[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Notices]
[Pages 11438-11440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6639]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21824; File No. 812-9788]
The Manufacturers Life Insurance Company of America, et al.
March 13, 1996.
agency: U.S. Securities and Exchange Commission (``SEC'' or
``Commission'').
action: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
applicants: The Manufacturers Life Insurance Company of America
(``ManAmerica''), Separate Account Four of The Manufacturers Life
Insurance Company of America (the ``Account''), and ManEquity
Securities, Inc. (``ManEquity'').
Relevant Act Sections: Order requested under Section 6(c) of the 1940
Act for exemptions from Section 27(a)(3) of the 1940 Act and Rules 6e-
3(T)(b)(13)(ii) and 6e-3(T)(d)(1)(ii)(A) thereunder.
summary of application: Applicants seek an order to permit ManAmerica
to deduct, under certain variable life insurance policies
(``Policies'') funded by the Account, a surrender charge that is
modified by a rider (the ``COLI Rider'' or the ``Rider'') used in
connection with sales of the Policies as corporate-owned life
insurance.
filing date: The application was filed on September 28, 1995.
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 Secretary of the SEC 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 April 8, 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 writer'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: SEC, Secretary, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, W. Randolph Thompson, Jorden Burt Berenson & Johnson
LLP, Suite 400 East, 1025 Thomas Jefferson Street, N.W., Washington,
D.C. 20007-0805.
for further information contact: Edward P. Macdonald, Staff Attorney,
or Patrice M. Pitts, Special Counsel, Division of Investment Management
(Office of Insurance Products), at (202) 942-0670.
supplementary information: The following is a summary of the
application. The complete application may be obtained for a fee from
the Public Reference Branch of the SEC.
Applicants' Representations
1. ManAmerica is a stock life insurance company organized in 1977
under the laws of the State of Michigan. It is an indirect, wholly-
owned subsidiary of The Manufacturers Life Insurance Company
(``Manufacturers Life''), a mutual life insurance company based in
Toronto, Canada. ManAmerica is a licensed life insurance company in the
District of Columbia and all states other than New York.
2. The Account was established by ManAmerica in 1987 under the laws
of the Commonwealth of Pennsylvania and currently is operated under the
laws of Michigan. It is a separate account within the meaning of
Section 2(a)(37) of the 1940 Act and is registered under the 1940 Act
as a unit investment trust.
3. Pursuant to an agreement with ManAmerica, ManEquity distributes
variable life insurance policies funded by the Account, including the
Policies, through its own registered representatives or through other
broker-dealers having distribution agreements with ManEquity.
ManEquity, an indirect wholly-owned subsidiary of Manufacturers Life,
is registered as a broker-dealer under the Securities Exchange Act of
1934, and is a member of the National Association of Securities
Dealers, Inc.
4. The Policies are flexible premium variable life insurance
policies funded by the Account and are registered under the Securities
Act of 1933 on Form S-6. Within certain limits, policyholders may make
premium payments in variable amounts and at various times. The Policies
will remain in force as long as their net cash surrender value at the
beginning of each policy month is sufficient to pay the amount of the
monthly deductions due at that date. If the foregoing test is not
satisfied, the Policies will lapse, unless a required payment is made
during the grace period or the death benefit guarantee provision takes
effect.
5. Premium payments received under the Policies are subject to a
charge for state and local premium taxes.
6. ManAmerica deducts a monthly administrative expenses charge of
$6.00, and a charge for the administrative costs associated with
underwriting and issuing a Policy. This latter charge varies with the
age of the insured at issuance (between $2 and $6 per $1,000 of face
amount), and is accrued and assessed as a deferred charge that grades
down to zero over fifteen years.
7. ManAmerica also deducts monthly cost of insurance charges under
the Policies at rates not to exceed those based on the 1980
Commissioners Standard Ordinary Mortality Tables. Additional charges
are imposed if the insured does not meet standard underwriting
requirements, and for certain ``incidental insurance benefits'' (within
the meaning of Rule 6e-3(T)(c)(2)).
8. A Policy owner is permitted to make one transfer among
investment options per month at no charge. Under its ``Dollar Cost
Averaging'' program ManAmerica charges $5 for each transfer (if Policy
value is less than $15,000), and $15 per transfer under its ``Asset
Allocation Balance'' program. Administrative charges are not designed
to yield a profit to ManAmerica.
9. ManAmerica also deducts daily a mortality and expense risk
charge from the assets of the Account, which charge will not exceed an
annual rate of 0.65%. Applicants represent that, subject to the relief
requested herein, all administrative and other charges in connection
with the Policies will comply with all applicable requirements of Rule
6e-3(T).
