[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17354]
[[Page Unknown]]
[Federal Register: July 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20396; No. 812-9022]
Pruco Life Insurance Company, et al.
July 12, 1994.
agency: Securities and Exchange Commission (``Commission'' or ``SEC'').
action: Notice of application for an Order under the Investment Company
Act of 1940 (the ``1940 Act'').
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applicants: Pruco Life Insurance Company (``Pruco''), Pruco Life
Individual Variable Annuity Account (``Variable Account''), and Pruco
Securities Corporation (``PruSec'') (collectively, ``Applicants'').
relevant 1940 act sections: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act.
summary of application: Applicants seek an order permitting the
deduction from the assets of the Variable Account of a mortality and
expense risk charge in connection with the offer and sale of certain
flexible premium combination fixed/variable annuity contracts
(``Contracts'').
filing date: The application was filed on May 31, 1994.
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 the 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 August 8, 1994, and should be accompanied by proof of service
on Applicants in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
addresses: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, c/o Pruco Life Insurance Company, 213 Washington Street,
Newark, New Jersey 07102-222992.
for further information contact: Yvonne M. Hunold, Senior Counsel, or
Michael Wible, Special Counsel, 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 Commission's
Public Reference Branch.
Applicants' Representations
1. Pruco, a stock life insurance company, is a wholly owned
subsidiary of The Prudential Insurance Company of America
(``Prudential''). Pruco is licensed to conduct business in the District
of Columbia, Guam, and all states except New York.
2. The Variable Account was established as a separate account by
Pruco to fund its variable annuity contracts. The Separate Account has
filed a notification of registration on Form N-8A and a registration
statement on Form N-4 with the Commission as a unit investment trust
under the 1940 Act. Applicants have filed on Form N-4 a registration
statement to register the Contracts as securities under the Securities
Act of 1933.
The Variable Account currently consists of eleven subaccounts
(Money Market, Bond, High Yield Bond, Government Securities, Common
Stock, Stock Index, High Dividend Stock, Natural Resources, Global
Equity, Conservatively Managed Flexible, and Aggressive Managed
Flexible) (``Subaccounts''), each investing in shares of a
corresponding portfolio (``Portfolio(s)'') of The Prudential Series
Fund, Inc. (``Series Fund''). Other portfolios of the Series Fund or of
other funds or investment vehicles may be made available for investment
in the future through additional subaccounts.
3. The Series Fund is a no-load, diversified, open-end management
investment company registered under the 1940 Act. The Series Fund
currently offers fourteen Portfolios, of which eleven are available for
investment by the Variable Account. Prudential, an investment adviser
registered under the Investment Advisers Act of 1940, will be the
investment adviser for the Series Fund.
4. PruSec is an indirect wholly-owned subsidiary of Prudential and
the principal underwriter of the Contracts, which will be sold and
distributed by PruSec's registered representatives. PruSec is
registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and is a member of the National Association of
Securities Dealers, Inc.
5. The Contracts are flexible premium combination fixed/variable
annuity contracts offered in connection with either non-tax qualified
plans or as an Individual Retirement Annuity (``IRA'') that qualify for
favorable tax-deferred treatment under Section 408(b) of the Internal
Revenue Code of 1986, as amended. The Contracts also may be made
available to certain other retirement plans that qualify for special
federal income tax treatment in the future. The Contracts initially
will be issued as individual contracts but also may be issued as group
contracts used in connection with either immediate or deferred
annuities. The Contracts permit premiums to vary in amount and
frequency but require certain minimum initial premium payments and
additional payments. The Contracts further provide for accumulation of
values on either a variable or a fixed basis, or both. The fixed-rate
option is part of Pruco's general account. Premiums allocated to the
fixed-rate option will earn interest at a minimum guaranteed effective
annual rate of 3 percent. Initially, the fixed-rate applicable at the
time of allocation to the fixed-rate option will be earned for a one-
year period, with a new interest rate set monthly thereafter. At the
end of each guarantee period, amounts allocated to that period will
automatically be ``rolled over'' and receive the new guarantee rate,
unless transferred to the Subaccounts.
6. During the accumulation period, a full or partial surrender of
the Contract may be made, subject to certain minimums and constraints
or partial withdrawals. Withdrawals from fixed-rate option guarantee
periods maybe effected only on the maturity date.
7. The Contracts also will provide for a death benefit and a
variety of payout options at annuitization. The death benefits will
equal the greater of (a) total purchase payments (less previous
withdrawals), and (b) the Account Value. Payout options include both
variable and fixed payment options, and payment options based on fixed
periods or on one or more measuring lives.
8. No sales charges are deducted under the Contracts. All expenses
relating to the sale of the Contracts will be paid by Pruco from its
general assets, including amounts derived from the mortality and
expenses risk charge. Shares of the Series Fund will be sold to the
Variable Account at the net asset value, which reflects the investment
advisory fee and other expenses deducted from Fund assets.
