[Federal Register Volume 65, Number 1 (Monday, January 3, 2000)]
[Notices]
[Pages 143-149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-34014]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24220; File No. 812-11818]
IDS Life Insurance Company, et al.
December 23, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of Application for an order under Section 6(c) of the
Investment Company Act of 1940 (the ``1940 Act'') granting exemptions
from the provisions of Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the
1940 Act and Rule 22c-1 thereunder to permit the recapture of credits
applied to
[[Page 144]]
contributions made under certain deferred variable annuity contracts.
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SUMMARY OF APPLICATION: Applicants seek an order under Section 6(c) of
the 1940 Act to the extent necessary to permit the issuance and, under
specified circumstances, the subsequent recapture of certain credits
applied to contributions made under: (i) certain deferred variable
annuity contracts that IDS Life or American Enterprise will issue
through the Accounts (``Contracts''), and (ii) contracts that the
Insurance Companies may in the future issue through the Accounts or any
Future Account that are substantially similar in all material respects
to the Contracts (``Future Contracts''). Applicants also request that
the order being sought extend to any other National Association of
Securities Dealers, Inc. (``NASD'') member broker-dealer controlling or
controlled by, or under common control with the Insurance Companies,
whether existing or created in the future, that serves as a distributor
or principal underwriter of the Contracts or any Future Contracts
offered through the Accounts or any Future Account (collectively
``Affiliated Broker-Dealers'').
APPLICANTS: IDS Life Insurance Company (``IDS Life''), American
Centurion Life Assurance Company (``American Centurion Life''), IDS
Life Insurance Company of New York (``IDS Life NY'') American
Enterprise Life Insurance Company (``American Enterprise Life'')
(collectively, the ``Insurance Companies''), American Express Financial
Advisors, Inc. (``AEFA''), IDS Life Variable Account 10 (``IDS Account
10''), American Enterprise Variable Annuity Account (``American
Enterprise Account,'' and together with IDS Account 10, the
``Account'') (collectively, ``Applicants'').
FILING DATE: The application was filed on October 15, 1999, and amended
and restated on December 7, 1999.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
Applicant with a copy of the request, in person or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 17,
2000, and should be accompanied by proof of service on the Applicants,
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o IDS Life
Insurance Company, IDS Tower 10, T27/52, Minneapolis, Minnesota 55440-
0010, Attn: Mary Ellyn Minenko.
FOR FURTHER INFORMATION CONTACT: Zandra Y. Bailes, Senior Counsel, or
Susan M. Olsen, Branch Chief; Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch, 450 Fifth St., N.W., Washington, D.C.
20549-0102 (tel. (202) 942-8090).
Applicants Representations
1. IDS Life is a stock life insurance company organized under the
laws of the State of Minnesota. IDS Life is registered with the
Commission as a broker-dealer under the Securities Exchange Act of 1934
(the ``1934 Act'') and is a member of the NASD. IDS Life is a wholly-
owned subsidiary of American Express Financial Corporation (``AEFC'').
IDS Account 10 was established on August 23, 1994, pursuant to
authority granted under a resolution of IDS Life's Board of Directors.
IDS Life is the issuer and principal underwriter of the Contracts
funded through IDS Account 10 (the ``IDS Account 10 Contracts''). IDS
Life may in the future issue Future Contracts through IDS Account 10 or
through Future Accounts, for which IDS Life also may serve as principal
underwriter.
2. American Enterprise Life is a stock life insurance company
organized under the laws of the State of Indiana. American Enterprise
Life is a wholly-owned subsidiary of IDS Life. American Enterprise
Account was established on July 15, 1987, pursuant to authority granted
under a resolution of American Enterprise Life's Board of Directors.
American Enterprise Life serves as the issuer for the Contracts funded
through American Enterprise Account (the ``American Enterprise Account
Contract''). American Enterprise Life may in the future issue Future
Contracts through American Enterprise Account or through Future
Accounts.
3. IDS Life NY is a stock like insurance company organized under
the laws of the State of New York. IDS Life NY is a wholly-owned
subsidiary of IDS Life. IDS Life NY may in the future issue Future
Contracts through Future Accounts.
