On July 1, 2024, the Securities and Exchange Commission (SEC) announced new rules for registered index-linked annuities (RILAs) and registered market-value adjustment annuities (MVAs). The new rules will significantly impact existing RILA and MVA issuers, as well as insurers that may have been waiting in the wings for these rules before venturing into the RILA space.

The new rules provide clarity in some areas and resolve certain open issues, but important strategic questions remain. Certain changes made to the proposal in the final rules streamline the conversion process for RILA and MVA issuers, and we see at least three alternative paths RILA and MVA issuers (existing and new) may take. There will be numerous decisions along the way, but for now, we offer some immediate practical questions to consider as RILA and MVA issuers map out their implementation plans.

The New Rules

First, let’s look at the main features of the new rules. These new rules:

• Require RILAs and MVAs[1] (also known collectively as non-variable contracts) currently registered on the SEC’s “catchall” registration forms — Form S-1 and Form S-3 — to “re-register” on the SEC’s revised registration form for variable annuities, RILAs, and MVAs — Form N-4.
• Require new RILA and/or MVA issuers to register on Form N-4.
• Relieve certain RILA and MVA issuers of the enormous burden of preparing financials under “generally accepted accounting principles” (GAAP), and instead allow them to use their state statutory (SAP) financials in registering these products.
• Require non-variable contracts to rely on related existing variable annuity rules, which include using an evergreen registration statement and paying registration fees in arrears on the basis of net sales.
• Require variable annuity issuers to file prospectus amendments to include new required disclosure regarding the variable investment options. If the prospectus included in the amendment offers variable investment options but does not also offer RILA or MVA investment options, with a possible exception noted below, such amendment will become effective automatically on the date of filing (or up to 30 days after the date of filing at the issuer’s request), without SEC staff review. If, on the other hand, the prospectus included in the amendment offers variable investment options and RILA and/or MVA investment options, the amendment will be reviewed by SEC staff, and while it will still become effective automatically, there is a 60-day waiting period (up to 80 days at the issuer’s request) during which the staff will review the filing and provide comments, and if comments cannot be resolved within 60 days, the staff may ask the issuer to file a “delaying amendment.”
• Permit cap and participation rates to be posted on the insurer’s website rather than filing them in prospectus supplements.
• Continue to require that sales materials for RILAs and MVAs used by insurers that would not otherwise be eligible to file on Form S-3 be accompanied or preceded by a statutory prospectus — and continue to allow those that would be eligible to file on Form S-3 to distribute these materials without that prospectus delivery requirement, permitting broad-based advertising, while at the same time subjecting sales materials from all RILA and MVA issuers to an existing antifraud rule, Rule 156.
• Require RILA and MVA issuers to characterize in some parts of their prospectus upside limits and “contract adjustments” (which adjust contract value upon a withdrawal before the end of a crediting period) as fees or costs that could cause an investor to lose up to most or all of their investment.
• Do not apply to index-linked life insurance policies or contingent deferred annuity contracts (CDAs), one consequence of which is that RILA and MVA issuers that also have currently registered one or more of these other contracts — absent individual relief from the SEC — will not be able to take advantage of the instructions in Form N-4 allowing the use of SAP financials (discussed further below).

Developing an Implementation Plan – Three Basic Options:

The SEC made certain changes to its proposed rules that streamlined the path for converting Form S-1 and Form S-3 RILA registration statements to Form N-4. The proposed rules had three important dates:

1. The effective date (60 days after publication of the final rules), after which registrants could use Form N-4 to register their RILA offerings.
2. The delayed effective date (six months later), after which registrants could rely on the related filing, registration fee payment, and other procedural rules.
3. The date by which all registration statements including RILAs had to comply with Form N-4, which was established for existing RILA filers as the first annual update after May 1, 2025, and May 1, 2026, for all initial registration statements including RILAs and/or MVAs.

However, there was a catch: with the delayed effective date, RILA issuers that converted to amended Form N-4 could not have used the more user-friendly filing, registration fee payment, and other related procedural rules for another six months.[2] As a practical matter, because of the uncertainty raised by the delayed effective date, RILA issuers would have had to wait until January 1, 2025, to start the initial filing process. This likely would not have provided enough time for these issuers to use conversion filings as annual updates for May 1, 2025, as some would have preferred.

Fortunately, the SEC did not adopt the delayed effective date in the final rules. The SEC determined that the EDGAR system could be modified by the effective date and that an additional six months was not necessary. RILA and MVA issuers may now start the filing process under the new procedural rules as soon as the effective date, clearing a new avenue for conversion. In addition, the compliance date is now May 1, 2026, and is structured as (a) the latest effectiveness date by which all post-effective amendments to registration statements for those RILAs and/or MVAs must comply with the requirements of Form N-4 and (b) the date after which all initial registration statements for RILAs and/or MVAs must comply with Form N-4.

