[Federal Register Volume 85, Number 85 (Friday, May 1, 2020)]
[Rules and Regulations]
[Pages 25964-26309]
[FR Doc No: 2020-05526]

Vol. 85

Friday,

No. 85

May 1, 2020

Part IV

Securities and Exchange Commission

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17 CFR Parts 200, 230, 232, et al.

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

Federal Register / Vol. 85, No. 85 / Friday, May 1, 2020 / Rules and
Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 232, 239, 240, 270, and 274

[Release Nos. 33-10765; 34-88358; IC-33814; 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: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting rule and
form amendments intended to help investors make informed investment
decisions regarding variable annuity and variable life insurance
contracts. The amendments 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. New rule 498A under the Securities Act of 1933 will permit a
person to satisfy its prospectus delivery obligations under the
Securities Act 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 rule also will
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. To implement the new disclosure framework, we are also
amending 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, and adopting amendments to our rules that will 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. The
Commission is also taking the position that if an issuer of a
discontinued contract that is discontinued as of July 1, 2020 that
provides alternative disclosures does not file post-effective
amendments to update a variable contract registration statement and
does not provide updated prospectuses to existing investors, this would
not provide a basis for enforcement action so long as investors are
provided with the alternative disclosures or modernized alternative
disclosures described below. We are also adopting certain technical and
conforming amendments to our rules and forms, including amendments to
rules relating to variable life insurance contracts, and rescinding
certain related rules and forms.

DATES: Effective dates: This rule is effective July 1, 2020, except:
     Amendatory instructions 12, 46, 48, and 50 to 17 CFR
230.498A, Form N-3 (referenced in 17 CFR 239.17a and 274.11b), Form N-4
(referenced in 17 CFR 239.17b and 274.11c), and Form N-6 (referenced in
17 CFR 239.17c and 274.11d), which are effective January 1, 2022; and
     Effective July 1, 2020, amendatory instructions 20, 22,
and 24 to Form N-3 (referenced in 17 CFR 239.17a and 274.11b), Form N-4
(referenced in 17 CFR 239.17b and 274.11c), and Form N-6 (referenced in
17 CFR 239.17c and 274.11d), published June 22, 2018, at 83 FR 29158,
with an effective date of January 1, 2022, are withdrawn.
    Compliance dates: See Section II.G.

FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, Pamela K. Ellis,
Bradley Gude, James Maclean, Amy Miller (Senior Counsels) or Michael C.
Pawluk (Senior Special Counsel), Investment Company Regulation Office,
at<PHONE_NUMBER>; or Harry Eisenstein or Michael Kosoff (Senior
Special Counsels), Disclosure Review and Accounting Office, at (202)
551-6921, Division of Investment Management, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-8549.

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

------------------------------------------------------------------------
       Commission reference                CFR citation (17 CFR)
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Organization; Conduct and Ethics;  Sec.  Sec.   200.1 through 200.800.
 And Information and Requests.
  Section 800....................  Sec.   200.800.
Securities Act of 1933
 (``Securities Act''): \1\
  Rule 159A......................  Sec.   230.159A.
  Rule 431.......................  Sec.   230.431.
  Rule 482.......................  Sec.   230.482.
  Rule 485.......................  Sec.   230.485.
  Rule 496.......................  Sec.   230.496.
  Rule 497.......................  Sec.   230.497.
  Rule 498.......................  Sec.   230.498.
  Form N-14......................  Sec.   239.23.
Regulation S-T                     Sec.  Sec.   232.10 through 232.501.
  Rule 11........................  Sec.   232.11.
  Rule 405.......................  Sec.   232.405.
Securities Exchange Act of 1934
 (``Exchange Act''): \2\
  Rule 14a-16....................  Sec.   240.14a-16.
  Rule 14a-101...................  Sec.   240.14a-101.
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 (former rule 6e-3(T))  Sec.   270.6e-3.
  Rule 8b-1......................  Sec.   270.8b-1.
  Rule 11a-2.....................  Sec.   270.11a-2.

  Rule 14a-2.....................  Sec.   270.14a-2.
  Rule 26a-1.....................  Sec.   270.26a-1.
  Rule 27i-1 (former rule 27c-1).  Sec.   270.27i-1.
Securities Act and Investment
 Company Act:
  Form N-3.......................  Sec.  Sec.   239.17a and 274.11b.
  Form N-4.......................  Sec.  Sec.   239.17b and 274.11c.
  Form N-6.......................  Sec.  Sec.   239.17c and 274.11d.
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a et seq.

    Finally, the Commission is rescinding:

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       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.  Sec.   239.15 and 274.11.
------------------------------------------------------------------------

TABLE OF CONTENTS

I. Introduction
    A. Background
    B. Overview of Final Rule and Rule and Form Amendments
II. Discussion
    A. New Option to Use a Summary Prospectus for Variable Contracts
    1. Initial Summary Prospectus
    2. Updating Summary Prospectus
    3. Interim Amendments to Contract Statutory Prospectuses
    4. Legal Effect of Use of Summary Prospectus for Variable
Contracts
    5. Online Accessibility of Contract Statutory Prospectus and
Certain Other Documents Relating to the Contract
    6. Other Requirements for Summary Prospectus and Other Contract
Documents
    7. Incorporation by Reference
    8. Filing Requirements for the Summary Prospectus
    9. Defined Terms in Final 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. 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
    D. Inline XBRL
    E. Discontinued Variable Contracts
    1. Background
    2. Comments Received on Proposal
    3. Commission Position on Existing Contracts Whose Issuers
Provide Alternative Disclosures to Investors
    4. Commission Declines To Adopt Going-Forward Relief
    F. Technical and Conforming Amendments to Other Aspects of the
Regulatory Framework for Variable Contracts
    G. Compliance Dates
III. Other Matters
IV. 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 Rule and Form Amendments
    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
V. Paperwork Reduction Act
    A. Form N-3
    B. Form N-4
    C. Form N-6
    D. Investment Company Interactive Data
    E. Rule 498A
VI. Regulatory Flexibility Act Certification
    VII. Statutory Authority

I. Introduction

    The Securities and Exchange Commission is adopting rule and form
amendments that are intended to help investors make informed investment
decisions regarding variable annuity \4\

and variable life insurance contracts \5\ (together, ``variable
contracts'' or ``contracts'').\6\ To improve the current disclosure
framework and update the manner in which variable contract investors
receive and review prospectuses and related information, we are
adopting 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 will have access
to the contract statutory prospectus and other information about the
contract online (and could receive paper or electronic copies upon
request), which will provide more-detailed information about the
contract.
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    \4\ 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
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.
    \5\ Variable life insurance contracts offer a death benefit to
the investor that may be significantly larger than the amount of
premiums paid, as well as the ability to accumulate cash value. Like
variable annuities, a variable life insurance contract permits the
investor to allocate their cash value to a variety of investment
options. Because an investor will generally allocate the insurance
premiums to the investment options, the investor is exposed to
market risk and the cash value (and in some cases, the death
benefit) will vary with the performance of these investments.
    \6\ The Commission proposed these rule and form amendments in
October 2018. See Updating Disclosure Requirements and Summary
Prospectus for Variable Annuity and Variable Life Insurance
Contracts, Investment Company Release No. 33286 (Oct. 30, 2018) [83
FR 61730 (Nov. 30, 2018)] (``Proposing Release'').
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    Specifically, the approach under the 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.
    To implement this new disclosure framework, we are also amending
the registration forms for variable annuity and variable life insurance
contracts to update and enhance the disclosures to investors in these
contracts, and requiring 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.
    In proposing new rule 498A, the Commission discussed and solicited
comment on approaches it was considering 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. While we are not taking any
such parallel actions in this document, Commission staff is currently
considering the comments received and reviewing the disclosure regime
for investment companies as to these and other potential amendments as
part of a broader modernization initiative.

A. Background

    To meet life insurance needs and retirement or other financial
goals, investors may consider variable contracts as a way of combining
insurance guarantees with the potential for long-term investment
appreciation.\7\ Variable contracts are generally more complex than
other retail investment products, such as mutual funds, in a variety of
ways:
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    \7\ For an overview of variable annuities and variable life
insurance contracts, see Proposing Release, supra note 6, at Section
I.A.
     The average contract value for individual variable annuities is
approximately $106,187. See Insured Retirement Institute, IRI Fact
Book 2019 (``IRI Fact Book''), at 167. 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.
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     Structure. Variable contracts combine both investment and
insurance features. Investors generally allocate their purchase
payments to a range of investment options, and the investor's account
value changes depending on the performance of the investment options
selected. For most variable contracts, these investment options
typically are mutual funds, which are separately registered and have
their own prospectuses.\8\ In addition, variable contracts frequently
offer a menu of optional benefits that an investor may select to
customize the contract to meet his or her individual needs.\9\
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    \8\ For purposes of this release, we refer to these entities as
``portfolio companies.''
    \9\ Variable contracts commonly offer optional benefit features
as riders to the contract with their own terms and conditions, and
typically for a separate charge. Riders commonly provide enhanced
death benefits, as well as ``living benefits'' that may be designed
to provide protection against declines in account value, longevity
risk, or other risks, or to cover financial losses that result from
illness, incapacity, or injury. These optional riders have become
increasingly popular with variable contract investors. See, e.g.,
IRI Fact Book, supra note 7, at 70 (``Approximately $1.8 trillion of
VA assets were held by insurance companies as of the end of the
fourth quarter of 2018, with an estimated $800 billion in assets
under a guaranteed income benefit.''); Gallup Survey, supra note 7,
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.'').
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     Fees and Expenses. Most variable contracts have two-level
fee structures, where fees are assessed at both the contract level by
the issuer (including mortality and expense risk charges,\10\
administrative fees, and fees for optional benefits selected by the
investor) and at the portfolio company level.\11\ 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.\12\ Variable life insurance contracts also impose an additional
insurance charge to cover the cost of the death benefit.\13\
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    \10\ 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 some or all of 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 Morningstar M&E Risk definition, available at https://awgmain.morningstar.com/webhelp/glossary_definitions/va_vl/pol_M_E_Risk.html.
    \11\ Investors indirectly bear the operating fees and expenses
of the portfolio companies they select as the underlying investments
in their variable contracts.
    \12\ 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.
    \13\ These additional insurance charges are determined at the
time 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
10.
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     Taxes. Special tax rules apply to variable products, with
both tax advantages and potential adverse tax impacts in certain
circumstances.\14\
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    \14\ 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.

