Mutual funds that are used specifically as investments of variable annuities will now follow disclosure rules more in line with the rest of the fund world.

Earlier this month, the Securities and Exchange Commission adopted an amendment to Form N-1A, the registration form used by mutual funds to register under the Investment Company Act of 1940 and to offer shares under the Securities Act of 1933. The form will now require that a mutual fund that offers its shares exclusively as an investment option in a variable annuity contract or variable life insurance policy include a fee table in its prospectus.

The change to Form N-1A is meant to produce consistency for investors, according to the SEC rule, which was issued on April 13.

"The amendment will produce consistent disclosure of fees and expenses by portfolio companies that offer their shares exclusively through separate accounts and by mutual funds that sell shares directly to the public," the SEC ruling read. "This more consistent disclosure may result in [the] more efficient allocation of assets among variable insurance products and mutual funds."

New Form for Annuities

The amendment to Form N-1A was adopted simultaneously with the adoption of Form N-6, a new registration form for variable life insurance that replaces two separate forms that carriers had to submit to the commission. Form N-1A is being changed, according to the SEC, because the fee table in the Form N-6 prospectus no longer requires firms to list all of the fees for each of the separate accounts in a variable life insurance policy. Carriers may now simply list the range. To compensate for this broader range now being allowed in the annuity registration process, the SEC is now requiring fund companies to list all fee information in Form N-1A.

Form N-6 represents the first form dedicated to the registration of variable life products. The form has been in the works for four years, since 1998 when the SEC originally proposed it.

"It should have a very big impact," said Michael DeGeorge, VP and acting general counsel at the National Association for Variable Annuities of Reston, Va.

Neither of the two registration statements that N-6 replaces "was designed for variable life insurance," DeGeorge said. "So they didn't really fit variable life insurance contracts. There were things that they required that weren't really relevant and then things that weren't addressed that were fairly important."

The SEC expects that the adoption and implementation of Form N-6 and the related amendment to Form N-1A "will improve efficiency and competition among issuers of variable life insurance policies."

All registration statements and annual updates to effective registration statements that are filed on or after Sept. 1, 2002 must be in compliance with the new amendment to N-1A. Neither the SEC nor the Investment Company Institute expect the new requirements to cause any headaches for fund firms.

"I don't think we're going to comment on it," said Chris Wloszczyna, a spokesman for the ICI. That is an indication that the institute has no problems with the amendment or concerns with its affects on fund companies, Wloszczyna said.

The SEC estimates that 163 post-effective amendments and nine initial registration statements on Form N-1A are filed annually for fund portfolios that are offered exclusively as investment options for variable annuity contracts and variable life insurance policies. The regulator estimates that the amendment will cause a burden of two hours per registration, resulting in an annual industry cost of $28,896.

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