This additional certainty provides a clearer path for RILA and MVA issuers to make conversion filings beginning in September 2024 (60 days after the final rules are published in the Federal Register), and therefore have time to have the conversion filings also serve as annual updates for May 1, 2025. Some of these issuers may even want to convert earlier, understanding that they would have to file an annual update to become effective on May 1, 2025. However, this second filing could be a post-effective amendment that becomes effective automatically without SEC staff review.

We offer three paths for consideration, as follows (there are surely more):

1. Convert to N-4 as early as practicable (before May 1, 2025), and then file a no-review post-effective amendment for the May 1, 2025, update.
2. File the initial conversion amendment in fall 2024, leaving enough time to clear SEC staff comments before May 1, 2025, and then update the filing with December 31, 2024, financial statements and other non-material changes to permit the conversion filing to also serve as the annual update for 2025.
3. Wait and begin the conversion process in fall 2025 for a May 1, 2026, conversion.

Conversion Mechanics

The basic mechanism for the conversion of a current registration statement on Form S-1 or S-3 to the new amended Form N-4 is a post-effective amendment to the current registration statement under Rule 485(a). In a change from the proposal, the final rule provides that a registration statement for a variable annuity contract that is not part of a combination contract with a RILA or MVA can adopt the amended Form N-4 in a post-effective amendment filed under Rule 485(b), which can become effective immediately upon filing without SEC staff review.

The final amendments extend the registration, filing, and disclosure requirements adopted for RILA offerings to offerings of registered MVA annuities on Form N-4. In addition, various form amendments are applicable to variable annuity offerings. The SEC adopted these amendments generally as proposed, with some modifications in response to comments received. Further, as proposed, the SEC adopted amendments that permit these issuers to make use of the summary prospectus framework available to variable annuity registrants on Form N-4.

To accommodate RILA and registered MVA registrations on Form N-4, the SEC adopted amendments that require issuers of those securities to pay registration fees in arrears on Form 24F-2. In addition, as discussed below, instructions to that form offer certain accommodations to registrants with RILAs and/or MVAs currently registered to avoid double counting registration fees and to permit registration fees to be based on sales net of unclaimed redemptions.

Registrants with multiple RILA and/or MVA offerings are encouraged to coordinate with SEC staff regarding their plans for their filing schedule and process, particularly the use of template filings under Rule 485(b)(1)(vii). Under this process, a template filing that is representative (materially similar) to the other registration statements is filed for SEC staff review under Rule 485(a) and, upon resolution of staff comments on the template, the other filings (typically called the “replicate” filings) can then be filed for immediate effectiveness under Rule 485(b).

Considerations for RILA and MVA Implementation Plans

There are at least three potential paths for RILA and MVA conversions, and variants of each plan depending upon whether an offering is registered on Form S-1 or Form S-3, whether the contract is a stand-alone or combination contract, and whether a new issuer files an initial registration statement. We believe, however, that the basic considerations in evaluating the alternative paths boil down to a simple question: what are the pros and cons of an early conversion versus a delayed conversion?

Pros and Cons of Early Conversions

Form S-1 Issuers:

• S-1 requires extensive company disclosure that leads to longer prospectuses. Converting a RILA or MVA from Form S-1 or Form S-3 to Form N-4 as soon as possible permits the issuer to get ahead of the game by presenting potential investors with streamlined prospectuses. A RILA or MVA issuer will be able to further simplify its disclosure documents for these products by using summary prospectuses.
• The attractiveness of using such a streamlined summary/statutory prospectus may be at least partially offset, however, by the requirement for prospectuses to include disclosure categorizing caps and contract adjustments as fees or For this reason, some issuers may want to get as many miles as possible out of their Form S-1 or Form S-3 prospectuses before they must convert to Form N-4. In addition, one new requirement is that historical upside limits must be filed annually in the registration, or as an exhibit. Converting to Form N-4 early would force disclosure of what could be competitive information.
• Converting to Form N-4 will require a significant revision to existing registration statements. This conversion will also entail an expanded set of disclosures that must be filed in a structured data format. Registrants with limited resources may wish to consider delaying conversion until the necessary infrastructure to support conversion is in place.
• Converting early would not only allow payment of fees in arrears but also allow existing RILA and MVA registrants to:
  1. Receive a credit for amounts rolled over from a prior crediting period for which registration fees have already been paid.
  2. Exclude from the itemization of sales in its initial Form 24F-2 filing amounts previously registered before conversion to Form N-4 that had remained unsold before the effective date.
  3. Receive a credit for unclaimed redemptions during the reporting period of the initial Form 24F filing of securities previously registered.
• Unlike variable product issuers and issuers that currently register RILAs and/or MVAs on Form S-3, RILA and MVA issuers on Form S-1 are permitted to advertise only when the advertisement is preceded or accompanied by a statutory prospectus. This precludes an issuer from using broad-based advertising (at least, forms of advertising that cannot practicably be preceded or accompanied by a prospectus), and the new rules leave this prohibition in place. Therefore, there would not seem to be any considerations in this regard that would factor into early conversion decisions one way or the other.
• Depending on the timing of the insurer’s preparation of financial statements and the corresponding audit, there may be considerable savings in the use of statutory financial statements as permitted in a Form N-4 filing a year earlier than required.