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    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 of and terminology
associated with these products can be difficult for investors to
understand. Moreover, variable contract prospectuses are often quite
lengthy (frequently more than one 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.\15\ 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.\16\
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    \15\ For a discussion of the requirements for variable contract
prospectus disclosure and delivery, see Proposing Release, supra
note 6, at Section I.B.1.
    \16\ For example, variable annuity contracts offer an average of
60 investment options, with some contracts offering more than 250
investment options. See IRI Fact Book, supra note 7, at 167.
Furthermore, variable life insurance contracts offer an average of
65 investment options, with some contracts offering more than 300
investment options. These variable life figures are based on
September 2019 data obtained from Morningstar Direct.
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    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. Based on our experience with both
layered disclosure (under the mutual fund summary prospectus) \17\ and
integrated disclosure (enhanced over a decade ago with securities
offering reform for corporate issuers),\18\ our more than twenty years
of experience with the use of the internet as a medium to provide
information to investors,\19\ and on our investor testing efforts,
outreach, and other empirical research concerning investors'
preferences, the Commission proposed a summary prospectus framework for
variable contracts using summary and layered disclosure principles.\20\
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    \17\ 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).
    \18\ 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, Pub. L. 115-174, 132 Stat. 1296 (2018)), and to business
development companies (see Section 803 of the Small Business Credit
Availability Act, Pub. L. 115-141, 132 Stat. 348 (2018)). The
Commission proposed such rules in 2019. See Securities Offering
Reform for Closed-End Investment Companies, Investment Company Act
Release No. 33427 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)]
(``Closed-End Offering Reform Release'').
    \19\ See, e.g., Use of Electronic Media for Delivery Purposes,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458
(Oct. 13, 1995)] (``1995 Release'') (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); 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'') (providing
Commission views on electronic delivery of required information by
broker-dealers, transfer agents, and investment advisers); Use of
Electronic Media, Investment Company Act Release No. 24426 (Apr. 28,
2000) [65 FR 25843 (May 4, 2000)] (``2000 Release'') (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 18 (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); Optional Internet Availability of
Investment Company Shareholder Reports, Investment Company Act
Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)]
(``Investment Company Shareholder Reports Release'') (adopting 17
CFR 270.30e-3 (new rule 30e-3 under the Investment Company Act) and
related rule amendments that, subject to conditions, provide certain
registered investment companies, including registrants on Forms N-3,
N-4, and N-6, with an optional method to transmit shareholder
reports by making such reports and other materials accessible at a
website address specified in a notice to investors).
    \20\ For a discussion of the evolution of layered disclosure and
the delivery of information to investors, including the Commission's
and the staff's investor testing efforts, outreach, and other
empirical research concerning investor preferences, see Proposing
Release, supra note 6, at Section I.B.2.
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B. Overview of Final Rule and Rule and Form Amendments

    We are adopting a new disclosure framework that, among other
things, permits the use of summary prospectuses for variable contracts,
with additional information available to investors online. To help
investors make an informed investment decision, the new framework 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 framework will
improve investor understanding of variable contracts. The mutual fund
industry has widely adopted the use of summary prospectuses, and we
expect our proposed prospectus delivery approach similarly will be
widely adopted by issuers of variable contracts.\21\
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    \21\ We estimate that as of December 31, 2018, approximately 93%
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 2018 (10,808) and the Investment
Company Institute's estimated number of mutual funds and ETFs as of
December 31, 2018 (11,656). See Investment Company Institute, 2019
Investment Company Fact Book (2019), at 50, available at https://www.ici.org/pdf/2019_factbook.pdf.
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    New rule 498A 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.\22\
Like the Commission's mutual fund summary prospectus rule, the summary
prospectus under rule 498A is meant to highlight key information of
variable contracts that we believe will help an investor make an
informed investment decision.\23\
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    \22\ However, the final 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 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).
    \23\ 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.'').

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    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 will serve as the
cornerstone of a layered disclosure framework that alerts investors to
the availability of more detailed information in the statutory
prospectus and in other locations, and will be tailored to the unique
aspects of these products. As a result, investors will 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.\24\ New rule 498A
permits 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 will 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 will 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 will
be provided in both the initial summary prospectus and updating summary
prospectus.
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    \24\ See infra Section II.A.
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     Availability of variable contract statutory prospectus and
other materials.\25\ New rule 498A requires the variable contract
statutory prospectus, as well as the contract's statement of additional
information (``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 may
request the contract statutory prospectus and SAI to be sent in paper
or electronically, at no cost to the investor.
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    \25\ See infra Section II.A.5.
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     Optional method to satisfy portfolio company prospectus
delivery requirements.\26\ New rule 498A provides 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.\27\ Investors may request and receive those
disclosures in paper or electronically at no cost. This new option for
satisfying portfolio company prospectus delivery requirements is only
available for portfolio companies available as investment options
through variable contracts that use contract summary prospectuses.
---------------------------------------------------------------------------

    \26\ See infra Section II.B.
    \27\ This option will not apply to Form N-3 registrants, which
do not have underlying portfolio companies due to their single-tier
investment company structure.
---------------------------------------------------------------------------

     Form amendments.\28\ We are amending 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.\29\ The
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.
---------------------------------------------------------------------------

    \28\ See infra Section II.C.
    \29\ 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 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''); 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.\30\ With respect to contracts currently
offered to new investors, registrants will be required to use the
Inline XBRL format for the submission of certain information. This
requirement is intended to harness technology to provide a mechanism
for allowing investors, Commission staff, data aggregators, financial
analysts, and other data users to efficiently analyze and compare the
available information about variable contracts, as required by their
particular needs and circumstances.
---------------------------------------------------------------------------

    \30\ See infra Section II.D.
---------------------------------------------------------------------------

     Discontinued Variable Contracts.\31\ We are taking the
position that if an issuer of a discontinued contract that is
discontinued as of July 1, 2020 that provides alternative disclosures
does not file post-effective amendments to update a variable contract
registration statement and does not provide updated prospectuses to
existing investors, this would not provide a basis for enforcement
action so long as investors are provided with the alternative
disclosures or modernized alternative disclosures described below.
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    \31\ See infra Section II.E.
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     Other Amendments.\32\ We are adopting certain technical
and conforming amendments to our rules to reflect the proposed new
regime for variable contract summary prospectuses. We are also adopting
certain technical amendments to rules relating to variable life
insurance contracts, as well as rescinding certain rules and forms.
---------------------------------------------------------------------------

    \32\ See infra Section II.F.
---------------------------------------------------------------------------

    Table 1 summarizes the various requirements--under the current
prospectus delivery regime, and under the new optional 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:

[GRAPHIC] [TIFF OMITTED] TR01MY20.000

II. Discussion

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

    We are adopting, substantially as proposed, new rule 498A, which
provides 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. Under
the new rule, a registrant (or the financial intermediary distributing
the variable contract) relying on the rule must send the variable
contract statutory prospectus and other materials to an investor in
paper or electronic format upon request.
    Commenters broadly supported our proposed layered disclosure
approach.\33\ One commenter stated that ``a layered disclosure
approach, as set forth in proposed Rule 498A, will vastly improve
investors' experiences with respect to purchasing and owning variable
products.'' \34\ Another commenter observed that ``the parallel
approaches proposed in the rule properly mirror the sensible,
constructive approaches adopted in the mutual fund summary disclosure
initiative,'' and predicted that such approach ``can be expected to
work equally well in the context of variable contracts.'' \35\ A third
commenter, finding that the proposal ``appropriately balances the goals
of investor protection with a better investor experience,'' endorsed
the use of variable contract

summary prospectuses ``as the lynchpin of a new variable contract
disclosure framework.'' \36\
---------------------------------------------------------------------------

