[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30137-30148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13893]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21104; No. 812-9200]
The Guardian Insurance & Annuity Company, Inc., et al.
May 31, 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: The Guardian Insurance & Annuity Company, Inc.
(``Guardian''), The Guardian Separate Account K (``Separate Account'')
and Guardian Investor Services Corporation (``Guardian Services'').
RELEVANT 1940 ACT SECTIONS Order requested under Section 6(c) granting
exemptions from the provisions of Sections 2(a)(32), 2(a)(35), 22(c),
26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2), 27(d), and 27(e) of
the 1940 Act, and paragraphs (b)(1), (b)(12), (b)(13)(i), (b)(13)(iii),
(b)(13)(iv), (b)(13)(v), (b)(13)(vii), (c)(1), (c)(4) of Rule 6e-2, and
Rules 6e-3(T)(c)(4)(v), 22c-1 and 27e-1 thereunder.
SUMMARY OF APPLICATION: Applicants request an order that would permit
them to offer and sell certain variable whole life insurance contracts
with modified scheduled premiums (``Contracts'') that provide for: (1)
A death benefit that may or may not vary based on investment
experience; (2) a sales charge deducted from premium payments and as a
contingent deferred sales charge; (3) a contingent deferred
administrative charge; (4) deduction from Account Value for cost of
insurance charges, guaranteed insurance amount charges, substandard
mortality risks and incidental insurance benefits, including
[[Page 30138]] a Premium Skip Option; (5) values and charges based on
the 1980 Commissioners' Standard Ordinary Mortality Tables (``1980 CSO
Tables''); (6) the holding of underlying fund shares by the Separate
Account without the use of a trustee under an open account arrangement
and without trust indenture; and (7) a waiver of notice of refund and
withdrawal rights. Applicants also request exemptive relief to deduct a
charge from premium payments received under the Contracts, and from
premiums received under certain single premium, scheduled premium and
flexible premium variable life insurance contracts (``Other
Contracts'') to be issued by Guardian through the Separate Account or
any other separate account established by Guardian (``Future
Accounts''), to compensate Guardian for its increased federal tax
burden resulting from the receipt of such premiums.\1\
\1\Applicants represent that the application will be amended
during the notice period to delete Future Accounts as applicants and
to request that exemptive relief to deduct such a charge be extended
to Future Accounts in connection with the offering of Other
Contracts.
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FILING DATE: The application was filed on August 29, 1994 and amended
on May 4, 1995. Applicants have represented that the application will
be amended during the notice period to reflect certain representations
made herein.
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 Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on June 26, 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 requestor'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: Richard T. Potter,
Esq., The Guardian Insurance & Annuity Company, Inc., 201 Park Avenue,
South, New York, New York 10003.
FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, Assistant Special Counsel, or Wendy Friedlander,
Deputy Chief, 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
Commission's Public Reference Branch.
Applicants' Representations
1. Guardian is a stock life insurance company and a wholly-owned
subsidiary of The Guardian Life Insurance Company of America. Guardian
is authorized to conduct a life insurance business in all 50 States and
the District of Columbia.
2. The Separate Account is registered as a unit investment trust
(``UIT) under the 1940 Act and interests in the Contracts are
registered under the Securities Act of 1933 (``1933 Act''). Future
Accounts will be registered under the 1940 Act as UITs. The Separate
Account and the Future Accounts will be used to support the Contracts
or the Other Contracts.
The Separate Account currently consists of six investment divisions
(``Investment Divisions''), each investing in a corresponding fund
registered under the 1940 Act as a diversified open-end management
company (``Fund'' or collectively, ``Funds''). The Funds serve as
underlying funding vehicles for the Contracts. Each Fund is managed by
a registered investment adviser. Additional Investment Divisions may be
established in the future and may invest in the Funds or in other
underlying investment vehicles.
3. Guardian Services, the principal underwriter for the Contracts,
is a registered broker-dealer under the Securities Exchange Act of 1934
and a member of the National Association of Securities Dealers, Inc.
4. Under the Contracts, premiums may be paid on a scheduled or an
unscheduled basis (collectively, ``Premium Payments''), subject to
certain exceptions and conditions. Each Premium Payment is subject to
``Premium Assessments'' which are paid in connection with a Contract
issued on a substandard basis and for supplemental insurance benefits
provided by rider or endorsement. If, however, the ``Premium Skip
Option'' is elected,\2\ 90.5% of Premium Assessment otherwise payable
from Premium Payments is deducted from Account Value. The remaining
Premium Payment (``Basic Scheduled Premium'')\3\ is used to purchase
base Contract coverage and is reduced by certain Premium Charges,
discussed below.\4\
\2\A Premium Skip Option permits the Contract owner, after the
first Contract Year, to skip annual Premium Payments without the
Contract lapsing, subject to certain conditions.
\3\The Basic Scheduled Premium initially is calculated at the
issuance of the Contract and thereafter on each subsequent date that
a Contract premium is due until the later of: (a) the Contract
Anniversary nearest the insured's 70th birthday; or (b) the 10th
Contract Anniversary (``Guaranteed Premium Period''). After the
Guaranteed Premium Period, the Basic Scheduled Premium will be
reviewed on each ``Contract Review Date'' (the monthly date prior to
each Contract anniversary). If on that date the Account Value is:
(a) less than the ``Benchmark Value,'' then the Basic Scheduled
Premium will be increased to no more than the ``maximum'' amount set
forth in the Contract; or (b) higher than the Benchmark Value, then
the Basic Scheduled Premium could be reduced to no less than the
Basic Scheduled Premium payable during the Guaranteed Premium
Period.
The Benchmark Value approximately equals the Account Value
needed on a Contract Anniversary for the Contract to endow at age
100 for the Face Amount, assuming (a) all Basic Scheduled Premiums
are paid when due and do not increase after the Guaranteed Premium
Period due to re-determination on a Review Date; (b) no unscheduled
payments, partial withdrawals, reductions in Face Amount, or loans
have been or will be made; (c) a level net annual rate of return on
Account Value of 4%; and (d) deduction on each Monthly Date of the
maximum Contract Charge, Administrative Charge, Guaranteed Insurance
Amount and Cost of Insurance Charges.
\4\The portion of a Premium Payment that consists of Premium
Assessments is not subject to Premium Charges.
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Each unscheduled Premium Payment also is subject to deduction of
Premium Charges, including the remaining 9.5% of Premium Assessment
otherwise payable from Premium Payments if the Premium Skip Option is
in effect. Thus, Premium Assessments usually are deducted from Premium
Payments before sales load and other charges against Premiums are
imposed. Premium Assessments deducted from Account Value (under the
Premium Skip Option), in effect, are deductions from amounts previously
subject to Premium Charges (which are equal to a total of 9.5% of
Premiums until the cumulative total of Basic Scheduled Premiums and
unscheduled Premium Payments is an amount equal to twelve Basic
Scheduled Premiums). Accordingly, a discounting of Premium Assessments
deducted from Account Value reflects the fact that the deductions are
being made from post-premium charge amounts. Net Premiums are credited
to Account Value and allocated to the Investment Divisions, or to the
Fix-Rate Option, as specified by the Contract owner.
5. Two Death Benefit Options are available: (1) ``Option 1 Death
Benefit,'' equal to the Face Amount of a Contract until the Contract
Anniversary nearest the insured's 100th birthday; and (2) ``Option 2
Death Benefit,'' equal to the Face Amount of a Contract plus the excess
of Account Value on the date of death over a Contract's ``Benchmark
Value'' for the applicable Contract Year, adjusted to the date of death
until the Anniversary nearest the insured's 100th birthday. Under
either Option, Death Benefits are guaranteed not to be less then a
Contract's then-current Face Amount as long as Premium Payments are
made, or excused, and there is no outstanding Contract Debt. If,
however, a greater Death Benefit would be provided under either one of
two ``Alternative Death Benefits,'' (a) the minimum death benefit
required under Section 7702 of the Code, or (b) the variable insurance
amount, then the greater Alternative Death Benefit will be paid. Thus,
the Death Benefit under either Option 1 or Option 2 varies with
investment experience when the Account Value is sufficiently large
that: (a) the Death Benefit is increased in order for a Contract to
qualify as life insurance for federal tax law purposes; or if greater,
(b) the Death Benefit is increased to the variable insurance amount.
This may occur because of favorable investment experience, unscheduled
Premium Payments, imposition of lower than guaranteed charges, or a
combination of these factors.
6. Various fees and expenses are deducted from Premium Payments
under the Contracts:
a. Premium Charges: The following charges are deducted from each
Premium Payment:
(1) Sales Charge: A Premium Sales Charge equal to 6.0% of all
Premium Payments until the cumulative total of all such Payments is
equal to twelve Basic Scheduled Premiums; thereafter, the charge will
be equal to 3.0% of all such payments.
