[Federal Register Volume 61, Number 28 (Friday, February 9, 1996)]
[Notices]
[Pages 5046-5050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2873]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21729; No. 812-9790]
American Skandia Life Assurance Corporation, et al.
February 5, 1996.
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: American Skandia Life Assurance Corporation (``American
Skandia''), American Skandia Assurance Corporation Variable Account B
(``Separate Account'') and American Skandia Marketing, Inc.
(``Marketing'').
Relevant 1940 Act Sections: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections 2(a)(32),
22(c), 26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and
Rule 22c-1 thereunder.
Summary of Application: Applicants see an order to permit the deduction
of a mortality and expense risk charge and the recapture of certain
credits applied to purchase payments from the assets of the Separate
Account or any other separate account (``Other Accounts'') established
by American Skandia to support certain flexible premium individual tax
deferred variable annuity contracts (``Contracts'') as well as other
variable annuity contracts that are substantially similar in all
material respects to the Contracts (``Future Contracts''). In addition,
Applicants propose that the order extend to any broker-dealer other
than Marketing, that may in the future serve as principle underwriter
for the Contracts or Future Contracts, the same exemptions granted to
Marketing (``Future Broker-Dealers''). Any such broker-dealer will be a
member of the National Association of Securities Dealers, Inc.
(``NASD''), and will be controlling, controlled by, or under common
control with American Skandia.
Filing Date: The application was filed on September 25, 1995, and was
amended on January 25, 1996.
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 March 1,
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, M. Patricia Paez,
Corporate Secretary, c/o Jeffrey M. Ulness, Esq., American Skandia Life
Assurance Corporation, One Corporate Drive, Shelton, Connecticut 06484.
For Further Information Contact: Pamela K. Ellis, Senior Counsel, or
Patrice M. Pitts, Special Counsel, Office of Insurance Products
(Division of Investment Management), at (202) 942-0670.
Supplementary Information: 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. American Skandia, a stock life insurance company, is organized
in Connecticut and licensed to do business in the District of Columbia
and all of the
[[Page 5047]]
United States. American Skandia is a wholly owned subsidiary of
American Skandia Investment Holding Corporation (``ASIHC''), which in
turn is wholly owned by Skandia Insurance Company Ltd., a Swedish
corporation.
2. The Separate Account is a separate account established by
American Skandia to fund the Contracts. The Separate Account is
registered with the Commission as a unit investment trust under the
1940 Act, and the Contracts are registered as securities under the
Securities Act of 1933.
3. American Skandia will establish for each investment option
offered under the Contract 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 open-end management
investment companies. Each Fund portfolio will have separate investment
objectives and policies.
4. Marketing will serve as the distributor and principal
underwriter of the Contracts. Marketing, a wholly owned subsidiary of
ASIHC, is registered under the 1934 Act as a broker-dealer and is a
member of the NASD.
5. In addition, broker-dealers other than Marketing also may serve
as distributors and principal underwriters of certain of the Contracts
as well as the Future Contracts.
6. There are two different Contracts which are being registered
(``Contract A and Contract B'', respectively).\1\ The Contracts are
individual and group flexible premium variable tax deferred annuity
contracts. The Contracts may be used in connection with retirement
plans that qualify for favorable federal income tax treatment under
Section 401, Section 403, or Section 408 of the Internal Revenue Code
of 1986, as amended, or the Contracts may be purchased on a non-tax
qualified basis.
\1\ Applicants have received a similar exemptive order in
relation to other annuities. American Skandia Life Assurance Corp.,
Investment Company Act Rel. No. 20980 (Mar. 31, 1995) (notice) and
Investment Company Act Rel. No. 21034 (Apr. 27, 1995) (order)
(``April Order''). The April Order permitted Applicants to deduct a
mortality and expense risk charge from the assets of certain
flexible premium deferred variable annuity contracts and any
contracts offered in the future that were substantially similar in
all material respects to the contracts that were the subject of the
April Order. Applicants state that while they believe that the
Contracts which are the subject of this application may be
substantially similar to the contracts that were the subject of the
prior relief, Applicants are submitting this request to avoid any
possibility that may be raised as to whether the Contracts that are
subject of this application are substantially similar ``in all
material respects'' to the contracts which were the subject of the
prior exemption relief.
