[Federal Register Volume 61, Number 117 (Monday, June 17, 1996)]
[Notices]
[Pages 30647-30650]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15275]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22012; File No. 812-9954-01]
ITT Hartford Life and Annuity Insurance Company, et al.
June 11, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: ITT Hartford Life and Annuity Insurance Company (``ILA''),
ICMG Registered Variable Life Separate Account One (``Separate
Account''), and Hartford Equity Sales Company (``HESCO'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions from Section 27(c)(2) of the 1940 Act and
Rule 6e-3(T)(c)(4)(v) thereunder.
SUMMARY OF APPLICATION: Applicants request an order permitting the
Separate Account and other separate accounts established in the future
by ILA to support certain group flexible premium variable life
insurance policies to deduct from premium payments an amount that is
reasonably related to the increased federal tax burden of ILA resulting
from the application of Section 848 of the Internal Revenue Code of
1986, as amended.
FILING DATE: The application was filed on October 30, 1995. An amended
application was filed on May 29, 1996.
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 on this application by writing to the
Secretary of the Commission and serving Applicants with a copy of the
request, personally or by mail. Hearing requests must be received by
the commission by 5:30 p.m. on July 8, 1996, and should be accompanied
by proof of service on 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 Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549. Applicants, c/o Scott K. Richardson, Esq., Assistant Counsel,
ITT Hartford Life Insurance Companies, P.O. Box 2999, Hartford, CT
06104-2999.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Special Counsel, Office of Insurance Products
(Division of Investment Management) at (202) 942-0670.
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. ILA is a stock life insurance company engaged in the business of
writing both individual and group life insurance and annuity policies
in the District of Columbia and in all states except New York. ILA was
redomesticated from Wisconsin to Connecticut on May 1, 1996. ILA is a
wholly-owned subsidiary of Hartford Life Insurance Company.
2. The Separate Account was established by ILA under the laws of
the state of Connecticut, and is registered as a unit investment trust
under the 1940 Act. The assets of the Separate Account are not
chargeable with liabilities arising out of any other business which ILA
may conduct. Income and realized and unrealized capital gains and
losses of the Separate Account will be credited to the Separate Account
without regard to any of ILA's other income or realized and unrealized
capital gains and losses, or the income, gains and losses of other ILA
separate investment accounts.
[[Page 30648]]
3. The Separate Account presently consists of twelve investment
divisions, each of which invests exclusively in the shares of
investment options available through seven open-end management
investment companies.
4. In the future, the board of directors of ILA may establish other
separate accounts (``Future Accounts'') which may serve as funding
vehicles for other variable life insurance policies issued by ILA. The
Future Accounts will be organized as unit investment trusts, and will
file registration statements under the 1940 Act and the Securities Act
of 1933.
5. HESCO will serve as the principal underwriter for certain group
flexible premium variable life insurance policies (``Policies'') and
any other variable life insurance policies (``Future Policies'') issued
in the future by ILA through the Separate Account or Future Accounts.
HESCO is registered as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the National Association of Securities
Dealers.
6. In 1990, Congress amended the Internal Revenue Code of 1986
(``Code'') by, among other things, enacting Section 848 thereof.
Section 848 changed the federal income taxation of life insurance
companies by requiring them to capitalize and amortize over a period of
ten years part of their general expenses for the current year. Under
prior law, those expenses were deductible in full from the gross income
of the current year.
7. The amount of expenses that must be capitalized and amortized
under Section 848 generally is determined with reference to premiums
for certain categories of life insurance contracts (``specified
contracts''). More specifically, an amount of expenses equal to a
percentage of the premiums for the current year (i.e., gross premiums
minus return premiums and reinsurance premiums) must be capitalized and
amortized for each specified contract. The percentage varies, depending
upon the type of specified contract in question, in accordance with a
schedule set forth in Section 848.
8. In effect, Section 848 accelerates the realization of income
from certain insurance contracts and, accordingly, the payment of taxes
on the income generated by those contracts. Taking into account the
time value of money, Section 848 increases the tax burden of an
insurance company because the amount of general expenses that must be
capitalized and amortized is measured by the premiums received under
certain insurance contracts.
9. The Policies and Future Policies to which a charge for the
federal tax burden related to deferred acquisition costs (``tax burden
charge'') will be applied are/will be among the specified contracts.
They fall/will fall into the category of life insurance contracts under
Section 848 for which 7.7% of net premiums received must be capitalized
and amortized.
10. The increased tax burden resulting from the application of
Section 848 may be quantified as follows. For each $10,000 of net
premiums received by ILA under the Policies, ILA may capitalize $770.00
(i.e., 7.7% of $10,000). $38.50 of that amount may be deducted in the
current year, leaving $731.50 (i.e., $770 minus $38.50) subject to
taxation at the corporate tax rate of 35 percent. This works out to an
increase in tax for the current year of $256.03 (i.e., 0.35 x
$731.50). This increased federal income tax burden will be partially
offset by deductions 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.
