[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67008-67011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31264]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21610; No. 812-9740]
Pruco Life Insurance Company, et al.
December 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Pruco Life Insurance Company (``Pruco Life''), Pruco Life
Insurance Company Insurance Company of New Jersey (``Pruco Life of New
Jersey''), The Prudential Insurance Company of America
(``Prudential''), Pruco Life Flexible Premium Annuity Account
(``Separate Account''), and Pruco Securities Corporation
(``Securities'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections 22(d),
26(a)(2)(C), and 27(c)(2) of the 1940 Act.
SUMMARY of APPLICATION: Applicants seek an order to permit: (1) The
deduction of a mortality and expense risk charge from the assets of the
Separate Account or any other separate account (``Other Accounts'')
established by Pruco Life, Pruco Life of New Jersey, or Prudential to
support individual flexible premium annuity contracts (``Contracts'')
as well as other variable annuity contracts that are substantially
similar in all material respects to the Contracts (``Future
Contracts'') (2) a waiver of the withdrawal charge for Contracts or
Future Contracts issued in connection with the waiver of withdrawal
charges endorsement (``Critical Care Access'') and (3) a reduction of
the withdrawal charge to Contract and Future Contract owners age 84 or
older to insure compliance with state non-forfeiture laws.
FILING DATE: The application was filed on August 25, 1995, and an
amended and restated application was filed on December 4, 1995. In
addition, Applicants have represented that they will file an amendment
during the notice period to make the representations contained herein.
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 January
15, 1996, 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 requestor'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 5th
Street, N.W., Washington, D.C. 20549. Applicants, Clifford E. Kirsch,
Esq., The Prudential Insurance Company of America, Prudential Plaza,
Newark, New Jerey 07102.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or
Wendy Finck Friedlander, Deputy Chief, both at (202) 942-0670, Office
of Insurance Products (Division of Investment Management).
[[Page 67009]]
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the SEC's Public
Reference Branch.
Applicant's Representations
1. Pruco Life, a stock life insurance company, is organized in
Arizona, and licensed to do business in the District of Columbia and
all states of the United States except New York. Pruco Life is a
wholly-owned subsidiary of Prudential.
2. Pruco Life of New Jersey, a stock life insurance company, is
organized in New Jersey. Pruco Life of New Jersey is a wholly-owned
subsidiary of Pruco Life.
3. Prudential, a mutual life insurance company, is organized in New
Jersey.
4. Securities will serve as the principal underwriter of the
Contracts. Securities, an indirect wholly-owned subsidiary of
prudential, is registered under the Securities Act of 1934 (``1934
Act'') as a broker-dealer, and is a member of the National Association
of Securities Dealers. The Contracts will be sold by registered
representatives of Securities. Securities also may enter into
agreements with other brokers registered under the 1934 Act who qualify
to sell the Contracts.
5. The Separate Account is a separate account established by Pruco
Life to fund the Contracts. The Separate Account is registered with the
Commission as a unit investment trust under the 1940 Act, and interests
in the Contracts are registered as securities under the Securities Act
of 1933.
6. Pruco Life has established for each investment option offered
under the Contracts a Separate Account subaccount (``Subaccount''),
which will invest solely in a specific corresponding portfolio of
certain designated investment companies (``Funds''). The Funds will be
registered under the 1940 Act as opened management investment
companies. Each portfolio of the Funds will have separate investment
objectives and policies.
7. The Contracts also provide for a fixed-rate option which
guarantees a stipulated rate of interest for a one-year period, and a
market-value adjustment option which guarantees a stipulated rate of
interest if held for a seven year period.
8. The Contracts are individual flexible premium annuity contracts.
The Contracts may be purchased with an initial purchase payment of
$10,000 or more. The minimum subsequent purchase payment for the
Contracts is $1000. Net purchase payments may be allocated to one or
more of the Separate Account Subaccounts, the fixed-rate option, or to
the market-value adjustment option.
9. The Contracts provide for a series of annuity payments beginning
on the annuity date. The Contract owner may select from several annuity
payout options.
10. The Contracts provide for a death benefit if the annuity or the
survivor of two co-annuitants dies during the accumulation period. The
death benefit is the greater of: (1) The accumulated value under the
Contract fund as determined on the date of receipt due proof of death
by Pruco Life; (2) 100% of all premium payments made by the Contract
owner under the Contract reduced by the amount of any partial
withdrawals (including withdrawal charges) ; or (3) the greatest of the
Contract fund values calculated on every third Contract anniversary,
reduced by all subsequent withdrawals and withdrawal charges.
