"It is hard to believe, but this is the third year in a row that I have had the pleasure to speak at this conference. In fact, my first public appearance as Director of the
"In the 1986 hit movie Ferris Bueller's Day Off, Ferris Bueller said "[life moves pretty fast. If you don't stop and look around once in a while, you could miss it." Division staff has been working hard on behalf of investors and has accomplished quite a bit since we last spoke. But it is important to stop and look around at the work the Commission and staff have done and what we have accomplished on behalf of
"I want to reflect today on the usefulness of new data required by new forms, the investor experience initiative, including an update on the proposed changes for variable annuity and variable life insurance contracts, and the recent rule proposals aimed at modernizing how we regulate the asset management industry.
"Before I begin, I want to remind you that I am speaking today only for myself and not for the Commission, the Commissioners, or the staff.
"Getting to Know You Better
"In speaking to you at prior conferences, I often cited statistics as to the size and the pace of growth in the variable insurance market. Those statistics typically came from trade group publications such as industry factbooks. The use of statistics compiled by those outside the Commission was not just limited to the variable insurance market. The lack of in-depth data about the inner workings of Commission registrants, their investments, and the ability to easily spot outliers in the investment management industry was a concern for the Commission./2
"With the filing of the first Form N-CENs this year by insurance companies, I can now tell you, without having to resort to outside sources, that as of the end of last year the Commission regulated 422 variable annuity separate accounts, 241 variable life separate accounts, and that - collectively - these separate accounts funded about 3,500 variable products./3 I know that because you told us directly.
"The data collection does not begin and end with the requirement to file new disclosure on Forms N-PORT and N-CEN, which were adopted by the Commission in 2016./4 Rather, the information must also be reported to the Commission in a structured data format. This modernized delivery of the information is just as important as the content required by the forms.
"With this rulemaking, the Commission moved from 1980s technology to a digital regulatory approach that actually makes the information more useful to the Commission, the markets, and investors. I have seen and used the data in formulating my opinion on a number of issues that the Commission is considering. It is truly amazing how helpful it is to receive the data in a structured format. By providing more useful structured data in these new forms, you are enabling the staff to better inform rulemakings and focus the Commission's compliance and inspection resources where needed. Moreover, the new information in the forms, such as on securities lending, derivatives, and ETFs provide data that better describe the contemporary underlying fund market. These forms represent only one of the multiple initiatives we are undertaking to modernize our approach to regulation of the asset management industry.
"Making it Easier for
"Another initiative under way at the Commission is trying to improve disclosures to investors through the use of shorter concise documents. These focused disclosures would be more accessible to Main Street investors, and it is my belief that these disclosures would provide investors with a roadmap so that they may better access the information they need to make informed investment decisions.
"One part of this effort is to streamline disclosures regarding the products you offer. Last October, the Commission proposed to modernize the disclosure framework for variable insurance contracts. As you know, a potential investor in these contracts is given a hundred pages, if not more, of account opening and disclosure documents. The resulting pile of documents is so daunting to many Main Street investors that they may invest in these products without reading the documents and making a fully informed decision about what they are investing in. At the same time, your products are the ones that many of these investors rely on or could rely on to provide for income during their retirement. With retirement planning being so important to Main Street investors as well as our overall economy, the Commission decided to act to improve investor understanding of your products.
"Toward this end, the Commission proposed changes that reflected a comprehensive review of our regulatory framework. We reviewed statutory prospectus requirements, rules applicable to variable life policies, and prior staff statements to find where the framework for variable contracts could be modernized. The proposal sought to leverage our experience with layered disclosure in the mutual fund context and the use of technology in general and, in particular, the internet to improve the usefulness of information provided.
"As with mutual funds, the Commission proposed a layered disclosure framework for variable contracts. Under the proposed framework, an issuer would be able to provide investors a summary prospectus for variable contracts with the full prospectus and related materials available online and in paper, upon request, without charge./5 The proposal featured an initial summary prospectus for new investors explaining up front a contract's important features, costs, and risks. An updating summary prospectus would be sent to existing contract holders to provide information on important changes that occur in subsequent years. Both types of summary prospectuses would use tables and high-level summaries to help make them more reader-friendly and easier to navigate.
