[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Notices]
[Pages 36847-36849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17521]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21202; File No. 812-9482]
Ameritas Life Insurance Corp., et al.
July 11, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Ameritas Life Insurance Corp. (``Ameritas''), Ameritas Life
Insurance Corp. Separate Account LLVL (``Separate Account''), and
Ameritas Investment Corp. (``Investment Corp.'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Section 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder.
SUMMARY OF APPLICATION: The Applicants seek an order to permit them to
deduct from premium payments received under certain flexible premium
variable life insurance contracts (the ``Policies'') issued through the
Separate Account an amount that is reasonable in relation to Ameritas's
increased federal tax burden resulting from the application of Section
848 of the Internal Revenue Code of 1986, as amended (the ``Code'').
The deduction would not be treated as sales load.
FILING DATE: The application was filed on February 15, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the Secretary of the SEC and serving
Applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on August 7, 1995,
and should be accompanied by proof of service on Applicants in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549;
Applicants, c/o Norman M. Krivosha, Esq., Ameritas Life Insurance
Corp., 5900 ``O'' Street, Lincoln, Nebraska 68510.
FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney,
or Patrice M. Pitts, Special Counsel, Division of Investment Management
(Office of Insurance Products), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC.
Applicants' Representations
1. Ameritas, a mutual life insurance company domiciled in Nebraska
since 1887, is licensed to sell insurance in 49 states, and has assets
of over $2 billion.
2. In 1994, the Board of Directors of Ameritas established the
Separate Account under Nebraska law. The Separate Account is registered
as a unit investment trust under the 1940 Act.
3. Currently, there are eleven subaccounts within the Separate
Account available to policyowners for investment. Each subaccount will
invest only in the shares of a corresponding portfolio of the Vanguard
Variable Insurance Fund or Neuberger & Berman Advisers Management Trust
(collectively the ``Funds''). Each Fund is
[[Page 36848]]
registered with the SEC as an open-end diversified management
investment company. The assets of the Separate Account are segregated
from all other Ameritas assets, and are not chargeable with liabilities
arising out of any other business which Ameritas may conduct.
4. Investment Corp. is a wholly-owned subsidiary of Ameritas and is
the principal underwriter of the Policies. Investment Corp. is
registered as a broker-dealer under the Securities Exchange Act of
1934, and is a member of the National Association of Securities
Dealers, Inc.
5. The Policies are issued through the Separate Account pursuant to
Rule 6e-3(T) under the 1940 Act. The Policies will provide for (i)
lifetime insurance coverage on the named insured up to age 100, (ii)
cash value accumulation, (iii) surrender rights, and (iv) loan
privileges. The Policies contain two death benefit options. Death
benefit proceeds are payable to the beneficiary of Policies upon
receipt by Ameritas of satisfactory proof of death. The amount of the
death benefit proceeds is equal to: (i) the death benefit, plus (ii)
additional life insurance proceeds provided by any riders, minus (iii)
outstanding policy loans, minus (iv) any overdue monthly deduction,
including the deduction for the month of death. The Policies
incorporate a guaranteed death premium feature under which Policies are
guaranteed not to lapse during the first three policy years, provided
the specified amount of premiums is paid in advance on a monthly or
yearly basis.
6. In the Omnibus Budget Reconciliation Act of 1990, Congress
amended the Code by, among other things, enacting Section 848 thereof
which requires that life insurance companies capitalize and amortize
over a period of ten years part of their general expenses for the
current year. Under prior law, these expenses were deductible in full
from the current year's gross income. Section 848, in effect,
accelerates the realization of income from specified insurance
contracts for federal income tax purposes and, therefore, the payment
of taxes on the income generated by those contracts. Taking into
account the time value of money, Section 848 increases the tax burden
borne by the insurance company because the amount of general deductions
that must be capitalized and amortized is measured by premium payments
received under specified contracts, such as the Policies. In this
respect, the impact of Section 848 can be compared with that of a state
premium tax.
7. The Policies to which the tax burden charge (the ``DAC tax
charge'') will apply fall into the category of life insurance contracts
identified under Section 848 as those for which the percentage of net
premiums that determines the amount of otherwise currently deductible
general expenses to be capitalized and amortized is 7.7 percent.
8. The increased tax burden resulting from the applicability of
Section 848 to every $10,000 of net premiums received may be quantified
as follows. In the year when the premiums are received, Ameritas's
general deductions are reduced by $731.50--i.e., an amount equal to (a)
7.7 percent of $10,000 ($770) minus (b) one-half year's portion of the
ten-year amortization ($38.50). Using a 35 percent corporate tax rate,
this computes to an increase in tax for the current year of $256.03
(i.e., $731.50 multiplied by .35). This increase in tax will be
partially offset by increased deductions that will be allowed during
the next ten years as a result of amortizing the remainder of the
$770--$77 in each of the following nine years, and $38.50 in the tenth
year.
