During recent industry calls, Insured Retirement Institute (IRI) group members stated that the Securities and Exchange Commission (SEC) has expressed interest in reviewing websites, either while in development for compliance with the rule or after the transition to the layered disclosure model required in Rule 498A. Questions regarding the Commission’s review and commenting approach still exist, but what is to be considered is whether the SEC’s planned oversight of compliance appears to be at a higher level than previously experienced. With this in mind, focusing on meeting the ruling standards and the right solution, must be taken into consideration when adopting Rule 498A.
Effective January 1, 2022, variable product issuers planning to adopt the Summary Prospectus as the primary disclosure document, must have a plan in place to meet website requirements focused on layered disclosure and document availability. The website must be compliant prior to Summary Prospectus document delivery.
To improve the current disclosure framework and update the manner in which variable contract investors receive and review prospectuses and related information, Rule 498A under the Securities Act permits the use of a summary prospectus to satisfy statutory prospectus delivery obligations, along with other rule and form amendments intended to implement the summary prospectus framework. Investors will have access to the contract statutory prospectus and other information about the contract online, and could receive paper or electronic copies upon request, which will provide more detailed information about the contract.
The approach under the new rule contemplates the use of two types of summary prospectuses:
- Initial Summary Prospectus to be provided to new investors, and
- Updating Summary Prospectus to be provided to existing investors.
To help investors make an informed investment decision, each type of summary prospectus uses a layered disclosure approach designed to provide investors with key information relating to the contract’s terms, benefits, and risks in a concise and more reader-friendly presentation, with website addresses or hyperlinks to more detailed information posted online and delivered electronically or in paper format on request.
Availability of variable contract statutory prospectus and other materials
New rule 498A requires the variable contract statutory prospectus, as well as the contract’s statement of additional information (SAI), to be publicly accessible free of charge, at a website address specified on or hyperlinked in the cover of the summary prospectus. An investor who receives a contract summary prospectus may request the contract statutory prospectus and SAI to be sent in paper or electronically, at no cost.
Optional method to satisfy portfolio company prospectus delivery requirements.
New rule 498A provides an optional method for satisfying portfolio company prospectus delivery obligations by making portfolio company summary and statutory prospectuses available online at the website address specified on or hyperlinked in the variable contract summary prospectus.
Investors may request and receive those disclosures in paper or electronically at no cost. This new option for satisfying portfolio company prospectus delivery requirements is only available for portfolio companies available as investment options through variable contracts that use contract summary prospectuses.
Initial Summary Prospectus
The new rule requires a variable product issuer relying on the rule to send/provide an Initial Summary Prospectus (ISP) in connection with sales of variable contracts to new investors. The ISP uses a layered disclosure approach that provides investors with key information relating to the contract’s terms, benefits, and risks in a concise and more reader-friendly presentation, with access to more detailed information available online and electronically or in paper format on request.
The cover page or beginning of the ISP is to include the following legends:
This Summary Prospectus summarizes key features of the [Contract]. Before you invest, you should also review the prospectus for the [Contract], which contains more information about the [Contract’s] features, benefits, and risks. You can find this document and other information about the [Contract] online at [___]. You can also obtain this information at no cost by calling [____] or by sending an email request to [___].
You may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review the prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.
The legend is required to provide an internet address, other than the address of the Commission’s electronic filing system, toll-free telephone number, and email address that investors can use to obtain the statutory prospectus and other materials, request other information about the variable contract, and make investor inquiries.
The website address must be specific enough to lead investors to a direct link to the statutory prospectus and other required information, rather than to the home page or another part of the website. The website could host other relevant disclosure documents with prominent links to each required document.
The legend could indicate, if applicable, that the statutory prospectus and other information are available from a financial intermediary, such as a broker-dealer, through which the contract may be purchased or sold.
For purposes of this requirement, documents available on the website address must be publicly accessible and free of charge.
The ISP, Updating Summary Prospectus (USP), contract statutory prospectus, and contract SAI must be publicly accessible, free of charge, on a website in the manner that the rule specifies.
Online accessibility of contract statutory prospectus and certain other documents relating to the contract
Under the final rule, as proposed, investors who receive an ISP or USP will have access to more detailed information about the variable contract, either by reviewing the information online, or by requesting the information to be sent in paper or electronically. These provisions parallel provisions in the rule governing the use of mutual fund summary prospectuses (Rule 498). The SEC is adopting a similar layered disclosure framework for variable contracts that mutual funds have benefitted from.
The required online contract documents generally comprise the same set of documents that the mutual fund summary prospectus rules require to be posted online.
a. Required online contract documents
Under the final rule, a variable contract’s current ISP, USP, statutory prospectus and SAI will be required to be available online. This approach operationalizes the summary prospectus layered disclosure framework, with the summary prospectus provided in paper or electronically to investors and additional information about the contract securities available online.
As with similar provisions in the mutual fund summary prospectus rule, these required online contract documents are required to be publicly accessible, free of charge, at the website address that the cover page of the summary prospectus specifies, on or before the time that the person relying on the rule provides the summary prospectus to investors. Moreover, a current version of each of the required online contract documents must remain on that website for at least 90 days following either:
- The time of the carrying or delivery of the contract security if a person is relying on the rule to satisfy its Section 5(b)(2) prospectus delivery obligations; or
- If a person is relying on the rule to send communications that will not be deemed to be prospectuses, the time that the person sends or gives the communication to investors.
