Date: 1/5/98 5:58 PM Mr. Jonathan G. Katz Secretary The Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-6009 Re: File number S7-22-97: Response to request for comments for Release No. 33-7438 I. Purpose The Securities and Exchange Commission (the "Commission") has requested comments on equity indexed insurance products, the manner in which such products are marketed and other issues relevant to federal securities law issues. CNA is pleased to offer its response to the Commission*s request for comments. CNA ranks as one of the top ten U.S. insurance groups and is a prominent organization in numerous insurance lines. CNA conducts its business through its operating companies, including the Valley Forge Life Insurance Company. The Valley Forge Life Insurance Company and its affiliates offer a variety of insurance products, including registered and non-registered equity indexed products. As an industry participant, we thought our input might be of some assistance. II. Background Equity indexed insurance products possess some insurance and some investment features. The demand, supply, and complexity of these products has markedly increased over the past two years . The majority of the products introduced to date have not been registered with the Commission . Several industry participants believe that the products introduced are excluded from the purview of the federal securities laws under Section 3(a)(8) of the Securities Act of 1933 (the "Act"). Valley Forge Life Insurance Company (VFL) introduced an equity indexed annuity registered under the Act . VFL determined that its equity indexed annuity warranted registration under the Act for three primary reasons: (1) the product would contain a market value adjustment on certain withdrawals ; (2) the complexity of the excess interest crediting features in this product necessitated an emphasis in its marketing material on the investment features of the product and 3) its likely purchasers. VFL determined that the foregoing facts arguably barred the product from meeting the requirements of the Rule 151 safe harbor (the *safe harbor*). VFL determined that the prudent approach was to register the product. III. Analysis Throughout our product development efforts, we were exposed to extensive advertising for equity indexed products. We discovered that, as the investment features of equity indexed products became more significant and complex in nature, it became increasingly difficult to develop advertisements which would definitively comply with the guidelines provided by the third prong of the safe harbor . More guidance in the area would benefit insurance product consumers, industry participants, and the Commission. Historically, the determinative factor in assessing marketing efforts under the safe harbor has been whether the product is marketed "primarily as an investment" . On the other hand, issuers of insurance products which possess complex investment features need to ensure adequate disclosure by appropriately describing the investment features. Thus, issuers of non-registered products have been performing a difficult balancing act that may be alleviated by additional Commission guidance. The following are our observations on marketing guidelines for equity indexed products: Non- Registered Product Marketing of Equity Indexed Annuities The Commission should clarify the extent to which the non-registered equity indexed annuity marketing plans can explain investment features. In 1986 the Commission issued Release 6645 , which stated that the Commission had determined not to publish specific guidelines for sales literature and marketing activities of insurers. We agree that any attempt to identify specific, narrowly tailored prohibitions would be impractical. On the other hand, the complexity of the investment features of equity indexed annuities warrants that the Commission address general parameters to guide issuers of non-registered equity indexed annuities. One industry observer has indicated that the following marketing examples may not provide support for reliance on Section 3(a)(8) of the Act: marketing that unduly emphasizes investment returns such as "investment performance," "investment returns," "maximizing returns," "Wall Street," or the "stock market"; marketing that characterizes the product*s indexing feature as providing full participation in the relevant index, or in the equity or stock markets; or marketing that emphasizes similarities to variable annuities, mutual funds, or other investments. We believe that establishing guidelines similar to the above stated examples would provide direction for issuers who are unclear as to whether their marketing program complies with the safe harbor requirements. Moreover, investors need protection from marketing efforts that color a non-registered equity indexed annuity as an investment. Registered Product Marketing of Equity Indexed Annuities The Commission should introduce marketing/advertising guidelines for issuers of registered equity indexed products. Registered equity indexed annuities are sold through a distribution system of registered representatives and licensed broker dealers. In addition to this distribution network, advertising that briefly describes product features and directs potential investors to a registered representative and prospectus is necessary to remain competitive with the non-registered products. Issuers opting to register equity indexed products should not be penalized for such registration by unduly limiting their ability to advertise. If issuers of registered equity indexed annuities are prohibited generally from describing their products in advertisements to increase public awareness and direct potential investors to a registered representative and prospectus, they would be discouraged from registering. Equity indexed annuities contain features of traditional insurance and investments. The decision to register needs to be made on a case by case basis. Products that rest in the center of the product spectrum may present difficult choices. In our case, we felt the prudent choice was to register the VFL equity indexed annuity as a security under the Act. By registering our equity indexed annuities and subjecting our marketing efforts to the restrictions of the Act, we under current rules appear to be prohibited from even from producing even the most "plain vanilla" advertisement describing the product prior to delivery of a prospectus. In contrast, issuers of non-registered equity indexed annuities routinely produce detailed advertisements touting both the investment and insurance features of the product. . The Commission should clarify the limitations on the advertising of registered equity-indexed annuity products. Currently, the VFL registered equity indexed annuity appears to be subject to stringent advertising restrictions under the Act; essentially "tombstone" , without the benefit of the more liberal provisions of Rule 134 that are available with respect to investment company securities. Because equity indexed annuities were introduced after the tombstone rules, the Commission should provide guidance on the types of product features that can be described in a tombstone advertisement for an equity indexed annuity. This explanation is necessary, because the specific language in the tombstone rules indicates that equity indexed annuities were not contemplated as securities at the time they were promulgated. Specifically, the Commission should allow general advertising of registered equity indexed annuities limited to a brief description of the product features and instructions to contact a representative from whom a prospectus could be obtained. The tombstone advertisements for equity indexed annuities should permit a description of the following product features: name of the equity indexed annuity; name of the issuer; description of the minimum single or flexible premium payment; description of available guarantee period(s); description of excess interest crediting methodology; description of fixed account option; description of transfer and/or withdrawal rights; description of applicable surrender/withdrawal charges; description of tax deferral status; and contact information for a registered representative and instructions to obtain a prospectus. The inclusion of the foregoing information in a "tombstone" advertisement does not pose harm to potential investors, in light of the informational nature of the proposed advertisement. In addition, the investor will receive an effective prospectus from a registered representative licensed with the NASD before making any purchase. The information merely informs the potential equity indexed annuity purchaser about the key attributes and general availability of the product. In comparison to the advertisements for the non-registered products that we encountered during our product development efforts, advertisements for registered products which included the foregoing facts pose minimal threat to potential investors. IV. Conclusion The three prong test provided by the Commission*s adoption of the safe harbor has provided the insurance industry with guidelines for determining when certain insurance products which possess investment features should be registered under the federal securities laws. Since the safe harbor*s adoption, products such as equity indexed annuities have increased in popularity and complexity. Issuers of non-registered products need broad guidelines so that in an attempt to disclose the complex investment features of their products adequately, they do not inadvertently market their products "primarily as investments". In addition, issuers of registered products need to be able to rely on more permissive tombstone rules to develop advertisements, so that potential investors can be informed of the product*s basic features and learn how to contact a registered representative to obtain a prospectus. It would be ironic indeed if, by registering equity indexed annuities, insurers were penalized through limiting the insurer*s ability to communicate product features through advertising.