June 30, 1999

DELIVERY BY HAND

Mr. Jonathan G. Katz Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 0609
Washington, DC 20549-0609

Dear Mr. Katz:

This letter is submitted on behalf of the Committee of Annuity Insurers (the "Committee").1 The Committee is pleased to have the opportunity to offer its comments in response to the request of the Securities and Exchange Commission (the "Commission") in Release No. 33-7606A (November 13, 1998) (the "Release") for comments on the proposal to modernize and clarify the regulatory structure for offerings under the Securities Act of 1933, as amended (the "Securities Act") and reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

We applaud the Commission's efforts to "make the registration system more workable for issuers and underwriters and more effective for investors in today's capital markets."2 Committee members are concerned, however, that the proposals do not address the unique challenges thatofferings of market-value adjusted annuity contracts ("MVA contracts") face under the current registration regime.3

MVA contracts compete in the marketplace with other types of annuity contracts, including fixed annuity contracts not required to register under Section 3(a)(8) of the Securities Act, and variable annuity contracts. However, the current registration regime hinders the ability of insurers to issue MVA contracts, and therefore the competitiveness of the MVA contract marketplace. Registering MVA contracts under the current registration process triggers Exchange Act reporting requirements for the insurance company and disclosure of detailed information about the insurance company not relevant to an investor's decision to purchase an MVA contract. For many insurers, the burdens of registration have acted as a barrier to entering the MVA contract market.

We appreciate the Commission specifically soliciting comments on how the proposals affect, and how they should be modified to accommodate, MVA contracts.4 While we have provided some suggestions below for modifying the Commission's proposals, we would principally like to take this opportunity to outline the concerns of MVA contract issuers under the current registration process generally, and explain why the proposals do not adequately address or alleviate those concerns.5 Because in respects relevant to Securities Act registration and Exchange Act reporting, MVA contracts bear more resemblance to variable annuity contracts than to corporate debt and equity securities, we ultimately propose that the Commission allow insurance companies to register MVA contracts on a modified Form N-4 which would provide purchasers with all material disclosure necessary to evaluate the MVA contracts and their issuers. Second,because solvency is the only insurance company information truly relevant for MVA investors, we also propose that the Commission allow issuers of MVA contracts to provide general account financial statements to contract owners on an annual basis in lieu of filing periodic reports under the Exchange Act. We also propose that the Commission apply the structure governing variable annuity contracts to the timing of effectiveness, payment of fees, prospectus delivery, and communication of performance for MVA contracts. Finally, we propose that the Commission exempt MVA issuers from the Release's proposals relating to communications prior to effectiveness, consistent with our suggested approach regarding the treatment of MVA contracts under the Securities and Exchange Acts generally. We do, however, suggest that the Commission develop a rule permitting MVA issuers and investment companies to distribute written material prior to effectiveness.

There is no registration form specifically designed for MVA contracts. Form N-4 is an integrated form for registering variable annuity contracts under the Securities Act and the separate accounts through which the contracts are issued under the Investment Company Act of 1940, as amended (the "Investment Company Act"). Under the Securities Act, the separate account and the insurer are generally considered co-issuers of variable annuity contracts.6 Form N-4 requires specific information about both the separate account and the insurer, and the financial statements for both are included in the registration statement. Form N-4, however, can only be used to register variable annuity contracts and the separate accounts through which they are issued. Accordingly, MVA contracts, as insurance company general account products, cannot be registered on Form N-4. Instead, MVA contracts are generally registered under the Securities Act on Form S-1, the "catch-all" form for registration under the Securities Act. "Combination" contracts must be registered on both Form N-4 and Form S-1, which increases burdens on issuers and can make the prospectus unnecessarily long and complicated. (Certain "seasoned" issuers that have filed reports under the Exchange Act for at least thirty-six months currently may be eligible for registration of MVA contracts on abbreviated Form S-2. Abbreviated Form S-3 may be available for issuers that have filed reports under the Exchange Act for at least twelve months and that issue MVA contracts rated as investment grade.7)

In contrast to the information required to be disclosed when registering variable annuity contracts on Form N-3 or Form N-4 (i.e., general disclosure about the separate account and brief disclosure about the insurance company), Form S-1 requires detailed disclosure about the insurance company. The required disclosure regarding the insurance company includes:

Form S-1 also requires detailed information about the offering itself, including the use of proceeds, determination of offering price, dilution, selling security holders, and plan of distribution.14 Much of this information is not relevant for MVA contract offerings for several reasons. First, insurance companies are in the business of issuing insurance products, including MVA contracts, and are not seeking to periodically raise capital to finance operations like corporate entities engaged in typical debt and equity offerings. Second, MVA contracts are not priced or sold like traditional debt and equity securities. Finally, insurance companies, as highly regulated entities, are subject to stringent solvency requirements, compliance with which is periodically monitored by state insurance departments.

