[Federal Register Volume 60, Number 79 (Tuesday, April 25, 1995)]
[Notices]
[Pages 20296-20301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10132]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21021; No. 812-8154]
General American Life Insurance Company, et al.
April 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: General American Life Insurance Company (``General
American''), General American Separate Account Eleven (``Account 11'')
and Walnut Street Securities, Inc. (``Underwriter'').
RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) granting
exemptions from Sections 27(c)(2) and 27(e) of the 1940 Act and from
Rules 6e-3(T)(b)(13)(vii), 6e-3(T)(c)(4)(v) and 27e-1 thereunder.
SUMMARY OF APPLICATION: Applicants request an order to permit Account
11 and other variable life insurance separate accounts that General
American may establish in the future (``Future Accounts'') to: (1)
Deduct a charge from premium payments under certain variable life
insurance contracts to compensate General American for its increased
federal tax burden resulting from the application of Section 848 of the
Internal Revenue Code of 1986, as amended, to the receipt of such
payments; and (2) to permit General American not to send such contract
owners a written notice of their refund and withdrawal rights.
[[Page 20297]] FILING DATES: The application initially was filed on
November 9, 1992, declared inactive on August 12, 1993, and amended on
September 12, 1994, and April 14, 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 Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on May 15, 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 requestor'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 Matthew P.
McCauley, Esq., General American Life Insurance Company, 700 Market
Street, St. Louis, Missouri 63101.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Wendy Friedlander, Deputy Chief, at (202) 942-0670, Office
of Insurance Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. General American, a mutual life insurance company, is
principally engaged in offering insurance policies and annuity
contracts. General American is authorized to conduct business in the
District of Columbia, all states except New York, and ten Canadian
provinces.
2. Account 11 is a separate account established by General American
and registered as a unit investment trust under the 1940 Act. Account
11 currently has 13 sub-accounts, each of which invests in
corresponding portfolios of one of four series-type registered open-
end, diversified management investment companies (collectively,
``Funds'').\1\ The Future Accounts will be separate accounts, as
defined in Rule 0-1(e) under the 1940 Act, and registered as unit
investment trusts under the 1940 Act.
\1\The Funds include General American Capital Company, Variable
Insurance Products Fund, Variable Insurance Products Fund II, and
Van Eck Investment Trust.
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3. The Underwriter acts as principal underwriter for certain
variable life and variable annuity contracts by General American. The
Underwriter is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. The Underwriter is an indirect wholly-owned
subsidiary of General American.
4. Account 11 currently funds two flexible premium variable life
insurance contracts offered by General American, the VUL-95 Contract
and the General Select Plus Contract (together, ``Existing
Contracts''). Account 11 will, and Future Accounts may, be used to fund
a new flexible premium variable life insurance contract (``Contract''),
as well as other flexible premium variable life insurance contracts
(``Future Contracts'') that in the future may be offered by General
American. (Future Contracts and Existing Contracts are hereinafter
referred to together as ``Other Contracts''.) Interests in all of the
contracts are or will be registered as securities under the Securities
Act of 1933.
5. The Contract offers the payment of premiums in any amount and
frequency, subject to certain limitations, three death benefit options,
cash value, loan privileges and other traditional life insurance
features. The Contract owner may receive a refund of premium payments
by cancelling and returning the Contract within the latest of: (1) 20
days of receipt (30 days for California residents, and for age 60 or
older), (2) 45 days of signing the application, or (3) 10 days of
General American's mailing a notice of this provision to the Contract
owner.\2\
\2\Contracts purchased in Kansas provide for a return of an
amount equal to the: (1) difference between premium payments and
amounts allocated to Account 11; and (2) cash value on the date the
Contract is returned.
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6. Certain charges and deductions are made under the Contract to
compensate General American for its costs and expenses.
(a) Premium Tax Charge
A charge of 2.10% is deducted from each premium payment for state
taxes assessed on premium payments received by General American. Such
premium taxes vary from jurisdiction to jurisdiction and range between
0.75% to 3.50%. This charge represents the average deduction considered
necessary for General American to pay such taxes. Some jurisdictions do
not impose a premium tax while others may impose a tax that is greater
than or less than the 2.10% deduction under the Contract. If the
average premium tax increases in the future, General American may
increase this deduction.