"To further improve investors' disclosure experience, the proposed framework would also permit layered disclosure about the underlying mutual funds in contracts. Certain key information about these funds would appear in the variable contract summary prospectus. The funds' prospectuses and related materials would be posted online and mailed to investors in a manner similar to the contract summary materials. Together, these changes would allow investors to obtain the information they want in the format of their choice without the daunting task of navigating a pile of documents.
"In addition to addressing the volume of data that investors are confronted with, the proposal also sought to modernize the registration statements and rules applicable to variable insurance products. Just as the Commission did with new Forms N-CEN and N-PORT, the variable contract proposal included the use of structured data for certain disclosures. I think we can all agree that investors should know and understand the fees associated with their investments, including those associated with your products. In order to provide greater clarity to retail investors, the proposal would require the use of structured data for certain items, including the Key Information Table. Using structured data would provide a way for investors, either on their own or through their financial professionals or data aggregators, to analyze and compare information about the costs associated with other variable contracts or other investment products.
"Response to Variable Products Proposal
"The proposal, if adopted, will establish a new disclosure framework for variable products. It was very important for us to obtain feedback on how best the proposed new framework could provide disclosures that are clear, concise, and understandable. To make sure that investors had an opportunity to comment, we included a feedback form in the proposal.
"We received over 50 comment letters and responses to our feedback form from retail investors, insurance companies, trade organizations, investor advocates, and academics. We also met and had productive discussions with different groups that had specific concerns and suggestions on the proposal.
"Overall, the feedback was very positive. Commenters generally supported the proposal's goals of providing layered disclosures, modernizing and streamlining the disclosures provided to investors, and embracing advances in technology in the disclosure framework. Let me share some of the themes from the comment process.
"First, the proposal discussed several possible approaches for discontinued contracts and requested comment on these approaches. This issue, in particular, drew the interest of commenters. A number of commenters requested that discontinued contracts be permitted to continue to rely on the Great West no-action position. In addition to comment letters, some concerned with this issue came in to meet personally with the staff and also provided helpful information regarding the costs and effects of revising or rescinding this relief.
"A second area that elicited comments and debate was the use of structured data. Although several commenters agreed that tagging key disclosures in the statutory prospectus using Inline XBRL would facilitate product comparisons, some opposed this requirement. These commenters suggested that data tagging would not be helpful due to the complex nature of variable contracts and the vast disparities in the design of different contracts.
"Third, many commenters were also concerned about the use of some of the proposed terminology in disclosure documents. Although some commenters supported specific terms or standardized definitions in the registration forms and summary prospectuses, other commenters voiced concerns. These commenters asserted that some of the terms would be confusing to investors who may be used to different terms in other contract documents or prior versions of the prospectus.
"So where are we? Division staff are developing our rulemaking recommendation to the Commission for adoption, taking into account the issues raised in the comment process. In terms of timing, although I cannot make any promises, I can tell you that the rule is listed in the Unified Agenda of Federal Regulatory and Deregulatory Actions for final action by April of next year. In the meantime, although the formal comment period has closed, the staff will continue to consider comments and is always available and interested if you have ideas, concerns, or information you would like to share with us.
"The Commission's variable product summary prospectus initiative is only one part of the Division staff's holistic review of disclosures with the goal of improving the investor experience and the utility of fund disclosures for Main Street investors so that they can make more informed investment decisions. This initiative is a top priority.
"I doubt it would surprise you to know that the average fund shareholder report delivered to investors is over 100 pages long. The size of these reports likely discourages Main Street investors from even attempting to try to read the reports. Yet, twice a year investors receive them. We in the Division believe that we can do better when it comes to the information disclosed in fund shareholder reports. The staff is currently considering options for a shorter and more engaging report that gives shareholders key information to assess and monitor their fund investments.
"Similarly, investors indicated that the fee disclosure was confusing. Investors stated that there were too many legal line items in the fee table and that they were just interested in an understandable bottom line. To help address these concerns, the staff is thinking about ways to simplify the presentation of fund fees. The staff also is considering ways to provide funds the flexibility to present disclosure using any technology or device reasonably capable of communicating the required information to investors. The ultimate goal of this initiative is to help investors locate key information, understand it, and use that information to make informed investment decisions.