Currently, a registration statement or post-effective amendment on Form S-1 does not become effective automatically. Issuers must file acceleration requests to accelerate the effectiveness of a registration statement or amendment on Form S-1, making the timing of the amendment process unpredictable.15

Variable annuity post-effective amendments, on the other hand, become effective automatically under Securities Act Rule 485. Because MVA contracts are not issued through separateaccounts, Rule 485 cannot be used with MVA contracts registered on Form S-1. With a combination contract, the process becomes even more complicated, as issuers must request acceleration of the Form S-1 amendment to coincide with the automatic effectiveness of the Form N-4 post-effective amendment under Rule 485.

The current process for effectiveness of MVA amendments creates uncertainty about the effective date of each amendment, even if there have been no material changes in the disclosure or the terms of the contracts. Variable annuity contracts, however, use a bifurcated system of filings under Rule 485 that permits the Commission Staff to review filings that contain material changes, but does not waste valuable Staff resources on unnecessary review. For annual updating and other non-material changes, a variable annuity post-effective amendment can be filed under Rule 485(b) to become effective immediately or on a specified date. For changes to the prospectus or contract that are material, the variable annuity post-effective amendment must generally be filed under Rule 485(a) to become effective no sooner than 60 days after filing.

Interests in MVA contracts, like interests in variable contracts and most other investment company securities, are offered on a continuous basis. While Section 24(f) of the Investment Company Act and Rule 24f-2 thereunder allow for the registration of an indefinite amount of securities and payment of fees in arrears based on net sales (purchases less redemptions), these provisions are not available to non-investment company registrants, such as issuers of MVA contracts. Accordingly, MVA registrants must file an initial registration statement and pay Securities Act registration fees in advance for securities to be sold during approximately the first two years of the offering.16 The amount of securities sold must be tracked with care and MVA registrants cannot net purchases and redemptions to calculate the amount of securities sold. A new registration statement for the MVA contracts must be effective (and accompanying fees must have been paid) before the securities previously registered have been exhausted through MVA contract sales.17

As the registered MVA product market, and the number of issuers of such products, have grown, interest has increased in reexamining the disclosure scheme and reporting requirements triggered by MVA product registration. Issuers generally find the current Securities Act framework applicable to the registration of MVA contracts to be expensive, unwieldy, ill-suited for continuous offerings of redeemable securities, and of limited value to investors.

Form S-1 was not designed for the registration of MVA contracts. Much information that may be material to a purchaser of more "traditional" securities (i.e., a security other than interests in an insurance contract) is simply not material to a prospective purchaser of an MVA contract. In fact, the presentation of such information in an MVA contract prospectus may confuse investors as to the nature of the security that is being offered.

An MVA contract is neither a "debt" nor an "equity" security, and is not appropriately registered (or regulated) as such. An MVA contract is an insurance contract and is classified as such under state insurance law and under the Internal Revenue Code of 1986, as amended. State insurance law regulates the terms of MVA contracts, the quality and quantity of corresponding reserves maintained by the issuer in connection with its obligations under such contracts, and the overall solvency of the insurance company. This insurance regulation and these solvency controls make detailed prospectus information about the insurance company unnecessary.

In fact, the only information that is material to a prospective purchaser of an MVA contract is information relating to:

This is the same type of information about an insurance contract and an insurer that is available to purchasers of variable annuity contracts registered on Form N-3 or Form N-4. Disclosure with respect to the issuer's history and business, MD&A, certain relationships and related transactions, management, and executive compensation is not relevant to a prospective purchaser of an MVA contract. Due to the requirements of Form S-1, this disclosure must nevertheless be developed, drafted, filed, and disseminated by issuers of MVA contracts -- at great expense, and with no benefit for investors.

The Exchange Act imposes additional securities registration and periodic reporting requirements with respect to certain securities traded in secondary markets and the issuers thereof; and imposes periodic reporting requirements with respect to issuers of certain securities subject to registration under the Securities Act.18 Due to applicable exemptions and interpretations thereof, insurance companies that sponsor separate accounts through which variable contract interests are issued are not viewed as subject to periodic reporting requirements under Section 13 or under Section 15(d) of the Exchange Act.19 MVA contracts, like variable contracts, are not traded in secondary markets. However, upon registration of MVA contract interests under the Securities Act, the insurance company issuer thereof generally becomes subject to periodic reporting under the Exchange Act, pursuant to Section 15(d) thereof.20 Accordingly, MVA issuers are required to file annual reports on Form 10-K; quarterly reports on Form 10-Q; and current reports, as necessary, on Form 8-K. Abbreviated reporting requirements may be available for insurance subsidiaries of reporting companies.21

On the other hand, variable annuity separate accounts file annual reports on Form N-SAR with the Commission.22 Reports on Form N-SAR are not distributed to contract owners. Variable annuity issuers, however, do mail copies of semi-annual and annual reports prepared by each mutual fund underlying the variable annuity contract to all contract owners.23 These reports contain financial statements for the underlying mutual funds.

Competition in the marketplace is hampered by the current reporting requirements. Requiring MVA contract issuers to file reports under the Exchange Act serves as a strong disincentive to insurance companies contemplating entering the MVA market that are not otherwise required to file these reports. An insurance company that issues only variable products, and/or traditional life insurance and fixed annuities that are exempt from registration under the Section 3(a)(8) of the Securities Act, would not generally be subject to Exchange Act reporting, disclosure of detailed company information (including MD&A), or preparation of financial statements in accordance with generally accepted accounting principles.24 By adding one type of insurance product -- MVA contracts -- to its product line, an insurance company would immediately become subject to a host of disclosure requirements that we submit are unnecessary for the protection of investors.

