[Federal Register Volume 60, Number 43 (Monday, March 6, 1995)]
[Notices]
[Pages 12261-12266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5335]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20926; File No. 812-9230]
The Equitable Life Assurance Society of the United States, et al.
February 27, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Equitable Life Assurance Society of the United States
(``Equitable''), Separate Account No. 45 of Equitable (the
``Account''), any other separate account established by Equitable in
the future to support certain deferred variable annuity contracts and
certificates issued by equitable (``Other Account''), and Equitable
Capital Securities Corporation (``ECCS'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 2(a)(35), 26(a)(2)(C) and
27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order to permit the
deduction of: (i) a mortality and expense risk charge from the assets
of the Account in [[Page 12262]] connection with the offering of
certain deferred variable annuity contracts and certificates
(collectively, the ``Account Contracts'') issued by Equitable through
the Account; (ii) a guaranteed minimum death benefit charge from a
contract owner's account value; and (iii) a contribution-based
distribution fee from a contract owner's account value. Applicants also
seek an order to permit the deduction of a mortality and expense risk
charge, guaranteed minimum death benefit charge and contribution-based
distribution fee from the assets of, and account values held in, the
Account and of any Other Account in connection with the offering in the
future of deferred variable annuity contracts (the ``Other Contracts'')
which are substantially similar in all material respect to the Account
Contracts and are issued by Equitable through the Account or any Other
Account.
FILING DATE: The Application was filed on September 16, 1994, and
amended and restated on January 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 March 24, 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 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, SEC, 450 Fifth Street NW., Washington, D.C.
20549. Applicants, 787 Seventh Avenue, Area 36-K, New York, NY 10019.
FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Attorney, or Wendy
Finck 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
1. Equitable is a stock life insurance company organized under the
laws of the State of New York. Equitable serves as depositor of the
Account. Equitable may establish one or more Other Accounts in the
future, for which it will serve as depositor.
2. The Account was established on August 15, 1994, as a segregated
asset account of Equitable. Any income, gains or losses, realized or
unrealized, from assets allocated to the Account are credited to or
charged against the Account without regard to other income, gains or
losses of Equitable. The Account is registered with the Commission as a
unit investment trust series investment company under the 1940 Act. The
Account will fund the variable benefits available under the Account
Contracts. Units of interest in the Account under the Account Contracts
will be registered under the Securities Act of 1933. In the future,
Equitable may issue Other Contracts through the Account or Other
Accounts.
3. The Account Contracts consist of a basic form of group annuity
contract (the ``Group Contract''), a basic form of certificate
(``Certificate'') issued under the Group Contract, and forms of
Certificate endorsements (``Endorsements'') to be used for specific
benefits under the Certificates. Certificates may be issued as
individual contracts in certain states.
4. The Account Contracts will be offered in the tax-qualified
retirement plan (``Plan'') market and in non-qualified (``NQ'')
markets. The Account Contracts initially will be offered in the
rollover individual retirement annuity (``IRA'') Plan market and in NQ
markets. In both the IRA Plan and NQ markets, the initial contribution
must be at least $10,000; under IRA Certificates, that initial payment
may come in the form of a minimum rollover contribution or direct
transfer from another individual retirement arrangement. In both IRA
Plan and NQ markets, additional contributions must be at least $1,000.
5. Different minimum contribution amounts may be established for
other Plan markets. Lower minimum amounts may be established for
automatic investment programs. Maximum limitations on contributions
also may be imposed. Contributions under the Certificates may be
accumulated before annuitization, and annuity payments may be received
after annuitization, on a variable basis. Annuity payments also may be
received on a fixed basis.
6. Under an Endorsement, the Certificates permit contributions to
be allocated to guarantee periods expiring on specified dates. The
guarantee periods will be funded through a ``non-unitized'' separate
account established by Equitable; assets in such ``non-unitized''
separate account will be subject to the claims of Equitable's general
creditors. Each guarantee period will provide a guarantee of the
contribution allocated thereto and interest, which guarantee is
supported by Equitable's general accounts assets, including those
allocated to the ``non-unitized'' separate account. An upward or
downward adjustment--a ``market value adjustment (``MVA'')''--will be
made to the Annuity Account Value\1\ in a guarantee period upon a
withdrawal, surrender or transfer from a guarantee period before its
expiration. Death benefit amounts based on Annuity Account Value in a
guarantee period only will reflect any upward MVA.