4. American Centurion Life is a stock insurance company organized
under the laws of the State of New York. American Centurion Life is a
wholly-owned subsidiary of IDS Life. American Centurion Life may in the
future issue Future Contracts through Future Accounts.
5. AEFA serves as the principal underwriter for the American
Enterprise Account Contracts and as distributor of the IDS Account 10
Contracts. AEFA is registered with the Commission as a broker-dealer
under the 1934 Act and is a member of the NASD. The IDS Account 10
Contracts will be offered through registered representatives of AEFA
and its affiliates who are registered broker-dealers under the 1934 Act
and NASD members. The American Enterprise Account Contracts will be
distributed by broker-dealers who are registered under the 1934 Act and
NASD members and who have entered into distribution agreements with
AEFA and American Enterprise Life and through AEFA. AEFA, or any
successor or affiliated entity, may act as principal underwriter for
any Future Account issued by American Enterprise Life or as distributor
for any Future Contracts issued by IDS Life in the future.
6. IDS Account 10 is a segregated asset account of IDS Life, and
American Enterprise Account is a segregated asset account of American
Enterprise Life. Each Account and its component subaccounts are
registered together with the Commission as a single unit investment
trust under the 1940 Act. The respective Account will fund the variable
benefits available under the Contracts. The offering of the Contracts
is registered under the Securities Act of 1933 (the ``1933 Act''). IDS
Life and IDS Account 10 filed a Form N-4 Registration Statement under
the 1933 Act relating to the Contracts on September 20, 1999 (Rule 497
filing). American Enterprise Life and American Enterprise Account filed
a Form N-4 Registration Statement on August 19, 1999 under the 1933 Act
relating to the Contracts.
7. That portion of the respective assets of the Accounts that is
equal to the reserves and other Contract liabilities with respect to
the Accounts is not chargeable with liabilities arising out of any
other business of IDS Life of American Enterprise Life, as the case may
be. Any income, gains or losses, realized or unrealized, from assets
allocated to the Accounts are, in accordance with the respective
Accounts' Contracts, credited to or charged against the Accounts,
without
[[Page 145]]
regard to other income, gains or losses of IDS Life or American
Enterprise Life, as the case may be.
8. An IDS Account 10 Contract may be issued as a non-qualified
annuity (``NQ'') for after tax contributions only, or as a qualified
annuity under the following retirement plans: (i) Individual Retirement
Annuities (``IRAs''), (ii) Simplified Employee Pension (``SEP'') plans,
(iii) Section 401(k) plans, (iv) custodial and trusteed pension and
profit sharing plans, or (v) Tax-Sheltered Annuities (``TSAs''). An IDS
Account 10 Contract may be purchased: (i) with a minimum initial
payment of $1,000 for qualified plans or $2,000 for nonqualified plans,
or (ii) in minimum installments or $50 per month or $23.08 biweekly
under a scheduled plan. Unless payments are made by installments under
a scheduled payment plan, an owner may make additional payments,
subsequent to the initial payment (initial payments and subsequent
additional payments are collectively referred to herein as ``Purchase
Payments''). Maximum limitations on Purchase Payments are imposed for
the first year and subsequent years, depending on the age of the owner
or annuitant.
9. Owners of IDS Account 10 Contracts may allocate their Purchase
Payments among a number of subaccounts of IDS Account 10. The
subaccounts are referred to as ``Investment Funds.'' Each Investment
Fund will invest in shares of a corresponding portfolio (``Portfolio'')
of American Express Variable Portfolio Funds (``AXP Funds''), AIM
Variable Insurance Funds, Inc. (``AIM Funds''), American Century
Variable Portfolios, Inc. (``American Century VP''), Fidelity Variable
Insurance Products Funds (Service Class) (``Fidelity VIP Funds''),
Franklin Templeton Variable Insurance Products Trust (Class 2)
(``Franklin Templeton VIP Trust''), Goldman Sachs Variable Insurance
Trust (``Goldman Sachs VIT''), Lazard Retirement Series, Inc. (``Lazard
RSI''), Putnam Variable Trust (``Putnam VT''), Royce Capital Fund,
Third Avenue Variable Series Trust, Wagner Advisors Trust, and Warburg
Pincus Trust. IDS Life, at a later date, may decide to create
additional Investment Fund(s) to invest in any additional Portfolio(s)
as may now or in the future be available. IDS Life, from time to time,
also may combine or eliminate Investment Funds.