(2) Premium Tax Charge: A State Premium Tax Charge of 2.5% which is
an approximate average of the rates Guardian expects to pay in all
states over the lifetime of the insureds covered by the Contracts.
Guardian reserves the right to increase if its premium taxes increase
due to a change in state law.
(3) Federal Premium Tax Burden Charge: A charge of 1.0% to
compensate Guardian for an increase in its federal income tax burden
resulting from the application of Section 848 of the Internal Revenue
Code of 1986 (``Code''), as amended by the Omnibus Budget
Reconciliation Act of 1990 (``OBRA'').
(4) Processing Charge: Guardian reserves the right to impose a
maximum charge of $2.00 from each unscheduled Premium Payment received
for processing costs, including recordkeeping. Guardian does not expect
a profit from this fee, if imposed.
b. Transaction Charges: The following charges are deducted
proportionately from Account Value attributable to the Investment
Divisions until the Account value is depleted, and then from the Fixed-
Rate Option:
(1) Surrender Charge: A Contingent Deferred Sales Charge (``CDSC'')
and a Contingent Deferred Administrative Charge (``CDAC'') are deducted
during the first 12 Contract Years upon withdrawal, surrender,
reduction in Face Amount, or lapse.
(A) CDSC:\5\ For an insured age 78 or less, the lesser of (i) 36%
of the annual Basic Scheduled Premium payable for the first Contract
Year, less the sum of 3% of all Basic Scheduled Premiums and
unscheduled Premium Payments actually paid under the Contract up to the
date that the Surrender Charge is incurred and any deferred sales
charges deducted for prior Face Amount reductions; or (ii) a percentage
of the then payable annual Basic Scheduled Premium specified in the
following chart for the Contract Year during which the Surrender Charge
is applied: [[Page 30139]]
\5\The total sales charge (Premium Sales Charge and CDSC) is
subject to a maximum of 9% of Basic Scheduled Premiums paid under
the Contract over the shorter of 20 years or the insured's
anticipated life expectancy.
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Contract year\6\ Percentage
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1.......................................................... 36
2.......................................................... 33
3.......................................................... 30
4.......................................................... 27
5.......................................................... 24
6.......................................................... 21
7.......................................................... 18
8.......................................................... 15
9.......................................................... 12
10......................................................... 9
11......................................................... 6
12......................................................... 3
13+........................................................ 0
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\6\In order to preclude the possibility that Guardian would be
required to refund any sales load, the Contracts provide that the
CDSC imposed during the first two Contract Years will be no greater
than the sum of: 24% of payments made during the first Contract Year
up to an amount equal to an annual Basic Scheduled Premium; plus 4%
of payments made during the second Contract Year up to an amount
equal to an annual Basic Scheduled Premium; plus 3% of all
unscheduled payments made during the first two Contract Years.
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(B) CDAC: The CDAC compensates Guardian for certain administrative
expenses as follows (per $1,000 Base Contract Face Amount), subject to
certain decreases associated with a reduction in Face Amount:
Administrative Surrender Charge
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Year (ages) 1 2 3 4 5 6 7 8 9 10 11 12 13+
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00-27........................................... 2.4 2.20 2.0 1.80 1.6 1.40 1.2 1.00 0.8 0.60 0.4 0.20 .00
28-29........................................... 3.0 2.75 2.5 2.25 2.0 1.75 1.5 1.25 1.0 0.75 0.5 0.25 .00
30-31........................................... 3.6 3.30 3.0 2.70 2.4 2.10 1.8 1.50 1.2 0.90 0.6 0.30 .00
32-33........................................... 4.2 3.85 3.5 3.15 2.8 2.45 2.1 1.75 1.4 1.05 0.7 0.35 .00
34-80........................................... 4.8 14.40 4.0 3.60 3.2 2.80 2.4 2.00 1.6 1.20 0.8 0.40 .00
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(2) Partial Withdrawal Administration Charge: The lesser of $25 or
2% of the amount withdrawn for certain administrative costs. Guardian
does not expect to profit from this charge.
(3) Transfer Charge: Guardian reserves the right to deduct $25 for
each transfer in excess of four transfers during a Contract Year. No
transfer charge will be imposed in connection with dollar cost
averaging feature or loans. Guardian does not expect to profit from
this charge.
(4) Premium Skip Option Charge: An amount equal to 90.5% of any
Premium Assessment that otherwise would be deducted from an annual
Premium will be deducted on each Contract Anniversary on which the
``skipped'' Premium otherwise would be due or, if later, on the date
the Premium Skip Option is effected. The remaining 9.5% is deducted as
part of the Premium Charges for any unscheduled Premium Payment.
c. Monthly Deductions: The following charges are deducted monthly
proportionately from Account Value attributable to each Investment
Division and the Fixed-Rate Option, ending on [[Page 30140]] the
Contract Anniversary nearest the insured's 100th birthday:
(1) Contract Charge and Administration Charge: The Contract charge
is equal to $10 per month during Contract Years 1 through 3, and $4 per
month thereafter (guaranteed not to exceed $8 per month). The
Administrative Charge is equal to $0.02 to $0.04 (increasing with issue
age) per $1,000 of Face Amount during the first 12 Contract Years, and
$0.015 per $1,000 of Face Amount thereafter, for underwriting, issuing
and maintaining the Contract. Guardian does not expect to profit from
these charges.\7\
\7\Applicants represent that each of these fees is reasonable,
and in an amount that does not exceed the expenses to which such
charge relates that are currently anticipated to be incurred over
the lifetime of the Contracts. The maximum amount of each of these
fees or charges is guaranteed not to increase during the term of the
Contract. Guardian does not anticipate realizing a profit from these
charges.
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(2) Guaranteed Insurance Amount Charge: $0.01 per $1,000 of Face
Amount to compensate Guardian for the risk it assumes by guaranteeing
that a Contract will remain in force if all premiums have been paid
when due and no loans have been taken, regardless of the investment
experience of the Investment Division; and
(3) Cost of Insurance Charge: A charge, based on the 1980 CSO
Tables (discounted at the monthly equivalent of 4% per year), is
deducted and calculated by multiplying the net amount at risk on a
Monthly Date (amount by which the Death Benefit on the first day of the
Contract month exceeds the Account Value on the same day, after monthly
deductions for contract and administration charges and the Guaranteed
Insurance Amount charge have been processed) by the applicable monthly
cost of insurance rate, divided by $1,000.
d. Separate Account Charges: Each Investment Division currently is
assessed a charge for mortality and expense risks that Guardian
assumes, at a current effective annual rate of .60% of the value of its
assets. Guardian reserves the right to increase the mortality and
expense risk charge up to a maximum effective annual rate of .90%,
subject to further Commission authorization. Guardian assumes a
mortality risk under the Contracts that insured may live for shorter
periods of time than estimated, and assumes an expense risk that its
actual costs of issuing and administering the Contracts may be more
than it estimated. No charge currently is deducted from Separate
Account assets for income taxes attributable to the Separate Account or
the Contracts. Guardian reserves the right to impose such charges if
the income tax treatment of variable life insurance changes, or if
there is a change in Guardian's tax status.
e. Fund Expenses: Charges for investment advisory and other
expenses incurred by the Funds are deducted from assets of the relevant
Fund and are indirectly borne by Contract owners.
Applicants' Legal Analysis
Section 6(c) authorizes the Commission, by order and upon
application, to exempt any person, security, or transaction, or class
of persons, securities, or transactions, from any provisions of the
1940 Act. The Commission grants relief under Section 6(c) to the extent
an 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. For the reasons
stated below, Applicants assert that the requested exemptions satisfy
the standards of Section 6(c).
A. Request for Exemptions Relating to Definition of ``Variable Life
Insurance Contract''
1. Applicants note that Rule 6c-3 under the 1940 Act provides that
a separate account that meets the requirements of Rule 6e-2(a)\8\ and
registers as an investment company under the 1940 Act also is exempt
from the 1940 Act provisions set forth in Rule 6e-2(b), except for
Sections 7 and 8(a), under the same terms and conditions as a separate
account claiming exemption directly under Rule 6e-2.\9\ Applicants
state that the Separate Account satisfies the conditions of Rule 6e-
2(a) and, therefore, is entitled to rely on Rule 6e-3. Accordingly, the
Separate Account is exempt from the provisions of the 1940 Act
specified in paragraph (b) of Rule 6e-2, except for Sections 7 and 8(a)
of the 1940 Act, under the same terms and conditions as a separate
account claiming exemption under Rule 6e-2.
\8\Rule 6e-2(a) states that ``a separate account * * * shall,
except for the exemptions provided in paragraph (b) [of Rule 6e-2],
be subject to all provisions of [the 19040 Act] * * * as though such
separate account were a registered investment company issuing
periodic payment plan certificates,'' provided that the conditions
set forth in Rule 6e-2(a) are met. Thus, Rule 6e-2(a) contemplates
that a variable life separate account relying on Rule 6e-2 will not
be registered under the 1940 Act.