11. Certain charges and fees are assessed under the Contracts.
Pruco Life will deduct an administration charge from a Contract owner's
account value to reimburse it for expenses relating to the
administration and maintenance of the Contract. The administrative
expense charge is deducted daily from the assets in each of the
Subaccounts, and is equivalent to an effective annual rate .15%.
Although there is no current intention to do so, Pruco Life reserves
the right to impose an additional charge of up to $25 annually and upon
surrender on Contracts with less than $50,000.
12. Applicants represent that the administration charges will not
increase during the life of the Contracts. In addition, Applicants
represent that these charges are made with no anticipation of profit,
and that the administrative charges comply with Rule 26a-1.
13. A withdrawal charge may be made upon full or partial
withdrawals under the Contract. The withdrawal charge will be imposed
for expenses related to the sales and distribution of the Contracts.
The amount of the withdrawal charge decreases annually from 7% to 0%
over 8 Contract years. For the purposes of determining the withdrawal
charge, withdrawals will be allocated to purchase payments on a first-
in, first-out basis so that all withdrawals are allocated to purchase
payments to which the lowest (if any) withdrawal charge applies. In
addition, a portion of the purchase payments may be withdrawn without
the imposition of any charge (``Charge Free Amount''). This Charge Free
Amount is equal to 10% of all purchase payments less all withdrawals of
the purchase payments previously made plus the Charge Free Amount
available in the immediately preceding Contract year not withdrawn in
that year.
14. No withdrawal charge is assessed if withdrawals are used to
effect an annuity based on the life of an annuitant. Contracts issued
to annuitants age 84 and older are subject to a reduced withdrawal
charge.
15. In those states which have approved a Critical Care Access
endorsement, all or part of any withdrawal and annual administrative
charges associated with a full or partial withdrawal, or any
annuitization or withdrawal charge due on the annuity date, will be
waived following the receipt of due proof that the annuitant or co-
annuitant (if applicable) has been confined to an eligible nursing home
or hospital for a period of at least 3 months, or a physician has
certified that the annuitant or co-annuitant has 6 months or less to
live.
16. Pruco Life proposes to deduct a daily mortality and expense
risk charge. Pruco Life represents that this charge is equal to an
effective annual rate of 1.25% of the net asset value of the Separate
Account, and that it will not increase. Of this amount, approximately
.80% is for mortality risks and .45% is for expense risks.
17. Pruco Life assumes the mortality risk that the life expectancy
of the annuitant will be greater than that assumed in the guaranteed
annuity purchase rates, thus requiring Pruco Life to pay out more in
annuity income than it had planned. In addition, Pruco Life is
contractually obligated to provide a death benefit prior to the annuity
date. Thus, Pruco Life assumes the risk that the owner may die at a
time when the amount of the death benefit payable exceeds the then net
surrender value of the Contracts. The expense risk assumed by Proco
Life is that the Contract administration charge will be insufficient to
cover the cost of administering the Contracts.
18. In the event the mortality and expense risk charges are more
than sufficient to cover Pruco Life's costs and expenses, any excess
will be a profit to Pruco Life.
19. A charge may be deducted for premium taxes and any taxes
attributable to purchase payments. This may include any state or local
premium taxes, any federal premium taxes, and any federal, state, or
local income, excise, business or any other type of tax (or component
thereof) measured by, or based upon, the amount of purchase payment
received by Pruco Life. Applicants represent that premium taxes
currently range from 1% to 5%.
[[Page 67010]]
Furthermore, Pruco Life reserves the right to impose a charge of up to
a maximum of .3% for federal income taxes measured by premiums upon
each purchase payment received under the Contact, in those states where
approval has been obtained. At present, no such charge is being made in
any state.
20. No transfer fee will be charged for the first 12 transactions
(excluding dollar cost averaging transfers) effecting transfers in any
contract year. Subsequent transfers within a Contract, year, however,
will be assessed a fee of $25 per transfer.
21. A market-value adjustment (``MVA'') will be made if a Contract
owner withdraws or transfers money before its maturity date from a
division of a fixed-rate investment option that is being credited with
an unique guaranteed interest rate (``interest cell''). The MVA may
increase or decrease either the amount transferred or the amount
remaining in an interest cell after a partial withdrawal.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule, or regulation of the 1940 Act to
the extent that the 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 1940 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, in relevant part,
prohibit a registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank, and held under arrangements which prohibit any payment
to the depositor or principal underwriter except a reasonable fee, as
the Commission may prescribe, for performing bookkeeping and other
administrative duties normally performed by the bank itself.
