[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24315]
[[Page Unknown]]
[Federal Register: October 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20576; File No. 812-8424]
Sentry Life Insurance Company, et al.
September 26, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'' or ``Act'').
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applicants: Sentry Life Insurance Company (``Sentry''), Sentry Variable
Account II of Sentry (``Sentry Account''), Sentry Investors Life
Insurance Company (``SILIC''), Sentry Investors Variable Account II of
SILIC (``SILIC Account,'' and, together with the Sentry Account, the
``Accounts''), and Sentry Equity Services, Inc. (``SESI'')
(collectively, the ``Applicants'').
relevant 1940 act section: Order requested under Section 17(b) of the
1940 Act for exemption from Section 17(a) thereof and under Section
6(c) of the Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2)
thereof.
summary of application: Applicants seek an Order to the extent
necessary to permit the transfer of assets of the SILIC Account to the
Sentry Account and to permit the deduction of a mortality and expense
risk charge under certain variable annuity contracts from the assets of
the Sentry Account as provided for by the SILIC Contracts originally
issued through the SILIC Account and proposed to be transferred to and
supported by the Sentry Account.
filing date: The application was filed on May 28, 1993 and was amended
and restated on March 29, 1994 and on September 6, 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 Secretary of the SEC
and serving the Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the SEC by 5:30 p.m. on
October 21, 1994, 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
may request notification of a hearing by writing to the Secretary of
the SEC.
addresses: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, DC 20549. Applicants: Sentry Life Insurance
Company, 1800 North Point Drive, Stevens Point, Wisconsin 54481; Sentry
Investors Life Insurance Company, 1800 North Point Drive, Stevens
Point, Wisconsin 54481; Sentry Equity Services, Inc., 1800 North Point
Drive, Stevens Point, Wisconsin 54481.
FOR FURTHER INFORMATION CONTACT:
W. Thomas Conner, Attorney, Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch
Applicants' Representations
1. Sentry is a stock life insurance company that was organized
under the laws of the State of Wisconsin in 1958. SILIC is a stock life
insurance company that was originally organized in 1966 under the laws
of the Commonwealth of Massachusetts as Patriot General Life Insurance
Company. SILIC is a wholly-owned subsidiary of Sentry. SESI is
registered with the SEC as a broker-dealer, is a member of the National
Association of Securities Dealers, Inc., and serves as the principal
underwriter for variable annuity contracts issued through the Sentry
Account and the SILIC Account (the ``Sentry Contracts'' and the ``SILIC
Contracts,'' respectively, and, together, the ``Contracts''). Sentry,
SILIC , and SESI are direct or indirect subsidiaries of Sentry
Insurance a Mutual Company, a Wisconsin mutual insurer.
2. Sentry established the Sentry Account in 1983 pursuant to the
laws of the State of Wisconsin. The Sentry Account is registered under
the Act as a unit investment trust, and the Sentry Contracts are
registered under the Securities Act of 1933 (``1993 Act''). SILIC
established the SILIC Account in 1983 to the laws of the Commonwealth
of Massachusetts. The SILIC Account is registered under the 1940 Act as
a unit investment trust, and the SILIC Contracts are registered under
the 1933 Act.
3. Each Account consists of four subaccounts: a Liquid Asset
Subaccount; a Growth Subaccount; a Limited Maturity Bond Subaccount;
and a Balanced Subaccount. Each of the subaccounts invests exclusively
in shares of a corresponding portfolio of the Neuberger & Berman
Advisers Management Trust (``Fund''). The Fund is registered under the
1940 Act as a diversified open-end management investment company, and
the shares issued by the Fund are registered under the 1933 Act.
4. The Sentry Contracts and the SILIC Contracts are identical in
all material respects, except for the identity and depositor of the
separate account issuing the respective Contract. The Contracts provide
for the accumulation of contract values and payment of monthly annuity
payments on a variable basis. The Contracts are designed for use by
individuals in retirement plans on a qualified or non-qualified basis.
5. Sentry has or will shortly enter into an agreement providing for
the sale of all outstanding stock of SILIC to an unrelated third party.
One of the conditions of the sale will be that Sentry and SILIC enter
into an assumption reinsurance arrangement providing for the transfer
to Sentry of all assets and liabilities of SILIC, other than the
minimum amount of capital necessary to support SILIC's licenses. Sentry
will, pursuant to the assumption reinsurance agreement, assume legal
ownership of the SILIC Account assets and become responsible for
satisfaction of all liabilities and obligations arising under the SILIC
Contracts and outstanding at the time of the transaction.
