[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Notices]
[Pages 62508-62510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29616]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21558; No. 812-9722]
The Prudential Insurance Company of America, et al.
November 29, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: The Prudential Insurance Company of America
(``Prudential''), The Prudential Variable Appreciable Account
(``Separate Account''), and Pruco Securities Corporation, Inc. (``Pruco
Securities'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Section 27(a)(3) of the 1940 Act and Rule 6e-
3(T)(b)(13)(ii) thereunder.
SUMMARY OF APPLICATION: This order will permit the Separate Account to
issue flexible premium survivorship variable life insurance contracts
(``Contracts'') in which the sales charge deducted from premiums up to
one target premium paid during any year exceeds the sales charge
payable on any excess premium payments made in any prior year.
FILING DATE: The application was filed on August 14, 1995.
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 should be received by the Commission by 5:30
p.m. on December 26, 1995, 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, Thomas Castano,
Prudential Insurance Company of America, Prudential Plaza, Newark, New
Jersey 07102.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or
Wendy Finck Friedlander, Deputy Chief, at (202) 942-0670, Office of
Insurance Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The 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. Prudential, a New Jersey mutual life insurance company, offers
life insurance and annuities in all states, the District of Columbia,
and in all United States' territories and possessions.
2. The Separate Account is a separate account established by
Prudential to fund the Contracts and other variable life insurance
contracts issued by Prudential. The Separate Account is registered with
the Commission under the 1940 Act as an unit investment trust, and
interests in the Contracts are registered with the Commission as
securities under the Securities Act of 1933. The Separate Account
presently is comprised of fifteen sub-accounts (``Sub-Account'') each
of which invests exclusively in a corresponding portfolio of the
Prudential Series Fund, Inc. The Prudential Series Fund, Inc. is an
open-end diversified management investment company registered under the
1940 Act. Its shares currently are sold only to separate accounts of
Prudential and certain subsidiaries of Prudential that fund variable
life insurance and variable annuity contracts.
3. Pruco Securities, a wholly-owned subsidiary of Prudential, is
the principal underwriter for the Contracts. Pruco Securities is
registered as a broker-dealer under the Securities Exchange Act of
1934.
4. The Contracts are flexible premium survivorship variable life
insurance contracts. The Contracts provide life insurance coverage on
two insureds with a death benefit payable when the last-surviving of
the two insureds dies. The Contracts allow Contract owners to allocate
premium payments among various Sub-Accounts and a fixed-rate option.
5. In addition, the Contracts offer Contract owners a choice
between a fixed insurance amount or a variable insurance amount. The
fixed insurance amount provides a death benefit under the Contract
equal to the basic insurance amount regardless of the investment
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performance of the investments chosen by Contract owners, provided the
Contract remains in force. The variable insurance amount provides for
an initial basic insurance amount, but favorable investment performance
and the payment of additional premiums generally will result in an
increase in the death benefit.
6. After paying the initial premium, Contract owners generally are
free to pay premiums at any time and in any amount (above a minimum of
$25), and the Contracts will not lapse if the Contract fund is
sufficient to cover monthly fees and charges deducted from the account
value.\1\ If the Contract owners pays premiums at or above certain
levels, the Contract owner will be entitled to guaranteed death
benefits even if poor investment performance results in the Contract
fund dropping below the amount needed to pay charges due under the
Contract. if target premiums are paid at the beginning of each Contract
year, the Contract will stay in force during the defined period known
as the limited death benefit guaranteed period (assuming no loans or
withdrawals).\2\ The target premiums will be level if the Contract
contains no riders or extra risk charges. If the Contract includes
certain riders, these premiums may increase each year, reflecting
increasing rider charges. The target level premium, the premium used by
Prudential to calculate the applicable charges for sales expenses, is
the target premium less premiums for single life riders, and any
premiums associated with aviation, avocation, occupational, or
temporary extras. The target level premium is always less than the
guideline annual premium as defined in Rule 6e-3(T)(c)(8).
\1\The Contract fund is defined as the total amount credited to
a specific Contract and is equal to the sum of all amounts invested
in the account and any earnings thereon, the amount invested in the
fixed-rate option and earnings thereon, and the principal amount of
any Contract debt.
\2\The Contract also allows the Contract owner to choose to pay
guideline premiums that, if paid at the beginning of each Contract
year, will keep the Contract in force for the life of the Contract
regardless of investment performance (assuming no loans or
withdrawals). As discussed below, the sales, charges for the
Contract are, however, always computed with reference to the target
level premium, not the issuer's higher guideline premium required to
guarantee the death benefit for life.
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7. certain fees and charges are deducted under the Contracts. Each
Sub-Account is assessed a daily mortality and expense risk charge, as
well as monthly administrative charges, cost of insurance charges,
charges for optional rider benefits, charges to compensate Prudential
for the risk in providing the death benefit guarantee, and charges for
special insurance class rating, if any. In addition to these daily and
monthly charges, Prudential will charge the lesser of 2% or $10 for
each partial withdrawal, reserving the right to increase this charge to
the lesser of 2% or $25. Prudential also will charge up to $25 for each
transfer among investment options exceeding 12 in any Contract year.