(b) Section 848 Deferred Acquisition Costs Charge
A charge of 1.25% (``DAC Tax Charge'') will be deducted from each
premium payment to reimburse General American for its increased federal
income tax burden resulting from changes made to Section 848 of the
Internal Revenue Code of 1986 (``Code''), by the Omnibus Budget
Reconciliation Act of 1990 (``OBRA 1990''), affecting the treatment of
deferred acquisition costs. The requested order would permit the
deduction of 1.25% of each premium payment under the Contract and
Future Contracts. The 1.25% DAC Tax Charge will not be deducted under
Existing Contracts issued prior to the receipt of the requested order.
However, the DAC Tax Charge may be deducted under Existing Contracts
issued after issuance of the requested order\3\ and after endorsements
permitting the charge have been approved by insurance regulators in
each applicable jurisdiction. Applicants represent that the DAC Tax
Charge is a legitimate expense of the company, is not used for sales
and distribution expenses and will be reasonably related to General
American's increased federal tax burden.
\3\Applicants undertake to make this representation in an
amendment to the Application, which is to be filed during the notice
period.
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(c) Administration Charge
The monthly administration charge is $13 per month during the first
Contract year, and $6 per month thereafter. This charge cannot be
increased under a Contract once it is issued.
(d) Selection and Issue Expense Charge
The selection and issue expense charge is $0.16 per month per
$1,000 of face amount during the first Contract year and $0.01 per
month per $1,000 of face amount thereafter. In the event that the face
amount is increased (other than by a change in death benefit options or
increasing death benefit rider), this charge is $0.16 per month per
$1,000 of increased face amount during the first Contract year
following the increase and $0.01 per month per $1,000 of face amount
thereafter.
(e) Cost of Insurance Charge
The monthly cost of insurance charge varies with each Contract
because it is based on the attained age, rate class, and sex (except
Montana) of the insured.
(f) Charge for Riders
A monthly charge will be deducted for any riders. This charge will
vary with each Contract.
(g) Mortality and Expense Risk Charge
A daily charge equivalent to an effective annual rate of .90% of
Account 11's average daily net assets\4\ will be deducted for General
American's assumption of mortality and expense risks. [[Page 20298]]
\4\The value of Account 11's net assets will reflect the
investment management fees and other operating expenses of the Funds
held by Account 11.
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(h) Contingent Deferred Sales Charge (``CDSC'')
For a period of up to 15 years after issuance of the Contract or an
effective face amount increase, General American will impose a CDSC
upon surrender, lapse, a requested decrease in face amount or a partial
withdrawal that results in a decrease in face amount.
The amount of the CDSC will depend upon a number of factors,
including the type of event, amount of premium payments made prior to
the event, number of Contract years that has elapsed since issuance of
the Contract or face amount increase, as applicable.
A separate CDSC applies to the initial face amount and to each
increase in face amount and is deducted whenever, and to the extent
that, a surrender, lapse or face amount decrease affects the applicable
increment of face amount. The length of time over which a CDSC will
apply to any increment of face amount will depend upon the attained age
of the insured on the issue date or the effective date of the increase,
as applicable, and the insured's sex and risk class, as follows:
Contingent Deferred Sales Charge Period
[Duration in years]
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Male Male Female Female
Insured's age nonsmoker smoker nonsmoker smoker
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0-50............................ 15 15 15 15
51.............................. 14 14 14 14
52.............................. 13 13 13 13
53.............................. 12 12 12 12
54.............................. 11 11 11 11
55-79........................... 10 11 10 10
80.............................. 10 6 10 10
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The CDSC will equal the CDSC grading percentage\5\ multiplied by
the sum of (1) and (2) where: (1) is 40% of the lesser of the premium
payments made or the target premium for the Contract, and (2) is the
excess premium surrender charge factor multiplied by premium payments
made in excess of the target premium for the Contract. With regard to a
face amount increase, multiplied by the sum of (1) and (2) where: (1)
Is 40% of the lesser of the premium payments attributable to the
increase, and (2) is the excess premium surrender charge factor
multiplied by the premium payments attributable to the increase in
excess of the target premium for the increase. The excess premium
surrender charge factors vary with the attained age, sex and risk class
of the insured. The target premium for the Contracts is somewhat less
than the guideline annual premium (``GAP'') as defined in Rule 6e-
3(T)(c)(8).
