[Federal Register Volume 60, Number 122 (Monday, June 26, 1995)]
[Notices]
[Pages 33021-33024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15572]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21153; No. 812-9498]
United of Omaha Life Insurance Company, et al.
June 20, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: United of Omaha Life Insurance Company (``United of
Omaha''), United of Omaha Separate Account C (``Separate Account'') and
Mutual of Omaha Investors Services, Inc. (``Services'').
RELEVANT 1940 ACT SECTIONS: Order requested under 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), and 27(c)(2) of the 1940 Act and Rule
22c-1 thereunder.
SUMMARY OF APPLICATION. Applicants seek an order to permit the
deduction of a mortality and expense risk charge and an enhanced death
benefit charge from the assets of the Separate Account or any other
separate account (``Other Accounts'') established by United of Omaha to
support certain flexible premium individual deferred variable annuity
contracts (``Contracts'') as well as other variable annuity contracts
that are substantially similar in all material respects to the
Contracts (``Future Contracts''). In addition, Applicants propose that
the order extend to any broker-dealer other than Services, that may in
the future serve as principal underwriter for the Contracts or Future
Contracts, the same exemptions granted to Services (``Future Broker-
Dealers''). Any such broker-dealer will register under the Securities
Exchange Act of 1934 (``1934 Act'') as a broker-dealer and will be a
member of the National Association of Securities Dealers, Inc.
(``NASD'').
FILING DATE: The application was filed on February 27, 1995, and was
amended and restated on June 12, 1995.
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 SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on July 14,
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 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
SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, NW., Washington, DC 20549. Applicants, Thomas J. McCusker,
Esq., Law Division--3rd Floor, United of Omaha Life Insurance Company,
Mutual of Omaha Plaza, Omaha, Nebraska 68175-1008.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Attorney, or Wendy
Friedlander, Deputy Chief, both 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 SEC's Public
Reference Branch.
Applicants' Representatives
1. United of Omaha, a stock life insurance company, is organized in
Nebraska and licensed to do business in the District of Columbia, all
states except New York, and several foreign countries. United of Omaha
is a wholly-owned subsidiary of Mutual of Omaha Insurance Company.
2. The Separate Account is a separate account established by United
of Omaha to fund the Contracts. The Separate Account is registered with
the Commission as a unit investment trust under the 1940 Act, and the
Contracts are registered as securities under the Securities Act of
1933.
3. United of Omaha will establish for each investment option
offered under the Contract a Separate Account subaccount
(``Subaccount''), which will invest solely in a specific corresponding
portfolio of certain designated investment companies (``Funds''). The
Funds will be registered under the 1940 Act as open-end management
investment companies. Each Fund series will have separate investment
objectives and policies.
4. Services will serve as the distributor and principal underwriter
of the Contracts, and also may serve in these capacities for the Future
Contracts. Services, an affiliate of United of Omaha, is registered
under the 1934 Act as a broker-dealer and a member of the NASD.
5. In addition, broker-dealers other than Services also may serve
as distributors and principal underwriters of certain of the Contracts
as well as the Future Contracts. Future broker-dealers will be
registered under the 1934 Act as broker-dealers and will be members of
the NASD.
6. The Contracts are individual flexible premium variable deferred
annuity contracts. They may be purchased on a non-tax qualified basis
(``Non-Qualified Contracts'') or they may be purchased and used in
connection with retirement plans that qualify for favorable federal
income tax treatment (``Qualified Contracts''). Both the Non-Qualified
Contracts and the Qualified Contracts may be purchased with an initial
premium of $5,000, except under the electronic fund transfer program
where the minimum initial purchase payments is $2,000.\1\ The minimum
subsequent premium for both the Unqualified and Qualified Contracts is
$500 (or $100 if made in connection with the electronic fund transfer
program). Net purchase payments may be allocated to one or more of the
Separate Account Subaccounts that have been established to support the
Contracts. The Contracts also provide for the allocation of net
purchase payments to the general account of United of Omaha, where such
purchase payments are credited with a predetermined fixed rate of
interest.