\1\A contract owner's ``Annuity Account Value'' is the sum of
the amounts held for the owner in the ``Investment Options'' under
the Account Contracts. The ``Investment Options'' include the
variable investment options and each guarantee period account
available through the Account Contracts.
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7. Under an Endorsement, the Certificates may include a life
contingent annuity option funded through Equitable's general account.
The life contingent annuity provides guaranteed periodic fixed annuity
benefits, generally commencing at later ages, for the life of the
annuitant or a survivor annuitant. This form of benefit will be offered
for use in conjunction with certain reallocations and withdrawal
arrangements to be made available by Equitable.
8. The Account currently is subdivided into nine subaccounts
(``Investment Funds''), each of which will be available under the
Certificates. Each Investment Fund will invest in the shares of a
corresponding portfolio (``Portfolio'') of The Hudson River Trust (the
``Trust''). The Trust is an open-end, diversified ``series'' management
investment company, registered under the 1940 Act.
9. In the future, Equitable may create additional Investment Funds
of the Account to invest in any additional Portfolios, or other such
underlying portfolios or other investments as may now or in the future
be available. Investment Funds also may be combined or eliminated from
time to time.
10. ECSC is an indirect wholly-owned subsidiary of Equitable, and
will be the principal underwriter of the Account and the distributor of
the Account Contracts. ECSC is registered with the Commission as a
broker-dealer under the Securities Exchange Act of 1934 (the ``1934
Act''), and is a member of the National Association of Securities
Dealers, Inc. (the ``NASD''). The Certificates will be offered through
representatives of ECSC and its affiliates, as well as through
unaffiliated broker-dealers who have entered into agreements with ECSC.
All of such [[Page 12263]] affiliates and unaffiliated broker-dealers
will be registered broker-dealers under the 1934 Act and NASD members.
11. ECSC or any successor entity may act as principal underwriter
for any Other Account and as distributor for any Other Contracts. A
successor entity also may act as principal underwriter for the Account.
12. The charges and fees described below are the maximum that may
be imposed under the Certificates. The amount of the applicable charges
and fees, as set forth in the Certificates and relevant offering
prospectuses, may not be increased during the life of the Certificate
without the owner's consent. Equitable may reserve the right to impose
transfer charges not otherwise applicable when the Certificate is
issued, subject to the maximum amounts described below.
13. Equitable proposes to deduct a daily asset charge from the
Account for assuming mortality and expense risks. Equitable assumes a
mortality risk by its contractual obligation to continue to make
annuity payments for the entire life of the annuitant under annuity
options involving life contingencies, regardless of the annuitant's own
longevity or an improvement in life expectancy generally. Equitable
assumes the risk that annuitants as a group will live longer than
Equitable's annuity tables predict, which would require Equitable to
pay out more in annuity income than it planned.
14. Equitable will assume an expense risk under the Certificates to
the extent that the administrative charges applicable under the
Certificates--including the annual contract fee, the asset-based
administrative charge, the withdrawal processing charge, and the
transfer charges--may be insufficient to cover actual administrative
expenses.
15. As compensation for assuming mortality and expense risks,
Equitable will assess a daily charge, equal on an annual basis to 0.90%
of the assets of each Investment Fund of the Account. Approximately
0.60% of the charge is for assumption of mortality risks, and
approximately 0.30% is for assumption of expense risks. (Equitable
reserves the right to revise the percentages so allocated.)
16. The Certificates provide for a death benefit which is the sum
of (a) the Annuity Account Value or, if greater, the ``guaranteed
minimum death benefit, '' and (b) the death benefit provided in an
Endorsement (including a ``Market Value Adjustment Terms Endorsement''
proposed to offered by Equitable).
