[Federal Register Volume 59, Number 65 (Tuesday, April 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8084]
[[Page Unknown]]
[Federal Register: April 5, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20176; 812-8804]
Canada Life Insurance Company of America, et al.
March 30, 1994.
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: Canada Life Insurance Company of America (``Canada Life''),
Canada Life Insurance Company of New York (``Canada Life of New
York''), Canada Life Insurance Company of America Variable Annuity
Account 1 (the ``Canada Life Account''), Canada Life of New York
Variable Annuity Account 1 (the ``Canada Life of New York Account''),
and Canada Life of America Financial Services, Inc. (``CLAFS'').
(Canada Life and Canada Life of New York are referred to collectively
herein as the ``Companies''; Canada Life Account and Canada Life of New
York Account are referred to collectively herein as the ``Accounts.''
The Companies, the Accounts, and CLAFS are referred to collectively
herein as the ``Applicants.'').
RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the
1940 Act for exemptions from sections 26(a)(2) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an amended order to permit the
deduction of a charge for mortality and expense risks under certain
flexible premium variable annuity contracts (the ``Contracts'').
FILING DATE: The application was filed on February 1, 1994.
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 Secretary of the SEC and serving
the 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 April 25,
1994, and should be accompanied by proof of service on the Applicants
in the form of an affidavit or, for lawyers, by certificate. Hearing
requests should state the nature of the interest, the reason 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 5th Street, NW., Washington, DC 20549.
Applicants, c/o David A. Hopkins, Esq., Canada Life Insurance Company
of America, 6201 Powers Ferry Road, NW., Atlanta, Georgia 30339.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Michael V. Wible, Special Counsel,
Office of Insurance Products, Division of Investment Management, at
(202) 272-2060.
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 SEC.
Applicants' Representations and Statements
1. Canada Life, a stock life insurance company incorporated under
the laws of Michigan on April 12, 1988, is principally engaged in the
sale and reinsurance of annuity contracts. Canada Life is a wholly
owned subsidiary of The Canada Life Assurance Company, a Canadian life
insurance company.
2. The Canada Life Account was established by Canada Life as a
separate account under the laws of Michigan on July 22, 1988, pursuant
to a resolution of Canada Life's board of directors. The Canada Life
Account is currently registered as a unit investment trust under the
1940 Act (File No. 811-5817).
3. The Canada Life Account will invest in shares of the investment
portfolios of the Canada Life of America Series Fund, Inc., as well as
portfolios of other specified registered open-end management investment
companies (collectively, the ``Funds''). The Funds are diversified,
open-end management investment companies with a number of series, or
portfolios. The assets of each portfolio are separate from the other
portfolios, and each portfolio has separate investment objectives and
policies. As a result, each portfolio operates as a separate investment
fund, and the investment performance of one portfolio has no effect on
the investment performance of any other portfolio. The Canada Life
Account has a number of subaccounts, each of which invests solely in a
specific corresponding portfolio of one of the Funds.
4. Canada Life of New York, a stock life insurance company
incorporated under the laws of the State of New York on June 7, 1971,
is principally engaged in the sale of annuity contracts and life
insurance policies in the State of New York. Canada Life of New York is
a wholly owned subsidiary of The Canada Life Assurance Company.
5. The Canada Life of New York Account was established by Canada
Life of New York as a separate account under the laws of the State of
New York on September 13, 1989, pursuant to a resolution of Canada Life
of New York's board of directors. The Canada Life of New York Account
currently is registered as a unit investment trust under the 1940 Act
(File No. 811-5961).
6. The Canada Life of New York Account will invest in shares of one
or more of the investment portfolios of the Funds. The Canada Life of
New York Account has a number of subaccounts, each of which invests
solely in a specific corresponding portfolio of the Funds.
7. CLAFS is a wholly owned subsidiary of Canada Life, and acts as
the distributor and principal underwriter of the Contracts. CLAFS is
registered under the Securities Exchange Act of 1934 as a broker-
dealer, and is a member of the National Association of Securities
Dealers, Inc.
8. The Contracts are individual flexible premium variable deferred
annuity contracts. The Contracts may be purchased on a non-tax-
qualified basis, or they may be purchased and used in connection with
retirement plans or individual retirement accounts that qualify for
favorable federal income tax treatment. Generally, the Contracts may be
purchased with an initial purchase payment of at least $5,000. However,
the initial purchase payment may be reduced to: $100 if the Contract
owner has executed a preauthorized check agreement for additional
purchase payments to be automatically withdrawn monthly from the
Contract owner's bank account (a ``PAC agreement''); or $2,000 if the
Contract is to fund an Individual Retirement Annuity (``IRA''). (The
Companies reserve the right to lower or raise the minimum premium for
IRAs.) Generally, subsequent purchase payments must be at least $1,000.