6. In order to avoid the administrative duplication that would
result from maintaining two identical unit investment trusts, Sentry
has decided to effectively merge the Accounts by transferring the
assets of the SILIC Account (consisting of shares of the Fund) to the
Sentry Account (the ``Proposed Transaction''). The Sentry Account will
continue to exist, and the SILIC Separate Account thereafter will be
deregistered as an investment company. The effect of the Proposed
Transaction will be that, as of its effective date, the Sentry Account
will support the Sentry Contracts, the SILIC Contracts (i.e., those
originally issued by the SILIC Account), and any Contracts issued
subsequent to the effective date of the Proposed Transaction. The
assets supporting the former SILIC Contracts will continue to be
invested exclusively in shares of the Fund.
7. The Proposed Transaction will be effected at the net asset
values of the subaccounts involved, and no charges will be imposed or
other deductions made in connection therewith. The Proposed Transaction
also will not affect the net asset value of any subaccount: the net
asset values for the four subaccounts of the Sentry Account in effect
immediately after the transaction will be identical to the net asset
values for the subaccounts of the SILIC Account in effect immediately
prior to the transaction. All costs of the transaction will be borne by
Sentry and not by Contractowners.
8. The succession of Sentry to SILIC as the insurance company
issuing the Contracts will not dilute or otherwise adversely affect the
economic interests of the Contractowners. The only change discernible
to a Contractowner as a result of the Proposed Transaction will be the
identity and depositor of the separate account in which his or her cash
value is invested. The fees deducted from assets supporting the former
SILIC Contracts after the Proposed Transaction will not differ in
amount or type from those currently being deducted from the Sentry
Account. After the Proposed Transaction, the guarantees that are not
allocated to the Sentry Account (e.g., the minimum death benefit) will
be backed by Sentry's pool of assets, which, based on financial
information as of December 31, 1993, is more than sixty times larger
than SILIC's. Moreover, as of the date hereof, Sentry is rated ``A+''
by A.M. Best, while SILIC is rated ``NA4'' (rating procedure
inapplicable).
9. The Proposed Transaction and the other transactions related to
the sale of SILIC will be approved in advance by the respective Boards
of Directors of Sentry and SILIC. Prior approval of the transaction
will be obtained from the Massachusetts Insurance Department and any
other applicable regulatory authority. To the extent notification to
Contractowners is required pursuant to generally applicable state
insurance laws relating to assumption reinsurance, it will be provided.
Applicable state insurance law does not require that Contractowners
vote on the transaction or be granted any ``opt-out'' rights.
10. In offer to reflect the transfer of assets supporting the SILIC
Contracts to the Sentry Account, Sentry will file a new 1933 Act
registration statement for the Contracts and will amend the 1940 Act
registration statement for the Sentry Account. Once the new 1933 Act
registration statement becomes effective, Sentry will distribute copies
of the prospectus contained therein to owners of outstanding Contracts.
Once the Proposed Transaction is effected, application will be made to
the Commission pursuant to Section 8(f) of the Act and Rule 8f-1
thereunder for an order declaring that the SILIC Account has ceased to
be an investment company.
11. Certain charges will be imposed under the SILIC Contracts
proposed to be supported by the Sentry Account. Sentry will deduct a
mortality and expense risk charge equal on an annual basis to 1.20% of
the average daily net asset value of the Sentry Account. Of this
charge, .80% will be for mortality risks and .40% will be for expense
risks. This charge compensates Sentry for providing a mortality
guarantee, a death benefit, an expense guarantee, and the waiver of the
Contingent Deferred Sales Charge, if any, upon the death of the
annuitant.
12. Sentry will deduct a contract maintenance charge of $30 per
SILIC Contract from contract values on each contract anniversary the
SILIC Contract is in force, or when the value of the SILIC Contract is
withdrawn in full prior to a contract anniversary. Sentry guarantees
that the amount of the contract maintenance charge will not be
increased in the future.
13. No sales charge was imposed on the SILIC Contracts at the time
of sale. A contingent deferred sales charge is imposed on surrenders of
purchase payments within six years after their being made. Thereafter,
the charge is equal to zero. The amount of the contingent deferred
sales charge is calculated by allocating purchase payments to the
amount surrendered, multiplying each such allocated purchase payment by
the appropriate percentage determined on the basis of the table below,
and adding the products of each such multiplication.
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Time between receipt of allocated purchase payment and date
of surrender Percentage
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Less than 1 year............................................ 6
At least 1 year but less than 2 years....................... 5
At least 2 years but less than 3 years...................... 4
At least 3 years but less than 4 years...................... 3
At least 4 years but less than 5 years...................... 2
At least 5 years but less than 6 years...................... 1
At least 6 years............................................ 0
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The contingent deferred sales charge is intended to provide
reimbursement for sales-related expenses. To the extent the charge is
insufficient to cover all distribution costs, Sentry may use the
mortality and expense risk charge to make up any difference.