    \33\ See, e.g., Comment Letter of Brighthouse Financial (Feb.
15, 2019) (``Brighthouse Comment Letter''); Comment Letter of the
American Council of Life Insurers (Feb. 15, 2019) (``ACLI Comment
Letter''); Comment Letter of the Committee of Annuity Insurers (Feb.
14, 2019) (``CAI Comment Letter''); Comment Letter of the Investment
Company Institute (Feb. 15, 2019) (``ICI Comment Letter''); Comment
Letter of the Independent Directors Council (Feb. 15, 2019) (``IDC
Comment Letter''); Comment Letter of the Center for Capital Markets
Competitiveness (Feb. 15, 2019) (``CCMC Comment Letter''); Comment
Letter of Pacific Life Insurance Company (Feb. 15, 2019) (``Pacific
Life Comment Letter''); Comment Letter of Jackson National Life
(Feb. 15, 2019) (``Jackson Comment Letter''); Comment Letter of
Donnelly Financial Solutions (Mar. 12, 2019) (``Donnelly Financial
Comment Letter I''); Comment Letter of Donnelly Financial Solutions
(Oct. 24, 2019); Comment Letter of Capital Research and Management
Company (Mar. 14, 2019) (``Capital Group Comment Letter''); Comment
Letter of Transamerica (Mar. 15, 2019) (``Transamerica Comment
Letter''); Comment Letter of Lincoln Financial Group (Feb. 13, 2019)
(``Lincoln Comment Letter''); Comment Letter of the National
Association of Insurance and Financial Advisors (Feb. 14, 2019)
(``NAIFA Comment Letter''); Comment Letter of TIAA (Feb. 15, 2019)
(``TIAA Comment Letter''); Comment Letter of Wells Fargo Advisors
(Mar. 14, 2019) (``WFA Comment Letter''); Comment Letter of the
Financial Services Institute (Mar. 15, 2019) (``FSI Comment
Letter''); Comment Letter of the Association for Advanced Life
Underwriting (Mar. 15, 2019) (``AALU Comment Letter''); Comment
Letter of the Insured Retirement Institute (Mar. 15, 2019) (``IRI
Comment Letter I'').
     One commenter asked us to clarify that all insurance products
where the value of the contract will vary depending on investment
performance are included within the scope of this proposal. See
Comment Letter of the AARP (Mar. 15, 2019) (``AARP Comment
Letter''). Because the scope of our proposal was limited to variable
contracts registered on Forms N-3, N-4, and N-6, it does not extend
to indexed annuities that register securities on Forms S-1 and S-3.
    \34\ See CAI Comment Letter.
    \35\ See ACLI Comment Letter.
    \36\ See Brighthouse Comment Letter.
---------------------------------------------------------------------------

    Some commenters expressed reservations about key aspects of the
proposal. One commenter stated that the initial summary prospectus
should provide the information needed to make an investment decision
without having to refer to other documents,\37\ essentially rejecting
the layered disclosure framework. Three commenters were skeptical that
certain aspects of the proposed initial summary prospectus would result
in better investor comprehension of how a variable contract works, and
recommended that we engage in investor testing to validate our
assumptions.\38\
---------------------------------------------------------------------------

    \37\ See Comment Letter of Mark Bowler (Feb. 11, 2019) (``M.
Bowler Comment Letter'').
    \38\ See Comment Letter of the Consumer Federation of America
(Feb. 27, 2019) (``CFA Comment Letter'') (stating that the
Commission should test the summary prospectuses to determine whether
the proposed disclosure effectively conveys key information to
investors before finalizing the rule); NAIFA Comment Letter; AARP
Comment Letter. See also Comment Letter of Miles Brooks (Nov. 28,
2019) (asserting the Commission should not regulate a disclosure
regime on variable contracts).
---------------------------------------------------------------------------

    After considering the comments received on the proposal, we are
adopting rule 498A and the general summary prospectus framework
substantially as proposed, with several modifications reflecting
considerations raised by commenters. As discussed in the Proposing
Release, our proposal built on our experience with both layered
disclosure (under the mutual fund summary prospectus) and integrated
disclosure (enhanced over a decade ago with securities offering reform
for corporate issuers), as well as more than 20 years of experience
with the use of the internet as a medium to provide information to
investors.\39\ We drew on our investor testing efforts in developing
the proposed summary prospectus framework, and specifically solicited
feedback from investors and other market participants on hypothetical
initial and updating summary prospectuses, which we received in
response to our ``feedback form'' and in numerous comment letters.\40\
---------------------------------------------------------------------------

    \39\ Proposing Release, supra note 6, at Section I.B.2.
    \40\ See supra note 33. The Proposing Release was accompanied by
a ``Feedback Flier'' that solicited investor feedback about the
primary components of the initial summary prospectus, which was also
generally supported by respondents. See, e.g., Comment Letter of
Betsy Nedar (``Nedar Comment Letter'') (Nov. 6, 2018); J. Topolski
Comment Letter (Nov. 16, 2018); Anonymous Comment Letter (Nov. 11,
2018) (``Anonymous Comment Letter I''); Anonymous Comment Letter
(Dec. 26, 2018) (``Anonymous Comment Letter II''); Velazquez Comment
Letter (Feb. 8, 2019); Comment Letter of Bernard Mihayo (Nov. 5,
2019); Yinan Ying Comment Letter (Dec. 10, 2019).
---------------------------------------------------------------------------

    We also received comments on whether the use of the summary
prospectus should be mandatory instead of voluntary as proposed. One
commenter stated that the use of the summary prospectus should be
voluntary to give insurers the flexibility to tailor their disclosure
practices to best fit their situations.\41\ Two commenters supported
mandatory compliance to ensure that variable contract investors receive
summary disclosures to aid their investment decisions.\42\
---------------------------------------------------------------------------

    \41\ See ACLI Comment Letter.
    \42\ See AARP Comment Letter; Comment Letter of Better Markets
(Feb. 14, 2019) (``Better Markets Comment Letter'').
---------------------------------------------------------------------------

    After considering such comments and evaluating our prior experience
with the mutual fund summary prospectus, we continue to believe that
reliance on rule 498A should be optional. This will give insurers the
opportunity to gradually transition to the new summary prospectus
regime while minimizing disruption to their current registration and
business processes. Although approximately 93% of mutual funds
currently use a summary prospectus, it took nearly eight years after
the adoption of the mutual fund summary prospectus framework for the
industry to reach that threshold.\43\ We believe that insurers may
similarly need a period of time to transition to the new regime given
the diversity of variable contracts (and corresponding diversity of
disclosure for variable contracts) and the fact that the variable
contract summary prospectus regime will 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).
---------------------------------------------------------------------------

    \43\ See supra note 21.
---------------------------------------------------------------------------

    Some variable contracts offer few (or no) optional benefits and few
investment options. Because these contracts have fairly straightforward
disclosure documents, the advantages of 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.\44\ An optional approach also preserves
flexibility for registrants that may not wish to undertake the costs of
the transition to a summary prospectus regime.
---------------------------------------------------------------------------

    \44\ See infra Section IV.C.1.
---------------------------------------------------------------------------

    Given the almost universal adoption of the summary prospectus
regime by mutual funds, and the anticipated cost-savings and other
efficiencies available to insurers that rely on the rule, we do not at
this time believe a mandatory approach is necessary to achieve the
goals of the variable contract summary prospectus regime. We intend to
review the voluntary use of the summary prospectus and to assess
whether benefits to investors warrant a future mandate.\45\
---------------------------------------------------------------------------

    \45\ See 2009 Summary Prospectus Adopting Release, supra note
17, at 66-67.
---------------------------------------------------------------------------

1. Initial Summary Prospectus
a. Overview
    The new rule requires a person relying on the rule to send or give
an initial summary prospectus in connection with sales of variable
contracts to new investors.\46\ The initial summary prospectus uses a
layered disclosure approach that provides 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.\47\ We designed the initial summary prospectus to
simplify and consolidate lengthy and complex disclosures, and to
highlight aspects of the contract that may not be emphasized

in marketing materials and other disclosures.\48\
---------------------------------------------------------------------------

    \46\ 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.4.
    \47\ One commenter, citing academic research, stated that to the
extent summary disclosure reduces information overload, it could, in
turn, increase financial literacy. See ACLI Comment Letter. This
comment letter, together with other similar comment letters
discussing the costs and benefits of the proposed rulemaking, are
discussed in greater detail in Section IV. See infra note 1038 and
accompanying and following text.
    We believe 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. We also note that, unlike other investment
products, variable contract investors typically have a state-
mandated ``free look'' opportunity to return the contract for a full
refund of premiums or purchase payments within a limited number of
days following contract issuance. See Proposing Release, supra note
6, at nn.65 and accompanying text.
    \48\ Another 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. See Proposing Release, supra note 6, at nn.66-69 and
accompanying text.
---------------------------------------------------------------------------

b. Contracts That May Be Included in the Initial Summary Prospectus
    As proposed, we are requiring the initial summary prospectus to
only describe a single contract that the registrant currently offers
for sale.\49\ Also as proposed, an initial summary prospectus may
describe more than one class of a currently offered contract.\50\ For
purposes of the rule, we are adopting, as proposed, a definition of
``class'' to be a class of a contract that varies principally with
respect to distribution-related fees and expenses.\51\
---------------------------------------------------------------------------

    \49\ Rule 498A(b)(1).
    \50\ Id.
    \51\ See rule 498A(a).
---------------------------------------------------------------------------

