[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27447]
[[Page Unknown]]
[Federal Register: November 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20668; 812-8888]
Fidelity Investment Life Insurance Company, et al.
October 31, 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: Fidelity Investments Life Insurance Company (``FILI''),
Fidelity Investments Variable Annuity Account I (the ``Variable
Account''), and Fidelity Brokerage Services, Inc. (``FBSI'')
(collectively, the ``Applicants'').
relEvant 1940 act sectionS: Order requested under Section 6(c) for
exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
summary of application: Applicants seek an order permitting, on a
prospective basis, the deduction of mortality and expense risk charges
from (1) the assets of the Variable Account with respect to certain
flexible premium deferred variable annuity contracts (``Contracts'')
and contracts offered in the future that are substantially similar in
all material respects to the Contracts (``future contracts'') and (2)
the assets of similar separate accounts established and maintained by
FILI (``FILI Accounts'') with respect to future contracts. Applicants
also request that the exemptive relief granted to FBSI extend to any
other broker-dealer that is a member of the National Association of
Securities Dealers and controlling, controlled by, or under common
control with FILI (``FILI Broker-Dealers''), that may serve in the
future as principal underwriter for the Contracts or future contracts
offered through the Variable Account or the FILI Accounts.
filing date: The application was filed on March 11, 1994 and amended on
October 4, 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 SEC by 5:30 p.m. on
November 25, 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 SEC's
Secretary.
addresses: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, DC 20549. Applicants, c/o Fidelity Investments
Life Insurance Company, 82 Devonshire Street, Mail Zone F5E, Boston,
Massachusetts 02109, Attention: David J. Pearlman, Esq.
FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel at
(202) 942-0670 or C. Gladwyn Goins, Associate Director at (202) 942-
0665, Division of Investment Management.
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.
Applicants' Representations
1. FILI is a stock life insurance company organized under the laws
of the State of Utah. FILI is a wholly-owned subsidiary of FMR Corp.,
the parent company for the group of financial services companies known
as Fidelity Investments.
2. The Variable Account was established by FILI as a separate
account under the laws of the state of Pennsylvania on July 22, 1987
for the purpose of funding certain variable annuity contracts issued by
FILI. FILI may, in the future issue other contracts funded by the
Variable Account or other FILI Accounts and deduct mortality and
expense risk charges under those contracts in reliance upon the
requested exemptive order, if granted. Applicants undertake that such
future contracts will be substantially similar in all material respects
to the Contracts.
3. FBSI is the principal underwriter for the Contracts. In 1988,
FILI, the Variable Account and Fidelity Distributors Corp. (``FDC''),
which at that time served as principal underwriter for the Contracts,
obtained an exemptive order (the ``1988 Order'') permitting the
deduction of mortality and expense risk charges under the Contracts.\1\
On January 1, 1990, as part of an internal consolidation, the
activities of FDC and FBSI were combined and FBSI became principal
underwriter for the Contracts. All aspects of the Contracts have
remained precisely the same as was represented in the application
pursuant to which the 1988 Order was granted and Contract owners have
continued to pay precisely the same fees as they paid (or would have
paid) when FDC served as principal underwriter.
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\1\See Fidelity Investments Life Insurance Co., et al., Release
Nos. IC-16615 (Oct. 28, 1988) (Notice) and IC-16656 (Nov. 28, 1988)
(Order).
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4. The Contracts are flexible premium deferred variable annuities.
Annuity payments can be on a fixed basis, a variable basis, or a
combination of both. If the Annuitant dies prior to the annuity date
and prior to age 70, FILI will pay a death benefit equal to the greater
of (1) the purchase payments made, less any withdrawals and charges
thereon and (2) the Contract value as of the end of the valuation
period in which proof of death is received at the service center.
5. On each Contract anniversary before the annuity date, FILI
imposes an annual maintenance charge of $30. FILI currently waives this
charge for any Contract under which total payments, less withdrawals,
equals at least $25,000 and for contracts purchased after May 1, 1990
in exchange for a Fidelity Variable Annuity contract (another contract
formerly issued by FILI). FILI reserves the right to increase this
annual charge to not more than $50, if warranted by expenses, and to
assess the charge against all contracts other than those issued in
exchange for a Fidelity Variable Annuity. The charge assessed after the
annuity date for a particular contract will never be greater than the
charge in effect just before the annuity date. FILI also deducts a
daily charge from the assets of the subaccounts of the Variable Account
equivalent to an effective annual rate of .25%. Applicants state that
the administrative charges contain no element of anticipated profit and
their deduction meets the standard specified in Rule 26a-1 under the
1940 Act.
6. FILI deducts an asset charge, computed daily, for its assumption
of mortality and expense risks. This charge is made by deducting daily
from the assets of each subaccount attributable to the Contracts a
percentage of those assets equal to an effective annual rate of .75%.
