[Federal Register Volume 59, Number 174 (Friday, September 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2242]
[[Page Unknown]]
[Federal Register: September 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20522; No. 812-9014]
Equitable Life Insurance Company of Iowa, et al.
August 31, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Equitable Life Insurance Company of Iowa (``Equitable''),
Equitable Separate Account A (``Separate Account''), and Equitable of
Iowa Securities Network, Inc. (``Equitable Securities'') (collectively,
``Applicants'').
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 permitting: (a) the
deduction of mortality and expenses risk charges from the assets of the
Separate Account in connection with the offering of individual deferred
variable annuity contracts (``Contracts''); (b) the deduction of
mortality and expense risk charges from the assets of any other
separate account established by Equitable in the future to fund other
variable annuity contracts (``Other Contracts'') that will be similar
to the Contracts; and (c) the waiver, under certain circumstances, of
the contingent deferred withdrawal charge that would otherwise be
imposed on certain variable annuity contracts.
FILING DATE: The application was filed on May 19, 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 the 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 September 26, 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 Commission's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants, c/o John Merriman, Equitable Life Insurance Company
of Iowa, 604 Locust Street, Des Moines, Iowa 50309.
FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, Senior Counsel, or Michael Wible, Special Counsel, at
(202) 942-0670, 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. Equitable is a stock life insurance company and a wholly-owned
subsidiary of Equitable of Iowa Companies, an Iowa corporation.
Equitable currently is licensed to do business in the District of
Columbia and all states except Hawaii, Maine, New Hampshire, New York
and Vermont.
2. The Separate Account is a registered unit investment trust under
the 1940 Act that currently is used to fund the Equitable Contracts.
The Separate Account has filed a registration statement on Form N-4 to
register the Contracts as securities under the Securities Act of 1933.
The Separate Account currently consists of ten sub-accounts
(``Subaccounts'') which invest in shares of one of ten corresponding
portfolios currently offered by the Equi-Select Series Trust
(``Trust''). Additional Subaccounts may be created in the future to
invest in any additional portfolios of the Trust which may be added in
the future.
3. The Trust is a series fund consisting of the Money Market,
Mortgage-Backed Securities, International Fixed Income, Advantage,
Government Securities, International Stock, Short-Term Bond, OTC,
Research, and Total Return Portfolios. The Trust is a registered open-
end management investment company under the 1940 Act. Equitable
Investment Services, Inc. is the investment adviser for the Trust.
4. Equitable Securities, a wholly-owned subsidiary of Equitable of
Iowa Companies and an affiliate of Equitable, will distribute the
Contracts. Equitable Securities is in the process of registering as a
broker-dealer under the Securities Exchange Act of 1934 and is applying
for membership in the National Association of Securities Dealers, Inc.
5. The Contracts are individual flexible purchase payment deferred
variable and fixed annuity contracts that are available in connection
with retirement plans which may or may not qualify for Federal income
tax advantages under the Internal Revenue Code. The Contracts require
certain minimum initial purchase payments and minimum subsequent
payments. The Contracts provide for certain guaranteed death benefits
equal to the greater of: (a) The sum of the Purchase Payments less any
withdrawals including any applicable Withdrawal Charge and any
applicable taxes not previously deducted; or (b) the Contract Value
less any applicable taxes not previously deducted; or, if death occurs
after the end of the eighth Contract Year, (c) the Contract Value at
the end of the eighth Contract Year less any withdrawals including any
applicable CDSC incurred since the end of the eighth Contract Year and
any applicable taxes not previously deducted.
6. Various fees and expenses are deducted under the Contracts and
the Variable Account. Premium taxes or other taxes payable to a state
or other governmental entity will be advanced by Equitable at the time
purchase payments are made and then deducted from Contract Value at
annuitization, withdrawal, or death if Equitable is unable to obtain a
refund. Equitable reserves the right to deduct premium taxes when
incurred. Premium taxes range from 0% to 4%.