\9\Accordingly, all registered separate accounts issuing
variable life insurance products do so in reliance on Rule 6c-3, and
not directly in reliance on Rules 6e-2 or 6e-3(T), as applicable.
Applicants represent that the application will be amended during the
notice period to reflect these statements.
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Rule 6e-2(c)(1) defines a ``variable life insurance contract'' to
include only life insurance contracts that provide both a death benefit
and a cash surrender value which vary to reflect the investment
experience of the separate account, and that guarantee that the death
benefit will not be less than an initial dollar amount stated in a
contract. The required guaranteed minimum death benefit need be
provided only so long as payments are duly made in accordance with the
contract's terms.
2. Applicants submit that under the Contracts the Death Benefit
varies to reflect investment experience within the meaning of Rule 6e-
2(c)(1). Applicants concede, however, that the Death Benefit is not
precisely the type of variable death benefit contemplated when Rule 6e-
2 was adopted, and that the Contracts also contain other provisions
that are not specifically addressed in Rule 6e-2.
3. Applicants believe that Option 2 Death Benefit falls within the
requirement that it ``vary to reflect the investment experience of the
separate account,'' although it varies only when Account Value exceeds
Benchmark Value. Applicants submit that this situation is analogous to
more conventional scheduled premium variable life insurance contracts
where death benefits are increased when investment experience exceeds
an assumed investment rate. Applicants assert that Rule 6e-2(c)(1)
clearly contemplates that a death benefit would vary only if it exceeds
a guaranteed minimum death benefit.
4. Applicants state, however, that Option 1 will fail to satisfy
this requirement if the Death Benefit has not been otherwise increased
to provide the minimum death benefit required by Section 7702 of the
Code of the variable insurance amount.
5. Applicants request exemptions from the definition of ``variable
life insurance contract'' in Rule 6e-2(c)(1) and from all Sections of
the 1940 Act and rules thereunder specified in Rule 6e-2(b) (other than
Sections 7 and 8(a)), under the same terms and conditions applicable to
a separate account that satisfies the conditions set forth in Rule 6e-
2(a), and to the extent necessary to permit the offer and sale of the
Contracts in reliance on Rule 6e-2, except as otherwise set forth
herein.\10\
\10\Both Death Benefit Options provide for a guaranteed minimum
death benefit at least equal to the Contract's initial Face Amount,
as required by Rule 6e-2(c)(1). The Contracts also permit a
reduction in Face Amount (including reductions through partial
withdrawals). Certain provisions of Rule 6e-2, such as paragraph
(c)(3), recognize the existence of partial withdrawals; in addition,
partial withdrawals and reductions in Face Amount are common
features in Contracts governed by Rule 6e-2. Applicants do not seek
exemptive relief in this regard.
Applicants also state that they believe the Contract Options
provide an additional benefit to a Contract owner by making it
possible to continue insurance protection and participation in the
Separate Account, if desired, even though the Contract owner may not
continue to pay Contract Premiums. Similarly, Applicants believe the
existence of the Primary Insured Term Rider and Fixed-Rate Option
enhance the benefits available to a Contract owner. Applicants
believe the availability of these options does not modify the basic
characteristics of the Contract and, therefore, is consistent with
the fundamental nature of the Contracts as variable life insurance
contracts under paragraph (c)(1) of Rule 6e-2. [[Page 30141]]
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6. Applicants submit that the definition of ``variable life
insurance contract'' in Rule 6e-2(c)(1) was drafted at a time when all
the variable life insurance contracts then contemplated clearly met
this definition, and that the considerations that led the Commission to
grant the exemptions in Rule 6e-2 did not depend in any material way
upon the fact that the death benefit, as well as cash values, varied
with investment experience. Nor did such considerations depend on
whether a scheduled premium contract also provided for substantial
premium payment flexibility and other features so long as the scheduled
premiums, if paid when due, provided for a minimum death benefit
guaranteed to at least equal the initial face amount.
7. Applicants further submit that the extent to which favorable
investment experience is used to increase death benefits rather than
cash values differs considerably among the contracts offered by
different issuers in reliance on Rule 6e-2. Applicants also submit
that, under all contract designs, the degree to which investment
performance changes the death benefit necessarily has an impact on cash
values under the Contracts.
8. Applicants represent, that, generally, higher death benefits
require higher cost of insurance deductions which, in turn, result in
lower cash values. Applicants state that it is desirable for purchasers
to be free to choose a benefit structure which they believe suits their
own needs with respect to the relationship of cash value, death benefit
and investment performance. Applicants also state that Contract owners
can do this by, for example, deciding whether to apply excess value to
purchase extra death benefit. Using excess value for this purpose will
maximize the guaranteed death benefit in the event of favorable
investment experience, but will cause Account Value to be less than it
otherwise would be.
9. Applicants also submit that the considerations that led the
Commission to adopt Rules 6c-3 and 6e-2 apply equally to the Separate
Account and the Contracts, and that the exemptions provided by these
rules would be granted to the Separate Account and to the other
Applicants on the terms specified in those rules, except to the extent
that further exemption from those terms is specifically requested
herein.
B. Request for Exemptions Relating to Sales and Administrative Charges
1. Applicants request exemptions from Sections 2(a)(32), 2(a)(35),
22(c), 26(a)(2), 27(a)(1), 27(c)(2), 27(d) and Rules 6e-2(b)(1),
(b)(12), (b)(13)(i), (b)(13)(iv), (b)(13)(v) and (c)(4), and Rule 22c-1
to the extent necessary to permit deductions of: (a) part of a
Contract's sales charge from premium payments and part from Account
Value as a CDSC, and (b) the CDAC from Account Value. Both the CDSC and
the CDAC will be deducted on surrender, Face Amount reduction
(including upon partial withdrawals), or lapse.
2. Section 2(a)(35) and Rules 6e-2 (b)(1) and (c)(4). Applicants
assert that Section 2(a)(35)\11\ and Rules 6e-2 (b)(1) and (c)(4)\12\
may be read to contemplate that the sales charge for a variable life
insurance contract will be deducted from premium payments. Applicants
submit that Guardian's deduction of the CDSC from Account Value may be
deemed inconsistent with these provisions. Further, deduction of the
CDSC also may be deemed inconsistent with Rule 6e-2(c)(4) because, in
order to facilitate the payment and other flexibility features under
the Contracts, the CDSC is computed based on the lesser of actual
payments made or Basic Scheduled Premiums payable (rather than as the
excess of actual premium payments made over certain amounts, as
required by the literal terms of that provision). Accordingly,
Applicants request exemptions from Section 2(a)(35) and Rule 6e-2
(b)(1) and (c)(4) to the extent necessary to permit part of the
Contracts' sales charge to be deducted from premium payments and part
as a CDSC upon surrender, Face Amount reduction (including upon partial
withdrawal) or lapse of a Contract.
\11\``Sales load'' is defined under Section 2(a)(35), in
relevant part, as:
``the difference between the price of a security to the public
and that portion of the proceeds from its sale which is received and
invested or held for investment by the issuer (or in the case of a
unit investment trust, by the depositor or trustee), less any
portion of such difference deducted for trustee's or custodian's
fees, insurance premiums, issue taxes, or administrative expenses or
fees which are not properly chargeable to sales or promotional
activities.''
\12\Under Rule 6e-2(b)(1), ``sales load'' has the meaning set
forth in Rule 6e-2(c)(4), which defines ``sales load'' charged on
any payment as the excess of the payment over the sum of certain
other amounts.
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In addition, Applicants argue that Rule 6e-2(c)(4) can be construed
to allow the imposition of a sales charge on other than premiums
because the definition of ``sales load'' in the Rule does not reflect
the actual methodology of administering variable life insurance
contracts, referring in subparagraphs (i) and (ii), for example, to
other amounts that are not deducted from payments. To this extent,
Applicants assert that the applicability of the definition need not be
limited to any particular form of sales load. Accordingly, Applicants
submit that the CDSC is consistent with the definition of ``sales
load'' set forth in Rule 6e-2(c)(4). Applicants, however, request the
exemptions noted above in order to avoid any question concerning full
compliance with the 1940 Act and any regulations thereunder.
3. Section 27(a)(1) and Rule 6e-2(b)(13)(i). Section 27(a)(1)
limits sales load in terms of a maximum percentage of payments to be
made on a periodic payment plan certificate. Rule 6e-2(b)(13)(i) limits
the amount of sales charges on a variable insurance contract to a
maximum of 9% of the payments to be made under the contract during a
period equal to or the lesser of (a) 20 years or (b) the anticipated
life expectancy of the insured, based on the 1958 Commissioners'
Standard Ordinary Mortality Table (``1958 CSO Tables'').
