variable contracts.\46\
Like the Commission's mutual fund summary prospectus rule, the summary
prospectus that the proposed rule contemplates is meant to highlight
key information of variable contracts that we believe would help an

investor make an informed investment decision.\47\
---------------------------------------------------------------------------

    \46\ However, the proposed rule departs from rule 498 in
requiring two separate types of summary prospectuses. See infra
sections II.A.1 and II.A.2. We designed this framework to
distinguish the information we believe new and existing investors
need, and to highlight the particular contract features and risks
that are particularly relevant to these two groups of investors,
taking into account information that we understand these investors
may receive through other channels (e.g., as a result of state
insurance law, other regulatory requirements, and industry
practice).
    \47\ The mutual fund summary prospectus rule is designed to
provide investors with ``streamlined and user friendly information
that is key to an investment decision.'' See Enhanced Disclosure and
New Prospectus Delivery Option for Registered Open-End Management
Investment Companies, Investment Company Act Release No. 28064 (Nov.
21, 2007) [72 FR 67790 (Nov. 30, 2007)] (``2007 Summary Prospectus
Proposing Release''), at section I; see also Richard J. Wirth,
What's Puzzling You . . . Is the Nature of Variable Annuity
Prospectuses, 34 Western New England Law Review 127 (2012)
(``Informed decision-making demands that consumers have enough of an
understanding of what's for sale and what trade-offs are being asked
of them in order to make an informed decision about whether or not
to buy a product.'').
---------------------------------------------------------------------------

    Because variable contracts typically include a number of optional
benefits and underlying investment options, a summary could not, by its
nature, include all relevant aspects and details regarding each of
these contract features. The variable contract summary prospectus is
designed to be a succinct summary of the contract's key terms and
benefits and most significant risks, making it easier to read and more
understandable for investors. This summary prospectus would serve as
the cornerstone of a layered disclosure framework that would alert
investors to the availability of more detailed information in the
statutory prospectus and in other locations, and would be tailored to
the unique aspects of these products. As a result, investors would have
ready access to key information in connection with an investment
decision.
    The main elements of the new disclosure framework include:

     Option to use summary prospectus.\48\ Proposed new rule
498A would permit the use of two distinct types of contract summary
prospectuses: (1) Initial summary prospectuses covering variable
contracts currently offered to new investors; and (2) updating
summary prospectuses for existing investors. The initial summary
prospectus would include certain key information about the
contract's most salient features, benefits, and risks, presented in
plain English in a standardized order. The updating summary
prospectus would include a brief description of certain changes to
the contract that occurred during the previous year, as well as a
subset of the information required to be in the initial summary
prospectus. Certain key information about the portfolio companies
would be provided in both the initial summary prospectus and
updating summary prospectus.
---------------------------------------------------------------------------

    \48\ See infra section II.A.
---------------------------------------------------------------------------

     Availability of variable contract statutory prospectus
and other materials.\49\ The proposed rule would require the
variable contract statutory prospectus, as well as the contract's
SAI, to be publicly accessible, free of charge, at a website address
specified on or hyperlinked in the cover of the summary prospectus.
An investor who receives a contract summary prospectus would be able
to request the contract statutory prospectus and SAI to be sent in
paper or electronically, at no cost to the investor.
---------------------------------------------------------------------------

    \49\ See infra section II.A.4.
---------------------------------------------------------------------------

     Optional method to satisfy portfolio company prospectus
delivery requirements.\50\ The proposed rule would provide an
optional method for satisfying portfolio company prospectus delivery
obligations by making portfolio company summary and statutory
prospectuses available online at the website address specified on or
hyperlinked in the variable contract summary prospectus, with
certain key information about the portfolio companies provided in
the variable contract's summary prospectus.\51\ Investors would also
be able to request and receive those disclosures in paper or
electronically at no cost. This new option for satisfying portfolio
company prospectus delivery requirements would only be available for
portfolio companies available as investment options through variable
contracts that use contract summary prospectuses.
---------------------------------------------------------------------------

    \50\ See infra section II.B.
    \51\ This option would not apply to Form N-3 registrants, which
do not have underlying portfolio companies due to a single-tier
investment company structure.
---------------------------------------------------------------------------

     Discontinued Variable Contracts.\52\ In proposing the
new variable contract summary prospectus disclosure framework, we
acknowledge the industry practice of providing alternative
disclosures under the specific circumstances described in certain
staff no-action letters. In light of this proposal, we believe that
it is useful to consider the appropriate disclosure framework for
the types of contracts that were the subject of the staff no-action
letters.
---------------------------------------------------------------------------

    \52\ See infra section II.C.
---------------------------------------------------------------------------

     Form amendments.\53\ We are also proposing to amend
Forms N-3, N-4, and N-6--the registration forms for variable
contracts--to update and enhance the disclosure regime for these
investment products.\54\ The proposed amendments are intended to
consolidate certain summary information in a condensed presentation,
reflect industry developments (e.g., the prevalence of optional
benefits in today's variable contracts), and otherwise improve
disclosures provided to variable contract investors.
---------------------------------------------------------------------------

    \53\ See infra section II.D.
    \54\ The Commission first adopted the registration form for
variable annuities over 30 years ago, and adopted the registration
form for variable life insurance over 15 years ago. See Forms N-3
and N-4 Adopting Release, supra note 28; Registration Form for
Insurance Company Separate Accounts Registered as Unit Investment
Trusts That Offer Variable Life Insurance Policies, Investment
Company Act Release No. 25522 (Apr. 12, 2002) [67 FR 19848 (Apr. 23,
2002)] (``Separate Accounts Offering Variable Life Release'').
---------------------------------------------------------------------------

     Inline XBRL.\55\ Registrants would be required to use
the Inline XBRL format for the submission of certain variable
contract information. This requirement is intended to harness
technology to provide a mechanism for allowing investors, their
investment professionals, data aggregators, and other data users to
efficiently analyze and compare the available information about
variable contracts, as required by their particular needs and
circumstances.
---------------------------------------------------------------------------

    \55\ See infra section II.E.
---------------------------------------------------------------------------

     Other Amendments.\56\ We are proposing certain
technical and conforming amendments to our rules to reflect the
proposed new regime for variable contract summary prospectuses. We
are also proposing certain technical amendments to rules relating to
variable life insurance contracts, as well as rescission of certain
rules and forms.
---------------------------------------------------------------------------

    \56\ See infra section II.F.