10. The IDS Account 10 Contract provides for various surrender
options, annuity benefits and annuity payout options, as well as
transfer privileges among Investment Funds, dollar cost averaging, and
other features. The IDS Account 10 Contract contains the following
charges: (i) a contingent deferred sales charge (``CDSC'') as a
percentage of Purchase Payment surrendered, depending on the surrender
charge schedule the owner selected at the time of application. With
respect to a 7-year surrender charge schedule, the CDSC is 7% in years
1-3, 6% in year 4, 5% in year 5, 4% in year 6, 2% in year 7, and 0%
thereafter. With respect to a 10-year surrender charge schedule, the
CDSC is 8% in years 1-3, 7% in years 4-5, 6% in year 6, 5% in year 7,
4% in year 8, 3% in year 9, 2% in year 10, and 0% thereafter; (ii) a
$30 annual administrative expense charge; (iii) a mortality and expense
risk fee of 0.75% for qualified annuities and 0.95% for NQs; and (iv)
any applicable state or local premium taxes up to 3.5%, depending on
the owner's state of residence or the state in which the contract was
sold. In addition, assets invested in Investment Funds are charged with
the annual operating expenses of those Funds.
11. Each time IDS receives a Purchase Payment from an owner, it
will allocate to the owner's IDS Account 10 a credit (``Credit'') equal
to: (i) 1% of each Purchase Payment received if the owner elected the
ten-year surrender charge schedule for the IDS Account 10 Contract, or
if the owner elected the seven-year surrender charge schedule and the
initial Purchase Payment is at least $100,000; and (ii) 2% of each
Purchase Payment received if the owner elected the ten-year surrender
charge schedule and the initial Purchase Payment is at least $100,000.
IDS Life will allocate Credits according to the allocation instructions
in effect for the Purchase Payments.
12. Applicants represent that the percentage amount of the Credit
under the IDS Account 10 and the American Enterprise Account Contracts
described in the application could change for enhanced versions of the
Contracts issued in the future, but will not exceed 8%. In addition,
the percentage amount of the Credit under Future Contracts may differ
from the Credit under the Contracts, but will not exceed 8%.
13. IDS Life will fund Credits from its general account assets. IDS
Life will recapture certain Credits from an owner under the following
circumstances: (i) any Credit applied if the owner returns the IDS
Account 10 Contract for a refund during the 10-day free look period;
(ii) Credits applied within twelve months preceding the date of death
that results in a lump sum death benefit under the IDS Account 10
Contract (as described herein); or (iii) Credits applied within twelve
months preceding a request for a surrender due to an event where no
CDSC is incurred (``Contingent Event''). Applicants represent that the
amount the owner receives in each of these circumstances will always at
least equal and normally will exceed the surrender value (Contract
value minus any applicable charges) of the IDS Account 10 Contract.
14. The free look period is the 10-day period during which an owner
may return a Contract after it has been delivered and receive a full
refund of the Contract value, less any Credits up to the maximum
surrender charge under the Contract. No other charges will apply to the
refund, but the owner bears the investment risk from the time of
purchase until he or she returns the contract. The refund amount may be
more or less than the Purchase Payment the owner made, unless the law
requires that the full amount of the Purchase Payment be refunded.
15. A Contingent Event is an owner's or annuitant's confinement to
a nursing home, disability, terminal illness or unemployment. Under the
IDS Account 10 Contract, the only Contingent Event currently is for
nursing home confinement, but the others are expected to be added later
by endorsements.