Applicants assert that Section 27(a)(1) and Rule 6e-2(b)(13)(i)
could be read to contemplate that the sales charge under the Contracts
will be deducted from Premium Payments prior to their allocation to the
Separate Account. Consequently, Guardian's deduction of part of its
sales charge as a CDSC may be deemed inconsistent with the foregoing
provisions to the extent that the sales charge is deducted from other
than premium payments. Applicants thus request exemptions from Section
27(a)(1) and Rule 6e-2(b)(13)(i) to the extent necessary to permit part
of the Contracts' sales charge to be deducted as a CDSC upon surrender,
Face Amount reduction (including upon partial withdrawal) or lapse.
4. Sections 26(a)(2) and 27(c)(2). Applicants state that Sections
26(a)(2)\13\ [[Page 30142]] and 27(c)(2)\14\ may be read to require
that proceeds of all Premium Payments under a Contract be deposited in
the Separate Account, and that no payment be made from the Separate
Account to any Applicant, or any affiliated person thereof, except for
bookkeeping and other administrative services. Accordingly, Guardian's
imposition of the CDSC may be deemed to be inconsistent with the
foregoing provisions to the extent that the deduction could constitute
payment for an expense not specifically permitted. Applicants thus
request exemptions from Sections 26(a)(2) and 27(c)(2) to the extent
necessary to permit the CDSC to be deducted upon surrender, Face Amount
reduction (including upon partial withdrawal) or lapse of a Contract.
\13\Section 26(a)(2) provides, in relevant part, that: ``no
principal underwriter for a depositor of a registered unit
investment trust shall sell any security of which the trust is the
issuer unless the instrument pursuant to which the security is
issued provides that no payment to the depositor of or the principal
underwriter for such trust, or to any affiliated person of such
depositor or underwriter, shall be allowed the trustee or custodian
as an expense, expect that provision may be made for the payment to
any such person of a fee, not exceeding such reasonable amount as
the Commission may prescribe, as compensation for performing
bookkeeping and other administrative services of a character
normally performed by the trustee or custodian itself.''
\14\Section 27(c)(2) provides, in relevant part, that: ``it
shall be unlawful for any registered investment company issuing
periodic payment plan certificates, or for any depositor of or
underwriter for such company, to sell any such certificate unless
the proceeds of all payments on such certificate (except such
amounts as are deducted for sales load) are deposited with a trustee
or custodian having specified qualifications and are held by such
trustee or custodian under an indenture or agreement containing
specified provisions.''
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5. Sections 2(a)(32), 27(c)(1) and 27(d), Rules 6e-2(b)(12),
(b)(13)(iv) and (b)(13)(v). Sections 2(a)(32), 27(c)(1) and 27(d)
prohibit Applicants from selling a Contract unless it is a ``redeemable
security,'' defined under Section 2(a)(32) as entitling an owner of a
Contract, upon surrender, to receive approximately his or her
proportionate share of the Separate Account's current net assets.
Section 27(d) provides a Contract owner with certain surrender and
sales charge refund rights.
Rules 6e-2(b)(12), (b)(13)(iv) and (b)(13)(v) provide exemptions
from Section 27(a)(1), and Rule 6e-2(b)(13)(iv) and (b)(13)(v) afford
exemptions from Section 27(d), to the extent necessary for cash value
to be regarded as satisfying the redemption and sales charge refund
requirements of the 1940 Act. Applicants note, however, that the
exemptions afforded by Rules 6e-2(b)(12), 6e-2(b)(13)(iv) and
(b)(13)(v) may not contemplate the deduction of the Surrender Charge
(i.e., the CDSC and the CDAC). Guardian's deduction of the Surrender
Charge can be viewed as reducing the proceeds that the Contract owner
would receive on surrender below a Contract owner's proportionate share
of the Separate Account's current net assets.
Further, Applicants note that Rule 6e-2 was adopted at a time when
less flexibility regarding payments and other contract features was
offered than subsequently has been permitted. Because of these
features, Applicants state that it is unclear how the technical sales
load computation provisions in Rule 6e-2 apply to the Contracts.
Accordingly, because certain provisions of the Contracts' sales charge
structure may be inconsistent with the provisions of Sections 2(a)(32),
27(c)(1) and 27(d) and paragraphs (b)(12), (b)(13)(iv) and (b)(13)(v)
of Rule 6e-2, Applicants request exemptions from those provisions to
the extent necessary to permit part of the Contracts' sales charge to
be deducted from Premium Payments and part to be deducted as a CDSC,
and to permit the deduction of the CDAC on surrender, Face Amount
reduction (including upon partial withdrawal) or lapse.
In addition, Applicants submit that, although Section 2(a)(32) does
not specifically contemplate the imposition of a sales charge and an
administrative charge at the time of redemption, such charges are not
necessarily inconsistent with the definition of ``redeemable
security.'' Applicants further submit that the charges are little
different, for this purpose, from the ``redemption'' charge authorized
in Section 10(d)(4) of the 1940 Act. Applicants argue that Congress
intended that such a redemption charge, expressly described as a
``discount from net asset value,'' be deemed consistent with the
concept of ``proportionate share'' under Section 2(a)(32).
Consistent with Section 2(a)(32), Applicants therefore assert that
the Contracts will be ``redeemable securities'' because the Contracts
provide for full surrender for the Net Cash Surrender Value and are
expected to provide for partial withdrawals of Cash Surrender Value in
excess of the Benchmark value. Applicants represent that the prospectus
for the Contracts will disclose the contingent deferred nature of part
of the sales charge and of the administrative charges. Accordingly,
Applicants state that there will be no restriction on, or impediment
to, surrender that should cause the Contracts to be considered other
than a redeemable security. Upon surrender or lapse, a Contract owner
will receive his or her proportionate share of the Separate Account
(i.e., the amount of net Basic Scheduled Premiums and unscheduled
payments made, reduced by the amount of all charges and deductions and
increased or decreased by the amount of investment performance credited
to a Contract).
6. Section 22(c) and Rules 6e-2(b)(12) and 22c-1. Applicants state
that Rule 22c-1 prohibits the redemption of a Contract except at its
current net asset value next computed after receipt of the request for
surrender or partial withdrawal. Rule 6e-2(b)(12) provides exemptions
from the redemption procedures mandated by Rule 22c-1. Nonetheless,
Applicants submit that the rule may not contemplate the deduction of
the Surrender Charge, which can be viewed as causing a Contract to be
redeemed at a price based on less than a Contract's current net asset
value next computed after full or partial surrender of a Contract.
Consequently, the Surrender Charge may be deemed to be inconsistent
with the foregoing rules.
Applicants submit that Rule 22c-1 and Rule 6e-2(b)(12) together
impose requirements with respect to both the amount payable on
surrender and the time as of which such amount is calculated. The
requirement of these rules regarding the amount payable to a Contract
owner on surrender is essentially the same as the requirements that are
explicit or implicit in certain other provisions of the 1940 Act and
rules thereunder from which Applicants are requesting exemptions.
Regarding the timing requirement of Rule 22c-1, Applicants state
that they will determine the Net Cash Surrender Value under a Contract
consistent with their current procedures and in accordance with Rules
6e-2(b)(12)(i) and 22c-1, and on a basis next computed after receipt of
a Contract owner's request for surrender of a Contract or partial
withdrawal. In addition, Applicants assert that the Commission's
purpose in adopting Rule 22c-1 was to minimize (i) dilution of the
interests of the other security holders and (ii) speculative trading
practices that are unfair to such holders. Applicants state that the
CDSC would in no way have the dilutive effect that Rule 22c-1 is
designed to prohibit because a surrendering Contract owner would
``receive'' no more than an amount equal to the Net Cash Surrender
Value determined pursuant to the formula set out in his or her Contract
and after receipt of the request. Further, variable life insurance
contracts do not lend themselves to the kind of speculative short-term
trading that Rule 22c-1 was aimed against, and, further, the CDSC would
discourage, rather than encourage, any such trading. [[Page 30143]]
7. In support of their request for exemptions relating to sales and
administrative charges, discussed above, Applicants submit that the
deduction on a contingent deferred basis of part of the sales charge
and the administrative charge will be advantageous to Contract owners
for the following reasons.
a. First, the deferred charge structure has been accepted as an
appropriate feature of life insurance products under Rule 6e-3(T) as
well as pursuant to exemptive relief granted by the Commission, expands
investors choices without sacrificing investor protection, and
reinforces the intention that the product be held as a long term
investment.
b. Second, the amount of a Contract owner's premium payment
allocated to the Separate Account and available to earn a return for a
Contract owner will be greater than it otherwise would have been if the
sales and administrative charges were deducted from Premiums.
c. Third, Applicants represent that the total dollar amount of a
sales load payable under a Contract is no higher than would be
permitted by Rule 6e-2(b)(13), if taken entirely as front-end
deductions from Premium Payments under a Contract for which all Premium
Payments have been paid, as well as from any unscheduled Premium
Payments. Moreover, for a Contract owners who does not lapse or
surrender in the early Contract years, the dollar amount of the sales
load is lower than otherwise would be permitted if taken entirely as
front-end deductions. Furthermore, no Surrender Charge is deducted from
any Death Benefit paid under a Contract.