    Table 1 summarizes the various requirements--under the current
prospectus delivery regime, and under the proposed summary prospectus
regime--for information to either be (1) delivered to all investors,
(2) made available online, or (3) delivered to those investors who so
request:

      Table 1--Information Available to Variable Contract Investors
------------------------------------------------------------------------
                                                      Optional proposed
                               Current prospectus    summary prospectus
                              delivery regime \57\         regime
------------------------------------------------------------------------
Contract Statutory            Delivered to all      Required to be
 Prospectus.                   investors.            available online
                                                     and delivered (in
                                                     paper or electronic
                                                     format) upon
                                                     request.
Contract SAI................  Available upon        Required to be
                               request.              available online
                                                     and delivered (in
                                                     paper or electronic
                                                     format) upon
                                                     request.
Contract Part C Information.  Not delivered to      Not delivered to
                               investors or          investors or
                               required to be        required to be
                               available online,     available online,
                               but is filed with     but is filed with
                               registration          registration
                               statement             statement
                               (available on         (available on
                               EDGAR).               EDGAR).
Initial Summary Prospectus..  N/A.................  Delivered to new
                                                     investors.
Updating Summary Prospectus.  N/A.................  Delivered to
                                                     existing investors.

Portfolio Company             Delivered to all      Delivered to
 Prospectuses.                 investors.            investors, or, if
                                                     the new option to
                                                     satisfy portfolio
                                                     company prospectus
                                                     delivery is
                                                     relied[dash]upon,\5
                                                     8\ required to be
                                                     available online
                                                     and delivered (in
                                                     paper or electronic
                                                     format) upon
                                                     request.\59\
------------------------------------------------------------------------

    Under proposed rule 498A, use of the summary prospectus to satisfy
a registrant's section 5(b)(2) obligation would be voluntary. We have
designed the proposal to permit, but not require, registrants to use a
summary prospectus coupled with the internet availability of variable
contract disclosures to make the delivery process more convenient and
efficient. While we believe the summary prospectus regime will benefit
investors, we are proposing that the approach be optional in light of
the novel nature of this disclosure approach for variable contracts
(including its use of layered disclosure), and because of the diversity
of variable contracts (and corresponding diversity of disclosure for
variable contracts).
---------------------------------------------------------------------------

    \57\ This column assumes that the contract at issue is not
providing alternative disclosures to investors in lieu of the
statutory prospectus, as described in certain staff no-action
letters discussed below in section II.C.
    \58\ See infra section II.B.2.
    \59\ Additionally, summary information about portfolio companies
would be available in the initial summary prospectus and updating
summary prospectus. See infra sections II.A.1.c.ii(i) and
II.A.2.c.ii(c).
---------------------------------------------------------------------------

    We believe that optionality not only would give market participants
time to adjust to the new layered disclosure approach, but also give
the Commission and its staff the opportunity to assess the benefits to
investors and insurers. While approximately 95% of mutual funds
currently use a summary prospectus,\60\ it took nearly eight years
after the adoption of the mutual fund summary prospectus framework for
the industry to reach that threshold.\61\
---------------------------------------------------------------------------

    \60\ See supra note 44.
    \61\ Estimates are based on EDGAR filings.
---------------------------------------------------------------------------

    Given the current widespread use of summary prospectuses by mutual
funds, we believe investors and other market participants have
generally become comfortable with the use of a summary prospectus.
However, the proposed variable contract summary prospectus regime would
differ from the mutual fund summary prospectus framework in several key
ways (e.g., the use of an initial and an updating summary prospectus,
and the new layered disclosure approach to satisfying portfolio company
prospectus delivery obligations). Therefore, we intend to review the
use of the summary prospectus by investors in variable contracts that
voluntarily adopt the summary prospectus and then reconsider whether
use of the summary prospectus for variable contracts should be mandated
in the future.\62\
---------------------------------------------------------------------------

    \62\ See 2009 Summary Prospectus Adopting Release, supra note
33, at 66-67 (similarly noting the Commission's intent to review the
use of the mutual fund summary prospectus by investors in funds that
voluntarily adopt the summary prospectus).
---------------------------------------------------------------------------

    We believe that the diversity of variable contracts (and the
corresponding diversity regarding variable contracts' approach to
prospectus disclosure) also supports permitting, but not requiring,
insurers to use the variable contract summary prospectus regime. We
have observed that some variable contracts are fairly basic, offering
few (or no) optional benefits and few investment options. Because these
contracts have fairly straightforward disclosure documents, the summary
prospectus regime may be less compelling for these products, as
compared to more complex variable products with numerous optional
benefits and investment options (which tend to have longer and more
complicated prospectuses). Registrants will likely assess the relative
benefit of using a summary prospectus based on the types of products
they offer and the length of their current prospectuses--as well as the
benefit of more concise disclosure to investors--when evaluating
whether to opt into the new layered disclosure regime.\63\ An optional
approach would also preserve flexibility for registrants that may not
wish to undertake the costs of the transition to a summary prospectus
regime.
---------------------------------------------------------------------------

    \63\ See infra section III.C.1.
---------------------------------------------------------------------------

II. Discussion

A. New Option To Use a Summary Prospectus for Variable Contracts

    We are proposing new rule 498A, which would provide a new option
for a person to satisfy its prospectus delivery obligations for
variable contracts under section 5(b)(2) of the Securities Act by: (1)
Sending or giving to new investors key information contained in a
variable contract statutory prospectus in the form of an initial
summary prospectus; (2) sending or giving to existing investors each
year a brief description of certain changes to the contract, and a
subset of the information in the initial summary prospectus, in the
form of an updating summary prospectus; and (3) providing the statutory
prospectus and other materials online. In addition, the new rule would
require a registrant (or the financial intermediary distributing the
variable contact) to send the variable contract statutory prospectus
and other materials to the investor in paper or electronic format upon
request.
1. Initial Summary Prospectus
a. Overview
    The proposed rule would require a person relying on the rule to
send or give an initial summary prospectus in connection with sales of
variable contracts to new investors.\64\ We have designed the initial
summary prospectus to use a layered disclosure approach that would
provide investors with key information relating to the contract's
terms, benefits, and risks in a concise and more reader-friendly
presentation, with access to more detailed information available online
and electronically or in paper format on request. Simplicity and
clarity are of heightened importance in a prospectus in connection with
an initial purchase decision for a variable contract because of the
long-term nature and complexity of these products. In addition, these
considerations are important because, unlike with other investment
products, typically variable contract investors have a state-mandated
``free look'' opportunity to return the contract for a full refund of
premium within a limited number of days following contract
issuance.\65\
---------------------------------------------------------------------------

    \64\ Proposed rule 498A(f)(1). For an initial purchase of a
variable contract, the initial summary prospectus must be ``sent or
given no later than the time of the carrying or delivery of the
contract security.'' See infra section II.A.3.
    \65\ State insurance law requirements typically require that
variable contracts have free look provisions that permit investors
to return the contract for a refund within a stated number of days
of receiving it (usually between ten and twenty days). The amount of
the refund may differ between variable annuity contracts and
variable life insurance contracts and also may vary among the
states.
    See also NAIC, Annuity Disclosure Model Regulations (2nd
Quarter, 2015) (``2015 NAIC Annuity Disclosure Model Regulations''),
available at http://www.naic.org/store/free/MDL-245.pdf (``Where the
Buyer's Guide and disclosure document are not provided at or before
the time of application, a free look period of no less than fifteen
(15) days shall be provided for the applicant to return the annuity
contract without penalty. This free look shall run concurrently with
any other free look provided by state law or regulation.''); NAIC,
Life Insurance Disclosure Model Regulations, (3rd Quarter, 2018),
available at http://www.naic.org/store/free/MDL-580.pdf (``[I]f the
policy for which application is made contains an unconditional
refund provision of at least ten (10) days, the Buyer's Guide may be
delivered with the policy or prior to delivery of the policy.'').