Form S-3 Issuers:

• The analysis set forth above for Form S-1 issuers generally applies to Form S-3 issuers.
• There could be an issue for certain Form S-3 filers that have RILA and/or MVA contracts that do not restrict assignability. While Form S-3 issuers can also rely on Form N-4 instructions to submit SAP financial statements, these insurers — like insurers that are not filing periodic reports — must be able to rely on Rule 12h-7 under the Securities Exchange Act of 1934 (Exchange Act), which among other things requires that the contracts prohibit assignments or require issuer consent to the assignment, unless prohibited by state law or regulatory action.

If a RILA or MVA contract registered on Form S-3 without such a term was issued in a state that did not prohibit assignments or require issuer consent, the issuer may not be able to rely on Rule 12h-7. This would in turn mean the issuer would have to continue filing periodic reports with GAAP financial statements and, consequently, not be able to file SAP financial statements in Form N-4 registration statements.

Regrettably, the SEC was not willing to provide some relief from this condition in Rule 12h-7 for this limited circumstance. Form S-3 issuers in this situation seeking to use SAP financials in registration statements for their RILA and MVA contracts should explore the extent to which an anti-assignment clause can be added to those contracts and engage with SEC staff if a state in which those contracts are sold will not permit such an endorsement.

Note for Variable Only Issuers:

As noted above, in a change from the proposing release, the SEC has stated that variable annuity issuers may file an updating amendment under Rule 485(b) to conform registration statements for variable annuities to the new disclosure requirements relevant to variable annuities, where those products do not also offer RILAs and/or MVAs. Since there are now considerable new disclosure requirements for fixed options, however, it is unclear whether filing under Rule 485(b) will be permitted for those products that offer these options. At the same time, it is unclear whether, given that fixed options are not securities, the staff will raise the propriety of filing under Rule 485(b) in this circumstance as an issue.

Note for Issuers That Also Have Currently Registered CDAs or Indexed Life Products:

While Form N-4 instructions offer RILA and MVA issuers the opportunity to use SAP financial statements in registration statements for these products instead of GAAP financial statements, one condition in the instruction could make it difficult to take advantage of this feature in the form. Specifically, this condition (Form N-4, Item 26, Instruction 1) does not allow the use of SAP financials where registrants using the form are preparing GAAP financials for use in any periodic report under the Exchange Act or in any registration statement under the Securities Act of 1933.

If a RILA or MVA issuer has currently registered CDAs or indexed life products, that issuer must either have or obtain individual permission from SEC staff (under delegated authority) to use SAP financials in registration statements for those products in order to rely on the form to use SAP financials in registration statements for the issuer’s RILAs and/or MVAs. In addition, while SEC staff has routinely permitted the use of SAP financials in registration statements for CDAs, we understand SEC staff may be reluctant to provide that permission in connection with indexed life products.

We believe this position to be highly anomalous, given the similarity of indexed life products with other non-variable products from the standpoint of the regulatory concerns evidenced by the use of SAP financials in registration statements for these products. We remain hopeful that SEC staff will engage with issuers of registered indexed life products on this issue going forward.

Note for New RILA Issuers:

New RILA issuers may begin registering RILAs on Form N-4 and benefit from the new filing rules on or about 60 days from publication in the Federal Register. Unless a new RILA issuer is also a seasoned issuer filing Exchange Act periodic reports, the new RILA issuer may not use broad-based advertising. Instead, like current RILA issuers whose offerings are registered on Form S-1, new RILA issuers may only use supplemental sales literature that accompanies or precedes a prospectus.

Conclusion

Carlton Fields will publish an in-depth analysis of the new RILA rule in the near future. In the meantime, we hope that you find our analysis in this article helpful as your company considers initial implementation issues relating to the Form N-4 conversion (or initial registration) process.

[1] The SEC did not initially propose that the new rules apply to MVAs but was apparently convinced by commenters that the new rules should apply to MVAs and included such application in the final rules.

[2] The SEC saw the delayed effective date for procedural rules as essential to make necessary modifications to the SEC’s EDGAR filing and data repository system.