14. Sentry will permit SILIC Contractowners to transfer all or part
of the contract values between eligible mutual fund(s) or portfolio(s)
subject to certain conditions. Currently, Sentry does not impose any
charge for effecting transfers but it reserves the right to assess a
transfer fee in the future subject to prior Commission approval or
pursuant to any applicable exemptive release issued by the Commission.
15. Any premium taxes payable to any governmental entity as a
result of the existence of the SILIC Contracts or the Sentry Account
will be charged against contract value. Premium taxes currently imposed
range from 0% to 4.0%.
16. Sentry deducts from the Sentry Account any income taxes
resulting from the operation of the Sentry Account. Sentry has not made
a provision for taxes within the Sentry Account for the payment of any
tax obligation because Sentry believes that the operations of the
Sentry Account and the underlying Trust will be conducted in such a
manner as to not give rise to such tax obligation. Sentry has reserved
the right, however, to establish such a provision in the future if it
determines that it will incur a tax as a result of the operation of the
Sentry Account.
17. On July 17, 1984, the SEC issued an order pursuant to Section
6(c) of the 1940 Act to SILIC, the SILIC Account, and SESI, exempting
them from Sections 26(a) and 27(c) of the Act to the extent necessary
to permit certain deductions and practices in connection with the SILIC
Contracts. The SEC granted identical relief on the same day to Sentry,
the Sentry Account, and SESI in connection with the Sentry Contracts.
Applicants' Legal Analysis
1. Section 17(a)(1) of the 1940 Act prohibits any affiliated person
of a registered investment company, or any affiliated person of such a
person, from knowingly selling any securities or other property to that
company. Section 17(a)(2) of the Act prohibits these persons from
knowingly purchasing any security or other property from the registered
investment company. Section 2(a)(3) of the Act defines an ``affiliated
person'' of another person to include any person directly or indirectly
controlling, controlled by, or under common control with such other
person. The Sentry Account and the SILIC Account may be deemed to be
under the common control of Sentry, which is the depositor of the
Sentry Account and the parent of the depositor of the SILIC Account.
While Applicants do not concede that Section 17(a) applies to the
Proposed Transaction, because the Sentry Account and the SILIC Account
are affiliated persons, the transfer of assets from the SILIC Account
to the Sentry Account arguably involves these entities, acting as
principals, in buying and selling securities or other property from or
to one another in contravention of Section 17(a).
2. Section 17(b) of the Act provides that a person may apply for an
order of exemption from the provisions of Section 17(a) in connection
with a transaction prohibited by that section, and that the Commission
shall grant such an application if evidence establishes that (1) the
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; (2) the proposed
transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and reports
filed under the 1940 Act; and (3) the proposed transaction is
consistent with the general purposes of the Act.
3. Although Rule 17a-8 is not available in this case, Applicants
submit that the Commission can look to the rule to determine whether
the transaction is reasonable and fair. Applicants assert that the
participating companies' investment objectives, policies, restrictions,
and portfolios are compatible. Both the Sentry Account and SILIC
Account invest exclusively in shares of the Fund, and, after the
Proposed Transaction, the Sentry Account will continue to invest in
shares of the Fund and provide holders of SILIC Contracts with the same
investment options as before the Proposed Transaction. Accordingly, the
Proposed Transaction will result in no change in the investment
objectives, policies, restrictions, or portfolios of the separate
account funding the SILIC Contracts.
4. Applicants also represent that the transfer of assets held by
the SILIC Account to the Sentry Account will be made at the relative
net asset values of the subaccounts. No dilution of, or increase in,
the SILIC Contractowners' contract values will occur as a result of the
Proposed Transaction. The transfer will not result in any change in
charges, costs, fees, or expenses borne by Contractowners.
5. Finally, Applicants state that no direct or indirect costs will
be incurred by the SILIC Account or the Sentry Account as a result of
the transaction. No charges, costs, fees, or other expenses would be
incurred by holders of the Contracts as a result of, or in connection
with, the Proposed Transaction. Thus, the Proposed Transaction will not
result in dilution of the economic interests of the Contractowners.
6. Applicants represent that the Proposed Transaction does not
involve overreaching on the part of any person involved. The purpose of
the transfer is to consolidate two identical separate accounts, both of
which issue identical contracts, have the same principal underwriter,
and invest in the same underlying mutual fund, into a single separate
account. This aggregation will allow for administrative efficiencies
and cost savings on Sentry's part because Sentry can consolidate its
separate account operations. It also will allow SILIC Contractowners to
participate in a separate account that is sizable in terms of its total
net assets and can be expected to grow since sales of Sentry contracts
will continue after the Proposed Transaction.