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

    One unique aspect of variable contract disclosure practices is the
wide variety of information about the contract that we understand
investors commonly receive throughout the lifecycle of the contract.
During the sales process, potential investors typically receive
informational materials provided by the insurer, such as marketing
brochures, investment option guides, and other explanatory materials
that focus on key features of the particular contract or variable
contracts generally. They may also receive disclosures required under
state law, such as a ``Buyer's Guide'' that generally describes how
variable contracts work.\66\ Each investor also typically completes an
application, along with certain assessment forms, in order to determine
whether a variable contract may be appropriate for the investor.\67\
---------------------------------------------------------------------------

    \66\ Some states have adopted model regulations that require
insurers to provide certain disclosure documents to annuity
investors either at or before the time of application. For example,
the ``Buyer's Guide'' describes in plain English how variable
contracts work, what certain technical terms mean, tax implications,
and fees. See NAIC, Buyer's Guide for Deferred Annuities Variable
(2013), available at http://www.naic.org/documents/prod_serv_consumer_anb_lv_2013.pdf; NAIC, Life Insurance Buyer's
Guide, (2007), available at http://naic.org/documents/consumer_guide_life.pdf.
    \67\ See, e.g., FINRA Rule 2330 (Members' Responsibilities
Regarding Deferred Variable Annuities) (establishing sales practice
standards, including suitability standards, regarding recommended
purchases and exchanges of variable annuities).
---------------------------------------------------------------------------

    Once the application is approved, the investor receives the
contract, which sets forth in detail the investor-specific contract
terms and is accompanied by the contract statutory prospectus. In
addition to receiving an updated contract statutory prospectus and the
prospectuses of the portfolio companies at least annually,\68\
investors also receive other information during the lifecycle of a
variable contract. This includes, for example, information required
under federal law (such as purchase and sale confirmations, and annual
and semi-annual reports for the portfolio companies to which the
investor has allocated contract value). This also includes notices that
insurers may choose to send to investors alerting them to key events
(such as required minimum distributions, withdrawals, annuitization,
ability to exercise an optional benefit, and loan confirmations).\69\
We have designed the initial summary prospectus to complement current
disclosure practices by not unnecessarily duplicating other
disclosures, and by highlighting aspects of the contract that may not
be described in detail elsewhere.
---------------------------------------------------------------------------

    \68\ See supra note 31 and accompanying text; see also infra
section II.C (discussing circumstances under which certain variable
contract issuers provide alternative disclosures instead of the
contract statutory prospectus, as described in certain staff no-
action letters).
    \69\ Additionally, to the extent that a variable contract
investor meets periodically with a sales agent, the sales agent may
also provide additional supplemental information about the contract
or the portfolio companies.
---------------------------------------------------------------------------

b. Scope of Disclosure To Be Included in Initial Summary Prospectus
    The proposed rule requires that the initial summary prospectus may
only describe a single contract that the registrant currently offers
for sale.\70\ We understand that industry practice is to combine
multiple contract prospectuses into a single registration statement on
Form N-3, N-4, or N-6 when those prospectuses describe variable
contracts that are ``essentially identical.'' \71\ We also understand
that certain contract prospectuses include disclosure about contract
features and options that the registrant may no longer offer to new
investors.
---------------------------------------------------------------------------

    \70\ Proposed rule 498A(b)(1).
    \71\ See General Guidance to Variable Annuity, Variable Life,
and Other Insurance Company Investment Contract Registrants, SEC
Staff No-Action Letter (Nov. 3, 1995), at section I.4 (discussing
industry practice); see also infra section II.D.1 (discussing our
proposed form instructions that would incorporate this existing
staff guidance).
---------------------------------------------------------------------------

    Aggregating disclosures for multiple contracts, or currently-
offered and no-longer-offered features and options of a single
contract, can hinder investors from distinguishing between contract
features and options that apply to them and those that do not.
Therefore, the proposed rule limits the initial summary prospectus to
describing only a single contract that the registrant offers under the
statutory prospectus to which the initial summary prospectus relates.
While the initial summary prospectus could only describe one contract,
the proposed rule nonetheless would permit it to describe more than one
class of a currently-offered contract.\72\
---------------------------------------------------------------------------

    \72\ Proposed rule 498A(b)(1). Similarly, a mutual fund summary
prospectus ``may describe only one Fund, but may describe more than
one Class of a Fund.'' See rule 498(b)(4).
---------------------------------------------------------------------------

    Although the content requirements for the initial summary
prospectus cross-reference items of Forms N-3, N-4, and N-6, we
anticipate that the proposed rule's scope provisions may cause
registrants to vary certain disclosures that appear in the statutory
prospectus when the same disclosure topics appear in the initial
summary prospectus. This may occur even if both disclosures respond to
the same form item requirement.\73\ For example, a registrant that
describes several currently- and previously-offered optional benefits
in response to Item 11 of Form N-4 in its statutory prospectus would
not be permitted to describe optional benefits that it no longer
currently offers in its initial summary prospectus.
---------------------------------------------------------------------------

    \73\ See infra section II.A.7.c. (discussing potential section
11 liability considerations to the extent that the language in the
summary prospectus is not identical in substance to the same
sections of the statutory prospectus).
---------------------------------------------------------------------------

    We request comment generally on the proposed scope requirements for
the initial summary prospectus, and specifically on the following
issues:

     Should the initial summary prospectus be limited to
describing a single contract that the registrant currently offers
for sale? Would this reduce the initial summary prospectus'
complexity and minimize confusion to investors? Would this
requirement be burdensome in any way for registrants to interpret,
administer, or manage operationally, and if so, how? Should the
proposed rule instead frame this requirement of one summary
prospectus-per-contract in another manner, for clarity or for any
other reason?
     Should we allow an initial summary prospectus to
describe multiple contracts if the registrant currently offers
multiple contracts through the related registration statement? Would
the answer change if the multiple contracts were offered on a single
prospectus versus multiple separate prospectuses? Would this make
the initial summary prospectus substantially longer or confusing to
investors, and would it decrease the likelihood that investors would
read an initial summary prospectus?
     Should we restrict the number of contract classes that
may be included in an initial summary prospectus?
c. Preparation of the Initial Summary Prospectus
    The following chart outlines the information that the proposed rule
would require to appear in an initial summary prospectus. Along with
specifying required introductory disclosures on the outside front cover
page or the beginning of the initial

summary prospectus, the proposed rule references particular disclosure
items from Forms N-3, N-4, and N-6 (as proposed to be amended).\74\ The
information would be required to appear in the same order, and under
the relevant corresponding headings, as the proposed rule
specifies.\75\ We propose a standardized presentation to require
certain disclosure items that we believe would be most relevant to
investors (such as the proposed contract overview section and proposed
table that includes key information about the contract), to appear at
the beginning of the initial summary prospectus, with supplemental
information appearing further in. The required presentation could also
facilitate comparison of different variable contracts.\76\
---------------------------------------------------------------------------

    \74\ To the extent we have proposed amendments to Forms N-3, N-
4, and N-6 that would facilitate the proposed summary prospectus
content requirements, as well as amend the content requirements for
the statutory prospectus, we generally discuss these amendments in
more detail in section II.D below. However, in order to better
explain the initial summary prospectus, we have elected to discuss
new or amended items that we propose to include in the statutory
prospectus, to the extent they would also appear in the initial
summary prospectus, in this section II.A.1.
    \75\ Proposed rule 498A(b)(5).
    \76\ We understand that many investors purchase variable
contracts through an intermediary and often do not directly compare
competing products. A standardized order may nonetheless be useful
for investment professionals to compare the products they ultimately
recommend to investors with other products, as well as investors
considering whether to purchase a new annuity contract to replace an
existing one. See infra note 160 and accompanying text. Having a
more comparable document may ultimately promote greater
comparability across products, registrants, and insurance
institutions, which could lead to better investor understanding and
increased competition.
    As discussed below in Section II.E, we are also proposing to
require the use of Inline XBRL format for the submission of certain
required disclosures in the variable contract statutory prospectus.
The structured data format would allow investors, financial
intermediaries, third-party analysts, and others to more efficiently
analyze and compare these products.

                                                   Table 2--Outline of the Initial Summary Prospectus
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Heading in initial summary prospectus         Proposed  item of  Form N[dash]3  Proposed  item of  Form N[dash]4  Proposed  item of  Form N[dash]6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cover Page:
    Identifying Information.
    Legends.
    EDGAR Contract Identifier.
    Table of Contents (optional).
Content:
    Overview of the [Variable Annuity/Life         2................................  2...............................  2.
     Insurance] Contract.
    Important Information You Should Consider      3................................  3...............................  3.
     About the [Contract].
    Standard Death Benefit.......................  11(a)............................  10(a)...........................  10(a).
    Other Benefits Available Under the Contract..  12(a)............................  11(a)...........................  11(a).
    Buying the Contract..........................  13(a)............................  12(a)...........................  9(a)-9(e).
    How Your Contract Can Lapse..................  .................................  ................................  14.
    Surrendering Your Contract or Making           14(a)............................  13(a)...........................  12(a).
     Withdrawals: Accessing the Money in Your
     Contract.
    Additional Information About Fees............  4................................  4...............................  4.
    Appendix: Portfolio Companies Available Under  19 or 20 \77\....................  18..............................  18.
     the Contract.
--------------------------------------------------------------------------------------------------------------------------------------------------------

i. Cover Page and Table of Contents
---------------------------------------------------------------------------

    \77\ Registrants on Form N-3 could omit the appendix specified
by proposed Item 19 of Form N-3, and instead provide the more
detailed disclosures about the investment options offered under the
contract required by proposed Item 20 of Form N-3. See infra note
517 and accompanying text.
---------------------------------------------------------------------------

    Identifying Information. Under the proposed rule, the following
information would be required to appear on the front cover page or the
beginning of the initial summary prospectus:
     The depositor's name;
     the registrant's name;
     the name of the contract, and the class or classes if any,
to which the initial summary prospectus relates;
     a statement identifying the initial summary prospectus as
a ``Summary Prospectus for New Investors''; and
     the approximate date of the first use of the initial
summary prospectus.\78\
---------------------------------------------------------------------------

    \78\ Proposed rule 498A(b)(2)(i) through (v).
---------------------------------------------------------------------------

    Legends. The cover page or beginning of the initial summary
prospectus would also be required to include the following legends:

    This Summary Prospectus summarizes key features of the [name of
Contract]. You should read this Summary Prospectus carefully,
particularly the section titled Important Information You Should
Consider About the [Contract].
    Before you invest, you should review the prospectus for the
[name of Contract], which contains more information about the
[Contract], including its features, benefits, and risks. You can
find the prospectus and other information about the [Contract]
online at [__]. You can also obtain this information at no cost by
calling [__] or by sending an email request to [__].\79\
---------------------------------------------------------------------------

    \79\ The legend would be required to provide an internet
address, other than the address of the Commission's electronic
filing system, toll-free telephone number, and email address that
investors can use to obtain the statutory prospectus and other
information, request other information about the variable contract,
and to make investor inquiries. Proposed rule 498A(b)(2)(vi)(B).
    The website address would be required to be specific enough to
lead investors to a direct link to the statutory prospectus and
other required information, rather than to the home page or another
part of the website. The website could host other relevant
disclosure documents with prominent links to each required document.
Id.
    The legend could indicate, if applicable, that the statutory
prospectus and other information are available from a financial
intermediary (such as a broker-dealer) through which the contract
may be purchased or sold. Id.
    For purposes of this proposed requirement, documents available
on the website address would be required to be publicly accessible
and free of charge. See proposed rule 498A(h)(1); see also infra
section II.A.4.
---------------------------------------------------------------------------

    You may cancel your [Contract] within 10 days of receiving it
without paying fees or penalties. In some states, this cancellation
period may be longer. Upon cancellation, you will receive either a
full refund of the amount you paid with your application or your
total contract value. You should review the prospectus, or consult
with your investment professional, for additional information about
the specific cancellation terms that apply.
    Additional general information about certain investment
products, including [variable annuities/variable life insurance
contracts], has been prepared by the Securities and Exchange
Commission's staff and is available at Investor.gov.\80\
---------------------------------------------------------------------------

    \80\ Proposed rule 498A(b)(2)(vi).

