[Federal Register Volume 61, Number 3 (Thursday, January 4, 1996)]
[Notices]
[Pages 362-365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-132]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21626; File No. 812-9580-01]
Great-West Life & Annuity Insurance Company et al.
December 27, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Great-West Life & Annuity Insurance Company (``GWL&A''),
Maxim Series Account (the ``Separate Account''), and The Great-West
Life Assurance Company (``Great-West'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the
1940 Act.
SUMMARY OF THE APPLICATION: Applicants seek an order permitting the
deduction of mortality and expense risk charges from: (i) the assets of
the Separate Account in connection with the offer and sale of certain
flexible premium variable annuity contracts (the ``Contracts'') issued
with a guaranteed death benefit, and of variable annuity contracts
established in the future (the ``Future Contracts'') which are
substantially similar in all material respects to the Contracts
(``Future Contracts''); and (ii) the assets of separate accounts
(``Future Accounts'') established in the future by GWL&A--which are
substantially similar to the Separate Account--in connection with the
offer and sale of Contracts and Future Contracts.
FILING DATE: The application was filed on April 25, 1995. An amended
and restated application was filed on October 16, 1995.
HEARING OF NOTIFICATION OF THE HEARING: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing on this application by writing
to the Secretary of the Commission and serving Applicants with a copy
of the request, personally or by mail. Hearing requests must be
received by the Commission by 5:30 p.m. on January 22, 1996 and should
be accompanied by proof of service on Applicants in the form of an
affidavit or, for lawyers, by certificate of service. Hearing requests
should state the nature of the interest, the reason for the request,
and the issues contested. Persons may request notification of the date
of the hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W. Washington, D.C.
20549. Applicants: Beverly A. Byrne, Esq., The Great-West Life
Assurance Company, 8515 East Orchard Road, Englewood, CO 80111.
FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Special Counsel,
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
Public Reference Branch of the Commission.
Applicants' Representations
1. GWL&A, a stock life insurance company, originally was organized
under Kansas law as the National Interment Association. In 1963, the
company's name was changed to Ranger Life Insurance Company, and later
was changed to Insuramerica Corporation; in February 1982, the company
assumed its current name. In September 1990, GWL&A redomesticated and
now is organized under the laws of Colorado. GWL&A is wholly-owned by
Great West, which is a subsidiary of Great-West Lifeco Inc., an
insurance holding company which, in turn, is a subsidiary of Power
Financial Corporation, a financial services company.
2. The Separate Account was established by GWL&A under the laws of
Kansas on June 24, 1981, and now exists under the laws of Colorado as a
result of the redomestication of GWL&A in 1990. The Separate Account is
a unit investment trust registered under the 1940 Act. The Separate
Account acts as a funding vehicle for flexible premium variable annuity
contracts--including the Contracts--which have a guaranteed death
benefit, as well as for other flexible premium annuity contracts
without a guaranteed death benefit (``Standard Death Benefit
Contracts'').
3. The Separate Account currently has fourteen investment
divisions, twelve of which invest solely in corresponding investment
portfolios of Maxim Series Fund, Inc. (``Maxim''), and two of which
invest solely in corresponding investment portfolios of TCI Portfolios,
Inc. (``TCI''). (Maxim and TCI shall be referred to herein collectively
as the ``Funds.'') Each investment division is subdivided into six
subaccounts, two of which are used for allocation under the Standard
Death Benefit Contracts and the Contracts in connection with retirement
plans (``qualified plans'') that qualify for favorable federal income
tax treatment under Sections 401 and 408 of the Internal Revenue Code
as well as retirement plans not receiving such favorable tax treatment
(``non-qualified plans''). The remaining four subaccounts are used for
allocations under other contracts previously offered by GWL&A--through
the Separate Account--in connection with qualified and non-qualified
plans. In the future, GWL&A may establish additional divisions within
the Separate Account to invest in other portfolios of the Funds or in
other investments, and may issue other contracts--including Future
Contracts--which may be funded by the Separate Account or by Future
Separate Accounts.
