[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Notices]
[Pages 27120-27123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13457]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21975; File No. 812-9696]
Washington National Insurance Company, et al.
May 22, 1996.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Washington National Insurance Company (``Washington
National'') and Separate Account I of Washington National Insurance
Company (the ``Separate Account'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) granting
exemptions from the provisions of Sections 26(a)(2)(C) and 27(c)(2).
SUMMARY OF APPLICATION: Applicants seek an order exempting Washington
National and the Separate Account, which will be reorganized from a
managed separate account to a separate
[[Page 27121]]
account organized as a unit investment trust (the ``Continuing Separate
Account''), from the provisions of Sections 26(a)(2)(C) and 27(c)(2) of
the 1940 Act, to the extent necessary to permit Washington National to
deduct a mortality risk charge from the Continuing Separate Account.
FILING DATE: The application was filed July 27, 1995, and amended on
November 15, 1995, February 8, 1996, and April 26, 1996.
HEARING OF NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission 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 June 17, 1996, and should be accompanied by
proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the requester'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, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants, Craig R. Edwards, Esq., Washington National
Insurance Company, 300 Tower Parkway, Lincolnshire, Illinois 60069-
3665.
FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Attorney, or Wendy Finck Friedlander, Deputy Chief, at
(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 Public
Reference Branch of the Commission.
Applicants' Representations
1. Washington National, the sponsor and depositor of the Separate
Account, is a stock life insurance company organized under the laws of
Illinois. Washington National is a wholly-owned subsidiary of
Washington National Corporation, a holding company incorporated in
Delaware in 1968 that acquired Washington National in 1968.
2. The Separate Account was established by Washington National as a
separate investment account to fund Washington National's tax-qualified
and non-tax-qualified retirement benefits offered through group and
individual variable annuity contracts (the ``Contracts''). The Separate
Account meets the definition of a ``separate account'' under the 1940
Act and is registered under the 1940 Act as an open-end management
investment company. The Separate Account is divided into three sub-
accounts (the ``Sub-Accounts''), the Bond Sub-Account, the Short-Term
Portfolio Sub-Account and the Stock Sub-Account. Washington National is
the investment adviser for the Separate Account. Washington National
has contracted with NBD Bank, an Illinois banking corporation, to act
as sub-adviser for and to manage the investments of the Stock Sub-
Account.
3. Applicants state that the Contracts are designed to provide
retirement benefits under a variety of retirement programs. Although
payments under outstanding Contracts continue to be received,
Washington National no longer offers the Contracts for sale. Purchase
payments under a Contract may be allocated to the fixed account or the
variable account. The Contract also provides for, among other things:
(a) a variety of annuity payout options beginning on the annuity
commencement date; (b) surrender of the Contract prior to its maturity
date for a cash payment representing all or part of the Contract's
value; and (c) a death benefit payable if the annuitant dies before the
maturity date.
4. Washington National Equity Company (``WNEC''), formerly a
registered broker-dealer which was a wholly-owned subsidiary of
Washington National, served as the underwriter for the Separate
Account. Applicants state that WNEC is no longer in existence.
5. Various fees and charges are deducted under the Contracts. A
daily mortality risk charge (the ``annuity rate guarantee charge'')
equal to an effective annual rate of 0.80% of the average net assets of
the Separate Account is deducted to compensate Washington National for
bearing certain mortality risks under the Contracts. The mortality risk
arises from Washington National's obligation to make annuity payments
regardless of the mortality experience of persons receiving such
payments. Washington National states that the mortality risk charge may
not be increased under the Contract. If the deductions are insufficient
to cover the actual cost of the mortality risk, Washington National
will bear the loss. Conversely, if the deductions prove more than
sufficient, the excess will be a profit to Washington National.
6. Applicants state that currently an investment management charge
is made daily from the Separate Account to Washington National which is
equal on an annual basis to 0.50% of the average net assets of the
Separate Account. Washington National pays NBD Bank, the sub-adviser
for the Stock Sub-Account, a fee of 0.40% of the average net assets of
the Stock Sub-Account.
7. A daily asset-based financial accounting service charge equal to
an effective annual rate of 0.35% of the average net assets of the
Separate Account is deducted to reimburse Washington National for
providing financial accounting services to the Separate Account,
including preparation and maintenance of all accounting, bookkeeping,
financial and other statements for the conduct of the business and
operations of the Separate Account. Applicants state that this charge
is guaranteed not to increase and is designed to cover the actual
expenses incurred in providing these services. Washington National does
not expect or intend to profit from the charge which will be deducted
in reliance on Rule 26a-1.
8. An annual contract maintenance charge of $30 is deducted from
the Contract value on each Contract anniversary or on the date of full
withdrawal or election of a settlement option if that date is not the
Contract anniversary. The charge is deducted on a pro rata basis from
the Contract value of each Sub-Account and the fixed account. The
charge is not guaranteed, may be changed in the future and may be
deducted more frequently than annually. Applicants represent that this
charge will be deducted in reliance on Rule 26a-1 and is not greater
than the cost of the bookkeeping and other administrative services to
be provided for one year.
