[Federal Register Volume 59, Number 201 (Wednesday, October 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25812]
[[Page Unknown]]
[Federal Register: October 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20616; 812-9134]
USAA Life Insurance Company, et al.
October 13, 1994.
agency: Securites and Exchange Commission (the ``SEC'' or
``Commission'').
action: Notice of Application for Exemptions under the Investment
Company Act of 1940 (the ``1940 Act'').
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applicants: USAA Life Insurance Company (``USAA Life''), Separate
Account of USAA Life Insurance Company (the ``Account''), any other
separate account (``Other Account''; together with the Account, the
``Separate Accounts,'' unless the context otherwise requires)
established by USAA Life in the future to support certain variable
annuity contracts, and USAA Investment Management Company (``USA
IMCO'').
relevant 1940 act sections: Exemptions requested under Section 6(c)
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
summary of application: Applicants seek an order permitting them to
deduct a mortality and expense risk charge from the assets of the
Account and any Other Account under certain flexible premium deferred
combination fixed and variable annuity contracts (the ``Contracts'').
filing date: The application was filed on August 1, 1994.
hearing or notification of hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
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 November 7, 1994, and must be accompanied by proof of service on
Applicants in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests must state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
may request notification of a hearing by writing to the Commission's
Secretary.
addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.,
20549. Applicants: 9800 Fredericksburg Road, San Antonio, Texas 78288.
for further information contact: C. Christopher Sprague, Senior
Counsel, at (202) 942-0670, or Brenda D. Sneed, Assistant Director, at
(202) 942-0670, Office of Insurance Products, Division of Investment
Management.
Applicants' Representations
1. USAA Life was organized under Texas law as a stock life
insurance company and is the depositor, for purposes of the 1940 Act,
of the Account. USAA Life will be the depositor of any Other Account
established by it.
2. The Account was established under Texas law as an insurance
company separate account, and is registered under the 1940 Act as a
unit investment trust. That portion of the assets of the Account equal
to the reserves and other Contract liabilities of the Account will not
be chargeable with liabilities arising out of any other business USAA
Life may conduct. Any income, gains, or losses, realized or unrealized,
from assets allocated to the Account will be, in accordance with the
Contracts, credited to or charged against the Account without regard to
other income, gains, or losses of USAA Life. The Account currently is
divided into seven variable fund accounts (the ``Variable Fund
Accounts'), all of which will initially be available under the
Contracts. Five of the Variable Fund Accounts will invest solely in the
shares of five corresponding funds of USA Life Investment trust, which
is registered under the 1940 Act as a diversified open-end management
investment company. One Variable Fund Account will invest solely in the
shares of the Capital Growth Portfolio of Scudder Variable Life
Investment Fund, an open-end management investment company. Another
Variable Fund Account will invest solely in the shares of the Alger
American Growth Portfolio of the Alger American Fund, an open-end
management investment company.
3. The Contracts will be distributed through USAA IMCO, which is a
broker-dealer registered under the Securities Exchange Act of 1934 and
a member of the National Association of Securities Dealers, Inc.
4. The Contracts will be flexible premium deferred combination
fixed and variable annuity contracts to be issued by USAA Life on an
individual basis. The Contracts are designed to provide retirement
payments and other long-term benefits for persons covered under plans
qualified for federal income tax advantages available under the
Internal Revenue Code of 1986, and for persons desiring such benefits
who do not qualify for such tax advantages. The Contracts will have a
Fixed Fund Account option that will be funded through USAA Life's
general account. USAA Life assesses a Contract maintenance charge of
$30 per year against each Contract at each Contract anniversary or at
the time of a full withdrawal from the Contract. The annual Contract
maintenance charge will be made only during the accumulation phase of
the Contract. Under all Contracts, USAA Life will assess each Variable
fund Account with an administrative expense charge, on a daily basis,
at an effective rate of 0.10% per annum of the average net assets. The
administrative expense charge will be imposed during both the
accumulation and distribution phases. Neither the contract maintenance
charge nor the administrative expense charge may be raised during the
life of a Contract. USAA Life does not expect that the total revenues
from such administrative charges under the Contracts will exceed the
expected costs of administering the Contracts, on average, excluding
costs that are properly categorized as distribution expenses, over the
period that the Contracts are in force. No sales charge is collected or
deducted under the Contracts, although a charge will be assessed on
full or partial withdrawals or on transfers from USAA Life's general
account under specified circumstances.
5. USAA Life proposes to compensate itself for assuming certain
insurance risks under the Contracts by deducting from the assets of the
Account a daily charge for mortality and expense risks.
