[Federal Register Volume 59, Number 192 (Wednesday, October 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24615]
[[Page Unknown]]
[Federal Register: October 5, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20592; File No. 812-9006]
Teachers Insurance and Annuity Association of America, et al.
September 28, 1994.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the
``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Teachers Insurance and Annuity Association of America
(``TIAA''), TIAA Separate Account VA-1 (the ``Separate Account''), and
Teachers Personal Investors Services, Inc. (``TPIS'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Sections 12(b), 26(a)(2)(C) and 27 (c)(2) of the 1940
Act, and Rule 12b-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit the
deduction of a mortality and expense risk charge from the assets of the
Separate Account under certain variable annuity contracts.
FILING DATE: An application was filed on May 18, 1994, and amended on
September 28, 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 SEC's Secretary and
serving 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
24, 1994, and should be accompanied by proof of service on 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 SEC's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, D.C. 20549. Applicants, 730 Third Avenue, New
York, NY 10007-3206.
FOR FURTHER INFORMATION CONTACT:
Wendy Finck Friedlander, Senior Attorney, at (202) 942-0682, Office of
Insurance Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Commission's
Public Reference Branch.
Applicants' Representations
1. TIAA is a nonprofit corporation regulated under New York law as
an insurance company. TIAA's purpose is to provide retirement benefits
to teachers and other employees of nonprofit-making colleges,
universities, and other institutions engaged in education or research
activities. All of TIAA's stock is held by TIAA Board of Overseers, a
New York not-for-profit membership corporation. TIAA is a companion
organization of the College Retirement Equities Fund, a New York
nonprofit corporation registered as a management investment company
that issues variable annuity certificates.
2. The Separate Account was established by TIAA under the laws of
New York to fund certain variable annuity contracts. The Separate
Account is registered as a management investment company on Form N-3
under the 1940 Act. The Separate Account currently consists of one
investment portfolio, the Stock Index Account. Other investment
portfolios may be made available in the future.
3. TPIS is the principal underwriter of the variable component of a
combination fixed and variable individual deferred annuity contract
(``Contract'') funded by the Separate Account. TPIS is a wholly-owned
subsidiary of TIAA VA Holdings, Inc., which is, in turn, a wholly-owned
subsidiary of TIAA. TPIS is registering as a broker-dealer under the
Securities Exchange Act of 1934. The Contract will be offered on a
continuous basis by registered representatives of TPIS.
4. The Contracts are designed to provide retirement or long-term
benefits to eligible employees, spouses or domestic partners. The
Contracts require a minimum initial premium of $2000 except if payments
are collected by payroll deduction by a Contractowner's employer.
Additional premium payments of at least $100 may be paid at any time
during the accumulation period. No sales charges are deducted from
premium payments.
5. Premium taxes are deducted by TIAA from premium payments prior
to allocation to the Separate Account in states that impose a premium
tax charge when a premium is paid. In states that impose a premium tax
later, TIAA deducts the appropriate amount when the tax is incurred.
6. When additional portfolios are added to the Separate Account,
Contractowners will be allowed to transfer among available portfolios
during the accumulation period. TIAA reserves the right to limit the
number of transfers among portfolios to once in any 90-day period.
Currently, no charge is made for transfers.
7. TIAA imposes a daily administrative expense charge at an
effective annual rate of 0.20% of the net assets of the Separate
Account. Applicants represent that this charge is deducted in reliance
on Rule 26a-1 under the 1940 Act and is not greater than the expected
cost of the administrative services to be provided over the life of the
Contract. TIAA does not expect or intend to earn a surplus from the
administrative expense charge. The rate of the charge is guaranteed not
to increase for the duration of the Contracts and is applicable only
during the period from the date of issue of the Contract until the end
of the accumulation period.
8. A daily investment advisory fee is deducted from the net assets
of the Separate Account and paid to Teachers Advisors, Inc.
(``Advisors''), a wholly-owned subsidiary of TIAA VA Holdings, Inc.
Advisors will be registered as an investment adviser under the
Investment Advisers Act of 1940. The investment advisory fee will be
0.30% of the average daily net assets of the Separate Account. Advisors
has agreed to waive a portion of the advisory fee so that the current
effective annual rate will be 0.10% of the average daily net assets of
the Separate Account.
9. TIAA deducts a Mortality and Expense Risk Charge that is equal,
on an annual basis, to 0.25% of the average daily net asset value of
the Separate Account: approximately .06% for mortality risks and .19%
for expense risks. TIAA reserves the right to increase this charge to
an effective annual rate of 1.00% of the net assets of each portfolio
of the Separate Account (approximately .20% for mortality risks and
.80% for expense risks) and guarantees that this charge will never
exceed 1.00%.
10. The mortality risks assumed by TIAA arise from its contractual
obligation to make annuity payment in accordance with the provisions of
the Contracts regardless of how long all annuitants or any individual
annuitant lives. In addition, TIAA assumes the risk that the total
premiums paid under a Contract less any cash withdrawals exceed the
account value of a Contract when a death benefit becomes payable. The
death benefit under the Contract is the greater of (a) account value or
(b) total premiums paid less cash withdrawals.
