[Federal Register Volume 60, Number 119 (Wednesday, June 21, 1995)]
[Notices]
[Pages 32387-32391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15118]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21137; No. 812-9400]
Western National Life Insurance Company, et al.
June 15, 1995.
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: Western National Life Insurance Company (``Western
National''), WNL Separate Account A (the ``Separate Account''), and WNL
Brokerage Services, Inc. (``WNL'').
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), 26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) thereof.
SUMMARY OF APPLICATION: Applicants seek an order granting exemptive
relief to the extent necessary to permit the issuance of variable
annuity contracts (``Existing Contracts'') providing for a recapturable
bonus equal to one percent of initial purchase payments, and the
deduction of mortality and expense risk and enhanced death benefit
charges from the assets of the Separate Account. Exemptive relief also
is requested to the extent necessary to permit the provision of the
recapturable bonus in connection with, and the deduction of the
mortality and expense risk and enhanced death benefit charges from, and
other separate account established in the future by Western National,
in connection with the issuance and sale of annuity contracts that will
be offered on a basis that is substantially similar in all material
respects to the Existing Contracts (``Future Contracts,'' together with
Existing Contracts, the ``Contracts''), which may be sold in the future
by the Separate Account or other separate accounts (``Future
Accounts,'' together with the Separate Account, the ``Accounts'')
established in the future by Western National in connection with the
issuance of Contracts.
FILING DATE: The application was filed on December 21, 1994, and
amended on June 14, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request [[Page 32388]] a hearing on the application by
writing to the Secretary of the Commission and serving the 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 10, 1995, 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 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, DC 20549. Applicants, Dwight L. Cramer,
Western National Life Insurance Company, 5555 San Felipe, Suite 900,
Houston, Texas 77056. Copies to Judith A. Hasenauer, Blazzard, Grodd &
Hasenauer, P.C. 943 Post Road East, P.O. Box 5108, Westport,
Connecticut 06881.
FOR FURTHER INFORMATION CONTACT: Kevin Kirchoff, Senior Counsel, or
Patrice M. Pitts, Special Counsel, at (202) 942-0670, Office of
Insurance Products (Division of Investment Management).
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 Commission.
Applicants' Representations
1. Western National is a stock life insurance company incorporated
under the laws of the State of Texas. Western National is licensed to
do business in 46 states and the District of Columbia. WNL, an
affiliate of Western National, will serve as distributor of the
Contracts. WNL is registered as a broker-dealer under the Securities
Exchange Act of 1934, and is a member of the National Association of
Securities Dealers.
2. The Separate Account was established as a segregated asset
account pursuant to a resolution of the Board of Directors of Western
National on November 9, 1994, to act as a funding medium for certain
annuity contracts. The Separate Account is registered with the
Commission pursuant to the 1940 Act as a unit investment trust.
3. The Separate Account presently consists of eight subaccounts,
each of which will invest in the shares of one of the portfolios of WNL
Series Trust (the ``Trust''). Additional subaccounts may be created to
invest in any additional portfolios of the Trust which may be added in
the future, or in other funding vehicles. The Trust is registered under
the 1940 Act as an open-end management investment company.
4. The assets of the Separate Account are the property of Western
National. However, the assets of the Separate Account, equal to the
reserves and other contract liabilities with respect to the Separate
Account, are not chargeable with liabilities arising out of any other
business Western National may conduct. Income, gains and losses,
whether or not realized, are, in accordance with the Contracts,
credited to or charged against the Separate Account without regard to
other income gains or losses arising out of any other business Western
National may conduct.
5. The Existing Contracts are available for retirement plans which
do not qualify for the special federal tax advantages pursuant to the
Internal Revenue Code and for retirement plans which do qualify for the
federal tax advantages available pursuant to the Internal Revenue Code.
6. The minimum initial purchase payment for non-qualified Existing
Contracts is $5,000 and for qualified Existing Contracts is $2,000. The
minimum subsequent purchase payment for non-qualified Existing
Contracts is $1,000 or, if the automatic premium check option is
elected, $50. The minimum subsequent purchase payment for qualified
Existing Contracts is $50. The maximum total purchase payments Western
National will accept without its prior approval is $500,000 for
contract owners up to 75 years in age. The maximum total purchase
payments Western National will accept without its prior approval for
contract owners age 75 and older is $250,000.
7. Western National will, at the time of the initial purchase
payment, add an additional amount, as a bonus (``Bonus''), equal to one
percent (1%) of such purchase payment. Western National reserves the
right to limit its payment of the Bonus to $5.000. If the contract
owner makes a withdrawal prior to the seventh contract anniversary in
excess of: (a) up to 10% of the contract value each contract year or
(b) the amount permitted under the systematic withdrawal option (up to
10% of the contract value each contract year) an amount equal to the
Bonus will be deducted by Western National from the contract value.
