SEC proposes variable annuity summary prospectus

Shot of a senior couple getting advice from their financial consultant at home

Agency wants to improve investor knowledge, but consumer advocate says seven-page example included in proposal has similar weaknesses to Form CRS

The Securities and Exchange Commission is attempting to help investors grasp how variable annuities work and what they cost, but one skeptic says the agency’s proposal would not deliver plain-language clarity.

The SEC released for public comment Tuesday night a proposal for a summary prospectus for variable annuities and variable life insurance contracts.

The initial summary prospectus for new investors would provide an overview of the terms, benefits, fees and risks in a “concise and more reader-friendly presentation,” according to the proposal. An updated prospectus for those who already own the product would outline changes to the contract from the previous year. More detailed information would be available online.

Variable annuities combine an equity component — usually a mutual fund — with an insurance component that protects against market losses and outliving assets. They generate an income stream in retirement but also can be risky and come with layers of fees. They typically have prospectuses that run hundreds of pages.

“This proposal is another important step in the commission’s efforts to provide Main Street investors with better information to make informed investment decisions,” SEC chairman Jay Clayton said in a statement. “Providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long-term nature of these contracts and their potential complexity.”

The Insured Retirement Institute, a trade association for the insurance industry, has been pushing the SEC for a summary prospectus rule for years and welcomed the first step in the process.

“For consumers, they would have access to a more user-friendly source of information about these valuable products,” said Jason Berkowitz, IRI vice president and counsel for regulatory affairs. “For carriers, it will give them an opportunity to more efficiently communicate with investors and potential investors.”

The proposed client relationship summary in the SEC’s investment advice reform proposal has been widely criticized for lacking visual appeal and containing jargon. Barbara Roper, director of investor protection at the Consumer Federation of America, said the nine-page example included in the summary prospectus proposal suffers from the same problems.

“I’m highly skeptical that the approach they outlined here is going to work,” Ms. Roper said. “It’s obviously a sincere effort to improve disclosures in annuities that badly need to be improved. But what it highlights to me is the SEC’s system for developing retail disclosures needs to be overhauled.”

She said the SEC should work with disclosure and design experts in advance of proposals and also test whether the disclosures are effective.

“Developing clear, readable disclosures that the average investor can understand is really hard,” she said.

Todd Cipperman, principal at Cipperman Compliance Services, gave credit to the SEC for trying to strengthen variable-annuity transparency but said it won’t necessarily achieve investor protection.

“It’s more about the commissions earned on these things than the disclosures,” Mr. Cipperman said. “It’s a good initial step. The bigger question is, do we need more substantive regulation of variable products than just disclosure?”

The SEC approved the proposal in a private vote among the five commissioners. The comment deadline is Feb. 15.