The SEC yesterday released what it is calling a new “reader friendly” variable annuities summary prospectus and rules designed to improve investors’ understanding of the complex contracts. But while the insurance industry cheered cautiously, consumer advocates remained concerned the change may not benefit consumers.

The changes, which go live July 1, permit insurers to use a summary prospectus to highlight variable annuities contract features, fees and risks. The new rules also allow insurers to take a layered approach by providing much of their disclosures at a secondary level online or by mail.

"The commission is taking this important step to improve Main Street investors' understanding of these products," SEC Chairman Jay Clayton said in a statement. "With today's technology and the benefits of layered disclosure, investors should not have to work through hundreds of pages of disclosure to understand these products' risks, fees, and features in order to make informed investment decisions."

But the problem with the new prospectus and rules is their usefulness was never qualitatively tested on actual investors, so it would be impossible to know if investors actually benefit and can make wiser investment decisions as a result, Barbara Roper, director of investor protection at the Consumer Federation of America (CFA), told Financial Advisor.

“The rules are clearly well intended, but they also perfectly illustrate why we shouldn’t leave the job of developing disclosures to securities attorneys. The model they developed based on the proposal is 16 pages of small type and legalese,” Roper said. “Had they bothered to test it, I am confident that they would have learned that much work was needed to make these documents both more readable and more visually appealing. But they weren’t willing to do that, perhaps because they didn’t want to hear what investor testing would have told them about the need to go back to the drawing board."

This is the second time in this administration that the SEC has developed an important new disclosure document aimed at retail investors without taking the time to get it right, said Roper, referencing the SEC’s release of Regulation Best Interest. Critics have argued the agency approved that nearly 1,000-page rule without qualitative, one-on-one investor interviews, despite being told by investors at numerous town halls that they could not understand the rule’s disclosures. Those disclosures—the customer relationship summary—is the lynchpin document in the new rule that is supposed to explain conflicts of interest and their costs to investors so they can make informed decisions.

The Insured Retirement Institute (IRI) called the action a “major leap forward” to provide investors with more easily digestible and navigable information about important retirement financial products. IRI members account for 90% of annuity assets in the U.S.,
The trade group began lobbying for a summary prospectus a decade ago and led the effort to make variable annuity disclosures more consumer friendly while still maintaining access to additional information, if requested. IRI is reviewing the final rule.
“This is a major leap forward in the ability to provide consumers with information they need to make educated investment decisions about financial products that can be essential to ensure a secure and dignified retirement,” said Jason Berkowitz, IRI chief legal and regulatory affairs officer.
“We are carefully scrutinizing the final rule with our members to fully understand its ramifications and to ensure that it allows for a more rational disclosure of important consumer information versus today’s required book-length paper versions delivered by US mail,” Berkowitz added.