    These proposed legends are designed to provide identifying
information about the variable contract to which the initial

summary prospectus relates, as well as certain general information that
would be applicable to all variable contracts.\81\ While the proposed
legend describing how to obtain further information about the contract
generally parallels the legend on the cover page of mutual fund summary
prospectuses,\82\ we have proposed several additional legends that we
believe are appropriate in the context of variable contracts. These
additional legends notify investors that: (1) The initial summary
prospectus is a summary that should be read carefully (and that
investors should particularly focus on the ``Important Information You
Should Consider About the [Contract]'' section of the summary
prospectus); (2) they may cancel the variable contract within a limited
amount of time after receiving it (that is, alerting investors to the
existence of the free look period); \83\ and (3) additional general
information about certain investment products, including variable
contracts, is available at Investor.gov.\84\
---------------------------------------------------------------------------

    \81\ A registrant would be able to modify the proposed legends
so long as the modified statements contain comparable information.
Proposed rule 498A(b)(2)(vi)(A).
    \82\ See rule 498(b)(1)(v).
    \83\ Many investors may not be familiar with the free look
period, and the proposed legend is intended to alert them of its
existence and explain where they may obtain additional information
about its operation. This is particularly important because the free
look period may be the only time the investor may cancel the
contract without paying significant surrender fees or tax penalties.
    \84\ The Commission's Office of Investor Education and Advocacy
maintains the website as an online resource to help investors make
sound investment decisions and avoid fraud. The website includes
investment bulletins, alerts, guidance and tools designed to assist
investors, including those considering variable contracts, in
obtaining additional information and resources on understanding and
managing their investments. See, e.g., Updated Investor Bulletin:
Variable Annuities (Oct. 30, 2018), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/updated-investor-bulletin-variable-annuities; Investor Bulletin:
Variable Life Insurance; Investor Bulletin: Variable Life Insurance
(Oct. 30, 2018), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-variable-life-insurance.
---------------------------------------------------------------------------

    If any information is incorporated by reference into the initial
summary prospectus, the proposed rule would require that the legend
include certain disclosures related to that information.\85\ These
requirements are described below in section II.A.6. The cover page
would also be required to include a legend indicating that the
Securities and Exchange Commission has not approved or disapproved of
the contract or passed upon the accuracy or adequacy of the disclosure
in the summary prospectus and that any contrary representation is a
criminal offense.\86\
---------------------------------------------------------------------------

    \85\ Proposed rule 498A(b)(2)(vi)(C).
    \86\ Proposed rule 498A(b)(2)(vii); cf. rule 481(b)(1) under the
Securities Act.
---------------------------------------------------------------------------

    EDGAR Contract Identifier. We are also proposing to require that
the contract's EDGAR contract identifier be included on the bottom of
the back cover page or last page of the initial summary prospectus in a
type size smaller than that generally used in the prospectus (e.g., 8-
point modern type).\87\ This requirement is intended to enable
Commission staff and others to more easily link the initial summary
prospectus with other filings associated with the contract.
---------------------------------------------------------------------------

    \87\ Proposed rule 498A(b)(3). An EDGAR contract identifier is
issued by the Commission, is ten characters in length (nine numbers
preceded by a ``C''), and uniquely, and persistently, identifies
each contract. These identifiers are available to the public.
Information filed with the Commission containing these identifiers
is searchable by the public and our staff using the contract
identifiers and also using the contract names without the need to
reference the registrant issuing the contract. See Rulemaking for
EDGAR System, Investment Company Act Release No. 26990 (July 18,
2005) [70 FR 43558 (July 27, 2005)] at text following n.29.
---------------------------------------------------------------------------

    Table of Contents. The proposed rule would permit an initial
summary prospectus to include a table of contents.\88\ A table of
contents must show the page number of the various sections or
subdivisions of the summary prospectus, and immediately follow the
cover page in any prospectus delivered electronically.\89\
---------------------------------------------------------------------------

    \88\ Proposed rule 498A(b)(4).
    \89\ Rule 481(c).
---------------------------------------------------------------------------

    We request comment generally on the proposed requirements for the
cover page and table of contents of the initial summary prospectus, and
specifically on the following issues:

     Should we include any additional information or
eliminate any of the information that we have proposed to include in
these parts of the initial summary prospectus? For example, for
prospectuses filed on Form S-11, which is used for registration
under the Securities Act of securities of certain real estate
companies, the cover page must include a prominent cross-reference
to the risk factors section of the prospectus, including the page
number where it appears, as well as certain disclosures, if
applicable, regarding limitations on transferability of the
securities being registered and the absence of a market for
securities of the same class as those being registered.\90\ Would it
be helpful for the cover page of the initial summary prospectus to
contain similar disclosures relevant to variable contracts? For
example, in addition to stating that investors should particularly
focus on the ``Important Information You Should Consider About the
[Contract]'' section of the initial summary prospectus, should the
cover page include disclosures regarding surrender charges or other
items relating to the contract, a cross-reference to the risk
factors section or other sections of the statutory prospectus, or
other disclosures?
---------------------------------------------------------------------------

    \90\ See Item 1 of Form S-11 (requiring certain disclosures and
also referencing Item 501 of Regulation S-K); see also Item 501 of
Regulation S-K [17 CFR 229.501].
---------------------------------------------------------------------------

     Are the proposed legends sufficient to notify investors
of the availability and significance of the contract statutory
prospectus and other information about the variable contract and how
to obtain this information? Should the legends include greater
detail about the information that is available?
     Will the proposed legends adequately inform investors
of the various means for obtaining additional information about a
variable contract? Are the proposed requirements for the website
address where additional information is available adequate to ensure
that the website and the additional information will be easy to
locate?
     Would the proposed legend on the cover page or
beginning of the initial summary prospectus with information on the
free look period help alert investors that they may cancel their
contracts without fees or penalties within a limited time after the
sale? Should this legend be more prominently displayed (e.g., larger
font size, boxed, or bolded) relative to the other legends?
     As proposed, should registrants be permitted to modify
the required legends, provided the modified legends provide
comparable information?
     Should the legends include a reference to the
Investor.gov website? Why or why not? If so, what specific
information about variable contracts would be most helpful to
investors for the staff to provide on this website?
     Should the proposed requirement to include the
contract's EDGAR contract identifier on the bottom of the back cover
page or last page of the initial summary prospectus instead require
that another identifier be provided? If so, what identifier should
be listed, and why?
     Should registrants be permitted to include a table of
contents in the initial summary prospectus? Instead, should a table
of contents be required? Does rule 481(c) under the Securities Act
provide appropriate requirements for a table of contents included in
an initial summary prospectus?
ii. Content of the Initial Summary Prospectus
    Proposed rule 498A specifies the content and order thereof required
in an initial summary prospectus.\91\ An initial summary prospectus
must contain the information required by the proposed rule, and only
that information, in the order specified by the rule.\92\ Adhering to
these content requirements is one condition that an initial summary
prospectus must satisfy in order to be deemed to be a prospectus that
is permitted under section 10(b) of the Securities Act and section
24(g) of the