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7. Contract A may be purchased with an initial payment of $1,000
and Contract B may be purchased with an initial payment of $25,000; the
minimum subsequent purchase payment for both Contract A and Contract B
is $100. Alternatively, in both cases, the Contract owner may authorize
and American Skandia may accept the use of a program of periodic
purchase payments provided that such payments received in the first
year total American Skandia's then current minimum payments under such
a program. Net purchase payments may be allocated to one or more of the
Subaccounts that have been established to support the Contracts or, in
most jurisdictions, to a fixed account.
8. Under Contract A, American Skandia will add bonus credits
(``Credits'') to the account value in conjunction with each purchase
payment. The funds for such credits are drawn from American Skandia's
general account. Generally, when total purchase payments are less than
$10,000, the Credits equal 1.5% of purchase payments. When the total
purchase payments are at least $10,000 but less than $1 million, the
Credits equal 3$ of purchase payments. When total Purchase payments are
at least $1 million but less than $5 million, the Credits equal 4% of
purchase payments. Credits equal 5% of purchase payments if the total
is at least $5 million. The Credits are vested when applied, except
under the following circumstances: (1) An amount equal to any Credit
will be returned to American Skandia if the Contract owner cancels the
Contract during the free-look period; (2) an amount equal to ``Excess
Credit will be returned to American Skandia should a purchaser not
fulfill its letter of intent obligation within a 13 month period; \2\
(3) an amount equal to any Credit will be returned to American Skandia
by reducing the amount available pursuant to the medically available
surrender by an amount equal to any Credit allocated within 12 months
of the first occurrence of the applicable contingency upon which such
medically related surrender is based (or applied after an application
is received for such medically related surrender); and (4) an amount
equal to any Credits applied within 12 months prior to the date of
death causing the payment of a death benefit will be returned to
American Skandia should the death benefit be greater than the minimum
death benefit. No such program applies under Contract B.
\2\ ``Excess Credit'' is the amount of the Credit in excess of
what would have been payable without the letter of intent.
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9. The Contracts provide for a series of annuity payments beginning
on the ``Annuity Date.'' The Contract owner may select from several
payout options which provide periodic annuity payments on a fixed
basis.
10. Prior to the Annuity Date, a medically related surrender may be
available under Contract A. If the specified eligibility requirements
are met, the amount available for surrender is the account value less
an amount equal to any Credit allocated to the ``account value'' \3\
within twelve months after the first occurrence of the contingency upon
which the medically related surrender is permitted.\4\ No similar
program applies under Contract B.
\3\ The ``account value'' is the value of each allocation to a
Subaccount or a ``fixed allocation'' prior to the annuity date, plus
any earnings, and/or losses, distributions, and charges thereon,
before assessment of any applicable contingent deferred sales charge
and/or maintenance fee.
\4\ In the case of a medically related surrender, Credits
applied in conjunction with purchase payments received after
application for a medically related surrender will also be returned
to American Skandia.
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11. During the accumulation period, the Contracts provide for
payment of a death benefit upon the death of: the first Contract owner,
should the annuity be held by one or more natural persons; or the
annuitant, should the annuity be held by an entity and there is no
contingent annuitant. The minimum death benefit under both Contracts is
the sum of all purchase payments less the sum of any withdrawals. If a
decent was not named a Contract owner or annuitant as of the Contract
issue date, and did not become such as a result of a prior Contract
owner's or annuitant's death, the minimum death benefit is suspended as
to that person for a two-year period from the date he or she first
became a Contract owner or annuitant. Following the suspension period,
the death benefit is the same as if such person had been a Contract
owner or annuitant on the Contract issue data.
12. After the first ten Contract years, the death benefit under
Contract A is the account value less an amount equal to any Credit
allocated within 12 months prior to the date of death. During the first
ten Contract years, the death benefit is the greater of (1) or (2),
where: (1) Is the account value of the Subaccounts and the ``interim
value'' of any ``fixed allocations'' less any Credits applied with in
the twelve months prior
[[Page 5048]]
to the date of death; \5\ and (2) is the minimum death benefit.
\5\ ``Fixed allocation'' is defined as an allocation of account
value that is to be credited a fixed rate of interest for a
specified guarantee period during the accumulation phase, and is to
be supported by the assets of the Separate Account.
As of any particular date, the ``interim value'' is the initial
value of a fixed allocation, plus all interest credited thereon,
less the sum of all previous transfers and withdrawals of any type
from such fixed allocation of such interim value and interest
thereon from the date of each withdrawal or transfer.