7. Administrative charges will be assessed to reimburse Equitable
for expenses incurred in establishing and maintaining the Contracts and
Separate Account. These charges include: (a) An Annual Contract
Maintenance Charge of $30, which is deducted from Contract Value on
each Contract Anniversary prior to the Maturity Date, or at the time of
total withdrawal on other than the Contract Anniversary; and (b) an
Administrative Charge equal on an annual basis to .15% of the average
daily net asset value of the Separate Account, which is deducted on
each Valuation Date. Equitable represents that the Administrative
Charge will not exceed expenses and will not increase should it prove
to be insufficient. Equitable relies on Rule 26a-1 with respect to
these administrative charges assessed under the Contract. Equitable
does not intend to profit from the administrative charges.
8. Contract owners may transfer all or part of their interest in a
Subaccount or in the Fixed Account prior to the Maturity Date. A
transfer charge of $25 or 2% of the amount transferred, if less, will
be deducted for each transfer after 12 transfers in a Contract year,
subject to certain limitations. For any Contract Year, a Contract owner
may transfer only 10% of purchase payments and 10% of any earnings
attributable to those purchase payments from the Fixed Account to a
Subaccount. There is no limitation on the transfer of purchase payments
received at least eight years prior to the request for transfer, and
any earnings thereon.
9. No sales charges are deducted from premium payments under the
Contracts. A contingent deferred sales charge (``CDSC'') in the amount
of up to 8% of total premiums paid is imposed on a declining basis over
a nine-year period on withdrawals prior to the Maturity Date. No CDSC
is assessed (a) upon withdrawal, once each Contract Year after the
first Contract Year, of up to 10% of the total of all purchase payments
made at the beginning of a Contract Year, less any purchase payments
previously withdrawn, and (b) under the Waiver of Withdrawal Charge
(``Waiver'') benefit provided under the Contract for withdrawals under
circumstances involving hospitalization and/or confinement to an
eligible nursing home for 30 consecutive days. In the event that the
CDSC is insufficient to cover distribution expenses, the deficiency
will be met from Equitable's assets, which may include amounts derived
from the charge for mortality and expenses risks.
10. Equitable will assume certain mortality and expense risks under
the Contracts. A daily charge equal to an annual rate of 1.25% of the
value of the average daily net asset value of the Separate Account will
be deducted on each Valuation Date to compensate Equitable for assuming
such risks. Of this amount, approximately .90% is attributable to
mortality risks, and .35% is attributable to expense risks. The
aggregate charge is guaranteed not to increase for the duration of the
Contracts. This charge may be a source of profit for Equitable, which
may be used for, among other things, the payment of distribution
expenses. Equitable currently anticipates a profit from this charge.
11. The mortality risk assumed under the Contracts arises from
Equitable's contractual obligation to make annuity payments after the
Maturity Date for the life of the Annuitant and to waive the CDSC in
the event of the Annuitant's death. The expense risk assumed is that
all actual expenses involved in administering the Contracts may exceed
the amount recovered by Equitable from the administrative charges,
which are guaranteed not to increase for the life of the Contract.
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.
Section 22(d)
2. 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 public offering price described in
the prospectus. Applicants recognize that the Waiver benefit could be
viewed as causing the Contracts to be sold at other than a uniform
offering price.
3. Rule 6c-8 adopted under the 1940 Act permits variable annuity
separate accounts to impose a deferred sales charge, without imposing
conditions on the ability of an investment company involved to provide
for variations in the deferred sales charges. Rule 6c-8, however, does
not provide an exemption from Section 22(d). Rule 22d-1 is not directly
applicable to the proposed Waiver benefit because that Rule has been
interpreted as granting relief only for scheduled variations in front-
end loads, not deferred sales loads such as the CDSC. Rule 22d-2 under
the 1940 Act exempts registered variable annuity accounts, their
principal underwriters, dealers and their sponsoring insurance
companies from Section 22(d) to the extent necessary to permit
variations in the sales load or in any administrative charge or other
deductions from the purchase payments, provided that such variations
reflect differences in costs or services, are not unfairly
discriminatory, and are adequately described in the prospectus.
