[Federal Register Volume 64, Number 71 (Wednesday, April 14, 1999)]
[Notices]
[Pages 18457-18461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9244]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23774; File No. 812-11388]
The Equitable Life Assurance Society of the United States, et al.
April 7, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of Application for an order under Section 6(c) of the
Investment Company Act of 1940 (the ``1940 Act'') granting exemptions
from the provisions of Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the
Act and Rule 22c-1 thereunder to permit the recapture of credits
applied to contributions made under certain deferred variable annuity
contracts.
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SUMMARY OF APPLICATION: Applicants seek an order under Section 6(c) of
the Act to the extent necessary to permit, under specified
circumstances, the recapture of credits applied to contributions made
under deferred variable annuity contracts and certificates (the
``Contracts'') that Equitable will issue through the Separate Accounts,
as well as other contracts that Equitable may issue in the future
through Future Accounts that are substantially similar in all material
respects to the Contracts (the ``Future Contracts''). Applicants also
request that the order being sought extend to any other National
Association of Securities Dealers, Inc. (``NASD'') member broker-dealer
controlling or controlled by, or under common control with, Equitable,
whether existing or created in the future, that serves as a distributor
or principal underwriter for the Contracts or Future Contracts offered
through the Separate Accounts or any Future Account (``Equitable
Broker-Dealer(s)'').
APPLICANTS: The Equitable Life Assurance Society of the United States
(``Equitable Life''), The Equitable of Colorado, Inc. (``EOC,'' and
together with Equitable Life, ``Equitable''), Separate Account No. 45
of Equitable Life (``SA 45''), Separate Account No. 49 of Equitable
Life (``SA 49''), Separate Account VA of EOC (``SA VA,'' and together
with SA 45 and SA49, the ``Separate Accounts''), any other separate
account established by Equitable in the future to support certain
deferred variable annuity contracts and certificates issued by
Equitable (``Future Account''), EQ Financial Consultants, Inc.
(``EQFC''), and Equitable Distributors, Inc. (``EDI'') (collectively,
``Applicants'').
FILING DATE: The application was filed on October 30, 1998, and amended
and restated on March 29, 1999.
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 SEC's Secretary and serving
Applicant with a copy of the request, in person or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on April 30, 1999,
and should be accompanied by proof of service on the 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 who wish to be
notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609.
[[Page 18458]]
Applicants, c/o The Equitable Life Assurance Society of the United
States, 1290 Avenue of the Americas, New York, New York 10104, Attn:
Mary P. Breen, Esq.
FOR FURTHER INFORMATION CONTACT: Kevin P. McEnery, Senior Counsel, or
Susan M. Olson, Branch 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
SEC's Public Reference Branch, 450 Fifth St., NW, Washington, DC 20549-
0102 (tel. (202) 942-8090).
Applicants' Representations
1. Equitable Life is a stock life insurance company organized under
the laws of the State of New York. SA 45 and SA 49 were established in
August 1994 and June 1996. Equitable Life serves as depositor of SA 45
and SA 49. Equitable Life may in the future establish one or more
Future Accounts for which it will serve as depositor.
2. EOC is a stock life insurance company organized under the laws
of the State of Colorado. SA VA was established in December 1996,
pursuant to authority granted under a resolution of EOC's Board of
Directors. EOC serves as depositor of SA VA. EOC may in the future
establish one or more Future Accounts for which it will serve as
depositor.
3. SA 45 and SA 49 are each a segregated asset account of Equitable
Life, and SA VA is a segregated asset account of EOC. Each of the
Separate Accounts is registered with the Commission as a unit
investment trust series investment company under the Act. SA 45 filed a
Form N-8A Notification of Registration under the 1940 Act on September
6, 1994, and SA 49 filed a Form N-8A under the Act on June 7, 1996. SA
VA filed a Form N-8A on February 16, 1999. Each of the Separate
Accounts will fund the variblabe benefits available under the Contracts
funded through it. Units of interest in the Separate Accounts under the
Contracts they fund will be registered under the Securities Act of 1933
(the ``1933 Act''). In that regard, SA 45 and SA 49 filed Form N-4
Registration Statements on September 30, 1998, under the 1933 Act
relating to the Contracts. SA VA filed a Form N-4 Registration
Statement on February 16, 1999, under the 1933 Act relating to the
Contracts. Equitable may in the future issue Future Contracts through
the Separate Accounts or through Future Accounts. That portion of the
respective assets of the Separate Accounts that is equal to the
reserves and other Contract liabilities with respect to SA 45, SA 49 or
SA VA is not chargeable with liabilities arising out of any other
business of Equitable Life or EOC, as the case may be. Any income,
gains or losses, realized or unrealized, from assets allocated to the
Separate Accounts are, in accordance with the respective Separate
Accounts' Contracts, credited to or charged against the Separate
Accounts, without regard to other income, gains or losses of Equitable
Life or EOC, as the case may be.