17. On the Contract Date,\2\ the guaranteed minimum death benefit
applicable to Certificates issued in all states except New York will
equal the portion of the initial contribution allocated to the Account.
Thereafter (except as adjusted at the end of the seventh Contract
year), the guaranteed minimum death benefit will equal (i) the prior
guaranteed minimum death benefit, (ii) plus any subsequent
contributions to and transfers into the Account, (iii) less any
transfers out of, and any withdrawals from, the Account, (iv) plus
interest credited on each Processing Date.\3\ At the end of the seventh
Contract year, the guaranteed minimum death benefit will be set at the
then current guaranteed minimum death benefit or, if greater, the
current Annuity Account Value in the Account.
\2\The ``Contract Date'' is the date on which an annuitant is
enrolled under a Group Contract, or the effective date of an
individual contract form of Account Contract in states requiring
individual contracts.
\3\The ``Processing Date'' is each anniversary of the Contract
Date, but may occur quarterly.
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18. Interest for the guaranteed minimum death benefit calculation
under NQ Certificates will be credited at rates determined by the
annuitant's ``issue age'' (the annuitant's age at issue of the
Certificate)--6% for issue ages 0 through 69, 3% for issue ages 70
through 74, and 0% for issue ages 75 and older. For amounts in the
money market Investment Fund, the rate will be based on the lesser of
those guaranteed minimum death benefit interest rates and the actual
rate of return.
19. Under IRA Certificates, interest will be credited at the
applicable effective annual guaranteed minimum death benefit interest
rate for an ``attained age'' (the owner's age at issue of the
Certificate plus the number of Contract years that have elapsed since
the Contract Date)--6% for attained ages 0 through 70, and 0% for
attained ages 71 through 85. For amounts in the money market Investment
Fund, the rate will be based on the lesser of those guaranteed minimum
death benefit interest rates and the actual rate of return.
20. For Certificates sold in New York, the guaranteed minimum death
benefit is calculated on a basis different from that for Certificates
sold in all other states, but will not be less than (i) the initial and
any subsequent contributions and transfers into the Account, (ii) less
any transfers out of, and any withdrawals from, the Account, (iii) plus
interest credited on each Processing Date in the same manner as under
Certificates sold in all other states.
21. Equitable will impose a charge for providing the guaranteed
minimum death benefit and assuming related mortality risks. The charge
will not be asset-based, but will be based on the amount of the
guaranteed minimum death benefit, and will compensate Equitable for the
risk that the annuitant may die at a time when the cash value of the
Account is less than the amount of the guaranteed minimum death
benefit. Because the Certificates do not impose any withdrawal charge
on the payment of a death benefit, Equitable assumes the risk that the
owner will die at a time when the withdrawal charge would otherwise
have been applicable. Equitable also will assume the risk that, at the
time of death, the Annuity Account Value will not have increased by at
least the amount of interest credited to contributions in determining
the amount of the guaranteed minimum death benefit.
22. The maximum guaranteed minimum death benefit charge is 0.35% of
the amount of the guaranteed minimum death benefit as of each
Processing Date. The applicable charge will be deducted from the
Annuity Account Value held in the Investment Funds on each Processing
Date, and will be the same for all Certificates.
23. No sales charges will be deducted at the time contributions are
applied under a Certificate. A distribution fee, or sales load, equal
to a maximum of 1.00% of the amount of each contribution made, and not
withdrawn, may be deducted from the Annuity Account Value held in the
Investment Funds annually on each of the seven Processing Dates
following the receipt by Equitable of each contribution. The
distribution fee, if any, will be deducted from the Investment Funds on
a pro-rata basis, unless the Certificate owner specifies otherwise. If,
at any time before the seventh Processing Date, the Certificate owner
surrenders the Certificate for its cash value (i.e., the Annuity
Account Value less any applicable charges) or annuitizes, the
Certificate is terminated, or a death benefit is payable, no further
distribution fee deductions will be made. If a partial withdrawal is
taken before the seventh Processing Date, the distribution fee will be
applied only to the remaining amount of the contribution. The
distribution fee and the withdrawal charge (described below) combined
will never exceed the amount of the maximum withdrawal charge. Any
amounts realized from the distribution fee will be used to defray a
portion of the sales expenses. [[Page 12264]]
24. Depending upon the distribution channels used and other factors
affecting marketing costs, Equitable may offer Certificates at
distribution fee levels below 1.00%, or without a distribution fee. In
addition, Equitable may increase the number of Processing Dates over
which the distribution fee may be imposed.
