[Federal Register Volume 61, Number 59 (Tuesday, March 26, 1996)]
[Notices]
[Pages 13223-13225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7237]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21834; File No. 812-9802]
Principal Mutual Life Insurance Company, et al.
March 20, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for Amendment to Order Granting
Exemptions Pursuant to the Investment Company Act of 1940 (the
``Act'').
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APPLICANTS: Principal Mutual Life Insurance Company (``Principal
Mutual''), Principal Mutual Life Insurance Company Separate Account B
(the ``Account'') and Princor Financial Services Corporation
(``Princor'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the Act to amend order granting exemptions from the provisions of
Sections 2(a)(35), 26(a)(2)(C), 27(a)(2) and (3), and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants have previously received relief from
the provisions of the Act set forth above to the extent necessary to
permit the issuance and sale of certain variable annuity contracts
(``Contracts'') with prescribed sales loads and mortality and expense
risk charges (the ``Prior Order'').\1\ This application seeks
additional relief so that: (a) The exemption from Sections 26(a)(2)(C)
and 27(c)(2) will extend to the mortality and expense risk charges
under the Contracts as revised by Principal Mutual; and (b) the
exemptive relief regarding the mortality and expense risk charges and
the relief granted by the Prior Order will extend to any variable
annuity contracts that may be offered in the future that are
substantially similar in all material respects to the Contracts
(``Future Contracts'') that are funded by the Account or any other
separate accounts established in the future by Principal Mutual
(``Future Accounts'') and that may be offered by Princor or any other
members of the National Association of Securities Dealers, Inc.
(``NASD'') that may in the future serve as principal underwriters of
the Contracts or Future Contracts (``Future Underwriters'').
\1\ See Principal Mutual Life Insurance Company, et al., Inv.
Co. Act Rel. No. 18798 (June 18, 1992)(1992 WL 150835 (SEC))
(notice) and Inv. Co. Act. Rel. No. 18853 (July 15, 1992)(1992 WL
172828 (SEC)) (order); file no. 812-7882.
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FILING DATE: The application was filed on October 6, 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 Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on April 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 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, c/o Kristian
Anderson, Counsel, The Principal Financial Group, Des Moines, Iowa
50392-0300.
FOR FURTHER INFORMATION CONTACT: Kevin M. Kirchoff, Senior Counsel, or
Wendy Friedlander, Deputy Chief, Office of Insurance Products (Division
of Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations and Legal Analysis
1. Principal Mutual is a mutual life insurance company with its
home office in Des Moines, Iowa. The Account was established on January
12, 1970, as a separate account as defined in Section 2(a)(37) of the
Act, and is registered pursuant to the Act as a unit investment trust
(file no. 811-2091). Princor, a wholly-owned subsidiary of Principal
Mutual, is the principal underwriter of the Contracts, and is a broker-
dealer registered under the Securities Exchange Act of 1934 and a
member of the NASD.
2. Principal Mutual assumes mortality and expense risks under the
Contracts. The mortality risk is the risk that annuitants receiving
annuity payments may live for a longer period of time than estimated.
Principal Mutual assumes this mortality risk by virtue of annuity rates
incorporated into the Contract which cannot be changed as to a current
plan participant (except to make them more favorable to the
participant). This assures each annuitant that his or her longevity
will not have an adverse effect on the amount of annuity payments. The
expense risk assumed by Principal Mutual is the risk that the allowance
for administration expenses in the annuity
[[Page 13224]]
conversion rates will be insufficient to cover actual costs of
administration during an annuity pay out period.
3. For assuming these risks, Principal Mutual, in determining unit
values for the Account and variable annuity payments, makes a charge as
of the end of each valuation period against the assets of the Account
held with respect to the Contract. If the charge is insufficient to
cover the actual costs of the mortality and expense risk assumes, the
financial loss will fall on Principal Mutual; conversely, if the charge
proves more than sufficient, the excess will be a gain to Principal
Mutual.
4. The relevant portions of Sections 26(a)(2)(C) and 27(c)(2) of
the Act prohibit a registered unit investment trust and any depositor
thereof or underwriter therefor from selling periodic payment plan
certificates unless the proceeds of all payments (other than the sales
load) are deposited with a qualified bank as trustee or custodian and
held under arrangements which prohibit any payment to the depositor or
principal underwriter except a fee, not exceeding such reasonable
amount as the Commission may prescribe, for performing bookkeeping and
other administrative services of a character normally performed by the
bank itself.
5. In the Prior Order, Applicants received exemptive relief
necessary to deduct a mortality and expense risk charge from the assets
of the Account. For assuming mortality and expense risks, Principal
Mutual currently deducts from each division of the Account a charge at
a simple annual rate of 0.33 percent for certain Contracts and 0.55
percent for other Contracts. In accordance with the right it has
reserved to increase the charge up to 1.25 percent, subject to certain
limitations, Principal Mutual intends to increase those charges to 0.42
percent and 0.64 percent, respectively.
6. Contracts issued prior to March 31, 1995, contained an
additional limitation that permitted a change in the mortality and
expense risk charge only after the Contract had been in effect for at
least one year. That limitation has been eliminated for all Contracts
issued subsequent to that date.