Western National will not recapture any investment earnings on the
Bonus. The owner does not have a vested interest in the principal
amount of the Bonus until seven contract years have elapsed from the
date of the Bonus payment, and until that time the Bonus belongs to
Western National.
8. The Existing Contracts provide for certain guaranteed death
benefits during the accumulation period. The standard death benefit
provides that for a death occurring prior to the 80th birthday of the
contract owner, or the oldest joint owner, the death benefit during the
accumulation period will be the greater of: (1) the purchase payments,
less any withdrawals including any previously deducted contingent
deferred sales charge; or (2) the contract value determined as of the
end of the valuation period during which Western National receives at
its annuity service office both due proof of death and an election of
the payment method; or (3) the highest step-up value prior to the date
of death. The step-up value is equal to the contract value on each
seventh contract anniversary plus any purchase payments made after such
contract anniversary less any withdrawals and contingent deferred sales
charge deducted after such contract anniversary. For a death occurring
on or after the 80th birthday of the owner, or the oldest joint owner,
the death benefit during the accumulation period will be the contract
value determined as of the end of the valuation period during which
Western National receives at its annuity service office both due proof
of death and an election of the payment method.
9. The Contracts also provide for an enhanced death benefit (via an
endorsement) if selected by the contract owner (``Enhanced Death
Benefit''). If the owner selects the Enhanced Death Benefit, for a
death occurring prior to the 75th birthday of the owner, or the oldest
joint owner, the death benefit will be the greater of 1, 2 or 3 above
(in paragraph 8) or the total amount of purchase payments compounded up
to the date of death at 3% interest, minus the total withdrawals and
previously deducted contingent deferred sales charges compounded up to
the date of death of 3% interest, not to exceed 200% of purchase
payments, less withdrawals and previously deducted contingent deferred
sales charges. For a death occurring on or after the 75th birthday and
before the 80th birthday of the owner, or the oldest joint owner, the
death benefit during the accumulation period will be the greater of 1,
2 or 3 (in paragraph 8) above. For death occurring on or after the 80th
birthday of the owner, or the oldest joint owner, the death benefit
during the accumulation period will be the contract value determined as
of the valuation period during which Western National receives at its
annuity service office both due [[Page 32389]] proof of death and an
election of the payment method.
10. Subject to any limitations imposed by Western National on the
number of transfers (currently unlimited), owners may transfer all or
part of their interest in a subaccount or during the annuity period
from a subaccount to the general account without the imposition of any
fee or charge if there have been no more than the number of free
transfers permitted. Currently, there are no restrictions on the number
of transfers that can be made each contract year. However, if Western
National does limit the number of transfers in the future, owners are
guaranteed 12 free transfers during the accumulation period and 6 free
transfers during the annuity period. Currently, Western National does
not impose a transfer fee. Western National has reserved the right to
charge a fee for transfers in the future which will not exceed the
lesser of $25 or 2% of the amount transferred.
11. Any premium taxes relating to the Existing Contracts may be
deducted from the purchase payments or contact value when incurred.
Western National currently defers the charge for premium taxes until
full withdrawal or annuitization. However, Western National reserves
the right to deduct the premium taxes when incurred. Premium taxes
generally range from 0% to 4%.
12. The Contracts do not provide for a front-end sales load to be
deducted from purchase payments. However, if all or a portion of the
Contract value is withdrawn, a contingent deferred sales charge (sales
load) (``CDSC'') will be calculated at the time of each withdrawal and
will be deducted from the contract value. This charge reimburses
Western National for expenses incurred in connection with the
promotion, sale and distribution of the Contracts. The CDSC is based
upon the length of time from when each purchase payment was made as
follows:
------------------------------------------------------------------------
Withdrawal
Length of time from purchase payment (number of years) charge(percent)
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1...................................................... 5
2...................................................... 5
3...................................................... 5
4...................................................... 4
5...................................................... 3
6...................................................... 2
7...................................................... 1
8 or more.............................................. 0
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After the first contract anniversary, a withdrawal of up to 10% of the
contract value, determined as of the immediately preceding contract
anniversary, may be withdrawn once each contract year on a non-
cumulative basis without the imposition of the CDSC.