"Helping Us Improve Disclosures to
"Improving disclosures to your investors should not be solely the responsibility of the Commission. Rather, you should take it upon yourselves to improve communications with your investors. Later today, you are going to hear from staff members from our disclosure review and accounting office. I want to emphasize the importance of maintaining a dialogue between the Division and market participants about what we expect to see in disclosure filings. I see this as a dynamic ongoing process.
"As part of this dialogue, the Division has started to issue Accounting and Disclosure Information staff documents (or "ADIs") to highlight some "best practices" for how you can disclose information to your investors. Over the past several months the Division has posted three such ADIs./7 The ADIs focused on automatic effectiveness of registration amendments and effective communications with Division staff during the process, improving principal risks disclosures, and performance and fee issues that the staff was seeing in their reviews of disclosures. These ADIs are an excellent resource and tool available to you. They are concise, and we believe they can help improve communications with your investors. I encourage you to reach out to Division staff with ideas for future ADIs in areas that you believe could use further clarification.
"The Commission's and the Division's efforts on behalf of investors has not been limited to the disclosures required by our forms. They also include modernizing how we regulate. Just this week the Commission proposed a wholesale update to the investment adviser advertising and solicitation rules, which were adopted in 1961 and 1979, respectively.
"In effect, the proposed rules would replace the original rules, the substance of which have not changed since they were adopted./8 The proposed advertising rule would replace the current rule's broadly drawn limitations with a more evergreen and principles-based rule that recognizes developments in technology, changing profiles of investment advisers registered with the Commission, and our experience administering the current rule. It should also accommodate future innovations in technology and the provision of investment advice.
"The proposed rule carries forward its predecessor's general prohibitions on certain advertising practices, such as the current prohibition of any advertisement "which contains any untrue statement of a material fact, or which is otherwise false or misleading." But then in a principles-based manner, it recognizes the evolution of the market place and how investors look for and receive information. Along those lines, the proposed rule would, for example, permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions. Needless to say, that these have commonplace uses in many parts of our daily lives.
"The proposed solicitation rule would replace the current cash solicitation rule and would cover solicitation arrangements involving all forms of compensation, rather than only cash compensation. Importantly, it also would add a new exemption for de minimis compensation to solicitors to accommodate trends. Recognizing that investors in private funds may not be aware that the person soliciting them is being compensated by the adviser to the fund, private fund investor solicitations would be covered by the proposed rule.
"The proposed wholesale modernization of these rules was not easy. Over nearly 60 years, staff has issued more than 100 no-action letters and other staff guidance on the application of the advertising and solicitation rules. This combination of outdated rules along with the numerous staff letters is, to say the least, a tangled web. Through no small feat, we reviewed this tangle of staff letters and crafted a proposal that would streamline and update the rules. As an example, the presentation of performance in advertisements is currently shaped by complex staff letters. The proposed advertising rule specifically addresses performance and would permit the presentation of an adviser's performance results subject to tailored requirements based on an advertisement's intended audience.
"The proposed rules reflect years of outreach conducted by our staff. We have met with groups presenting diverse points of view, including investor advocacy groups, adviser groups, legal practitioners, and others. However, we would greatly value your input on whether the proposed rules strike the right balance. In particular, we hope you comment on how the advertising rule deals with testimonials, performance, and whether it will provide advisers the flexibility they need in marketing their services to clients in today's technology driven world while continuing to protect investors.
"We will continue this dialog not only in the traditional rulemaking comment process, but also through feedback forms. As with some recent rulemakings, the Commission included an investor feedback form, which investors can use to tell us about their experiences with investment adviser advertising and referrals. For the first time, the Commission also has included an adviser feedback form, which smaller advisers can use to tell us about how the rules will affect them. The development of the feedback form is the direct result of our outreach meetings with smaller and mid-size advisers. Smaller advisers in particular, requested a tool that would assist them in providing us with feedback in an efficient and cost effective manner. Both feedback forms will be available on our website. We really do hope to hear from investors and smaller advisers so we can carefully assess the impacts the proposed rules would have. We also hope to hear back generally from smaller advisers on the usefulness of the feedback form and whether any changes going forward would be beneficial.
"Increasing Investment Opportunities for
"Another focus for the Division is looking for ways to increase the diversity of investment opportunities available to investors by addressing unnecessary regulatory barriers. Having a diversified portfolio of investments is critical to making sure that investors are not too dependent on any single investment or single type of investment.
