[Federal Register Volume 61, Number 119 (Wednesday, June 19, 1996)]
[Notices]
[Pages 31193-31197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15509]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22014; No. 812-9968]
Fortis Benefits Insurance Company, et al.; Notice of Application
for an Order Pursuant to the Investment Company Act of 1940
June 13, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Fortis Benefits Insurance Company (``Fortis Benefits''),
Variable Account C of Fortis Benefits Insurance Company (``Fortis
Benefits Account'') and Fortis Investors, Inc. (``Investors'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the 1940 Act granting exemptions from the provisions of Sections
2(a)(32), 22(c), 27(a)(3), 27(c)(1) and 27(d) thereof, and Rules 22c-1,
6e-3(T)(b)(12), 6e-3(T)(b)(13) and 6e-3(T)(d)(1)(ii) thereunder.
SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary to permit them to issue flexible premium surviorship variable
life insurance policies (``Policies'') that enable Fortis Benefits to:
(1) credit the Policy owner's account with ``premium based bonuses''
and ``Policy value bonuses''; (2) include in the surrender charge of
the Policies any premium tax charge not previously recovered; and (3)
deduct sales charges in a manner that may result in such deductions
taken in one period being considered to be higher than those taken in a
prior period.
FILING DATE: The application was filed on January 30, 1996, and amended
on June 11, 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 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 must 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 writer'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 Douglas R. Lowe,
Esq., Fortis Benefits Insurance Company, 500 Bielenberg Drive,
Woodbury, Minnesota 55125.
FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, or 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. Fortis Benefits, a Minnesota corporation, is qualified to sell
life insurance in the District of Columbia and in all states except New
York. It is
[[Page 31194]]
an indirect, wholly-owned subsidiary of Fortis, Inc., which is itself
indirectly owned by N.V. AMEV (50 percent) and by Compaignie Financiere
et de Reassurance de Group AG (50 percent).
2. Fortis Benefits established the Fortis Benefits Account under
the laws of the State of Minneota as a segregated investment account
for the purpose of funding variable life insurance policies, including
the Policies. The Fortis Benefits Account is registered as a unit
investment trust under the 1940 Act, and currently consists of twelve
subaccounts (``Subaccounts''), each of which invests exclusively in
shares of a corresponding portfolio of Fortis Series Fund, Inc., a
registered management investment company.
3. Investors, an indirect wholly-owned subsidiary of Fortis, Inc.,
is the principal underwriter for the Policies. Investors 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 Policies are last survivor flexible premium variable life
insurance policies. Under the Policy a death benefit is payable upon
the death of the second to die of two insured persons named in the
application for the Policy. The Policy permits the Policy owner to
select between, and change from time to time, two death benefit
options. Under one of these options (``Option B''), but not the other,
the amount at work earning a return for the Policy owner (the ``Policy
value'') is added to the Policy's ``face amount'' of insurance coverage
for purposes of computing the death benefit. The Policy owner also may
change the face amount from time to time, subject to certain
restrictions.
5. The Policy owner may allocate the Policy value to one or more of
the Subaccounts and/or to the general account of Fortis Benefits.
6. The Policy may be fully surrendered at any time for its
``surrender value,'' and, generally after the first Policy year, the
Policy owner may make a partial withdrawal of surrender value once a
year. The Policy owner also may take out Policy loans and has
considerable flexibility to vary the frequency and amount of premium
payments.
7. The Policy generally is guaranteed not to lapse until 10 years,
20 years, or the Policy anniversary following the younger insured's age
85 (subject to certain limitations if the younger insured is age 65 or
more at issue or if either insured is in a substandard mortality risk
class), if certain minimum premium payments are made.
8. Unless prohibited by applicable state insurance law, Fortis
Benefits intends to pay a premium based bonus on the last day of the
7th and each subsequent Policy year. The amount of the bonus is a
percentage of the lesser of (a) or (b) (below), the result divided by
the number of years that the Policy has been in force, where, as of the
date of the credit:
(a) is the sum of all premiums paid under the Policy less any
withdrawals and loans taken out by the Policy owner; and
(b) is the sum of all ``Maximum Bonus Premiums'' to date.
For this purpose, a Maximum Bonus Premium generally is the hypothetical
estimated monthly premium payment that would keep the Policy in force
to the younger insured's age 85, without regard to substandard risks or
riders. A face amount increase or decrease requested by the Policy
owner will cause an increase or decrease, respectively, in the size of
future Maximum Bonus Premiums.