However, such purchase payments may be reduced to: $100 or more if the
purchase payment is made by preauthorized check pursuant to a PAC
agreement; or $50 or more per month if an IRA Rider is in effect, and
provided that no purchase payment, together with the total of other
purchase payments, would exceed $1,000,000 unless the applicable
Company consents to a larger amount.
9. A Contract owner may allocate net purchase payments to one or
more subaccounts of the applicable Account, each of which will invest
in a corresponding portfolio of the Funds. (Net purchase payments equal
purchase payments less any premium taxes deducted.) Purchase payments
will be credited with the investment experience of the selected
subaccount(s). A Contract owner also may allocate net purchase payments
to the applicable Company's general account.
10. Prior to the annuity date, a Contract owner may transfer
Contract value among subaccounts of the applicable Account, or
surrender a Contract or withdraw a portion of the cash surrender value.
The amount payable upon surrender, the cash surrender value, is the
Contract value less any applicable contingent deferred sales charge.
11. The Contracts provide for a series of annuity payments
beginning on the annuity date. A Contract owner may select from several
annuity payment options, all of which are fixed options that provide
for payments out of the applicable Company's general account.
12. If the annuitant dies prior to the annuity date, a death
benefit is payable upon receipt of due proof of death as well as proof
that the annuitant died prior to the annuity date. Up to the fifth
anniversary of the Contract, the death benefit will be equal to the
greater of: (1) Purchase payments paid, reduced by any partial
surrenders (including applicable surrender charges and any incurred
taxes); or (2) the Contract value on the date the applicable Company
receives due proof of death. If a Company receives due proof of death
after the fifth anniversary of the Contract, the death benefit is the
greatest of: (1) Purchase payments paid, reduced by any partial
surrenders (including applicable surrender charges and any incurred
taxes); (2) the Contract value on the date the applicable Company
receives due proof of death; or (3) the Contract value at the end of
the fifth Contract year preceding the date the applicable Company
receives due proof of death, plus purchase payments, less partial
surrenders (including applicable surrender charges), and less any
incurred taxes.
13. The Companies deduct an administration charge of $30 per
Contract year ($45 if a PAC agreement was in force at any time during
the Contract year) to compensate the applicable Company for the
administrative services provided to Contract owners. This charge will
be deducted from the Contract value at the end of each Contract year
prior to the annuity date, and upon a full surrender on any date other
than a Contract anniversary. Applicants represent that the
administration charge will be deducted in reliance on Rule 26a-1 and
Rule 6c-8 under the 1940 Act, and represents reimbursement only for the
administration costs expected to be incurred over the life of the
Contract. This charge is guaranteed not to increase for the duration of
the Contract, and the Companies neither expect nor intend to make a
profit from this charge.
14. The Companies will assess a daily administrative charge under
the Contracts to compensate them for the administrative expenses they
will bear in connection with the Contracts and the Accounts. For
incurring these administrative expenses in connection with the
Contracts and the Accounts, the Companies will deduct from their
respective Contracts a daily administrative charge at an annual rate of
0.15% of the value of net assets in each subaccount. This rate will be
guaranteed not to increase for the duration of the Contract.
15. A contingent deferred sales charge of 6% of the amount
withdrawn is imposed on certain full surrenders or partial surrenders
of Contract Value to cover expenses relating to the sale of the
Contracts, including commissions to registered representatives and
other promotional expenses.
16. Purchase payments paid at least five or more Contract years
prior to the date of surrender or partial surrender are not subject to
the contingent deferred sales charge. The Companies will also waive the
contingent deferred sales charge for the first partial surrender in any
Contract year if equal to or less than 10% of current premiums
(premiums paid within the previous four Contract years, less any prior
partial surrenders or systematic withdrawals from current premiums),
and if the Contract owner has not elected the systematic withdrawal
privilege for that Contract year. The Companies will not deduct the
contingent deferred sales charge from investment earnings.
17. The Companies will assess a daily charge to compensate them for
bearing certain mortality and expense risks in connection with the
Contracts. This charge is equal to an effective annual rate of 1.25% of
the value of the net assets in the applicable Account. Of that amount,
approximately 0.55% is attributable to mortality risks, and
approximately 0.70% is attributable to expense risks. The Companies
guarantee that this charge will never increase.