MVA contracts do not trade in any secondary market; thus, there is no "audience" of market participants analyzing the information included in periodic reports filed by MVA issuers solelydue to their continuously offering MVA contracts. In addition, these reports are not, and are not required to be, delivered to existing contract owners or prospective investors. Investors are, however, required to receive a prospectus for the MVA contract that includes financial information about the issuer; this information must satisfy not only the "currentness" requirements of Section 10(a)(3) of the Securities Act, but also the accuracy and completeness requirements of applicable anti-fraud provisions of the Securities Act and Exchange Act. Because offerings of MVA contracts are continuous, issuers of such contracts are under a continuous obligation to update prospectus disclosure as necessary to inform prospective investors of material developments regarding the issuer. In light of this, Section 15(d) periodic reports filed by issuers of MVA contracts arguably have no audience and serve no purpose; investors receive the current material information needed to evaluate their investment through Securities Act disclosure documents.

The Release does not address the fundamental problems of the current registration process as it applies to MVA contracts. In the Release, the Commission proposes replacing current registrations forms with a three-tiered registration system for offerings consisting of:

Form A would generally replace Forms S-1 and S-2, while Form B would generally replace Form S-3, which is generally available to seasoned issuers with relatively large market capitalizations. Accordingly, under the proposals, MVA contracts would be registered on either Form A or Form B.

Under the proposals, Form A would be the basic form for registration of securities under the Securities Act, and most MVA contracts would register on this form. Form B would be available only to register:

As for the offering of non-convertible, investment grade securities, the proposal would be generally consistent with current Form S-3, although the reporting history requirement would be more rigorous. Accordingly, under the proposals, it appears that some issuers would be eligible to register MVA contracts on Form B.

However, it appears that certain MVA contract issuers that currently rely on their parent companies to satisfy certain of the eligibility requirements of Form S-3 may not be able to use Form B. Proposed Form B, like Form S-3, permits majority-owned subsidiaries that do not satisfy all Form B eligibility requirements to register offerings of non-convertible securities on Form B. However, Form B's eligibility requirements, as drafted, are much more burdensome than current Form S-3. Form B permits a majority-owned subsidiary that does not satisfy all of the eligibility requirements to register offerings of non-convertible securities on Form B if:

In contrast, under current Form S-3, for primary offerings of non-convertible investment grade securities, a majority-owned subsidiary can rely on its parent to satisfy the registrant requirements without the parent being required to guarantee the securities.26 Furthermore, under proposed Form B, the parent would have to concurrently register the guarantee as a separateoffering of securities (although the guarantee could be registered on the same registration statement as the security being issued).27 Certain financial statements of the parent would also be required.28

A registration statement on Form A would contain substantially the same itemized disclosures required in current Form S-1. Certain "seasoned" Form A issuers would be eligible to incorporate by reference company information from Exchange Act reports instead of presenting it directly in the prospectus, but would be required to deliver the incorporated information in a manner similar to current Form S-2.29 Accordingly, these issuers would have to deliver, along with the prospectus, their latest annual report filed under the Exchange Act, as well as the information in Part I of their most recent Form 10-Q.30 For offerings by all other issuers that are not seasoned, the issuer must include the company information directly in the prospectus.31

Registration statements on Form B would contain transactional disclosure about the offering, company information (primarily through incorporation by reference), and a securities term sheet.32 For company disclosure, an issuer filing a Form B registration statement would be required to specifically incorporate by reference its latest annual report under the Exchange Act and any Exchange Act reports filed since the end of the fiscal year covered by the latest annual report.33 It is not entirely clear from the Release whether Form B issuers engaged in continuous offerings will be permitted to incorporate by reference all subsequently filed Exchange Actreports.34 If not, this would be a significant change from current Form S-3, where such "forward incorporation" is permitted. Forward incorporation under the current system allows registration statements for continuous offerings to be continuously current without the filing of a post-effective amendment. Accordingly, for MVA contracts registered on Form B, periodic post-effective amendments may need to be filed to update, at a minimum, the documents incorporated by reference. In addition to incorporation of certain Exchange Act reports, a Form B issuer would be required to disclose in its registration statement updated company information that describes material changes not reflected in any Exchange Act reports incorporated by reference.

Certain "seasoned" Form A issuers would be able to designate the effectiveness of their Form A registration statements without Staff review if (1) their public float is at least $75 million or (2) their most recent annual report has been fully reviewed by the Commission Staff and there are no outstanding, unresolved staff comments.35 Issuers designating the effectiveness of a Form A registration statement would need to file the registration statement prior to making offers. For all other Form A issuers, the timetable for filing and effectiveness of Form A registration statements would be similar to the current timetable for filings on Form S-1. Under these requirements, most MVA issuers could not designate effectiveness without Staff review.