25. A withdrawal charge will be imposed upon a surrender of a
Certificate, upon annuitization, or upon any partial withdrawal. The
charge will apply to amounts in excess of a ``free corridor amount''
and will be deducted from the Annuity Account Value held in the
Investment Funds from which the withdrawal is made. The withdrawal
charge is a percentage of each contribution received by Equitable, and
depends on the Contract year in which the Certificate is surrendered,
or a partial withdrawal is taken. The maximum withdrawal charge during
the first Contract year--i.e., when Equitable receives the
contribution--is 7% and declines by 1% each Contract year thereafter to
zero in the eighth and subsequent Contract years.
26. A ``free corridor amount'' equal to 15% of the Annuity Account
Value under a Certificate at the beginning of the Contract year, less
prior withdrawals made in that Contract year, may be withdrawn during
that Contract year without being subject to the withdrawal charge. The
``free corridor amount'' is not applicable upon the surrender of a
Certificate.
27. When computing the withdrawal charge, amounts shall be
considered withdrawn on a ``first-in, first-out'' basis. The withdrawal
charge is not applicable upon the payment of any death benefit. The
amounts obtained from the withdrawal charge, together with the
distribution fee, will be used to help defray expenses incurred in the
sale of Certificates. The withdrawal charges will not exceed the
percentages discussed above. Based on marketing considerations,
Equitable may reduce the percentages charged or increase the number of
Contract years over which the charges are imposed. During the life of
the Certificate, the schedule of withdrawal charges shown in a
Certificate will not be increased, nor will the charge period be
abbreviated.
28. The administrative charges which may be assessed under the
Certificates include: a maximum annual contract fee, equal to the
greater of 0.15% of the amount of each contribution made and $30 per
Contract Year, which is incurred by the Certificate owner at the
beginning of each Contract Year and deducted annually on each
Processing Date; and a daily asset-based administrative charge, at a
maximum annual rate of 0.25%, assessed against the Investment Funds.
Unless the Certificate owner directs otherwise, the annual contract fee
will be deducted pro-rata from amounts held in the Investment Funds.
The annual contract fee may be inapplicable if the total contributions
received under a Certificate exceed specified amounts.
29. The administrative charges also include a charge, equal to the
lesser of $25 or 2% of the amount withdrawn, for processing each
partial withdrawal (other than withdrawals under certain flexible
payment distribution options) after the first in a Contract year. This
charge will be deducted pro-rata from the Investment Funds from which
each withdrawal is made. This charge does not apply upon the surrender
of a Certificate.
30. The Certificates provide for five free transfers during a
Contract year. For each additional transfer in excess of the free
transfers, Equitable may charge $25 at the time the transfer is
processed. The charge will be deducted pro-rata from the Investment
Funds from which the transfer is made. Equitable also may deduct a $25
transfer charge for a direct transfer to a third party of amounts under
the Certificate, or for an exchange for the contract of another
insurance carrier.
31. Equitable expects that, over the period that the Certificates
are in force, the revenues from the administrative charges--including
the annual contract fee, the daily asset-based administrative charge,
the withdrawal processing charge, and the transfer charges--will not
exceed its total expected costs of administering the Certificates, on
average, excluding costs that are properly categorized as distribution
expenses. Applicants represent that these administrative charges will
be deducted in reliance upon and in compliance with Rule 26a-1 under
the 1940 Act.