\1\United of Omaha reserves the right to increase or decrease
this amount.
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7. The Contracts provide for a series of annuity payments beginning
on the annuity date. The Contract owner may select from several payout
options which provide periodic annuity payments on a fixed basis.
8. The Contracts provide for a death benefit if the annuitant dies
during the accumulation period. Any applicable premium taxes not
previously deducted will be deducted from the death benefit payable.
The standard death benefit is the greater of: (1) The accumulation
value (without deduction of the CDSC, as defined below) on the later of
the date on which due proof of death or an election of payout option is
received by [[Page 33022]] United of Omaha's service office less any
charge for applicable premium taxes; or (2) the sum of all net purchase
payments, less any partial withdrawals. If the Contract owner elected
the enhanced death benefit and dies before age 81, United of Omaha will
provide an enhanced death benefit that will equal the greater of: (1)
The accumulation value as of the end of the valuation period during
which due proof of death and an election of a payout option are
received by United of Omaha's service center; (2) the greatest
anniversary value,\2\ plus any subsequent net purchase payments and
less any subsequent partial withdrawals; and (3) the sum of all net
purchase payments less any partial withdrawals, accumulated at a 4.5%
annual rate of interest, up to a maximum of two times each purchase
payment. If the Contract owner elected the enhanced death benefit and
dies after attaining age 81, the enhanced death benefit under the
Contract will equal the greatest of: (1) The accumulation value as of
the end of the valuation period during which due proof of death and an
election of a payout option are received by United of Omaha's service
center; (2) the greatest anniversary value up to the last Contract
anniversary before the Contract owner attains age 81, plus any
subsequent purchase payments and less any subsequent partial
withdrawals; and (3) the sum of all net purchase payments paid prior to
the last Contract anniversary before the Contract owner attained age
81, less any partial withdrawals, accumulated at a 4.5% annual rate of
interest, up to a maximum of two times each purchase payment.
\2\The anniversary value equals the accumulation value on the
Contract anniversary and subsequent purchase payments less
subsequent partial withdrawals and premium tax not yet deducted.
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9. Certain charges and fees are assessed under the Contracts. There
is no transfer fee charged for transfers from the fixed account or for
the first 12 transactions from Subaccounts of the Separate Account in
each Contract year. Subsequent transfers within a Contract year,
however, will be assessed a fee of $10 per transfer.
10. United of Omaha will deduct an administration charge from each
Subaccount of the Separate Account. The charge is equal, on an annual
basis, to .20% of the net asset value of each Subaccount.
11. An annual policy fee of $30 will be charged against each
Contract. This charge will be deducted pro rata from each Subaccount in
which the Contract owner is invested at the end of each Contract year
prior to the annuity starting date (and upon a complete surrender) to
compensate United of Omaha for the administrative services provided to
Contract owners. Currently, this fee is waived if the accumulation
value exceeds $50,000.
12. Applicants represent that the transfer fee, administration
charge, and the annual policy fee will not increase regardless of the
actual cost incurred. In addition, Applicants represent that these
charges are at cost with no anticipation of profit.
13. A contingent deferred sales charge (``CDSC'') may be imposed on
certain withdrawals. The amount of the CDSC decreases annually from 7%
to 0% over 8 Contract years. For the purposes of determining the CDSC,
withdrawals will be allocated first to premiums on a first-in, first-
out basis so that all withdrawals are allocated to premiums to which
the lowest (if any) CDSC applies, then to earnings. In addition, there
is a free withdrawal amount equal to up to 15% of accumulation value
each Contract year.\3\ Applicants state that the CDSC will not
increase.
\3\United of Omaha may waive the CDSC under certain
circumstances.
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14. United of Omaha proposes to deduct a daily mortality and
expense risk charge. United of Omaha represents that this charge is
equal to an effective annual rate of 1.00% of the net asset value of
the Separate Account, and that it will not increase. Of this amount,
approximately .75% is for mortality risks and .25% is for expense
risks.