9. The Separate Account currently pays all taxes, interest,
brokerage fees and commissions, fees and expenses of legal counsel and
independent auditors, custodian fees and expenses, expenses associated
with meetings of the Contract owners, expenses incurred in the
preparation, printing and distribution of reports and prospectuses by
the Separate Account to its current owners, fees of and expenses
incurred by directors of the Separate Account who are not Washington
National's directors, officers or employees, fees and expenses
associated with the approval, qualification or registration of the
Contracts, extraordinary expenses if permitted by applicable laws and
regulations, and all other fees and expenses incurred by or on behalf
of the Separate Account which are not borne by Washington National
(collectively, ``Separate Account Expenses''). During 1995, charges for
the Separate Account Expenses were made against the assets of each Sub-
Account of the Separate Account at an annual rate of 0.20%.
[[Page 27122]]
10. Although Washington National currently pays premium taxes,
Washington National reserves the right to deduct premium taxes from
purchase payments or to charge them against the Contracts to which they
are attributable in the future. Premium taxes currently range up to
3.5%.
11. No sales charge is deducted from purchase payments. However,
certain full or partial surrenders are subject to a contingent deferred
sales charge (``Withdrawal Charge''). The Withdrawal Charge covers
expenses relating to the sale of the Contracts. If the proceeds
received from the Withdrawal Charge are not sufficient to pay such
expenses, then Washington National will pay the excess out of its
general assets, which may include proceeds derived from the annuity
rate guarantee charge.
The Withdrawal Charge is made at the rate of 6% of the amount
withdrawn and is deducted from the amount withdrawn. In calculating the
Withdrawal Charge, any amount which the Contract owner withdraws will
be treated as a withdrawal of purchase payments until the Contract
owner has withdrawn the total amount of all purchase payments received
within 72 months of the date of withdrawal. The Withdrawal Charge
applies to purchase payments on a first-in, first-out basis. The total
Withdrawal Charge will never exceed 6% of the total purchase payments.
Washington National will not deduct the Withdrawal Charge: (a) on
the first 10% of the Contract value withdrawn from a Contract during
any Contract year (determined as of the date of the first withdrawal
during the year); (b) on purchase payments received more than 72 months
prior to the date of withdrawal; (c) if the amount withdrawn is applied
to (i) a settlement option after the Contract has been in effect for
five or more years, or (ii) settlement options 2, 5 or 6 (as defined in
the Contract) at any time; and (d) if the annuitant dies.
12. Pursuant to an Asset Transfer Agreement and Plan of
Reorganization (the ``Reorganization Agreement'') and subject to
approval by persons entitled to vote in respect of the Separate Account
(``Separate Account Voters''), the Separate Account will be
restructured as a unit investment trust (the ``Reorganization'').
Applicants state that the unit investment trust will be divided into
three sub-accounts, each of which will invest exclusively in shares of
a corresponding series of the Scudder Variable Life Investment Fund
(the ``Fund'') whose investment objective is substantially the same as
the current investment objective of the relevant Sub-Account of the
Separate Account. In connection with the Reorganization, the assets of
each Sub-Account of the Separate Account will be transferred to the
corresponding portfolio of the Fund in exchange for shares of the
portfolio of equal value. Applicants state that the Reorganization is
intended to counteract the trend of net redemptions in the Separate
Account which limits investment flexibility and threatens the ability
of the Separate Account to best achieve its investment objectives.
Applicants also state that the Reorganization will benefit Contract
owners by providing economies of scale and simplifying record keeping.
13. The Fund was organized as a Massachusetts business trust on
March 15, 1985, for the purpose of serving as the funding vehicle for
variable annuity contracts and variable life insurance policies to be
offered by the separate accounts of certain life insurance companies.
The Fund has six separate investment portfolios: the Bond Portfolio,
the Money Market Portfolio; the Capital Growth Portfolio; the Growth
and Income Portfolio; the Balanced Portfolio; and the International
Portfolio. Only the Bond Portfolio, the Money Market Portfolio and the
Capital Growth Portfolio of the Fund will be involved in the
Reorganization. Scudder Investor Services, Inc. serves as the
underwriter for the Fund.
14. The Fund has adopted a plan for financing distribution expenses
pursuant to Rule 12b-1 under the 1940 Act for a newly authorized class
of shares (``Class B'' shares). Applicants state that the Continuing
Separate Account will, at the time of the Reorganization and
thereafter, invest only in a class of the Fund's shares for which such
a Rule 12b-1 plan has not been adopted (``Class A'' shares).
15. Pursuant to an investment advisory agreement with the Fund, and
subject to the supervision and approval of the Fund's Board of
Trustees, Scudder, Stevens & Clark, Inc. (the ``Adviser'') renders
investment advisory services to the Fund's portfolios. Under the
investment advisory agreement, the Adviser charges the Fund an
investment management fee with respect to the Bond Portfolio at the
annual rate of 0.475% of its average net assets, with respect to the
Money Market Portfolio at the annual rate of 0.370% of its average net
assets, and with respect to the Capital Growth Portfolio at the annual
rate of 0.475% of its average net assets. In addition, the Fund bears
certain expenses for clerical, accounting and certain other services
provided to the Fund. In 1995, these other expenses were deducted at an
annual rate of 0.085%, 0.130% and 0.095% of the average net assets of
the Bond Portfolio, the Money Market Portfolio and the Capital Growth
Portfolio, respectively.