    The Commission proposed these requirements for the initial summary
prospectus because 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.
Currently, and under our amendments to the registration forms, it is
industry practice for registrants to describe multiple contracts in a
single prospectus (or multiple versions of a particular contract in a
prospectus), or include multiple prospectuses in a single registration
statement.\52\ We also understand that certain contract prospectuses
include disclosure about contract features and options that the
registrant may no longer offer to new investors.
---------------------------------------------------------------------------

    \52\ 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). As discussed below, we are amending the
registration forms to permit insurers to include multiple contracts
(or versions thereof) in a single statutory prospectus and multiple
prospectuses in a single registration statement subject to certain
restrictions. See infra text following note 598 (discussing the
amended form instructions that provide a prospectus may describe
multiple contracts that are ``essentially identical,'' while a
registration statement may include multiple prospectuses if the
contracts described in those prospectuses are ``substantially
similar'').
---------------------------------------------------------------------------

    We received mixed comments regarding this aspect of the proposal.
One commenter supported limiting the initial summary prospectus to a
single contract currently offered for sale, but to facilitate reader
comprehension, urged us to further limit the initial summary prospectus
to only one class of a currently offered contract.\53\ In contrast,
three commenters urged us to allow an initial summary prospectus to
describe multiple variable contracts that differed in ways other than
distribution-related fees and expenses.\54\ Their suggested approach
would permit an initial summary prospectus to describe all contracts
currently offered for sale, regardless of how they differed, including
with respect to fees and expenses beyond traditional distribution-
related fees and expenses (e.g., administrative, insurance, and benefit
charges), optional benefits, and other features. These commenters
asserted that our proposal would require investors to review multiple
initial summary prospectuses to choose between different variable
contracts, and suggested that instead permitting multiple contracts to
be described in a single document would make it easier for investors to
choose between contracts.
---------------------------------------------------------------------------

    \53\ See AARP Comment Letter.
    \54\ See Transamerica Comment Letter; ACLI Comment Letter; CAI
Comment Letter.
---------------------------------------------------------------------------

    We are adopting this aspect of the rule as proposed. The initial
summary prospectus is designed to provide investors key information to
facilitate an initial investment decision. If we were to expand its
scope as suggested by commenters, it could result in initial summary
prospectuses that disclose information about contracts and contract
features and options not available to the prospective investor. We
continue to believe that requiring an initial summary prospectus to
describe only one contract will provide more effective disclosure by
omitting information that is not relevant to an investor's investment
decision.
    Commenters raised the concern that our approach could result in
investors reviewing multiple initial summary prospectuses.\55\ We
believe, however, that an approach that results in multiple initial
summary prospectuses--where each is tailored to present key information
about a single contract--will more effectively facilitate an investment
decision than a longer or more complex document that may overwhelm
investors with information that is not relevant to the investment
decision.\56\ The summary prospectus regime is designed to reduce the
volume and content of variable contract disclosures that may make it
difficult for some investors to find and understand key information
they need to make an investment decision. Describing multiple contracts
in a single initial summary prospectus, as some commenters suggest,
conflicts with this goal. Our approach also is consistent with
requirements for mutual fund and exchange-traded fund (``ETF'') summary
prospectuses, where summary prospectuses may only present key
information as to a single fund.\57\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ See, e.g., AARP Comment Letter (``By permitting the
disclosures to discuss more than one contract and, indeed, even more
than one class per contract, the information becomes unorganized,
unfocused, and difficult to understand.'').
    \57\ For example, a mutual fund may offer a suite of equity
funds that share the same statutory prospectus, but must provide a
separate summary prospectus for each fund that has different
investment objectives, strategies and risks (e.g., large-cap, mid-
cap, small-cap, emerging markets, etc.). This reduces complexity and
minimizes the likelihood of overwhelming investors with too much
information in a single document.
---------------------------------------------------------------------------

c. Preparation of the Initial Summary Prospectus
    The chart at the end of this section outlines the information
required 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 new rule
references particular disclosure items from Forms N-3, N-4, and N-6 (as
amended).\58\ We are adopting, largely as proposed, a standardized
presentation to require certain disclosure items that we believe will
be most relevant to investors (such as the table that includes key
information about the contract and the contract overview section), to
appear at the beginning of the initial summary prospectus, followed by
supplemental information. The required presentation could also
facilitate comparison of different variable contracts.\59\
---------------------------------------------------------------------------

    \58\ The amendments to Forms N-3, N-4, and N-6 that facilitate
the summary prospectus content requirements, as well as amend the
content requirements for the statutory prospectus, are generally
discussed in more detail in Section II.C below. However, in order to
better explain the initial summary prospectus, we discuss new or
amended items in the statutory prospectus, to the extent they will
also appear in the initial summary prospectus, in this Section
II.A.1.
    \59\ We understand that many investors purchase variable
contracts through an intermediary and may 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 194 and accompanying text. Having a
more standardized 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.D, we are also adopting, as
proposed, the requirement to use Inline XBRL format for the
submission of certain required disclosures in the variable contract
statutory prospectus with respect to contracts currently offered to
new investors. The structured data format will allow investors,
Commission staff, data aggregators, financial analysts, and other
data users to more efficiently analyze and compare these products.

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

    Largely as proposed, we are requiring an initial summary prospectus
to only contain the information specifically required, which must
appear in the same order, and under the relevant corresponding
headings, as the rule specifies.\60\ While we did not receive any
comments regarding the proposed order of the substantive contents of
the initial summary prospectus, in a change from the proposal, and as
discussed below, we are reversing the order of the first two
sections,\61\ and, for Forms N-3 and N-4 only, merging two sections
together.\62\ These changes are designed to facilitate investor
readership and to streamline the document.
---------------------------------------------------------------------------

    \60\ Rule 498A(b)(5). While the Commission did not propose (and
we are not adopting) page limits for the initial summary prospectus,
these provisions are designed to require registrants to produce a
document that will present key information in a concise and clear
way.
    \61\ See infra Section II.A.1.c.ii.(a) (relocating ``Important
Information You Should Consider About the Contract'' before
``Overview of the Variable Contract''); see also rule 498A(b)(5)(i)
through (ii).
    \62\ See infra Section II.A.1.c.ii.(c) through (d) (merging the
``Standard Death Benefit'' into ``Benefits Under the Contract'');
see also rule 498A(b)(5)(iv).
---------------------------------------------------------------------------

Use of Illustrations and Examples
    While not proposed, three commenters suggested that we permit the
use of illustrations or examples in summary prospectuses.\63\
Illustrations and examples are frequently presented in variable
contract sales materials, and may be included in the statutory
prospectus.\64\
---------------------------------------------------------------------------

    \63\ See Lincoln Comment Letter; Comment Letter of Cardozo
School of Law Securities Arbitration Clinic (Mar. 14, 2019)
(``Cardozo Clinic Comment Letter''); Comment Letter of Benjamin G.
Baldwin, Jr. (Feb. 13, 2019) (``Baldwin Comment Letter'').
    \64\ General Instruction C.3.(g) to Forms N-3, N-4, and N-6.
---------------------------------------------------------------------------

    We are persuaded that illustrations and examples could assist
investors in more readily understanding potentially complex or lengthy
narrative disclosures. Consequently, the final rule and forms permit
the inclusion of illustrations or examples in a summary prospectus to
the extent that they are responsive and limited to the particular
statutory prospectus items required to be included in the summary
prospectus.\65\ However, such illustrations and examples generally
should not, by their nature, quantity, or manner of presentation,
obscure or impede understanding of the information that is required to
be included in the summary prospectus.\66\
---------------------------------------------------------------------------

    \65\ As guidance, we generally do not believe that illustrations
or examples regarding the operation of optional benefits should be
included in the initial summary prospectus because the summary
prospectus disclosure requirements regarding those benefits are
generally limited to a tabular summary of those benefits. See rule
498A(b)(5)(iv) (providing initial summary prospectus disclosure
requirements for ``(Other) Benefits Available Under the Contract''
by referencing the relevant item requirements from the particular
registration statement forms). See also Item 11(a) of amended Form
N-3; Item 10(a) of amended Form N-4; and Item 11(a) of amended Form
N-6.
    \66\ See General Instruction C.3.(b) to amended Forms N-3, N-4,
and N-6.
---------------------------------------------------------------------------

Terminology
    Commenters broadly objected to the requirement to use only the
headings and terms specified in the proposed rule (and forms).\67\ One
commenter stated because the industry uses a wide variety of
terminology in contract prospectuses, marketing materials, and the
contracts themselves, investors may be confused by receiving an initial
summary prospectus that uses different terminology than related
contract documents.\68\ Several commenters identified specific terms
they believed should not be required.\69\ Another commenter asked that
we permit registrants reasonable flexibility to use alternative terms
that reflect the substance of the defined terms in the proposed rule,
noting that readability should be the top priority.\70\ Commenters also
stated that providing flexibility in terminology would allow the
industry to simplify the complex language commonly used in variable
product disclosures,\71\ facilitate product evolution and
innovation,\72\ and be consistent with current practice as permitted by
the staff.\73\ Instead of prescribing specific terminology, four
commenters asked that we prescribe only the content of the disclosures,
giving industry the flexibility to modify headings and terms to better
convey certain aspects of a variable contract and make them easier to
understand, as long as such terms are substantially similar in meaning
to the terms used in the rule and forms and are clearly defined in the
prospectuses in which they appear.\74\
---------------------------------------------------------------------------