4. EQFC is an indirect, wholly-owned subsidiary of Equitable Life
and will be the principal underwriter of SA 45 and SA VA and
distributor of the Contracts funded through SA 45 (the ``SA 45
Contracts'') and through SA VA (the ``SA VA Contracts''). EQFC 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 NASD.
The SA 45 Contracts and the SA VA Contracts will be offered through
registered representatives of EQFC and its affiliate who are registered
broker-dealers under the 1934 Act and NASD members. EQFC, or any
successor entity, may act as principal underwriter for any Future
Account and distributor for any Future Contracts issued by Equitable in
the future. A successor entity also may act as principal underwriter
for SA 45 and/or SA VA. During May 1999, EQFC will change its name to
AXA Advisors, Inc.
5. EDI is an indirect, wholly-owned subsidiary of Equitable Life
and will be the principal underwriter of SA 49 and SA VA and
distributor of the Contracts funded through SA 49 (the ``SA 49
Contracts'') and the SA VA Contracts. EDI is registered with the
Commission as a broker-dealer under the 1934 Act and is a member of the
NASD. The SA 49 and SA VA Contracts will be offered through registered
representative of EDI and its affiliates, as well as through
unaffiliated broker-dealers who have entered into agreements with EDI.
All of such affiliates and unaffiliated broker-dealers will be
registered broker-dealers under the 1934 Act and NASD members. EDI, or
any successor entity, may act as principal underwriter for any Future
Account and distributor for any Future Contracts issued by Equitable in
the future. A successor entity also may act as principal underwriter
for SA 49 or SA VA.
6. The SA 45 Contracts and the SA 49 Contracts are part of
Equitable Life's ``Accumulator'' line of annuity products and they are
substantially similar in all material respects. They differ principally
in the mix of mutual funds underlying each of the Separate Accounts and
in the distribution channels used in the offering of the Contracts;
otherwise, they are essentially identical. The SA VA Contracts are part
of EOC's ``Accumulator'' line of annuity products. They are
substantially similar in all material respects of the SA 45 and SA 49
Contracts, except that they: (i) Only offer variable investment options
during the accumulation period of the Contracts, (ii) do not offer a
``guaranteed period account'' feature that involves a market value
adjustment; and (iii) do not offer a combined guaranteed minimum income
benefit and guaranteed minimum death benefit or ``baseBUILDER''
feature. EOC may, in the future, add these features to the SA VA
Contracts. Contracts may be issued as individual retirement annuities
(``IRAs,'' either ``Traditional IRAs'' or ``Roth IRAs''), or as non-
qualified annuitiess (``NQ'') for after-tax contributions only. NQ
Contracts also my be used for certain types of qualified plans
(``QP''). Each of the Contracts consists of (i) a basic form of group
annuity contract (the ``Group Contract'') issued to a bank or trust
company whose sole responsibility will be to serve as party to the
Group Contract, (ii) a basic form of certificate issued under and
reflecting the terms of the Group Contract, and (iii) forms of
certificate endorsements to be used for specific forms of benefits
under the certificates. In some states, the certificates will be issued
in the form of individual contracts, rather than under a Group
Contract.
7. An IRA Contract may be purchased by rolling over or transferring
a contribution of at least $25,000 or more from one or more individual
retirement arrangements. Under a Traditional IRA Contract additional
contributions of $1,000 or more may be added at any time subject to
certain restrictions. Additional contributions under a Traditional IRA
Contract are limited to $2,00 per year, but additional rollover or IRA
transfer amounts are unlimited. In certain cases, additional amounts
may not be added to a Roth IRA Contract. An NQ or QP Contract can be
purchased with a contribution of $25,000 or more. Additional
contributions of $1,000 or more can be made at any time, subject to
certain restrictions. Certain restrictions also apply to the type of
contribution Equitable will accept under QP Contracts. Different
minimum contribution amounts may be established for other retirement
plan
[[Page 18459]]
markets, including IRAs, or particular NQ markets, or for automatic
investment programs.
