The SEC is considering action regarding "disclosure creep."
I have been writing variable annuity prospectuses for more than 35 years. During that time I have been perpetually frustrated because as the prospectuses got longer and longer the value of the material in the documents became less and less useful for investors. I spent 12 years as chair of the regulatory affairs committee for the trade association for variable annuities, and during that time we submitted a comprehensive proposal to the SEC to permit variable annuities to be sold using a "summary prospectus" that would give prospective investors a succinct description about the product they were buying. The summary prospectus proposal received favorable response from the SEC, but languished for over a decade from the time it was first submitted with no action having been taken toward implementation. It now appears that the SEC is prepared to act to implement a summary prospectus rule for variable annuities within the near future. The trade association for the retirement industry, the Insured Retirement Institute, has done a wonderful job in moving this project forward. Hopefully, it and the SEC will be able to finalize the process so that consumers can have more meaningful disclosure about these increasingly important products.
Securities lawyers have a term we sometimes use for the process by which disclosure documents constantly become more and more lengthy. This is called "disclosure creep." It is similar to the process in which a committee is formed to design a horse and ends up with a camel. Each time a document is submitted to the various people within the insurance company for review, or to regulators for final approval, each reviewer feels compelled to make some change--usually in the form of adding something to ensure that the document is "complete." (We understand that one definition of a lawyer is a person who changes a document to prove he read it.) In this way, a document that started out as a 20-page piece ends up 75 or 80 pages long. It is rare that the longer document does more than ensure that the prospectus will never be read. Those of us who have worked on the implementation of a summary prospectus for variable annuities have hoped for a process that would discourage disclosure creep so that we would not eventually end up back with the same long and unwieldy documents that have plagued variable annuities from the time the U.S. Supreme Court first decided they were "securities" that were not exempt from federal securities laws as are other annuities and life insurance policies.
Variable annuities are, by their very nature, complicated investments. They can be difficult to understand and in recent years have added more and more features to make them more appealing to consumers and even more complex. All insurance products are complex and the terminology is often alien to the consumer--annuities are no exception! The immediate question that a summary prospectus raises is, what to include and what to leave out? It is important to note that the concept of a summary prospectus does not mean that prospective purchasers cannot get more detailed information if they want it. Full details about the product and the issuer are always available to anyone. A summary prospectus merely eliminates those details that are generally conceded not to be essential in order for a purchaser to make an informed decision--even if that decision is to ask for more details.
It should be obvious that any summary prospectus should contain information regarding the costs involved in purchasing a variable annuity. Brief information about the issuer and the available investment options would also seem to be appropriate. Brief descriptions of guarantees included in the product as well as a general description of annuities and how they work would also seem necessary. The key items to be eliminated from a summary prospectus would be the detailed financial disclosures about the issuer and the separate accounts, annuity tables and detailed descriptions of annuity settlement options, valuation procedures, etc. When writing prospectuses, lawyers and marketing people often disagree--sometimes forcefully--regarding which details are essential and which are trivial. Summary prospectuses will likely fall prey to the same problem. Hopefully, the final summary prospectus rules will clarify these issues.
For many years, those of us writing variable annuity prospectuses lived with the requirement that certain items of information had to be on the front page, or no further back that the second or third or fourth pages of the prospectus. This was recognition by the SEC that it was more important for investors to read some descriptions of some details than it was for others. It was also recognition that few investors read the entire prospectus. It is a running joke among variable annuity prospectus writers that there were 12 pages of materials that had to be contained in the first four pages. A well-thought-out summary prospectus should be a good substitute for these types of requirements.
It appears that the sentiment for implementation of a summary prospectus for variable annuities is overwhelming and the question is not if, but when? There remains the seminal question of what the detailed requirements for a summary prospectus will be, but the materials submitted by IRI to the SEC seem to have a good consensus regarding content. Experience will always dictate changes, particularly with products that have as much iteration as is the case with variable annuities. However, the implementation of a summary prospectus should afford consumers with better, more readable information that will streamline the sales process so that more and more people can use this valuable tool for retirement security.
For those of you who will be using variable annuity summary prospectuses, it is important for you to understand the process the SEC envisions with respect to such disclosure. The SEC views the summary prospectus as the first step in what it characterizes as "layered disclosure." The concept encompasses the totality of disclosure documents--the summary prospectus followed by a formal prospectus, all supplemented by a statement of additional information--all available at the option of the prospective purchaser. The financial advisor is an important implementer of the entire process.
It does not appear that the implementation of summary prospectuses will cause any changes to the current practices with respect to the use of sales materials and other sales practices.