Summary of Comments on Proposed Amendments to Fee Table of Form N-4, Registration Form for Insurance Company Separate Accounts Registered as Unit Investment Trusts that Offer Variable Annuity Contracts
SEC Release Nos. 33-8087; IC-25521; File No. S7-07-02
Prepared by Katy Mobedshahi
On April 12, 2002, the Securities and Exchange Commission published a release proposing for public comment amendments to Form N-4, the registration form for insurance company separate accounts that are registered as unit investment trusts and that offer variable annuity contracts [Investment Company Act Release No. IC-25521, April 11, 2002]. The amendments would revise the format of the fee table to require disclosure of the range of expenses for all the mutual funds offered through a separate account, rather than disclosure of the expenses of each fund.
The Commission received 4 comment letters. The commenters included two trade associations (National Association for Variable Annuities ("NAVA") and American Council of Life Insurers ("ACLI")) and two insurance companies (Nationwide Life Insurance Co. ("Nationwide") and American Skandia Life Assurance Corp. ("Skandia")). Two of the four commenters expressed support for the amendments, and all commenters recommended changes. The following discussion summarizes the commenters' views on the proposed amendments.
1. Disclosure of Range of Portfolio Company Expenses
a. Nationwide and NAVA These commenters supported the requirement to disclose the range of expenses for all of the portfolio companies offered. However, they suggested that the Commission require only disclosure of the range of total annual expenses, instead of the range for each of the subcategories of management, 12b-1, other, and total expenses. Their rationale is that disclosing the range of minimum and maximum for each subcategory of all underlying mutual fund expenses results in two columns that do not add up to the range of total annual operating expenses. They believe this result will cause more confusion rather than simplify disclosure for investors. Nationwide suggests a narrative discussion of the subcategories, following a total expense range presentation.
b. Skandia The commenter disagrees that Form N-4 should only disclose a range of charges for all portfolio companies. Skandia believes that actual charges for each portfolio company should be disclosed in Form N-4 so that potential investors will have access to such information at the time they make a purchase decision.
c. ACLI The commenter recommends that we clarify the definition of "Portfolio Company" to reference the underlying funds to the variable annuity separate accounts and not the fund company or the full fund, in the case of a series fund or trust.
2. Expense Example
a. NAVA The commenter suggests that the Commission revise Instruction 24(f) to Item 3 in an effort to simplify the formula and make it more accurate. The revision would have the annual contract fee be reflected by dividing the amount of the contract fee by the average contract value, including both the general and separate account, rather than the assets of all the sub-accounts in the separate account only.
b. Skandia The commenter disagrees with the proposal to require registrants to provide an expense example based on the maximum expenses charged by any of the portfolio companies, and to permit an optional expense example based on the minimum expenses charged by any of the portfolio companies. Skandia claims it will not provide comparability to investors. Skandia suggests two alternatives: (1) Assuming a range of portfolio company expenses is adopted in the fee table, it recommends that the variable annuity prospectus rely on the expense examples required by Form N-1A for each portfolio company. Variable annuity contract level expenses would be the only charges required to be deducted when calculating expense examples for the annuity. Skandia states that this bifurcation of presentation of fees and charges and related expense examples between those of the variable annuity and the underlying funds would help investors better understand the costs associated with each annuity contract. (2) Skandia suggests allowing for hypothetical expense examples for other levels of fund charges along with, or instead of, the maximum and minimum portfolio company expenses.
c. ACLI The commenter recommends that the intervals in the expense example be modified to 1, 5, 10 and 20-years instead of the proposed 1, 3, 5, and 10-year intervals. ACLI states that this would better fit the long-term nature of variable annuities and not present them as if they are fungible with mutual funds. ACLI also recommends that the language of Instruction 24 for the expense example (referencing separate account fees and charges) and the narrative accompanying the example (referencing only portfolio company fees and expenses and not separate account fees and charges) be made consistent.
3. Expense Reimbursement and Fee Waiver Arrangements
a. NAVA The commenter recommends that the instructions to Form N-4, rather than just a footnote in the proposing release, explicitly state that net expenses after subtracting any contractual reimbursement or fee waiver may be disclosed as a line in the fee table itself, and in the example.
b. ACLI The commenter recommends that registrants be permitted to show in the fee table the range of total minimum and maximum expenses with reimbursement and the range of total minimum and maximum expenses without reimbursement, with explanatory disclosure in footnotes. The commenter suggested that the requirement to disclose portfolio company operating expenses may expose registrants to increased liability when the portfolio company prospectus does not accompany the variable annuity prospectus, and the range of expense figures do not match the individual customer's circumstances.
4. Fee Table Captions
a. Skandia The commenter supports the proposed instruction allowing registrants to modify or add captions in the fee table when captions do not provide an accurate description of the registrant's fees and expenses.
b. ACLI The commenter recommends that the Commission define the scope of coverage of "service fees" in relation to the heading of "Distribution [and/or Service](12b-1) Fees" referenced in the Portfolio Company expense fee table. The commenter also recommends simplifying and clarifying the term "Distribution [and/or Service](12b-1) Fees" because the combination of bracketed and parenthetical language makes the provision hard to interpret.
5. Requirement to Disclose All Fees and Charges/Maximum Charges
a. Skandia The commenter suggests that additional clarification be added in the instructions to the fee table stating that separate account annual expenses should be provided for the basic contract, as well as for each combination of optional benefits offered under the contract, or for the combination of optional benefits that represents the maximum total annual charge under the contract.
b. ACLI The commenter recommends the instructions to the fee table be clarified to indicate that two mutually exclusive fees should not be presented simultaneously in the fee table. The commenter states that the Commission currently does not expect mutually exclusive fees to be presented in the expense example.
6. Fee Table Narrative
ACLI The commenter supports the proposal to require a brief narrative immediately following the fee table, explaining the purpose of the fee table and cross-referencing the portfolio company prospectuses.
7. Costs, Benefits and Paperwork Burdens
ACLI The commenter recommends that the Commission accept PDF files in addition to EDGAR files because of the efficiency and cost effectiveness of PDF files, which are a more universally accepted form of electronic transmission of documents.