13. Applicants acknowledge that the CDSC, if applicable, may 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 CDSC.
14. On each contract anniversary, Western National will deduct a
charge to reimburse it for expenses relating to maintenance of the
Contracts (``Contract Maintenance Charge''). The Contract Maintenance
Charge is currently $30 each contract year. However, during the
accumulation period, if the contract value on the contract anniversary
is at least $40,000, then no Contract Maintenance Charge is deducted.
If a total withdrawal is made on other than a contract anniversary and
the contract value for the valuation period during which the total
withdrawal is made is less than $40,000, the full Contract Maintenance
Charge will be deducted at the time of the total withdrawal. During the
annuity period, the Contract Maintenance Charge will be deducted pro-
rata from annuity payments regardless of contract size and will result
in a reduction of each annuity payment. The Contract Maintenance Charge
will be deducted from the general account and the subaccounts in the
Separate Account in the same proportion that the amount of the contract
value in the general account and each subaccount bears to the total
contract value.
15. Each valuation period Western National will deduct a charge
equal on an annual basis to .15% of the average daily net asset value
of the Separate Account (``Administrative Charge''). Western National
represents that the Administrative Charge will not exceed expenses and
will not be increased should it prove to be insufficient. Western
National does not intend to profit from the Administrative Charge,
which will be reduced to the extent that the amount of the charge is in
excess of that necessary to reimburse Western National for its
administrative expenses.
16. Western National will assume certain mortality and expense
risks under the Contracts. To compensate it for assuming these risks,
Western National will deduct each valuation period a charge which is
equal, on an annual basis, to 1.25% of the average daily net asset
value of the Separate Account (``Mortality and Expense Risk Charge'').
Of this amount, approximately .80% is attributable to mortality risks,
and approximately .45% is attributable to expense risks. The Mortality
and Expense Risk Charge is guaranteed by Western National and cannot be
increased. Western National anticipates that it will derive a profit
from this charge.
17. The mortality risks assumed by Western National arise from its
contractual obligation to make annuity payments after the annuity date
(determined in accordance with the annuity option chosen by the owner)
regardless of how long all annuitants live. This assures that neither
an annuitant's own longevity, nor an improvement in life expectancy
greater than that anticipated in the mortality tables, will have any
adverse effect on the annuity payments the annuitant will receive under
the Contract. Further, Western National bears a mortality risk because
it guarantees the annuity purchase rates for the annuity options under
the Contracts whether for a fixed annuity or a variable annuity. Also,
there is a mortality risk borne by Western National with respect to the
standard death benefit and the waiver of the CDSC if purchase payments
have been held in the contract less than seven contract years.
18. The expense risk assumed by Western National is that all actual
expenses involved in administering the Contracts, including maintenance
costs, administrative costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees and the costs of other
services may exceed the amount recovered from the Contract Maintenance
Charge and the Administrative Charge.
19. If the Owner selects the Enhanced Death Benefit, each valuation
period prior to the 75th birthday of the contract owner, or oldest
joint owner, Western National will deduct a charge from the Separate
Account which is equal, on an annual basis, to .15% of the average
daily net asset value of the Separate Account (``Enhanced Death Benefit
Charge''). This charge compensates Western National for assuming the
mortality risks for the Enhanced Death Benefit. Western National
expects to profit from this charge.
Applicants' Legal Analysis and Conditions
1. Pursuant to Section 6(c) of the 1940 Act the Commission may, by
order upon application, conditionally or unconditionally exempt any
person, security, or transaction, or any class or classes of persons,
securities or transactions, from any provision or provisions of the
1940 Act or from any rule or regulation thereunder, if and to the
extent that such exemption is [[Page 32390]] 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in pertinent
part, 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
load) 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 of a character normally performed by the
bank itself.
3. Applicants request an order pursuant to Section 6(c) of the 1940
Act exempting them from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to the extent necessary to permit the deduction of mortality and
expense risk and enhanced death benefit charges from the assets of the
Separate Account and any Future Accounts in connection with the
Existing Contracts and Future Contracts.
4. Applicants assert that the mortality and expense risk charge of
1.25% is reasonable in relation to the risks assumed by Western
National under the Existing Contracts and reasonable in amount as
determined by industry practice with respect to comparable annuity
products. Applicants state that these determinations are based upon an
analysis of the mortality risks (taking into consideration such factors
as the guaranteed annuity purchase rates), the expense risks (taking
into account the existence of charges against the Separate Account
assets for other than mortality and expense risks), the estimated costs
for certain product features and industry practice with respect to
comparable variable annuity products. Western National undertakes to
maintain at its principal office a memorandum, available to the
Commission, setting forth in detail the products analyzed and the
methodology and results of this analysis.
