[Federal Register Volume 61, Number 47 (Friday, March 8, 1996)]
[Notices]
[Pages 9513-9515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5552]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21800; File No. 812-9922]
Zurich Life Insurance Company of America, et al.; Notice of
Application
March 4, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Zurich Life Insurance Company of America (``Zurich Life''),
Kemper Investors Life Insurance Company (``KILICO''), Federal Kemper
Life Assurance Company (``FKLA''), Zurich Life Variable Annuity
Separate Account (the ``Account''), and Investors Brokerage Services,
Inc. (``IBS'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants request an order permitting Zurich
Life, KILICO and FKLA to deduct mortality and expense risk charges from
the assets of certain separate accounts that fund certain individual
deferred variable annuity contracts.
FILING DATE: The application was filed on December 28, 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 SEC
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests must be received by the SEC by 5:30 p.m. on
March 29, 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 reasons for the request, and the issues contested.
Persons may request notification of a hearing by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, Frank J. Julian, Esq., Kemper Investors Life Insurance
Company, KLIC Legal T-1, 1 Kemper Drive, Long Grove, Illinois, 60049.
FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special
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 Public
Reference Branch of the Commission.
Applicants' Representations
1. Zurich Life, KILICO, and FKLA (collectively referred to as the
``Companies'') are stock life insurance companies organized under the
laws of Illinois. Zurich Life is a wholly-owned subsidiary of Zurich
Insurance Company; KILICO is wholly-owned subsidiary of Kemper
Financial Corporation (``Kemper''); and FKLA is a wholly-owned
subsidiary of Kemper. Zurich Life entered into a definitive agreement
to become the majority owner of Kemper, including Kemper's direct and
indirect subsidiaries, KILICO and FKLA. Zurich Life is the depositor of
the Account.
2. The Account, established by Zurich Life under Illinois law as an
insurance company separate account to fund certain variable annuity
contracts (the ``Account Contracts''), is registered under the 1940 Act
as a unit investment trust. Applicants request that the relief sought
herein extend to variable annuity contracts that are materially similar
to the Account Contracts (``Future Contracts'') (the Account Contracts
and the Future Contracts collectively referred to as the ``Contracts'')
and that are offered by the Account.
3. The Companies may establish one or more separate accounts in the
future (``Other Accounts'') (Other Accounts and the Account are
referred to collectively as the ``Separate Accounts'') to support
Future Contracts that are offered through any other broker-dealer that
(i) may serve in the future as principal underwriter in respect of
certain variable annuity contracts offered by the Companies, (ii) is
registered under the Securities Exchange Act of 1934 as a broker-dealer
and which is or will be a member of the National Association of
Securities Dealers, Inc. (the ``NASD''), and (iii) is controlling,
controlled by, or under common control with Zurich Life or any other
affiliated insurance company (Other Principal Underwriters'').
Applicants request that the relief sought herein extend to the Other
Accounts.
4. The Account is comprised of 14 sub-accounts each of which
invests in the corresponding portfolio or series of a management
investment company registered under the 1940 Act. Zurich Life may
create new sub-accounts of the Account.
5. IBS, a registered broker-dealer and a member of the NASD, is the
principal underwriter of the Account Contracts.
6. The Account Contracts provide retirement payments or other long-
term benefits for individuals who qualify for federal income tax
advantages available under Sections 401, 403(b), 408 and 457 of the
Internal Revenue Code of 1986, as amended (``qualified Account
Contracts''), and for individuals desiring such benefits who do not
qualify for such tax advantages (``non-qualified Account Contracts'').
The Account Contracts will be offered on a flexible payment basis.
7. Applicants state that the minimum initial purchase payment is
$50 for a qualified Account Contract and $2,500 for a non-qualified
Account Contract. The minimum additional purchase payment for a non-
qualified Account Contract is $500. However, when purchase payments are
made through a systematic investing program and the annual contribution
is not less than $600, the minimum payment is $50.
