[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37504-37513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18173]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22066; No. 812-9944]
The Minnesota Mutual Life Insurance Company, et al.
July 11, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application of Exemptions pursuant to the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: The Minnesota Mutual Life Insurance Company (``Minnesota
Mutual''), Minnesota Mutual Variable Life Separate Account
(``Account'') and MIMLIC Sales Corporation (``MIMLIC Sales'').
RELEVANT ACT SECTIONS: Order requested pursuant to Sections 6(c) of the
Act, granting exemptions from Sections 2(a)(35), 22(c), 22(d), 22(e),
26(a), 27(a), 27(c), 27(d) and 27(f) of the Act and from Rules 6e-
2(b)(1), (b)(12)(i), (b)(13)(i), (b)(13)(ii), (b)(13)(iii), (b)(13)(v),
(b)(13)(viii), (c)(1) and (c)(4), 22c-1 and 27f-1 thereunder. Order
also requested pursuant to Section 11 approving an exchange offer.
SUMMARY OF APPLICATION: The relief requested would permit the offer and
sale of certain scheduled premium variable life insurance policies
(``Policies'') that provide for: (a) a cash option death benefit; (b) a
scheduled decrease in the initial face amount and the subsequent
adjustment of Policies to a face amount less than the initial face
amount; (c) deduction of cost of insurance charges not to exceed the
charges derived from the 1980 Commissioners Standard Ordinary Mortality
Table for purposes of calculating ``sales load''; (d) deduction of a
federal tax charge; (e) the anticipated joint life expectancy of the
insureds to be determined on the basis of the 1980 Commissioners
Standard Ordinary Mortality Table for purposes of calculating the
period over which sales load may not exceed 9 percent; (f) assessment
of a new first year sales load upon a policy adjustment involving an
increase in base premium, which sales load may be in addition to a
first year sales load being taken at the time the adjustment is made;
(g) increase in the proportionate amount of sales load deducted from
premiums following certain policy adjustments or the payment of
nonrepeating premiums; (h) deduction from Account assets of the
proposed charges for the cost of insurance and the face amount
guarantee; (i) a right to convert to a fixed benefit adjustable life
insurance policy with a death benefit equal to the Policy's then
current face amount and with a plan of insurance which may be less than
for the whole of life; and (j) personal delivery to Policy owners of
free-look right notices which contain information comparable to that
required by Form N-27I-2. The requested relief also would approve an
exchange offer. The relief would extend to any variable
[[Page 37505]]
life insurance policies that may be offered in the future that are
substantially similar in all material respects to the Policies
(``Future Policies'') that are funded by the Account or any other
separate accounts established in the future by Minnesota Mutual
(``Future Accounts'') and that may be offered by MIMLIC Sales or any
other members of the National Association of Securities Dealers, Inc.
(``NASD'') that may in the future serve as principal underwriters of
the Policies or Future Policies (``Future Underwriters'').
FILING DATE: The application was filed on January 16, 1996.
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 Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on August 5, 1996, and must be accompanied by
proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the request, and the
issues contested. Persons may request notification of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, c/o J. Sumner Jones,
Esq., Jones & Blouch L.L.P., Suite 405 West, 1025 Thomas Jefferson
Street, N.W., Washington, D.C. 20007-0805.
FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, or Wendy Friedlander, Deputy Chief,
Office of Insurance Products (Division of Investment Management), at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants, Representations
1. Minnesota Mutual is a mutual life insurance company organized
under the laws of Minnesota in 1880. It is authorized to do life
insurance business in the District of Columbia, certain Canadian
provinces, Puerto Rico and all states of the United States except New
York.
2. The Account is a separate account of Minnesota Mutual
established by its Board of Trustees on October 21, 1985, to facilitate
the issuance of scheduled premium variable life insurance policies.
Under Minnesota law, assets of the Account equal to the reserves and
other Account liabilities are not chargeable with liabilities arising
out of any other business Minnesota Mutual may conduct, and the income,
gains and losses, realized or unrealized, of the Account are credited
to or charged against the Account without regard to other income, gains
or losses of Minnesota Mutual.
3. MIMLIC Sales, an indirect wholly-owned subsidiary of Minnesota
Mutual, is the principal underwriter for the Account. The Policies will
be sold by life insurance agents of Minnesota Mutual who are associated
persons of either MIMLIC Sales or other broker-dealers who have entered
into selling agreements with MIMLIC Sales. MIMLIC Sales is registered
as a broker-dealer under the Securities Exchange Act of 1934 and is a
member of the NASD.
4. Assets of the Account are invested in shares of MIMLIC Series
Fund, Inc. (``Fund''), a diversified, management investment company
registered under the Act. The Fund is a series company consisting of a
number of separate portfolios. Shares of each portfolio are sold
without a sales charge to the Account and to other separate accounts of
Minnesota Mutual established for the purpose of funding variable
annuity contracts and other variable life insurance policies issued by
Minnesota Mutual.