Similarly, the total dollar amount of the CDAC under a Contract is
no higher than if the charge were taken in full for the first Contract
year, and is less for Contract owners who do not lapse, reduce the Face
Amount by request or partial withdrawal, or surrender prior to the
thirteenth Contract year. Applicants represent that this charge has not
been increased to take into account the time value of money or the fact
that not all Contract owners will incur the charge. Applicants state
that Guardian does not anticipate a profit on the CDAC.\15\
\15\Guardian intends to rely on Rule 6e-2(b)(13)(iii)(C) with
regard to the CDAC.
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d. Fourth, the allocation of a greater amount of Premium Payments
to the Separate Account initially reduces the net amount at risk (Death
Benefit less Account Value), upon which the cost of insurance charge is
based.
8. Applicants submit that if Guardian is not permitted to charge
sales and administrative charges in the form of contingent deferred
charges and deducts these charges entirely from premiums, it could be
charging continuing Contract owners more than otherwise may be
necessary to recover the distribution and issuance costs attributable
to such Contract owners. Applicants contend that their charge
structure, by contrast, provides greater equity among both Contract
owners who surrender and those who continue as Contract owners.
9. Applicants state that the CDSC, consistent with the definition
in Section 2(a)(35), is an amount ``chargeable to sales or promotional
activities.'' Although not imposed on ``payments,'' Applicants submit
that the charge will cover expenses associated with the offer and sales
of the Contracts, including commissions paid to sales personnel,
promotional expenses and sales administration expenses. Similarly, the
CDAC is for estimated administrative expenses connected with the
Contracts. Applicants represent that these administrative expenses
exclude any costs properly attributable to sales or distribution
activity.
10. Applicants contend that the fact that the timing of the
imposition of the Surrender Charge may not fall within the literal
pattern of all the provisions discussed herein does not change the
essential nature of the sales charge structure.
11. Although the methodology for computing sales charges under the
Contracts may not have been contemplated by Rule 6e-2 as originally
adopted, Applicants represent that the percentage of sales load imposed
during the first two Contract Years will be no greater than the sum of:
30% of payments made during the first Contract Year up to an amount
equal to an annual Basic Scheduled Premium, plus 10% of payments made
during the second Contract Year up to an amount equal to an annual
Basic Scheduled Premium, plus 9% of all unscheduled Premium Payments
made during the first two Contract Years. Additionally, the percentage
of sales load under the Contract will not exceed 9% of Basic Scheduled
Premiums expected to be paid over the shorter of 20 years or the
expected life expectancy of the insured. Moreover, Guardian does not
anticipate making a profit on the CDAC. Therefore, Applicants submit
that the Contract is consistent with the principals and policies
underlying the limitations of Section 27 and Rule 6e-2(b)(13).
C. Deductions From Account Value of the Cost of Insurance, Guaranteed
Insurance Amount Charge and Premium Assessments
1. Applicants submit that Sections 26(a)(2) and 27(c)(2), read
together, could be interpreted to prohibit Guardian from deducting the
following charges from Account Value: (a) Cost of insurance charge, (b)
guaranteed insurance amount charge, and (c) if a Contract Premium is
``skipped,'' charges for Premium Assessments in connection with the
Premium Skip Option. Accordingly, Applicants request exemptions from
Sections 26(a)(2) and 27(c)(2) and Rule 6e-2(b)(13)(iii)\16\ to the
extent necessary to permit deduction of these charges from Account
Value.\17\ Applicants submit that, as described above, the method of
deducting these charges is fair and reasonable in that the charges are
not designed to yield more revenues than if they were assessed solely
against premium payments.
\16\Rule 6e-2(b)(13)(iii) provides an exemption from Sections
27(c)(2) and 26(a)(2), subject to certain conditions, which
Applicants submit they satisfy as noted herein.
\17\Applicants state that they are not seeking exemptions from
these provisions with regard to the maximum handling fee for
unscheduled premium payments that may be imposed under the Contracts
(which will be deducted from premium payments in reliance on Rule
6e-2(c)(4)(iv), or the CDAC, the partial withdrawal charge, the
transfer charge that may be imposed under the Contracts, or the
Contract and Administration Charges deducted as part of the monthly
deduction (each of which will be deducted pursuant to Rule 6e-
2(b)(13)(iii). Applicants state that each of these charges is
reasonable, and in an amount that does not exceed the expenses to
which such charge relates that are currently anticipated to be
incurred by Guardian over the lifetime of the insureds covered by
the Contracts. Applicants represent that the maximum amount of each
of these fees and charges is guaranteed not to increase during the
term of the Contracts. Guardian does not anticipate realizing a
profit on these fees or charges.
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2. Cost of Insurance Charges. Applicants submit that the method of
deducting this charge is fair and reasonable. Applicants represent that
they believe all other variable life insurance contracts provide for
cost of insurance deductions from cash value, which under a Contract
consists of the unloaned Account Value.
3. Premium Assessments. As described above, Premium Assessments are
deducted from Premium Payments before the Basic Scheduled Premium (net
of Premium Charges) is allocated to the Separate Account. However,
when, pursuant to the Premium Skip Option, Premiums are ``skipped,''
and not paid, an amount equal to 90.5% of any Premium Assessment that
otherwise would be deducted from a premium will be deducted from
Account Value on [[Page 30144]] each Contract Anniversary on which the
``skipped'' Premium otherwise would be due or, in later, on the date
the Premium Skip Option is effected. The remaining 9.5% is deducted as
part of the Premium Charges when any unscheduled Premium Payment is
made. Thus, part of the Premium Charges applied to any unscheduled
Payment is to collect charges covered by Rules 6e-2(c)(4)(vi) and
(vii), which refer to charges for substandard risk and for incidental
insurance benefits deducted from Account Value.
Applicants represent that if Premium Assessments were required to
be deducted solely from Premiums, it would be necessary for Guardian:
(a) to reduce Contract payment flexibility, and/or (b) further limit
the classes of insureds for whom a Contract will be available and limit
or eliminate the rider benefits to be made available under a Contract.
Applicants submit that purchasers and prospective purchasers of a
Contract would find these results undesirable.
Rule 6e-2(c)(4), among other things, requires that charges referred
to in Rule 6e-2(c)(4)(vi) and (vii) be subtracted from gross payments
in determining amounts of ``sales load.'' Rule 6e-2(c)(7) requires the
amount of gross premiums attributable to such charges to be subtracted
for purposes of determining the amount of ``payments'' on which sales
load percentages are calculated in order to evaluate compliance with
Rule 6e-2's various sales load limitations. Accordingly, Applicants
subtract any Premium Assessments (including that deducted from Premiums
and from Account Value upon exercise of Premium Skip Option) from
Premium Payments to compute ``sales load'' under Rule 6e-2(c)(4) and to
compute the amount of payments under Rule 6e-2(c)(7).
Where, because of the payment and other flexibility features of a
contract, the entire Premium for a Contract Year is not paid, Rule 6e-
2(c)(7) might still require Applicants to deduct certain amounts from
any payments that were made, for sales load compliance purposes. These
deductions would be for payments made that would be deemed
``attributable'' to charges for substandard risks and incidental
insurance benefits. If this were so, Applicants would subtract the same
amount in determining the amount of sales load under paragraph (c)(4)
of Rule 6e-2. The amount would be the same, because part of any
payments deemed ``attributable'' to such charges would, in effect, be
deducted as a portion of Premium Charges, and part would be deducted as
a portion of Account Value upon exercise of the Premium Skip Option.
4. Guaranteed Insurance Amount Charge. Applicants represent that
the guaranteed insurance amount charge compensates Guardian for the
risk that it assumes in guaranteeing death benefits under a Contract.
Applicants submit that this charge essentially is an insurance charge
that was not contemplated at the time that the 1940 Act was adopted.
Although Rule 6e-2(c)(4)(iii) provides for such a charge, it does not
expressly authorize it to be deducted from Account Value.
Applicants submit that Rule 6e-3(T) authorizes deductions from
Account Value for a minimum death benefit guarantee charge in
connection with variable life insurance contracts qualified to rely on
that rule, conditioned on the life insurer's making certain
representations. Further, proposed amendments to Rule 6e-2 would
similarly authorize such deductions from Account Value. Accordingly,
Guardian makes the following representations and undertakings, which
are consistent with the proposed amendments:
(a) The level of the guaranteed insurance amount charge is
reasonable in relation to the risks assumed by Guardian under the
Contracts. The methodology used to support this representation is based
on an analysis of the pricing structure of the Contracts, including all
charges, and an analysis of the various risks, including special risks
arising out of Contract provisions that allow unscheduled payments and,
in certain circumstances, skipping Premiums. Guardian undertakes to
keep and make available to the Commission on request the documents or
memoranda used to support this representation.