7. Section 17(b) also requires that the Proposed Transaction be
consistent with the policy of each registered investment company
concerned, as recited in its registration statement and reports filed
under the 1940 Act. Applicants represent that because the assets
underlying the SILIC Contracts and the Sentry Contracts will continue
to be invested in shares of one or more portfolios of the Fund in the
same manner as before the Proposed Transaction, the assets underlying
the SILIC Contracts and the Sentry Contracts will continue to be
invested according to the investment policies recited in their
respective registration statements.
8. Finally, Section 17(b) requires that the Proposed Transaction be
consistent with the general purposes of the Act. Applicants represent
that the Proposed Transaction is consistent with the general policies
and purposes of the Act. The transfer does not present any of the
issues or abuses that Section 17(a) in particular, and the 1940 Act in
general, were designed to prevent.
9. In light of the foregoing, Applicants request an exemption from
Section 17(a) of the Act, pursuant to Section 17(b) thereof, to permit
the proposed transfer. Applicants represent that the terms of the
proposed transfer described in this Application, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching; are consistent with the investment policies
of each of the Accounts; and are consistent with the general purposes
of the Act.
10. Section 26(a)(2)(C) provides that no payment to the depositor
of, or principal underwriter for, a registered unit investment trust
shall be allowed the trustee or custodian as an expense except
compensation, not exceeding such reasonable amount as the Commission
may prescribe for performing bookkeeping and other administrative
duties normally performed by the trustee or custodian. Section 27(c)(2)
prohibits a registered investment company or a depositor or underwriter
for such company for selling periodic payment plan certificates unless
the proceeds of all payments on such certificates, other than sales
loads, are deposited with a trustee or custodian having the
qualifications prescribed in Section 26(a)(1), and are held by such
trustee or custodian under an agreement containing substantially the
provisions required by Sections 26(a)(2) and 26(a)(3) of the 1940 Act.
11. Sentry, the Sentry Account, and SESI (``Section 6(c)
Applicants'') request an order under Section 6(c) of the 1940 Act
exempting them 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 from the Sentry Account as provided for by the
SILIC Contracts previously issued through the SILIC Account and
proposed to be supported by the Sentry Account pursuant to the Proposed
Transaction.
12. Sentry represents that the charge of 1.20% for mortality and
expense risks is reasonable in relation to the risks undertaken by
Sentry and within the range of industry practice with respect to
comparable annuity products. This representation is based upon Sentry's
analysis of publicly available information about similar industry
products, taking into consideration such factors as current charge
levels, the existence of charge level guarantees, and guaranteed
annuity rates. Sentry will maintain at its administrative offices,
available to the Commission, a memorandum setting forth in detail the
products analyzed in the course of, and the methodology and results of
its comparative survey.
13. The Section 6(c) Applicants acknowledge that if a profit is
realized from the mortality and expense risk charge, all or a portion
of such profit may be viewed as being offset by distribution expenses
not reimbursed by the sales charge. Sentry has concluded that there is
a reasonable likelihood that the proposed distribution financing
arrangements will benefit the Sentry Account and SILIC Contractowners.
The basis for such conclusion is set forth in a memorandum maintained
by the Sentry at its administrative offices and will be available to
the Commission.
14. Sentry represents that the Sentry Account will invest only in
management investment companies that undertake, in the event the
company adopts a plan to finance distribution expenses under Rule 12b-1
under the 1940 Act, to have a board of directors, a majority of whom
are not interested persons of the company within the meaning of Section
2(a)(19) of the 1940 Act, formulate and approve any such plan.
Conclusion
Applicants request that the Commission issue an order pursuant to
Section 17(b) of the 1940 Act exempting the Proposed Transaction from
the provisions of Section 17(a), to the extent necessary to permit that
transfer of assets underlying the SILIC Contracts to the Sentry
Account. In addition, the Section 6(c) Applicants request that the
Commission issue an order pursuant to Section 6(c) of the Act to the
extent necessary to permit the deduction by Sentry of mortality and
expense risk charges from Sentry Account as provided for by the SILIC
Contracts previously supported by the Sentry Account pursuant to the
Proposed Transaction. Applicants and the Section 6(c) Applicants, as
appropriate, submit that, for all of the reasons stated above, granting
the relief requested herein is appropriate in the public interest, and
consistent with the policy and purposes of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24315 Filed 9-30-94; 8:45 am]
BILLING CODE 8010-01-M