\5\Grading percentages range, on a declining scale, from 100% in
the first policy year to 0% in the 15th policy year, and vary
depending on the sex, issue age, and risk class of the insured.
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The CDSC for the initial face amount during the first two Contract
years will not exceed: (a) 30% of the first GAP paid under the
Contract; (b) 10% of the second GAP paid; and (c) 9% of premium
payments made in excess of two GAPs. The CDSC for any increase in face
amount during the first two Contract years following the increase will
not exceed: (a) 30% of the first GAP attributable to the increase; (b)
10% of the second GAP attributable to the increase; and (c) 9% of
premium payments attributable to the increase of two GAPs.
7. Application of Section 848 of the Code. Section 848 of the Code,
as amended by OBRA, requires life insurance companies to capitalize and
amortize over a period of ten years part of their general expenses for
the current year. Prior law allowed these expenses to be deducted in
full from the current year's gross income. Section 848 effectively
accelerates the realization of income from certain categories of life
insurance and other contracts (``Specified Contracts'') categorized
under this Section and, thus, the payment of taxes on that income. The
Contract and Other Contracts will be categorized under Section 848 as
Specified Contracts. Taking into account the time value of money,
Section 848 increases the insurance company's tax burden because the
amount of general deductions that must be capitalized and amortized is
measured by the premiums received under the Specified Contracts.
8. The amount of deductions subject to Section 848 equals a
percentage of the current year's net premiums received (i.e., gross
premiums minus return premiums and reinsurance premiums) under the
Specified Contracts. Consequently, 7.7% of the net premiums received
must be capitalized and amortized under the schedule set forth in
Section 848(c)(1) of the Code.
9. The increased tax burden on every $10,000 of net premiums
received is quantified as follows. For each $10,000 of net premiums
received in a given year, Section 848 requires General American to
capitalize $770 (i.e., 7.7% of $10,000), and $38.50 of this amount may
be deducted in the current year. The remaining $731.50 ($770 less
$38.50), which is subject to taxation at the corporate tax rate of 35%,
results in General American owning $256.03 (.35% x $731.50) more in
taxes for the current year than it otherwise would have owed prior to
OBRA 1990. However, the current tax increase will be partially offset
by deductions that will be allowed during the next ten years as a
result of amortizing the remainder of the $770 ($77 in each of the
following nine years and $38.50 in year ten).
10. In its business judgment, General American believes it
appropriate to use a discount rate of at least 10% in evaluating the
present value of its future tax deductions for the following reasons.
Capital that General American must use to pay its increased federal tax
[[Page 20299]] burden under Section 848 will be unavailable for
investment. The cost of capital used to pay this increased tax burden
essentially will be General American's after tax rate of return on
surplus (i.e., return sought on invested capital), which is 10% to 12%.
Accordingly, Applicants assert that the after tax rate of return on
surplus is appropriate for use in this present value calculation.
11. In determining the after tax rate of return, General American
considered a number of factors, including market interest rates,
anticipated long-term growth rate, acceptable risk levels, inflation,
and available information about the rates of return obtained by other
mutual life insurance companies. General American represents these are
appropriate factors to consider.
12. General American first projects its future growth rate based on
sales projections, current interest rates, inflation rate, and the
amount of surplus that it can provide to support such growth. General
American then uses these factors, giving market interest rates,
acceptable risk level, and inflation rate significantly more weight, to
set a rate of return on surplus equal to or in excess of the
anticipated rate of growth. General American seeks to maintain a ratio
of surplus to assets that it establishes based on its judgment of the
risks represented by various components of its assets and liabilities.
Maintaining the ratio of surplus to assets is critical to General
American maintaining a competitive rating from various rating agencies
and to offering competitively priced products. Consequently, General
American's surplus must grow at least at the same rate as its assets.