The mortality and expense risk charge would be a daily net asset
charge at an aggregate nominal rate of 1.05% per annum, consisting of
approximately .70% for mortality risks and .35% for expense risks. USAA
Life will assume a mortality risk arising from its obligation to pay a
death benefit prior to the annuity date. The death benefit payable is
the greater of (a) the monetary value of the Contract (i.e., the sum of
the Contract values invested in the Variable Fund Accounts and in USAA
Life's general account) on the date USAA Life receives proof of death
or (b) the sum of all premium payments credited to the Contract, less
the amount of any withdrawals and less any applicable premium tax. USAA
Life assumes an additional mortality risk by its contractual obligation
to continue to make annuity payments for the entire life of the
annuitant under annuity options that involve life contingencies.
6. In addition to mortality risks, USAA Life will assume an expense
risk because the administrative charges under the Contract, which
cannot be raised, may be insufficient to cover actual administrative
expenses. In this regard, USAA Life agrees not to raise, for the
duration of the Contracts, the daily net asset value charge of 0.10%
for administrative expenses and the annual Contract maintenance charge
in the amount of $30 per year.
7. The order requested by Applicants would apply to the Contracts
and also to substantially similar contracts issued by the Account or by
any Other Account.
Applicants' Legal Analysis
1. Applicants request an order under Section 6(c) of the 1940 Act
granting exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to the extent necessary to permit the deduction of the mortality
and expense risk charge. Sections 26(a)(2)(C) and 27(c)(2) 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 trustee or custodian
having the qualifications prescribed by Section 26(a)(1) of the 1940
Act and are held under an agreement that provides that no payment to
the depositor or principal underwriter shall be allowed except as a
fee, not exceeding such reasonable amount as the Commission may
prescribe, for bookkeeping and other administrative services.
Applicants' proposed mortality and expense risk charge would not be
considered a bookkeeping and administrative expense.
2. Applicants propose to assess against the assets of the Account a
daily mortality and expense risk charge at an aggregate rate of 1.05%
per annum. USAA Life guarantees that it will not raise the charge for
the duration of the Contracts. USAA Life expects to make a profit from
this charge. Applicants represent that the level of the mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts. Applicants state that they have reviewed
publicly-available information regarding products of other companies,
taking into consideration such factors as guaranteed minimum death
benefits, guaranteed annuity purchase rates, minimum initial and
subsequent premium payments, other contract charges, the manner in
which charges are imposed, market sector, investment options under the
contracts, and availability to individual qualified and nonqualified
plans. Based upon this review, Applicants have concluded that the
mortality and expense risk charge is within the range of charges
determined by industry practice. With respect to any Contracts offered
by it, USAA Life will maintain at its principal offices a memorandum
setting forth in detail the variable annuity products analyzed and the
methodology, and results, of Applicants' comparative review. USAA Life
will make this memorandum available to the Commission and its staff
upon request.
3. If the mortality and expense risk charge is insufficient to
cover the expenses and cost assumed, the loss will be borne by USAA
Life. Conversely, if the charge deducted proves more than sufficient,
the excess will be profit to USAA Life. USAA Life expects to earn a
profit from the mortality and expense risk charge.
4. Applicants acknowledge that, in the absence of a specified
charge for the costs of distributing the Contracts, all or a portion of
any profit realized from the mortality and expense risk charge may be
offset by distribution expenses. In such circumstances, a portion of
the mortality and expense risk charge might be viewed as providing for
a portion of the costs relating to distribution of the Contracts.
Notwithstanding the foregoing, USAA Life has concluded that there is a
reasonable likelihood that the proposed distribution financing
arrangements made with respect to the Contracts will benefit the
Account and Contract owners. The basis for such conclusion will be set
forth in a memorandum which will be maintained by USAA Life at its
principal offices and will be made available to the Commission and its
staff upon request.
5. USAA Life represents that the Account will invest only in an
underlying mutual fund that undertakes, in the event it should adopt
any plan under Rule 12b-1 under the 1940 Act to finance distribution
expenses, to have such plan formulated and approved by a board of
trustees, a majority of the members of which are not ``interested
persons'' of such fund within the meaning of Section 2(a)(19) of the
1940 Act.
6. Applicants submit that the requested relief is appropriate in
the public interest, because it would promote competitiveness in the
variable annuity contract market by eliminating the need for Applicants
to file redundant exemptive applications, thereby reducing their
administrative expenses and maximizing the efficient use of their
resources.
Applicants' Conclusion
For the reasons discussed above, Applicants conclude that granting
their requested order would be 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25812 Filed 10-18-94; 8:45 am]
BILLING CODE 8010-01-M