16. The IDS Account 10 Contract death benefit provision states
that, upon the earlier of the owner's or annuitant's death before
annuity payouts begin and while the Contract is in force, IDS Life will
pay the following death benefits less any Credits applied to the
Contract in the preceding twelve months (to the extent a death benefit
includes contract value credits): (i) if both the owner and annuitant
are age 80 or younger on the date of death, the beneficiary receives
the greatest of (a) the Contract value; (b) Purchase Payments, minus
any adjusted partial surrenders; or (c) the Contract value of the most
recent sixth contract anniversary, plus any purchase payments paid, and
minus any adjusted partial surrenders since that anniversary; or (ii)
if either the owner or annuitant are age 81 or older on the date of
death, the beneficiary receives the greater of (a) Contract value; or
(b) Purchase Payments, minus any adjusted partial surrenders.
17. An American Enterprise Account Contract may be issued as an NQ
or as a qualified annuity under the following retirement plans: (i)
IRAs, including Roth IRAs, or (ii) SEP plans. There are two different
Contracts supported by American Enterprise Account: Wells Fargo
Advantage Credit Variable Annuity (``Advantage Contract'') and
Signature Plus Variable Annuity
[[Page 146]]
(``Signature Contract''). An Advantage Contract sold through AEFA
currently may be issued only as an NQ. The American Enterprise Account
Contract differs from the IDS Account 10 contract in that the American
Enterprise Account Contract offers: (i) a Guaranteed Period Account
feature that involves a market value adjustment (``MVA''); (ii)
optional death benefit riders; and (iii) guaranteed minimum income
riders.
18. Purchase Payments allocated to Guaranteed Period Accounts are
held in a ``nonunitized'' separate account established under Indiana
law. The assets in the Guaranteed Period Account will not be charged
with the liabilities of any other separate account or of American
Enterprise Life's general business. Each Guarantee Period will provide
a guarantee of the Purchase Payment allocated thereto and an interest
rate that is declared at the time of the allocation. An upward or
downward adjustment, or MVA, will be applied to a Guaranteed Period
Account upon a withdrawal or transfer prior to the end of the Guarantee
Period.
19. An Advantage Contract may be purchased: (i) with a minimum
initial payment of $2,000 (the minimum initial payment for an Advantage
Contract sold through AEFA is $100,000); or (ii) $50 if enrolled in the
Systematic Investment Program (``SIP''). A Signature Contract may be
purchased: (i) with a minimum initial payment of $25,000; or (ii) $50
if enrolled in the SIP. A Guarantee Period Account requires a minimum
initial payment of $1,000. Subsequent additional Purchase Payments
require a minimum of $50 for SIP payments and $100 for non-SIP
payments. The maximum total Purchase Payments under an American
Enterprise Account Contract is $1,000,000 (without prior approval). The
owner of an American Enterprise Account Contract also may select a
withdrawal charge period of six or eight years at the time of
application. Only the eight-year withdrawal charge period is available
under an Advantage Contract sold through AEFA.
20. Owners of the Advantage Contract may allocate the Purchase
Payments among the Investment Funds under the Contract. Each Investment
Fund will invest in shares of portfolios of AXP Funds, AIM Funds,
Franklin Templeton VIP Trust, Goldman Sachs VIT, Putnam VT, Dreyfus
Socially Responsible Growth Fund, Inc., MFS Variable Insurance Trust
(``MFS VIT''), and Wells Fargo Variable Trust Funds (``Wells Fargo
VT'').
21. Owners of the Signature Contract may allocate their Purchase
Payments among the Investment Funds under the Contract. Each Investment
Fund will invest in shares of Portfolios of AXP Funds, AJM Funds,
Alliance Variable Products Series Funds, Baron Capital Funds, Fidelity
VIP Funds, Franklin Templeton VIP Trust, Goldman Sachs VIT, J.P. Morgan
Series Trust 11, Lazard RSI, MFS VIT, Royce Capital Fund, Wanger
Advisors Trust, Warburg Pincus Trust, and Wells Fargo VT.