9. Various fees and expenses are deducted under the Contracts and
the Variable Account. A charge may be deducted for state, local or
federal premium taxes, and any income, excise, business or other type
of tax measured by or based on the amount of premium received by Pruco.
The tax rates currently range from 1% to 5% and may be imposed upon
purchase payments, on Account Value upon surrender, or when converted
into an annuity or other benefit payment. Pruco may also charge Account
Value or the Separate Account for any taxes attributable to the
Separate Account or the Contract, including income taxes incurred by
Pruco attributable to the Separate Account.
10. Initially, Pruco will charge $15 for each transfer or
withdrawal from or among the Subaccounts after the first four transfers
or withdrawals in each Contract year. No charge is imposed for
transfers or withdrawals in connection with dollar cost averaging, the
systematic withdrawal programs or from the fixed-rate option.
Initially, an annual maintenance fee of $30 may be deducted
proportionately from Contract Value allocated among the Subaccounts and
the fixed-rate option if the Contract Value is less than $10,000 on
December 31 or at the time a full withdrawal is effected. Pruco
reserves the right to deduct a separate charge against the assets in
the Separate Account to compensate it for administration of the
Contract and the Separate Account, but does not currently intend to do
so. This charge is guaranteed not to exceed .15% for the duration of
the Contract.
Applicants represent that current and future charges for
administration of the Contract will be deducted from the Subaccounts in
reliance on Rule 26a-1 under the 1940 Act and will not be greater than
the cost of administrative services provided under the Contract. Pruco
does not expect or intend to make a profit from these charges.
11. A daily charge equal to an annual rate of .95% of the value of
the net assets in each Subaccount attributable to the Contracts will be
imposed to compensate Pruco for bearing certain mortality and expense
risks it assumes in offering and administering the Contracts and in
operating the Variable Account. Of this amount, .63% is attributable to
mortality risks, and .32% is attributable to expense risks. The
aggregate charge is guaranteed by Pruco not to increase. The charge may
be a source of profit for Pruco, which will be added to its surplus and
may be used for, among other things, the payment of distribution, sales
and other expenses. Pruco currently anticipates a profit from this
charge.
12. The mortality risk arises from Pruco's contractual obligation
to make periodic annuity payments (determined in accordance with
Pruco's annuity tables and other Contract provisions) regardless of how
long all annuitants or any individual annuitant lives. Contract owners
thus are assured that neither annuitant's longevity nor an improvement
in life expectancy generally (which is greater than expected) will
adversely effect annuity payments the payee will receive under the
Contracts. This eliminates the risk of outliving the funds accumulated
for retirement. Morality risk also is assumed in connection with
payment of the death benefit because the death benefit guarantee could
exceed the Account Value. There is no charge for the guaranteed death
benefit.
13. The expense risk assumed by Pruco is that its actual expenses
in issuing and administering the Contracts and operating the Variable
Account will exceed the amount recovered through the administrative
charges.
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 Act 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 Act, 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 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.
3. Applicants request exemptions from Sections 26(a)(2) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction from the assets of the Separate Account of the charge for
mortality and expense risks. Applicants believe that the requested
exemptions 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.
4. Applicants submit that Pruco is entitled to reasonable
compensation for its assumption of mortality and expense risks.
Applicants represent that the mortality and expense risk charge is
consistent with the protection of investors because it is a reasonable
and proper insurance charge. The charge is a reasonable charge to
compensate Pruco for the risks that: (a) Annuitants under the Contract
will live longer individually or as a group than has been anticipated
in setting the annuity rates guaranteed in the Contracts; (b) the
Account Value will be less than the death benefit; and (c)
administrative expenses will be greater than amounts derived from the
administrative charges.
5. Applicants represent that the .95% mortality and expense risk
charge under the Contracts is within the range of industry practice for
comparable annuity products. This representation is based upon
Applicants' analysis of publicly available information about similar
industry products, taking into consideration such factors as current
charge levels, the existence of charge level guarantees, death benefit
guarantees, and guaranteed annuity rates. Applicants represent that
Pruco will maintain at its administrative offices, available to the
Commission, a memorandum setting forth in detail the products analyzed
in the course of, and the methodology and results of, its comparative
survey.
6. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge, all or a portion of such profit may
be available to pay distribution expenses. Pruco has concluded that
there is a reasonable likelihood that the proposed distribution
financing arrangements will benefit the Variable Account and the
Contract Owners. The basis for that conclusion is set forth in a
memorandum which will be maintained by Pruco at its administrative
offices and will be available to the Commission.
7. Applicants also represents that the Variable Account will invest
only in open-end management investment companies that undertake, in the
event that such company should adopt a plan under Rule 12b-1 to finance
distribution expenses, to have a board of directors (or trustees), a
majority of whom are not ``interested persons'' of the company,
formulate and approve any such plan.
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.
Accordingly, Applicants request relief from Sections 26(a)(2)(C) and
27(c)(2) to the extent necessary to permit the assessment and deduction
of the mortality and expense risk charge under the Contracts.
Applicants assert that the requested exemptions 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. 94-17354 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M