13. Using a federal corporate tax rate of 35%, and assuming a
discount rate of 10%, the present value of the tax effect of the
increased deductions allowable in the following ten years, which
partially offsets the increased tax burden, comes to $160.40. The
effect of Section 848 on the Contracts and Other Contracts is therefore
an increased tax burden with a present value of $95.63 for each $10,000
of net premiums received (i.e., $256.03 minus $160.40).
14. General American does not incur incremental federal income tax
when it passes on state premium taxes to Contract Owners because state
premium taxes are deductible in computing federal income taxes.
Conversely, federal income taxes are not deductible in computing
General American's federal income taxes. To compensate General American
fully for the impact of Section 848, General American must impose an
additional charge to make it whole not only for the $95.63 additional
tax burden attributable to Section 848, but also for the tax on the
additional $95.63 itself. This federal tax can be determined by
dividing $95.63 by the complement of 35% federal corporate income tax
rate (i.e., 65%), resulting in an additional charge of $147.12 for each
$10,000 of net premiums, or 1.47%.
15. Based on its prior experience, General American reasonably
expects to take almost all future deductions. It is General American's
judgment that a 1.25% charge would reimburse it for its increased
federal income tax liabilities under Section 848. Applicants represent
that the 1.25 charge will be reasonably related to General American's
increased federal income tax burden under Section 848. This
representation takes into account the benefit to General American of
the amortization permitted by Section 848 and the use of a 10% discount
rate (which is equivalent to General American's cost of capital) in
computing the future deductions resulting from such amortization. To
the extent that General American's actual cost of capital exceeds an
annual rate of 10%, the calculation of this increased tax burden will
continue to be reasonable over time.
16. General American believes that the 1.25% charge would have to
be increased if future changes in, or interpretations of, Section 848
or any successor provision result in a further increased tax burden due
to receipt of premiums. The increase could be caused by a change in the
corporate tax rate, or in the 7.7% figure, or in the amortization
period. Accordingly, the Contract, Future Contracts and endorsements to
the Existing Contracts offered after issuance of an order in this
matter will or may reserve the right to increase, or decrease, the
1.25% charge in response to such future changes or interpretations that
increase or decrease its tax burden. Any increase of the charge above
1.25% would require additional exemptive relief from the Commission
under the 1940 Act.
Applicants' Legal Analysis
1. Applicants request an order under Section 6(c) of the 1940 Act
for exemptions from Section 27(c)(2) of the 1940 Act to the extent
necessary to permit the deduction from premium payments of a DAC Tax
Charge in an amount that is reasonable in relation to General
American's increased federal tax burden based on receipt of premiums
under the Contract. The DAC Tax Charge also may be included in Future
Contracts and may be added to Existing Contracts issued after receipt
of the order requested herein. Applicants also request exemptions from
Rule 6e-3(T)(c)(4)(v) under the 1940 Act to permit the proposed DAC Tax
Charge to be treated as other than ``sales load,'' as defined under
Section 2(a)(35) of the 1940 Act, for purposes of Section 27 and the
exemptions from various provisions of that Section found in Rule 6e-
3(T).
2. Applicants also request an order under Section 6(c) exempting
them and any Future Accounts from Section 27(e) of the 1940 Act and
Rules 27e-1 and 6e-3(T)(b)(13)(vii) thereunder to the extent necessary
to eliminate the requirement of written notice to owners of the
Contract or Future Contracts concerning certain withdrawal and refund
rights.
3. Section 6(c) authorizes the Commission, by order and upon
application, to exempt any person, security, or transaction, or class
of persons, securities, or transactions, from any provisions of the
1940 Act. The Commission grants relief under Section 6(c) to the extent
an exemption is ``necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of [the 1940 Act].''
A. DAC Tax Charge
1. Section 27(c)(2). Section 27(c)(2) prohibits any deduction from
premium payments made under periodic payment plan certificates other
than a deduction for ``sales load.'' ``Sales load'' is defined under
Section 2(a)(35), in relevant part, 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 or held for investment by the
issuer (or in the case of a unit investment trust, by the depositor or
trustee), 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.
Sales loads on periodic payment plan certificates are limited by
Sections 27(a)(1) and 27(h)(1) to 9% of total payments.