11. To the extent that capital must be used by ILA to satisfy its
increased tax burden under Section 848, such profits are not available
to ILA for investment. ILA submits that the cost of capital used to
satisfy its increased federal income tax burden under Section 848 is,
in essence, its targeted rate of return on invested capital. Because
ILA seeks a targeted rate of return on its invested capital of 10
percent,\1\ ILA submits that a discount rate of 10% is appropriate for
use in calculating the present value of its future tax deductions
resulting from the amortization described above.
---------------------------------------------------------------------------
\1\ In determining the targeted rate of return on invested
capital used in arriving at this discount rate, ILA first identified
a reasonable risk-free rate of return that can be expected to be
earned over the long term. ILA then determined the premium it needs
to earn over that risk-free rate of return because of the nature of
the products it sells. Applicants represent that such factors are
appropriate to consider in determining ILA's targeted rate of return
on invested capital.
---------------------------------------------------------------------------
12. Using a corporate tax rate of 35 percent, and assuming a
discount rate of 10 percent, the present value of the federal income
tax effect of the increased deductions allowable in the following ten
years is $160.40. Because this amount partially offsets the increased
tax burden, Section 848 imposes an increased tax burden on ILA equal to
a present value of $95.63 ($56.03 minus $160.40) for each $10,000 of
net premiums received under the Policies.
13. ILA does not incur incremental federal income tax when it
passes on state premium taxes to contract owners because premium taxes
are deductible when computing federal income taxes. The same is not
true for federal income taxes. Therefore, to offset fully the impact of
Section 848, ILA must impose an additional charge that would 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
additional charge can be computed by dividing $95.63 by the complement
of the 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% of net premiums.
14. Based on its prior experience, ILA expects that all of its
current and future deductions will be fully taken. ILA submits that a
charge of 1.25% of net premium payments would reimburse it for the
impact of Section 848, taking into account the benefit to ILA of the
amortization permitted by Section 848 and the use by ILA of a discount
rate of 10% (which is equivalent to its targeted rate of return) in
computing the future deductions resulting from such amortization.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission, by order upon application, may exempt any person,
security or transaction (or any class or classes of persons, securities
or transactions) from provisions of the 1940 Act or any rules
thereunder, if and to the extent that the 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.
2. Applicants request an order of the Commission pursuant to
Section 6(c) exempting them from the provisions of Section 27(c)(2) of
the 1940 Act and Rule 6e-3(T)(c)(4)(v) thereunder to permit ILA to
deduct from premium payments received in connection with Policies and
Future Policies an amount that is reasonable in relation in ILA's
increased federal income tax burden related to the receipt of such
premiums. Applicants further request an exemption from Rule 6e-
3(T)(c)(4)(v) to permit the proposed deductions to be treated as other
than ``sale load'' for the purposes of Section 27 of the 1940 Act and
the exemptions from various provisions of that Section found in Rule
6e-3(T)(b)(13) under the 1940 Act.
3. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic
payment plan certificates unless the proceeds of all payments (excepts
such amounts as are deducted for sales load) are held under an
indenture or agreement containing in substance the provisions required
by Sections 26(a)(2) and
[[Page 30649]]
26(a)(3) of the 1940 Act. Sections 27(a)(1) and 27(h)(1), in effect,
limit sales load on periodic payment plan certificates to 9% of total
payments.
4. Certain provisions of Rule 6e-3(T) provide a range of exemptive
relief for the offering of flexible premium variable life insurance
policies such as the Policies and Future Policies. For example, subject
to certain conditions, Rule 6e-3(T)(b)(13)(iii) provides exemptions
from Section 27(c)(2) that include permitting the payment of certain
administrative fees and expenses, the deduction of a charge for certain
mortality and expense risks, and ``[t]he deduction of premium taxes
imposed by any state or other governmental entity.''
5. Rule 6e-3(T)(c)(4) defines ``sales load'' charged during a
contract period as the excess of any payments made during the period
over the sum of certain specified charges and adjustments, including
``[a] deduction for and approximately equal to state premium taxes[.]''
Applicants submit that the proposed tax burden charge is akin to a
state premium tax charge in that it is an appropriate charge related to
ILA's tax burden attributable to premiums received under the Policies
and Future Policies.
6. Applicants represent that the requested exemptions from Rule 6e-
3(T)(c)(4)(v) are necessary in connection with Applicants' reliance on
certain provisions of Rule 6e-3(T)(b)(13), particularly on subparagraph
(b)(13)(i), which provides exemptions from Sections 27(a)(1) and
27(h)(1) of the 1940 Act. Issuers and their affiliates may rely on Rule
6e-3(T)(b)(13)(i) if they meet the Rule's alternative limitations on
``sales load,'' as defined in Rule 6e-3(T)(c)(4). Applicants
acknowledge that a deduction for an insurance company's increased
federal tax burden does not fall squarely within any of the specified
charges or adjustments which are excluded from the definition of
``sales load'' in Rule 6e-3(T)(c)(4). Nevertheless, Applicants submit
that there is no public policy reason for treating such increased
federal tax burden as sales load.
