[Federal Register Volume 59, Number 102 (Friday, May 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12940]
[[Page Unknown]]
[Federal Register: May 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20309; File No. 812-8816]
Principal Mutual Life Insurance Company, et al.
May 20, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for order under the Investment Company
Act of 1940 (the ``1940 Act'' or the ``Act'').
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APPLICANTS: Principal Mutual Life Insurance Company (``Principal
Mutual''), Principal Mutual Life Insurance Company Separate Account B
(``Separate Account B'') and Princor Financial Services Corporation
(``Princor'').
RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the
Act granting exemptions from sections 26(a)(2)(C) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction from the assets of Separate Account B of the mortality and
expense risks charge imposed under certain flexible purchase payment
individual variable annuity contracts (the ``Contracts'').
FILING DATE: The application was filed on February 7, 1994.
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 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
June 14, 1994, and should be accompanied by proof of service on the
Applicants in the form of an affidavit or, for lawyers, a certificate
of service. Persons may request notification of the date of a hearing
by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
Applicants, The Principal Financial Group, Des Moines, IA 50392-0300.
FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or
Wendell M. Faria, Acting Assistant Director, on (202) 942-0670, Office
of Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch.
Applicants' Representations
1. Principal Mutual, a mutual life insurance company, was
incorporated under the laws of Iowa in 1879 as Bankers Life
Association. It changed its name to Bankers Life Company in 1911 and
assumed its present name in 1986. Principal Mutual sells life,
disability, and health insurance, and annuities written both on an
individual and group basis.
2. Separate Account B was established on January 12, 1970. It is
registered under the Act as a unit investment trust. Under Iowa
insurance laws and regulations the income, gains or losses, whether or
not realized, of Separate Account B are credited to or charged against
the assets of Separate Account B without regard to the other income,
gains or losses, of Principal Mutual. Separate Account B is divided
into three divisions (``Divisions'') corresponding to the three mutual
funds (``Mutual Funds'') in which its assets may be invested. The
Mutual Funds are diversified, open-end, management investment companies
that serve as funding vehicles for variable insurance products of
Principal Mutual and are not offered directly to the public. Principal
Mutual may, at a later date, determine to create additional Divisions
of Separate Account B to invest in any additional Mutual Fund shares
which may be issued in the future or in the shares of other investment
companies.
3. Princor, a wholly-owned subsidiary of Principal Mutual, will be
the principal underwriter of the Contracts. It 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.
4. The Contracts are flexible purchase payment individual variable
annuity contracts which provide for the accumulation of values on a
fixed or variable basis and the payment of annuity benefits on a fixed
basis. The Contracts are designed to provide individuals with
retirement benefits in connection with certain plans entitled to
special tax treatment under the Internal Revenue Code and in connection
with non-tax qualified retirement plans. Subject to certain
restrictions, amounts accumulated may be transferred among Divisions of
Separate Account B or to or from Principal Mutual's general account.
5. The owner of a Contract may allocate purchase payments among the
available Divisions of Separate Account B and to Principal Mutual's
general account for accumulation on a fixed basis (the ``Fixed
Account''). The owner may also transfer on either a scheduled or
unscheduled basis amounts accumulated in any Division or the Fixed
Account subject to certain restrictions. For any unscheduled transfer
from a Division made after the twelfth such transfer in a Contract
year, Principal Mutual may impose a transaction fee not to exceed $30.
Such charge is designed to cover the administrative expenses associated
with the transfer. Transfers among Divisions of Separate Account B will
be made in reliance upon the exemptive relief provided by Rule 11a-2
under the Act.
6. On the last day of each Contract year prior to the commencement
of annuity payments, Principal Mutual will deduct from the accumulated
value of the Contract an annual fee equal to the lesser of $30 or 2% of
the accumulated value. The fee will be deducted from the owner's
interest in either the Fixed Account or a Division of Separate Account
B, whichever has the greatest value. The annual fee will also be
deducted if the Contract is surrendered on any date other than a
Contract anniversary. No annual fee will be deducted, either annually
or upon surrender, if the accumulated value of the Contract is at least
$30,000 at the time the fee is to be deducted.