2. Rule 6e-3(T)(b). Certain provisions of Rule 6e-3(T) provide
exemptive relief from Section 27(c)(2) if the separate account issues
flexible premium variable life insurance contracts, as defined in
subparagraph (c)(1) of that Rule. Rule 6e-3(T)(b)(13)(iii) provides
exemptive relief from Section 27(c)(2) to permit an insurer to make
certain deductions, other than sales load, including ``[t]he deduction
of premium or other taxes imposed by any State or other governmental
entity.'' [[Page 20300]]
3. Applicants assert that the proposed deduction with respect to
Section 848 of the Code arguably is covered by subparagraph
(b)(13)(iii)(E) of Rule 63-3(T), but that the language of paragraph
(c)(4) of the Rule appears to require that deductions for federal tax
obligations from receipt of premium payments be treated as ``sales
load.'' Applicants state that they request relief from Section 27(c)(2)
only to preclude the possibility that a charge related to the increased
burden resulting from Section 848 is not covered by the exemption
provided by Rule 6e-3(T)(b)(13)(iii)(E). Applicants submit that the
public policy reasons underlying subparagraph (b)(13)(iii)(E) provide
support for the exemption requested.
4. Rule 6e-3(T)(c)(4). Paragraph (b)(1), together with paragraph
(c)(4), of Rule 6e-3(T) provide an exemption from the Section 2(a)(35)
definition of ``sales load'' by substituting a new definition to be
used for purposes of the Rule.
Rule 6e-3(T)(c)(4) defines ``sales load'' during a period as the
excess of any purchase payments made during that period over certain
itemized charges and adjustments, including a deduction for state
premium taxes. Under a literal reading of paragraph (c)(4) of the Rule,
a deduction for an insurer's increased federal tax burden does not fall
squarely into those itemized charges or deductions, arguably causing
the deduction to be treated as part of ``sales load.'' Applicants
maintain, however, that there is no public policy reason why a tax
burden charge designed to cover the expense of federal taxes should be
treated as sales load or otherwise be subject to the sales load limits
of Rule 6e-3(T). Moreover, Applicants assert that nothing in the
administrative history of Rule 6e-3(T) suggests that the Commission
intended to treat tax charges as sales load.
5. Applicants argue that the exemption is necessary in order for
Account 11 and any Future Account to rely on subparagraph (c)(13)(i),
which provides critical exemptions from Sections 27(a)(1) and 27(h)(1)
of the 1940 Act. Applicants note that issuers and their affiliates may
only rely, however, on subparagraph (b)(13)(i) if they meet its
alternate limits that apply to sales load as defined in paragraph
(c)(4). Applicants represent that they and Future Accounts could not
meet these limits if the DAC Tax charge is included in sales load.
6. Applicants assert that the public policy that underlies
paragraph (b)(13) of Rule 6e-3(T), and particularly subparagraph
(b)(13)(i), like that which underlies Sections 27(a)(1) and 27(h)(1),
is to prevent excessive sales loads from being charged for the sale of
periodic payment plan certificates. Applicants argue that this
legislative purpose is not furthered by treating a federal income tax
charge based on premium payments as a sales load because the deduction
is not related to the payment of sales commissions or other
distribution expenses. Applicants assert that the Commission has
concurred with this conclusion by excluding deductions for state
premium taxes from the definition of sales load in paragraph (c)(4) of
each Rule.
7. Applicants suggest that the source for the definition of ``sales
load'' found in paragraph (c)(4) of Rule 6e-3(T) supports this
analysis. In adopting paragraph (c)(4) of the Rule, the Commission
intended to tailor the general terms of Section 2(a)(35) to flexible
premium variable life insurance contracts to ease verification by the
Commission of compliance with the sales load limits of subparagraph
(b)(13)(i) of the Rule. Just as the percentage limits of Section
27(a)(1) and 27(h)(1) depend on the definition of sales load in Section
2(a)(35) for their efficacy, the percentage limits in subparagraph
(b)(13)(i) of Rule 6e-3(T) depend on paragraph (c)(4), which does not
depart, in principle, from Section 2(a)(35).