9. The applicable percentage depends on the age of the younger
insured at issue and the number of years the Policy has been in force.
The current percentages and durations are as follows:
------------------------------------------------------------------------
End of policy year
Age of younger insured at issue -------------------
0-6 7 8 9+
------------------------------------------------------------------------
(3) Percentages
18-50............................................... 0 2 4 4
51-60............................................... 0 2 4 7
61-70............................................... 0 5 7 10
71-85............................................... 0 5 5 5
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Premium based bonuses at the foregoing rates are not guaranteed,
and Fortis Benefits reserves the right to reduce them, subject to
guaranteed minimum rates. The guaranteed rates are as follows, and are
guaranteed only to the extent allowed by state insurance law:
------------------------------------------------------------------------
End of policy year
Age of younger insured at issue -------------------
0-6 7 8 9+
------------------------------------------------------------------------
(3) Percentages
18-50............................................... 0 2 4 4
51-60............................................... 0 2 4 7
61-70............................................... 0 2 4 7
71-85............................................... 0 2 4 5
------------------------------------------------------------------------
No further premium based bonuses are credited to a Policy
subsequent to the time that the younger insured reaches age 100.
10. All premium based bonuses will be allocated among the general
account and the Subaccounts on a pro rata basis: i.e., in proportion to
the amount of Policy value in each, exclusive of amounts transferred to
the general account as a result of Policy loans. This is referred to
hereinafter as the ``unloaded policy value.'' Following such
allocation, these amounts will be credited with investment performance,
and otherwise will be treated the same as any other amounts of Policy
value.
11. Unless prohibited in a state by applicable insurance law, each
Policy will be credited with an increase in Policy value in the form of
a ``Policy value bonus'' paid by Fortis Benefits on each monthly Policy
anniversary. The Policy value bonus is computed as a percentage of the
unloaned policy value after the ``Monthly Deduction,'' described below.
The percentage depends on the face amount ``band,'' the death benefit
option in effect, the amount of surrender value, and the length of time
the Policy has been in force as of the date of the bonus. The
percentages, expressed as annual rates, are as follows:
Annual Rate of Policy Value Bonuses as a Percent of Unloaned Policy Value \1\
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Band 1 & 2 Band 3 Band 4
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Surrender value on date of monthly bonus Policy Years 20 Policy Years 20 Policy Years 20
years 1-19 and later years 1-19 and later years 1-19 and later
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$0-$9,999............................... .00 .35 .00 .35 .00 .35
$10,000-$49,000......................... .00 .35 .05 .40 .05 .40
$50,000-$99,000......................... .05 .40 .10 .45 .10 .45
$100,000 or more........................ .10 .45 .15 .50 .20 .55
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\1\ If the Option B death benefit is in effect under the Policy, .30 percent of the applicable unloaned Policy
value is added to the otherwise applicable bonus, regardless of the band or Policy year of the Policy,
provided that the surrender value on the date of the bonus is at least $10,000.
[[Page 31195]]
12. There are four face amount bands for the Policies. Policies
with a minimum face amount of $5,000,000 are band 4 Policies; Policies
with a minimum face amount of $1,000,000 but less than $5,000,000 are
band 3 Policies; Policies with a minimum face amount of $500,000 but
less than $1,000,000 are band 2 Policies and Policies with a minimum
face amount of less than $500,000 are band 1 Policies. For purposes of
calculating the Policy value bonus percentage, the average face amount
of the Policy from issuance to the point of the bonus payment will be
used to determine the Policy band. Policy value bonuses at the
foregoing rates are guaranteed, to the extent such guarantees are
allowed by the state in which the Policy is issued, except that after
the 19th Policy year, Fortis Benefits reserves the right, in its sole
discretion, to reduce the otherwise applicable bonus by an amount equal
to up to .35 percent of the unloaned policy value. All Policy value
bonuses will be allocated among the general account and the subaccounts
on a pro-rata basis. These amounts will be credited with investment
performance and otherwise will be treated the same as any other amounts
of Policy value.
13. Fortis Benefits has designed premium based bonuses and Policy
value bonuses and their method of operation so as to address certain
state regulatory concerns. All sales illustrations used by Fortis
Benefits specifically will disclose the rates of any premium based
bonuses and Policy value advances that are assumed by any
illustrations.