8. Certain charges and fees are assessed under the Account
Contracts. Where applicable, the dollar amount of state premium taxes
previously paid or payable upon annuitization by Zurich
[[Page 9514]]
Life may be charged against Contract Value (the amount that the Account
Contract provides for investment at any time) if not previously
assessed, when and if the Account Contract is annuitized. Premium taxes
range up to 3.5%.
9. No front-end sales charge is imposed when purchase payments are
applied under the Account Contracts. However, a contingent deferred
sales charge (``CDSC'') will be used to cover expenses relating to the
sale of the Account Contracts. The maximum CDSC is 6% of the amount
withdrawn during the first Contract year. The percentage scales
downward by one percent each year, so that there is no charge against
accumulation units withdrawn or annuitized in the seventh and later
contribution years. Contract owners will be permitted to withdraw up to
10% of the Contract Value determined at the time the withdrawal is
requested in any Contract year without the assessment of any sales
charge. If the Contract owner withdraws an amount in excess of the 10%
amount, the excess withdrawn is subject to a CDSC. In no event, will
the CDSC under the Account Contracts be greater than 7.25% of purchase
payments.
10. Applicants submit that proceeds from the CDSC may not cover the
expected cost of distributing the Account Contracts and that any
shortfall will be recovered from Zurich Life's general assets, which
may include revenue from the mortality and expense risk charge deducted
from the Account.
11. The administrative charges to be assessed with respect to the
Account Contracts will be (i) an annual records maintenance charge of
$36 per Contract year, which is deducted from the Contract Value upon
surrender of the Account Contract, and which is not assessed during the
annuity period, and (ii) an asset-related administration charge at an
annual rate of .10%. These charges may be reduced by Zurich Life but
may not be increased for outstanding Account Contracts.
12. Zurich Life and the Account represent that they do not expect
that the total revenues from the administrative cost portion of the
asset-based charge will be greater than the expected administrative
expenses, in conformity with the requirements of Rule 26a-1(b) under
the 1940 Act. Applicants represents that they are relying on Rules 26a-
1 and 6c-8 under the 1940 Act in connection with the imposition of the
records maintenance charge under the Account Contract.
13. Applicants propose to deduct a daily charge for mortality and
expense risks from the assets of the Account. With respect to the
Account Contracts, Zurich Life will assess the Account with a daily
charge for mortality and expense risks at an aggregate annual rate of
1.20%. Approximately .85% of the annual charge is allocated to the
mortality risks and .35% is allocated to the expense risks.
14. Applicants represent that Zurich Life will assume a mortality
risk by its contractual obligation to pay a death benefit to the
beneficiary if the owner, as defined in the Account Contract, dies
prior to the annuity date. Applicants assert that the Account Contracts
provide a guaranteed death benefit that is the greater of: (a) the
Contract Value at the time of death; or (b) the total net amount of
purchase payments, reduced by any withdrawals.
15. Applicants also represent that Zurich Life assumes a mortality
risk by its contractual obligation to continue to make annuity payments
for the life of the annuitant, as defined in the Account Contract,
under annuity options involving life contingencies. This assures each
annuitant that neither the annuitant's own longevity nor an improvement
in life expectancy generally will have an adverse effect on the annuity
payments received under an Account Contract. This relieves the
annuitant from the risk of outliving the amounts accumulated for
retirement. At the same time, Applicants represent that Zurich Life
assumes the risk that annuitants as a group will live a longer time
than Zurich Life predicts, which would require Zurich Life to pay out
more in annuity income than planned.
16. In addition to mortality risks, Applicants assert that Zurich
Life assumes an expense risk under the Account Contracts because the
administrative charges under the Contracts may be insufficient to cover
actual administrative expenses.
17. Applicants represent that if the mortality and expense risk
charges assessed against Account assets are insufficient to cover the
expenses and costs assumed, the loss will be borne by Zurich Life. If
the amount deducted for mortality and expense risk charges proves more
than sufficient, the excess will be profit to Zurich Life. Zurich Life
anticipates earning a profit from the mortality and expense risk
charge.
