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Regulation S-X under the Securities Exchange Act of 1934
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RESPONSE OF CHIEF ACCOUNTANT'S OFFICE |
November 16, 2016 |
Stephen E. Roth
Email: steve.roth@sutherland.com
Re.: Great-West Life & Annuity Insurance Company
By letter dated November 16, 2016, you have requested authority under Regulation S-X §3-13 for the Great-West Life & Annuity Insurance Company (the “Company”) to file audited financial statements prepared in accordance with statutory accounting principles (“SAP financial statements”), in place of financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP financial statements”), in registration statements on Form S-1 for certain insurance contracts (the “Contracts”) that provide guaranteed lifetime benefits, in satisfaction of the requirements of Items 11(e), 11(f) and 11(g) and Item 16(b) of Form S-1, as described in your letter.
Background
You state the following:
The Company is an insurance company domiciled in the State of Colorado and prepares financial statements in accordance with specific guidance from the National Association of Insurance Commissioners (“NAIC”) using statutory accounting principles which are audited by an independent public accountant. The Company is also required to prepare and obtain an audit of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”), but solely for the purpose of including them in reports required by the Securities Exchange Act of 1934 (the “1934 Act”) that are incorporated by reference into registration statements on Form S-1 for the Contracts.[1]
The Contracts promise that, for a periodic fee, the Contract owner and/or his or her spouse (the “Covered Person”) can choose to receive lifetime annual income payments beginning at a designated date based on the Contract owner’s direct investment in certain proprietary mutual funds (the “Covered Funds”) managed by the Company’s advisory affiliate, regardless of how long the Covered Person lives or the actual performance or value of the Covered Fund or Covered Funds in which the Contract owner invests, provided all the conditions of the Contract are satisfied. Annual income payments are deducted from the Contract owner’s Covered Fund(s) value. If the value of all Covered Funds is reduced to zero due to Covered Fund performance and deductions for the annual income payments (including the fee), the Company will make the annual income payments for the life of the Covered Person.
The Contracts are securities, separate and distinct from the Covered Funds shares, and are registered on Form S-1 separately from the Covered Funds, which are registered under the 1933 Act and the Investment Company Act of 1940 on Form N-1A. The Company currently offers three versions of the Contracts that are required to be registered on Form S-1, each of which targets a different segment of the retirement market.
The guaranteed lifetime benefits provided by the Contracts are virtually the same as those offered as elective riders in variable annuity contracts issued by the Company that are registered under the 1933 Act on Form N-4. The principal difference between the Contracts and the guaranteed lifetime income features available in the variable annuities is how the Covered Funds are owned. When the Covered Funds are purchased and held directly by the investor in a retirement account, individual retirement account or other brokerage or advisory account, the lifetime income guarantee is provided by the Contract. In contrast, when the Covered Funds are offered as investment options within a variable annuity product, they are held in the insurance company separate account and the lifetime income guarantee is provided through a variable annuity contract. Other than how the Covered Funds are owned, there is nothing unique about the Contracts or a variable annuity that would require the guaranteed lifetime income feature to function differently.[2]
Form N-4 and Form N-6, on which the Company registers its variable insurance products under the 1933 Act, as well as Form N-3, would permit the Company to file SAP financial statements audited by an independent public accountant if the Company would not have to prepare GAAP except only for use in registration statements on those forms.[3] But for the Contracts, the Company would not otherwise be required to prepare GAAP financial statements for any registered security and, therefore, would be eligible for this exception to file SAP financial statements in its Form N-4 and Form N-6 filings as well.
Discussion
You note that Rule 3-13 of Regulation S-X provides that the SEC “may, upon the informal written request of the registrant, and where consistent with the protection of investors, permit the omission of one or more of the financial statements required by Regulation S-X or the filing in substitution therefore of appropriate statements of comparable character.” You assert that filing SAP financial statements in registration statements on Form S-1 for the Contracts will satisfy this standard with respect to the needs of the holders of the Contracts.