8. Applicants further suggest that the exclusion from the
definition of ``sales load'' under Section 2(a)(35) of deductions from
premiums for ``issue taxes'' indicates that it is consistent with the
policies of the 1940 Act to exclude from the definition of ``sales
load'' in Rule 6e-3(T) deductions made to pay an insurer's costs
attributable to its federal tax obligations. By extension, it is
equally consistent to exclude such charges from Rule 6e-3(T)(c)(4)
definition of sales load. Additionally, the exclusion of administrative
expenses or fees that are ``not properly chargeable to sales or
promotional activities'' also suggests that the only deductions
intended to fall within the definition of ``sales load'' are those that
are properly chargeable to sales or promotional activities. The
proposed deductions will be used to compensate General American for its
increased federal tax burden attributable to the receipt of premiums
and not for sales or promotional activities. Therefore, the language in
Section 2(a)(35) further indicates that not treating such deductions as
sales load is consistent with the policies and provisions of the 1940
Act.
9. Finally, Applicants submit that it is probably an historical
accident that the exclusion of premium tax in subparagraph (c)(4)(v) of
Rule 6e-3(T) from the definition of ``sales load'' is limited to state
premium taxes. When Rule 6e-3(T) was adopted and later amended, the
additional Section 848 tax burden attributable to the receipt of
premiums did not yet exist.
10. Applicant's Conditions for DAC Tax Relief: Applicants agree to
the following conditions:
(a) General American will monitor the reasonableness of the 1.25%
DAC Tax Charge;
(b) The registration statement for any variable life insurance
contract under which the 1.25% charge is deducted will include: (1)
disclosure of the charge; (2) disclosure explaining the purpose of the
charge; and (3) a statement that the charge is reasonable in relation
to General American's increased federal tax burden under Section 848 of
the Code; and
(c) General American also will include as an exhibit to the
registration statement for any variable life insurance contract under
which the 1.25% charge is deducted an actuarial opinion as to: (1) the
reasonableness of the charge in relation to General American's
increased federal tax burden under Section 848 of the Code; (2) the
reasonableness of the after-tax rate of return that is used in
calculating such charge; and (3) the appropriateness of the factors
taken into account by General American in determining such after-tax
rate of return.
11. Request for Class Relief. Applicants also request exemptions to
deduct the DAC Tax Charge for any Future Account established by General
American to support Future Contracts, as defined in Rule 6e-3(T)(c)(1).
Applicants assert that granting exemptive relief to deduct the 1.25%
DAC Tax Charge from the assets of any Future Account established in
connection with the issuance of Future Contracts would promote
competitiveness in the variable life insurance market by eliminating
the need for General American to file redundant exemptive applications,
thereby reducing its administrative expenses and maximizing the
efficient use of its resources. Applicants further represent that the
delay and expense involved in having repeatedly to seek exemptive
relief would impair General American's ability effectively to take
advantage of business opportunities as they arise. Further, any
additional requests for exemptive relief for such Future Accounts would
present no issues under the 1940 Act that have not already been
addressed in this application. Without the requested relief, General
American would have to [[Page 20301]] obtain exemptions for each Future
Account with respect to the same issues addressed in this application.
Thus, investors would receive no benefit or additional protection and
might be disadvantaged by General American's increased overhead
expenses.
12. Applicants submit that, for the reasons stated above, it is
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 to deduct a DAC Tax Charge and to exclude it
from sales load.
B. Waiver of Notice of Withdrawal and Refund Rights
1. Section 27(e) requires, with respect to any periodic payment
plan certificate sold subject to Section 27(d), written notification of
the right to surrender and receive a refund of the excess sales load.
Section 27(d) requires the refund of any excess sales load paid during
the first eighteen months after issuance of a periodic payment plan
certificate. Rule 27e-2 establishes the requirements for the notice
mandated by Section 27(e) and prescribes Form N-271-1 for that purpose.
