October 27, 2020
I generally support the tailored shareholder report proposal. However, I do believe a summary of key risks need to be delivered to investors each year. This is the same approach the Commission took with the variable annuity summary prospectus. Each summary prospectus repeats certain key risks of investing in the contract. I suggest the same approach for annual reports particularly in a regime where a fund prospectus id not delivered annually (and that is also consistent with operating company 10-Ks requirements).
I do have some concerns about the application of the amendments to the advertising rules and the applicability of some of the changes to variable annuities and other variable insurance products.
Below are some concerns specific to variable annuities:
1. The insurance products summary prospectus removed the requirement to physically deliver an underlying fund prospectus. I disagree with this policy decision. While the table of funds is better than sending the prospectus for each of the 60 underlying funds, I believe investors should still be delivered the summary prospectus for the funds contract owners actually own. I do not understand why investors who own a fund directly have different informational needs that an investor that owns a fund through a variable annuity.
Now it appears the SEC wants to keep rule 30e-3 for insurance product funds, when it finds that rule 30e-3 is not appropriate for retail mutual funds. I again believe this is folly. Fund investors through a variable annuity have the same informational needs as any other owner of a mutual fund. They should be delivered the same materials.
Insurance companies may argue that it is expensive to coordinate the mailing of fund materials, but every brokerage firm seems capable of sending fund materials specific to an investors holdings. An insurance company can do the same.
2. The summary fee table and the marketing rules require the fund to show maximum fees, because if an investor sees anything, it should be the maximum charges. However, the key information table in the variable annuity summary prospectus illustrates current fees and not maximum fees. It is unclear why the variable annuity summary prospectus takes a different policy position. Similarly, the variable annuity summary prospectus has an appendix of funds that also shows net expenses instead of gross expenses. Again, this approach seems counter to the approach laid out in the marketing rules component of the shareholder report proposal.
In light of the policy positions taken in the shareholder report proposal, I think the SEC should reconsider some policy decisions with respect to variable annuity disclosures.
3. It is unclear to me how the revised marketing rules would apply to variable annuities. Can an insurer merely show the maximum charge for each product feature? (e.g., in a brochure to a particularly withdrawal benefit.) A variable annuity is like a menu at a restaurant. It would be hard to say what the most expensive meal might be, nor would that be representative of a typical meal. Also, unlike a mutual fund class, in a variable product not every investor gets the same deal, so coming up with a consistent cost figures is not possible. This is even moreso the case for variable life insurance that is based on an investors personal characteristics. Will this force insurance products to pull all cost information from advertisements? Perhaps showing the min and max fees per $100,000 investment is the better solution for variable annuities however, that would not work for variable life insurance that has no such presentation.
On the other hand, variable products often have both current and maximum charges and overtime, insurers may increase the fees on investors up to the maximum, so I still believe that if insurers disclose any fee, it should include any maximum fee and prominently as it discloses a current fee in any marketing materials.
Also, the variable products summary prospectus has a listing of underlying funds as an appendix. Can an insurance company post a sortable version of that appendix to its website? Under the proposed revisions to rule 482 it could not because it does not show gross fund fees.
Below are some questions regarding web posting generally.
Suppose we want to post an interactive version of the expense example from the annual report. Could we? Can it be based on the expenses in the shareholder report, or must it be based on the gross fees in the prospectus? If it can be shown just as it is in the annual report but with a customized starting investment, must we also show the gross prospectus expenses since this features would either be a 482 ad or supplemental sales literature that is outside the four-corners of the annual report?
In an online world, what is the difference between supplemental sales literature and a 482 ad?