Investment Company Act for the purposes of section 5(b)(1) of the
Securities Act.\93\ To aid market participants in understanding the
types of disclosures we propose to require, Appendix A to this release
contains a hypothetical initial summary prospectus for a variable
annuity separate account with a registration statement filed on Form N-
4. This hypothetical initial summary prospectus is provided solely for
illustrative purposes and is not intended to imply that it would
reflect a ``typical'' initial summary prospectus.
---------------------------------------------------------------------------

    \91\ Proposed rule 498A(b)(5).
    \92\ Id.
    \93\ Proposed rule 498A(b); see also infra section II.A.3.
    Section 10(b) of the Securities Act authorizes the Commission to
adopt rules deemed necessary or appropriate in the public interest
or for the protection of investors that permit the use of an
``omitting prospectus'' for the purposes of section 5(b)(1) that
omits or summarizes information contained in the statutory
prospectus. Section 24(g) of the Investment Company Act authorizes
the Commission to permit the use of a prospectus under section 10(b)
of the Securities Act to include information the substance of which
is not included in the statutory prospectus. 15 U.S.C. 77j(b); 15
U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g); see also 2009 Summary
Prospectus Adopting Release, supra note 33, at n.70.
---------------------------------------------------------------------------

(a) Overview of the Contract
    The initial summary prospectus would begin with a section including
certain basic and introductory information about the contract and its
benefits, under the heading ``Overview of the [Variable Annuity/Life
Insurance] Contract.'' \94\ This section would appear at the beginning
of the initial summary prospectus because it is designed to provide
basic information about how the variable contract functions. We believe
that investors of different levels of financial sophistication may
benefit from receiving this information early in the initial summary
prospectus. This would provide a contextual baseline to help inform
investors' understanding of disclosure about more detailed aspects of
the variable contract that are described later in the initial summary
prospectus.
---------------------------------------------------------------------------

    \94\ See proposed rule 498A(b)(5)(i); see also proposed Item 2
of Forms N-3, N-4, and N-6; infra section II.D.2.b.
---------------------------------------------------------------------------

    Specifically, this section would be required to include a concise
description of the following:
    Purpose of Contract. The proposed requirement to briefly describe
the purpose(s) of the contract in general terms \95\ is intended to
provide the reader with information on what financial objectives that
contract could help the investor achieve, as well as the profile of an
investor for whom the contract may be appropriate (e.g., by discussing
a representative investor's time horizon, liquidity needs, and
financial goals). This requirement could be satisfied, for example, by
stating that the contract is meant to help the investor accumulate
assets through an investment portfolio, to provide or supplement the
investor's retirement income, or to provide death benefits and/or other
benefits, and that the contract may not be appropriate for an investor
that intends to access his or her invested funds within a short-term
timeframe.
---------------------------------------------------------------------------

    \95\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(a) of Forms N-3, N-4, and N-6.
---------------------------------------------------------------------------

    Phases of Contract (for Variable Annuity Contracts). The proposed
requirement to include a brief description of the accumulation
(savings) phase and annuity (income) phases of the contract \96\ is
meant to provide basic information about how the variable annuity
contract functions, which in turn would help highlight how the contract
differs from other types of investment products. It also is designed to
address common areas of confusion among variable annuity investors. For
example, it would highlight the effect of annuitization on the ability
to make withdrawals and the continuation of contract benefits.
---------------------------------------------------------------------------

    \96\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b) of Forms N-3 and N-4.
---------------------------------------------------------------------------

    This discussion would require a brief overview of the investment
options available under the contract (that is, portfolio companies and
any general or fixed account option).\97\ The registrant also would be
required to prominently disclose that additional information on the
portfolio companies is provided in an appendix to the summary
prospectus (or elsewhere in the case of registrants on Form N-3 that
chose to omit the appendix from the initial summary prospectus in favor
of more detailed information about investment options as required by
proposed Item 20 of Form N-3),\98\ and provide a cross-reference or
link to the relevant appendix.\99\ Finally, the registrant would be
required to state, if applicable, that if an investor annuitizes, he or
she will receive a stream of income payments, but he or she will be
unable to make withdrawals, and death benefits and living benefits will
terminate.\100\
---------------------------------------------------------------------------

    \97\ However, a detailed explanation of the separate account,
sub-accounts, and portfolio companies is not required. See
Instruction 2 to proposed Item 2(b)(1) of Forms N-3 and N-4.
     The registrant thus would not list the names of each portfolio
company available under the contract, as this would be duplicative
of information available in the appendix that would accompany the
summary prospectus. See infra section II.A.1.c.ii(i).
    \98\ See infra note 517 and accompanying text.
    \99\ See proposed rule 498A(b)(5)(i); see also Instruction 1 to
proposed Item 2(b)(1) of Forms N-3 and N-4.
    \100\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b)(2) of Forms N-3 and N-4.
---------------------------------------------------------------------------

    Premiums (for Variable Life Insurance Contracts). Instead of
requiring a description of the phases of the contract as with variable
annuities, Form N-6 would require the ``Overview'' section to briefly
describe the payment of premiums under the variable life insurance
contract. This description of premiums would include: (1) Whether
premiums may vary in timing and amount (e.g., flexible premiums); (2)
whether restrictions may be imposed on premium payments (e.g., by age
of insured, or by amount); (3) how premiums may be allocated (this
discussion would include a brief overview of the investment options
available under the contract, as well as any general (fixed) account
options); and (4) a statement that payment of insufficient premiums may
result in a lapse of the contract.\101\
---------------------------------------------------------------------------

    \101\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(b) of Form N-6. The proposed instructions to this requirement
would require the registrant to disclose that additional information
on the portfolio companies is provided in an appendix to the summary
prospectus, and provide a cross-reference to the relevant appendix.
See proposed rule 498A(b)(5)(i); see also Instruction 1 to proposed
Item 2(b)(3) of Form N-6.
---------------------------------------------------------------------------

    Unlike variable annuities, variable life insurance requires the
investor to make continuous premium payments in order to avoid a lapse
of the contract. We therefore believe the ``Overview'' section should
prominently explain the role of premium payments in the contract, and
highlight for investors a key risk that non-payment (or insufficient
payment) of premiums could result in contract lapse.
    Contract Features. Finally, this section would include a summary of
the contract's primary features, including death benefits, withdrawal
options, loan provisions, and any available optional benefits.\102\ If
applicable, the registrant would be required to state that the investor
will incur an additional fee for selecting a particular benefit.\103\
Because registrants would discuss many of these subjects in other
sections of the initial summary prospectus in greater detail (and would
discuss each of these subjects in more detail in the contract statutory
prospectus), this paragraph is intended to be summary in nature.
---------------------------------------------------------------------------