18. The mortality risk borne by the Companies arises from: (1)
Their contractual obligations to make annuity payments (determined in
accordance with the annuity tables and other provisions contained in
the Contracts) regardless of how long all annuitants or any individual
annuitant may live; and (2) their possible obligation to pay a claim
for a death benefit in excess of a Contract owner's Contract value. The
Companies also will assume an expense risk through their guarantees not
to increase the charges for issuing the Contracts and administering the
Contracts and the Accounts, regardless of their actual expenses,
including maintaining policy records, communicating with Contract
owners, and processing transactions.
19. If the mortality and expense risk charges under a Contract are
insufficient to cover actual costs and assumed risks, the loss will
fall on the applicable Company. Conversely, if the charges are more
than sufficient to cover costs, any excess will be profit to the
Company. The Companies currently do not anticipate a profit from these
charges.
20. The Companies may deduct any applicable premium tax from gross
purchase payments. The Companies reserve the right, however, to deduct
any applicable aggregate premium taxes paid on behalf of a particular
Contract from the Contract value upon full or partial surrender or on
the Annuity Date.
21. The Companies assess no charge for the first twelve transfers
in each Contract Year, and will assess a $25 charge for each subsequent
transfer request made by the Contract owner during a single Contract
Year. The Companies do not count transfers made in connection with
dollar cost averaging in determining whether to impose the $25 transfer
charge.
Applicants' Legal Analysis
1. Applicants request an exemption from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction of a mortality and expense risk charge under the Contracts.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, as herein
pertinent, prohibit a registered unit investment trust and any
depositor thereof or underwriter therefor from selling periodic payment
plan certificates unless the proceeds of all payments (other than sales
loads) are deposited with a qualified bank as trustee or custodian and
held under arrangements which prohibit any payment to the depositor or
principal underwriter except a fee, not exceeding such reasonable
amount as the Commission may prescribe, for performing bookkeeping and
other administrative services.
3. Applicants submit that the Companies are entitled to reasonable
compensation for their assumption of mortality and expense risks.
Applicants represent that the mortality and expense risk charge of
1.25% assessed under the Contracts is consistent with the protection of
investors because they are reasonable and proper insurance charges. In
this regard, Applicants represent that the mortality and expense risk
charge is reasonable to compensate the Companies for the risks that:
(i) annuitants under the Contracts will live longer as a group than has
been anticipated in setting the annuity rates guaranteed in the
Contracts; (ii) the Contract value will be less than the death benefit;
and (iii) administrative expenses will be greater than amounts derived
from the administrative charges.
4. The Companies represent that the charges for mortality and
expense risks assumed by them are within the range of industry practice
with respect to comparable annuity products. This representation is
based upon the Companies' analysis of publicly available information
about similar industry products, taking into consideration such factors
as current charge levels, the existence of charge level guarantees, and
guaranteed annuity rates. The Companies will maintain at their
respective administrative offices, available to the Commission,
memoranda setting forth in detail the products analyzed in the course
of, and the methodology and results of, their comparative surveys.
5. Applicants acknowledge that the surrender charges may be
insufficient to cover all costs relating to the distribution of the
Contracts. Applicants also acknowledge that if a profit is realized
from the mortality and expense risk charges, all or a portion of such
profit may be viewed by the Commission as being offset by distribution
expenses not reimbursed by the sales charge. The Companies have
concluded that there is a reasonable likelihood that the proposed
distribution financing arrangements will benefit the Accounts and the
Contract owners. The basis for such conclusions are set forth in
memoranda which will be maintained by the Companies at their respective
administrative offices and will be available to the Commission.
6. The Companies also represent that the Accounts will only invest
in management investment companies which undertake, in the event such
an investment company adopts a plan under Rule 12b-1 to finance
distribution expenses, to have a board of directors (or trustees), a
majority of whom are not interested persons of the company, formulate
and approve any such plan under Rule 12b-1.
Conclusion
Applicants assert that, for the reasons set forth above, the
requested exemptions from sections 26(a)(2) and 27(c)(2) of the 1940
Act to permit the deduction of a mortality and expense risk charge
under the Contracts meet the standards of Section 6(c) of the 1940 Act.
Applicants assert that the requested exemptions are necessary and
appropriate in the public interest, and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8084 Filed 4-4-94; 8:45 am]
BILLING CODE 8010-01-M