Applicants do not believe that the Waiver benefit reflects differences
in sales costs or services and, consequently, do not rely on Rule 22d-2
for the requested relief, even assuming that the rule does apply to
deferred sales loads.
4. Nonetheless, Applicants submit that the proposed Waiver benefit
is consistent with the policies of Section 22(d) and the rules
promulgated thereunder, including the policy of preventing an
investment company from discriminating among investors by charging
different prices to different investors. Applicants represent that,
where the Waiver benefit is permitted by state law, the benefit will be
uniformly available to any Contract owner if the annuitant under the
Contract satisfies the relevant conditions and, therefore, the benefit
will not unfairly discriminate among Contract owners. Moreover,
Applicants assert that the benefit is advantageous to Contract owners
by permitting any such owner, upon a triggering of the Waiver benefit,
to surrender the Contract without imposition of the CDSC. Further,
Applicants assert that the Waiver benefit will not result in dilution
of the interests of any other Contract owner or result in the
occurrence of any of the abuses that Section 22(d) is designed to
prevent.
5. Applicants submit that the proposed Waiver benefit meets the
substantive requirements of Rule 22d-1 in that Applicants specifically
state that: (a) the benefit will be uniformly available to all eligible
Contract owners except where prohibited by state law; and (b) the
benefit will be adequately described in the Separate Account prospectus
for the Contracts. Applicants also note that the public offering of the
Contracts has not yet commenced and, thus, there are no existing
Contract owners.
Sections 26(a)(2)(C) and 27(c)(2)
6. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust and its depositor or underwriter from
selling periodic payment plan certificates unless the proceeds of all
payments, other than sales load, are deposited with a qualified bank as
trustee or custodian. Further, the proceeds are required to be 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 normally performed by the bank itself.
7. Applicants request exemptions from Sections 26(a)(2) and
27(c)(2) to the extent necessary to permit the deduction of a maximum
charge for assumption of mortality and expense risks from the assets
of: (a) The Separate Account in connection with the ofering of the
Contracts, and (b) any other separate account established by Equitable
in the future to support any Other Contracts. Applicants believe that
the requested exemptions 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 following reasons.
8. Applicants submit that Equitable is entitled to reasonable
compensation for its assumption of mortality and expense risks.
Applicants represent that the proposed mortality and expense risk
charge is within the range of industry practice for comparable variable
annuity contracts. This representation is based upon Applicants'
analysis of the mortality risks, taking into consideration such factors
as guaranteed annuity purchase rates, current charge levels, benefits
provided, and industry practice with respect to comparable variable
annuity contracts. Equitable undertakes to maintain at its principal
office, available to the Commission, a memorandum setting forth in
detail the products analyzed and the methodology and results of this
analysis.
9. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge, all or a portion of such profit may
be available to pay distribution expenses not reimbursed by the CDSC.
Equitable has concluded that there is a reasonable likelihood that the
proposed distribution financing arrangements will benefit the Variable
Account and the Contract owners. The basis for that conclusion is set
forth in a memorandum which will be maintained by Equitable at its
principal office and will be available to the Commission.
10. Applicants submit that without the requested relief for future
separate accounts issuing Other Contracts, they would have to
repeatedly request and obtain exemptive relief which would present no
issues under the 1940 Act that have not already been addressed in this
Application. Eliminating redundant exemptive applications would reduce
administrative expenses and maximize the efficient use of resources,
thus, promoting competitiveness in the variable annuity market.
Further, the delay and expense of repetitive exemptive applications
would impair Equitable's ability to effectively take advantage of
business opportunities as they arise and investors would not receive
any benefit or additional protection.
11. Applicants also represents that the Separate Account will
invest only in underlying mutual funds that undertake, in the event
that they should adopt a plan under Rule 12b-1 to finance distribution
expenses, to have a board of directors (or trustees), a majority of
whom are not ``interested persons'' of the funds, formulate and approve
any such plan.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2242 Filed 8-8-94; 8:45 am]
BILLING CODE 8010-01-M