    \102\ See proposed rule 498A(b)(5)(i); see also proposed Item
2(c) of Forms N-3, N-4, and N-6.
    \103\ Id.
---------------------------------------------------------------------------

    We request comment generally on the ``Overview'' section that we
propose would appear in the initial summary prospectus, and
specifically on the following issues:

     Are the requirements of the proposed section clear and
appropriate in light of the goals of the initial summary prospectus,
and would the information disclosed to investors be helpful to
investors in light of these goals? Is this the most useful
information for the beginning of the initial summary prospectus?
Would it provide investors with context to better understand the
remainder of the initial summary prospectus? Why or why not? Would
the information provided in the proposed section be unnecessarily
duplicative with other information that would appear in the initial
summary prospectus?
     Should we impose word or page limits on the proposed
section? If so, what should the word or page limits be (e.g., no
more than one page)?
     Are there additional disclosure topics that should be
required to be included in the proposed ``Overview'' section?
Instead, should we provide flexibility to registrants in preparing
this section as to topics, etc.?
(b) Key Information
    The initial summary prospectus would next include a table (the
``Key Information Table'') that would provide a brief description of
key facts about the variable contract in a specific sequence and in a
standardized presentation that is designed to be easy to read and
navigate.\104\ Specifically, it would include a summary of five topic
areas: (1) Fees and expenses; (2) risks; (3) restrictions; (4) taxes;
and (5) conflicts of interest. This is intended to highlight, in a
consolidated location, important considerations related to these
products, including certain unique aspects of the variable contract
that might be unfamiliar to investors who have experience with mutual
funds or other types of investment products.\105\
---------------------------------------------------------------------------

    \104\ See proposed rule 498A(b)(5)(ii); proposed Item 3 of Forms
N-3, N-4, and N-6.
    \105\ In determining these proposed topic areas, we considered
investor complaints received by the Commission's Office of Investor
Education and Advocacy and the results of the 2012 Financial
Literacy Study. See text accompanying note 667 (regarding investor
complaints); 2012 Financial Literacy Study, supra note 39. We also
considered various regulatory and industry sources. See, e.g., FINRA
Rule 2330(b)(1)(A)(i) (variable annuity investors must be informed,
``in general terms, of various features of deferred variable
annuities, such as the potential surrender period and surrender
charge; potential tax penalty if consumers sell or redeem deferred
variable annuities before reaching the age of 59\1/2\; mortality and
expense fees; investment advisory fees; potential charges for and
features of riders; the insurance and investment components of
deferred variable annuities; and market risk'').
---------------------------------------------------------------------------

    The Key Information Table includes a number of prescribed
disclosures and is designed to complement the ``Overview'' section. We
have proposed placing these two disclosure sections at the beginning of
the initial summary prospectus because we believe they contain certain
basic information that is critical for variable contract investors to
read. We are also proposing that this information be provided in a
standardized tabular presentation because we believe that, as compared
to the narrative-type presentation of corresponding disclosures in the
statutory prospectus, a summary tabular presentation would be easier to
read and better convey the importance of the information to
investors.\106\ This presentation may also facilitate comparisons of
certain disclosure topics among variable contract prospectuses.
---------------------------------------------------------------------------

    \106\ We considered mutual fund disclosure research that
supported the view that a tabular presentation would be an effective
disclosure delivery method. See, e.g., John Kozup, Elizabeth
Howlett, and Michael Pagano, The Effects of Summary Information on
Consumer Perceptions of Mutual Fund Characteristics, The Journal of
Consumer Affairs 42, 37-59 (2008) (concluding that summary
information, particularly using graphical presentation, is an
effective way to facilitate the processing of information for
investors evaluating mutual funds).
    Experts in disclosure effectiveness for consumer-facing
communications also have encouraged the use of a ``strong design
grid'' (such as the tabular presentation we propose) to clarify
concepts to consumers and to organize disclosure elements. See,
e.g., Susan Kleimann, Making Disclosures Work for Consumers,
Presentation to the SEC's Investor Advisory Committee (June 14,
2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf (``Kleimann
Presentation'').
---------------------------------------------------------------------------

    We propose requiring that a registrant provide the Key Information
Table under the heading ``Important Information You Should Consider
About the [Contract].'' \107\ There would be specified headings for
each of the five topic areas that the table would include, and under
each heading would be two columns. The left column would list the
required disclosure line-items for each of the five topic areas, and
the right column would provide a brief description for each
corresponding line-item, according to the respective instructions for
each proposed line-item.\108\
---------------------------------------------------------------------------

    \107\ Immediately following this heading would be the statement:
``An investment in the Contract is subject to fees, risks, and other
important considerations, some of which are briefly summarized in
the following table. You should review the prospectus for additional
information about these topics.''
    \108\ The table also could include a third column, which would
include cross-references to the locations in the statutory
prospectus where the subject matter that each line-item requires is
described in greater detail, or would otherwise cross-reference that
information. See infra note 162 and accompanying text.
---------------------------------------------------------------------------

(i) Fees and Expenses
    Variable contracts typically have multiple layers of fees,
expenses, and charges that can be confusing to investors. While the Fee
Table currently required in variable contract prospectuses provides
comprehensive fee and expense information,\109\ that information is
frequently presented over a span of two or more pages when a prospectus
is printed on paper. We believe that investors may benefit from a
shorter, more tailored discussion in the Key Information Table that is
intended to convey the importance of a contract's fee and expense
structure. As discussed below, we are proposing to require that the
initial summary prospectus also include the Fee Table from the
statutory prospectus.\110\ This framework would allow an investor to
determine the level of fee information that best suits his or her
informational needs.
---------------------------------------------------------------------------

    \109\ See Item 3 of current Forms N-3, N-4, and N-6 (``Fee
Table'').
    \110\ See infra section II.A.1.c.ii(h).
---------------------------------------------------------------------------

    Surrender Charges. We believe that it is important that investors
understand that if they make a withdrawal in the first several years of
their contract, they may pay a significant charge that will reduce the
value of their investment. We believe, however, that investors
frequently do not understand, or may be surprised by, surrender charges
associated with early withdrawals.\111\
---------------------------------------------------------------------------

    \111\ The Commission's Office of Investor Education and Advocacy
frequently receives investor inquiries about variable contract
surrender charges, suggesting that many investors may be confused
about how surrender charges work.
---------------------------------------------------------------------------