8. The Contracts offered by Equitable Life permit, and in the
future the Contracts offered by EOC may permit, contributions to be
allocated to guarantee periods (``Guarantee Periods'') expiring on
specified dates. The Guarantee Periods will be funded through an
Equitable Life ``non-unitized'' separate account (the ``Guaranteed
Period Account''). The assets in the Guaranteed Period Account will not
be subject to claims of Equitable Life's general creditors. Each
Guarantee Period will provide a guarantee of the contribution allocated
thereto and interest. The guarantee is supported by Equitable Life's
general account assets, including those allocated to the Guaranteed
Period Account. An upward and downward adjustment, or ``market value
adjustment'' (``MVA''), will be made to the annuity account value in a
Guarantee Period upon a withdrawal, surrender or transfer from a
Guarantee Period prior to its expiration. Death benefit amounts based
on annuity account value in a Guarantee Period will reflect only any
upward MVA. Guarantee Period interests are registered under the 1933
Act pursuant to a Form S-3 Registration Statement.
9. SA45 currently is subdivided into 27 sub-accounts, each of which
will be available under the SA45 Contracts. SA 49 currently is
subdivided into 22 sub-accounts, each of which will be available under
the SA 49 Contracts. SA VA currently consists of 22 sub-accounts, each
of which will be available under the SA VA Contracts. The respective
sub-accounts are referred to as ``Investment Funds.'' Each Investment
Fund will invest in shares of a corresponding portfolio (``Portfolio'')
of The Hudson River Trust (``HRT'') or EQ Advisors Trust (``EQAT,'' and
together with HRT, the ``Trusts''). The Investment Funds, and in the
case of the SA 45 and 49 Contracts the Guarantee Periods, will comprise
the initial ``Investment Options'' under the Contracts. Each Trust is
an open-end, diversified series management investment company
registered under the Act, whose shares are registered under the 1933
Act. Both Trusts are available under the Separate Accounts.
10. HRT is managed and its Portfolios are advised by Alliance
Capital Management L.P. (``Alliance''), a publicly traded limited
partnership. Alliance is an indirect, majority-owned subsidiary of
Equitable Life. EQFC has overall responsibility for the general
management and administration of each EQAT Portfolio. Various entities
serve as the investment advisers to one or more of the EQAT Portfolios.
Equitable, at a later date, may determine to create an additional
Investment Fund or Investment Funds of the Separate Accounts to invest
in any additional Portfolio or Portfolios, or other such underlying
portfolios or other investments as may now or in the future be
available. Similarly, Investment Funds of the Separate Accounts may be
combined or eliminated from time to time.
11. The Contracts provide for various withdrawal options, annuity
benefits and payout annuity options, as well as transfer privileges
among Investment Options, dollar cost averaging, death benefit and
other features. The SA 45, SA 49 and SA VA Contracts have identical
charges at the separate account level consisting of (i) a withdrawal
charge as a percentage of contributions declining from 8% in years one
and two to 0% in year ten and thereafter, with a 15% ``free corridor''
amount, (ii) asset-based charges at the annual rates of 1.10% for
mortality and expense risks, 0.25% for administration expenses, and
0.25% for distribution expenses, assessed against the net assets of
each Investment Fund, and (iii) currently, for SA 45 and SA 49
Contracts only, an annual 0.30% charge for an optional ``baseBUILDER''
benefit feature. The underlying Trusts each impose investment
management fees, Rule 12b-1 plan fees and charges for other expenses.
12. Each time Equitable receives a contribution from a Contract
owner, it will allocate to the owner's annuity account value a credit
(the ``Credit'') equal to 3% of the amount of the contribution.
Equitable will allocate Credits among the Investment Options in the
same proportion as the corresponding contributions are allocated by the
owner. Equitable will fund the Credits from its general account assets.
Equitable will recapture Credits from an owner only if: (i) the owner
returns the Contract during a 10-day (or longer, if required) ``free
look'' period, or (ii) the owner annuitizes within three years of
making a subsequent contribution, in which case Equitable will recover
the amount of any Credit applicable to such contribution. Under the
terms of the Contracts, Contract owners may not annuitize, i.e.,
commence annuity payments, earlier than five years from the date of the
Contract.
13. Applicants seek exemption pursuant to Section 6(c) from
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder to the extent necessary to permit Equitable to issue
Contracts and Future Contracts that provide for the recapture of an
amount equal to any Credits in the following two instances: (i) when an
owner returns a Contract to Equitable for a refund during the ``free
look'' period, and (ii) when an owner annuitizes within three years of
making a subsequent contribution, in which case Equitable will recover
the amount of any Credit applicable to such contribution.
