99-33348. Aetna Life Insurance and Annuity Company, et al.

[Federal Register Volume 64, Number 246 (Thursday, December 23, 1999)]
[Notices]
[Pages 72111-72114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33348]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24204; File No. 812-11814]


Aetna Life Insurance and Annuity Company, et al.

December 16, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940, as amended (``Act'') granting 
exemptions from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder to permit the 
recapture of bonuses applied to purchase payments made under certain 
deferred variable annuity contracts.

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APPLICANTS: Aetna Life Insurance and Annuity Company (``ALIAC'') and 
its Variable Annuity Account B (``VA B''), Aetna Insurance Company of 
America (``AICA'' together with ALIAC, ``Aetna''), and any other 
separate accounts of ALIAC or AICA (``Future Accounts'') that support 
in the future deferred variable annuity and certificates that are 
substantially similar in all material respects to the VA B contracts 
described herein (collectively, ``Applicants'').

SUMMARY OF APPLICATION: Applicants seek an order under Section 6(c) of 
the Act to the extent necessary to permit, under specified 
circumstances, the recapture of bonuses applied to purchase payments 
made under: (i) deferred variable annuity contracts and certificates 
that ALIAC will issue through VA B (the contracts and certificates, 
including certificate data pages and endorsements, are collectively 
referred to herein as the ``VA B Contracts''), and (ii) deferred 
variable annuity contracts and certificates, that Aetna may issue in 
the future through VA B or any Future Account (collectively, the 
``Accounts''), that are substantially similar to the VA B Contracts in 
all material respects (the ``Future Contracts'' together with the VA B 
Contracts, ``Contracts''). Applicants also request that the order being 
sought extend to any National Association of Securities Dealers, Inc. 
(``NASD'') member broker-dealer controlling or controlled by, or under 
common control with, Aetna, whether existing or created in the future, 
that serves as a distributor or principal underwriter of the Contracts 
offered through the Accounts (collectively ``Aetna Broker-Dealers'').

FILING DATE: The application was filed on October 15, 1999, and amended 
and restated on December 14, 1999 (``Application'').

HEARING OR NOTIFICATION OF HEARING: An order granting the Application 
will be issued unless the SEC 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, in person or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on January 10, 2000 
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 who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Aetna Life 
Insurance and Annuity Company, 151 Farmington Avenue, Hartford, 
Connecticut 06156, Attn: J. Neil McMurdie, Esq.

FOR FURTHER INFORMATION CONTACT: Ann L. Vlcek, Senior Counsel, or Susan 
M. Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at [phone].

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth St., NW., Washington, DC 
20549-0102 (tel. [phone]).

Applicants' Representations

    1. ALIAC is a stock life insurance company organized under the laws 
of the State of Connecticut. ALIAC serves as depositor for VA B, which 
was established in 1976 pursuant to authority granted under a 
resolution of ALIAC's Board of Directors. ALIAC also serves as 
depositor for several currently existing Future Accounts, one or more 
of which may support obligations under Future Contracts. ALIAC may 
establish one or more additional Future Accounts for which it will 
serve as depositor.
    2. AIAC is a stock life insurance company organized under the laws 
of the State of Connecticut. AIAC serves as depositor for several 
currently existing Future Accounts, one or more of which may support 
obligations under Future Contracts. AIAC may establish one or more 
additional Future Accounts for which it will serve as depositor.
    3. ALIAC is the principal underwriter of VA B. ALIAC is registered 
with the Commission as a broker-dealer under the Securities Exchange 
Act of 1934, as amended (the ``1934 Act'') and is a member of the NASD. 
ALIAC will enter into arrangements with one or more registered broker-
dealers, which may be affiliated with ALIAC, to offer and sell VA B 
Contracts. ALIAC also may enter into these arrangements with banks that 
may be acting as broker-dealers without separate registration under the 
1934 Act pursuant to legal and regulatory exceptions. Further, ALIAC 
may distribute VA B Contracts directly. ALIAC may enter into similar 
arrangements for Future Contracts. ALIAC may act as principal 
underwriter for Future Accounts and distributor for Future Contracts. A 
successor entity also may act as principal underwriter for any of the 
Accounts and distributor for any of the Contracts.
    4. VA B is a segregated asset account of ALIAC. VA B is registered 
with the Commission as a unit investment trust under the Act. VA B will 
fund the variable benefits available under the VA B Contracts. Units of 
interest in VA B will be registered under the Securities Act of 1933 
(the ``1933 Act''). ALIAC may issue Future Contracts through VA B. 
ALIAC and AICA also may issue Future Contracts through Future Accounts. 
The assets of VA B that are equal to the reserves and VA B Contract 
liabilities are not chargeable with liabilities arising out of any 
other business of ALIAC. Any income, gains or losses, realized or 
unrealized, from assets allocated to VA B are, in accordance with the 
VA B's Contracts, credited to or changed against VA B, without regard 
to other income, gains or losses of ALIAC. The same will be true of any 
Future Account of ALIAC or AICA.
    5. The following is a discussion of the VA B Contracts. Future 
Contracts funded by VA B or any Future Account of ALIAC or AICA will be 
substantially