Prudential does not currently impose a charge for decreasing the basic
insurance amount but reserves the right to charge up to $25 for each
decrease.
8. In addition, Prudential will deduct from each premium payment a
charge for taxes attributable to premiums. This charge currently
consists of two parts: (1) an amount based on an average of state and
local premium taxes--presently, 2.5% of each premium payment; and (2) a
charge to cover the estimated cost of an increase in Prudential's
federal income tax liabilities that is measured by premiums received,
and currently is 1.25% of each payment.
9. During the first 20 Contract years, Applicants also propose to
deduct from premium payments a sales charge. This change will be equal
to: (1) for the first Contract year, 30% of all premiums up to the
amount of the target level premium and 4% of premiums paid in excess of
the target level premium (``Excess Premiums''); and (2) for Contract
years 2 through 20, 7.5% of all premiums paid in each Contract year to
the target premium and 4% for Excess Premiums paid in each such
Contract year. If the average age of the insureds is 58 years or more,
these charges may be reduced to comply with the sales charge
limitations contained in Rule 6e-3(T) under the 1940 Act.
Applicants' Legal Analysis
1. Section 27(a)(3) of the 1940 provides that the amount of sales
charge deducted from any of the first twelve monthly payments on a
periodic payment plan certificate may not exceed proportionately the
amount deducted from any other such payment. Section 27(a)(3) further
provides that the sales charge deducted from any subsequent payment may
not exceed proportionately the amount deducted from any other
subsequent payment.
2. Rule 6e-3(T)(b)(13)(ii) provides a partial exemption from the
prohibitions of Section 27(a)(3). Exemptive relief from the
prohibitions of Section 27(a)(3) provided by Rule 6e-3(T)(ii) is
available if the proportionate amount of sales charge deducted from any
premium does not exceed the proportionate amount deducted from any
prior premium payment, unless an increase is caused by reductions in
the annual cost of insurance or in sales charge for amounts transferred
to a variable life insurance contract from another plan of insurance.
Rule 6e-3(T)(b)(13)(ii) thus permits a decrease in sales load for any
subsequent premium payment but not an increase.
3. Under the Contracts' sales load structure, premium payments that
do not exceed the target level premium in a year will be subject to a
30% sales charge in the first year and 7.5% in each subsequent year up
to the 20th Contract year. Excess Premium payments in each such year,
however, will be subject to only a 4% sales charge. Consequently, if a
Contract owner pays Excess Premiums in the Contract year, the Contract
owner will pay one level of sales charge on the portion of the premium
up to the target level premium and a lower sales charge on the Excess
Premiums paid in that same Contract year. Applicants thus request an
exemption from the requirements of Section 27(a)(3) and Rule 6e-
3(T)(b)(13)(ii) because the Contracts' sales load structure would
appear to violate the ``stair-step'' provisions in Section 27(a)(3) and
because the exemption from Section 27(a)(3) provided by Rule 6e-
3(T)(b)(13)(ii) does not seem to apply to the Contracts' sales load
structure.
4. Applicants state that, had they chosen to impose the higher
front-end sales load equally on all premium payments, the Contracts
would qualify for exemptive relief under Rule 6e-3(T)(b)(13)(ii),
subject to the maximum limits permissible under subparagraph (b)(13)(i)
of the Rule. Applicants assert, however, that such a front-end charge
would be less favorable to Contract owners than provided under the
Contracts; under such a sales charge structure, sales load would be
recovered by Prudential earlier than is the case under the Contracts'
sales load structure. The sales charge structure under the Contracts
benefits Contract owners by spreading Prudential's recovery of sales
load over a longer period of time, and thereby permitting a greater
portion of a Contract owner's Excess Premiums to be credited to account
value.
5. In addition, Applicants represent that the sales load structure
has been designed based on Prudential's operating expenses for the sale
of the Contracts and, thus, reflects in part the lower overall
distribution costs (including commissions paid to sales persons) that
are associated with Excess Premiums paid over the life of a Contract.
Applicants submit that it would not be in the best interests of a
Contract owner to require the imposition of a higher sales load
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structure than Applicants deem necessary to adequately defray their
expenses.
6. applicants argue that Section 27(a)(3) was designed to address
the abuse of periodic payment plan certificates under which large
amounts of front-end sales loads were deducted so early in the life of
the plan that an investor redeeming in the early periods would recoup
little of his or her investment since only a small portion of the
investor's early payments were actually invested. Applicants submit
that the deduction of a reduced front-end sales load on Excess Premiums
paid in any Contract year does not have the detrimental effect that
Section 27(a)(3) was designed to prevent because a greater proportion
of the Contracts' sales loads are deducted later than otherwise would
be the case.
Conclusion
For reasons states above, Applicants submit that the requested
exemptions from Section 27(a)(3) of the 1940 Act, and Rule 6e-
3(T)(b)(13)(ii) thereunder, are in accordance with the standards of
Section 6(c) of the 1940 Act, and are consistent with the protection of
investors and the policies 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. 95-29616 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-M
