Investor advocate says variable annuity summary prospectus lacked sufficient testing

The SEC says in the final rule that it solicited feedback on hypothetical forms

A new document designed to help investors better understand variable annuity and variable life insurance contracts won’t shed much light on the often complicated products because the Securities and Exchange Commission failed to do adequate investor testing, an investor advocate asserts.

Last week, the SEC adopted a final rule for a so-called variable annuity summary prospectus. Issuers can use such a document to provide an overview of a product’s fees, terms, features and potential risks.

If investors want to drill deeper into details of a contract, they can do so online with a link to the so-called statutory prospectus, which can run anywhere from 150 to 300 pages.

Variable products can produce lifetime income in retirement and other benefits investors seek. But they also can be complex and come with high fees.

Barbara Roper, director of investor protection at the Consumer Federation of America, said the summary prospectus will not effectively illuminate variable annuities because the SEC didn’t do enough to vet it with investors.

“This is the second major disclosure aimed at retail investors where they’ve refused to use the available techniques to develop disclosures that are effective, and it shows,” Ms. Roper said. “I just don’t understand why they’re not willing to take the time to get it right.”

Ms. Roper and other investor advocates also criticized the SEC for failing to do sufficient investor testing of the client relationship summary, known as Form CRS, that was part of the investment-advice reform package the SEC approved last year.

The variable annuity summary prospectus final rule states the SEC “drew on our investor testing efforts” to develop the summary prospectus framework.

“The Commission specifically solicited feedback from investors and other market participants on hypothetical initial and updating summary prospectuses, which we received in response to our ‘feedback form’ and in numerous comment letters,” the final rule states. “In addition, the staff leveraged their considerable experience and expertise with investor disclosures and variable annuity prospectus disclosures in particular.”

But Ms. Roper said the SEC misused the word “testing.”

“Seeking feedback from investors on their preferences is not testing,” she said. “Using generic ‘testing’ that is not specific to the document in question may be helpful, but it is not remotely adequate to determine whether the disclosure in question actually works.”

Ms. Roper also pointed to a footnote in the final rule in which the SEC said that its investor testing did not indicate whether investors will be more likely to read the summary prospectus than the statutory prospectus.

A SEC spokeswoman declined to comment.

The insurance industry has been advocating for more than a decade for a streamlined variable contract prospectus. It is happy with what it got from the SEC.

Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, said the summary prospectus will help investors find the information they need to make an informed decision about variable products. It will be a better experience than wading through the “phone book” size statutory prospectus.

“It’s time to give people access to more easily digestible information,” Mr. Berkowitz said. “Let’s start using it and see how it works. Investor testing works to a degree but at some point you have to go out into the real world.”

Ms. Roper, who is a member of the SEC’s Investor Advisory Committee, said studies show that most disclosures don’t work. She asserted the variable annuity summary prospectus will be another one.

“This is well-intentioned,” she said. “I’m not sure it’s going to make any difference.”