"One example is the recently adopted exchange-traded fund ("ETF") rule, which was originally proposed in 2008. Allow me to start with a bit of personal history. My first job in the Division was working in the office charged with investment company rulemaking. As a staff attorney, I worked on the original ETF rulemaking proposal. Shortly thereafter, I left the Commission. A few years later I returned and joined the Division's Office of Investment Company Regulation. The ETF rule still had not been adopted, and during my time in that office, I was part of the staff that handled ETF exemptive applications.
"When I returned to the Commission as Director of the Division in 2017, I had adoption of an ETF rule at the top of my wish list. I am happy to stand here today and say there is one less thing on my wish list. In September, the Commission adopted the ETF rule. The rule permits certain ETFs organized as open-end funds to enter the market without first having to obtain an exemptive order from the Commission. The Commission also issued an exemptive order that harmonizes related relief for broker-dealers.
"ETFs relying on the rule and related exemptive order will have to comply with certain conditions designed to protect investors, including conditions regarding transparency and disclosure. Under the rule and related amendments to registration statement forms, evaluation of ETF operations will be more straight forward for all ETFs, not just those relying on the rule, given that ETF trading costs will now be required as part of disclosures filed by all open-end and UIT ETFs with the Commission. Although most insurance company separate accounts do not invest directly in ETFs, the new ETF regime should increase the options for contract holders desiring a fund-of-ETFs structure for their invested assets.
"With the adoption of the ETF rule and rescission of the parts of the prior ETF orders that allowed funds to operate as ETFs, the Commission has created a level playing field for run of the mill ETFs. Over the decades in which ETF exemptive orders were issued, the conditions for and terms of relief varied. In particular, some of the earlier exemptive orders allowed for greater flexibility in the composition of baskets. I believe the new rule will increase competition in the ETF space and lead to continued growth in the varieties of ETFs offered to investors.
"The ability of ETF sponsors to rely on a rule, instead of going through the exemptive application process, can hopefully reduce cost for sponsors which may translate into more opportunity and choice for ETF investors. And while that also freed up valuable staff resources, the Commission recently went further. Recognizing the importance of the exemptive process in timely access to more investment choices, the Commission also proposed rule amendments to establish an expedited review procedure for applications under the Investment Company Act that are substantially identical to recent precedent. The proposal also would establish a new informal internal procedure for applications that would not qualify for the new expedited process and promote transparency through the public dissemination of comment letters./9 The proposed actions are intended to make the application process more efficient and transparent. By increasing efficiency, the Division hopes that more investment options will open up to investors on an ongoing basis.
"It has been enjoyable to spend this time with you looking around at what the Division has been doing. As you can see, we have been busy. The staff is committed to improving the investor experience and modernizing our regulatory framework, and that has been the focus of much of our efforts these last few years. The staff is not done. The Division plans to continue to focus on protecting Main Street investors. Whether through improving disclosures to investors, including through a recommendation for adoption of the variable annuity summary prospectus, or helping to make available with proper protections new products that can be used to diversify investors' portfolios, the Division will continue to work on behalf of Main Street investors.
"The work of the Division is truly a team effort. I am fortunate to have fellow Division staff members dedicated to the Commission's mission. Some of my Division colleagues will be participating on various panels later today.
1/ I would like to thank
2/ See Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (
3/ Summary of Form N-CEN data for Variable Insurance Products for fiscal year 2018.
4/ Reporting Modernization Release supra footnote 2.
5/ Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33286 (
6/ Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Release No. 33113 (
7/ See Review of Certain Filings Under Automatic Effectiveness, ADI 2019-07 available at https://www.sec.gov/investment/accounting-and-disclosure-information/adi-2019-07-review-certain-filings-under-automatic; Improving Principal Risks Disclosure; ADI 2019-08 available at https://www.sec.gov/investment/accounting-and-disclosure-information/principal-risks/adi-2019-08-improving-principal-risks-disclosure; Performance and
8/ The current advertising rule has been amended once, when the Commission revised the introductory text of paragraph (a) as part of a broader amendment of several rules under the Investment Advisers Act of 1940 to reflect changes made by the National Securities Markets Improvement Act of 1996. Rules Implementing Amendments to the Investment Advisers Act of 1940, Release No.IA-1633 (
9/ Amendments to Procedures With Respect to Applications Under the Investment Company Act of 1940, Investment Company Act Release No. 33658 (