5. Applicants assert that the charge of 0.15% for the Enhanced
Death Benefit is reasonable in relation to the risks assumed by Western
National under the Existing Contracts for providing the Enhanced Death
Benefit. Western National undertakes to maintain at its home office a
memorandum, available to the Commission upon request, setting forth in
detail the methodology used in determining that the risk charge of
0.15% for the enhanced death benefit is reasonable in relation to the
risks assumed by Western National under the Existing Contracts.
6. Applicants represent that, before relying on exemptive relief
requested in this application in connection with Future Contracts,
Applicants will determine that any enhanced death benefit risk charges
under such contracts are reasonable in relation to the related risks
assumed by Western National under such Future Contracts. Applicants
represent that Western National will maintain and make available to the
Commission upon request a memorandum setting forth in detail the
methology used in making that determination with respect to Future
Accounts.
7. Applicants represent that, before relying on exemptive relief
requested in this application in connection with Future Contracts,
Applicants will determine that any mortality and expense risk charges
under such contracts are reasonable in amount as determined by industry
practice with respect to comparable annuity products and/or reasonable
in relation to the risks assumed by Western National. Applicants
represent that Western National will maintain and make available to the
Commission upon request a memorandum setting forth the basis of such
conclusion with respect to the Future Accounts.
8. Western National has concluded that there is a reasonable
likelihood that the Separate Account's distribution financing
arrangement will benefit the Separate Account and its investors.
Western National represents that it will maintain and make available to
the Commission upon request a memorandum setting forth the basis of
such conclusion.
9. Applicants represent that, before relying on exemptive relief
requested in this application in connection with Future Contracts or
Future Accounts, Applicants will determine that there is a reasonable
likelihood that the distribution financing arrangement will benefit the
Separate Account and its investors or Future Accounts and their
investors. Western National represents that it will maintain and make
available to the Commission upon request a memorandum setting forth the
basis of such conclusion.
10. Western National represents that the assets of the Separate
Account and any Future Accounts will be invested only in underlying
mutual funds which undertake, in the event they 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 their board of
directors, the majority of whom are not ``interested persons'' of such
funds within the meaning of Section 2(a)(19) of the 1940 Act.
11. Applicants request an order pursuant to Section 6(c) of the
1940 Act exempting them from Sections 2(a)(32), 22(c), 26(a)(2)(C),
27(c)(1), 27(c)(2) and 27(d) of the 1940 Act, and from Rule 22c-1
promulgated thereunder, to the extent necessary to permit Western
National to issue Contracts providing for the Bonus and its recapture
if the owner makes a withdrawal prior to the seventh contract
anniversary in excess of 10% of the contract value each contract year.
12. Applicants represent that contract owners do not have a vested
interest in the principal amount of the Bonus until seven contract
years have elapsed from the date of payment of the Bonus by Western
National and that, until such time, the Bonus is the property of
Western National.
13. Applicants represent that it is not administratively feasible
for them to track the Bonus amounts in the Separate Account.
Accordingly, the Mortality and Expense Risk Charge, the Administrative
Charge and, when applicable, the Enhanced Death Benefit Charge
(collectively, the ``Asset-Based Charges''), will be assessed against
the entire value of each Contract holder's account, including the Bonus
amount, even during the period when the Owner's interest in the Bonus
has not vested (the first seven Contract years). As a result, during
the first seven years of each Contract that includes a Bonus, the
aggregate Asset-Based Charges assessed will be higher than those that
would be charged if the Contract did not include the Bonus.
14. Applicants represent that the Bonus and its recapture will
involve none of the abuses to which Sections 2(a)(32), 22(c),
26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and Rule
22c-1 thereunder were intended to prevent. Applicants also state that
the Bonus will be attractive to and in the interest of investors
because it will permit owners to put 101% of their purchase payments to
work for them in the selected investment options. Applicants further
explain that the earnings attributable to the Bonus always will be
retained by the owner, and the principal amount of the Bonus also will
be retained if the initial purchase payment is not withdrawn for seven
contract years.
15. Applicants submit that their request for exemptive relief would
promote competitiveness in the variable annuity contract market by
eliminating the need for redundant exemptive
[[Page 32391]] applications, thereby reducing Applicants'
administrative expenses and maximizing the efficient use of their
resources. Applicants further submit that the delay and expense
involved in having repeatedly to seek exemptive relief would impair
their ability effectively to take advantage of business opportunities
as they arise. Further, if Applicants were required repeatedly to seek
exemptive relief with respect to the same issues addressed in this
application, investors would not receive any benefit or additional
protection.
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. 95-15118 Filed 6-20-95; 8:45 am]
BILLING CODE 8010-01-M