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13. Under Contract B, the death benefit after the earlier of ten
Contract years or age 90 of the decedent is the account value. Prior to
that, the death benefit is the greater of (1) or (2), where: (1) Is the
account value of the Subaccounts and the interim value of fixed
allocations; and (2) is a minimum death benefit.
14. Certain charges and fees are assessed under the Contracts.
There is no transfer fee charged for transfers or ``renewals'' \6\ from
a fixed allocation at the end of its guarantee period, or for the first
12 transactions from Subaccounts of the Separate Account in each
Contract year. Subsequent transfers within a Contract year, however,
will be assessed a fee of $10 per transfer.
\6\ A ``renewal'' is a transaction that occurs automatically as
of the last day of a fixed allocation's guarantee period unless
American Skandia receives alternative instructions.
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15. Before the Annuity Date, American Skandia will deduct an
administration charge at the rate of .15% per annum of the average
daily total asset value of each Account.
16. Before the Annuity Date and upon surrender, American Skandia
will deduct a maintenance fee equalling the lesser of 2% of the account
value or $30 per Contract year. This fee is waived under certain
circumstances that generally include situations when the maintenance
expenses likely are to be reduced (i.e., when a large number of
annuities are purchased by an owner).
17. The total maintenance fee and administrative charges assessed
against the Separate Account will not be greater than the total
anticipated costs of services to be provided over the life of the
Contracts, in accordance with the applicable standards of Rule 26a-1
under the 1940 Act.
18. Under Contract A, a contingent deferred sales charge (``CDSC'')
may be imposed on certain withdrawals. The amount of the CDSC decreases
annually from 8.5% to 0% over 9 Contract years. In addition, there is a
free withdrawal amount during a Contract year that is the greater of
(1) or (2), where (1) is the annuity's ``growth'' \7\ and (2) is 10% of
``new'' purchase payments. When determining the CDSC, withdrawals other
than the free withdrawals amount will be allocated first to any amount
available as a free withdrawal, then from new purchase payments on a
first-in first-out basis. There is no CDSC upon withdrawal under
Contract B.
\7\ ``Growth'' is defined as the then current account value,
less all ``unliquidated'' purchase payments (i.e., purchase payments
not previously surrendered or withdrawn), and less the value at the
time credited of any Credits or additional amounts.
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19. American Skandia proposes to deduct a daily mortality and
expense risk charge. This charge will be equal to an effective annual
rate of 1.25% of the daily net asset value of the Separate Account. Of
this amount, approximately .90% is for mortality risks and .35% is for
expense risks.
20. American Skandia 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 American Skandia to
pay out more in annuity income than it had planned. Additional
mortality risks assumed by American Skandia are that it will waive the
CDSC in the event of the death of the owner, and its contractual
obligation to provide a standard and an enhanced death benefit prior to
the annuity date. Thus, American Skandia assumes the risk that it may
not be able to cover its distribution expenses and 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
American Skandia is that the contract administration charge and
maintenance fee will be insufficient to cover the cost of administering
the Contracts.
21. In the event the mortality and expense risk charges are more
than sufficient to cover American Skandia's costs and expenses, any
excess will be a profit to American Skandia.
22. Should the owner live in a jurisdiction that levies a premium
tax, American Skandia will pay the taxes when due. American Skandia
represents that state premium taxes may range up to 3.5% of purchase
payments and are subject to change. Although no local taxes currently
are assessed against any American Skandia annuity, local taxes also may
be assessed.
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 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 Act, in relevant
part, prohibit a registered unit investment trust, its depositors 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 Contract and Future Contracts of the
1.25% charge for the assumption of mortality and expense risks, and an
extension of the exemptive relief requested herein to Future Broker-
Dealer.
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, among others, the
current charge levels, the existence of charge level guarantees, and
guaranteed annuity rates. American Skandia will maintain at its
principal offices, and make 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 or
Other Accounts.
5. American Skandia has concluded that there is a reasonable
likelihood that the proposed distribution financing arrangements will
benefit the Separate Accounts and Other Accounts and their respective
investors. American Skandia 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
[[Page 5049]]
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. Applicants request exemptions from Section 2(a)(32), 22(c),
26(a)(2)(c), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and Rule
22c-1 thereunder to the extent necessary to permit American Skandia to
issue certain Contracts which provide a ``bonus'' Credit to a Contract
with each purchase payment received and to recapture such Credit if:
(1) The Contract is cancelled during the ``free-look'' period; (2) the
purchaser fails to satisfy his or her obligations to make certain
purchase payments within a 13 month period pursuant to a letter of
intent; (3) there is a medically related surrender; and (4) the death
benefit payable is greater than the minimum death benefit.