22. An American Enterprise Account Contract provides for various
withdrawal options, annuity benefits and payout annuity options, as
well as transfer privileges among Investment Funds, dollar cost
averaging, asset rebalancing, and other features. The Advantage
Contracts contain the following charges: (i) $30 annual administrative
charge (waived at $50,000); (ii) a 0.15% variable account
administrative charge; (iii) a mortality and expense risk fee of: 1.35%
for 6-year withdrawal schedule, 1.10% for 8-year withdrawal schedule,
and an additional charge of 0.20% if the Enhanced Death Benefit Rider
is selected; (iv) an annual fee based on a modified Guaranteed Income
Benefit Base (currently at 0.30%) if the Guaranteed Minimum Income
Benefit Rider is selected; (v) a CDSC as a percentage of Purchase
Payment withdrawn, depending on the withdrawal charge schedule selected
(the CDSC is as follows for: (a) a 6-year surrender charge schedule: 8%
in years 1-3, 6% in year 4, 4% in year 5, 2% in year 6, and 0%
thereafter; and (b) an 8-year surrender charge schedule: 8% in years 1-
5, 6% in year 6, 4% in year 7, 2% in year 8 and 0% thereafter); (vi)
any applicable state or local premium taxes; and (vii) the annual
operating expenses of the Investment Funds.
23. The Signature Contracts contain the following charges: (i) $40
annual administrative charge (waived at $100,000); (ii) a 0.15%
variable account administrative charge; (iii) a mortality and expense
risk fee of: 1.45% for 9-year withdrawal schedule (including either the
Maximum Anniversary Death Benefit Rider or the 5% Accumulation Death
Benefit Rider), 1.35% for 9-year withdrawal schedule without either of
the death benefit riders; (iv) an annual fee based on a modified
Guaranteed Income Benefit Base (currently at 0.30%) if the Guaranteed
Minimum Income Benefit Rider (5% Accumulation Benefit Base) is
selected; (v) a CDSC as a percentage of Purchase Payment withdrawn of
8% in years 1-4, 7% in year 5, 6% in years 6 and 7, 4% in year 8, 2% in
year 9, and 0% thereafter, (vi) any Applicable state or local premium
taxes; and (vii) the annual operating expenses of the Investment Funds.
24. Each time American Enterprise Life receives a Purchase Payment
from an owner, it will allocate the owner's American Enterprise Account
a Credit as a percentage of the net current payment (current payment
less the amount of partial withdrawals that exceed all prior Purchase
Payments) as follows: (i) with respect to an Advantage Contract: 1% for
less than $10,000, 2% for $10,000 to less than 1 million, 3% for $1
million to less than 5 million, and 4% for $5 million and over; and
(ii) with respect to a Signature Contract: 3% for $25,000 to less than
$100,000, 4% for $100,000 to less than $1 million, and 5% for $1
million and over. American Enterprise Life will allocate Credits
according to the allocation instructions in effect for the Purchase
Payments.
25. American Enterprise Life will fund Credits from its general
account assets. American Enterprise Life will recapture certain Credits
from an owner under the following circumstances: (i) any Credit applied
if the owner returns the American Enterprise Account Contract for a
refund during a 10-day free look period; (ii) Credits applied within
twelve months preceding the date of death that results in a death
benefit (including death benefits under the Enhanced Death Benefit
Rider, Maximum Anniversary Value Death Benefit Rider, and 5%
Accumulation Death Benefit Rider) under the American Enterprise Account
Contract; or (iii) Credits applied within twelve months preceding a
request for a withdrawal due to any Contingent Event. The amount the
owner receives under these circumstances will always equal or exceed
the surrender value of the Contract.
26. The Advantage Contract death benefit provision states that, if
the owner or annuitant dies before annuity payouts begin while the
Contract is in force, American Enterprise Life will pay the beneficiary
the greatest of the following less any Credits added to the Contract in
the last 12 months: (i) the Contract value; (ii) the total Purchase
Payments paid, plus Credits, and minus any adjusted partial
withdrawals; or (iii) the maximum anniversary value immediately
preceding the date of the death, plus the dollar amount of any Purchase
Payments since that anniversary, plus Credits, and minus any adjusted
partial withdrawals since that anniversary.
