SEC Staff Updates Guidance on Rate Sheet Supplements to Include Changes to Index Loss Limits in RILAs

On August 4, SEC staff updated guidance on the use of rate sheet supplements in disclosing changes to terms in insurance products. As revised, updated ADI 2018-05 enables insurers to use rate sheet supplements to notify investors of changes to current limits on index losses in registered index-linked annuities (RILAs).

Two Rate Sheet Supplement Alternatives

The updated guidance continues to provide for two rate sheet supplement alternatives. One alternative requires the rate sheet supplement to include start and end dates for the new values, while the second alternative requires only a start date, along with prominent disclosure that the rates may change at any time and how notice of the change will be provided. Issuers choosing to use a rate sheet supplement must disclose their intent to do so in the prospectus and must disclose, among other things, how investors can obtain applicable rates if a rate sheet supplement has been superseded. In addition, the updated guidance requires that historical rates be disclosed in an appendix to the prospectus and that the form of the rate sheet supplement intended for use be used be included in a reviewable filing before the rate sheet supplement is used.

Additional Requirements

The following additional requirements apply to the use of rate sheet supplements that disclose changes in limits on losses due to index changes:

• The rate sheet supplement must include the table of registered index-linked investment options required by Item 17(b) of Form N-4, including:
  • The two-paragraph legend preceding that table required by Item 17(b)(1) (noting the possibility of loss and the insurer’s right to change option features); and
  • The disclosure following that table required by Item 17(b)(1) (noting, among other things, any minimum loss limits);
• The rate sheet supplement must highlight the new current limits, as well as state before the table containing the new limits that these changed values are highlighted.
• The rate sheet supplement must state prominently that:
  • The purpose of the supplement is to disclose current limits on index loss,
  • No other index-linked option feature shown in the table has changed; and
  • Investors should refer to the prospectus appendix for other currently available investment options not shown in the supplement.

While the ADI has expanded the use of a rate sheet supplement to disclose changes in current limits on index losses, it notes at the same time that any changes to guaranteed minimum limits on index losses that will always be available under the contract or for a particular index-linked option would require the filing of a post-effective amendment under Rule 485(a) under the Securities Act.

Conclusion

This update is a welcome change to the disclosure requirements for RILAs and should provide issuers of these products more flexibility in making changes to crediting rates. This should lead, in turn, to more product innovation for investors.