10. The Policies have both a front-end sales load of 3% of premiums
received throughout the life of the Policies and a contingent deferred
sales load of 47% of premiums paid, up to the first two ``target
premiums.'' The deferred sales load is subject to refund rights on
surrenders in the first two policy years. In most cases, the full
deferred sales load is deducted from any surrender or lapse during the
first five policy years, and a portion of the full deferred sales load
is imposed in the event of a partial withdrawal or face amount decrease
[[Page 11439]]
during that period. For the ten years following the first five policy
years, the deferred sales load applicable to surrenders, lapses,
partial withdrawals, or face amount decreases is reduced by ten percent
per year. After the end of fifteen policy years, there is no deferred
sales load. The deferred sales load also applies in the event of an
increase in face amount for up to fifteen years after the increase.
11. Generally accepted accounting principles (``GAAP'') require
that a corporation or partnership (an ``Employer'') that purchases a
Policy book as an expense the net amounts of the premiums paid for a
life insurance policy over that policy's cash surrender value, and book
as an asset the cash surrender value of such a policy. The COLI Rider
reduces the adverse impact on the earnings of the Employer that would
otherwise result from the application of this aspect of GAAP by
refunding or waiving surrender charges under the Policies according to
the following schedule:
------------------------------------------------------------------------
Percent
of
Partial withdrawal or surrender in policy year surrender
charges
waived
------------------------------------------------------------------------
1 & 2........................................................ 100
3............................................................ 75
4............................................................ 50
5............................................................ 25
6 and later.................................................. 0
------------------------------------------------------------------------
The rider does not apply upon lapse or face amount decrease.
12. The net effect of implementing the Rider is to reduce the
amount of surrender charges that would otherwise be applicable during
the early policy years. However, because the Rider's waiver percentages
are decreasing in each of the third through sixth policy years, the
Rider could cause a policyowner to pay proportionately more surrender
charge upon a surrender, partial withdrawal, lapse, or face amount
decrease in those years than may have been paid upon a partial
withdrawal or than might have been paid had there been a surrender in a
preceding policy year. For example, if a Policy subject to the Rider
were surrendered in the first policy year, ManAmerica would waive 100%
of the otherwise applicable first year surrender charge. Consequently,
the amount of the surrender charge would be zero. If, however, the
Policy were surrendered in the third policy year, ManAmerica would
waive 75% of the otherwise applicable surrender charge (47% of up to
two target premiums received) or, started another way, would deduct 25%
of that amount (i.e., 0.25 * 0.47 = 0.1175% of up to two target
premiums received). Proportionately, this results in a greater amount
of surrender charge being paid than would have been paid had the policy
been surrendered in the first policy year. If the Policy were
surrendered after the fifth policy year, the Rider would no longer be
applicable. Accordingly, if the surrender charge were imposed during
the sixth policy year, for example, it could be as high as 0.423% (0.9
* 0.47% = 0.423%) of two target premiums.
13. The COLI Rider also applies to surrender charges established in
connection with face amount increases. The waiver percentage that will
apply to any surrender or partial withdrawal after a face amount
increase will be determined by the policy year in which a surrender or
a partial withdrawal occurs, rather than the year in which the face
amount increase is implemented. Thus, in the event of a partial
withdrawal from, or a surrender of, a Policy at a time when the Rider
is in effect, the Rider will reduce the surrender charges attributable
to the base policy and each face amount increase by the same
proportionate amount.
14. There is no specific charge or fee for the COLI Rider. Rather,
ManAmerica intends to make the Rider available under Policies purchased
by or through an Employer if a minimum of ten lives (or fewer, if not
prohibited by state law) are insured and the aggregate annual target
premiums for all Policies purchased by or through that Employer equals
at least $100,000.
15. In ManAmerica's experience, policy owners of the type to which
the COLI Rider will be available are unlikely to surrender their
Policies within the five-year period during which the Rider is
operative. The amount of the surrender charge has not been increased to
compensate for the fact that, because of the Rider, not all Policies
will be subject to the full surrender charges that otherwise would
apply.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act, in pertinent part, provides that
the Commission, by order upon application, may conditionally or
unconditionally exempt any person, security or transaction or any class
or classes or persons, securities or transactions, from any provision
of the 1940 Act, 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 1940 Act. Applicants request an order pursuant to
Section 6(c) of the 1940 Act providing exemptions from Section 27(a)(3)
of the 1940 Act and subsections (b)(13)(ii) and (d)(1)(ii)(A) of Rule
6e-3(T) thereunder, to the extent necessary to permit ManAmerica to
deduct a surrender charge under the Policies that is modified by the
COLI Rider in the manner set forth herein.