14. A premium tax charge in the amount of 2.2 percent of all
premium payments is assessed through monthly and daily deductions from
Policy value under the Policy. Any portion of such amount that is not
recovered by Fortis Benefits pursuant to the monthly and daily
deductions may be deducted as part of the surrender charge.
15. A sales charge in the amount of 9 percent of all premium
payments is also assessed through the monthly and daily deductions from
Policy value under the Policy. Any amount of this sales charge that is
not recovered by Fortis Benefits through these monthly and daily
deductions may be deducted as a contingent deferred sales charge that
would be assessed as part of the surrender charge.
16. The monthly deduction under the Policy for premium tax and
sales charges totals $4.00 per month (deducted as part of the ``Monthly
Deduction'' referred to below), and the daily deduction for these
purposes is at an aggregate annual rate of .35 percent of the value of
the Policy's net assets in the Fortis Benefits Account. These
deductions will be waived to the extent that the cumulative amount of
all such deductions, plus any premium tax or sales charges that may in
the future be deducted from premiums would exceed 11.2 percent (9
percent for sales charges and 2.2 percent for premium tax charges) of
all premium payments made to date. This maximum may be slightly less in
any state that limits premium tax charges to less than 2.2 percent.
17. Fortis Benefits reserves the right to increase the premium tax
charge to not more than 3 percent, in which the case the 11.2 percent
maximum for the monthly and daily deductions would be increased by a
corresponding amount up to a maximum of 12 percent. Fortis Benefits
also reserves the right to deduct a premium tax charge or a sales
charge directly from premium payments. The maximum amount of such
deductions from premium payments will be 7.5 percent (a maximum of 2.5
percent for premium tax charges and 5 percent for sales charges), in
which case the 11.2 percent maximum referred to above for monthly and
daily deductions would be decreased by at least a corresponding amount.
18. A monthly charge for Policy issuance expenses at the rate set
out below is imposed and deducted as part of the Monthly Deduction for
the first ten Policy years following issuance of the Policy.
------------------------------------------------------------------------
Monthly rate
per $1,000 of
face amount at
Face amount issue (or face
amount
increase)
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Band 1................................................. 0.10
Band 2................................................. 0.08
Band 3................................................. 0.05
Band 4................................................. 0.03
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This charge will also be imposed for the first ten Policy years
following a face amount increase. Any uncollected charges are deducted,
if at all, only as part of the surrender charge, discussed below.
Applicants represent that this charge will not exceed the amount
permitted by Rule 6e-3(T)(b)(13)(iii)(A).
19. A surrender charge may be assessed on lapse or full surrender
of a Policy before the tenth Policy anniversary (or the tenth
anniversary of a face amount increase requested by the Policy owner).
The surrender charge equals any portion of the Policy issuance expense
charge, premium tax charge and the sales charge that has not yet been
collected through the monthly and daily deductions therefor (or, in the
case of premium tax or sales charges, deducted from premiums, as
described above). No surrender charge is deducted upon a partial
withdrawal of Policy value or a face amount decrease.
20. The entire surrender charge is subject to an overall upper
limit or ``cap'' as set forth in the table below.
------------------------------------------------------------------------
Overall ``cap''
on surrender
charge (per
Adjusted age at time of policy issuance or face amount thousand
increase dollars of face
amount or face
amount
increase)
------------------------------------------------------------------------
18-24 years............................................ 1.90
25-29.................................................. 3.30
30-34.................................................. 4.50
35-39.................................................. 6.00
40-44.................................................. 8.25
45-49.................................................. 10.75
50-54.................................................. 14.25
55-59.................................................. 19.00
60-64.................................................. 25.20
65-69.................................................. 33.60
70-85.................................................. 41.00
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The ``Adjusted Age'' referred to in the foregoing table is the age
of the younger insured plus \1/3\ of the lesser of (a) the difference
in age between the younger and older insured or (b) 20. If both
insureds are over age 80, the maximum surrender charge is $33 per
thousand. The overall cap (and each amount of increase therein)
decreases at a constant rate on the first and each subsequent Policy
anniversary (or anniversary of a face amount increase, as the case may
be) until it is zero for surrenders and lapses as of the tenth Policy
anniversary (or increase anniversary). There will be no surrender
charge on surrenders or lapses as of the later of the tenth Policy
anniversary or the tenth anniversary of any face amount increase.