    \67\ See CAI Comment Letter; Pacific Life Comment Letter; ACLI
Comment Letter; Brighthouse Comment Letter; Jackson Comment Letter;
CCMC Comment Letter; ACLI Comment Letter; Transamerica Comment
Letter.
    \68\ See CAI Comment Letter.
    \69\ Several commenters objected to the terms ``death benefit,''
``mortality and expense risk charges,'' and ``surrender charge.''
See Comment Letter of Jackson National Life (Feb. 15, 2019)
(``Jackson Comment Letter''); CCMC Comment Letter. Others did not
want to use ``contract'' on the grounds that investors are used to
``policy.'' See Comment Letter of Ameritas Life Insurance Corp.
(Mar. 12, 2019) (``Ameritas Comment Letter''); ACLI Comment Letter.
One insurer objected to ``living benefit rider'' because ``protected
lifetime income benefit'' resonates more with investors. See Lincoln
Comment Letter.
    \70\ See ACLI Comment Letter.
    \71\ See CAI Comment Letter; Pacific Life Comment Letter;
Brighthouse Comment Letter; Jackson Comment Letter.
    \72\ See Brighthouse Comment Letter; Transamerica Comment
Letter; ACLI Comment Letter; CAI Comment Letter.
    \73\ See ACLI Comment Letter.
    \74\ See CAI Comment Letter; Pacific Life Comment Letter;
Jackson Comment Letter; Brighthouse Comment Letter.
---------------------------------------------------------------------------

    We recognize that variable contract and other issuers may use
terminology in their disclosure documents other than that used in our
rules and forms, and that in many instances, our rules and forms do not
prescribe terminology.\75\ After considering comments, we are modifying
the proposed rule and form requirements to give insurers the
flexibility to describe their variable contracts in a manner best
suited to their products and business practices, while still requiring
the use of certain standardized headings in initial summary
prospectuses to allow investors to easily compare the features of
different products.
---------------------------------------------------------------------------

    \75\ However, in certain instances our rules and forms do
prescribe specific terminology. See, e.g., Form CRS (generally
requiring that investment advisers and broker-dealers use specific
headings when responding to each item).
---------------------------------------------------------------------------

    The proposed amendments to the forms would have defined and used
certain terminology. However, contrary to certain commenters' concerns,
the forms, as proposed, would not have required that registrants use
the specific terminology in the forms in preparing a registration
statement, other than in certain legends. To respond to these
commenters' concerns, we are adding a clarifying instruction to the
forms that explicitly and broadly permits registrants to use alternate
terminology in preparing registration statements pursuant to the forms'
disclosure requirements, so long as the alternate terminology clearly
conveys the meaning of, or provides comparable information as, the
terms used in the forms.\76\ Notwithstanding this instruction, we are
adding an additional instruction, which was not included in the
proposed amendments to the forms, that a registrant must prepare the
Key Information Table using the headings and sub-headings specified by
the form.\77\
---------------------------------------------------------------------------

    \76\ See General Instruction C.3.(d)(ii) of Forms N-3, N-4, and
N-6. See also infra note 598 and accompanying text.
    \77\ See General Instruction 1(a) to Item 2 of Forms N-3, N-4,
and N-6. We discuss the Key Information Table below in Section
II.A.1.c.ii.(a).
---------------------------------------------------------------------------

    Because the initial summary prospectus (and as discussed below, the

updating summary prospectus) draw from disclosures in the statutory
prospectus, insurers will similarly have flexibility in preparing those
documents with one exception. With respect to the initial summary
prospectus, we are generally requiring, as proposed, that the initial
summary prospectus use the standardized headings required by the
rule.\78\ We believe that the use of standardized headings will provide
a consistent framework to allow investors to more easily navigate
through variable product summary prospectuses and also facilitate the
ability of investors to compare information across different variable
contract products.
---------------------------------------------------------------------------

    \78\ However, registrants are provided with limited flexibility
as to certain bracketed terms. For example, information about buying
a contract must be disclosed under the heading ``Buying the
[Contract].'' Registrants could substitute ``Policy'' for the
bracketed term ``Contract.'' See rule 498A(b)(5)(v).
---------------------------------------------------------------------------

    Commenters generally objected to the proposed use of ``surrender
charges'' and ``death benefits'' in the initial summary prospectus
headings.\79\ Regarding ``surrender charges,'' we believe that the term
``withdrawal'' both sufficiently encompasses surrenders and other types
of withdrawals and is a more intuitive term for investors, and have
modified the heading regarding surrenders and withdrawals to no longer
require the term ``surrender.'' \80\ We decline, however, to permit the
use of alternate terms for ``death benefits'' in the case of initial
summary prospectuses for variable life insurance, because we believe
that ``death benefits'' is a more intuitive term than ``legacy
benefits'' or other terms.\81\ Additionally, the terms ``mortality and
expense risk charges'' and ``living benefit rider'' do not appear in
the standardized headings required by the rule, so insurers will have
flexibility with respect to those terms.
---------------------------------------------------------------------------

    \79\ See Jackson Comment Letter; CCMC Comment Letter.
    \80\ See rule 498A(b)(5)(vii) (requiring the heading ``Making
Withdrawals: Accessing the Money in Your [Contract]'' when
disclosing the information required by Item 13(a) of Form N-3, Item
12(a) of Form N-4, or Item 12(a) of Form N-6).
     Similarly, we are modifying the sub-heading in the Key
Information Table regarding surrenders and withdrawals to eliminate
the proposed use of the term ``surrenders.'' See Item 2 of Forms N-
3, N-4, and N-6. We discuss the Key Information Table below in
Section II.A.1.c.ii.(a).
    \81\ Although information about standard death benefits offered
by variable life insurance contracts must be disclosed under the
heading ``Standard Death Benefits,'' the disclosures provided under
that heading could, for example, explain that ``death benefits'' are
referred to as ``legacy benefits'' under the contract and could use
the term ``legacy benefits'' in providing the disclosures required
under that heading. See rule 498A(b)(5)(iii).

                               Table 2--Outline of the Initial Summary Prospectus
----------------------------------------------------------------------------------------------------------------
                                                                      Item of         Item of         Item of
              Heading in initial summary prospectus               amended Form N- amended Form N- amended Form N-
                                                                         3               4               6
----------------------------------------------------------------------------------------------------------------
Cover Page:
    Identifying Information.....................................  ..............  ..............  ..............
    Legends.....................................................  ..............  ..............  ..............
    EDGAR Contract Identifier...................................  ..............  ..............  ..............
    Table of Contents (optional)................................  ..............  ..............  ..............
Content:
    Important Information You Should Consider About the                        2               2               2
     [Contract].................................................
    Overview of the [Contract]..................................               3               3               3
    Standard Death Benefits.....................................  ..............  ..............           10(a)
    [Other] Benefits Available Under the [Contract].............           11(a)           10(a)           11(a)
    Buying the [Contract].......................................           12(a)           11(a)       9(a)-9(c)
    How Your [Contract] Can Lapse...............................  ..............  ..............     14(a)-14(c)
    Making Withdrawals: Accessing the Money in Your [Contract]..           13(a)           12(a)           12(a)
    Additional Information About Fees...........................               4               4               4
    Appendix: [Investment Options/Portfolio Companies] Available   \82\ 18 or 19              17              18
     Under the [Contract].......................................
----------------------------------------------------------------------------------------------------------------

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

    \82\ Registrants on Form N-3 may omit the Appendix specified by
Item 18 of amended Form N-3, and instead provide the more detailed
disclosures about the investment options offered under the contract
required by Item 19 of amended Form N-3. See infra note 788 and
accompanying text.
---------------------------------------------------------------------------

    Identifying Information. We are adopting, largely as proposed, the
requirement that the following information appear on the front cover
page or the beginning of the initial summary prospectus:
     The depositor'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.\83\
---------------------------------------------------------------------------

    \83\ Rule 498A(b)(2)(i) through (iv).
---------------------------------------------------------------------------

    Several commenters suggested that instead of requiring the document
to be identified as a ``Summary Prospectus,'' we should permit
different titles, such as ``Key Information Document'' or ``Summary
Information.'' \84\ A prospectus, however, is a legal term with
specific legal implications. It is also a term that is understood in
the marketplace. We believe it is important that investors understand
that an initial summary prospectus is, in fact, a prospectus, and that
it therefore contains important required regulatory disclosures.
However, in a change from the proposal, the cover page will not be
required to include the registrant's name. We agree with a commenter's
suggestion that the registrant's name is of limited value to investors
because it is largely a legal convention,\85\ and believe investors are
more likely to be interested in the names of the depositor (or insurer)
and the variable contract.
---------------------------------------------------------------------------

    \84\ See, e.g., NAIFA Comment Letter; Comment Letter of VIP
Working Group (Dec. 4, 2018) (``VIP Working Group Comment Letter'');
Comment Letter of Jack Breacher (Jan. 27, 2019) (``Breacher Comment
Letter'').
    \85\ See VIP Working Group Comment Letter (stating that the
separate account name ``is jargon and an accounting fiction''). In
addition, mutual funds are not required to include the registrant's
name on the summary prospectus cover page.
    We are making a conforming change to the cover page requirements
for the updating summary prospectus. See infra Section II.A.2.c.i.
---------------------------------------------------------------------------

    Legends. We are requiring, largely as proposed, the cover page or
beginning of the initial summary prospectus to include the following
legends:

    This Summary Prospectus summarizes key features of the
[Contract]. Before you invest, you should also review the prospectus
for the [Contract], which contains more information about the
[Contract's] features, benefits, and risks. You can find this
document 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 [__].\86\
---------------------------------------------------------------------------

    \86\ The legend is 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 materials, request
other information about the variable contract, and make investor
inquiries. Rule 498A(b)(2)(v)(B).
    The website address must 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 requirement, documents available on the
website address must be publicly accessible and free of charge. Rule
498A(h)(1); see also infra Section II.A.5.
---------------------------------------------------------------------------

    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.\87\
---------------------------------------------------------------------------

    \87\ The paragraph of the legend regarding cancellation of the
contract may be omitted if not applicable. If this paragraph is
included in the legend, the paragraph must be presented in a manner
reasonably calculated to draw investor attention to that paragraph.
See infra note 95.
---------------------------------------------------------------------------

    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.\88\
---------------------------------------------------------------------------

    \88\ Rule 498A(b)(2)(v). 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 investor 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 (Oct. 30, 2018), available at
https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-variable-life-insurance.