15. United of Omaha assumes the mortality risk that the life
expectancy of the annuitant will be greater than that assumed in the
guaranteed annuity purchase rates, thus requiring United of Omaha to
pay out more in annuity income than it had planned. Additional
mortality risks assumed by United of Omaha are that it will waive the
CDSC in the event of the death of the owner and United of Omaha's
contractual obligation to provide a standard and an enhanced death
benefit prior to the annuity date. Thus, United of Omaha assumes the
risk that it may not be able to cover its distribution expenses and
that the owner may die at a time when the amount of the death benefit
payable exceeds the then net surrender value of the Contracts. The
expense risk assumed by United of Omaha is that the contract
administration charge will be insufficient to cover the cost of
administering the Contracts.
16. In the event the mortality and expense risk charges are more
than sufficient to cover United of Omaha's costs and expenses, any
excess will be a profit to United of Omaha. The cost of distributing
the Contracts will be met from funds derived from the CDSC and from
United of Omaha's general account, which may include amounts derived
from the mortality and expense risk charge.
17. There will be a charge made each year for expenses related to
the enhanced death benefit. United of Omaha deducts this charge through
the cancellation of accumulation units at each Contract anniversary and
at surrender to compensate it for the increased risks associated with
providing the enhanced death benefit. The charge at full surrender will
be a pro-rata portion of the annual charge. United of Omaha guarantees
that this charge will never exceed an annual rate of .35% of the
average death benefit amount.\4\
\4\The average death benefit amount is the mean of the death
benefit amount on the most recent Contract anniversary and the death
benefit amount on the immediately preceding Contract anniversary.
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18. Should the owner live in a jurisdiction that levies a premium
tax, United of Omaha will pay the taxes when due. United of Omaha
represents that state premium taxes may range up to 3.5% of purchase
payments and are subject to change. United of Omaha reserves the right
to deduct the amount of the tax either from the premiums as they are
received, upon payment in connection with the surrender of the
Contract, upon death of any owner, or upon application of proceeds to a
payout option.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, 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. [[Page 33023]]
3. Applicants request exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction from the net assets of the Separate Account and the Other
Accounts in connection with the Contracts and Future Contracts of the
1.00% charge for the assumption of mortality an expense risks, and .35%
of the average death benefit amount for the enhanced death benefit
charge, and to exempt Future Broker-Dealers.
4. Applicants assert that the terms of the relief requested with
respect to any Future Contracts funded by the Separate Account or Other
Accounts, as well as for Future Broker-Dealers, are consistent with the
standards enumerated in Section 6(c) of the 1940 Act. Without the
requested relief, Applicants would have to request and obtain exemptive
relief for each new Other Account it establishes to fund any Future
Contract, as well as for each Future Broker-Dealer that distributes the
Contracts or the Future Contracts. Applicants submit that any such
additional request for exemption would present no issues under the 1940
Act that have not already been addressed in this application, and that
investors would not receive any benefit or additional protections
thereby.
Applicants submit that the requested relief is appropriate in the
public interest, because it would promote competitiveness in the
variable annuity contract market by eliminating the need for Applicants
to file redundant exemptive applications, thereby reducing their
administrative expenses and maximizing the efficient use of their
resources. The delay and expense involved in having repeatedly to seek
exemptive relief would reduce Applicants' ability effectively to take
advantage of business opportunities as they arise.
Applicants further submit that the requested relief is consistent
with the purposes of the 1940 Act and the protection of investors for
the same reasons. Applicants thus believe that the requested exemption
is 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.
5. Applicants represent that the 1.00% per annum mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts. This representation is based upon an
analysis of publicly available information about similar industry
products, taking into consideration such factors as, among others, the
current charge levels and benefits provided, the existence of expense
charge guarantees, guaranteed death benefits, and guaranteed annuity
rates. United of Omaha will maintain at its principal offices,
available to the Commission, a memorandum setting forth in detail the
products analyzed in the course of, and the methodology and results of,
Applicants' comparative review.