5. The Policies are scheduled premium variable life insurance
policies that pay a death benefit at the death of the second to die of
two named insureds (``second death''). The Policies permit an owner to
select a plan of insurance based on his or her insurance needs and the
amount of premium the owner wishes to pay. Based on the owner's
selection of any two of three components of a Policy--face amount,
premium and plan of insurance--Minnesota Mutual will then calculate the
third. The owner may change the face amount and premium level, and thus
the plan of insurance, subject to certain limitations, so long as the
Policy remains in force.
6. The flexibility provided by the Policies results in a broad
range of plans of insurance. ``Plan of insurance'' refers to the level
of cash value accumulation assumed in the design of the Policy and, for
whole life plans, the period of coverage over which premiums are
required to be paid. There are two general categories of plans of
insurance--whole life plans and protection plans. Whole life plans
contemplate an eventual cash value accumulation, at or before the
younger insured's age 100, equal to the net single premium require for
the face amount of insurance. Premiums may be payable for a specified
number of years or for the joint lives of the insured. Premiums payable
for a specified number of years will cause a Policy to become paid-up
prior to the younger insured's age 100. At issue, the maximum plan of
insurance permitted under the Policies for a specific face amount is
one in which the Policy will be paid up after the payment of ten annual
premiums. A Policy is paid-up when is Policy value is such that no
further premiums are required to provide the face amount of coverage
until the second death of the two insureds.
7. Protection plans of insurance assume an eventual exhaustion of
cash value at the end of a specified period. Under conventional
adjustable life, insurance coverage would terminate at the end of the
specified period. However, since premiums under the Policies are
payable for the joint lives of two insureds, the Policies provide for a
scheduled reduction in face amount at the end of the initial period of
coverage to an amount which the continued payment of the scheduled
premium will provide a whole life plan. The minimum plan of insurance
for a specific face amount is one which will provide for no scheduled
reduction in face amount for at least ten years, except where the age
of the younger insured is over age 70, in which case the minimum plan
will be less than ten years.
8. The scheduled reduction in face amount under a protection plan
will occur at such time as the Policy's tabular cash value, i.e., the
cash value which is assumed in designing the Policy and which would be
guaranteed in a conventional fixed-benefit policy, is exhausted. If, at
the time of a scheduled reduction in face amount, the actual cash value
with the annual premium is sufficient to provide at least one year of
protection at the then current face amount, the Policy will be adjusted
to preserve the current face amount. The adjustment will result in a
scheduled decrease in the current face amount at a later Policy
anniversary, the elimination of the scheduled decrease in face amount,
or the shortening of the premium payment period.
9. The Policies offer a choice of two death benefits--the ``cash
option'' and the protection option. If neither death benefit option has
been elected, the cash option will be in effect. The scheduled premium
for a Policy is the same no matter which option is chosen. Under the
cash option, the death benefit is the current face amount at the time
of the
[[Page 37506]]
second death. The death benefit will not vary unless the Policy value
exceeds the net single premium for the then current face amount. Under
the protection option,the death benefit is the Policy value plus the
greater of the then current face amount or the amount of insurance
which could be purchased using the Policy values as a net single
premium. The net single premium is the amount necessary to pay all
future guaranteed cost of insurance charges for the lifetime of both
insureds without the payment of additional premium. The protection
option death benefit is available only until the Policy anniversary
nearest the younger insured's age 70. At the Policy anniversary nearest
the younger insured's age 70, the protection option is automatically
converted to the cash option death benefit. At that time the Policy
will be automatically adjusted so that the face amount will equal the
death benefit in effect immediately prior to the adjustment.
10. One of the principal benefits of an adjustable policy such as
the Policy is that it may be adjusted on any monthly anniversary of the
policy date to reflect the changing personal and insurance needs of the
owner. Unlike most traditional life insurance policies, there is no
need to exchange the Policy or to purchase an additional policy as such
needs change. The Policies allow the owner to make four types of
adjustment: (a) an increase or decrease in the premium; (b) an increase
or decrease in the face amount; (c) a partial surrender; and (d) an
adjustment to stop premium, which is an adjustment made on the
assumption that no further base premiums will be paid. There are also
two automatic adjustments, one at the point that the face amount is
scheduled to decrease and the other upon the change from protection
option death benefit to the cash option death benefit at the Policy
anniversary nearest the younger insured's age 70.
11. An adjustment usually will result in a change in the Policy's
plan of insurance. Depending on the adjustment requested, for whole
life plans the premium paying period may be lengthened or shortened or
the plan may be changed from a whole life plan to protection plan by
providing for a scheduled reduction in face amount at a future date.
For Policies having a protection plan prior to an adjustment, and
adjustment may change the Policy to a whole life plan by eliminating
the scheduled decrease in face amount or it may change the duration of
the plan by changing the time at which the decrease is scheduled to
occur.
12. If an owner requests an increase in scheduled premium, the
adjustment will result in either an increase in face amount or an
improvement in plan, whichever the owner selects. If the owner requests
a decrease in scheduled premium or makes a partial withdrawal, the
opposite results occur--a decrease in face amount or reduction in plan.