(b) Guardian has concluded that: the proceeds from the sales
charges may not cover the expected costs of distribution; surplus
arising from the guaranteed insurance amount charge (among other
sources) may be used to cover the distribution costs; and there is a
reasonable likelihood that the distribution financing arrangements of
the Separate Account will benefit the Separate Account and the
Contracts owners. Guardian undertakes to keep and make available to the
Commission on request a memorandum setting forth basis of this
representation; and
(c) The Separate Account will invest only in management investment
companies that have undertaken, in the event they should adopt any plan
under Rule 12b-1 to finance distribution expenses, to have a board of
directors (or trustees, as appropriate), a majority of whom are not
interested persons of the company, formulate and approve such plan.
D. Request for Exemptions Relating to Use of 1980 CSO Tables
1. As discussed above, Rule 6e-2(b)(1) makes the definition of
``sales load'' in Rule 6e-2(c)(4) applicable to the Contracts. Section
27(a)(1) prohibits an issuer of periodic payment plan certificates from
imposing a sales load exceeding 9% of the payments to be made on such
certificates. Rule 6e-2(b)(13)(i) provides an exception from Section
27(a)(1) to the extent that sales load, as defined in Rule 6e-2(c)(4),
does not exceed 9% of payments to be made on the variable life
insurance contract during the period equal to the lesser of 20 years or
the anticipated life expectancy of the insured based on the 1958 CSO
Tables. Rule 6e-2(c)(4), in defining sales load, contemplates the
deduction of an amount for the cost of insurance based on the 1958 CSO
Tables and an assumed investment rate specified in the contract.\18\
\18\An assumed investment rate of 4% is specified in the
Contract and used for purposes of determining the required Basic
Scheduled Premiums. ``Assumed investment rate'' is defined by Rule
6e-2(c)(5) to be the net rate of investment return specified in the
contract which would result in neither an increase nor a decrease in
the variable death benefit of the contract above or below the
guaranteed minimum death benefit. Applicants submit that this
definition accurately describes the Contract's 4% assumed investment
rate only so long as all other assumptions used in establishing
Basic Scheduled Premiums holds true and only until the Death Benefit
is increased in order for the Contract to qualify as life insurance
for federal tax law purposes or the variable insurance amount is
applicable. Applicants assert, however, the Rule 6e-2(c)(5) has
never been interpreted to require that a contract's death benefit
always vary in relation to performance above or below the assumed
investment rate. Applicants believe it is appropriate to consider 4%
to be the assumed investment rate for purposes of Rule 6e-2(c)(5)
and, thus, seek no exemptive relief in this regard.
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2. Applicants assert it is appropriate that the deduction for the
cost of insurance be based on the 1980 CSO Tables in determining what
is deemed to be the sales load under the Contracts because: (a) the
1980 CSO Tables\19\ reflect more recent information and data about
mortality than the 1958 CSO Tables; (b) use of either the 1958 CSO
Tables or the 1980 CSO Tables be permitted under proposed amendments to
Rule 6e-2 for purposes of Rule 6e-2(b)(13)(i) and (c)(4), depending on
which relates to the insurance rates guaranteed under a contract; and
(c) the [[Page 30145]] 1980 CSO Tables must be used for all contracts
that rely on Rule 6e-3(T).
\19\Applicants state that the 1980 CSO Tables were adopted by
the National Association of Insurance Commissioners subsequent to
adoption of Rule 6e-2 by the Commission.
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3. Applicants further represent that: (a) Guardian uses the 1980
CSO Tables to establish Premium rates and determine reserve liabilities
for the Contracts; (b) the guaranteed cost of insurance rates under the
Contracts are based on the 1980 Tables; (c) the mortality rates
reflected in the 1980 CSO Tables more nearly approach the mortality
experience which Guardian believes will apply to the Contracts; and (d)
for Contracts issued for insured at advance ages, appropriate
adjustments have been made in the CDSC structure to ensure that,
subject to the other exemptive relief requested herein, the 9% standard
prescribed by Rule 6e-2(b)(13)(i) will be met over the expected
lifetimes of such insureds, based on the 1980 CSO Tables.
E. Request for Exemptions Relating to Custodianship Arrangements
1. Applicants state that Section 26(a)(1) and Section 26(a)(2), in
effect, prohibit Applicants from selling the Contracts unless the
Contracts are issued pursuant to a trust indenture or other such
instrument that designates one or more qualified trustees or custodians
to have possession of all securities in which Guardian and the Separate
Account invest. Applicants submit that Section 27(c)(2), in effect,
could be read to prohibit Applicants from selling the Contracts unless
the proceeds of all Premium Payments are deposited with a qualified
trustee or custodian. Applicants further submit that Rule 6e-
2(b)(13)(iii), in relevant part, provides an exemption from Sections
26(a)(1), 26(a)(2) and 27(c)(2), provided that Guardian complies with
all other applicable provisions of Section 26 as though it were a
trustee or custodian for the Separate Account and assuming it meets the
other requirements set forth in the rule.
2. Applicants assert that the holding of Fund shares by Guardian
and the Separate Account under an open account arrangement, without
having possession of share certificates and without a trust indenture
or other such instrument, may be deemed to be inconsistent with the
foregoing provisions. Nevertheless, Applicants represent that current
industry practice calls for separate accounts organized as UITs, such
as the Separate Account, to hold shares of management investment
companies in uncertificated form. This practice is believed to
contribute to efficiency in the purchase and sale of such shares by
separate accounts and to bring about cost savings generally. Therefore,
Applicants submit that the requirements of the 1940 Act and Rule 6e-2
regarding share ownership are in-consistent with current industry
practice and its rationale.
3. Applicants further note that the Commission has adopted and
proposed the following rules which would grant the requested
exemptions: (a) Rules 6e-3(T)(b)(13)(iii)(B) and (C), in effect, grant
the requested exemptions, but only for contracts covered by Rule 6e-
3(T); (b) proposed Rule 6e-2(b)(13)(iii)(B) would permit a life
insurer, such as Guardian, to hold the assets of a separate account
without a trust indenture or other such instrument; (c) proposed Rule
6e-2(b)(13)(iii)(C) would permit a separate account organized as a UIT
to hold the securities of registered investment companies, such as the
Funds, that offer shares to the Separate Account in uncertificated
form; and (d) Rule 26a-2, adopted by the Commission, affords exemption
essentially similar to those requested here regarding variable annuity
contracts. Applicants presume, based on information and belief, that
the Commission adopted or proposed the foregoing exemptive rules based
on a determination that safekeeping of separate account assets does not
necessarily depend on the presence of a trustee, custodian or trust
indenture or the issuance of share certificates, where state insurance
law protects separate account assets, and open account arrangements
foster administrative efficiency and cost savings.
4. The proposed exemptive provisions of Rule 6e-2(b)(13)(iii)(B)
and (C) subject a life insurer to certain conditions. Guardian
represents that it will: (a) comply with conditions of Rule 6e-
2(b)(13)(iii)(B) and (C); (b) comply with all other applicable
provision of Section 26 as if it were a trustee or custodian for the
Separate Account (subject to the other exemptive relief requested in
this application); and (c) will file with the insurance regulatory
authority of Delaware an annual statement of its financial condition in
the form prescribed by the National Association of Insurance
Commissioners, which most recent statement indicates that it (i) has a
combined capital and surplus of not less than $1 million, (ii) is
examined from time-to-time by the insurance regulatory authority of
Delaware as to its financial condition and other affairs, and (iii) is
subject to supervision and inspection with respect to its separate
account operations.
5. Applicants further believe that the Commission has determined
that compliance with such conditions, which contemplate state
protection of separate account assets, will help assure that the
exemptions will be consistent with the public interest, the protection
of investors and the purposes fairly intended by the policy and
provisions of the 1940 Act.
F. Request for Exemptions Relating to Waiver of Notice of Withdrawal
and Refund Rights
1. Section 27(e) and Rules 27e-1 and 6e-2(b)(13)(vii),\20\ in
effect require a notice of right of withdrawal and refund on Form N-
271-1 to be provided to Contract owners entitled to a refund of sales
load in excess of the limits permitted by Rule 6e-2b(13)(v). The
Contracts limit the amount of the CDSC that may be deducted by excess
sales load limits consistent with those set forth in Rule 6e-
2(b)(13)(v)(A). Thus, under the Contracts' sales load structure, no
excess sales load will be paid by or refunded to a Contract owner
surrendering, effecting a Face Amount reduction or lapsing in the first
two Contract years.\21\
\20\Section 27(e) requires, with respect to any periodic payment
plan certificate sold subject to Section 27(d) (which requires the
refund of any excess sales load paid during the first 18 months
after issuance), written notification of the right to surrender and
receive a refund of the excess sales load. Rule 27(e) establishes
the requirements for the notice mandated by Section 27(e) and
prescribes Form N-271-1 for that purpose. Rule 6e-2(b)(13), which
modifies the requirements of Section 27 and the rules thereunder,
adopts Form N-271-1 and requires it to be sent to a contract owner
upon issuance of a contract and again during any lapse period in the
first two contract years. The Form requires statements of (i) the
contract owner's right to receive back excess sales load for a
surrender during the first two contract years, (ii) the date that
the right expires, and (iii) the circumstances in which the right
may not apply upon lapse.
