SEC Director of Investment Issues Remarks at American Law Institute Conference
"Good morning. Thank you
"This conference was the first time I spoke to a public audience as Director of the Division. It is a pleasure to return a year later and continue our dialogue.[1] Over the last year, I have had the opportunity to engage on many different policy areas. What I see, from one area to the next, is the vibrancy of the American financial markets. It is a symphony of participants - from investors of all ages, financial situations and preferences to financial services providers with a variety of investment products and services that can meet unique investor needs.
"The products and services that you offer add to the symphony of choice that makes our markets vibrant. Variable products represent
"Today, I'm going to start by talking about one area where we are working to modernize information - the Commission's recent proposal to improve the disclosure framework for variable annuities and variable life insurance contracts ("variable contracts").[3] The proposal reaches multiple facets of the rulebook for variable insurance to bring our regulatory framework to the 21st century. Then, I would like to highlight an area where folks in this audience have been able to offer a unique perspective on investor choice - the standards of conduct for financial professionals.
"But before I do, let me remind you that I am speaking today only for myself and not for the Commission, the Commissioners or the staff.[4]
"Variable Products and a Modernized Framework
"
1. Layered Disclosure Framework
"A core feature of the Commission's proposal is a layered disclosure framework. The proposal would permit issuers to provide investors with a summary prospectus for variable contracts, while making the full prospectus and related materials available online.
"This approach is similar to the layered disclosure that mutual funds have used since 2009.[5] However, the proposal is tailored to variable contracts. Instead of a single summary prospectus, the proposal features two: an initial summary prospectus for new investors and an updating summary prospectus for existing investors. The initial summary prospectus would explain up front a contract's features, costs and risks, while the updating summary prospectus would provide information on changes that occur in subsequent years. In both, the use of tables and high-level summaries would help make them more reader friendly and easier to navigate.
"This proposed framework also would permit layered disclosure about the underlying mutual funds in contracts. Certain key information about these funds would appear in the summary prospectus. The fund's full prospectuses would be available online. This change could dramatically improve the experience of investors. Instead of being confronted with the challenge of reading a telephone book of disclosure and figuring out what is relevant, this approach could allow investors to navigate the information in a way that responds to their needs.
"In effect, the summary prospectus would not be a self-contained disclosure vehicle, but rather one element in a layered disclosure framework. Investors could use the summary prospectus as a starting point. Then they could dig down through the layers for the information that interests them. And they could obtain this information in the format of their choice, paper or electronic, at no charge.
2. Modernizing Reforms Informed by Retrospective Review
"I imagine many of the practitioners in the room today have already begun reviewing the proposing release. You may have noticed that it begins with a table listing the Commission's proposed rule amendments. As you can see, the proposal includes a number of changes to modernize the rulebook for insurance products. These changes reflect our Division's efforts to engage in retrospective review of our regulatory framework as we look ahead. We reviewed statutory prospectus requirements, past Commission temporary rules and prior staff statements to see where the framework for variable contracts could be modernized.
"Take, for example, discontinued contracts. I think many practitioners think of this as the issue addressed in the "Great-West" line of staff no-action letters. Other types of funds can liquidate when they shrink. But an insurance company is unable to liquidate a contract in similar circumstances. As the number of contracts declines, costs grow in proportion to assets. In the '70s, '80s and '90s, the staff attempted to address this in the Great-West line of no-action letters.[6]
"The proposal gave the Commission a chance to reconsider how this works. With that in mind, the proposal discusses several possible approaches for discontinued contracts, and I would appreciate your input. Among the options, which do you think is the most appropriate? Do you think the proposed summary prospectus and form amendments could relieve current burdens and costs of updating registration statements and delivering prospectuses? If so, would it be unnecessary for the Commission to take a position? Your engagement, perspective and practical feedback are important on these and the many other questions posed in the release.
3. Use of Technology
"In addition to reviewing the past, we are also looking to the future and the use of technology. For example, the proposed amendments would require the use of structured data for certain disclosures, including the fee tables. This change would leverage technology to provide a way for investors, financial professionals, data aggregators and other data users to efficiently analyze and compare information about variable contracts, including, most importantly, their costs. The use of structured data would similarly allow an investor to more easily compare the investment options offered by different variable contracts and assess whether a particular contract's investment options meet her needs or goals.
"Beyond the proposal, the Division continues to engage with market participants on innovative ideas and technological developments. We participate in the Commission's FinHub (Strategic Hub for Innovation and
4. Request for Comments on the Proposal
"So, the Commission put out the proposal - what comes next? Next, we need constructive feedback. We want to know where we hit the mark and where we missed. But I would like to make one request - please do not approach your comment letters as just a legal exercise. This rule - if it gets adopted - could be on the books for a long time. I don't want a rule that is going to be out of date the minute it is adopted - we want to future-proof it. How can you help us do that? Start by asking your designers, marketing teams, disclosure teams and product development teams to pick up a pen, click a mouse or tap the keyboard and actually try out the rule. What would your summary prospectus look like? What should it look like? How will you deliver it? Can it work across platforms, like email, paper and mobile? Is there anything in the proposed rule text that interferes with you giving investors the clearest, most effective, most useful disclosure you can give?