27. The Advantage Contract offers an Enhanced Death Benefit Rider,
which requires the owner or the annuitant to be age 79 or younger on
the Contract date. The Enhanced Death Benefit Rider provides that if
the owner or the annuitant dies before annuity payouts
[[Page 147]]
begin while the Contract is in force, American Enterprise Life will pay
the beneficiary the greatest of the following specified amounts, less
any Credits added in the last twelve months: (i) the contract value;
(ii) the total Purchase Payments paid, plus Credits, and minus any
adjusted partial withdrawals; (iii) the ``maximum anniversary value''
immediately preceding the date of death, plus any Purchase Payments
since that anniversary, plus Credits, and minus any adjusted partial
withdrawals since that anniversary; or (iv) the Variable Account 5%
Floor (the sum of the value in the fixed accounts plus the accumulated
initial purchase payments allocated to the subaccounts plus 5%).
28. The Signature Contract death benefit provision states that, if
the owner or annuitant dies before annuity payouts begin while the
contract is in force, American Enterprise Life will pay the beneficiary
the greatest of the following less any Credits added to the contract in
the last 12 months: (i) the Contract value; or (ii) the total Purchase
Payments paid, plus Credits, and minus any adjusted partial
withdrawals.
29. The Signature Contract has two other death benefit options
offered as riders, which require the owner or the annuitant to be age
79 or younger on the Contract date. The Maximum Anniversary Value Death
Benefit Rider provides that if the owner or the annuitant dies before
annuity payouts begin while the Contract is in force, American
Enterprise Life will pay the beneficiary the greatest of the following
specified amounts, less any Credits added in the last twelve months:
(i) the Contract value; (ii) the total Purchase Payments paid, plus
Credits, and minus any adjusted partial withdrawals; or (iii) the
maximum anniversary value immediately preceding the date of death, plus
any Purchase Payments since that anniversary, plus Credits, and minus
any adjusted partial withdrawals since that anniversary.
30. The Signature Contract also offers the 5% Accumulation Death
Benefit Rider option, which provides that if the owner or annuitant
dies before annuity payouts begin while the Contract is in force,
American Enterprise Life will pay the beneficiary the greatest of the
following specified amounts, less any Credits added in the last twelve
months: (i) the Contract value; (ii) the total Purchase Payments paid,
plus Credits, and minus any adjusted partial withdrawals; or (iii) the
Variable Account 5% Floor.
31. Applicants seek exemption pursuant to Section 6(c) from
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder to the extent necessary to permit the Insurance Companies to
issue Contracts and Future Contracts that provide for Credits upon the
receipt of Purchase Payments, and to recapture certain Credits in the
following instances: (i) any Credit applied when an owner returns a
Contract to the Insurance Companies for a refund during the free look
period, and (ii) Credits applied within twelve months preceding the
date of death that results in a death benefit as described herein
(including death benefits under the Enhanced Death Benefit Rider and
Maximum Anniversary Value Death Benefit Rider under an American
Enterprise Account contract); and (iii) Credits applied within twelve
months preceding a request for a surrender or withdrawal charge waiver
due to any Contingent Event.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission to exempt
any person, security or transaction, or any class or classes of
persons, securities or transactions from the provisions of the 1940 Act
and the rules promulgated thereunder if and to the extent that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act. Applicants
request that the Commission, pursuant to Section 6(c) of the 1940 Act,
grant the exemptions summarized above with respect to the Contracts and
any Future Contracts funded by the Accounts or Future Accounts, that
are issued by the Insurance Companies and underwritten or distributed
by IDS Life, AEFA, or Affiliated Broker-Dealers. Applicants undertake
that Future Contracts funded by the Separate Accounts or any Future
Account will be similar in all material respects to the Contracts.
Applicants believe that the requested exemptions are appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
2. Applicants represent that it is not administratively feasible to
track the Credit amount in any of the Accounts after the Credit is
applied. Accordingly, the asset-based charges applicable to the
Accounts will be assessed against the entire amounts held in the
respective Accounts, including the Credit amount, during the free look
period and the three year period prior to annuitization. As a result,
during such periods, the aggregate asset-based charges assessed against
an owner's annuity account value will be higher than those that would
be charged if the owner's annuity account value did not include the
Credit.
