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Bates News, Bates Research  |  11-08-18

The Regulatory Landscape is Changing for Variable Annuity and Life Insurance Contracts



Significant regulatory developments are taking place in the variable annuity and life insurance market that are intended to encourage investors to make more informed decisions about these financial products. Along with the SEC’s announcement of an extensive new rule proposal that would leverage technology and create a “layered disclosure approach” to variable annuities and life insurance contracts, the SEC Office of Investor Education (“OCIE”) issued a Bulletin that offers a basic primer on these instruments.

The issuance of the new proposed rules comes a week after state insurance regulators met to revise the National Association of Insurance Commissioners (NAIC) “Suitability in Annuity Transactions Model Regulation.” (See Bates' article on recent deliberations.) The model regulation sets forth standards and procedures for providing appropriate recommendations to consumers “that result in transactions involving annuity products.” Here is a closer look at these recent developments.

SEC Proposes Rule Changes to Improve Disclosure on Variable Contracts

Weighing in at 480 pages, the new SEC proposal is a disclosure initiative intended to help investors understand key terms, fees and risks associated with variable contracts. The proposal creates a “layered approach to disclosure” similar to the approach which has been in use for mutual funds since 2009. The idea is to require issuers of variable contracts to provide basic information in a “summary prospectus” format with links to additional and more detailed information accessible by the consumer. For existing holders of these variable instruments, issuers would be required to provide an updated summary prospectus which would contain a brief description of changes to the contract that occurred during the previous year along with all the basic information contained in the new summary. SEC Chair Jay Clayton stated that "providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long‑term nature of these contracts and their potential complexity."

The proposed amendments affect existing disclosure rules and forms and would permit an issuer of a variable product to satisfy their legal compliance obligations through the delivery to an investor of this “reader-friendly” summary prospectus. Technical aspects of the proposal include: (i) required links to the full statutory contract prospectus; (ii) use of the Inline eXtensible Business Reporting Language format for the submission of other required disclosures; and (iii) revocation of certain rules and forms that have been superseded by law or that have been rendered moot. Comments on the proposal and on the provided samples of the summary prospectus must be submitted before February 15, 2019.

OCIE Investor Bulletin

The OCIE issued a primer on variable life insurance that provides a general description of how variable contracts work and how such a long-term policy is meant to satisfy a consumer’s insurance needs, investment goals and tax planning objectives. The Bulletin describes the features of the contract, including death benefits, accrued cash value that varies according to the amount of premiums paid, fees and expenses, and investment options offered under the policy. The Bulletin also explains the risks of such contracts, including the risks from policy lapse, investment loss and insurance company failure. Perhaps most important, the OCIE urges consumers to review the policy prospectus and to “be prepared to ask your financial professional questions about whether the policy is right for you.” Such guidance relates directly to the ongoing discussion of the suitability obligations of those financial professionals.

Latest Developments on Amending NAIC “Suitability in Annuity Transactions Model Regulation.”

As discussed previously, the NAIC Annuity Suitability working group has been working on revisions to the model regulation since late July. The intent of the working group is to update a rule that would enhance the standard of care for sales of variable annuity products. On October 25, 2018 the working group published the latest revisions to its draft of the model rule which reflect the deliberations from its most recent meetings. Among other things, the draft proposal would require an agent to act with reasonable diligence, care, skill and prudence on behalf of clients and to disclose conflicts of interest as well as cash and non-cash compensation.

Against the backdrop of the SEC’s proposed Best Interest rulemaking, (see Bates’ research articles here and here,) the working group reportedly continued to debate many of the thorny definitional issues that may impact the final model regulation. These include (i) whether a recommendation must be “consistent with” or must be “in furtherance” of a client’s objectives and needs, (the new draft keeps the “consistent with” language”); (ii) the applicability of the model regulation to “in-force” transactions, (the new draft does not apply to in-force policy transactions); (iii) the degree to which a producer must consider recommending other products, (the new draft does not contain references to other products available through the producer); and (iv) the allowable extent to which a producer’s interests may be considered, (the latest draft states that the producer may not place the producer’s or the insurer's financial interest “ahead of the consumer’s interest”).


Given the reprioritized focus on protecting retail investors by both federal and state regulators, enhanced or simplified disclosure of some kind is a certainty. The new SEC disclosure rule on variable contracts is one step in that direction. Publication of the OCIE primer on variable contracts (not a coincidence) serves not only as a useful resource, but also a reminder of the wider debate on raising standards for issuers. It is, of course, unlikely that any final NAIC model regulation on annuity standards will be issued before the SEC resolves its broader rulemaking on Best Interest. According to Mike Lacek, Bates’ Retirement, Insurance and Annuity Consultant, “the NAIC deliberations reflect a real tension underlying efforts to produce a simple rule that can do it all. Until such time as these issues are resolved in a comprehensive and coherent way, companies will have to continue to address the on-going compliance challenges they present.” Bates will continue to monitor developments.


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