    These legends are designed to provide identifying information about
the variable contract to which the initial summary prospectus relates,
as well as certain general information applicable to all variable
contracts.\89\ Pursuant to the requirements of new rule 30e-3,\90\ the
initial summary prospectus may include the legend designed to alert
investors that beginning on a specified date, shareholder reports for
Form N-3 variable annuities and for portfolio companies available under
Form N-4 variable annuity and Form N-6 variable life insurance
contracts will no longer be sent by mail (unless paper copies are
specifically requested), and will instead be posted on a website,
subject to notification by mail of their location and availability.\91\
---------------------------------------------------------------------------

    \89\ A registrant will be able to modify the legends so long as
the modified statements contain comparable information. Rule
498A(b)(2)(v)(A).
    \90\ Rule 30e-3; see also Investment Company Shareholder Reports
Release, supra note 19. This rule became effective January 1, 2019.
    \91\ Rule 498A(b)(2)(v)(E) through (F); see also rule
498A(b)(2)(v)(B) (requiring, if applicable, cover page legend to
include the website address required by rule 30e-3, if different
from the website address provided for variable contract and related
documents). The legends required by rule 30e-3 will be removed from
variable contract registration forms on January 1, 2022.
---------------------------------------------------------------------------

    One commenter stated that the initial summary prospectus would be
more approachable if the cover page had more white space with fewer
legal disclaimers and suggested that we eliminate the legend urging
investors to review the statutory prospectus before investing and
describing how to obtain further information about the contract.\92\ We
are retaining the legend and have streamlined it in consideration of
this comment, but are otherwise adopting the legend largely as proposed
because we believe that it concisely informs investors that the
statutory prospectus is available and how to obtain it. Providing
investors information about the statutory prospectus and where to find
it will facilitate the layered disclosure approach we are adopting in
this document.
---------------------------------------------------------------------------

    \92\ See WFA Comment Letter.
---------------------------------------------------------------------------

    Another commenter stated that because the free look period is one
of the most crucial rights available to variable contract purchasers,
investors should receive a separate, one-page disclosure describing
this unique, time-limited revocation right.\93\ The commenter also
suggested that we require insurers to draw more attention to free look
disclosure by requiring it to be in a larger font size, bolded, and
boxed.
---------------------------------------------------------------------------

    \93\ See AARP Comment Letter.
---------------------------------------------------------------------------

    We are not requiring insurers to provide a stand-alone document
describing the free look period, but rather are requiring, as proposed,
that the legend on the cover page or beginning of the summary
prospectus retain all disclosures of key information in one document.
We also understand that state laws typically mandate free look
disclosures in the variable contract application, investor education
materials (e.g., the NAIC Buyer's Guide), and the variable contract
itself, and investors therefore already receive multiple notices
regarding this unique revocation right. We agree, however, that this is
important information that should be highlighted to investors because
it is unique to variable contracts and time limited. We are therefore
revising the rule to require that insurers present the ``free-look''
legend in a manner reasonably calculated to draw an investor's
attention.\94\ In response to comments, the new rule also clarifies
that this legend is required only if applicable.\95\
---------------------------------------------------------------------------

    \94\ Rule 498A(2)(v)(C).
    \95\ See rule 498A(b)(2)(v)(C); see also ACLI Comment Letter
(stating that some types of group annuity contracts, such as those
used to fund Section 403(b) retirement plans, are not required to
have a free look provision under state law).
---------------------------------------------------------------------------

    Taking into account the comments urging that we streamline the
legends where possible, we are relocating one legend and eliminating
two others. Specifically, the Commission proposed that, if any
information is incorporated by reference into the initial summary
prospectus, the front cover page would include a legend with certain
disclosures related to that information.\96\ Incorporation by reference
is a technical legal doctrine that may not be understandable to many
investors. To reduce the length of the legends on the cover page of the
initial summary prospectus, we are relocating this legend to the back
cover page or last page of the initial summary prospectus.\97\ However,
we are not eliminating the legend because our rules on incorporation by
reference require registrants to provide disclosure about what
information is incorporated into a document.\98\
---------------------------------------------------------------------------

    \96\ Proposed rule 498A(b)(2)(vi)(C).
    \97\ Rule 498A(b)(3)(i).
    \98\ See, e.g., 17 CFR 230.411(e) (rule 411(e) under the
Securities Act); 17 CFR 270.0-4(e) (rule 0-4(e) under the Investment
Company Act).
---------------------------------------------------------------------------

    We are also eliminating the proposed legend stating ``You should
read this Summary Prospectus carefully, particularly the section titled
Important Information You Should Consider About the Contract.'' We
believe that legend is no longer necessary because the section
referenced by that legend is now the first item in the initial summary
prospectus.\99\
---------------------------------------------------------------------------

    \99\ See text following note 121.
---------------------------------------------------------------------------

    One commenter suggested that we remove the proposed legend stating
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, on the basis that this

legend was ``legalese.'' \100\ We agree that this legend may not
communicate as effectively as the other legends and that removing it
will streamline the cover page, potentially increasing the likelihood
that investors will read the remaining legends. Removing the
requirement to include that legend also treats variable contract
summary prospectuses similarly to mutual fund summary prospectuses,
which are permitted, but not required, to include that legend on their
cover page.
---------------------------------------------------------------------------

    \100\ See Breacher Comment Letter.
---------------------------------------------------------------------------

    EDGAR Contract Identifier. We are adopting, as proposed, the
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 in a type size smaller than that generally used in the
prospectus (e.g., 8-point modern type).\101\ 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. We received no comments regarding the EDGAR contract
identifier.
---------------------------------------------------------------------------

    \101\ Rule 498A(b)(3)(ii); see also Proposing Release, supra
note 6, at n.87 (describing an EDGAR contract identifier).
---------------------------------------------------------------------------

    Table of Contents. Likewise, we are adopting, as proposed, the rule
provision permitting an initial summary prospectus to include a table
of contents.\102\ 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 initial summary prospectus
delivered electronically.\103\ We received no comments on this aspect
of the proposal.
---------------------------------------------------------------------------

    \102\ Rule 498A(b)(4).
    \103\ 17 CFR 230.481(c) (Rule 481(c)).
---------------------------------------------------------------------------

ii. Content of the Initial Summary Prospectus
    We are adopting, generally as proposed but with some modifications,
specifications in the rule regarding the content and order required in
an initial summary prospectus.\104\ An initial summary prospectus must
contain the information required by the rule, and only that
information, in the order specified by the rule.\105\ 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.\106\
---------------------------------------------------------------------------

    \104\ Rule 498A(b)(5); see also Section II.A.1.c.
    \105\ Id.
    \106\ Rule 498A(b); see also infra Section II.A.4.
    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 17, at n.70.
---------------------------------------------------------------------------

Key Information Table
    The initial summary prospectus will include a table (the ``Key
Information Table'') that will 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.\107\ Specifically, it will 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.\108\ We are adopting the
Key Information Table substantially as proposed, with some
modifications made in response to comments.
---------------------------------------------------------------------------

    \107\ See rule 498A(b)(5)(i); Item 2 of Forms N-3, N-4, and N-6.
    \108\ As discussed in the Proposing Release, 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 1041 (regarding investor
complaints). Office of Investor Education and Advocacy of the U.S.
Securities and Exchange Commission, Study Regarding Financial
Literacy Among Investors (Aug. 2012), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf
(``2012 Financial Literacy Study''). 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'').
---------------------------------------------------------------------------

    Commenters were broadly supportive of the proposed Key Information
Table,\109\ which was identified by respondents to the Feedback Flier
as the ``most useful'' section in the hypothetical initial summary
prospectus that accompanied the Proposing Release. One commenter said
the information in the Key Information Table was most relevant to
investors, particularly if standardized to compare annuities,\110\
while another noted approvingly that it broke the information down in a
simplified way.\111\
---------------------------------------------------------------------------

    \109\ See, e.g., ACLI Comment Letter; CAI Comment Letter.
    \110\ See Comment Letter of Christopher Viscomi (Dec. 4, 2018).
    \111\ See Comment Letter of Anthony Harrison (Dec. 7, 2018).
---------------------------------------------------------------------------