16. Applicants state that Washington National will assume all costs
to be incurred by the Separate Account in effecting the Reorganization.
In exchange for the assets of each of the Sub-Accounts of the Separate
Account, shares of the corresponding portfolio of the Fund will be
issued. Shares of the Capital Growth Portfolio will be issued in return
for the assets of the Stock Sub-Account, shares of the Bond Portfolio
will be issued for the assets of the Bond Sub-Account, and shares of
the Money Market Portfolio will be issued for the assets of the Short-
Term Portfolio Sub-Account.
17. The number of shares of each portfolio to be issued in
connection with the Reorganization to the respective corresponding sub-
account of the Continuing Separate Account will be determined by
dividing the value of the net assets to be transferred from the
particular Sub-Account of the Separate Account as of the business day
immediately preceding the effective date of the Reorganization by the
net asset value per share of the corresponding portfolio of the Fund.
18. Applicants state that, after the Reorganization, the investment
management fee and the charge for Separate Account Expenses will not be
deducted from the Continuing Separate Account. Applicants state,
however, that the portfolios of the Fund in which the sub-accounts of
the Continuing Separate Account will invest after the Reorganization
will deduct an investment management fee and a charge for operating
expenses of each portfolio of the Fund.
19. Applicants state that the Reorganization will not have any
adverse economic impact on the Contract owners' interests under the
Contracts. Applicants state that the overall level of fees and charges
borne, directly or indirectly, by Contract owners will not be
materially greater (and generally should be lower) immediately after
the Reorganization than immediately before it. The investment
management fee for each of the three available portfolios of the Fund
is lower than the current rate charged to any of the Sub-Accounts of
the Separate Account. Applicants state that in 1995 the sum of the
investment management fee and the other operating expenses deducted
from each of the three portfolios of the Fund (0.56% for the Bond
Portfolio, 0.50% for the Money
[[Page 27123]]
Market Portfolio and 0.57% for the Capital Growth Portfolio) is less
than the 0.70% sum of the investment management fee and the deduction
for other expenses currently imposed against the assets of the three
corresponding Sub-Accounts of the Separate Account.
20. The application states that a Special Meeting of Separate
Account Voters was held on March 12, 1996. The proposed transactions
were approved at the Special Meeting by the vote of a majority of the
outstanding voting securities with respect to each Sub-Account of the
Separate Account. Applicants state that on September 22, 1995, a
registration statement was filed on Form N-14 in connection with the
Reorganization.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission to grant
an exemption from any provision, rule or regulation of the 1940 Act to
the extent 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. Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant part, prohibit a
registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank and held under arrangements which prohibit any payment
to the depositor or principal underwriter except a reasonable fee, as
the Commission may prescribe, for performing bookkeeping and other
administrative duties normally performed by the bank itself.
2. Applicants request exemptions from Sections 26(a)(2)(C) and
27(a)(2) of the 1940 Act to the extent necessary to permit the
deduction of the 0.80% mortality risk charge from the assets of the
Continuing Separate Account. Applicants represent that the annuity rate
guarantee charge under the Contracts is within the range of industry
practice for comparable annuity contracts issued by other insurance
companies. This representation is based upon Washington National's
analysis of publicly available information about such other contracts,
taking into consideration the particular annuity features of the
comparable contracts, including such factors as current charge levels,
charge level or annuity rate guarantees, the manner in which the
charges are imposed and the markets in which the contracts have been
offered. Applicants state that Washington National will maintain a
memorandum, available to the Commission upon request, setting forth in
detail the products analyzed in the course of, and the methodology and
results of, its review.
3. Applicants state that amounts derived from the annuity rate
guarantee charge that exceed the expenses that the deductions were
designed to cover will be offset by aggregate expenses of Washington
National, which will include any distribution expenses not reimbursed
by the contingent deferred sales charge. In such circumstances, a
portion of the annuity rate guarantee charge could be viewed as
providing for a portion of the costs relating to distribution of the
Contracts.
4. Applicants state that there is currently no distribution
financing arrangement for the Contracts because no new Contracts are
being distributed. Nevertheless, Applicants represent that there is a
reasonable likelihood that the distribution financing arrangement for
the Continuing Separate Account (to the extent that such an arrangement
may be deemed to exist) will benefit the Continuing Separate Account
and the Contract owners. Applicants state that Washington National will
maintain a memorandum, available to the Commission upon request,
setting forth in detail the basis for this conclusion.
5. Washington National represents that the assets of the Continuing
Separate Account will be invested only in a management investment
company which undertakes, in the event it should adopt a plan for
financing distribution expenses pursuant to Rule 12b-1 under the 1940
Act, to have such plan formulated and approved by a board of directors,
the majority of whom are not ``interested persons'' of the management
investment company within the meaning of Section 2(a)(19) of the 1940
Act.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested 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. 96-13457 Filed 5-29-96; 8:45 am]
BILLING CODE 8010-01-M