Rule 6e-3(T)(b)(13) modifies the requirements of Section 27 and the
rules thereunder. Rule 6e-3(T)(b)(13)(vii) adopts Form N-27-1,
originally intended for application to contractual plans, and requires
it to be sent to a contract owner upon issuance of the contract and
again during any lapse period in the first two contract years. The Form
requires statements of (1) the contract owner's right to a refund of
the excess sales load for a surrender during the first two contract
years, (2) the date that the right expires, and (3) the circumstances
in which the right may not apply upon lapse. Thus, Section 27(e) of the
1940 Act and Rules 27e-1 and 6e-3(T)(b)(13)(vii), in effect, require a
notice of right of withdrawal and refund, on Form N-271-1, to be
provided to owners of the Contracts or Future Contracts (``Contract
Owners'') entitled to a refund of sales load in excess of the limits
stated in paragraph (b)(13)(v)(A) of Rule 6e-3(T).
2. Applicants note that the CDSC may be deducted upon surrender,
face amount reduction or lapse of the Contract, which does not assess
any other sales charges. The CDSC does not, during the first two
Contract years, or during the first two Contract years after the
increase in face amount, exceed the limits described under paragraph
(b)(13)(v)(A) of Rule 6e-3(T), beyond which sales charges are
characterized as ``excess sales charges.'' Thus, Applicants assert that
no ``excess sales charge'' is ever paid by a Contract Owner
surrendering, reducing the face amount, or lapsing in the first two
Contract years, or during the first two Contract years after the
increase in face amount. Moreover, Applicants state that the Contract
does not impose an excess sales load upon lapse, thus negating the
value of a notice being sent during the lapse period.
3. Rule 27e-1, pursuant to which Form N-271-1 was first prescribed,
specifies in paragraph (e) that a notice need be mailed when there is
otherwise no entitlement to receive any refund of sales charges.
Moreover, Rule 27e-1 and Rule 6e-2, from which Rule 6e-3(T) was
derived, were adopted in the context of front-end loaded products only
and in the broader context of the companion requirements in Section 27
for the depositor or underwriter to maintain segregated funds as
security to assure the refund of any excess sales charges.
4. Applicants submit that requiring of a Form N-271-1 could confuse
Contract Owners or encourage them to surrender during the first two
Contract years, or surrender or decrease face amount during the first
two Contract years following a face amount increase, when it may not be
in their best interests to do so. A Contract Owner with a declining
contingent deferred sales load, unlike a contract with a front-end
sales charge, does not foreclose the opportunity, at the end of the
first two Contract years, to receive a refund of monies spent. Such a
Contract Owner has not paid any excess sales charge and, as the
deferred sales charge declines over the life of the Contract, may never
pay it. Applicants thus assert that encouraging a surrender during the
first two Contract years could cost such a Contract owner more in total
sales load, relative to total premium payments, than would otherwise be
paid if the Contract were held for the long-term period originally
intended.
5. Applicants submit that the absence of excess sales charge and,
therefore, the absence of an obligation to assure repayment of that
amount, do not create a right in a Contract owner which Form N-271-1
was designed to highlight. In the absence of this right, the
notification contemplated by Form N-271-1 is an unnecessary and
counter-productive administrative burden the cost of which appears
unjustified. Any other purpose potentially served by Form N-271-1 would
already be addressed by the required Form N-271-2 Notice of Withdrawal
Right, generally describing the charges associated with the Contract,
and prospectus disclosure detailing the sales load design. Neither
Congress, in enacting Section 27, nor the Commission, in adopting Rule
27e-1, contemplated the applicability of Form N-271-1 in the context of
a contract with a declining contingent deferred sales load.
C. Applicants' Conclusion
For the reasons and upon the facts set forth above, Applicants
submit that the exemptions requested under Section 6(c) of the 1940 Act
form: (1) Section 27(c)(2) of the 1940 Act and Rule 6e-3(T)(c)(4)(v)
thereunder to permit General America to deduct up to 1.25% from premium
payments as a DAC Tax Charge, and (2) under Section 27(e) of the 1940
Act and Rules 27e-1 and 6e-3(T)(b)(13)(vii) thereunder to permit the
elimination of the requirement of written notice to owners of the
Contract or Future Contracts concerning certain withdrawal and refund
rights, 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 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10132 Filed 4-24-95; 8:45 am]
BILLING CODE 8010-01-M