In this regard, you state the lifetime income guarantees provided by the Contracts depend on the Company’s ability to fulfill its contractual obligations, which in turn depends on its solvency. You note that, in proposing Form N-4, the Commission recognized that the guarantees associated with annuity payments and other benefits provided by such contracts, which are backed by the insurance company general account, depend upon the solvency of the insurance company and that contract owners, participants and annuitants who invest in the contracts may not want or need disclosure about the financial performance of the insurance company, but instead may be interested only in the company’s solvency.[4]
You assert that SAP financial statements are designed to facilitate regulatory oversight of insurance company solvency by providing detailed information about an insurance company’s balance sheet as well as information about its regulatory capital and surplus, which serve as the company’s financial cushion for paying contract owner claims. In addition, you assert that SAP financial statements enable regulators to determine the Company’s ability to meet policyholder obligations based on the availability of readily marketable assets when both current and future obligations are due. You argue that, consequently, SAP financial statements should provide investors in the Contracts sufficient information to assess the Company’s solvency and its ability to fulfill its contractual guarantees.
Separately, you state that the Company offers benefits under the Contracts that are virtually identical to the benefits under certain riders that the Company offers with its variable annuity contracts registered on Form N-4. You assert that, because investors in Contracts assume the same risks as variable contract owners who elect to receive the guaranteed lifetime income benefit, the same financial disclosure is appropriate. You argue that requiring the Company to use GAAP financial statements when the guaranteed lifetime income benefit is offered as a standalone product imposes inconsistent disclosure requirements based solely on whether the Contracts qualify for registration on Form N-4 or must register under the 1933 Act on Form S-1 as a separate security from the Covered Funds to which they relate.
Based on the facts and representations set forth in your letter as summarized above, and without necessarily agreeing with all of your analysis, your request for authority under Regulation S-X §3-13 for the Company to file SAP financial statements, audited by an independent public accountant, in lieu of GAAP financial statements in registration statements filed for the Contracts as described above is granted.[5] [6]
If you have any questions regarding this letter, please call me at (202) 551-6918.
Sincerely,
Matthew J. Giordano
Chief Accountant
Division of Investment Management
For the Commission, by the Division of Investment Management pursuant to delegated authority.
[1] The Company began filing reports under Section 15(d) of the 1934 Act in 1997 after it registered a fixed investment option with a market value adjustment (“MVA”) feature for its variable annuity contracts. The Company ceased issuing interests in the MVA investment option in 2008 and has stopped updating the registration statement for the MVA investment option. You state that your request applies only to the Contracts.
[2] Other differences between the Contracts and the Company’s variable annuity contracts that include a guaranteed lifetime income benefit merely reflect differences in product features at time of development. These differences include that, unlike the Contracts, the most recent version of the variable annuity contract permits contributions after guaranteed income payments begin, and provides for the annual reset (i.e., possible increase) of guaranteed income payments to occur automatically rather than at the contract owner’s request.
[3] See Form N-4 Item 23(b), Instruction 1 (relating to variable annuity separate accounts organized as unit investment trusts); Form N-6 Item 24(b), Instruction 1 (relating to variable life separate accounts organized as unit investment trusts); and Form N-3 Item 28(b), Instruction 1 (relating to variable annuity separate accounts organized as management investment companies).
[4] See Registration Forms for Insurance Company Separate Accounts That Offer Variable Annuity Contracts, Investment Co. Act Release No. 13689 (December 22, 1983). This form was adopted in 1985. See Registration Forms for Insurance Company Separate Accounts that Offer Variable Annuity Contracts, Investment Company Act Release No. 14575 (June 14, 1985).
[5] Our analysis underlying this assurance has been developed in consultation with the staff of the Commission’s Office of the Chief Accountant.
[6] The staff notes that it would be receptive to considering applications under Regulation S-X §3-13 from other registrants seeking to file SAP financial statements in lieu of GAAP financial statements in registration statements filed for Contracts under circumstances similar to those described above. However, the staff might take a different position with regard to financial statements to be included in a registration statement on Form S-1 or Form S-3 were the security not virtually identical to insurance benefits currently offered as part of a variable annuity registered on Form N-4.
Incoming Letter
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2016/fidelity-management-research-company-062016.htm
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