7. Principal Mutual reserves the right to deduct from each Division
of Separate Account B each valuation period an administrative expense
charge equivalent to a nominal annual rate not greater than .15% of the
average daily net assets of the Division. The annual fee and the
administrative expense charge are designed to help cover administrative
costs relating to the Contracts, such as those incurred in issuing
Contracts, establishing and maintaining Contract records, making
regulatory filings, furnishing notices, voting materials and other
communications, providing computer, actuarial and accounting services,
and processing Contract transactions. The annual fee and administrative
expense charge are designed only to reimburse Principal Mutual for
administrative expenses on a cumulative basis. With respect to any
issued Contract, the annual fee is guaranteed never to be increased and
the administrative expense charge, if imposed, is guaranteed never to
be increased above .15% on an annualized basis. Applicants will rely on
Rule 26a-1 under the Act for the necessary exemptive relief to impose
the annual fee and the administrative expense charge.
8. Principal Mutual will deduct amounts necessary to cover any
premium taxes required by state or local law. Such deductions may be
made from purchase payments when received or from the Contract's
accumulated value when surrendered (in whole or in part) or applied to
provide annuity payments. Applicants will rely on Rule 26a-2(d) under
the Act to permit the deduction of such taxes from the assets of
Separate Account B.
9. No sales charge will be deducted from purchase payments as they
are made. Instead, Principal Mutual will deduct a surrender charge
(contingent deferred sales charge) on certain total and partial
surrenders of the Contract on or prior to the commencement of annuity
payments. The surrender charge is intended to partially reimburse
Principal Mutual for expenses incurred in the sale of the Contracts,
including commissions and other promotional or distribution expenses
associated with the marketing of the Contracts.
10. The surrender charge is a percentage of the purchase payments
withdrawn or surrendered which were received by Principal Mutual during
the seven-year period prior to the withdrawal or surrender. The
applicable percentage is based on the number of completed Contract
years between the Contract year in which the purchase payment was paid
and the Contract year of surrender. For purchase payments received less
than three completed Contract years at the time of surrender, the
surrender charge is six percent of the purchase payment. For purchase
payments received three or more completed Contract years at the time of
surrender, the surrender charge is reduced one percent each Contract
year, so that purchase payments held for three completed Contract years
are subject to a five percent charge, purchase payments held for four
completed Contract years are subject to a four percent charge, and so
forth. Purchase payments held for seven or more completed Contract
years are not subject to any surrender charge. For purposes of
calculating the surrender charge, amounts surrendered are deemed to be,
first, purchase payments made in Contract years no longer subject to a
surrender charge, then, amounts entitled to a free surrender privilege
and, then, purchase payments made on a first-in, first-out basis. The
amount of the surrender charge may be reduced in circumstances
permitted by the Act and the rules thereunder.
11. Pursuant to a free surrender privilege, no surrender charge
will apply to surrenders made during a Contract year in an amount not
exceeding the greater of (i) the Contract's accumulated value minus
purchase payments not surrendered and (ii) an amount equal to (a) ten
percent of purchase payments still subject to a surrender charge as of
the last Contract anniversary plus (b) 10 percent of any purchase
payments made since the last Contract anniversary reduced by (c) any
partial surrenders made since the last Contract anniversary. In
addition, no surrender charge applies to amounts used to provide
annuity payments or a death benefit payment or amounts distributed to
satisfy the minimum distribution requirements of section 401(a)(9) of
the Internal Revenue Code. Finally, if permitted by state law, the
surrender charged will be waived, pursuant to a rider to the Contracts
and subject to the conditions set forth therein, as to the payment of
any amounts after the first Contract anniversary as a result of the
owner's or annuitant's being confined to a health care facility (as
defined in the rider), having been diagnosed as having a terminal
illness (as defined in the rider) or being totally and permanently
disabled (as defined in the rider). Applicants will rely on Rule 6c-8
under the Act for the necessary exemptive relief to permit imposition
of the surrender charge.