    The proposed Key Information Table would require certain
information intended to alert investors about the potential impact of
surrender charges imposed on early withdrawals. The first line-item in
the proposed table, ``Surrender Charge (charges for early
withdrawals),'' would require a statement that if the investor
withdraws money from the contract within [x] years following his or her
last premium payment, he or she will be assessed a surrender charge.
This statement would include the maximum surrender charge, and the
maximum number of years that a surrender charge may be assessed since
the last payment was made under the contract.\112\
---------------------------------------------------------------------------

    \112\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(a) to proposed Item 3 of Forms N-3, N-4, and N-6. The maximum
surrender charge would be expressed as a percentage of the
contribution or premium or the amount surrendered, whichever is
applicable.
---------------------------------------------------------------------------

    In addition, we are proposing to require an example of the maximum
surrender charge an investor could pay (in dollars) under the contract
assuming a $100,000 investment (e.g., ``[i]f you make an early
withdrawal, you could pay a surrender charge of up to $9,000 on a
$100,000 investment.'').\113\ We

believe that for purposes of the Key Information Table, providing a
dollar figure may better communicate to investors the impact of
surrender charges than a surrender charge schedule that shows the
applicable surrender charge per year as a percentage.\114\
---------------------------------------------------------------------------

    \113\ We propose to use $100,000 as the basis for the surrender
charge example because the value of the average variable annuity
contract has recently exceeded $100,000. See IRI Fact Book, supra
note 8, at 170. Using this figure would result in cost estimates
that more closely mirror the actual experience of many variable
contract investors. See infra note 130 and accompanying text.
    \114\ Registrants would continue to disclose the surrender fee
in the Fee Table as a line-item in the ``Transaction Expenses''
table. They also would continue to reflect the consequence of any
surrender fee in the ``Example'' to the Fee Table that would show
the investor's contract costs if he or she were to surrender the
contract after 1 year, 3 years, 5 years, and 10 years. See Item 3 of
Forms N-3, N-4, and N-6.
---------------------------------------------------------------------------

    Transaction Charges. The second line-item in the ``Fees and
Expenses'' section of the proposed table, ``Transaction Charges
(charges for certain transactions),'' would require a statement that,
in addition to surrender charges, the investor may also be charged for
other transactions. This statement would be required to include a brief
description of the types of such charges (e.g., front-end loads,
charges for transferring cash value between investment options, charges
for wire transfers, etc.).\115\ We are not proposing to require
registrants to disclose the amount of each transaction charge in the
Key Information Table because we understand the costs associated with
most transaction charges to be relatively small, as a percentage of
average account size (unlike surrender charges). Moreover, the Fee
Table would require more detailed information about each of these
charges (including the amount of each charge).\116\ The line-item for
Transaction Charges in the Key Information Table is designed to provide
a simple narrative description to alert investors that surrender
charges are not the only transaction charges they could pay.
---------------------------------------------------------------------------

    \115\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(b) to proposed Item 3 of Forms N-3, N-4, and N-6. Although
surrender charges are a type of transaction charge, we are proposing
to require surrender charges be separately disclosed in the Key
Information Table to highlight to investors the significant costs
associated with early withdrawals.
    \116\ See proposed Item 4 of Forms N-3, N-4, and N-6 (requiring
disclosure of transaction expenses).
---------------------------------------------------------------------------

    Ongoing Fees and Expenses. The third line-item in the ``Fees and
Expenses'' section, ``Ongoing Fees and Expenses (annual expenses),'' is
designed to alert investors that they also will bear recurring fees on
an annual basis.\117\ In Form N-3 and N-4, the disclosure in this line-
item would begin with the legend ``The table below describes the fees
and expenses that you may pay each year, depending on the options you
choose.'' \118\
---------------------------------------------------------------------------

    \117\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c) to proposed Item 3 of Forms N-3, N-4, and N-6.
    \118\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(A) to proposed Item 3 of Forms N-3 and N-4.
---------------------------------------------------------------------------

    Form N-4 registrants would disclose, in a tabular presentation in
the order specified, the minimum and maximum annual fees for: (1) Base
contract expenses; \119\ (2) investment options (e.g., portfolio
company fees and expenses); \120\ and (3) optional benefits.\121\ Since
Form N-3 registrants have a single-tier structure and consolidate fees
and expenses for investment options into base contract expenses, Form
N-3 registrants would disclose the same information as Form N-4
registrants except fees for base contract expenses and investment
options would be consolidated into a single entry labeled ``annual
contract expenses.'' \122\ The minimum annual fee column would show the
lowest available current fee for each annual fee category (i.e., the
least expensive contract class, the lowest total annual portfolio
company operating expense, lowest annual contract expenses, and the
least expensive optional benefit available for an additional
charge).\123\ The maximum annual fee column would show the highest fees
for these categories. Additionally, a legend preceding the minimum and
maximum annual fee table would refer investors to their contract
specifications page for information about the specific fees they would
pay each year based on the options elected.\124\
---------------------------------------------------------------------------

    \119\ Minimum and maximum annual fees for base contract expenses
would not be required on Form N-6 because life insurance charges are
based on underwriting and can vary significantly from one insured
person to another depending on various demographic characteristics.
This could lead to significant variations between these amounts,
which we do not expect would be helpful, and may be confusing, to
investors.
    \120\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(D) to proposed Item 3 of Form N-4. Registrants would use the
gross expense ratio disclosed in the Fee Table of a portfolio
company's current prospectus, which is the same basis for
calculating portfolio company expense ratios as Items 4 (Fee Table)
and 18 ([Portfolio Companies] Available Under the Contract) of Form
N-4.
    \121\ The disclosure would also require, in a parenthetical or
footnote to the table or each caption, an explanation of the basis
for each percentage (e.g., as a percentage of separate account value
or benefit base, or % of net asset value). See proposed rule
498A(b)(5)(ii); see also Instruction 2(c)(i)(C) to proposed Item 3
of Form N-4 (% of net asset value).
    \122\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i)(B) to proposed Item 3 of Form N-3.
    \123\ See proposed rule 498A(b)(5)(ii); see also Instruction
2(c)(i) to proposed Item 3 of Form N-3; Instruction 2(c)(i) to
proposed Item 3 of Form N-4.
    Because the table showing minimum and maximum annual fees is
intended to inform investors about the types and ranges of fees
associated with a variable contract, we are excluding certain
assumptions from the calculations. For example, although we know
that some registrants do not charge extra for certain optional
benefits, we want to alert investors to the costs associated with
optional benefits that are available for an additional charge.
Accordingly, the disclosure should reflect the minimum cost
associated with an optional benefit that has a fee.
    \124\ Instruction 2(c)(i)(A) to proposed Item 3 of Forms N-3 and
N-4. Many states require a contract specifications page that
contains information about the premiums, fees, annuitization date
and other information specific to an investor's variable annuity