3. Subsection (i) of Section 27 of the 1940 Act provides that
Section 27 does not apply to any registered separate account funding
variable insurance contracts, or to the sponsoring insurance company
and principal underwriter of such account, except as provided in
paragraph (2) of the subsection. Paragraph (2) provides that it shall
be unlawful for such a separate account or sponsoring insurance company
to sell a contract funded by the registered separate account unless,
among other things, such contract is a redeemable security. Section
2(a)(32) defines ``redeemable security'' as any security, other than
short-term paper, under the terms of which the holder, upon
presentation to the issuer, is entitled to receive approximately his
proportionate share of the issuer's current net assets, or the cash
equivalent thereof.
4. Applicants submit that the recapture of the Credit amount in the
circumstances set forth above would not deprive an owner of his or her
proportionate share of the issuer's current net assets. Applicants
state that an owner's interest in the Credit amount allocated to his or
her annuity account value upon receipt of an initial Purchase Payment
is not vested until the applicable free look period has expired without
return of the Contract. Similarly, Applicants state that an owner's
interest in the Credit amounts allocated to his or her annuity account
within twelve months preceding a Contingent Event also is not vested.
Until the right to recapture has expired and any Credit amount is
vested, Applicants submit that the Insurance Companies retain the right
and interest in the Credit amount, although not in the earnings
attributable to that amount. Thus, Applicants argue that when the
Insurance Companies recapture any Credit, they are merely retrieving
their own assets, and the owner has not been deprived of a
proportionate share of the applicable Account's assets because his or
her interest in the Credit amount has not vested.
5. In addition, Applicants state that permitting an owner to retain
a Credit amount under a Contract upon the exercise of the free look
privilege would not only be unfair, but would also encourage
individuals to purchase a Contract with no intention of keeping it and
returning it for a quick profit.
6. Furthermore, Applicants state that the recapture of Credit
amounts within twelve months preceding a Contingent Event is designed
to provide the Insurance Companies with a measure of
[[Page 148]]
protection against anti-selection. Applicants state that the risk here
is that, rather than spreading Purchase Payments over a number of
years, an owner might make very large Purchase Payments shortly before
the occurrence of a Contingent Event, thereby leaving the Insurance
Companies little time to recover the cost of the Credits. As noted
earlier, the amounts recaptured equal the Credits provided by the
Insurance Companies from their general account assets, and any gain
would remain a part of the owner's Contract value. In addition, the
amount the owner will receive in any of the circumstances where Credits
are recaptured will always equal or exceed the surrender value of the
Contract.
7. Applicants represent that the Credit will be attractive to and
in the interest of investors because it will permit owners to put 101%
to 105% of their Purchase Payments to work for them in the selected
Investment Funds. In addition, the owner will retain any earnings
attributable to the Credit, as well as the principal Credit amount once
vested after twelve months if the Contingent Events set forth in the
application are satisfied.
8. Further, Applicants submit that the recapture of any Credit only
applies in relation to the risk of anti-selection against the Insurance
Companies. In the context of the Contingent Events described in the
application, anti-selection can generally be described as a risk that
Contract owners obtain an undue advantage based on elements of fairness
to the Insurance Companies and the actuarial and other factors they
take into account in designing the Contracts. The Insurance Companies
provide the Credits from their general account on a guaranteed basis.
Thus, the Insurance Companies undertake a financial obligation that
contemplates the retention of the Contracts by their owners over an
extended period, consistent with the long-term nature of retirement
planning. The Insurance Companies generally expect to recover their
costs, including Credits, over an anticipated duration while a Contract
is in force. The right to recapture Credits applied to Purchase
Payments made within twelve months preceding the applicable contingency
protects the Insurance Companies against the risk that a Contract owner
will make additional Purchase Payments to or purchase a contract with
the knowledge that the contingency that triggers payment of a benefit
is likely or about to occur. With respect to refunds paid upon the
return of Contracts within the free look period, the amount payable by
the Insurance Companies must be reduced by the Credit amount.