9. Capital which must be used by Ameritas to satisfy its increased
federal tax burden under Section 848 (resulting from the receipt of
premiums) is not available to Ameritas for investment. Because it seeks
an after tax rate of return of 10 percent on its invested capital,\1\
Ameritas submits that a discount rate of at least 10 percent is
appropriate for use in calculating the present value.
\1\ In determining its cost of capital, Ameritas considered a
number of factors. Ameritas first determined a reasonable risk-free
rate of return that could be expected to be earned over the long
term, based on current market rates, inflation, and expected future
interest rate trends. Ameritas then determined the premium it needed
to earn over this risk-free rate in order to compensate for the risk
profile of the insurance business. Ameritas also took into
consideration any information available about the rates of return
earned by other mutual life insurance companies. Ameritas represents
that these factors are appropriate considerations in determining it
cost of capital.
Ameritas also took into account the ratio of surplus to assets
that it seeks to maintain. Ameritas represents that maintaining the
ratio of surplus to assets is critical to maintaining both
competitive ratings from various rating agencies and to offering
competitive pricing on new and in force business. Consequently,
Ameritas asserts that its surplus must grow at least at the same
rate as its assets.
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10. Using a corporate tax rate of 35 percent, and assuming a
discount rate of 10 percent, the present value of the tax effect of the
increased deductions allowable in the following ten years comes to
$160.41. Because this amount partially offsets the increased tax
burden, applying Section 848 to the specified contracts imposes an
increased tax burden on Ameritas equal to a present value of $95.62
(i.e., $256.03 minus $160.41) for each $10,000 of net premiums.
11. Ameritas does not incur incremental income tax when it passes
on state premium taxes to contract owners, because state premium taxes
are deductible when computing federal income taxes. In contrast,
federal income taxes are not tax-deductible when computing Ameritas's
federal income taxes. Therefore, to offset fully the impact of Section
848, Ameritas must impose an additional charge that would make it whole
not only for the $95.62 additional tax burden attributable to Section
848, but also for the tax on the additional $95.62 itself. This
additional charge can be computed by dividing $95.62 by the complement
of the 35 percent federal corporate income tax rate (i.e., 65 percent),
resulting in an additional charge of $147.11 for each $10,000 of net
premiums, or 1.47 percent.
12. Tax deductions are of value to Ameritas only to the extent that
it has sufficient gross income to fully utilize the deductions. Based
upon its prior experience, Ameritas submits that it is reasonable to
expect that virtually all future deductions will be fully taken.
13. Ameritas submits that a DAC tax charge of 1.00 percent of
premium payments would reimburse it for the impact of Section 848 on
its federal tax liabilities. Ameritas represents that a 1.00 percent
charge is reasonably related to its increased tax burden under Section
848, taking into account the benefit to Ameritas of the amortization
permitted by Section 848, and the use by Ameritas of a 10 percent
discount rate in computing the future deduction resulting from such
amortization, such rate being the equivalent of Ameritas's cost of
capital.
Applicants' Legal Analysis
1. Pursuant to Section 6(c) of the 1940 Act, the SEC may, by order
upon application, conditionally or unconditionally exempt any person,
security, or transaction, or any class or classes of persons,
securities or transactions, from any provision(s) of the 1940 Act or
from any rule or regulation thereunder, if and to the extent that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
2. Applicants request an order of the Commission pursuant to
Section 6(c) of the 1940 Act, exempting them from the provisions of
Section 27(c)(2) of the 1940 Act and 6e-3(T)(c)(4)(v) thereunder to the
extent necessary to permit
[[Page 36849]]
Applicants to deduct from premium payments received in connection with
the Policies an amount that is reasonable in relation to Ameritas's
increased federal tax burden created by its receipt of such premium
payments. The deduction would not be treated as sales load.
3. Section 2(a)(35) of the 1940 Act defines ``sales load'' as the
difference between the price of a security offered to the public and
that portion of the proceeds from its sale which is received and
invested or held 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.
4. Section 27(c)(2) of the 1940 Act prohibits a registered
investment company or a depositor or underwriter for such company from
making any deduction from purchase payments made under periodic payment
plan certificates other than a deduction for sales load.