7. In order to avoid questions regarding the scope of the Prior
Order, Applicants seek an order pursuant to Section 6(c) of the Act
amending the Prior Order to permit the issuance and sale of the
Contracts providing for the mortality and expense risk charges
described above, including the right to increase the charges up to a
maximum of 1.25 percent.
8. Applicants represent that the maximum charge of 1.25 percent is
within the range of industry practice for comparable annuity products.
This representation is based upon an analysis by Principal Mutual of
publicly available information about selected similar industry
products, taking into consideration such factors as the method used in
charging sales loads, any contractual right to increase charges above
current levels and the existence of charges against separate account
assets for other than mortality and expense risks. Principal Mutual
will maintain its principal office, available to the Commission upon
request, a memorandum setting forth in detail the products analyzed in
the course of, and the methodology and results of, the comparative
survey made.
9. Applicants acknowledge that the sales load and the deferred
sales charge under the Contracts will be insufficient to cover all
costs relating to the distribution of the Contracts and if a profit is
realized from the mortality and expense risk charge, all or a portion
of such profit may be offset by distribution expenses not reimbursed by
sales charges. In such circumstances a portion of the mortality and
expense risk charge might be viewed as providing for a portion of the
costs relating to distribution of the Contracts. Notwithstanding the
foregoing, Principal Mutual has concluded that there is reasonable
likelihood that the proposed distribution financing arrangements made
with respect to the Contracts will benefit the Account, the
Contractholders and plan participants. The basis for that conclusion is
set forth in a memorandum which will be maintained by Principal Mutual
at its principal office and will be available to the Commission upon
request.
10. Principal Mutual represents that the Account will invest only
in underlying mutual funds which undertake, in the event such funds
should adopt any plan under Rule 12b-1 to finance distribution
expenses, to have such plan formulated and approved by a board of
directors, a majority of the members of which are not ``interested
persons'' of such fund within the meaning of Section 2(a)(19) of the
Act.
11. Applicants also request that the Prior Order be amended to
provide that the exemptive relief from Sections 26(a)(2)(C) and
27(c)(2) in connection with the mortality and expense risk charge
extend to Future Contracts, funded by Future Accounts and sold through
Future Underwriters. Applicants assert that extending the relied
concerning the mortality and expense risk charge to Future Contracts,
funded by Future Accounts and sold through Future Underwriters, is
appropriate in the public interest. An order so providing should
promote competitiveness in the variable annuity contract market by
eliminating the need for filing redundant exemptive applications,
thereby reducing Principal Mutual's costs. The delay and expense of
repeatedly seeking exemptive relief for substantially similar
contracts, new separate accounts or new principal underwriters could
impair Principal Mutual's ability to take effective advantage of
business opportunities that might arise. There is no benefit or
additional protection afforded to investors by requiring Applicants
repeatedly to seek exemptive relief with respect to the same issues
addressed in this application.
12. Applicants represent that, before any Future Contracts are made
available for sale to the public, Principal Mutual will have determined
that the mortality and expense risk charge under the Future Contracts
is within the range of industry practice for comparable annuity
products based upon its analysis of then publicly available information
about selected similar industry products. Principal Mutual will
maintain at its principal office, available to the Commission upon
request, a memorandum setting forth in detail the products analyzed in
the course of, and the methodology and results of, the comparative
survey made.
13. Applicants also represent that, if the sales charges under any
Future Contracts are expected to be insufficient to cover the costs of
distributing the Contracts, Principal Mutual, before such Future
Contracts are made available for sale to the public, will have
concluded that there is a reasonable likelihood that the proposed
distribution financing arrangements made with respect to the Future
Contracts will benefit the Account or the Future Account, as
applicable, the contractholders and plan participants. The basis for
that conclusion will be set forth in a memorandum which will be
maintained by Principal Mutual at its principal office and will be
available to the Commission upon request.
14. Principal Mutual represents that, if the Future Contract is
funded by a Future Account, the Future Account will invest only in an
underlying mutual fund which undertakes, in the event such fund should
adopt any plan under Rule 12b-1 to finance distribution expenses, to
have such plan formulated and approved by a board of directors, a
majority of the members of which are not ``interested persons'' of
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such fund within the meaning of Section 2(a)(19) of the Act.
15. In the Prior Order, Applicants also received exemptive relief
from the provisions of Sections 2(a)(35), 27(a)(2) and 27(a)(3) to
permit the use of the sales load pattern and payment arrangements
described in the application that resulted in the Prior Order.
Applicants now request that this relief extend to Future contracts that
are funded by the Account or any Future Accounts and that may be
offered by Princor or any Future Underwriters. Applicants assert that
extending the relief previously granted in this manner is appropriate
in the public interest for the same reasons as those discussed in
paragraph 11, above.
16. The reasons advanced in support of the exemptive application
resulting in the Prior Order apply with equal force, Applicants assert,
to Future Contracts, Future Accounts and Future Underwriters. The abuse
intended to be curbed by Section 27(a)(3) (excessive front-end loading
of periodic payment plans) is not, and will not be presented by the
sales load structure of the Contracts or Future Contracts.
Conclusion
For the reasons summarized 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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7237 Filed 3-25-96; 8:45 am]
BILLING CODE 8010-01-M