4. Each of the Funds is a registered open-end, diversified
investment company under the 1940 Act; each consists of one or more
investment series or portfolios which pursue different investment
objectives and policies and have distinct investment advisers. GWL&A
purchases and redeems portfolio shares for the corresponding investment
divisions of the Separate account at net asset value. Shares of the
Funds also are offered to other affiliated or unaffiliated separate
accounts of insurance companies offering variable annuity contracts or
variable life insurance policies.
5. The principal underwriter of the Contracts, Great-West, is
registered with the Commission under the Securities and Exchange Act of
1934 as a broker-dealer, and is a member of the National Association of
Securities Dealers, Inc.
6. The minimum initial purchase payment for a Contract used in
connection with a non-qualified plan is $5,000; the minimum initial
purchase payment for a Contract used in connection with a qualified
plan is $2,000. Additional purchase payments
[[Page 363]]
for both non-qualified plan and qualified plan Contracts must be at
least $500, except for payments made through an automatic contribution
plan, which are subject to a $50 minimum. The Contracts also permit
periodic payments and partial surrenders.
7. Prior to issuance of a Contract, the Contract owner selects a
``Retirement Date'' on which annuity payments are to begin. All or part
of the Contract value may be placed under one or more of the annuity
payout options available under the Contract, or the Contract owner may
elect to receive the Contract value in a lump sum of the Retirement
Date.
8. The Contracts provide for the payment of a death benefit. If the
Annuitant dies before the Retirement Date, a death benefit will be paid
to the designated beneficiary in an amount which is the greater of
either: (a) the Contract value as of the date of death, less premium
taxes, if any; or (b) the guaranteed death benefit, less premium taxes,
if any. The guaranteed death benefit equals the initial purchase
payment on the date the Contract is issued, and thereafter is adjusted
upon each purchase payment, partial surrender, or periodic payment. The
guaranteed death benefit is recalculated at the end of each calendar
year by adding interest at an annual effective rate of 5%. At any date
(other than the end of a calendar year) the guaranteed death benefit
equals the lesser of: (a) The guaranteed death benefit as of the end of
the last calendar year, plus any subsequent purchase payments, and less
any partial surrenders and periodic payments; or (b) the result of the
following calculation--Contract value after the last partial surrender
or periodic payment made during the calendar year, multiplied by the
guaranteed death benefit prior to such partial surrender or periodic
payment, divided by the Contract value prior to such partial surrender
or periodic payment.
9. Various fees and expenses are deducted under the Contracts.
Prior to the Retirement Date, an annual maintenance charge of $27 will
be deducted from the Contract value to compensate GWL&A for
administrative services. The charge will not exceed the cost of
services to be provided over the life of the Contract, in accordance
with the provisions of Rule 26a-1 under the 1940 Act. GWL&A does not
anticipate any profit from this charge.
10. Any premium or other taxes levied by any government entity with
respect to the Contracts or the Separate Account will be paid by GWL&A.
If the Contract value is used to purchase an annuity under the annuity
payout options, the dollar amount of any premium tax previously paid or
payable upon annuitization by GWL&A will be charged against Contract
value. The applicable premium tax rates currently range from 0% to
2.50%.
11. The Separate Account and its investment divisions will bear
their own operating expenses and charges for federal income tax, should
such taxes be incurred by GWL&A in connection with the operation of the
Separate Account. No charge is made by GWL&A for transfers of Contract
value among Separate Account investment divisions.
12. No front-end sales load will be deducted from premium payments
under the Contracts. Rather, upon any total or partial surrender of
Contract Value prior to the Retirement Date, a contingent deferred
sales charge will be deducted from purchase payments which have been
credited to a Contract for fewer than seven years. Once per year,
however, up to 10% of the Contract value as of December 31 of the
calendar year prior to the year in which the amount is being
surrendered may be withdrawn without incurring a contingent deferred
sales charge. Total surrender charges will not exceed 7% of the
purchase payment under the Contract.