11. The expense risk assumed by TIAA is that actual expenses
involved in administering the Contracts (including Contract maintenance
costs, administrative costs, mailing costs, data processing costs, and
costs of other services) may exceed the amount recovered from the
administrative expense charge.
Applicants' Legal Analysis and Conditions
1. Sections 26(a)(2) and 27(c)(2) of the 1940 Act 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 held under arrangements which prohibit any payment to the
depositor or principal underwriter except a fee, not exceeding such
reasonable amounts as the Commission may prescribe, for performing
bookkeeping and other administrative services.
2. Applicants request an order under Section 6(c) exempting the
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 assets of the Separate Account under the Contracts.
3. Applicants represent that the Mortality and Expense Risk Charge
is within the range of industry practice with respect to comparable
annuity products. Applicants base this representation on an analysis of
publicly available information about similar annuity products, taking
into consideration such factors as the current charge levels, existence
of charge level guarantees, any death benefit guarantees, guaranteed
annuity rates, and other policy options. TIAA represents that it will
maintain at its administrative offices a memorandum, available to the
Commission, setting forth in detail this analysis.
4. If the Mortality and Expense Risk Charge is insufficient to
cover actual costs, the loss will be borne by TIAA. Conversely, if the
amount deducted proves more than sufficient, the excess will be a
profit to TIAA. TIAA does not expect a profit from this charge during
the first years of the Separate Account's operation. To the extent this
charge results in a surplus to TIAA, such surplus will be available for
use by TIAA for the payment of distribution, sales, and other expenses.
Applicants represent that no separate charge for distribution expenses
will be imposed upon the assets of the Separate Account unless and
until the requirements of Rule 12b-1 under the 1940 Act have been
complied with.
5. TIAA represents that it has concluded that there is a reasonable
likelihood that the proposed distribution financing arrangement will
benefit the Separate Account and Contractowners. The basis for this
conclusion is set forth in a memorandum that will be maintained by TIAA
at its administrative offices and that will be available to the
Commission upon request.
6. TIAA represents that it will have a board of directors, a
majority of whom are not interested persons within the meaning of
Section 2(a)(19) of the 1940 Act, formulate and approve any plan under
Rule 12b-1 to finance distribution expenses.
7. Applicants also request an order under Section 6(c) of the 1940
Act exempting them from Section 12(b) of the 1940 Act and Rule 12b-1
thereunder, insofar as this proposed distribution financing arrangement
might be deemed to involve the direct or indirect use of assets in the
Separate Account for distribution.
8. Section 12(b) of the 1940 Act prohibits a registered investment
company from acting as a distributor of securities of which it is the
distributor, except through an underwriter. Rule 12b-1 prohibits any
such company directly or indirectly from financing distribution of the
company's shares except in compliance with the rule's requirements. The
rule requires that a company financing distribution of its shares
formulate a written plan describing all material aspects of the
proposed arrangement and that the plan be approved initially by the
company's shareholders, directors, and disinterested directors. The
directors must vote annually to continue a plan and the directors must
conclude that there is a reasonable likelihood that implementation or
continuation of the plan will benefit the company and its shareholders.
9. Applicants expect to finance the expenses of distributing the
Contracts through the use of TIAA's general assets, which may be
attributable in part to any surplus from the Mortality and Expense Risk
Charge. Thus, the proposed distribution financing arrangement might be
deemed to involve the direct or indirect use of assets in the Separate
Account for distribution. Accordingly, Applicants represent that this
aspect of the requested relief is solely ``defensive,'' i.e., to
clarify that the current distribution financing arrangement is not
subject to Section 12(b) or Rule 12b-1 thereunder. Applicants contend
that the requested exemptive relief is not intended to cover the
imposition of a separate charge for distribution expenses against the
assets in the Separate Account, and acknowledge that any such
distribution charge would only be assessed in compliance with Rule 12b-
1.
10. Applicants assert that Rule 12b-1 was not intended to apply to
managed accounts, and that the rule's provisions are directed only at
traditional mutual funds and should not be applied to managed accounts.
Applicants further assert that the protections of Rule 12b-1 are not
necessary in the case of managed accounts. Applicants state that
Commission review under Section 26 and 27 of the 1940 Act of the
reasonableness of asset charges of managed accounts, and explicit
prospectus disclosure that the asset charge may be used for
distribution expenses, provide sufficient protection for Contractowners
and obviate the need for a managed account to comply with the
requirements of Rule 12b-1.
11. Applicants assert that the application of Rule 12b-1 to managed
accounts would produce a burdensome and inequitable treatment of these
accounts, would place them at an unfair competitive disadvantage with
respect to trust accounts offering similar annuity contracts, and would
create an artificial distinction between managed and trust accounts not
justified by policy considerations.
Conclusion
Applicants assert that, for the reasons and upon the facts set
forth above, the requested exemptions from Sections 12(b), 26(a)(2)(C)
and 27 (c)(2) of the 1940 Act, and Rule 12b-1 thereunder, to deduct the
Mortality and Expense Risk Charge from the assets of the Separate
Account under the Contracts meet the standards in Section 6(c) of the
1940 Act. Applicants assert that the exemptions requested are necessary
and appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies 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. 94-24615 Filed 10-4-94; 8:45 am]
BILLING CODE 8010-01-M