Website address at which required online contract documents are available
The website address must be specific enough to lead investors directly to the required online contract documents, although the website can be a central site with prominent links to each document. While contract documents may be hosted at multiple locations, for purposes of compliance with the rule, a summary prospectus may only include a single website address where each of the required online contract documents may be accessed.
This requirement is designed to ensure that the required online contract documents are collectively located at the same website address or can be readily accessed from the same website address, as opposed to being scattered across various disconnected websites which could discourage investors from seeking those materials.
As discussed below, if an insurer avails itself of the optional method of delivering portfolio company prospectuses, the portfolio company documents required to be made available online under that option must be accessible from the same website address used to access the required contract documents.
b. Formatting requirements for required online contract documents
The final rule requires that the online contract documents be presented in a manner that is human-readable and capable of being printed on paper in human-readable format.
This formatting requirement is a condition of reliance on the rule to satisfy a person’s delivery obligations under Section 5(b)(2) of the Securities Act and the provision that a communication shall not be deemed a prospectus under Section 2(a)(1) of the Securities Act. The rule governing mutual fund summary prospectuses also requires this formatting approach.
The “human-readable” presentation requirement is designed to impose a minimum standard of usability comparable to that of a paper document, although the electronic version could include additional features, such as fee calculators or pop-up explanations, that might enhance its usability compared to the paper version.
All portions of the document should be human-readable, such that when an investor views the document electronically, the text is not cut off based on the screen size.
The final rule requires that the online materials be presented in a format, or formats, that are convenient for both reading online and printing on paper.
c. Linking within and between documents
The final rule includes requirements for linking within the electronic versions of the contract statutory prospectus and SAI that are available online, and also for linking between electronic versions of contract summary and statutory prospectuses that are available online.
- The first linking requirement will allow the reader to move directly between a table of contents of the contract statutory prospectus or SAI and the related sections of that document.
- The second linking requirement will allow the reader to move back and forth between each section of the summary prospectus and any related section of the contract statutory prospectus and contract SAI that provides additional detail. This back-and-forth movement could occur either directly from the summary prospectus to the relevant section of the statutory prospectus or SAI, or indirectly by linking from the summary prospectus to a table of contents for the statutory prospectus or SAI, and vice versa.
d. Definitions of special terms and online viewing of special terms
The final rule requires a summary prospectus to define any “special terms” elected by the registrant, using any presentation that clearly conveys their meaning to investors.
The rule requires that investors either be able to view the definition of each special term used in an online summary prospectus upon command, or to move directly back and forth between each special term and the corresponding entry in any glossary or list of definitions that the summary prospectus includes.
Investors could view the definitions of special terms by moving or “hovering” the computer’s pointer or mouse over the term or selecting the term on a mobile device.
e. Ability to retain documents
The final rule requires that a person accessing the website that appears on the summary prospectus cover page be able to permanently retain, free of charge, an electronic version of each of the required online contract documents. Like the online version of these documents, the retainable version of the documents must be in a format that:
- is human-readable and capable of being printed on paper in human-readable format; and
- permits a person accessing the downloaded documents to move directly back and forth between each section heading in a table of contents of that document and the section of the document referenced in that section heading.
- The permanently retained document does not have to be in a format that allows an investor to move back and forth between the summary prospectus and the statutory prospectus and SAI, because of possible technical difficulties associated with maintaining links between multiple downloaded documents.
f. Safe Harbor for temporary noncompliance
Compliance with the conditions of Rule 498A, regarding the online availability of the required online contract documents,
- including the formatting and linking requirements for these documents,
- the requirements associated with the use of special terms in these documents, and
- the ability to retain these documents permanently is generally required to rely on the rule to meet prospectus delivery obligations under Section5(b)(2) of the Securities Act.
- Failure to comply with any of these conditions could result in a violation ofSection5(b)(2) unless the contract statutory prospectus is delivered by means other than reliance on the rule.
There may be times when, due to events beyond a person’s control, they may be temporarily not in compliance with the rule’s conditions regarding the availability of the required online contract documents.
The final rule contains a provision for temporary noncompliance, which is substantively identical to a parallel provision in the rule governing mutual fund summary prospectuses. This provision provides that the conditions regarding the availability of the required online contract documents will be deemed to be met, even if the required online contract documents are temporarily unavailable, provided that the person has reasonable procedures in place to ensure that those materials are available in the required manner.
A person relying on the rule to satisfy prospectus delivery obligations is required to take prompt action to ensure that those materials become available in the manner required as soon as practicable following the earlier of the time when the person knows, or reasonably should have known, that the documents were not available in the manner required.
Hyperlinking of website addresses in electronic versions of the summary prospectus
The final rule requires any website address that is included in an electronic version of the summary prospectus (i.e., electronic versions sent to investors or available online) to be an active hyperlink. This provision is intended to ensure that investors viewing electronic versions are able to easily access website addresses that are included in the summary prospectus.
Toppan Merrill is here to help.
Should you have questions about the 1940 Securities Act and the compliance requirements for investment companies, visit ToppanMerrill.com, connect with us via email@example.com or by phone at 800.688.4400.
Guy Stanzione – Compliance Services Director and Product Manager
Guy Stanzione provides deep insight on the Securities Act of 1933, the Investment Company Act of 1940 and SEC regulatory compliance, as well as investment company solutions for regulatory document preparation, filing and distribution. Leveraging more than 40 years of financial services, shareholder communication, printing and compliance service expertise he is a vital resource for financial services professionals navigating the complexities and pace of SEC regulatory changes.