A Form B issuer would designate when the registration statement was to become effective by indicating on the cover page whether it was to become effective (1) upon filing; (2) at a date and time specified by the issuer; or (3) as specified in a later amendment to the registration statement.36 A Form B issuer could file its registration statement on Form B at any time before the sale of securities occurred. When an issuer files a Form B registration statement, it wouldalso file all free writing materials it had disseminated prior to filing the registration statement.37 Because relatively few MVA contract issuers may be able to register on Form B as proposed, we do not view this effectiveness scheme as a meaningful improvement on the existing regime.

The Release expands the occasions on which issuers can offset filing fees and codifies certain staff interpretations regarding filing fees.38 These proposals would not alter the scheme currently imposed upon issuers of MVA contracts to pay filing fees.

The Release does not address the fundamental problem of requiring issuers of MVA contracts to file periodic reports under the Exchange Act. The proposed amendments would, among other things, require risk factor disclosure in Exchange Act reports, treat quarterly financial information as "filed" for purposes of Section 18 liability, expand the disclosure items required to be reported on Form 8-K and accelerate due dates for filing this information, potentially accelerate the due dates for Forms 10-Q and 10-K, expand the required signatures for certain periodic reports, and require management to certify that they have reviewed the disclosure in all Exchange Act reports and registration statements.39

The Committee submits that, in light of the concerns discussed above, the proposed new registration Forms A and B are no more appropriate for the registration of MVA contracts than are the current Forms S-1, S-2, and S-3. Continuing to register MVA contracts on the same forms as used for corporate debt and equity offerings only serves to create a barrier to marketentry for such products, without increasing investor protection or providing disclosure useful to investors. Instead, the Committee proposes that the burdens on insurance companies issuing MVA contracts could be substantially reduced, while maintaining the protection of investors, by allowing MVA contracts to be registered on a modified Form N-4.

We suggest that the Commission adopt amendments to Form N-4 to accommodate MVA registration by:

With a modified Form N-4, MVA purchasers would receive all material disclosure about a general account issuer of MVA contracts, because the only information relevant to investors about the insurance company relates to the insurer's creditworthiness in the context of comprehensive solvency regulation. The overall suitability of the Form N-4 regime for a continuous offering of MVA contracts is far superior to that of the current corporate issuer regime.

Although our proposal suggests a completely alternative structure for registration of MVA contracts, we also would like to comment on two particular aspects of Form B as proposed. First, the Release specifically requests comment on whether Form B should be available for the offering of non-convertible, investment grade securities, consistent with current Form S-3. We would support making Form B available for the offering of non-convertible, investment grade securities, consistent with current Form S-3. In fact, if Form B will be made applicable to MVA offerings, we strongly suggest that the Commission permit insurance companies issuing MVA contracts to rely on the insurance company's rating for this determination, because MVAcontracts, unlike debt securities, do not typically receive separate ratings. Second, we strongly suggest that Form B be modified to allow majority-owned subsidiaries, which do not satisfy all of the eligibility requirements to register offerings of non-convertible securities on Form B, to rely on their parents to satisfy registrant eligibility requirements in General Instruction I.B. and the public float/average daily trading volume test in General Instruction I.C.1. without requiring their parent to fully and unconditionally guarantee the payment obligations on the securities being offered in the registered transaction. For MVA contracts, such a guarantee is unnecessary in light of state insurance solvency regulation.

The proposed rules relating to effectiveness of Forms A and B do not adequately address the nature of a truly continuous offering. In light of the recurring need to file updating post-effective amendments for such registration statements at least annually, we instead propose that the Commission amend Securities Act Rule 485 to allow MVA contracts to use the effectiveness regime available under that Rule for variable annuity contracts registered on Form N-4. This procedure would promote the most efficient use of Staff resources by highlighting material changes to the prospectus that should be reviewed and allowing non-material and ordinary updates to become effective immediately.

We suggest that issuers of MVA contracts be permitted to use the Securities Act fee payment regime available under Investment Company Act Rule 24f-2. In light of the similarities between continuous offerings of MVA contracts and offerings of variable annuity contracts and other investment company securities, it would be appropriate to develop procedures:

Accordingly, we propose that the Commission adopt a rule under the Securities Act allowing the registration of indefinite amounts of MVA contract interests and permitting payment of registrations fees in arrears, consistent with Investment Company Act Rule 24f-2.

The Committee recommends that the Commission dispense with any Exchange Act reporting requirement for insurers issuing MVA contracts, as there is no secondary market in MVA contracts; in addition, an MVA contract owner may redeem an MVA contract at any time from its insurance company issuer, whose solvency is strictly regulated by state insurance laws. In addition, Exchange Act reports are not delivered to investors. In light of our objections to issuers of MVA contracts being subject to Exchange Act reporting, we do not view the changes proposed in the Release as helpful to MVA issuers or meaningful for investors. Instead, the Committee submits a proposal that would ensure that MVA contract owners receive updated information that is most relevant to a creditworthiness evaluation. Specifically, we suggest that the Commission adopt a new rule under the Exchange Act exempting insurance companies issuing MVA contracts (and not otherwise subject to Exchange Act reporting) from the reporting requirements of the Exchange Act and requiring such insurers instead to undertake to provide updated general account financial statements to MVA contract owners on an annual basis.41 Of course, if there are fundamental changes with respect to the insurance company at any other time of the year, the insurance company would be under a general duty to update the prospectus under Securities Act Rule 415.