"In developing the staff's recommendation, we considered our experience with investors during the recent "Tell Us" investor roundtables. Across the board, investors are looking for clear, concise and digestible disclosure. Given the valuable input we have received from investors, we included a feedback flier in this proposal.
"Investor Choice and Regulatory Consistency
"Next, I would like to talk about the standards of conduct for financial professionals. In April, the Commission proposed a package of rulemakings that includes Form CRS, Regulation Best Interest and the fiduciary duty interpretation for investment advisers.[8] These proposals were intended to serve
"Let's turn first to investor choice. Broker-dealers and investment advisers are different, and their compensation models are different. One investor may find the services and fees of a broker-dealer a better fit. Another may prefer those of an investment adviser. Each offers its own features, advantages and conflicts. In addition, just as investors can benefit from a variety of financial services, they can also benefit from a variety of investment options. For one investor, a mutual fund may check all the boxes; for another, an insurance product may work better. That is why, as my staff and I continue our work, I believe it is important for us to keep in mind past experiences and focus on those policy options that help preserve choice for investors.
"I also believe consistent rules are important - especially for products where multiple federal and state rules can apply. In my view, this means coordination among regulators is central to having an efficient, effective and rational framework. Proposed Regulation Best Interest, Form CRS and the thousands of thoughtful comments received help set us on a path of policy considerations and potential solutions that I believe will benefit investors. I also hope these can serve as a model for other policy makers and help promote consistency.
"The viewpoints of the insurance industry are important to the advancement of this proposal. We appreciate the comprehensive comment letters submitted by many of you. The types of products, services, operations and oversight framework in your space differ from others. Your products have features and costs that reflect the insurance guarantees against risk of loss that other investment products do not provide. As a result, I believe it is important for the staff to keep all types of investment products in mind as we think about choice and consistency.
"Looking Ahead
"The Division has been quite busy this past year on a number of key policy initiatives, including the two I just discussed. Our work extends beyond rulemaking. For example, the Division recently issued no-action relief to permit issuers of structured indexed annuities to file audited financials in their registration statements that are prepared according to SAP (state statutory accounting principles) instead of GAAP (generally accepted accounting principles).[9] SAP financials provide information on the solvency of the issuer and its ability to fulfill its contractual obligations, which is the information their investors want. The relief also aligns this area with SAP accounting principles used for other registered insurance products like variable annuities. The relief is an example of promoting consistency to ease burdens without sacrificing investor protections.
"As we continue to work on initiatives like this to improve the investor experience and modernize our regulatory framework, we also keep an eye on the implementation of recently adopted rules. One of the key rules we have been monitoring is the liquidity risk management rule. The first of a series of compliance dates for the rule is on the near horizon. Recently, I have heard concerns about the possible impact of this rule on fixed income markets if a fund holds more than 15% in illiquid investments. Some funds may be concerned that the rule forces them to sell assets immediately, possibly in a down market.
"The rule does not require forced sales. Rather, it requires responsible actions. Specifically, the rule requires a fund to (1) stop acquiring illiquid investments, (2) provide notice to the Commission and (3) present a plan to its board of directors. The plan has to address how the fund will bring its illiquid investments to or below 15% within a reasonable period of time.[10] To me, this is not saying that funds should just start selling illiquid investments. It is saying that advisers and boards should take the situation seriously and act in the best interests of the fund to move its portfolio into an appropriate liquidity posture. As you have seen over the last year, the staff has actively engaged on questions regarding the implementation of this rulemaking, and we remain available to advise and assist as you have questions.
"In closing, I would like to express my gratitude to the talented staff of the Division. We are fortunate to have staff members with expertise in variable insurance products. They inform the daily review of product disclosures, counsel on requests for relief and staff guidance and work on broad policy initiatives. Some of my colleagues will be participating on various panels later today and tomorrow. From our Division
"Thank you again for the opportunity to join you this morning, and I hope you enjoy the rest of the conference."
[1] I would like to thank
[2] See, e.g.,
[3] See SEC Proposes Disclosure Improvements for Variable Annuities and Variable Life Insurance Contracts (
[4]
[5] Most investors are likely familiar with mutual fund summary prospectuses today due to their widespread use. In fact, approximately 95% of mutual funds and ETFs currently offer a summary prospectus. This estimate is based on EDGAR data for the number of mutual funds and ETFs that filed a summary prospectus in 2017 (10,686) and the
[6] From 1977 to 1995 the staff of the
[7] See SEC Launches New Strategic Hub for Innovation and
[8] See SEC Proposes to Enhance Protections and Preserve Choice for
[9] See,
[10] See Rule 22e-4(b)(1)(iv)(A).
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