12. Principal Mutual will also deduct a $30 transaction charge for
each unscheduled partial surrender made after the first such surrender
during a Contract year. Such charge, designed to cover the
administrative expenses associated with the surrender, will be deducted
from the owner's interest in the Fixed Account or each Division of
Separate Account B from which the surrender is made in the same
proportion that the amount surrendered from the Fixed Account or such
Division bears to the total amount surrendered. Applicants will rely on
Rule 26a-1 under the Act for the necessary exemptive relief to charge
such fee.
13. Principal Mutual assumes mortality and expense risks under the
Contracts. The mortality risk is the risk that annuitants may live for
a longer period of time than estimated. Principal Mutual assumes this
mortality risk by virtue of annuity rates incorporated into the
Contract which cannot be changed. This assures each annuitant that
neither his longevity nor an improvement in life expectancy generally
will have an adverse effect on the amount of annuity payments. Also,
Principal Mutual guarantees that if the annuitant dies before the
commencement of annuity payments it will pay a minimum death benefit.
The expense risk assumed by Principal Mutual is the risk that actual
administration expenses incurred in connection with issuing and
administering the Contracts will exceed the limits on administrative
charges set in the Contracts.
14. To compensate it for assuming these risks, Principal Mutual
deducts from each Division a charge each valuation period equivalent to
an annual rate of 1.25% of the average daily net assets of the
division, consisting of .80% for mortality risks and .45% for expense
risks. The rate of the mortality and expense risk charge cannot be
increased, and the charge is assessed only during the period prior to
the commencement of annuity payments. If the charge is insufficient to
cover the actual cost of the mortality and expense risk undertaking.
Principal Mutual will bear the loss. Conversely, if the charge proves
more than sufficient, the excess will be profit to Principal Mutual and
will be available for any proper corporate purpose including, among
other things, payment of distribution expenses.
Applicants' Legal Analysis
1. Sections 26(a)(2)(C) and 27(c)(2) of the Act requires that all
payments received under periodic payment plan certificates by held by a
qualified trustee or custodian and held under arrangements which
prohibit any payment to the depositor or principal underwriter except
for the payment of a fee, not exceeding such reasonable amount as the
Commission may prescribe, for bookkeeping and other administrative
services.
2. Applicants submit that Principal Mutual is entitled to
reasonable compensation for its assumption of mortality and expense
risks and Applicants represent that the 1.25% charge for the Contracts
is within the range of industry practice for comparable annuity
products. Applicants state that this representation is based upon an
analysis by Principal Mutual of publicly available information about
selected similar industry products. Principal Mutual shall maintain at
its principal office, available to the Commission upon request, a
memorandum setting forth in detail the products analyzed in the course
of, and the methodology and results of, the comparative survey made.
3. Applicants acknowledge that the surrender charge under the
Contracts will be insufficient to cover all costs relating to the
distribution of the Contracts and that 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 surrender
charge. In such circumstances a portion of the mortality and expense
risk charge might be viewed as providing for a portion of the costs
relating to distribution of the Contracts. Notwithstanding the
foregoing, Principal Mutual has concluded that there is a reasonable
likelihood that the proposed distribution financing arrangements made
with respect to the Contracts will benefit Separate Account B and the
Contract owners. The basis for the conclusion is set forth in a
memorandum which will be maintained by Principal Mutual at its
principal office and will be available to the Commission upon request.
4. Principal Mutual represents that Separate Account B will invest
only in underlying mutual funds which undertake, in the event such
funds should adopt any plan under Rule 12b-1 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
Act.
Conclusion
Applicants submit that for the reasons and upon the facts set forth
above, their request for exemptions from sections 26(a)(2)(C) and
27(c)(2) of the Act is 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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12940 Filed 5-26-94; 8:45 am]
BILLING CODE 8010-01-M