32. Unless the Certificate owner specifies otherwise, charges for
premium taxes generally are deducted from the Annuity Account Value in
the Investment Funds upon annuitization. Under Certificates sold in
certain states, however, a deduction for premium taxes is made from the
Annuity Account Value in the Investment Funds at the time the
contribution is received. Whether premium taxes are applicable depends
on the owner's current place of residence; such taxes generally range
from 0% to 5% of contributions or the amount annuitized, as
appropriate. Equitable represents that the amount that it will recover
for premium taxes will not exceed the amount of premium taxes required
to be paid.\4\
\4\Equitable represents that, to the extent necessary, it will
assess charges for premium taxes in reliance upon Rule 26a-2(d)
under the 1940 Act.
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33. Applicants represent that if the mortality and expense risk
charge and the guaranteed minimum death benefit charge are insufficient
to cover the expenses and costs assumed, the loss will be borne by
Equitable; if the amounts deducted prove more than sufficient, the
excess will be profit to Equitable. Equitable expects to earn a profit
over the expected life of the Certificates from the mortality and
expense risk and the guaranteed minimum death benefit charges. If the
distribution fee and withdrawal charge are insufficient to cover the
actual costs of distribution, the expenses will be paid from
Equitable's general account assets, which will include any profit
derived from the mortality and expense risk and the guaranteed minimum
death benefit charges.
Applicants' Legal Analysis
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant exemptions from Sections 2(a)(35), 26(a)(2)(C)
and 27(c)(2) thereof to the extent necessary to permit the assessment
of a mortality and expense risk charge, a guaranteed minimum death
benefit charge, and a distribution fee under the Account Contracts and
Other Contracts.
2. Section 6(c) of the 1940 Act provides, in relevant part, that
the Commission may issue an order exempting any person, security or
transaction, or any class or classes thereof, from any provisions of
the 1940 Act as may be 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.
3. Applicants believe that the terms of the relief requested with
respect to any Other Contracts funded by the Account or any Other
Account are consistent with the standards set forth in Section 6(c) of
the 1940 Act. Applicants undertake that the Other Contracts funded by
the Account or any Other Account will be substantially similar in all
material respects to the Account Contracts. Applicants state that
without the requested relief Applicants would have to request and
obtain exemptive relief in connection with Other Contracts and/or Other
Accounts. Any such additional request for exemption would present no
issues under the 1940 Act that have not already been addressed in this
Application. [[Page 12265]]
4. 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 Equitable
to file redundant exemptive applications, thereby reducing its
administrative expenses and maximizing the efficient use of its
resources. The delay and expense involved in having to repeatedly seek
exemptive relief would impair Equitable's ability to effectively take
advantage of business opportunities as they arise.
5. Applicants submit that the reasons cited above also explain why
the requested relief is consistent with the purposes of the 1940 Act
and the protection of investors. In this regard, Applicants submit that
investors would not receive any benefit or additional protection if
Equitable were required repeatedly to seek exemptive relief with
respect to the same issues addressed in this Application. Indeed,
investors might be disadvantaged as a result of Equitable's increased
overhead expenses.
6. Section 2(a)(35) defines ``sales load'' as the difference
between the price of a security to the public and that portion of the
proceeds from its sale which is received and invested by the issuer,
less any portion of such difference deducted for trustee's or
custodian's fees, insurance premiums, issue taxes, or administrative
expenses or fees which are not properly chargeable to sales or
promotional activities.
7. The literal wording of Section 2(a)(35) contemplates a front-end
sales charge. Although Rule 6c-8 permits the deduction of a contingent
deferred sales load, such as the withdrawal charge provided for in the
Certificates, that rule is not available for the periodic deduction of
a contribution-based deferred distribution fee. Applicants, therefore,
request an exemption from Section 2(a)(35) to the extent necessary to
permit the assessment of a contribution-based deferred distribution fee
under the Accounts.
8. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act require, among
other things, that all payments received under a periodic payment plan
certificate sold by a registered unit investment trust, any depositor
thereof or underwriter therefor, be held by a qualified bank as trustee
or custodian, under arrangements which prohibit any payment to the
depositor or principal underwriter except for the payment of a fee, not
exceeding such reasonable amount as the Commission may prescribe, for
bookkeeping and other administrative services.