Of this .75% charge, .65% is estimated to be for assuming mortality
risks and .10% is estimated to be for assuming expense risks. The
mortality risk FILI bears is that of making annuity payments for the
life of an annuitant no matter how long that may be. FILI also bears a
mortality risk by guaranteeing the death benefit if the annuitant dies
prior to the annuity date. The expense risk is the risk that the costs
of issuing and administering the Contracts will be greater than
expected when setting the administrative charge. FILI will realize a
gain from the charge for these risks to the extent that such charge is
not needed to provide for benefits and expenses under the Contracts.
7. A surrender charge is assessed on purchase payments withdrawn
from the Contract within the first five Contract years and may be
assessed on annuitizations within the first three Contract years. The
surrender charge is 5% during the first Contract year and declines one
percent per year thereafter. No surrender charge is imposed on total
withdrawals in each Contract year of up to 10% of purchase payments
(less amounts previously withdrawn that were subject to a surrender
charge). Applicants expect that the surrender charge will not be
sufficient to cover the expenses incurred in selling the Contracts. To
the extent that the surrender charge is not sufficient, FILI will pay
these expenses from its general assets which may include proceeds from
the mortality and expense risk charge.
Applicants' Legal Analysis
1. Applicants request exemptive relief on a prospective basis from
the provisions of Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to
permit the deduction of the mortality and expense risk charges under
the Contracts and any future contracts offered through the Variable
Account or through similar separate accounts established and maintained
by FILI, whether currently existing or created in the future.
Applicants also request that such exemptive relief extend to any other
National Association of Securities member broker-dealer controlling,
controlled by or under common control with FILI, whether existing or
created in the future, that may serve in the future as principal
underwriter of the Contracts or of future contracts offered through the
Variable Account or other FILI Accounts.
2. Section 27(c)(2) of the 1940 Act prohibits the issuer of a
periodic payment plan certificate, and any depositor or underwriter for
such issuer, from selling such periodic payment plan certificate unless
proceeds of payments on such certificates (other than sales loads) are
held under an indenture or agreement containing specified provisions.
Section 26(a)(2) and the Rules thereunder do not permit a deduction
from the assets of a separate account for mortality and expense risk
charges.
3. Applicants submit that their request for an order that applies
to (1) contracts offered in the future by the Variable Account or other
FILI Separate Accounts that are substantially similar in all material
respects to the Contracts described in the application, and (2) other
FILI Broker-Dealers which may serve in the future as principal
underwriter in respect of the Contracts or of future contracts offered
by the Variable Account or other FILI Separate Accounts, is appropriate
in the public interest. Such an order would promote competitiveness in
the variable annuity contract market by eliminating the need for FILI
to file redundant exemptive applications, thereby reducing its
administrative expenses and maximizing its use of its resources. The
delay and expense involved in having to repeatedly seek exemptive
relief would impair FILI's ability to effectively take advantage of
business opportunities as they arise. Applicants further submit that
the requested relief is consistent with the purposes of the 1940 Act
and the protection of investors for the same reasons. If FILI were
required to repeatedly seek exemptive relief with respect to the same
issues addressed in the application, investors would not receive any
benefit or additional protection thereby.
4. Applicants submit that FILI is entitled to reasonable
compensation for its assumption of mortality and expense risks and that
the change in principal underwriter in no way affects the findings the
SEC made in granting the 1988 Order. Applicants represent that the
charge of .75% made under the Contracts for mortality and expense risks
is consistent with the protection of investors because it is a proper
insurance charge.
5. FILI further represents that the charge of .75% for mortality
and expense risks is within the range of industry practice with respect
to comparable annuity products. This representation is based upon
FILI'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. FILI will maintain at its executive office, and make
available to the SEC upon request, a memorandum setting forth in detail
the products analyzed in the course of, and the methodology and results
of, its comparative survey.
6. Applicants represent that prior to making available any future
contracts, they will make a determination that the mortality and
expense risks under any such contract will be within the range of
industry practice for comparable contracts. Applicants will also
maintain and make available to the Commission, upon request, a
memorandum outlining the methodology underlying such determination.
Further, such mortaility and expense risk charge would not exceed 1.25%
of the daily assets of the Variable Account or other FILI Separate
Account.
7. Applicants acknowledge that if a profit is realized from the
mortality and expense risk charges, all or a portion of such profit may
be viewed as being used to cover distribution expenses. Notwithstanding
the foregoing, FILI has concluded that there is a reasonable likelihood
that the proposed distribution financing arrangements will benefit the
Variable Account and Contract owners. The basis for such conclusion is
set forth in a memorandum which will be maintained by FILI at its
executive office and which will be made available to the Commission
upon request.
8. FILI represents that the Variable Account and other FILI
Separate Accounts will invest only in a management investment company
which has undertaken, in the event such company adopts a plan under
Rule 12b-1 of the 1940 Act to finance distribution expenses, to have a
board of directors (or trustees), a majority of whom are not interested
persons of such open-end management investment company, formulate and
approve any plan under Rule 12b-1 to finance distribution expenses.
Conclusion
Applicants submit that the exemptive relief requested in the
application 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27447 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M