13. A daily charge equal to an effective annual rate of 1.45% of
the net asset value of the Separate Account attributable to the
Contracts will be imposed to compensate GWL&A for bearing certain
mortality and expense risks in connection with the Contracts. Of this
amount, 0.85% is allocable to the mortality risk apart from that
associated with the guaranteed death benefit, 0.20% is allocable to the
mortality risk associated with the guaranteed death benefit, and 0.40%
is allocable to the expense risk. The mortality and expense risk charge
is guaranteed by GWL&A and cannot be increased.
14. The annual mortality and expense risk charge assessed under
Future Contracts will be the same as that mentioned above. In addition,
there will be no front-end sales charge for Future Contracts, and the
maximum contingent deferred sales charge will not exceed 7% of the
amount distributed.
15. The mortality risk under the Contract is that, upon selection
of an annuity payout option with a life contingency, annuitants will
live longer than GWL&A's actuarial projections indicate, thereby
resulting in higher than expected annuity payments. GWL&A also assumes
a mortality risk under the Contract if the death of an annuitant
results in a death benefit being payable under the Contract. GWL&A is
at risk to the extent that the amount of the guaranteed death benefit
exceeds the Contract value as of the date of death.
16. The expense risk borne by GWL&A under the Contracts is that the
charges for administrative expenses, which charges are guaranteed for
the life of the Contracts, may be insufficient to cover the actual
costs of issuing and administering the Contracts.
Applicants' Legal Analysis
1. Applicants request an order of the Commission under Section 6(c)
for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act
to the extent necessary to permit the deduction of a maximum charge of
1.45% for the assumption of mortality and expense risks from the assets
of: (a) The Separate Account in connection with the issuance of the
Contracts or Future Contracts; and (b) any Future Separate Accounts in
connection with the issuance of Contracts or Future Contracts.
Applicants submit that the requested exemption is 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. 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
the 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.
3. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, as herein
pertinent, prohibit a registered unit investment trust and any
depositor or underwriter thereof from selling periodic payment plan
certificates unless the proceeds of all payments are deposited with a
qualified trustee or custodian and are held under arrangements which
prohibit any payment to the depositor or principal underwriter.
Exception is made for fees, not exceeding any such reasonable amounts
as the Commission may prescribe, for performing bookkeeping and other
administrative services.
4. Applicants submit that their request would promote
competitiveness in the variable annuity contract market by eliminating
the need for GWL&A to file redundant exemptive applications, thereby
reducing GWL&A's administrative expenses and maximizing the efficient
use of
[[Page 364]]
GWL&A's resources. Applicants further submit that the delay and
expenses involved in having to seek exemptive relief repeatedly would
impair GWL&A's ability effectively to take advantage of business
opportunities as they arise. Further, if GWL&A were required to seek
exemptive relief repeatedly with respect to the issues addressed in
this application, investors would not receive any benefit or additional
protection thereby. Thus, Applicants believe that the requested
exemption is 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.
5. Applicants represent that the mortality and expense risk charge
of 1.25% (which includes all risk charges imposed under the Contracts
except the 0.20% mortality risk charge for the guaranteed death
benefit) is within the range of industry practice for variable annuity
contracts which, while not offering a guaranteed death benefit feature,
are otherwise comparable to the Contracts. This representation is based
upon Applicants' analysis of publicly available information regarding
the aggregate level of the mortality and expense risk charges under
such comparable variable annuity contracts currently being offered in
the insurance industry, taking into consideration such factors as
current charge levels, the manner in which charges are imposed, the
presence of charge-level or annuity-rate guarantees, and the markets in
which the contracts will be offered. Applicants represent that GWL&A
will maintain at the administrative offices at its headquarters, and
make available to the Commission, a memorandum detailing the variable
annuity products analyzed in the course of, and the methodology and
results of, its comparative survey.
