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SEC Commissioner Hester Peirce.

Life Health > Annuities > Fixed Annuities

New SEC RILA Rules Accentuate the Negative, Commissioner Says

By Allison Bell

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What You Need to Know

  • The Insured Retirement Institute is welcoming the form shift.
  • SEC Commissioner Hester Peirce is welcoming the form change.
  • But Peirce is not happy with the new RILA disclosure requirements.

The new U.S. Securities and Exchange Commission regulations for registered index-linked annuities and another product, market-value-adjusted annuities, reflect anti-RILA bias, according to SEC Commissioner Hester Peirce.

The SEC announced Monday that it has completed regulations that will let life insurers register RILAs and MVA contracts on the relatively simple SEC Form N-4, rather than using the same long, complicated Form S-1 that giant companies use to go public.

The Insured Retirement Institute, one of the groups that has been lobbying for the form shift for years, welcomed the arrival of the final RILA form shift rule.

“This rule will ensure that prospective purchasers can readily find the essential information they need to understand RILAs and their risks and benefits,” IRI President Wayne Chopus said. “The changes made by this rule change should also eliminate barriers to entry and encourage more competition and innovation in this critical market segment.”

Peirce agreed that the form shift should be helpful to issuers and users of RILAs and MVA contracts.

But “this rule, to turn an old classic on its head, accentuates the negative,” Peirce said in a statement.

The disclosures the SEC will require RILA issuers to use are “almost certainly going to confuse potential RILA investors and lead them to conclude that these products are riskier than they are,” Peirce said.

The background: Life insurers can already use Form N-4 to register traditional variable annuities.

Insurers have been asking the SEC to let them use Form N-4 for other types of annuities subject to SEC registration requirements for more than 20 years.

Congress forced the issue in 2022, by including a provision requiring the SEC to make the form shift happen in the same Consolidated Appropriations Act, 2023 legislation that ferried the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022, or Secure 2.0, to passage.

Life insurers are hoping the form shift will save them tens of millions of dollars per year and speed up the process of introducing new annuities.

Peirce’s critiques: Here are five suggestions Peirce gave for improving the coming RILA disclosures.

1. Change the maximum loss disclosure requirement.

RILA issuers will have to put their front cover page a notice showing “the maximum potential loss that an investor could experience in connection with a negative contract adjustment.”

“Absent necessary context, the disclosure seems designed to dissuade investors from purchasing RILAs,” Peirce said. “No other securities offerings are burdened by the same disclosure.”

2. Include realistic data points with respect to caps and buffers, or limits on the amount of losses a RILA absorbs and the maximum gains an investor can keep.

A RILA prospectus will have to include a bar chart showing each index’s annual return, along with a hypothetical example for index return that indicates the return after applying a 5% cap and a negative 10% buffer.

Those hypothetical caps and buffers do not reflect industry practice, Pierce said.

3. Don’t classify a RILA cap as a fee.

RILA investors give up some potential returns to reduce losses, Peirce said.

“That give-up is no more a fee than the downside buffer is a rebate,” she said. “By characterizing these caps as ‘implicit fees,’ we have abandoned the plain language we demand of registrants.”

4. Provide a formal transition period.

The SEC made the new requirements apply immediately because of concerns about protecting investors, “but those concerns will be addressed most thoroughly if issuers undertake careful reviews of their sales literature in light of the commission’s newly applicable interpretation,” Peirce said.

5. Update the SEC’s overall approach to disclosures.

“Because of their features, RILAs provided a unique opportunity to try new things, like decision trees and interactive technologies, and shed old ones, like requiring issuers to file 10 copies of forms,” Peirce said.

SEC Commissioner Hester Peirce. Credit: SEC

Allison Bell

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