National Association for Variable Annuities Mark J. Mackey President & Chief Executive Officer June 6, 1997 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 5th Street, N.W. Mail Stop 6-9 Washington, DC 20549-6009 Re: Profile for Open-End Management Investment Companies; File No. S7-18-19 Dear Sir: The National Association for Variable Annuities Inc. ("NAVA") is pleased to comment on the Securities and Exchange Commission's ("Commission") proposed Rule 498 as set forth in Release Nos. 33-7399; IC-22529, ("Proposing Release"). NAVA supports the Fund Profile concept and believes that the adoption of Rule 498 is an important step toward providing consumers with information regarding investment companies in a clear and concise manner and in a standardized format. Broader Applicability of Use of a Profile In the Proposing Release, the Commission specifically requested comment as to whether and why the Profile as proposed for funds would be appropriate for other types of investment companies. In 1995, NAVA began work on its Profile and Prospectus Simplification Project ("Profile Project"). NAVA requested and received, on behalf of variable annuity issuers, a no action letter permitting the use of a variable annuity profile ("VA Profile") to be used together with the variable annuity prospectus. (See National Association for Variable Annuities, pub. avail. June 4, 1996). A number of our member companies are currently using the VA Profile together with the statutory prospectus. In addition, NAVA has recently completed the first phase of its research regarding the use of the VA Profile as well as other forms of disclosure. This research was conducted through focus groups and constituted the qualitative phase of the research. Phase two, the quantitative research, will begin shortly. NAVA's preliminary research has confirmed that different variable annuity purchasers prefer different amounts of information before making an investment decision. We understand that this finding is consistent with research involving mutual fund investors. By allowing the use of the VA Profile, purchasers would be allowed to choose the amount and format of the information they want before making an investment decision. A purchaser comfortable with the level of information contained in a VA Profile could purchase a variable annuity based on that information (and receive the variable annuity prospectus with the purchase confirmation). A purchaser who prefers more information before purchasing a variable annuity contract could use the VA Profile to request the variable annuity prospectus and other information about the life insurer and the variable annuity contract. Like the profile for the underlying fund ("Fund Profile"), the VA Profile could be used to narrow the selection of variable annuity contracts being offered. NAVA's preliminary research also confirmed that variable annuity purchasers have a strong preference for summary information about a variable annuity contract in a standardized format. The VA Profile would meet this desire. Therefore, NAVA urges the Commission to extend Rule 498 to cover separate accounts offering variable annuity contracts. In addition, as part of the Profile Project, NAVA is analyzing the statutory prospectus in order to make recommendations to the Commission regarding changes to variable annuity prospectus disclosure requirements. This part of the project is focused on making prospectuses shorter and more user friendly. Specific Comments on Fund Profile NAVA has reviewed Proposed Rule 498 and the Proposing Release only with respect to Fund Profiles used in conjunction with variable annuity and variable life insurance (collectively, "Variable Contracts"). The following are specific comments: Cover Page Proposed Rule 498(c)(1)(iii) requires that the cover page or the beginning of the Fund Profile include "the approximate date of the Profile's first use and, if applicable, the date of the most recent updated performance information included in the Profile." NAVA has no objection to the provision. However, we suggest that a fund should be permitted, at its option, to include the effective date of the most current prospectus. We make this suggestion because distributors and consumers of Variable Contracts are often removed from the mutual fund management and allowing such a date on the Fund Profile would give a proper reference for people seeking to get more information and eliminate possible duplicative requests. The Fund's Fees and Expenses Item 3(a) of Form N-4 requires a table, which contains information regarding the fees and expenses of the underlying fund(s). It is anticipated that when Form N-6 adopted, it will also address the issue of disclosing underlying fund fees. The current guidelines for VA Profiles require that information regarding fees and expenses of any underlying fund to be included. When the Guidelines for the VA Profile were developed, there was considerable discussion of the disclosure that is required to accompany the fee table regarding