5. Rule 6e-3(T)(b)(13)(iii), among other things, provides relief
from Section 27(c)(2) of the 1940 Act to the extent necessary to permit
the deduction of certain charges other than sales load, including
``[t]he deduction of premium or other taxes imposed by any state or
other governmental entity.'' Applicants represent that the requested
exemption is necessary if they are to rely on certain provisions of
Rule 6e-3(T)(b)(13).
6. Rule 6e-3(T)(c)(4) defines ``sales load'' during a contract
period as the excess of any payments made during that period over
certain specified charges and adjustments, including ``[a] deduction
for and approximately equal to state premium taxes.'' Applicants submit
that the proposed DAC tax charge is akin to a state premium tax charge
and, therefore, should be treated as other than sales load for purposes
of the 1940 Act and the rules thereunder.
7. Applicants acknowledge that the proposed DAC tax charge does not
fall squarely into any of the itemized categories of charges or
adjustments set forth in Rule 6e-3(T)(c)(4); a literal reading of that
rule arguably does not exclude such a ``tax burden charge'' from sales
load. Applicants maintain, however, that there is no public policy
reason why a tax burden charge designed to cover the expense of federal
taxes should be treated as sales load. Applicants also assert that
nothing in the administrative history of Rule 6e-3(T) suggests that the
SEC intended to treat tax charges as sales load.
8. Applicants assert that the public policy that underlies Rule 6e-
3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and
27(h)(1), is to prevent excessive sales loads from being charged in
connection with the sale of periodic payment plan certificates.
Applicants submit that the treatment of a tax burden charge
attributable to the receipt of purchase payments as sales load would in
no way further this legislative purpose because such a charge has no
relation to the payment of sales commissions or other distribution
expenses. Applicants further submit that the Commission has concurred
with this conclusion by excluding deductions for state premium taxes
from the definition of sales load in Rule 6e-3(T)(c)(4).
9. Applicants assert that the genesis of Rule 6e-3(T)(c)(4)
supports this analysis. In this regard, Applicants note that Section
2(a)(35) of the 1940 Act provides a scale against which the percent
limits of Sections 27(a)(1) and 27(h)(1) thereof may be measured.
Applicants submit that the intent of the SEC in adopting Rule 6e-
3(T)(c)(4) was to tailor the general terms of Section 2(a)(35) top
flexible premium variable life insurance contracts in order, among
other things, to facilitate verification by the SEC of compliance with
the sales load limits set forth in Rule 6e-3(T)(b)(13)(i). Applicants
submit that Rule 6e-3(T)(c)(4) does not depart, in principal, from
Section 2(a)(35).
10. Applicants further assert that Section 2(a)(35) excludes from
the definition of sales load under the 1940 Act deductions from
premiums for ``issue taxes.'' Applicants submit that, by extension, the
exclusion from ``sales load'' (as defined in Rule 6e-3(T)) of charges
to cover an insurer's expenses attributable to its federal tax
obligations is consistent with the protection of investors and the
purposes intended by the policies and provisions of the 1940 Act.
11. Applicants also submit that the reference in Section 2(a)(35)
to administrative expenses or fees that are ``not properly chargeable
to sales or promotional activities'' suggests that the only deductions
intended to fall within the definition of sales load are those that are
properly chargeable to such activities. Because the proposed DAC tax
charge will be used to compensate Ameritas for its increased federal
tax burden attributable to the receipt of premiums, and such deductions
are not properly chargeable to sales or promotional activities,
Applicants assert that the language of Section 2(a)(35) is another
indication that not treating such deductions as sales load is
consistent with the purposes intended by the policies of the 1940 Act.
Condition for Relief
1. Applicants agree to comply with the following conditions for
relief.
a. Ameritas will monitor the reasonableness of the 1.00 percent
proposed DAC tax charge.
b. The registration statement for the Policies under which the 1.00
percent charge is deducted will: (i) disclose the charge; (ii) explain
the purpose of the charge; and (iii) state that the charge is
reasonable in relation to Ameritas's increased federal tax burden
resulting from the application of Section 848 of the Code.
c. The registration statement for the Policies under which the 1.00
percent charge is deducted will contain as an exhibit an actuarial
opinion as to: (i) the reasonableness of the charge in relation to
Ameritas's increased federal tax burden resulting from the application
of Section 848 of the Code; (iii) the reasonableness of the targeted
rate of return that is used in calculating such charge; and (iii) the
appropriateness of the factors taken into account by Ameritas in
determining such targeted rate of return.
Conclusion
For the reasons summarized above, Applicants represent that the
requested relief from Section 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder is necessary or appropriate in the public
interest and otherwise meets the standards of 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. 95-17521 Filed 7-17-95; 8:45 am]
BILLING CODE 8010-01-M