    Given the positive response to the Key Information Table, in a
change from the proposal, we are relocating it so it will be the first
substantive section of the initial summary prospectus, followed by the
Overview of the Contract instead of the second section following
Overview of the Contract, as proposed. We believe that investors of
different levels of financial sophistication may benefit from receiving
this information early in the initial summary prospectus, as it was
designed to provide a contextual baseline to help inform investors'
understanding of disclosure about more detailed aspects of the variable
contract that are described later on.
    The Key Information Table includes a number of prescribed
disclosures and is designed to complement the ``Overview'' section,
discussed below. As proposed, we are 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 requiring, as
proposed, 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 will be easier to read and better convey
the importance of the information to investors.\112\ This

presentation may also facilitate comparisons of certain disclosure
topics among variable contract prospectuses.
---------------------------------------------------------------------------

    \112\ As discussed in the Proposing Release, 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, & 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 are requiring, as proposed, that a registrant provide the Key
Information Table under the heading ``Important Information You Should
Consider About the [Contract].'' We are not requiring the proposed
legend that would have followed this heading, because we believe that
legend is largely redundant with similar language on the cover page or
beginning of the summary prospectus.\113\
---------------------------------------------------------------------------

    \113\ We proposed that the following legend would precede the
Key Information Table: ``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.'' See also
text following supra note 85 (discussing the legend that appears on
the cover page or beginning of the summary prospectus).
---------------------------------------------------------------------------

    As proposed, specified headings are required for each of the five
topic areas included in the table, and under each heading will be two
columns. The left column lists the required disclosure line-items for
each of the five topic areas, and the right column provides a brief
description for each corresponding line-item, according to the
respective instructions for each proposed line-item. Registrants will
also provide a cross-reference to the location in the statutory
prospectus where further information can be found for each line-
item.\114\ One commenter expressed a preference for allowing
registrants the discretion to use a one or two column format based on
specific formatting and design preferences.\115\ While we recognize
there are many ways to effectively provide the required information,
requiring all registrants to adhere to the same presentation standards
facilitates comparability. The overall format of the Key Information
Table is depicted below:
---------------------------------------------------------------------------

    \114\ See infra text following note 201.
    \115\ See ACLI Comment Letter (stating that ``[t]he priority
should emphasize readability and clarity of presentation, rather
than stipulating the number of appropriate columns.'').

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

------------------------------------------------------------------------
                            FEES AND EXPENSES
------------------------------------------------------------------------
Charges for Early Withdrawals..........
------------------------------------------------------------------------
Transaction Charges....................
------------------------------------------------------------------------
Ongoing Fees and Expenses (annual
 charges).
------------------------------------------------------------------------
                                  RISKS
------------------------------------------------------------------------
Risk of Loss...........................
------------------------------------------------------------------------
Not a Short-Term Investment............
------------------------------------------------------------------------
Risks Associated with Investment
 Options.
------------------------------------------------------------------------
Insurance Company Risks................
------------------------------------------------------------------------
                              RESTRICTIONS
------------------------------------------------------------------------
Investment Options.....................
------------------------------------------------------------------------
Optional Benefits......................
------------------------------------------------------------------------
                                  TAXES
------------------------------------------------------------------------
Tax Implications.......................
------------------------------------------------------------------------
                          CONFLICTS OF INTEREST
------------------------------------------------------------------------
Investment Professional Compensation...
------------------------------------------------------------------------
Exchanges..............................
------------------------------------------------------------------------

(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,\116\ that information is
frequently presented over a span of two or more pages when a prospectus
is printed on paper.\117\ We believe that investors may benefit from a
shorter, more tailored discussion in the Key Information Table that is
intended to convey how an investor's elections under the contract
(e.g., as to classes, optional benefits, portfolio companies, etc.)
will impact the fees and expenses he or she will experience under his
or her contract.\118\ As discussed below, we are requiring, as
proposed, that the initial summary prospectus also include the Fee
Table from the statutory prospectus.\119\ This framework will allow an
investor to determine the level of fee information that best suits his
or her informational needs.
---------------------------------------------------------------------------

    \116\ See Item 3 of current Forms N-3, N-4, and N-6 (``Fee
Table'').
    \117\ See VIP Working Group Comment Letter (observing that the
Fee Tables in some statutory prospectuses ``[a]re quite long
(pushing 7 pages) . . . [one] has a fee table with its own table of
contents.'').
    \118\ Although the presentation of fees and expenses in the Key
Information Table is shorter and more tailored relative to what is
included in the Fee Table, many of the calculations and instructions
in the Key Information Table directly reference parallel provisions
in the Fee Table. This should increase efficiency and comparability
between the disclosures, and also help ensure that updates and
amendments to the calculations and instructions in the Fee Table are
appropriately reflected in the Key Information Table.
    \119\ See infra Section II.A.1.c.ii.(h).
---------------------------------------------------------------------------

    We received mixed comments regarding the proposed Key Information

fee tables. One commenter approved of the summary fee tables, stating
``they are well[hyphen]conceived.'' \120\ Two commenters opposed
presenting fee information in the Key Information Table (and certain
other sections of the initial summary prospectus) as repetitive and
potentially confusing to investors, and instead recommended that all
fee and expense information be disclosed in a single location in the
initial summary prospectus (i.e., the full Fee Table, described in the
section titled ``Additional Information About Fees.'').\121\ One
commenter stated that numerical fee information should not be in the
Key Information Table because the investor would not have sufficient
context to understand specific dollar figures or percentages at that
point of the document, and that a narrative explanation of the types of
fees and expenses associated with the investment, accompanied by a
cross-reference to the Fee Table, would be most useful to
investors.\122\
---------------------------------------------------------------------------

    \120\ See VIP Working Group Comment Letter. In addition, almost
all of the respondents to our Feedback Flier agreed that the
examples reflecting how much an investor would pay for a variable
annuity, including upfront fees and future costs were clear.
    \121\ See CAI Comment Letter; Lincoln Comment Letter; see also
CFA Comment Letter (expressing skepticism that most investors would
be able to pull together disparate information about the contract
features and fees that is scattered throughout the initial summary
prospectus to make an informed choice).
    \122\ See CAI Comment Letter.
---------------------------------------------------------------------------

    While we acknowledge that some fee information presented in the Key
Information Table may be duplicative of information in the Fee Table,
we believe that this is consistent with our general layered disclosure
approach. Investors can receive preliminary fee-related information in
the Key Information Table, and more detailed information in the Fee
Table later in the document. Moreover, we are not persuaded, as one
commenter suggests, that providing only a narrative description of the
charges, without corresponding numerical costs, would as effectively
communicate to new investors the costs associated with a variable
product as a presentation that includes numeric information.
Accordingly, we are adopting, as proposed, the requirement to include
specific dollar figures and percentages in the Key Information Table.
    Charges for Early Withdrawals. It is important that investors
understand that if they make a withdrawal in the first several years
following an investment in 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.\123\
For that reason, the Commission proposed that the Key Information Table
require information intended to alert investors about the potential
impact of surrender charges imposed on early withdrawals.
---------------------------------------------------------------------------

    \123\ 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.
---------------------------------------------------------------------------