the fees and expenses of the underlying fund. For multi-manager products, this disclosure is often a page or more of footnotes to the fee table in the statutory prospectus. It was decided that this level of detail would not be useful in the VA Profile. Form N-1A permits funds that offer their shares exclusively to separate accounts to exclude the fee table, footnotes and examples. This approach appears to be carried over to the proposed revisions to Form N-1A and proposed rule 498. NAVA recommends that the Commission make it clear that mutual funds that offer their shares exclusively to separate accounts may, at their option, include the fee table and footnotes in the Fund Profile or prospectus for the fund. NAVA further recommends that funds electing to include this disclosure need not include the examples. Finally, NAVA recommends that, if a fund chooses to include the table and accompanying footnotes in either the Fund Profile or prospectus, the variable product prospectus and the VA Profile need not contain the explanatory footnotes. How do I buy the Fund's Shares? How do I sell the Fund Shares? Proposed Rule 498(c)(2)(vi) and (vii) require that the Fund Profile provide information about how to purchase the fund's shares, and how to sell fund shares, respectively. The tax law that relates to Variable Contracts and their underlying investments requires that funds used as an investment option for Variable Contracts sell their shares solely to pension plans and separate accounts used to fund Variable Contracts. Variable contract owners do not deal directly with the fund with respect to purchases and sales of fund shares. It would be inappropriate and very confusing to contract owners and consumers to have such disclosures in the Fund Profile used in conjunction with documents offering Variable Contracts. Therefore, NAVA recommends that if a fund is used exclusively as an underlying investment of a Variable Contract, these items need not be included. How are the Fund's distributions made and taxed? Proposed Rule 498(c)(2)(viii) requires a description of the fund's distribution policy, including reinvestment, as well as a discussion of the taxation of those distributions. Even though mutual fund shares are used as the funding vehicle for Variable Contracts, distributions and the taxation thereof are based on the contract provisions and the tax laws applicable to the type of Variable Contract. NAVA believes that inclusion in the Fund Profile of a discussion of fund distributions and their taxation could be misleading. Therefore, NAVA recommends that a Fund used, as an underlying investment of a Variable Contract need not include such a discussion. What other services are available from the Fund? Proposed Rule 498(c)(2)(ix) requires disclosure of the services available to the fund's shareholders. Variable contract owners are deemed, for certain purposes, to be indirect shareholders. However, as noted above, variable contract owners have no direct relationship with the fund. Therefore, there are usually no services provided by the fund to such owners. NAVA recommends that if a fund is used as underlying investment of a Variable Contract, such a discussion need not be included. Expanding Proposed Rule 498(c)(4) to include Variable Contracts. Proposed Rule 498(c)(4) provides that a Fund Profile available as an investment option for participants in a defined contribution plan that meets the requirements for qualification under Internal Revenue Code of 1986 may omit the information required by paragraph (c)(2)(vi) through (ix). As an alternative to some of the individual changes suggested above, the Commission could achieve the same result by renumbering existing paragraph 4 to 4(a) and adding a new paragraph 4(b) to the Proposed Rule that does for variable contracts what Paragraph (c)(4) does for defined contribution plans. The new paragraph would read as follows: 4(b) A Profile of a Fund available as an investment option for holders of variable contracts as defined in Section 817(d) of the Internal Revenue Code of 1986 may omit the information required by paragraphs (c)(2)(vi) through (ix) of this section. * * * * * On behalf of the Regulatory Affairs Committee and the full membership of NAVA, I want to thank you for this opportunity to comment on this important initiative. If there are any questions about the comments presented, please contact any of the following: Susan L. Harris, (SunAmerica Inc. 310-772-6540); Judith A. Hasenauer (Blazzard, Grodd & Hasenauer, P.C. 954-771-7909); or myself (703-620-0674). Ms. Harris and Ms. Hasenauer jointly chair the Committee. Sincerely, Mark J. Mackey NAVA is a non profit association which represents the variable annuity and variable life insurance industry. It has approximately 300 corporate members, including distributors, third party administrators, service providers, and insurance companies representing most of the variable insurance market. Internal Revenue Code Section 817(h). Jonathan G. Katz June 6, 1997 Page PAGE 5