3. Applicants request exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction from the net assets of the Separate Account and the Other
Accounts in connection with the Contracts and Future Contracts of the
1.25% charge for the assumption of mortality and expense risks.
4. Applicants represent that the 1.25% per annum mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts. This representation is based upon an
analysis of publicly available information about similar industry
products, taking into consideration such factors as the current charge
levels, the existence of expense charge guarantees, and guaranteed
annuity rates. Pruco Life will maintain at its principal offices,
available to the Commission, a memorandum setting forth in detail the
products analyzed in the course of, and the methodology and results of,
Applicants' comparative review. In addition, Applicants will keep, and
make available to the Commission, a memorandum setting forth the basis
for the same representations, and that the mortality and expense risk
charges are reasonable, with respect to the Future Contracts offered by
the Separate Account of Other Accounts.
5. Pruco Life has concluded that there is a reasonable likelihood
that the Separate Account's and Other Accounts' proposed distribution
financing arrangements will benefit the Separate Accounts and their
investors. Pruco Life represents that it will maintain and make
available to the Commission upon request a memorandum setting forth the
basis of such conclusion. In addition, Applicants will keep, and make
available to the Commission, a memorandum setting forth the basis for
the same representations with respect to the Future Contracts offered
by the Separate Account or Other Accounts.
6. The Separate Account and Other Accounts will be invested only in
management investment companies that undertake, in the event the
company should adopt a plan for financing distribution expenses
pursuant to Rule 12b-1 under the 1940 Act, to have such plan formulated
and approved by the company's board members, the majority of whom are
not ``interested persons'' of the management investment company within
the meaning of Section 2(a)(19) of the 1940 Act.
7. Section 22(d) of the 1940 Act prohibits a registered investment
company, its principal underwriter, or a dealer in its securities from
selling any redeemable security issued by such registered investment
company to any person except at a current offering price described in
the prospectus.
8. Applicants request that the Commission issue an order under
Section 6(c) of the 1940 Act exempting them from the provisions of
Section 22(d) to the extent necessary to permit Applicants to reduce
the withdrawal charge for annuitants 84 or older, and to waive the
withdrawal charge for Critical Care Access.
9. Applicants submit that the proposed reduction and waiver are
consistent with the policies of Section 22(d) and the rules promulgated
thereunder. One of the purposes of Section 22(d) is to prevent an
investment company from discriminating among investors by charging
different prices to different investors. Eligibility for the reduction
of fees will be based on advanced age to comply with state non-
forfeiture laws, and eligibility for the Critical Care Access fee
waiver will be based on the Contract or Future Contract owner
experiencing the defined medically related contingencies. Therefore,
these benefits will not unfairly discriminate among Contract and Future
Contract owners. Applicants submit that the reduction in fees and fee
waiver is advantageous to Contract and Future Contract owners by
permitting them, upon experiencing such contingencies, to make
withdrawals from the Contract or Future Contract with the imposition of
either a reduced fee or no fee, respectively. Applicants represent that
the reduction in charges and waiver will not result in dilution of the
interests of any other Contract and Future Contract owners. Applicants
also submit that reducing and waiving the withdrawal fee under such
circumstances will not result in the occurrence of any of the abuses
that Section 22(d) is designed to prevent.
10. Applicants represent that the reduction and waiver of the
withdrawal charge will be uniformly available to all eligible Contract
and Future Contract owners, except where prohibited by state law, and
that these provisions will be adequately described in the prospectus of
the Contracts and Future Contracts.
11. Applicants assert that the terms of the relief requested with
respect to any Future Contracts funded by the Separate Account or Other
Accounts are consistent with the standards enumerated in Section 6(c)
of the 1940 Act. Without the requested relief, Applicants would have to
request and obtain exemptive relief for each new Other Account it
establishes to fund any Future Contract. Applicants submit that any
such additional request for exemption would present no issues under the
1940 Act that have not already been addressed in this application, and
that investors would not receive any benefit or additional protections
thereby.
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
[[Page 67011]]
and maximizing the efficient use of their resources. The delay and
expense involved in having repeatedly to seek exemptive relief would
reduce Applicants' ability effectively to 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. Applicants thus assert 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 1940 Act.
Conclusion
For the reasons set forth above, Applicants represent 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 policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. NcFarland,
Deputy Secretary.
[FR Doc. 95-31264 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M
