The market for registered index-linked annuities ("RILAs") is small but growing. RILAs are annuity contracts, the payout of which is linked to the performance of an underlier, such as an equity index. In today's market, we see an intersection of some features of structured products and RILAs. In particular, both instruments increasingly use proprietary indices as a reference asset. Can insurance companies that issue RILAs learn from the structured products marketplace?

Issuers of registered structured products are generally bank holding companies or their finance company subsidiaries or non-US banks eligible to use Form S-3 or F-3. These forms allow for the use of product supplements, which allow the preliminary or final prospectus (or pricing) supplement to be relatively short and easier for an investor to work through, as many of the "boilerplate" provisions, such as market disruption events and a full tax section, are in contained in the underlying supplement. Forms S-3 and F-3 also allow for forward incorporation by reference of material disclosure in the issuer's reports filed under the Securities Exchange Act of 1934 (the "Exchange Act").

Offerings of RILAs are generally registered with the SEC on Form S-1. One approach for S-1 RILA issuers is to obtain a no-action letter from the SEC staff, under which the issuer's financial statements are presented in accordance with statutory accounting principles ("STAT"), rather than US GAAP (as required by Form S-1). STAT financials are required by state insurance regulators and are the norm for RILA issuers.

Under Section 15(d) of the Exchange Act, any issuer that has had a registration statement under the Securities Act declared effective must file Exchange Act reports. Under the Securities Act and the Exchange Act, the financial statements in these reports must be prepared in accordance with US GAAP or International Financial Reporting Standards ("IFRS"). Exchange Act reports also require that the issuer's chief executive officer and chief financial officer complete and file Sarbanes-Oxley certifications.

To avoid burdening an insurance company issuer that is already required under state insurance regulations to report its results under STAT, Rule 12h-7 under the Exchange Act provides an exemption for insurance company issuers from the Section 15(d) reporting requirement. Rule 12h-7, in brief, exempts an insurance company that is state-regulated and also files an annual statement of its financial condition with, and is supervised and its financial condition is examined periodically by, the state insurance commissioner or equivalent official, among other requirements.

Having no-action letter relief allows use of STAT financials and reliance on Rule 12h-7 allows RILA issuers to enter the market with the least impact on how they run their business. However, there are some drawbacks to this approach.

Form S-1 filings require a full SEC review, which can take several months if there are multiple rounds of SEC comments. Once declared effective, and if the offering of the RILA continues over a period of time, the issuer would have to supplement the prospectus for any material changes in the disclosure. If the offering extends into a new fiscal year and new fiscal year-end financial statements are required, a post-effective amendment to the Form S-1 will have to be filed with the new financial statements, together with an auditor's consent. This may result in some delay in the offering process, given that a post-effective amendment might be subject to a new review by the SEC and to a declaration of effectiveness by the SEC.

No separate product supplements can be used with a Form S-1. In other words, the terms of the offering are locked into the S-1 prospectus, with whatever options are described in that prospectus. For example, a Form S-1 registering the offering of a RILA linked only to the S&P 500 could not be used to offer a similarly structured RILA linked to the Russell 2000.

How could a RILA issuer get to the flexibility in offerings available to issuers of registered structured notes? For issuers willing to provide US GAAP financial statements and file Exchange Act reports, the issuer could commence an offering on Form S-1 and then timely file its Exchange Act reports. After a year of reporting, the issuer could file a Form S-3 with the SEC, which would be reviewed. Once declared effective, the RILA issuer would be able to commence offerings on its own timetable and have the flexibility of using product supplements to describe the distinctive features of each its offerings. These product supplements could describe different underliers (indices, ETFs) or various payoff structures. A RILA issuer using Form S-3 could conduct offerings in much the same way as an issuer of structured notes.

RILA issuers that are subsidiaries of well-known seasoned issuers ("WKSIs") may be able to make an initial offering on Form S-3, provided that they meet the requirements for use of that form. In order to take full advantage of Form S-3, the subsidiary should initially file a Form 10-K, which would be incorporated by reference into the Form S-3. Otherwise, the company disclosure in the Form S-3 will be just as lengthy as the disclosure in a Form S-1.

Originally published in REVERSEinquiries: Volume 5, Issue 2.
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