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SEC seeks new variable annuity disclosure — but doesn't require it

A new SEC proposal aimed at greater disclosures on variable insurance products would not actually impose any new requirements on issuers.

Variable annuity and life insurance issuers could optionally provide clients with a new summary prospectus under the 480-page proposal, which the SEC issued with a request for public comment until mid-February.

“This proposal is another important step in the Commission's efforts to provide Main Street investors with better information to make informed investment decisions,” SEC Chairman Jay Clayton said in a statement.

Annuity sales Q2 2018

The rule would only apply to variable contracts, as other types fall outside the SEC's jurisdiction. Clients who are considering VAs or variable life products could receive a new so-called summary prospectus with key facts about the product, including their fees, risks and main features.

They could get more detailed information online, though issuers already provide electronic or hard-copy prospectuses. The impact of the potential rule appears minimal in the immediate term.

It would “newly permit” the summary rather than mandating them, but nearly all mutual funds have adopted a “similar layered approach to disclosure” after the SEC approved the voluntary summary in 2009, the regulator says.

The largest firms’ combined VA and FA revenues hit a three-year low in 2017, but the products still make up a significant portion of their businesses.
August 3

Summary prospectuses would be optional “in light of the novel nature of this disclosure approach for variable contracts (including its use of layered disclosure), and because of the diversity of variable contracts (and corresponding diversity of disclosure for variable contracts),” the proposal states.

The summary documents would “mirror” those used voluntarily by open-end funds, according to a blog after the announcement by Cipperman Compliance Services, a third-party compliance firm which works with RIAs and broker-dealers. The proposal also looks similar to earlier FINRA standards.

“FINRA has consistently prioritized the regulation and disclosure of variable products and has issued multiple rules and notices to members about sales practices,” according to Cipperman founder Todd Cipperman. “While we agree that the SEC should allow summary prospectuses, we are not sure whether this will materially improve investor knowledge or reduce sales practice abuses.”

Under the proposed Regulation Best Interest, the SEC has sought to create simple explanatory documents summarizing fiduciary and suitability standards. Industry and consumer advocates alike panned the regulator’s sample customer relationship summary as too long and hard to understand.

Annuity sales have rebounded after a federal appeals court vacated the fiduciary rule, and the SEC is reviewing the Reg BI comments. The new proposal seeks to address the complexity of variable contracts, which advisors often cite alongside high fees as a major concern about all types of insurance products.

“Providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important,” Clayton said, “in light of the long‑term nature of these contracts and their potential complexity.”

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