    Comments were mixed on this issue. Two commenters urged us to de-
emphasize the surrender charges in the summary prospectus, suggesting
that their prominence overemphasizes the risk they present.\124\
However, another commenter stressed the need for prominent disclosure
of surrender charges, stating that older investors might not understand
that long surrender periods may limit their ability to access money in
their account.\125\ Other commenters requested more flexibility in the
terminology used for this heading, and objected to the use of the term
``surrender charges.'' \126\
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    \124\ See VIP Working Group Comment Letter; NAIFA Comment
Letter.
    \125\ See AARP Comment Letter.
    \126\ See supra note 79.
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    Given the consequences of misunderstanding the impact of a
surrender charge for early withdrawals, we are requiring, largely as
proposed, the first line-item in the table, ``Charges for Early
Withdrawals,'' to state 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 will 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.\127\ In response to commenters' concerns regarding the
term ``surrender charges,'' we believe that the term ``withdrawal''
both sufficiently encompasses surrenders and other types of withdrawals
and is a more intuitive term for investors, and have modified the
heading accordingly.
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    \127\ See rule 498A(b)(5)(i); see also Instruction 2(a) to Item
2 of Forms N-3, N-4, and N-6. The maximum surrender charge must be
expressed as a percentage of the purchase payment or premium or the
amount surrendered, whichever is applicable.
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    In addition, we are requiring, as proposed, 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.'').\128\ The Commission proposed to use $100,000
as the basis for the surrender charge example because the value of the
average variable annuity contract exceeds $100,000.\129\ For purposes
of the Key Information Table, we believe that 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, as reflected elsewhere in the
document.\130\
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    \128\ Id.
    \129\ See also IRI Fact Book, supra note 7.
    \130\ Registrants will continue to disclose the surrender fee as
a percentage in the ``Transaction Expenses'' section of the Fee
Table. See Item 4 of amended Forms N-3, N-4, and N-6.
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    One commenter objected to a surrender charge example in the Key
Information Table based on an assumed investment of $100,000,\131\
while several others generally opposed using $100,000 as the basis for
any fee examples in the initial summary prospectus, preferring the
current $10,000 assumed investment level.\132\ As we noted in the
Proposing Release, $100,000 more closely approximates the current
average value of a variable annuity, and therefore we continue to
believe that figure is more likely to result in cost projections that
align with actual investor expectations and experience.\133\ For this
reason, and as discussed in more detail below, we are requiring
$100,000 as the baseline investment assumption for all fee examples in
a variable contract prospectus, including the Key Information Table's
surrender charge example.\134\
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    \131\ See ACLI Comment Letter (``The assumed $100,000 average
for variable contracts overstates the impact of surrender charges
for contracts that are below that average.'').
    \132\ See CAI Comment Letter; Lincoln Comment Letter;
Transamerica Comment Letter; ACLI Comment Letter.
    \133\ See Proposing Release, supra note 6, at n.9.
    \134\ See infra Section II.C.2.d.iv; see also Item 4 of amended
Forms N-3, N-4, and N-6 (requiring registrants to reflect the
consequence of any surrender fee in the ``Example'' to the Fee
Table, which, based on a $100,000 assumed investment, shows in
dollar figures how much an investor would pay if the contract were
surrendered after 1 year, 3 years, 5 years, and 10 years).
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    Transaction Charges. As proposed, the second line-item in the
``Fees and Expenses'' section of the table, ``Transaction Charges,''
requires a statement explaining that in addition to surrender charges,
the investor may also be charged for other transactions, accompanied by
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.).\135\ This requirement is designed to
provide a simple narrative description to alert investors that
surrender charges are not the only transaction charges they could pay.
We received no comments regarding this line-item.
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    \135\ See rule 498A(b)(5)(i); see also Instruction 2(b) to Item
2 of Forms N-3, N-4, and N-6. Although surrender charges are a type
of transaction charge, we are requiring surrender charges be
separately disclosed in the Key Information Table to highlight to
investors the significant costs associated with early withdrawals.
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    Ongoing Fees and Expenses. We are adopting, largely as proposed,
the third line-item in the ``Fees and Expenses'' section of the Key
Information Table, ``Ongoing Fees and Expenses (annual expenses),''
which is designed to alert investors that they also will bear recurring
fees on an annual basis.\136\ In Forms N-3 and N-4, the disclosure in
this line-item will begin with the legend: ``The table below describes
the fees and expenses that you may pay each year, depending on the
options you choose.'' \137\
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    \136\ See rule 498A(b)(5)(i); see also Instruction 2(c) to Item
2 of amended Forms N-3, N-4, and N-6.
    \137\ See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(A) to
Item 2 of amended Forms N-3 and N-4.
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    Largely as proposed, Form N-4 registrants will disclose, in a
tabular presentation in the order specified, the minimum and maximum
annual fees for: (1) Base contract expenses;\138\ (2) investment
options (e.g., portfolio company fees and expenses); \139\ and (3)
optional benefits available for an additional charge (for a single
optional benefit, if elected).\140\ Since Form N-3 registrants have a
single-tier structure and consolidate fees and expenses for investment
options into base contract expenses, they will disclose the same
information as Form N-4 registrants, except fees for base contract
expenses and investment options will be consolidated into a single
entry labeled ``annual contract expenses.'' \141\
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    \138\ The Commission did not propose to require and we are not
adopting minimum and maximum annual fees for base contract expenses
for Form N-6 registrants 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 may be
confusing to investors.
    \139\ See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(D) to
Item 2 of amended Form N-4. Registrants will 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 17 (Portfolio
Companies Available Under the Contract) of Form N-4.
    \140\ The disclosure will 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 percentage of net asset value). See rule
498A(b)(5)(i); see also Instruction 2(c)(i)(C) to Item 3 of amended
Form N-4 (percentage of net asset value).
    In a change from the proposal, we are revising the line-item
heading for optional benefits available for an additional charge to
clarify that the minimum and maximum fees disclosed for that line-
item relate to a single optional benefit, if elected.
    \141\ See rule 498A(b)(5)(i); see also Instruction 2(c)(i)(B) to
Item 2 of amended Form N-3. In a conforming change, we are revising
the instructions to this item to clarify that optional benefits
charges should not be included in the calculation of annual contract
expenses, because optional benefits charges are separately displayed
in a line-item titled ``optional benefits available for an
additional charge (if elected).'' See Instruction 2(c)(i)(D) to Item
2 of amended Form N-3.
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    The minimum annual fee column will show the lowest fee for each
annual fee category (i.e., the least expensive contract class, the
lowest annual portfolio company expense or management fee, and the
single least expensive optional benefit that is available for an
additional charge).\142\ The maximum annual fee column will show the
highest fees for these categories (and will reflect the single most
expensive optional benefit). Additionally, a legend preceding the
minimum and maximum annual fee table will refer investors to their
contract specifications page for information about the specific fees
they would pay each year based on the options elected.\143\
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    \142\ See rule 498A(b)(5)(i); see also Instruction 2(c)(i) to
Item 2 of amended Form N-3; Instruction 2(c)(i) to Item 2 of amended
Form N-4. In a conforming change, we are revising this instruction
in amended Form N-3 to mirror the parallel instruction in amended
Form N-4 in order to identify the specific categories for which
lowest and highest fees should be shown, as opposed to simply
stating that the lowest and highest contract fees should be shown.
    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 some
registrants do not charge extra for certain optional benefits (e.g.,
portfolio rebalancing and dollar-cost averaging), we believe
investors should be alerted to the costs associated with optional
benefits that are available for an additional charge. See
Instruction 2(c)(i)(B) to Item 2 of amended Form N-3 (stating that
disclosures should be provided for optional benefits available for
an additional charge); Instruction 2(c)(i)(B) to Item 2 of amended
Form N-4 (same). Accordingly, the disclosure should reflect the
minimum cost associated with an optional benefit that has a fee. If
the registrant offers any optional benefits for an additional
charge, the minimum fee should not be zero. For example, if the
registrant offers three optional benefits, with additional charges
of 0%, 0.50%, and 1.50%, then the minimum and maximum annual fees
reflected in the table would be 0.50% and 1.50%.
    \143\ Instruction 2(c)(i)(A) to Item 2 of amended Forms N-3 and
N-4. Many states require a contract specifications page that
contains information about the purchase payments, fees,
annuitization date and other information specific to an investor's
variable annuity contract. See, e.g., the Insurance Compact's
Individual Deferred Variable Annuity Contract Standards, available
at https://www.insurancecompact.org/rulemaking_records/080911_stds_annuity_individual_deferred_variable.pdf.
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    This presentation will consolidate the more detailed information in
the Fee Table, in an effort to minimize the need for investors to
perform complex calculations to understand the fees they will pay.\144\
For example, like the ``Ongoing Fees and Expenses'' line-item in the
Key Information Table, the Fee Table will also include information
about the contract's base contract fee, portfolio company fees and
expenses, and optional benefits.\145\ However, the Fee Table will
include a separate response for each contract class.\146\ In order to
condense this information, the parallel disclosure in the Key
Information Table will be presented as fee ranges.
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    \144\ This reflects the principle, which experts in disclosure
effectiveness for consumer-facing communications have encouraged, of
``eliminat[ing] most complex calculations'' for consumers. See
Kleimann Presentation, supra note 112.
    \145\ See Item 4 of amended Forms N-3 and N-4.
    \146\ See Instruction 7 to Item 4 of amended Forms N-3 and N-4.
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    As described in the Proposing Release, we also designed an example
in Forms N-3 and N-4 to provide a high-level cost illustration that
will give an investor a tool to understand the basic cost framework of
the contract. To emphasize that an investor's choices have a
significant impact on the costs associated with his or her investment,
we are requiring a two-column tabular presentation in the order
specified reflecting the lowest and highest annual cost estimates for
the variable contract.\147\ The following legend will precede this
table: ``Because your contract is customizable, the choices you make
affect how much you will pay. To help you understand the cost of owning
your contract, the following table shows the lowest and highest cost
you could pay each year. This estimate assumes that you do not take
withdrawals from the contract, which could add surrender charges that
substantially increase costs.'' \148\
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    \147\ See rule 498A(b)(5)(i); see also Instruction 2(c)(ii) to
Item 3 of Forms N-3 and N-4.
    \148\ See rule 498A(b)(5)(i); see also Instruction 2(c)(ii)(A)
to Item 3 of Forms N-3 and N-4.
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    As proposed, the lowest and highest annual dollar costs in this
table are based on certain prescribed assumptions (i.e., a $100,000
investment) with no additional contributions, transfers, or
withdrawals, no sales charges, and a 5% annual return over a
hypothetical 10-year period.\149\ The lowest annual cost

estimate is based on the least expensive combination of contract
classes and portfolio company charges or management fees, and excludes
optional benefits. The highest annual cost estimate reflects the most
expensive combination of contract classes, portfolio company charges or
management fees, and optional benefits.\150\ Excluding optional
benefits from the lowest annual cost estimate, and including them in
the highest annual cost estimate, is intended to illustrate the cost
impact of adding optional benefits to a contract.\151\ With this
information, the investor will be able to roughly estimate further
costs,\152\ and may be able to obtain additional information about
costs in the statutory prospectus if needed.\153\
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    \149\ See rule 498A(b)(5)(i); see also Instruction
2(c)(ii)(C)(a) to Item 3 of Forms N-3 and N-4.