Otherwise, purchasers could apply for Contracts for the sole purpose of
exercising the free look provision and making a quick profit.
9. Applicants submit that the provisions for recapture of any
Credit under the Contracts does not, and any such Future Contract
provisions will not, violate Section 2(a)(32) and 27(i)(2)(A) of the
1940 Act. However, to avoid any uncertainty as to full compliance with
the 1940 Act, Applicants request an exemption from those Sections, to
the extent deemed necessary, to permit the recapture of any Credit
under the circumstances summarized herein with respect to Contracts and
Future Contracts, without the loss of the relief from section 27
provided by Section 27(i).
10. Section 22(c) of the 1940 Act authorizes the Commission to make
rules and regulations applicable to registered investment companies and
to principal underwriters of; and dealers in, the redeemable securities
of any registered investment company, whether or not members of any
securities association, to the same extent, covering the same subject
matter, and for the accomplishment of the same ends as are prescribed
in Section 22(a) in respect of the rules which may be made by a
registered securities association governing its members. Rule 22c-1
thereunder prohibits a registered investment company issuing any
redeemable security, a person designated in such issuer's prospectus as
authorized to consummate transactions in any such security, and a
principal underwriter of; or dealer in, such security, from selling,
redeeming, or repurchasing any such security except at a price based on
the current net asset value of such security which is next computed
after receipt of a tender of such security for redemption or of an
order to purchase or sell such security.
11. Arguably, the Insurance Companies' recapture of the Credit
might be viewed as resulting in the redemption of redeemable securities
for a price other than one based on the current net asset value of the
Accounts. Applicants contend, however, that recapture of the Credit
does not violate Section 22(c) and Rule 22c-1. Applicants argue that
the recapture of the Credit does not involve either of the evils that
Rule 22c-1 was intended to eliminate or reduce, namely: (i) The
dilution of the value of outstanding redeemable securities of
registered investment companies through their sale at a price below net
asset value or repurchase at a price above it, and (ii) other unfair
results including speculative trading practices. See Adoption of Rule
22c-1 under the 1940 Act, Investment Company Release No. 5519 (Oct. 16,
1968). To effect a recapture of a Credit, the Insurance Companies will
redeem interests in an owner's annuity account at a price determined on
the basis of current net asset value of the Account. The amount
recaptured will equal the amount of the Credit that the Insurance
Companies paid out of their general account assets. Although the owner
will be entitled to retain any investment gain attributable to the
Credit, the amount of such gain will be determined on the basis of the
current net asset value of the Account. Thus, no dilution will occur
upon the recapture of the Credit. Applicants also submit that the
second harm that Rule 22c-1 was designed to address, namely,
speculative trading practices calculated to take advantage of backward
pricing, will not occur as a result of the recapture of the Credit.
However, to avoid any uncertainty as to All compliance with the 1940
Act, Applicants request an exemption from the provisions of Section
22(c) of Rule 22c-1 to the extent deemed necessary to permit them to
recapture the Credit under the Contracts and Future Contacts.
Conclusion
Applicants submit that their request for an order is appropriate in
the public interest. Applicants state that such an order would promote
competitiveness in the variable annuity market by eliminating the need
to file redundant exemptive applications, thereby reducing
administrative expenses and maximizing the efficient use of Applicants'
resources. Applicants argue that investors would not receive any
benefit or additional protection by requiring Applicants to repeatedly
seek exemptive relief that would present no issue under the 1940 act
that has not already been addressed in their application described
herein. Applicants submit that having them file additional applications
would impair their ability effectively to take advantage of business
opportunities as they arise. Further, Applicants state that if they
were required repeatedly to seek exemptive relief with respect to the
same issues addressed in the application described herein, investors
would not receive any benefit or additional protection thereby.
Applicants submit, based on the grounds summarized above, that
their exemptive request meets the standards set out in Section 6(c) of
the 1940 Act, namely, that the exemptions requested
[[Page 149]]
are necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act, and that, therefore, the
Commission should grant the requested order.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-34014 Filed 12-30-99 8:45 am]
BILLING CODE 8010-01-M