Registration for Index-Linked Annuities; Amendments to Form N-4 for Index-Linked and Variable Annuities

As previously announced on September 29, 2023 (EventID 23289), the U.S. Securities and Exchange Commission, SEC, has now published in the Federal Register its consultation on proposed amendments in connection with the registration of index-linked annuities (RILAs). RILAs are annuities that typically provide some principal protection while offering the potential for growth tied to the performance of a stock market index. As RILAs can have various forms and designs, for instance with caps on the maximum growth participation or annual reset features, they tend to be rather complex which is why they are considered financial instruments under the Securities Act of 1933.
As stated before, the SEC seeks to enhance investor protection with respect to RILAs by adopting a tailored registration Form N-4 just for RILAs to ensure that all relevant information on such products are appropriately disclosed to investors. The adjusted Form N-4, which is currently required to be filed for most variable annuities issued by insurance firms, would require (additional) information on
– the phases of a contract (accumulation or savings phase and annuity or income phase);
– any positive or negative interest that will be credited to the invested amount based on the performance of the index;
– any limits that will apply if an index has a negative performance in the crediting period;
– any limits that may apply for participating in a positive performance of the index in the crediting period; and
– any details relevant for the investor in the context of (index-linked) annuities such as possible death benefits, withdrawal options AND corresponding withdrawal fees or penalties in case of early withdrawal, loan provisions, etc.
Furthermore, the SEC plans to revise just for RILAs the Key Information Table (KIT) to include a set of questions instead of individual data items that are necessary to ensure that a potential investor is aware of the risks of RILAs, any potential fees in connection with these annuities, tax consequences from investments in RILAs, and any restrictions in relation to such instruments.
Furthermore, the SEC suggests to revise the corresponding prospectus rules to align the rules for RILAs with those of other variable annuities. That is, the SEC would allow insurance companies to take advantage of the „summary prospectus framework“ which is already applicable to variable annuities and which provides that issuers can use a staged approach to provide information to investors. Specifically, the key information would have to be disclosed, while detailed, more comprehensive information must be provided to investors upon request only. As with prospectuses of other annuities, stringent rules would apply as to the delivery of the prospectus, (electronic format or – upon request – in printed form and free of charge), the disclosure of the prospectus or any subsequent modifications (easy accessible web site), or the wording inside the prospectus (easy to comprehend with most important disclosures to be prominently displayed).
Finally, the SEC proposes to amend rule 156 under the Securities Act of 1933 (17 CFR Part 230, § 230.156) to make its provisions applicable to RILA sales literature. Rule 156 is an interpretive rule under the Act that provides guidance on whether a statement involving a material fact is misleading in the context of investment company sales literature, including sales literature related to variable annuities. The amendment aims to apply this rule to RILA sales literature to ensure that investors receive accurate information about these products. Thereafter, insurance companies would be required to provide additional explanations for statements about RILAs‘ growth potential, costs, fees, and historical performance for those statements not to be considered misleading.
In this context, it may also be worth noting that at the current time, the SEC does not seek to apply rule 482 under the Securities Act of 1933 (17 CFR Part 230, § 230.482) which stipulates requirements as to the disclosure of performance metrics of registered investment companies.
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As the above summary only presents the key points of the consultation, please refer to the original legal document for more detailed, comprehensive information.