6. Applicants represent that before relying on exemptive relief
resulting from this application in connection with any Future Contracts
funded through the Separate Account or Future Separate Accounts, they
will determine that the mortality and expense risk charge of 1.25%
imposed under such Future Contracts (which includes all risk charges
imposed under the Future Contracts except the 0.20% mortality risk
charge for the guaranteed death benefit) will be within the range of
industry practice for variable annuity contracts which, while not
offering a guaranteed death benefit feature, are otherwise comparable
to the Future Contracts. GWL&A will maintain at the administrative
offices at its headquarters, and make available to the Commission, a
memorandum detailing the variable annuity products analyzed in the
course of, and the methodology and results of, its comparative survey.
7. Applicants also hereby represent that the mortality risk charge
of 0.20% for the guaranteed death benefit is reasonable in relation to
the additional mortality risks assumed by GWL&A in offering a
guaranteed death benefit under the Contracts. This representation is
based upon GWL&A's examination of a large number of trials at different
issue ages to determine the expected additional cost of offering a
guaranteed death benefit. GWL&A fist projected hypothetical asset
returns using generally accepted actuarial simulation methods. GWL&A
then calculated hypothetical accumulated values by applying the
projected asset returns to the initial value in a hypothetical account
for each asset return pattern generated. GWL&A compared each
accumulated value so calculated to the amount of the guaranteed death
benefit payable in the event of the hypothetical annuitant's death
during the year in question. GWL&A also studies recent published
actuarial statistics regarding the costs associated with similar
enhanced or guaranteed death benefits, and sought reinsurance bids in
relation to the guaranteed death benefit. GWL&A will maintain at the
administrative offices at its headquarters, and make available to the
Commission, a memorandum detailing the methodology used in determining
that an additional level cost of 0.20% for the guaranteed death benefit
is reasonable in relation to the additional risks assumed by GWL&A in
offering such a death benefit under the Contracts.
8. Before relying on exemptive relief resulting from this
application in connection with any Future Contracts funded through the
Separate Account or any Future Separate Accounts, GWL&A will prepare
and maintain at the administrative office at its headquarters, and make
available to the Commission, a memorandum detailing the methodology
used in determining that an additional level cost of 0.20% for a
guaranteed death benefit is reasonable in relation to the additional
risks assumed by GWL&A in offering such a death benefit under the
Future Contracts.
9. GWL&A does not believe that the contingent deferred sales
charges imposed under the Contracts will necessarily cover the expected
costs of distributing the Contracts. Any ``shortfall'' will be made up
from the assets of the general account of GWL&A, which will include
amounts derived from the mortality and expense risk charges. GWL&A has
concluded that there is a reasonable likelihood that the distribution
financing arrangement being used in connection with the Contracts will
benefit the Separate Account and the Contract owners. The basis for
this conclusion is set forth in a memorandum which will be maintained
by GWL&A at the administrative offices at its headquarters, and will be
made available to the Commission.
10. Applicants recognize that the contingent deferred sales charges
that may be imposed under Future Contracts may not necessarily be
sufficient to cover the expected costs of distributing such contracts.
Any ``shortfall'' will be made up from the assets of the general
account, which will include amounts derived from the mortality and
expense risk charges imposed under Future Contracts. Applicants
represent that before relying on exemptive relief resulting from this
application in connection with the Future Contracts funded through the
Separate Account or any Future Separate Accounts, GWL&A will determine
that there is a reasonable likelihood that the distribution financing
arrangements being used in connection with the Future Contracts will
benefit the Separate Account or any Future Separate Accounts and their
respective Future Contract owners. GWL&A will maintain at the
administrative offices at its headquarters, and make available to the
Commission, a memorandum setting forth the basis for this conclusion.
11. Applicants also represent that the Separate Account and any
Future Separate Accounts will invest only in underlying funds which
have undertaken, in the event they should adopt a plan for financing
distribution expenses pursuant to Rule 12b-1 of the 1940 Act, to have
such a plan formulated and approved by their board of directors/
trustees, a majority of whom are not interested persons of any such
funds.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested are necessary and appropriate in the public
interest and consistent with the protection of investors and purposes
fairly intended by the policy and provisions of the 1940 Act.
[[Page 365]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-132 Filed 1-3-96; 8:45 am]
BILLING CODE 8010-01-M
