Better Markets filed a comment letter with the Securities and Exchange Commission in response to the SEC’s proposal to require that issuers seeking to register the offering of registered index-linked annuities (RILAs) do so on Form N-4, a registration form used for variable annuities. The proposal would also amend Form N-4 to specifically address the features and risks of RILAs. These reforms are vitally important, as RILAs are aimed at retail investors, including retirement savers, but their features can be baffling. Better disclosure requirements are essential, and this proposal goes a long way toward achieving that goal.
Why It Matters. A RILA is an annuity contract that credits interest based on the performance of an external securities index, such as the S&P 500 Index, over a specified period of time. The contract generally limits both positive and negative returns, so there is a limit on both how much investors can make and how much investors can lose. Investment performance over the course of a return period will depend on a contract owner’s choices with respect to the referenced index, the length of the return period, and the limits on positive and negative returns.
Although RILAs have been around for over a decade, the SEC has never adopted a specific RILA registration form. As a result, insurance companies currently register offerings of RILAs on forms that are designed for stocks and bonds and are therefore ill-suited for insurance products. In 2022, Congress directed the SEC to adopt a registration form for RILAs that would provide investors with the information necessary to make an informed investment decision.
The SEC’s proposal would amend Form N-4 to make it suitable for the registration of RILAs. The amendments would require the insurance company to disclose on the cover page of the form an RILA’s limitations on gains and potential for loss and that they are not short-term investments. In the body of the form, issuers would be required to further disclose the key features of index-linked options: that returns are based on an index, that investors could still lose a significant amount of money under the contract, and that there are limits on both positive and negative index performance. The amendments would also ensure that Form N-4 highlights in a “Key Information Table” the key features of a RILA contract, such as the maximum amount of loss an investor could experience from the negative performance of the index.
What We Said. We support the SEC’s proposal to require insurance companies to register the offering of RILAs on Form N-4 and to amend Form N-4 so that it addresses the features and risks of RILAs. The purpose of securities disclosures is to equip investors to make informed investment decisions. Yet the absence of a prescribed form for a specific type of offering such as RILAs prevents investors from receiving meaningful disclosure. The proposal’s requirement that issuers register offerings of RILAs on Form N-4 and include disclosures specific to RILAs in prominent places on the form is precisely the sort of disclosure that should improve investors’ ability to use the provided information to their benefit. While this reform cannot guarantee that investors considering RILAs as an investment option will receive, understand, and apply all of the information they need to make informed choices, it is a vast improvement over the status quo.
Bottom Line. Better Markets supports the SEC’s efforts to better protect investors by ensuring that they receive specific disclosures
You can find the comment letter here.