At present, the Securities Act imposes limitations on communications surrounding the filing of an initial registration statement. Current limitations vary depending on when the communications occurs. Prior to filing a registration statement, the "pre-filing period," an issuer may not offer to sell the securities. Between the filing and effectiveness of a registration statement, the so-called "waiting period," the issuer may make oral offers; any written offer must conform to Section 10 of the Securities Act (i.e., a preliminary or "red herring" prospectus). Following effectiveness of the registration statement, the "post-effective period," the issuer mayoffer and sell securities and use supplemental sales materials, but only if it delivers a final prospectus complying with Section 10(a) before or with those supplemental materials. These restrictions, particularly during the waiting period, have hampered some MVA issuers.

Current Securities Act registration does not facilitate an insurer's ability to advertise current rate information for MVA contracts in a manner comparable to that permitted for performance advertising by investment companies under Securities Act Rules 134(a)(3)(iii) and 482 or for interest rate or yield advertisements by corporate issuers of debt securities under Securities Act Rule 134(a)(5). The content requirements that are applicable to advertisements of corporate issuers under Rule 134 -- and the unavailability of Rule 482 to MVA issuers -- creates an "unlevel" playing field with respect to the marketing of MVA contracts (as opposed to variable annuities), and creates practical difficulties for combination contract advertisements.

The SEC Staff has taken the position that MVA issuers cannot advertise current rates in reliance on Rule 134(a)(5) essentially because such rates are subject to market value adjustment and, for certain contract designs, a surrender charge, if contract values are surrendered prior to their applicable maturity or guarantee period.42 Contract owners always, however, have the option of obtaining the current guaranteed rate -- by retaining contract values in an MVA contract until the end of the maturity or guarantee period. Accordingly, we submit that there are no policy reasons for precluding the advertisement of such rates, with appropriate disclosure.

Under Section 5 of the Securities Act, any written offer must be made by means of a Section 10 prospectus. Oral offers, however, do not require delivery of a prospectus. In any event, however, a Section 10(a) prospectus must be delivered no later than the time of sale.43 Under current rules, oral offers can be made after a registration statement is filed and no preliminary prospectus is required to be delivered, but a final prospectus must be delivered prior to or at the time of sale.

The proposals, which are intended to provide greater flexibility to issuers, to increase the amount of information provided to investors, and to minimize the problem of selective disclosure, would alter the current regime substantially. The proposals would give issuers greater freedom to make public statements around the time of offerings without the statements being considered "gun jumping" or non-compliant prospectuses. Bright-line safe harbors would be adopted to provide more certainty regarding the dissemination of information before filings have been made with the Commission. Issuers generally would be required to file and assume varying degrees of statutory liability for any documents used during the waiting period, called "free writing." Free writing materials would include all written information disclosed by or on behalf of the issuer in connection with the offering during the offering period other than required offering information. Free writing materials would be filed with the Commission under proposed Securities Act Rule 425, but would not be considered part of the effective registration statement.

The Release proposes removing all restrictions on the timing of offering communications for issuers registering offerings on Form B and permitting these issuers to make offers (oral and written) during the pre-filing period.44 As proposed, this treatment would be available for each type of offering registered on Form B under the new system.45 Under proposed Securities Act Rule 425, the registrant would have to file any free writing used in the period beginning 15 days before the first offer and ending with completion of the offering.46

For all other issuers, offers would not be permitted in any form during the pre-filing period. However, to avoid uncertainty and the chilling effect of this prohibition on issuercommunications, the Commission has proposed a safe harbor under which communications made more than 30 days before the initial filing of a registration statement ("pre-offering communications") would not be deemed an offer.47 The Commission indicates that this 30-day period will operate as a "cooling off" period with respect to any prior communication. In order to satisfy the safe harbor, however, the issuer, underwriter, and participating dealers must take all reasonable steps within their control to prevent the further distribution or re-publication of pre-offering communications during the 30-day period immediately preceding filing.48

During the 30 days prior to filing (the "limited communications period"), certain limited communications would be permitted. Factual business communications would be exempt from the prohibition on offers during the 30-day limited communications period.49 Although factual business communications do not include forward-looking information, "regularly released forward-looking information" released during the 30-day limited communications period would also be exempt from the prohibition on offers during the 30-day limited communications period.50 Finally, proposed Securities Act Rule 135 provides a safe harbor for limited notices regarding proposed offerings if the information included in such notice is limited to those items specified in the rule.

Under the proposals, for MVA contracts registered on Form A, issuers could not make offers during the pre-filing period. However, as proposed, these issuers would be able to rely on the safe harbors noted above. For MVA contracts registered on Form B, issuers would be able to communicate freely in the pre-filing period, but any free writing would need to be filed with the Commission.