Applicants' Legal Analysis
1. Section 6(c) of the Act authorizes the Commission to exempt any
person, security or transaction, or any class or classes of persons,
securities or transactions from the provisions of the Act and the rules
promulgated thereunder 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 Act. Applicants request that the Commission,
pursuant to Section 6(c) of the Act, grant the exemptions summarized
above with respect to the Contracts and any Future Contracts funded by
the Separate Accounts or Future Accounts, that are issued by Equitable
and underwritten or distributed by EQFC, EDI or Equitable Broker-
Dealers. Applicants state that Future Contracts funded by the Separate
Accounts or any Future Account will be substantially similar in all
material respects to the Contracts. Applicants believe that the
requested exemptions are 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.
2. Applicants represent that it is not administratively feasible to
track the Credit amount in any of the Separate Accounts after the
Credit is applied. Accordingly, the asset based charges applicable to
the Separate Accounts will be assessed against the entire amounts held
in the respective Separate Accounts, including the Credit amount,
during the ``free look'' period and the three year period prior to
annuitization. As a result, during such periods, the aggregate asset
based charges assessed against an owner's annuity account value will be
higher than those that would be charged if the owner's annuity account
value did not include the Credit.
3. Subsection (i) of Section 27 provides that Section 27 does not
apply to any registered separate account funding variable insurance
contracts, or to the sponsoring insurance company and principle
underwriting of such
[[Page 18460]]
account, except as provided in paragraph (2) of the subsection.
Paragraph (2) provides that it shall be unlawful for any registered
separate account funding variable insurance contracts or a sponsoring
insurance company of such account to sell a contract funded by the
registered separate account unless, among other things, such contract
is a redeemable security. Section 2(a)(32) defines ``redeemable
security'' as any security, other than short-term paper, under the
terms of which the holder, upon presentation to the issuer, is entitled
to receive approximately his proportionate share of the issuer's
current net assets, or the cash equivalent thereof.
4. Applicants submit that the Credit recapture provisions of the
Contracts would not deprive an owner of his or her proportionate share
of the issuer's current net assets. Applicants state that an owner's
interest in the amount of the Credit allocated to his or her annuity
account value upon receipt of an initial contribution is not vested
until the applicable free-look period has expired without return of the
Contract. Similarly, Applicants state that an owner's interest in the
amount of any Credits allocated upon receipt of subsequent
contributions made during the three years before the owner annuitizes
also is not vested. Until or unless the amount of any Credit is vested,
Applicants submit that Equitable retains the right and interest in the
Credit amount, although not in the earnings attributable to that
amount. Thus, Applicants argue that when Equitable recaptures any
Credit it is simply retrieving its own assets, and because an owner's
interest in the Credit is not vested, the owner has not been deprived
of a proportionate share of the applicable Separate Account assets,
i.e., a share of the applicable Separate Accounts assets proportionate
to the owner's annuity account value (including the Credit).
5. In addition, with respect to Credit recapture upon the exercise
of the free-look privilege, Applicants state that it would be patently
unfair to allow an owner exercising that privilege to retain a Credit
amount under a Contract that has been returned for a refund after a
period of only a few days. Applicants state that if Equitable could not
recapture the Credit, individuals could purchase a Contract with no
intention of retaining it, and simply return it for a quick profit.
6. Furthermore, Applicants state that the recapture of Credits
relating to subsequent contributions made within three years of
annuitization is designed to provide Equitable with a measure of
protection against ``anti-selection.'' Applicants state that the risk
is that, rather than spreading contributions over a number of years, an
owner will make very large contributions shortly before annuitizing,
thereby leaving Equitable less time to recover the cost of the Credits
applied, to its financial detriment. Again, the amounts recaptured
equal the Credits provided by Equitable from its own general account
assets, and any gain would remain as part of the Contract's value at
annuitization.
7. Applicants represent that the Credit will be attractive to and
in the interest of investors because it will permit owners to put 103%
of their contributions to work for them in the selected Investment
Options. Also, any earnings attributable to the Credit will be retained
by the owner, and the principal amount of the Credit will be retained
if the contingencies set forth in the application are satisfied.
8. Further, Applicants submit that the recapture of any Credit only
applies in relation to the risk of anti-selection against Equitable.
