Subject: File No. S7-23-18
From: Tom Gilmour

November 14, 2018


1. Have you ever considered purchasing a variable annuity? : yes

2. The sample summary prospectus is divided into eight sections. Please indicate which two sections you found to be the most useful, and which two sections you found to be the least useful, in describing the variable annuity
b. Important Information You Should Consider About the Contract : Most Useful :
c. Standard Death Benefit : Least Useful :
h. Portfolio Companies Available Under Your Contract : Most Useful :

3. The sample summary prospectus includes a section named Overview of the Variable Annuity Contract. Does that section provide clear information?

4. The section named Important Information You Should Consider About the Contract includes a table. Do you think the table is clear?

5. The sample summary prospectus describes what you would pay for the variable annuity, including upfront fees and future fees. Was this description clear?

6. Variable annuities may offer optional insurance benefits that you can purchase for extra fees. The sample summary prospectus describes these optional benefits.
A. Does the sample summary prospectus describe these optional benefits clearly?

B. Does the sample summary prospectus describe the extra fees associated with these optional benefits clearly?

7. When you purchase a variable annuity, you decide how to invest your money by selecting one or more available mutual funds.
The sample summary prospectus includes a table of mutual funds that are available as investment options. Does this table provide the information
that you would want to consider when choosing mutual funds?

8. After reading the sample summary prospectus, how likely would you be to request the full prospectus for more information on the following topics?
Investment options (mutual funds) offered under the variable annuity :
Standard death benefit:
Optional insurance features (also called optional benefits or riders) :
Fees (how much the variable annuity costs) :
Mechanics of how a variable annuity works (how to purchase, accessing money, annuitization, etc.) :

9. Is the length of the document:
About right

10. How would you prefer to receive/read a document like the sample summary prospectus?
On paper

11. Do you have any additional suggestions for improving the summary prospectus? Is there anything else you would like to tell us about your experience with variable annuities?
The fund tables should link to more information about each fund.

In my mind, one of the biggest problems with variable annuity disclosures is how they show the benefits of tax deferral. Variable annuity providers typically show a graphic that shows how much more you would have after 20 years in a variable annuity as opposed to a regular mutual fund because of tax deferral. However, these presentations are fraudulent. Considering both taxes, fees and a fair comparison is performed, you will typically be better off with regular mutual fund.
The variable annuity presentation of tax deferral:
Assumes the gains on mutual funds are taxed at ordinary income rates. However, a majority of variable annuity assets are invested in equity securities which if held through a mutual fund would be taxed at a lower capital gains rate.
The presentation assumed there are no charges associated with variable annuities. If charges were factored it, it would be a significant drag on the performance of the mutual fund.
Many presentations show a figure that at the end of 20 years no money is taxed on the variable annuity, but it assumes an investment in a mutual fund is fully taxed (which is not likely the case if you still hold the fund).
In addition, variable annuities are not subject to stepped-up taxation upon your death, which is a huge tax disadvantage.
I believe the SEC should have its analytics group look at a typical fund and a clone of that fund offered through a variable annuity and objectively evaluate the claims insurance companies make about the benefits of tax deferral in a variable annuity.
Please note that variable annuities may offer benefits that have real value, my specific concern is tied to the tax-deferral claim.

Another other big issue I see is fund substitutions, or replacing a fund selected by an investor for a different fund selected by the insurance company. The SEC should provide greater scrutiny of fund substitutions. The SEC has approved substitutions that solely benefit the insurance company and that overrides a contract owners investment decision. Some of the funds substituted are not even particularly comparable, such as movements from ESG funds to traditional funds, active funds to index funds, and domestic funds to global funds. The SEC needs to take a fresh look at the conditions it imposes, the circumstances under which it should grant relief, and the expectations of the investors it is supposed to protect.
If th SEC does not want to reform its approach, the summary prospectus should not bother listing underlying funds. Instead it should list broad asset categories (like debt, equity, other) and fee rates and let the insurance company pick what is best for you, as that is what is happening in practice.

The final issue I would like to discuss is the freedom of action reserved by the insurance company. Insurance companies have used this to stop accepting purchase payments, to increase fees, to cut off benefits, and to change investment restrictions. Variable insurance contracts often include such provisions subject to change at the discretion of the insurance company. Unlike equity securities or investment funds, where the issuer and its officers must act as fiduciaries an insurance company is only self-interested. Worse, the investor base is not sophisticated enough to look out for their own interests. Such provisions could not exist in the commercial space. The SEC should not permit insurance companies to reserve the freedom of action to change an offering. One way to do this is to require such a specific description of an offering such that an insurance company cannot change the offering.
Under certain circumstances, an investor may make an investment decision that is harmful to their interests, such as by violating an investment restriction, or withdrawing too much so as to reduce a n insurance guarantee. While certain insurance companies make efforts to try to reach out to investors who take such actions, they are also bound by the restrictions of section 22, such as providing NAV next computed after an order is received. So, if an investor makes a bad decision at 3:55 PM, the insurance company has little opportunity to reach out to the investor to confirm their intention. I believe that if an insurance company would like to take 2 additional business days to attempt to confirm a potentially adverse investment decision, the SEC should permit this without violating section 22.