During the waiting period, the Commission has proposed eliminating the existing prohibition on free writing. Companies would be permitted to make offers and disseminate free writing during the waiting period in any form without each communication having to meet the requirements of Section 10 as long as the issuer:

Although MVA issuers would be permitted to use free writing during the waiting period only if they deliver a prospectus in accordance with proposed Rule 172, this proposed Rule does not require that a preliminary ("red herring") prospectus accompany the free writing.52 Accordingly, in the context of continuous offerings, it appears that MVA issuers could distribute free writing in the waiting period without ever developing or distributing a preliminary prospectus, as long as they instead deliver full Section 10(a) prospectuses prior to purchase under proposed Rule 172.53

In light of the free writing proposed to be permitted during the waiting period, the Release proposes to revise Securities Act Rule 134 to narrow its application to investment companies only.54 Rule 134 would no longer be needed by companies that could rely on proposed Securities Act Rule 165, which allows broad use of free writing during the waiting period. Rule 134 as proposed would therefore not be available to MVA issuers. The Release does not propose to alter Securities Act Rule 482.

The Release does not propose to limit the type of information that could be contained in free writings. Accordingly, it appears that MVA contract issuers could include current interest rate information in free writing materials during the waiting period.

The Commission has expressed concerns that the current regime does not result in delivery of information to investors in offerings in a timely manner.55 Under the current system, the issuer has the option of delivering prospectus information to an investor prior to the investor making an investment decision, but only is required to deliver a final prospectus at the time of sale. An investor's investment decision, however, has been made prior to the time of sale. Based on this concern, the Commission has proposed significant changes to require earlier delivery of information. The Commission's purpose in its proposed prospectus delivery requirement is to provide information "when it is needed most: before investors make an investment decision."56 In connection with those changes, the Commission also has proposed to provide an exemption from the final prospectus delivery requirements.

Under Proposed Securities Act Rule 172, issuers would be required to provide investors with transactional information before they make their investment decision. The information required to be delivered and the timing of the delivery would depend on the type of issuer and offering. For offerings on Form B, certain information would have to be delivered to an investor at any time prior to a binding investment decision being made.57 For a best efforts offering or direct public offering on Form A, a Section 10 prospectus would have to be delivered in a manner reasonably designed to be received by each investor no later than seven calendar days (or for certain more seasoned issuers, three calendar days) before the investor signs a subscription agreement or otherwise commits to purchase securities.58 The issuer could satisfy the requirements of proposed Rule 172 by delivering either a preliminary ("red herring") prospectus or a final Section 10(a) prospectus.

Proposed Securities Act Rule 173 would provide an exemption from the final prospectus delivery requirements in Section 5(b)(2) of the Securities Act in certain circumstances where a preliminary prospectus has previously been delivered. The conditions to the availability of this exemption would be:

A final prospectus must be mailed to any investor upon request.

Accordingly, it appears that, under the Commission's proposals, MVA issuers would be required to deliver either a preliminary ("red herring") prospectus or a final prospectus to an investor prior to purchase. In practice, this would mean that MVA issuers, on an ongoing basis, would be required to deliver prospectuses a specified amount of time prior to the investor making a binding investment decision. The exemption provided by proposed Rule 173 regarding final prospectus delivery would be of little use to MVA issuers who engage in continuous offerings where the great majority of offers are made during the post-effective period. Such issuers would be required to deliver the final prospectus prior to an investment decision being made, consistent with proposed Rule 172.

As noted in our proposals regarding registration above, we recommend that MVA contracts be treated in a manner similar to investment company securities. As drafted, the pre-effective offer and promotion provisions do not apply to investment companies. Accordingly, we would recommend that the Commission exempt MVA issuers from these proposed provisions, except as noted below.

Certain of these provisions would generally be beneficial for MVA issuers and investment companies. Specifically, we would suggest that consideration be given to allowing MVA issuers and investment companies to engage in free writing during the waiting period. There do not appear to be any policy reasons to restrict the ability to make offers during the waiting period toissuers of "traditional" securities. However, to address the concerns articulated in the Release, we suggest that MVA issuers and investment companies be allowed to engage in free writing during the waiting period only under certain circumstances. We would propose that free writing be allowed for MVA issuers and investment companies during the waiting period in a manner similar to the way free writing is permitted currently during the post-effective period. In other words, to the extent that an MVA issuer or an investment company elects to develop and distribute a preliminary ("red herring") prospectus during the waiting period, we would suggest that such an issuer also be permitted to provide investors with free writing materials. Accordingly, the Committee recommends that the Commission adopt a specific rule permitting MVA issuers and investment companies to engage in free writing during the waiting period if the free writing is accompanied by a preliminary prospectus.

Consistent with our general recommendation that MVA contracts be treated similarly to investment company contracts, with respect to content, we suggest that consideration be given to expressly permitting insurers to advertise current rate information for MVA contracts, including rates subject to market value adjustments or surrender charges (with appropriate information included about these features). The Committee submits that there are no policy reasons to prohibit MVA contracts from advertising current guaranteed interest rates. Conversely, prohibiting such advertisements is detrimental to investors who seek information necessary to evaluate various MVA contracts. As MVA contracts compete with investment company products, MVA issuers should have the flexibility to advertise current rates on a similar basis as investment companies are permitted to advertise past returns. Moreover, consistent with our recommendations regarding communications prior to effectiveness above, we suggest that the Commission allow MVA issuers to continue to rely on Securities Act Rule 134 for advertisements prior to and after effectiveness. Accordingly, we recommend that the Commission amend Securities Act Rule 134's provisions regarding investment company issuers to encompass MVA issuers and to permit the advertisement of current rates, and amend Securities Act Rule 482 to encompass advertisements of MVA contracts.