9. Applicants submit that because the distribution fee is designed
to compensate for sales related expenses, not bookkeeping or other
administrative services, it could be argued that Section 26(a)(2)(C)
precludes the deduction of the distribution fee from the Annuity
Account Value in the Account. Applicants also submit that Section
27(c)(2) may be construed to prohibit a registered investment company
or a depositor or underwriter for such a company from selling any
periodic payment plan certificate (such as the Certificates) unless the
proceeds of all the payments under such a certificate are held by a
trustee or custodian under an agreement containing the substance of the
provisions of Section 26(a)(2). For this reason, Applicants state that
it could be argued that the Account, by virtue of the deduction of the
distribution fee, does not meet the requirements of Section 26(a)(2)(C)
and, therefore, the sale of the Certificates violates Section 27(c)(2).
Accordingly, Applicants request exemption from Sections 2(a)(35),
26(a)(2)(C) and 27(c)(2) to the extent necessary to permit the
deduction of the distribution fee in the manner described in this
Application.
10. Applicants submit that the imposition of a sales load in the
form of a contribution-based charge that is deducted over an extended
period is more favorable to Certificate owners than the deduction of
the equivalent charge as a front-end sales load (as contemplated by
Section 2(a)(35)). In this regard, Applicants note that the full amount
of a contribution is available for investment in the Account, thereby
providing each Certificate owner with more investment dollars than if
an equivalent front-end sales charge were deducted from the
contribution.
11. Applicants also state that deferring a sales charge can benefit
Certificate owners by permitting them to receive any positive
investment experience on the portion of the charge that is deferred.
Applicants further state that, because the distribution fee is not
deducted from death benefit proceeds, deducting the distribution fee
over time, rather than at issue of the Certificate, can favorably
affect the amount of the death benefit payable if death occurs during
the first seven Contract years. Applicants also state that the total
amount charged to a Certificate owner when the distribution fee is
deducted over time is no greater than the amount that would be charged
if the distribution fee were deducted from the contribution as a front-
end sales load.
12. Applicants state that the Commission previously has promulgated
regulations permitting the deduction of sales charges from cash value,
but only in connection with variable life insurance policies pursuant
to Rule 6e-3(T) under the 1940 Act. Applicants submit that the
reasoning that justifies the exemptions provided by that rule in
connection with variable life insurance policies also justifies
exemptive relief in this instance.
13. Applicants represent that the distribution fee may not exceed
7% of the contribution made, and the total sales load will never be
more than the maximum withdrawal charge of 7%. In this regard,
Applicants assert that if a Certificate owner does not withdraw a
contribution in the seven-year period after the contribution is made,
no withdrawal charge will be applicable, but the 1% maximum
distribution fee will be imposed on each Processing Date, for a maximum
total of 7% of the contribution made. Applicants further assert that if
a partial withdrawal of a contribution is made during that seven-year
period, the amount withdrawn will be subject to a withdrawal charge,
but will no longer be part of the contribution base upon which the
distribution fee is assessed on a Processing Date. That is, the amount
withdrawn would not be subject to any further distribution fee, and the
balance of the contribution would not be subject to a withdrawal
charge, but would be charged a distribution fee on the Processing Date.
Accordingly, Applicants represent that, as the withdrawal charge is
reduced 1% in each of the years following the year in which the
contribution is made, and the distribution fee only applies to the
remaining amount of a contribution after a withdrawal, the sum of the
distribution fee and the withdrawal charge (as applicable) will never
exceed 7% of the contribution made. Applicants also represent that the
sum of the distribution fee and the withdrawal charge (as applicable)
always will be lower than the 9% maximum permitted by Rule 6c-8 and the
provisions of Section 27(a)(1) of the 1940 Act regarding maximum sales
loads for variable insurance products or periodic payments plan
certificates.