\21\Applicants submit that the application of the technical
sales load computation provisions in Rule 6e-2 to a modified
scheduled premium contract is unclear. Applicants state that the
reduction of the CDSC during the first two Contract Years is
intended to reflect the requirements of Rule 6e-2 and take into
account the Contract's payment flexibility in a manner that is
consistent with Rule 6e-3(T)(b)(13)(v)(A), which specifically
addresses flexible premium variable life insurance products.
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2. Rule 27e-1(a) specifies that no notice need be mailed when there
is otherwise no entitlement to receive any refund of sales load. Rule
27e-1 and Rule 6e-2 were both adopted in the context of front-end
loaded products only, and in the broader context of the companion
requirements in Section 27 for the depositor or underwriter to maintain
segregated funds as security to assure the refund of any excess sales
load.
3. Applicants submit that requiring delivery of Form N-271-1 could
confuse Contract owners and potentially encourage a Contract owner to
surrender during the first two Contract Years against the Contract
owner's best [[Page 30146]] interest to do so. Further, an owner of a
variable insurance contract with a declining deferred sales charge,
unlike a front-ended contract, does not foreclose his or her
opportunity at the end of the first two contract years to receive a
refund of monies spent. Not only has such an owner not paid any excess
load, but because the deferred charge declines over the life of the
Contract, the Contract owner may never have to pay it. Applicants
submit that encouraging a surrender during the first two Contracts
years could cost a Contract owner more in total sales load (relative to
total payments) than he or she otherwise would pay if the Contract,
which is designed as a long-term investment vehicle, were held for the
period originally intended.
4. Because of the absence of excess sales load, and therefore, the
absence of an obligation to assure repayment of that amount, Applicants
believe that the Contracts do not create the right in a Contract owner
which Form N-271-1 was designed to highlight. In the absence of this
right, Applicants submit that the notification contemplated by Form N-
271-1 creates an unnecessary and counterproductive administrative
burden the cost of which appears unjustified. Any other purpose
potentially served by the Form would already be addressed by the
required Form N-271-2 Notice of Withdrawal Right, generally describing
the charges associated with a Contract, and prospectus disclosure
detailing a Contract's sales load structure. Applicants assert that
neither Congress, in enacting Section 27, nor the Commission, in
adopting Rule 27e-1 and Rule 6e-2, could have contemplated the
applicability of Form N-271-1 in the context of a Contract with a
declining contingent deferred sales charge.
G. Deduction of Charge for Section 848 Deferred Acquisition Costs
1. Applicants request exemptive relief from Section 27(c)(2) of the
1940 Act to permit the deduction of the 1.0% charge from each Premium
Payment received under the Contracts, and from premiums received under
Other Contracts to be issued by Guardian through the Future Accounts to
reimburse Guardian for its increased federal tax burden resulting from
the application of Section 848 of the Code, as amended, to the receipt
of those premiums. Applicants also request exemptions from subparagraph
(c)(4)(v) of Rules 6e-2 and 6e-3(T) under the 1940 Act to permit the
proposed deductions to be treated as other than ``sales load,'' as
defined under Section 2(a)(35) of the 1940 Act, for purposes of Section
27 and the exemptions from various provisions of that Section found in
Rules 6e-2 and 6e-3(T), respectively.
2. Applicants state that Section 848, as amended, requires life
insurance companies to capitalize and amortize over ten years certain
general expenses for the current year rather than deduct these expenses
in full from the current year's gross income, as allowed under prior
law. Section 848 effectively accelerates the realization of income from
specified contracts and, consequently, the payment of taxes on that
income. Taking into account the time value of money, Section 848
increases the insurance company's tax burden because the amount of
general deductions that must be capitalized and amortized is measured
by the premiums received under the Contracts.
3. Deductions subject to Section 848 equal a percentage of the
current year's net premiums received (i.e., gross premiums minus return
premiums and reinsurance premiums) under life insurance or other
contracts categorized under this Section. The Contracts will be
categorized under Section 848 as life insurance contracts requiring
7.7% of the net premiums received to be capitalized and amortized under
the schedule set forth in Section 848(c)(1).
4. The increased tax burden on every $10,000 of net premiums
received under the Contracts is quantified by Applicants as follows.
For each $10,000 of net premiums received in a given year, Guardian
must capitalize $770 (i.e., 7.7% of $10,000), and $38.50 of this amount
may be deducted in the current year. The remaining $731.50 ($770 less
$38.50) is subject to taxation at the corporate tax rate of 35% and
results in $256.03 (.35% x $731.50) more in taxes for the current
year than Guardian otherwise would have owned prior to OBRA 1990.
However, the current tax increase will be offset partially by
deductions allowed during the next ten years, which result from
amortizing the remainder of the $770 ($77 in each of the following nine
years and $38.50 in year ten).
5. It is Guardian's business judgement that it is appropriate to
use a discount rate of 10% in evaluating the present value of its
future tax deductions for the following reasons. Guardian has computed
its cost of capital as the after-tax rate of return that it seeks to
earn on its surplus, which is in excess of 10%. To the extent that
surplus must be used by Guardian to pay its increased federal tax
burden under Section 848, such surplus will be unavailable for
investment. Thus, the cost of capital used to satisfy this increased
tax burden essentially will be the after-tax rate of return Guardian
seeks on its surplus, which is in excess of 10%. Accordingly,
Applicants submit that the rate of return on surplus is appropriate for
use in this present value calculation.
6. To the extent that the 10% discount rate is lower than
Guardian's actual rate of return on surplus, the calculation of this
increased tax burden will continue to be reasonable over time, even if
the corporate tax rate applicable to Guardian is reduced, or its
targeted rate of return is lowered.
7. In determining the after-tax rate of return used in arriving at
the discount rate, Guardian considered a number of factors that apply
to itself and to its parent, including market interest rates,
anticipated long-term growth rates, the risk level for this type of
business that is acceptable, inflation, and available information about
the rate of return obtained by other life insurance companies. Guardian
represents that these are appropriate factors to consider.
8. First, Guardian projects its future growth rate, including the
future growth rate of its parent, based on sales projections, current
interest rates, inflation rate and amount of surplus that can be
provided to support such growth. Guardian then uses the anticipated
growth rate and the other factors to set a rate of return on surplus
that equals or exceeds this rate of growth. Of these other factors,
market interest rates, acceptable risk level and inflation rate receive
significantly more weight than information about the rates of return
obtained by other companies.
9. Guardian and its parent seek to maintain a ratio of surplus to
assets that is established based on its judgment of the risks
represented by various components of its assets and liabilities.
Maintaining the ratio of surplus to assets is critical to offering
competitively priced products and to maintaining the superior ratings
now assigned to Guardian and its parent by various rating agencies.
Consequently, Guardian's surplus should grow at least at the same rate
as its assets.
10. Using a federal corporate tax rate of 35%, and assuming a
discount rate of 10%, the present value of the tax effect of the
increased deductions allowable in the following ten years, which
partially offsets the increased tax burden, comes to $152.96. The
effect of Section 848 on the Contracts is therefore an increased tax
burden with a present value of $91.15 for each $10,000 of net premiums
(i.e., $244.11 less $152.96).
11. Guardian does not incur incremental federal income tax when it
passes on state premium taxes to Contract Owners because state premium
[[Page 30147]] taxes are deductible in computing federal income taxes.
Conversely, federal income taxes are not deductible in computing
Guardian's federal income taxes. To compensate Guardian fully for the
impact of Section 848, Guardian must impose an additional charge to
make it whole for the $91.15 additional tax burden attributable to
Section 848, as well as the tax on the additional $91.15 itself, which
can be determined by dividing $91.15 by the complement of 35% federal
corporate income tax rate (i.e., 65%), resulting in an additional
charge of $140.23 for each $10,000 of net premiums, or 1.40%.
12. Based on its prior experience, Guardian reasonably expects to
fully take almost all future deductions. It is Guardian's judgment that
a charge of 1.00% of Basic Scheduled Premiums and unscheduled Premium
Payments would reimburse it for the increased federal income tax
liabilities under Section 848. Applicants represent that the 1.00%
charge will be reasonably related to Guardian's increased federal
income tax burden under Section 848. This representation takes into
account the benefit to Guardian of the amortization permitted by
Section 848 and the use of a 10% discount rate (which is equivalent to
Guardian's rate of return on surplus) in computing the future
deductions resulting from such amortization.