The Committee objects to the proposed requirement that issuers of MVA contracts provide prospectuses to investors three to seven days prior to purchase. The Committee believes that this delivery requirement is unnecessary in light of the nature of MVA contracts and their continuous offering. We recommend that MVA contracts instead be treated in a fashion similar to variable annuity contracts and other investment company securities. In fact, the Staff of the Division ofInvestment Management of the Commission has previously considered, and rejected, requiring delivery of mutual fund prospectuses to investors prior to sale.59 The Staff rejected prior delivery of such prospectuses based on the particular circumstances of these continuous offerings, basing its position on the following facts: (i) mutual fund prospectuses are easily obtained by anyone requesting them; (ii) investors who know what they want to buy may not appreciate having to wait until their brokers send them a prospectus; (iii) with the thousands of funds available, brokers may not be able to keep adequate stocks of prospectuses on hand; and (iv) the process of actually getting the investor's money invested could be slowed unnecessarily.60

Application of the prospectus delivery proposals to MVA contracts would also cause great difficulties for insurance companies and broker-dealers that would be forced to develop special procedures for sales of MVA contracts that would not be applicable to sales of variable annuity contracts and other investment company securities. Based on the foregoing, we strongly suggest that the Commission exclude MVA issuers from the prospectus delivery proposals contained in Securities Act Rule 172.

The proposals in the Release do not address the fundamental deficiencies of the current registration and reporting regimes as they apply to MVA contracts. In light of the goals the Commission has set forth in the Release, we believe that this is an important opportunity to integrate MVA contracts into the existing registration regime for variable annuity contracts in a rational manner that is consistent with investor protection. We urge the Commission to reconsider the implications of continuing to register MVA contracts on the same forms used for traditional debt and equity offerings, and instead to adopt an approach based on the current registration regime for variable annuity contracts. We would, of course, be willing to assist the Commission and its Staff with developing specific proposals to accomplish this result.

* * *

The Committee appreciates the time and resources that the Commission and its Staff have devoted to this reform initiative, and this opportunity to provide our views to the Commission. We also appreciate your careful consideration of our comments and positions.

Respectfully submitted,

/s/ Stephen E. Roth

Stephen E. Roth

/s/ Kimberly J. Smith

Kimberly J. Smith

cc: Committee of Annuity Insurers

FOOTNOTES

-[1]- The Committee of Annuity Insurers is a coalition of 41 life insurance companies. The member companies of the Committee represent approximately two-thirds of the annuity business in the United States. The Committee was formed in 1981 to participate in the development of Federal tax policy and Federal securities law regulation affecting annuities.

-[2]- Section IV of the Release.

-[3]- MVA contracts generally shift some portion of the interest rate risk from the issuing insurer to the contract owner through a "market value adjustment" feature that could, if prevailing interest rates rise sufficiently, invade principal (i.e., cause the proceeds on surrender to be less than the premiums paid less other charges deducted). MVA contracts may be either "stand alone" contracts (i.e., not part of a variable annuity) or can be a component of "combination" contracts. "Combination" contracts are variable annuity contracts that offer fixed account options containing a market value adjustment feature. (Unless otherwise specified, the term "MVA contracts" as used herein refers only to MVA contracts registered under the Securities Act.)

-[4]- See Section XIII of the Release.

-[5]- For a general discussion of these concerns, see Stephen E. Roth and Kimberly J. Smith, "Emerging Developments Relating to Fixed Insurance Products Under the Federal Securities Laws," ALI-ABA Conference on Life Insurance Company Products (Nov. 1996).

-[6]- See Section 2(4) of the Securities Act; see generally, Stephen E. Roth, Susan S. Krawczyk, and David S. Goldstein, "Reorganizing Insurance Company Separate Accounts Under Federal Securities Laws," 46 Business Lawyer 537, 546 (Feb. 1991).

-[7]- Forms S-2 and S-3 permit certain required information to be incorporated by reference into the prospectus from periodic reports filed under the Exchange Act. While Form S-2 requires that the prospectus be accompanied by certain incorporated documents, Form S-3 does not require delivery of incorporated documents with the prospectus. Furthermore, Form S-3 requires incorporation by reference of all subsequently filed Exchange Act reports.

-[8]- See Item 101 of Regulation S-K.

-[9]- See Item 301 of Regulation S-K.

-[10]- See Item 303 of Regulation S-K.

-[11]- See Item 301 and Item 303(a) and (b) of Regulation S-K.

-[12]- See Item 305 of Regulation S-K.

-[13]- See Items 401 and 402 of Regulation S-K.

-[14]- See Items 4-8 of Form S-1 and Items 504-508 of Regulation S-K.

-[15]- See Securities Act Rules 473 and 461.

-[16]- See Securities Act Rule 415(a)(2).

-[17]- Rule 429 under the Securities Act does facilitate an "overlap" in registration statements (and the use of prospectuses filed in more current registration statements to provide updated annual disclosure to purchasers of MVA contracts under prior registration statements).