6. Applicants also assert that the charge equal to an annual rate
of .35% of the average death benefit amount for Contracts and Future
Contracts issued with the enhanced death benefit is reasonable in
relation to the risks assumed by United of Omaha. In arriving at this
determination, United of Omaha projected its expected cost in providing
this benefit by using the price of put options which could be used to
hedge the risk inherent in providing the enhanced death benefit. United
of Omaha undertakes to maintain at its home office a memorandum,
available to the Commission, setting forth in detail the methodology
used in determining that the risk charge equal to an annual rate of
.35% of the average death benefit amount under certain Contracts and
Future Contracts for the enhanced death benefit is reasonable in
relation to risks assumed by United of Omaha under the Contracts and
Future Contracts.
7. United of Omaha has concluded that there is a reasonable
likelihood that the Separate Accounts and Other Accounts' proposed
distribution financing arrangements will benefit the Separate Accounts
and their investors. United of Omaha represents that it will maintain
and make available to the Commission upon request a memorandum setting
forth the basis of such conclusion.
8. The Separate Account and Other Accounts will be invested only in
management investment companies that undertake, in the event the
company 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 the company's board members, 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.
9. Section 2(a)(32) of the 1940 Act defines a redeemable security
as any security under the terms of which the holder, upon its
presentation to the issuer, is entitled to receive approximately his
proportionate share of the issuer's current net assets, or the cash
equivalent thereof. Section 27(c)(1) of the 1940 Act and Rule 22c-1
thereunder, in pertinent part, prohibit a registered investment
company, its depositor, or principal underwriter, from selling periodic
payment plan certificates unless such certificates are redeemable
securities.
10. Applicants request exemptions from Sections 2(a)(32), 22(c),
and 27(c)(1) of the 1940 Act, and Rule 22c-1 thereunder, to permit the
deduction upon surrender of the prorated enhanced death benefit equal
to .35% of the average death benefit.
11. Applicants assert that the enhanced death benefit charge is
assessed to compensate United of Omaha for the increase risk it bears
if the Contract owner elects the enhanced death benefit. The death
benefit represents an optional insurance benefit that United of Omaha
may provide through the life of the Contract or Future Contract for
which it is entitled to receive compensation. Normally, the enhanced
death benefit charge accrues each Contract year and is deducted
retroactively on each Contract anniversary, for that prior Contract
year. By deducting a prorated enhanced death benefit charge upon a
Contract owner's surrender, the Contract owner compensates United of
Omaha for the additional risk the company bears during the period
between the last Contract anniversary and the date of surrender.
12. Applicants further assert that the assessment of the prorated
enhanced death benefit charge upon surrender does not alter a Contract
owner's current net asset value. As previously discussed, United of
Omaha deducts the enhanced death benefit charge through the
cancellation of a Contract owner's accumulation units. Accordingly, the
assessment of the prorated enhanced death benefit charge upon
surrender, or at any other time during the life of a Contract or Future
Contract, will not alter the Contract or Future Contract's current net
asset value.
13. In addition, Applicants assert that the assessment of a
prorated enhanced death benefit charge upon a Contract owner's
surrender, which is fully disclosed in the prospectus for the Contract,
should not be construed as a restriction on redemption. Applicants
maintain that the Contracts and Future Contracts are and will be
redeemable securities and that the imposition of the prorated enhanced
death benefit charge upon surrender represents nothing more than the
proportionate deduction of an insurance charge that could otherwise be
deducted daily through the life of the Contract or Future Contract.
Moreover, as stated previously, Applicants only assess the charge if
the Contract owner has elected the enhanced death
benefit. [[Page 33024]]
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. 95-15572 Filed 6-23-95; 8:45 am]
BILLING CODE 8010-01-M