21. The Monthly Deduction from Policy value includes: (a) the
above-described monthly premium tax, sales charges and Policy issue
expense deductions; (b) cost of insurance charge; (c) a charge for any
optional insurance benefits added by rider; and (d) a monthly
administrative expense charge of $6.00 per Policy. Fortis Benefits
reserves the right to raise the monthly administrative expense charge
to not more than $7.50 per month, and to impose an additional monthly
administrative expense charge of up to $.13 per thousand dollars of
face amount then in force. Applicants represent that the administrative
charges under the Policies will not exceed the amount permitted by Rule
6e-3(T)(b)(13)(iii)(A). After the tenth Policy year, the Monthly
Deduction under a Policy as to which the no-lapse
[[Page 31196]]
guarantee is still in effect will also include a charge for that
guarantee.
22. A daily charge at an annual rate of 1.00 percent of the average
daily value of the net assets in the Fortis Benefits Account that are
attributable to the Policy is made for mortality and expense risks
assumed by Fortis Benefits.
23. Fortis Benefits reserves the right to deduct: (a) charges to
defray its administrative expenses in effecting transfers of Policy
value or partial withdrawals; and (b) charges for any federal income
taxes that it may incur.
Applicants' Request for Relief and Legal Analysis
1. Section 6(c) of the 1940 Act, in pertinent part, provides that
the Commission may, by order upon application, conditionally or
unconditionally exempt any person, security or transaction, or any
classes thereof from any provisions of the 1940 Act or rules
thereunder, if and to the extent that such 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.
Exemptive Relief To Permit Deduction of Remaining Premium Taxes in
Surrender Charge
2. Applicants request exemptions from Sections 2(a)(32), 22(c),
27(c)(1) and 27(d) of the 1940 Act and Rules 6e-3(T)(b)(12), 6e-
3(T)(b)(13) and 22c-1 thereunder to the extent necessary to permit the
amount of any premium tax charges that have not been previously
collected by means of a deduction from Policy value to be included in
the surrender charge.
3. Sections 2(a)(32), 27(c)(1) and 27(d) of the 1940 Act prohibit
Applicants from selling interests under a Policy unless they are
redeemable securities, entitling a Policy owner, upon surrender, to
receive approximately his or her proportionate share of the Fortis
Benefits Account's current net assets. Section 27(c)(1) provides that
no issuer of a periodic payment plan certificate shall sell such
certificate unless the certificate is a ``redeemable security.''
Section 2(a)(32) defines a ``redeemable security'' as any security
which entitles the holder, upon its presentation to the issuer, to
receive approximately a proportionate share of the issuer's current net
asset value, or the cash equivalent thereof. Section 27(d) requires
that the holder of a periodic payment plan certificate be able to
surrender the certificate under certain circumstances and recover
certain amounts of sales charges.
4. Rule 22c-1 prohibits Applicants from redeeming interests under a
Policy except at a price based on the current net asset value that is
next computed after receipt of the request for full or partial
redemption of interests under the Policy.
5. Rule 6e-3(T)(b)(13) provides an exemption from Section 27(d),
and like Rule 6e-3(T)(b)(12) provides exemptions from Sections 22(c)
and 27(c)(1) and Rule 22c-1 to the extent necessary for the payment of
a flexible contract's cash value to be regarded as satisfying the
requirements of those provisions, if specified conditions are
satisfied. Applicants represent that the Policy satisfies all of such
conditions.
6. Applicants assert that contingent deferred sales charges for
premium taxes were not contemplated at the time the 1940 Act was
enacted and are not specifically contemplated by any of the rule
provisions referenced in the preceding paragraph. Accordingly, Sections
2(a)(32), 22(c), 27(c)(1) and 27(d) and Rules 22c-1, 6e-3(T)(b)(12) and
6e-3(T)(b)(13) may be deemed to be inconsistent with the deduction of a
contingent deferred charge for premium taxes from the cash proceeds
that are, in effect, required by those provisions to be paid to Policy
owners under various circumstances.
7. Applicants assert that the method adopted under the Policy for
deducting all or part of the charges for premium taxes on a basis other
than from premium payments is more favorable to investors because more
Policy value is available to earn a return for the investor. Applicants
represent that:
(a) no premium tax charge will be designed to yield a profit;
(b) the total amount charged for premium taxes, including any
amount of premium tax charge that Fortis Benefits may in the future
decide to deduct from premium payments, will be no greater than if all
such charges were taken from premiums when paid; and
(c) the premium tax charges will not take into account the ``time
value'' of money, which would increase the charge to factor in the
investment cost to Fortis Benefits of deferring collection of the
charge.