13. Guardian believes, however, that the 1.00% charge would have to
be increased if future changes in, or interpretations of, Section 848
or any successor provision result in a further increased tax burden due
to receipt of premiums. The increase could be caused by a change in the
corporate tax rate, or in the 7.7% figure, or in the amortization
period. The Contracts will reserve the right to increase the 1.00%
charge in response to future changes in, or interpretations of, Section
848 or any successor provisions that increase Guardian's tax burden.
14. Applicants assert that it is appropriate to deduct this charge,
and to exclude the deduction of this charge from sales load, because it
is a legitimate expense of the company and not for sales and
distribution expenses. Applicants represent that this charge will be
reasonably related to Guardian's increased federal tax burden.
15. The Separate Account is, and the Future Accounts will be,
regulated under the 1940 Act as issuers of periodic payment plan
certificates. Accordingly, the Separate Account, the Future Accounts,
Guardian (as depositor), and Guardian Services (as principal
underwriter) are deemed to be subject to Section 27 of the 1940 Act.
16. Section 27(c)(2) prohibits the sale of periodic payment plan
certificates unless the following conditions are met. The proceeds of
all payments (except amounts deducted for ``sales load'' must be held
by a trustee or custodian having the qualifications established under
Section 26(a)(1) for the trustees of UITs. Sales loads, as defined
under Section 2(a)(35), are limited by Sections 27(a)(1) and 27(h)(1)
to a maximum of 9% of total payments on periodic payment plan
certificates. These proceeds also must be held under an indenture or
agreement that conforms with the provisions of Section 26(a)(2) and
Section 26(a)(3) of the 1940 Act.
17. Certain provisions of Rules 6e-2 and 6e-3(T) provide a range of
exemptive relief. Rule 6e-2 provides exemptive relief if the separate
account issues scheduled variable life insurance contracts as defined
in Rule 6e-2(c)(1). Rule 6e-3(T) provides exemptive relief if the
separate account issues flexible premium variable life insurance
contracts, as defined in subparagraph (c)(1) of that Rule.
18. Applicants state that paragraph (b)(13)(iii) of Rule 6e-2
implicitly provides, and paragraph (b)(13)(iii) of Rule 6e-3(T)
explicitly provides, exemptive relief from Section 27(c)(2) to permit
an insurer to make certain deductions, other than sales load, including
the insurer's tax liabilities from receipt of premium payments imposed
by states or by other governmental entities. Applicants assert that the
proposed deduction with respect to Section 848 of the Code arguably is
covered by subparagraph (b)(13)(iii) of each Rule. Applicants note,
however, that the language of paragraph (c)(4) of the Rules appears to
require that deductions for federal tax obligations from receipt of
premium payments be treated as ``sales load.''
19. Applicants state that paragraph (b)(1), together with paragraph
(c)(4), of each Rule provides an exemption from the Section 2(a)(35)
definition of ``sales load'' by substituting a new definition to be
used for purposes of each respective Rule. Rule 6e-2(c)(4) defines
``sales load'' charged on any payment as the excess of the payment over
certain specified charges and adjustments, including a deduction for
state premium taxes. Rules 6e-3(T)(c)(4) defines ``sales load'' during
a period as the excess of any payments made during that period over
certain specified charges and adjustments, including a deduction for
state premium taxes. Under a literal reading of paragraph (c)(4) of the
Rules, a deduction for an insurer's increased federal tax burden does
not fall squarely into those itemized charges or deductions, arguably
causing the deduction to be treated as part of ``sales load.''
20. Applicants state that the public policy that underlies
paragraph (b)(13) of each Rule, and particularly subparagraph
(b)(13)(i), like that which underlies paragraphs (a)(1) and (h)(1) of
Section 27, is to prevent excessive sales loads from being charged for
the sale of periodic payment plan certificates. Applicants submit that
this legislative purpose is not furthered by treating a federal income
tax charge based on premium payments as a sales load because the
deduction is not related to the payment of sales commissions or other
distribution expenses. Applicants assert that the Commission has
concurred with this conclusion by excluding deductions for state
premium taxes from the definition of sales load in paragraph (c)(4) of
each Rule.
21. Applicants submit that the source for the definition of ``sales
load'' found in paragraph (c)(4) of each Rule supports this analysis.
Applicants believe that, in adopting paragraph (c)(4) of each Rule, the
Commission intended to tailor the general terms of Section 2(a)(35) to
variable life insurance contracts to ease verification by the
Commission of compliance with the sales load limits of subparagraph
(b)(13)(i) of each Rule. Just as the percentage limits of Section
27(a)(1) and 27(h)(1) depend on the definition of sales load in Section
2(a)(35) for their efficacy, Applicants assert that the percentage
limits in subparagraph (b)(13)(i) of each Rule depend on paragraph
(c)(4) of each Rule, which does not depart, in principal, from Section
2(a)(35).
22. Applicants submit that the exclusion from the definition of
``sales load'' under Section 2(a)(35) of deductions from premiums for
``issue taxes'' suggests that it is consistent with the policies of the
1940 Act to exclude from the definition of ``sales load'' in Rules 6e-2
and 6e-3(T) deductions made to pay an insurer's costs attributable to
its federal tax obligations. Additionally, the exclusion of
administrative expenses or fees that are ``not properly chargeable to
sales or promotional activities'' also suggests that the only
deductions intended to fall within the definition of ``sales load'' are
those that are properly chargeable to sales or promotional activities.
Applicants state that the proposed deductions will be used to
compensate Guardian for its increased federal tax burden attributable
to the receipt of premiums and not for sales or promotional activities.
Therefore, Applicants believe the language in [[Page 30148]] Section
2(a)(35) further indicates that not treating such deductions as sales
load is consistent with the policies of the 1940 Act.
23. Finally, Applicants submit that it is probably an historical
accident that the exclusion of premium tax in subparagraph (c)(4)(v) of
Rules 6e-2 and 6e-3(T) from the definition of ``sales load'' is limited
to state premium taxes. When these Rules were each adopted and, in the
case of Rule 6e-3(T), later amended, the additional Section 848 tax
burden attributable to the receipt of premiums did not yet exist.
24. Applicants submit that the terms of the relief requested with
respect to Other Contracts to be issued through Future Accounts are
also consistent with the standards of Section 6(c). Without the
requested relief, Guardian would have to request and obtain such
exemptive relief for each Other Contract to be issued through a Future
Account. Such additional requests for expensive relief would present no
issues under the 1940 Act that have not already been addressed in this
Application.
25. The requested relief is appropriate in the public interest
because it would promote competitiveness in the variable life insurance
market by eliminating the need for Guardian to file redundant exemptive
applications regarding the federal tax charge, thereby reducing its
administrative expenses and maximizing the efficient use of its
resources. The delay and expense involved in having to repeatedly seek
exemptive relief would impair Guardian's ability to effectively take
advantage of business opportunities as they arise.
26. The requested relief is consistent with the purposes of the
1940 Act and the protection of investors for the same reasons. If
Guardian were required to repeatedly seek exemptive relief with respect
to the same issues regarding the federal tax charge addressed in this
Application, investors would not receive any benefit or additional
protection thereby and might be disadvantaged as a result of Guardian's
increased overhead expenses.
27. Conditions for Relief:
a. Guardian will monitor the reasonableness of the charge to be
deducted pursuant to the requested exemptive relief.
b. The registration statement for the Contracts, and for any Other
Contracts under which the above-referenced federal tax 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
Guardian's increased federal tax burden under Section 848 of the Code.
c. The registration statement for the Contracts, and for such Other
Contracts, providing for the above-referenced deduction will contain as
an exhibit an actuarial opinion as to: (1) The reasonableness of the
charge in relation to Guardian's increased federal tax burden under
Section 848 of the Code resulting from the receipt of premiums; (2) the
reasonableness of the rate of return on surplus that is used in
calculating such charge; and (3) the appropriateness of the factors
taken into account by Guardian in determining such targeted rate of
return.
Conclusion
For the reasons and upon the facts set forth above, Applicants
submit that the requested exemptions from Sections 2(a)(32), 2(a)(35),
22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2), 27(d), and
27(e) of the 1940 Act and paragraphs (b)(1), (b)(12), (b)(13)(i),
(b)(13)(iii), (b)(13)(iv), (b)(13)(v), (b)(13)(vii), (c)(1), (c)(4) of
Rule 6e-2, and Rules 6e-3(T)(c)(4)(v), 22c-1 and 27e-1 thereunder, 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 and, therefore, satisfy the
standards set forth in Section 6(c) of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13893 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M