Applicants state that Equitable's right to recapture Credits applies to
subsequent contributions made within three years of annuitization
protects it against the risk that owners will contribute larger amounts
as they approach an annuitization date to obtain the Credit, while
avoiding Contract charges over the long term. With respect to refunds
paid upon the return of Contracts within the ``free-look'' period, the
amount payable by Equitable must be reduced by the allocated Credits.
Otherwise, Applicants state that purchasers could apply for Contracts
for the sole purpose of exercising the free-look fund provision and
making a quick profit.
9. Applicants submit that the provisions for recapture of any
applicable Credit under the Contracts do not, and any such Future
Contract provisions will not, violate Section 2(a)(32) and 27(i)(2)(A)
of the Act. Nevertheless, to avoid any uncertainties, Applicants
request an exemption from those Sections, to the extent deemed
necessary, to permit the recapture of any Credit under the
circumstances described herein with respect to the Contracts and any
Future Contracts, without the loss of the relief from Section 27
provided by Section 27(i).
10. Section 22(c) of the 1940 Act authorizes the Commission to make
rules and regulations applicable to registered investment companies and
to principal underwriters of, and dealers in, the redeemable securities
of any registered investment company, whether or not members of any
securities association, to the same extent, covering the same subject
matter, and for the accomplishment of the same ends as are prescribed
in Section 22(a) in respect of the rules which may be made by a
registered securities association governing its members. Rule 22c-1
thereunder prohibits a registered investment company issuing any
redeemable security, a person designated in such issuer's prospectus as
authorized to consummate transactions in any such security, and a
principal underwriter of, or dealer in, such security, from selling,
redeeming, or repurchasing any such security except at a price based on
the current net asset value of such security which is next computed
after receipt of a tender of such security of redemption or of an order
to purchase or sell such security.
11. Arguably, Equitable's recapture of the Credit might be viewed
as resulting in the redemption of redeemable securities for a price
other than one based on the current net asset value of the Separate
Accounts. Applicants contend, however, that recapture of the Credit is
not violative of Section 22(c) and Rule 22c-1. Applicants argue that
the recapture does not involve either of the evils that Rule 22c-1 was
intended to eliminate or reduce, namely: (i) the dilution of the value
of outstanding redeemable securities of registered investment companies
though their sale at a price below net asset value or their redemption
or repurchase at a price above it, and (ii) other unfair results
including speculative trading practices. See Adoption of Rule 22c-1
under the 1940 Act, Investment Company Release No. 5519 (Oct. 16,
1968). To effect a recapture of a Credit, Equitable will redeem
interests in an owner's annuity account at a price determined on the
basis of current net asset value of the respective Separate Accounts.
The amount recaptured will equal the amount of the Credit that
Equitable paid out of its general account assets. Although owners will
be entitled to retain any investment gain attributable to the Credit,
the amount of such gain will be determined on the basis of the current
net asset value of the respective Separate Accounts Thus, no dilution
will occur upon the recapture of the Credit. Applicants also submit
that the second harm that Rule 22c-1 was designed to address, namely,
speculative trading practices calculated to take advantage of backward
pricing, will not occur as a result of the recapture of the Credit.
However, to avoid any uncertainty as to full compliance with the Act,
Applicants
[[Page 18461]]
request an exemption from the provisions of Section 22(c) and Rule 22c-
1 to the extent deemed necessary to permit them to recapture the Credit
under the Contracts and Future Contacts.
Conclusion
Applicants submit that their request for an order is appropriate in
the public interest. Applicants state that such an order would promote
competitiveness in the variable annuity market by eliminating the need
to file redundant exemptive applications, thereby reducing
administrative expenses and maximizing the efficient use of Applicants'
resources. Applicants argue that investors would not receive any
benefit or additional protection by requiring Applicants to repeatedly
seek exemptive relief that would present no issue under the Act that
has not already been addressed in their Application described herein.
Applicants submit that having them file additional applications would
impair their ability effectively to take advantage of business
opportunities as they arise. Further, Applicants state that if they
were required repeatedly to seek exemptive relief with respect to the
same issues addressed in the Application described herein, investors
would not receive any benefit or additional protection thereby.
Applicants submit, based on the grounds summarized above, that
their exemptive request meets the standards set out in section 6(c) of
the Act, namely, that the exemptions requested 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 Act, and that, therefore, the Commission should grant
the requested order.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9244 Filed 4-13-99; 8:45 am]
BILLING CODE 8010-01-M