[[Page 72112]]

similar in all material respects to the VA B Contracts. Certain 
anticipated differences between VA B Contracts and Future Contracts are 
noted below. VA B Contracts will be sold by registered representatives 
of ALIAC and affiliated or unaffiliated broker-dealers with which ALIAC 
enters into selling agreements, as indicated above. ALIAC may issue VA 
B Contracts as individual or group flexible premium tax deferred 
variable annuity contracts. ALIAC may issue VA B Contracts in 
connection with retirement plans that qualify for favorable federal 
income tax treatment under Section 403 as a tax sheltered annuity or 
Section 408 of the Internal Revenue Code as an individual retirement 
plan (``Qualified Contract''). ALIAC also may issue VA B Contracts on a 
non-tax qualified basis (``Non-Qualified Contract''). VA B Contracts 
may be used for other purposes in the future, or offered only as 
Qualified Contracts or Non-Qualified Contracts.
    6. A Non-Qualified Contract may be purchased with an initial 
payment of at least $15,000. The minimum initial purchase payment for a 
Qualified Contract is $1,500. Subsequent purchase payments must be at 
least $50. ALIAC may impose maximum limitations on purchase payments. 
The maximum age of any annuitant as of the issue date is 85 (Death 
Benefit Option I) or 75 (Death Benefit Option II). ALIAC does not 
accept subsequent purchase payments after the annuity date.
    7. An owner can allocate purchase payments or account value to one 
or more sub-accounts of VA B, each of which will invest in a 
corresponding portfolio of a mutual fund. In addition, VA B Contracts 
will permit purchase payments to be allocated to fixed interest options 
funded through the ALIAC Guaranteed Account (the ``Guaranteed 
Account'') and the fixed account (the ``Fixed Account'') which provide 
a guarantee of the purchase payment allocated thereto and interest for 
specified periods. A positive or negative adjustment, or ``market value 
adjustment'' (``MVA''), will be made to the account value in the 
Guaranteed Account upon a withdrawal, surrender or transfer from the 
Guaranteed Account prior to the end of the guaranteed term. When a 
death benefit is paid under a VA B Contract within six months of the 
date of death, only a positive aggregate MVA amount, if any, is applied 
to the account value attributable to amounts withdrawn from the 
Guaranteed Account. Because of the MVA feature, fixed interest option 
interests are registered under the 1933 Act pursuant to a Form S-2 
Registration Statement. Contract owners may receive annuity payments 
after annuitization on a fixed or variable basis.
    8. VA B currently consists of 65 sub-accounts, 29 of which will be 
available under the VA B Contracts. Each sub-account will invest in 
shares of a corresponding portfolio (``Portfolio'') of an open-end, 
diversified series management investment company registered under the 
Act (each a ``Fund,'' collectively, the ``Funds''). The Funds currently 
available are managed by various entities affiliated and unaffiliated 
with Aetna.
    9. ALIAC, at a later date, may determine to create additional sub-
accounts to invest in additional Portfolios. In addition, sub-accounts 
of VA B may be combined or eliminated from time to time. Future 
Contracts may offer Funds managed by the same or other investment 
advisers.
    10. VA B Contracts provide for various withdrawal options, annuity 
benefits and payout annuity options, as well as transfer privileges 
among Investment Options, dollar cost averaging, death benefit and 
other features. VA B Contracts have the following charges: (i) a 
withdrawal charge as a percentage of purchase payments declining from 
8% in years one, two, and three to 0% in year nine and thereafter, with 
a 10% ``free withdrawal'' amount; (ii) asset-based mortality and 
expense risks charges at the annual rates of 1.25% for Death Benefit 
Option I and 1.45% for Death Benefit Option II (1.25% during the income 
phase) assessed against the net assets of each sub-account; and (iii) 
an asset-based administrative expense charge at an annual rate of 0.15% 
for administration expenses (0.25% during the income phase, but 
currently not deducted) assessed against the net assets of each sub-
account. Also, each year during the accumulation phase, a $30 annual 
maintenance fee is deducted proportionately from each Investment 
Option. The annual maintenance fee will be waived if the Contract 
owner's account value is $50,000 or greater on the date this fee is 
due. The underlying Funds impose investment management fees and charges 
for other expenses.
    11. ALIAC will credit a premium bonus (``Bonus'') under VA B 
Contracts to an owner's account whenever the owner makes an eligible 
purchase payment. The amount of the Bonus is a percentage of the 
eligible purchase payment. Withdrawals reduce on a dollar-for-dollar 
basis the eligibility of subsequent purchase payments to receive the 
Bonus. The Bonus percentage is based upon the sum of all purchase 
payments made, less withdrawals (``net cumulative purchase payments''), 
as follows:

------------------------------------------------------------------------
                                                                Bonus
             Net cumulative purchase  payments                percentage
------------------------------------------------------------------------
$1,500 to $14,999..........................................         2.00
$15,000 to $2,499,999......................................         4.00
$2,500,000 or more.........................................         5.00
------------------------------------------------------------------------

An owner's initial purchase payment will be eligible for the Bonus at 
the rates shown above. The amount of a subsequent purchase payment 
eligible for a Bonus is the amount of net cumulative purchase payments 
minus the sum of purchase payments upon which a Bonus has previously 
been paid. No Bonus will be credited on amounts reinvested following a 
full withdrawal. In the future, ALIAC (or AICA) may credit Bonuses of 
up to 5% of eligible purchase payments under Future Contracts according 
to different purchase payment breakpoint schedules. ALIAC will allocate 
Bonuses among the Investment Options (defined below) in the same 
proportion as the corresponding purchase payments are allocated by the 
owner. ALIAC will fund Bonuses from its general account assets. The 
Bonuses are vested when applied, except under the following 
circumstances: (i) ALIAC will recapture all Bonuses if the owner 
returns a VA B Contract to ALIAC for a refund during the 10-day (or 
longer, if required) ``free look'' period; (ii) any Bonus credited to 
an owner's account within 24 months of electing an income phase payment 
option will be forfeited and not included in an owner's account value 
when calculating the payment amount; and (iii) the amount of any death 
benefit will not include any Bonus credited to an owner's account after 
or within 12 months of the date of death.
    12. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder to the extent necessary to permit Aetna to issue Contracts 
that permit Aetna to recapture (i) all Bonuses if the owner returns the 
Contract to Aetna for a refund during the 10-day (or longer, if 
required) ``free look'' period; (ii) any Bonus credited to an owner's 
account within 24 months of electing an income phase payment option so 
that such Bonuses will be forfeited and not included in an owner's 
account value when calculating the payment amount; and (iii) any Bonus 
credited to an owner's account after or within 12 months of the date of 
death so that the amount of any death benefit will not include such 
Bonuses.

[[Page 72113]]