8. Applicants represent that it is not administratively feasible to
track the Credit amount in the Separate Account. Accordingly, any asset
based charges under the Contracts will be assessed against the entire
amount in the Separate Account, including the Credit amount, even
during the period when the Contract owner's interest in the Credit is
not completely vested. As a result, for a period of up to 13 months
from the Contract issue date, the aggregate asset based charges
assessed will be higher than those which would be charged if the
Contract owner's account value did not include the Credit.
9. Applicants submit that the recapture of the Credit amount would
not deprive an owner of his or her proportionate share of the issuer's
current net assets. Until the right to recapture has expired, American
Skandia retains the right to, and interest in, the Credit amount,
although not in the earnings attributable to that amount. Applicants
state that the Contract owner's interest in the Credit amount should
not be viewed as completely vested until the applicable recapture
period has ended. Thus, Applicants assert that when American Skandia
recaptures the applicable Credit, it merely retrieves its own assets,
and because the Contract owner's interest in that amount has not been
completely vested, he or she has not been deprived of a proportionate
share of the Separate Account's assets. Applicants submit that the
Contract's provisions for recapture of any applicable Credit does not
violate Section 27(c)(1) and 2(a)(32) of the 1940 Act.
10. Applicants assert that because the recapture of any Credit
amount merely returns to American Skandia its own assets, such
recapture is not a payment of the sort addressed by Section
26(a)(2)(C). Moreover, Applicants submit that the Credit amount should
at most be viewed as a deduction from the amount redeemed rather than
from the account, and thus Section 26(a)(2)(C) would not apply.
11. Although Section 27(d) speaks in terms of the certificate
holder receiving the value of his or her account, Applicants assert
that the recapture of any credits is consistent with that section.
Applicants state that the Contract owner's interest in any Credit does
not vest completely until the right of recapture has expired. Until
such time, American Skandia retains the rights to and interest in any
such Credit. Thus, Applicants assert the reference to Section 27(d) to
the value of the account should not be understood to encompass the
principal amount of any Credit.
12. Applicants state that American Skandia's addition of the Credit
arguably could be viewed as resulting in the owner purchasing
redeemable securities for a price below the current net asset value.
Applicants contend, however, that the Credit is not violative of
Section 22(c) and Rule 22c-1. Applicants assert that the Credit does
not threaten the evils that Rule 22c-1 was intended to eliminate or
reduce--namely, 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, or other unfair results, including speculative trading
practices. These evils were the result of the practice of basing the
price of a mutual fund share on the net asset value per share
determined as of the close of the market on the previous day--i.e.,
``backward pricing.'' Where this practice allowed purchasers to take
advantage of increases in the net asset value that were not yet
reflected in increased price, the value of outstanding mutual fund
shares were diluted. The proposed Credit poses no such threat of
dilution. Interests in the Contract owner's account will be sold at a
price determined on the basis of net asset value. The Credit does not
reflect a reduction of that price. Instead, American Skandia will
purchase with its own money on behalf of the Contract owner an interest
equal to the Credit amount based on the size of the initial purchase
payment. Because any Credit will be paid from American Skandia's
general account assets and will not be drawn from the assets of the
Separate Account, no dilution will occur.
13. Applicants also submit that a second harm that Rule 22c-1 was
designed to address--namely, speculative trading practices--will not
occur as a result of the proposed Credit. Because neither of the harms
that Rule 22c-1 was meant to address would result from American
Skandia's proposed method of adding Credits to a Contract owner's
account value, Rule 22c-1 and Section 22(c) should have no application
to American Skandia's proposal to add Credits.
14. Applicants assert that the terms of the relief requested with
respect to any Future Contracts funded by the Separate Account or Other
Accounts, as well as for Future Broker-Dealers, 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 Other Account it establishes to fund any Future
Contract, as well as for each Future Broker-Dealer that distributes the
Contracts or the Future Contracts. 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.
15. 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 and maximizing the efficient use of their
resources. The delay and expense involved in having to seek exemptive
relief repeatedly would reduce Applicants' ability effectively to take
advantage of business opportunities as they arise.
16. 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 believe that the
requested exemption is appropriate in the public interest and
consistent with the protection of investors and the
[[Page 5050]]
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. McFarland,
Deputy Secretary.
[FR Doc. 96-2873 Filed 2-8-96; 8:45 am]
BILLING CODE 8010-01-M