-[18]- See generally Section 12, Section 13, and Section 15(d) of the Exchange Act.

-[19]- Registered investment companies required to file periodic reports under Rule 30b1-1 under the Investment Company Act are explicitly exempt from most periodic reporting requirements imposed under Section 13 of the Exchange Act (see Rules 13a-11(b) and 13a-13(b)(1) under the Exchange Act). Registered investment companies required to file periodic reports under Rule 30b1-1 under the Investment Company Act are also explicitly exempt from most periodic reporting requirements under Section 15(d) of the Exchange Act (see Rules 15d-11(b) and Rule 15d-13(b)(1) under the Exchange Act).

-[20]- Mutual insurance companies enjoy a limited exemption from the periodic reporting requirements imposed by Section 15(d) and rules thereunder; such issuers are not required to file Part I of the quarterly report on Form 10-Q. See Exchange Act Rule 15d-13(c)(1).

-[21]- See General Instruction H to Form 10-Q, and General Instruction I to Form 10-K.

-[22]- See Investment Company Act Rule 30a-1.

-[23]- See Investment Company Act Rules 30d-1 and 30d-2.

-[24]- Insurance companies must prepare their financial statements in accordance with statutory accounting principles which are required by state insurance regulatory authorities. Statutory financial statements are permitted to be filed with Form N-4 if the insurance company is not otherwise required to prepare its financial statements in accordance with generally accepted accounting principles. See Instruction 1 to Item 23 of Form N-4. In order to issue MVA contracts, most insurance companies must also have their financial statements prepared in accordance with generally accepted accounting principles. Financial statements filed for mutual life insurance companies and wholly owned stock insurance companies subsidiaries of mutual life insurance companies, however, may be prepared in accordance with statutory accounting requirements. See Rule 7-02(b) of Regulation S-X.

-[25]- Proposed Form B, General Instruction I.C.5.

-[26]- Form S-3, General Instruction I.C.

-[27]- Proposed Form B, Note to General Instruction I.C.5.

-[28]- Id.

-[29]- Proposed Form A, General Instruction II.A. Seasoned Form A issuers would be issuers that have been reporting companies under the Exchange Act for at least 24 months and that (1) have a public float of at least $75 million or (2) have filed at least two annual reports.

-[30]- Proposed Form A, Item 12.

-[31]- Proposed Form A, Item 14.

-[32]- See Section V.A.1.a. of the Release.

-[33]- See Section V.A.1.a.i. of the Release.

-[34]- Proposed Form B permits incorporation of subsequently filed Exchange Act reports during the "offering period." It is not clear whether issuers engaged in continuous offerings could rely on subsequent incorporation indefinitely.

-[35]- Proposed Securities Act Rule 462(f)(1)(iii). The same types of companies disqualified from using Form B would also be ineligible to incorporate by reference under Form A or designate the effectiveness of a Form A registration statement. Proposed Form A, General Instruction I.B.

-[36]- Proposed Securities Act Rule 462(f)(2).

-[37]- Proposed Securities Act Rule 425(b); see also "Ramifications of Aircraft Carrier Proposals -Communications Prior to Effectiveness" infra at II.B.1.

-[38]- See Section V.I. of the Release.

-[39]- See Section XI. of the Release.

-[40]- See Item 23 of Form N-4. Consistent with Form N-4, we recommend that the Commission not require financial statements to be more current than as of the end of the most recent fiscal year, unless the insurer meets one of the conditions listed in Instruction 3 to Item 23 of Form N-4.

-[41]- Although such a rule would represent a broad exemption from Exchange Act requirements, we submit that the Commission has the authority to grant such an exemption by rulemaking under the general exemptive authority of Section 36(a)(1) of the Exchange Act, added by the National Securities Markets Improvements Act of 1996.

-[42]- See Hartford Life Companies, SEC No-Action Letter (July 1, 1988) (permitting only advertisement of interest rates that are not subject to any type of deferred charge or market value adjustment).

-[43]- See Section 5 of the Securities Act.

-[44]- See Section VII.A.1.a. and VII.A.2. of the Release; proposed Securities Act Rule 166.

-[45]- See Section VII.A.1.a. of the Release.

-[46]- See Section VII.A.1.a. of the Release, n. 278; see proposed Securities Act Rules 165 and 166.

-[47]- Proposed Securities Act Rule 167(c).

-[48]- Id.

-[49]- Proposed Securities Act Rule 169.

-[50]- Proposed Securities Act Rule 168.

-[51]- Proposed Securities Act Rule 165.

-[52]- For a discussion of proposed Securities Act Rule 172, see "Prospectus Delivery Requirements" infra at II.B.3.

-[53]- See proposed Securities Act Rule 172, Note to Paragraphs (b) and (c).

-[54]- See Section VII.A.2. of the Release.

-[55]- See Section VIII.A. of the Release.

-[56]- Section I.C. of the Release

-[57]- Proposed Securities Act Rule 172(a)(2).

-[58]- Proposed Securities Act Rule 172(c).

-[59]- Division of Investment Management of the Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation 369 (May 1992).

-[60]- Id.