14. Applicants assert that the maximum guaranteed minimum death
benefit charge is reasonable in relation to the risk assumed by
Equitable under the Certificates. In arriving at this determination,
Equitable states that it conducted a large number of trials at
different issue ages to determine the expected cost of the guaranteed
minimum death benefit. By analyzing [[Page 12266]] the results of a
statistically valid number of such simulations, Equitable was able to
determine actuarially the level cost of providing the benefit. Based on
this analysis, Equitable determined that the 0.35% charge was a
reasonable charge for providing the guaranteed minimum death benefit
under the Certificates. Equitable undertakes to maintain at its home
office a memorandum, available to the Commission upon request, setting
forth in detail the methodology used in making that determination.
15. Applicants represent that the aggregate mortality and expense
risk and guaranteed minimum death benefit charges under the
Certificates are reasonable in relation to the risks by Equitable under
the Certificates, and reasonable in amount as determined by industry
practice for comparable contracts. Applicants represent that they have
reviewed publicly available information regarding the aggregate level
of the mortality and expense risk and guaranteed minimum death benefit
charges under comparable variable annuity contracts currently being
offered in the insurance industry, taking into consideration such
factors as current charge levels, the manner in which charges are
imposed, the presence of charge level or annuity rate guarantees, and
the markets in which the Certificate will be offered. Applicants will
maintain and make available to the Commission upon request a memorandum
outlining the methodology underlying the foregoing representations.
16. Equitable will assess a mortality and expense risk charge not
to exceed an annual rate of 0.90%, and a maximum annual charge of 0.35%
of the guaranteed minimum death benefit. Assuming a hypothetical gross
investment return in the Account of 5.0%, the 0.35% maximum guaranteed
minimum death benefit charge would, if expressed as a daily charge
against Account assets, add approximately 0.35% to the 0.90% mortality
and expense risk charge, for a total charge, on an annual basis, of
approximately 1.25% of the assets in the Investment Funds.
17. For higher hypothetical gross returns, the guaranteed minimum
death benefit charge, when expressed as an asset-based charge, would be
less; for lower hypothetical gross returns, it would be more.
Applicants assert that this is because the charge base--which is
essentially contributions plus interest--is a relative constant in
dollar amount compared to the fluctuating values of an Investment Fund.
Thus, as a percentage of the assets of an Investment Fund, which
(assets) change with investment performance, positive performance
results in a reduction of the guaranteed minimum death benefit charge
when expressed as an asset-based charge; negative performance will
result in an increase in the guaranteed minimum death charge when
expressed as an asset-based charge.
18. Applicants acknowledge that the withdrawal charge and
distribution fee, as applicable, may be insufficient to cover all costs
relating to the distribution of the Certificates. Applicants further
acknowledge that if a profit is realized from the mortality and expense
risk and guaranteed minimum death benefit charges, all or a portion of
such profit may be offset by distribution expenses not reimbursed by
the withdrawal charge and distribution fee. In such circumstances, a
portion of such charges might be viewed as providing for costs relating
to distribution of the Certificates.
19. Notwithstanding the foregoing, Equitable has concluded that
there is a reasonable likelihood that the proposed distribution
financing arrangements made with respect to the Certificates will
benefit the Account and Certificate owners and annuitants. Equitable
represents that it will maintain at its principal office, and make
available on request to the Commission, a memorandum setting forth the
basis for such conclusion.
20. Equitable represents that the Account will invest only in an
underlying mutual fund which has undertaken to have 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, formulate and approve any plan to finance distribution expenses in
accordance with Rule 12b-1 under the 1940 Act.
Conclusion
Applicants submit that for the reasons and based upon the facts set
forth above, the requested exemptions from Sections 2(a)(35),
26(a)(2)(C) and 27(c)(2) of the 1940 Act to permit the assessment of a
mortality and expense risk charge, a guaranteed minimum death benefit
charge, and a distribution fee under the Account Contracts and Other
Contracts meet the statutory standards of Section 6(c) of the 1940 Act.
Accordingly, Applicants assert that the requested exemptions are
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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5335 Filed 3-3-95; 8:45 am]
BILLING CODE 8010-01-M