Applicants' Legal Analysis

    1. Section 6(c) of the 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 Act and the rules 
promulgated thereunder if and to the extent that such 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 Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions summarized 
above with respect to the VA B Contracts and any Future Contracts 
funded by VA B or Future Accounts, that are issued by Aetna and 
underwritten or distributed by ALIAC or any Aetna Broker-Dealers. 
Applicants undertake that Future Contracts funded by VA B or any Future 
Account, in the future, will be substantially similar in all material 
respects to the VA B Contracts. Applicants believe that the requested 
exemptions are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.
    2. Applicants represent that it is not administratively feasible to 
track the Bonus amount in the Accounts after the Bonus is applied. 
Accordingly, the asset-based charges applicable to the Accounts will be 
assessed against the entire amounts held in the Accounts, including the 
Bonus amount, during the period when the owner's interest in the Bonus 
is not completely vested. Therefore, during such periods, the aggregate 
asset-based charges assessed against an owner's annuity account value 
will be higher than those that would be charged if the owner's annuity 
account value did not include the Bonus.
    3. Subsection (i) of Section 27 provides that Section 27 does not 
apply to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for such a 
separate account or sponsoring insurance company to sell a contract 
funded by the registered separate account unless, among other things, 
such contract is a redeemable security. Section 2(a)(32) defines 
``redeemable security'' as any security, other than short-term paper, 
under the terms of which the holder, upon presentation to the issuer, 
is entitled to receive approximately his proportionate share of the 
issuer's current net assets, or the cash equivalent thereof.
    4. Applicants submit that the Bonus recapture provisions summarized 
herein would not deprive an owner of his or her proportionate share of 
the issuer's current net assets. Applicants state that an owner's 
interest in the amount of the Bonus allocated to his or her annuity 
account upon receipt of an initial purchase payment is not vested until 
the applicable free-look period has expired without return of the 
Contract. Similarly, Applicants state that an owner's interest in the 
amount of any Bonus allocated upon receipt of eligible purchase 
payments during the two years before the owner annuities or during the 
12 months prior to the date of death also is not vested. Until or 
unless the amount of any Bonus is vested, Applicants submit that Aetna 
retains the right and interest in the Bonus amount, although not in any 
earnings attributable to that amount. Thus, Applicants argue that, when 
Aetna recaptures any Bonus, it is simply retrieving its own assets and, 
because an owner's interest in the Bonus is not vested, the owner has 
not been deprived of a proportionate share of the applicable Account's 
assets, i.e., a share of the applicable Account's assets proportionate 
to the owner's annuity account value (including the Bonus).
    5. In addition, with respect to Bonus recapture upon the exercise 
of the free-look privilege, Applicants state that it would be patently 
unfair to allow an owner exercising that privilege to retain a Bonus 
amount under a Contract that has been returned for a refund after a 
period of only a few days. Applicants state that, if Aetna could not 
recapture the Bonus, individuals could purchase a Contract with no 
intention of retaining it, and simply return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of a Bonus 
relating to purchase payments made within two years of annuitization or 
within twelve months of death is designed to provide Aetna with a 
measure of protection against ``anti-selection.'' Applicants state that 
the risk here is that, rather than spreading purchase payments over a 
number of years, an owner will make very large payments shortly before 
annuitizing, or death, thereby leaving Aetna less time to recover the 
cost of Bonus, to its financial detriment. Aetna intends to recover the 
cost of the Bonus through a portion of the early withdrawal charge and 
the mortality and expense risks charge imposed under the Contracts. 
Aetna may use any excess to recover distribution costs relating to the 
Contracts and as a source of profit. The amounts recaptured equal the 
Bonuses provided by Aetna from its own general account assets, buy any 
gain would remain part of the Contract's value.
    7. Applicants represent that the Bonus will be attractive to and in 
the interest of investors because it will permit owners to put an 
amount greater than their purchase payments (depending on the net 
cumulative purchase payments) of work for them in the selected 
Investment Options. Also, owners will retain any earnings attributable 
to the Bonus and, unless any of the contingencies summarized above 
apply, the principal amount of the Bonus.
    8. Applicants submit that the provisions for recapture of any 
applicable Bonus under the VA B Contracts do not, and any such Future 
Contract provisions will not, violate Sections 2(a)(32) and 27(i)(2)(A) 
of the Act. Nevertheless, to avoid any uncertainties, Applicants 
request an exemption from those Sections, to the extent deemed 
necessary, to permit the recapture of any Bonus under the circumstances 
described herein with respect to the Contracts, without the loss of the 
relief from Section 27 provided by Section 27(i).
    9. Section 22(c) of the Act authorizes the Commission to make rules 
and regulations applicable to registered investment companies and to 
principal underwriters of, and dealers in, the redeemable securities of 
any registered investment company, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in Section 22(a) in respect of the rules which may be made by a 
registered securities association governing its members. Rule 22c-1 
thereunder prohibits a registered investment company issuing any 
redeemable security, a person designated in such issuer's prospectus as 
authorized to consummate transactions in any such security, and a 
principal underwriter of, or dealer in, such security, from selling, 
redeeming, or repurchasing any such security except at a price based on 
the current net asset value of such security which is next computer 
after receipt of a tender of such security for redemption or of an 
order to purchase or sell such security.
    10. Arguably, Aetna's recapture of the Bonus might be viewed as 
resulting in the redemption of redeemable securities for a price other 
than one based on the current net asset value of the Accounts. 
Applicants contend, however, that the recapture of the Bonus is not 
violative

[[Page 72114]]

of Section 22(c) and Rule 22c-1. Applicants argue that the recapture of 
the Bonus does not involve either of the evils that Rule 22c-1 was 
intended to eliminate or reduce, namely: (i) the dilution of the value 
of outstanding redeemable securities of registered investment companies 
through their sale at a price below net asset value or their redemption 
or repurchase at a price above it, and (ii) other unfair results, 
including speculative trading practices. See Adoption of Rule 22c-1 
under the Act, Investment Company Release No. 5519 (Oct. 16, 1968). To 
effect a recapture of a Bonus, Aetna will redeem interest in an owner's 
annuity account at a price determined on the basis of the current net 
asset value of the respective Accounts. The amount recaptured will 
equal the amount of the Bonus that Aetna paid out of its general 
account assets. Alhough owners will be entitled to retain any 
investment gain attributable to the Bonus, the amount of such gain will 
be determined on the basis of the current net asset value of the 
respective Accounts. Thus, no dilution will occur upon the recapture of 
the Bonus. Applicants also submit that the second harm that Rule 22c-1 
was designed to address, namely, speculative trading practices 
calculated to take advantage of backward pricing, will not occur as a 
result of the recapture of the Bonus. However, to avoid any uncertainty 
as to full compliance with the Act, Applicants request an exemption 
from the provisions of Section 22(c) and Rule 22c-1 to the extent 
deemed necessary to permit them to recapture the Bonus under the 
Contracts.
    Conclusion:
    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the Act, namely, that the exemptions requested are 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 Act, and that, therefore, the Commission should grant 
the requested order

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33348 Filed 12-22-99; 8:45 am]
BILLING CODE 8010-01-M