2. Section 27(a)(3) of the Act provides, in effect, that the amount
of sales charge deducted from any of the first twelve monthly payments
of a periodic payment plan certificate may not exceed proportionately
the amount deducted from any other such payment, and that the amount
deducted from any subsequent payment may not exceed proportionately the
amount deducted from any other subsequent payment. This prohibition is
referred to commonly as the ``stair-step'' rule.
3. Subsection (b)(13)(i) of Rule 6e-3(T), in pertinent part,
provides an exemption from Section 27(a)(3), provided that the
proportionate amount of sales charge deducted from any payment does not
exceed the proportionate amount deducted from any prior payment. Rule
6e-3(T)(b)(13)(ii) provides exceptions to its stair-step provisions for
increases caused by reductions in the annual cost of insurance or
reductions in sales load for amounts transferred to a variable life
insurance policy from another plan of insurance. Neither of these
exceptions is applicable in the present case.
4. Subsection (d)(1) of Rule 6e-3(T) provides relief similar to
subsection (b)(13)(ii) for sales charges deducted from other than
premiums, subject to, inter alia, a requirement in subsection
(d)(1)(ii)(A) that ``the amount of sales load deducted pursuant to any
method permitted under this paragraph (other than asset-based sales
loads) does not exceed the proportionate amount of sales load deducted
prior thereto pursuant to the same method * * * '' (emphasis added).
5. Applicants submit that Policy owners benefit from the fact that
the COLI Rider applies to partial withdrawals as well as to full
surrenders. Applicants represent that, consequently, the effective rate
of a surrender charge actually imposed upon a partial withdrawal during
the first five policy years from a Policy subject to the COLI Rider can
be lower than the surrender charge actually imposed upon a later
partial withdrawal, face amount decrease, surrender, or lapse.
Accordingly, Applicants request an exemption from the stair-step
[[Page 11440]]
requirements of Section 27(a)(3) and Rules 6e-3(T)(b)(13)(ii) and 6e-
3(T)(d)(1)(ii)(A) to the extent necessary to permit the deduction of a
surrender charge modified by the COLI Rider, because such a deduction
could be at a percentage that is greater than the percentage of sales
load that would have been deducted had the surrender occurred earlier,
when the COLI Rider would have limited the deduction to a lesser
amount.
6. Applicants represent that when there has been no partial
withdrawal to which the COLI Rider applies at the time of the lapse,
face amount decrease, or surrender, the sales load imposed would not be
higher in percentage than that imposed upon any prior partial
withdrawal or face amount decrease. Applicants further represent that
in such a case, however, the sales load imposed might be different
(i.e., lower) than that imposed on prior face amount decreases or
partial withdrawals not subject to the COLI and, therefore, be deemed
to violate Section 27(a)(3). Moreover, because the deferred sales load
that would have been imposed on prior transactions subject to the COLI
Rider could have been lower, the relief from Section 27(a)(3) provided
by exemptive rule would not be available. For these reasons as well,
Applicants request relief to permit the deduction of a surrender charge
modified by the COLI Rider.
7. Applicants submit that the requested relief should be granted
because the Policies' sales charge structure benefits Policy owners and
is not inconsistent with the policies and purposes behind Section
27(a)(3), namely, addressing the perceived abuse of periodic payment
plan certificates that deducted large amounts of front-end sales
charges so early in the life of the plan that little of the investor's
money was actually invested and an investor redeeming in the early
periods would recoup little of his or her investment. Applicants
further submit that, to the extent that the operation of the Rider
actually reduces the amount of sales charges otherwise payable under a
Policy in the early years, the Rider can be viewed as furthering the
purposes of the 1940 Act.
8. Applicants submit that discouraging unduly complicated sales
charges also may be deemed to be a purpose of Section 27(a)(3) and
Rules 6e-3(T)(b)(13)(ii) and 6e-3(T)(d)(1). Applicants further submit
that the variation to the Policies' sales charge structure effected by
the COLI Rider is relatively straightforward and easily understood as
compared to that of many other variable life insurance policies
currently being offered. Moreover, Applicants represent that eligible
Policy owners will benefit from the sales charge structure effected by
the Rider, and that the prospectuses for the Policies, or supplements
thereto, will contain disclosure information prospective Policy owners
of the effect of the Rider on the sales charges under the Policies.
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 purposes
fairly intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6639 Filed 3-19-96; 8:45 am]
BILLING CODE 8010-01-M
