VA companies ready summary prospectuses

An insurance industry effort to make summary prospectuses permissible for variable annuities is being received warmly by broker-dealers, despite doubts that the complex products can be described adequately in abbreviated form.

The Securities and Exchange Commission is weighing a proposed rule change that would allow shorter prospectuses, an idea championed by the Insured Retirement Institute, the trade group of the VA business. The IRI claims that more investors would take the time to read — and understand — a shorter version of a full statutory prospectus, which can run hundreds of pages.

To speed the approval process, a task force assembled by the IRI will deliver a draft version of a summary prospectus to the SEC by the end of next month. The three companies working on the draft are Axa Financial Inc., The Hartford Financial Services Group Inc. and Jackson National Life Insurance Co.

The IRI is aiming for a 10-page “plain-English” document that would highlight the most important details of a variable annuity in a way that is understandable to an average investor. The full prospectus would be made available online, an approach similar to that being used by the mutual fund industry.

The SEC now allows a four-page summary prospectus for mutual funds.

Currently, 2,373 mutual funds have abbreviated prospectuses available for delivery.

Their use is growing quickly among the fund subaccounts in variable annuities, according to data from NewRiver Inc., a provider of mutual fund information and summary prospectuses. Through the end of February, 154 subaccount funds offered summary prospectuses, which have been used 1,758 times in VA contracts, NewRiver said.

Because VA prospectuses can be hundreds of pages long and are inherently more complicated than mutual fund prospectuses, experts think that the summary VA prospectuses will gain traction more quickly than did summary fund prospectuses.

“We feel better about the summary VA prospectus than we do about the statutory prospectus,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network. “People will get what they need in a document that’s not so overwhelming that they throw it away,”

Others think that the shorter prospectus will also help VA sales.

“This would work phenomenally at the point of sale,” said Bonnie Gee, first vice president and variable annuity manager at Cadaret Grant & Co. Inc.

“It’s good to have the summary there when you meet with the registered representative to talk about investment selections,” she said. “You tell the client to look at the summary so that when you schedule additional appointments, you’re talking to an informed investor.”

Still, the complexity of VA products and the need to inform potential investors about what they are buying remains a concern, even among those in favor of summary disclosure.

“If you’re only going to briefly describe the complexity of the living and death benefits, and then refer to the statutory prospectus, that’s a major concern,” Ms. Gee said. “When you do that, you’ve defeated the purpose of creating a summary.”

That issue was a major gripe among consumer advocates when they looked at abbreviated mutual fund disclosures.

Online versions of summarized prospectuses read “like a typical SEC document that’s reformatted for the Internet, rather than something that fundamentally rethinks the way we use the Internet for disclosure,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

“We tend to favor shortened disclosures because investors don’t read more than that, but this is an area where the devil is in the details and the product sponsors have a terrible record,” she said. “The [VA product’s] complexity makes that abbreviated disclosure both necessary and much more difficult to accomplish.”

Indeed, “summary prospectuses are like Cliff Notes. They are a nice over-view, but not a substitute for reading the book,” said Larry Slabotsky, director of the Society for Lifetime Planning, a firm that manages more than $250 million in assets. “I’m a proponent of variable annuities, but it’s my experience that these are sophisticated and complicated products that require thorough description and understanding by the client.”

Like their mutual fund counterparts, many VA providers are worried about the increased liability associated with using a summary prospectus. But layered disclosure — having the summary make several references to the voluminous standard prospectus inside — is a solution, said Lee Covington, IRI’s general counsel.

“The layered disclosure will be one way to address [liability issues],” he said.

Some advisers are not so sure.

“I fear some planners will eliminate details that are important to the investor,” said Mr. Slabotsky.

E-mail Darla Mercado at [email protected].

Related Topics: Securities and Exchange Commission