7. Applicants assert that the public policy which underlies Rule
6e-3T(b)(13)(i), like that which underlies Sections 27(a)(1) and
27(h)(1), is to prevent excessive sales loads from being charged in
connection with the sale of periodic payment plan certificates.
Applicants submit that the treatment of a federal income tax charge
attributable to premium payments as sales load would in no way further
this legislative purpose because such a deduction bears no relation to
the payment of sales commissions or other distribution expenses.
Applicants assert that the Commission has concurred in this conclusion
by excluding deductions for state premium taxes from the Rule 6e-
3(T)(c)(4) definition of ``sales load.''
8. Applicants submit that Rule 6e-3(T)(c)(4) tailors the general
terms of Section 2(a)(35) of the 1940 Act to variable life insurance
contracts. Applicants further submit that, just as the percentage
limits of Sections 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 Rule 6e-3(T)(b)(13)(i) depend on Rule 6e-3(T)(c)(4).
Applicants submit that Rule 6e-3(T)(c)(4) does not depart, in
principal, from Section 2(a)(35).
9. Applicants assert that Section 2(a)(35) excludes from ``sales
load'' expenses or fees ``not properly chargeable to sales or
promotional activities.'' Because the proposed tax burden charge will
be used to compensate ILA for its increased federal tax burden
attributable to the receipt of premiums, and such cost is not properly
chargeable to sales or promotional activities, Applicants submit that
not treating the proposed tax burden charge as sales load is consistent
with the policies of the 1940 Act.
10. Applicants further assert that Section 2(a)(35) excludes from
the definition of ``sales load'' deductions for premiums for ``issue
taxes.'' Applicants submit that the exclusion of charges for expenses
attributable to federal taxes from sales load (as defined in Section
2(a)(35)) is consistent with the policies of the 1940 Act. By
extension, Applicants submit, it is equally consistent to exclude such
charges, including the proposed tax burden charge, from the definition
of ``sales load'' in Rule 6e-3(T)(c)(4).
11. For these reasons, Applicants submit that deducting a charge
from variable life insurance contract premium payments for an insurer's
tax burdens attributable to its receipt of such payments, and excluding
that charge from sales load, is consistent with the policies of the
1940 Act. Applicants assert that this is because such a deduction is an
appropriate charge related to the insurer's tax burden attributable to
the premium payments received.
12. Applicants seek the relief requested herein with respect to the
Policies and Future Policies. Without the requested relief, ILA would
have to request and obtain exemptive relief for each Future Contract to
be issued. Such additional requests for exemptive relief would present
no issues under the 1940 Act not already addressed in this request for
exemptive relief.
13. Applicants submit that the requested relief would promote
competitiveness in the variable life insurance market by eliminating
the need for them to file redundant exemptive applications, thereby
reducing ILA's administrative expenses and maximizing efficient use of
its resources. Applicants further submit that the delay and expense
involved in having to seek exemptive relief repeatedly would impair
ILA's ability to take advantage of business opportunities as they
arise. Moreover, if Applicants were required to seek exemptive relief
repeatedly with respect to the issues addressed in this application,
investors would not receive any benefit or additional protection
thereby, and might be disadvantaged as a result of increased overhead
expenses for ILA. For these reasons, Applicants assert that the
requested relief is appropriate in the public interest and consistent
with the protection of investors.
Conditions for Relief
Applicants agree to comply with the following conditions for
relief.
1. ILA will monitor the reasonableness of the tax burden charge.
2. The registration statement for the Policies and Future Policies
under which the tax burden charge is deducted will: (a) disclose the
charge; (b) explain the purpose of the charge; and (c) state that the
charge is reasonable in relation to ILA's increased federal tax burden
under Section 848 resulting from the receipt of premiums.
3. The registration statement for any Policies of Future Policies
under which a tax burden charge is deducted will contain as an exhibit
an actuarial opinion as to: (a) the reasonableness of the charge in
relation to ILA's increased federal tax burden under Section 848
resulting from the receipt of premiums; (b) the reasonableness of the
targeted rate of return used in calculating such charge; and (c) the
appropriateness of the factors taken into account by ILA in determining
the targeted rate of return.
Conclusion
For the reasons and upon the facts set forth above, Applicants
submit that the requested exemptions from Section 27(c)(2) of the 1940
Act and Rule 6e-3(T)(c)(4)(v) thereunder--to permit the deduction of
1.25% of premium payments under the Policies and any Future Policies--
would be 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.
[[Page 30650]]
For the Commission, by the Division of Investment Management, by
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15275 Filed 6-14-96; 8:45 am]
BILLING CODE 8010-01-M