Applicants' Legal Analysis
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and
27(c)(2) thereof to the extent necessary to permit the deduction of a
mortality and expense risk charge from the assets of the Separate
Accounts which fund the Contracts.
2. Section 6(c) of the 1940 Act, in relevant part, provides that
the Commission may issue an order exempting any person, security or
transaction, or any class or classes of persons, securities or
transactions, from any provision or 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. Sections 26(a)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust and any depositor thereof or principal
underwriter therefore, from selling periodic payment plan certificates
unless the proceeds of all payments (other than sales load) are
deposited with a qualified trustee or custodian and held under an
agreement that provides that no payment to the depositor or principal
underwriter shall be allowed except as a fee, not exceeding such
reasonable amount as the Commission may prescribe, for bookkeeping and
other administrative services.
4. Applicants assert that the requested exemptions meet the
standards of Section 6(c) of the 1940 Act, and that the terms of the
relief requested with respect to the Account Contracts or Future
Contracts funded by a Separate Account and distributed by IBS or any
Other Principal Underwriter are consistent with the standards set forth
in Section 76(c) of the 1940 Act. Applicants state that without the
requested future relief, they would have to request and obtain
exemptive relief in connection with Account Contracts or Future
Contracts to the extent required. Applicants submit that any such
additional requests for exemption would present no issues under the
1940 Act that have not already been addressed in this application.
5. Applicants submit that the requested exemptive relief is
appropriate in the public interest because it would promote
competitiveness in the variable annuity contract market by eliminating
the need for Zurich Life and its appropriate affiliates to file
redundant exemptive applications, thereby reducing administrative
expenses and maximizing the efficient use of resources. The delay and
expense involved in having to seek exemptive relief repeatedly would
impair the ability of Zurich Life and its appropriate affiliates to
take advantage of business opportunities as they arise. If Zurich Life
and its appropriate affiliates were required to seek exemptive relief
[[Page 9515]]
repeatedly with respect to the issues addressed in this Application,
investors would not receive any benefit or additional protection
thereby. Indeed, they might be disadvantaged as a result of increased
overhead expenses incurred by Zurich Life and its appropriate
affiliates. Applicants further submit that, for the same reasons, the
requested relief is consistent with the purposes of the 1940 Act and
the protection of investors.
6. Applicants represent that the mortality and expense risk charge
of 1.20% is and will be within the range of industry practice for
comparable annuity products. Applicants state that this determination
is, and for Future Contracts will be, based on their analysis of
publicly available information about similar industry practices, taking
into consideration such factors as current charge levels and benefits
provided, the existence of expense charge guarantees, and guaranteed
annuity rates. Zurich Life, KILICO and FKLA undertake to maintain at
their home offices, and make available to the Commission upon request,
memoranda setting forth in appropriate detail the products analyzed,
the methodology, and the results of the analysis relied upon, in making
the foregoing determination.
7. The CDSC may be insufficient to cover all costs relating to the
distribution of the Account Contracts. In that event, 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
the CDSC. Notwithstanding the foregoing, Applicants have concluded that
there is a reasonable likelihood that the proposed distribution
financing arrangements will benefit the Separate Accounts and Contract
owners. Zurich Life, KILICO and FKLA undertake to maintain at their
principal offices, and make available upon request to the Commission
and its staff, memoranda setting forth the basis for such conclusion.
8. Zurich Life, KILICO and FKLA also represent that the Separate
Accounts will invest only in an underlying fund that undertakes, in the
event it should adopt any plan pursuant to Rule 12b-1 of the 1940 Act
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 1940 Act.
Conclusion
Applicants submit, for the reasons stated herein, that the
requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act--to permit the deduction of a mortality and expense risk charge
from Separate Account assets funding the Contracts--meet the standards
set out in 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. 96-5552 Filed 3-7-96; 8:45 am]
BILLING CODE 8010-01-M