Exemptive Relief From ``Stair Step'' Requirements
8. Applicants also request an exemption from the ``stair step''
requirements of Section 27(a)(3) of the 1940 Act and Rules 6e-
3(T)(b)(13)(ii) and 6e-3(T)(d)(1)(ii) thereunder.
9. Section 27(a)(3) prohibits the sale of the Policy if the sales
load deducted from any one of the first twelve monthly payments thereon
``exceeds proportionately the amount deducted from any other such
payment, or the amount deducted from any subsequent payment exceeds
proportionately the amount deducted from any other subsequent
payment.''
10. Rule 6e-3(T)(b)(13)(ii) provides an exemption from Section
27(a)(3), ``provided that the proportionate amount of sales load
deducted from any payment shall not exceed the proportionate amount
deducted from any prior payment.'' Rule 6e-3(T)(d)(1)(ii)(A) provides,
in pertinent part, that, with respect to sales charges deducted other
than from premiums (excluding asset-based sales charges), Rule 6e-
3(T)(b)(13)(ii) is deemed satisfied if ``the amount of sales load
deducted pursuant to any method * * * does not exceed the proportionate
amount of sales load deducted prior thereto pursuant to the same
method.'' Rule 6e-3(T)(d)(1)(ii)(B) provides comparable relief for
asset-based sales charges, provided that ``the percentage of assets
taken as sales load does not exceed any of the percentages previously
taken pursuant to the same method.''
11. Applicants request an exemption from these ``stair step''
requirements because of the following three aspects of the Policies.
First, part of the $4.00 monthly charge deducted pursuant to each
Policy is a sales charge. While this charge will not change from month-
to-month, it will vary from month-to-month as a percentage of premiums
paid and as a percentage of the Policy value. Applicants assert that
assessing part of the sales charge as a flat monthly deduction rather
than deducting it from premium payments is beneficial to Policy owners
because: (a) a greater amount is available to earn an investment
return; (b) deductions will be more predictable than deducting the
entire sales charge through a daily percentage charge; and (c) Policy
owners will have an enhanced ability to plan based on expected amounts
of sales charge deductions.
12. Second, the monthly and/or daily sales charge deductions may
cease for certain periods of time and subsequently be resumed. These
charges are suspended when the maximum amount of such charges, as a
percentage of premium payments, has been reached. Such charges also
will cease if additional deductions would cause sales charges to exceed
permitted maximums, as a percentage of premiums actually paid. This
creates a question regarding compliance with the requirements in Rule
6e-3(T)(d)(1)(ii) (A) and (B) that
[[Page 31197]]
the proportionate or percentage amount of sales charges deducted not
exceed the proportionate or percentage amount previously deducted
pursuant to the same method.
13. Applicants assert that, if Section 27(a)(3) and the related
provisions of Rule 6e-3(T) were interpreted to prevent the resumption
of sales charge deductions from contract assets once the deduction of
such charges has ceased for any reason, the utility of policy designs
that deduct sales charges from contract assets would be greatly
reduced. Applicants submit that deducting part of the sales charges
from Policy value, rather than from premium payments, is advantageous
to Policy owners because more assets are put to work as Policy value
with the potential of earning a return for the Policy owner's benefit.
14. Third, Rule 6e-3(T)(c)(4) defines ``sales load'' for any
contract period as the excess of premium payments over changes in
``cash value'' (other than from investment performance) and certain
enumerated charges. Applicants submit that because premium based
bonuses and Policy value bonuses affect the Policy's cash value in the
contract period during which they are credited, such bonuses could be
deemed to result in sales charges that vary from one contract period to
the next, relative to the amount of premium payments paid in such
periods. The stair step provisions could apply to the extent that the
sales load, as a percentage of premium payments made in a contract
period, were thereby deemed to be more than that in a prior contract
period. Applicants submit that the Policy's charge structure complies
with the spirit and apparent purposes of Rule 6e-3(T)(b)(13)(ii) and
6e-3(T)(d)(1)(ii).
15. The stair step issues under the Policies result from the
imposition of deferred sales charges in the form of monthly and/or
daily deductions and, in the case of Policies that are surrendered or
lapse before a certain time, the surrender charge. The stair step
issues under the Policies do not result from early deduction of front-
end charges. Although sales charges will be deducted through several
different types of deductions, the rate of these charges will not
increase.
Conclusion
For the reasons summarized 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. 96-15509 Filed 6-18-96; 8:45 am]
BILLING CODE 8010-01-M