An improvement in plan is, in the case of protection plans of
insurance, a postponement of the time at which a reduction in face
amount is scheduled to occur and, in the case of whole life plans, a
reduction in the premium payment period. Elimination of a scheduled
decrease in face amount and reduction in the premium payment period
will occur if the improvement in plan is sufficient to convert a
protection plan of insurance to a plan greater than whole life.
13. Plan changes also will result from changes in face amount with
or without changes in premium. Thus, an improvement in plan may be made
by reducing the face amount while keeping the premium constant, and
conversely, a reduction in plan may be made by increasing the face
amount without a change in premium. If both face amount and premium are
changed, the resulting plan will depend on the extent of the changes
and whether the influence of the face amount or premium on the plan
complements or contradicts the influence of the other. For example, if
an owner requested a reduction in both face amount and premium, the
effect of the reduction in face amount might more than offset the
effect of a lower premium so as to result in an improved plan of
insurance.
14. The plan of insurance also will be affected by an adjustment to
stop premium. This type of adjustment may be viewed as a decrease in
base premium to a zero amount. In the absence of an accompanying
request to change the face amount, and adjustment to stop premium is in
effect a redetermination of the plan of insurance on the assumption
that no further base premiums will be paid. In view of the contemplated
termination of base premium payments, the resulting plan will usually
be substantially reduced.
15. When a Policy is adjusted, Minnesota Mutual will in effect
reissue the Policy by computing a new plan of insurance, face amount
and premium amount, if any. In addition, Minnesota Mutual will bring
all Policy charges up to date, charge and credit loan interest and then
calculate new tabular cash, actual cash and Policy values. In computing
either a new face amount or new plan of insurance as a result of an
adjustment, Minnesota Mutual will make the calculation on the basis of
the higher of the Policy's Policy value or its tabular cash value at
the time of the change. If the Policy value is higher than the tabular
cash value, whether as the result of favorable investment performance,
the payment of a nonrepeating premium or otherwise, a Policy adjustment
will translate the excess value into enhanced insurance coverage in the
form of either a higher face amount or an improved plan of insurance.
If the Policy value is less than the tabular cash value, use of the
tabular cash value insures that the Policy's guarantee of a minimum
death benefit is not impaired by the adjustment.
16. An adjustment also will result in the computation of a new
tabular cash value. The tabular cash value after adjustment will be
equal to the greater of the Policy value or the tabular cash value
prior to the adjustment, plus the amount of any nonrepeating premium
credited to the Policy and minus the amount of any partial surrender
made at the time of the adjustment. Although the payment of a
nonrepeating premium is not an adjustment, any such payment will be
reflected in the tabular cash value of the Policy at issue or upon
later adjustment. Minnesota Mutual reserves the right in its discretion
to impose restrictions on or to refuse to permit nonrepeating premiums.
17. The Policies provide various limitations and conditions on the
right to make adjustments. These limitations and conditions may be
changed in the future or additional restrictions may be imposed.
18. Charges under the Policies are assessed against scheduled and
nonrepeating premiums, the Policies' actual cash values and the assets
of the Account. Premium charges vary depending on whether the premium
is a scheduled premium or a nonrepeating premium. From scheduled
premiums there is deducted any charge for sub-standard risks and any
charge for additional benefits provided by rider to determine the base
premium. From the base premium there is deducted a sales load, an
underwriting charge, a premium tax charge and a federal tax charge.
19. A basic sales load of 7 percent will be deducted from each
scheduled premium and a first year sales load not to exceed 23 percent
also may be deducted. A first year sales load will be applied only
against base premiums scheduled to be paid in the twelve month periods
following the Policy data, any policy adjustment involving an increase
in base premium or any policy adjustment occurring during a
[[Page 37507]]
period when a first year sales load is being assessed. It will also
apply only to that portion of an annual base premium necessary for an
original issue whole life plan of insurance. For base premiums greater
than this whole life premium, the amount of the base premium in excess
of the original issue whole life base premium will be subject only to
the 7 percent basic sales load. In computing the first year sales load
following a policy adjustment involving an increase in base premium,
the charge will be applied only to the amount of the increase in base
premium. However, if an adjustment occurs during a period when a first
year sales load is being taken, the uncollected portion of such sales
load--determined on the basis of the lesser of the base premium in
effect prior to, or following, the adjustment--will also be assessed
during the twelve month period following the adjustment. All of the
sales load charges are designed to average not more than 9 percent of
the base premiums over the lesser of: (a) the joint life expectancy of
the insureds at policy issue or adjustment; (b) fifteen years from
policy issue or adjustment; or (c) the premium paying period.
Compliance with the 9 percent ceiling will be achieved by reducing the
amount of the first year sales load, if necessary.
20. An underwriting charge currently in an amount not in excess of
$10 per $1,000 of face amount of insurance will be deducted ratably
from the premiums scheduled to be made during the first Policy year and
during the twelve month period following certain policy adjustments. In
the event of a policy adjustment which results in a face amount
increase and no base premium, the Policy owner must remit the
underwriting charge to Minnesota Mutual prior to the effective date of
the adjustment or it will be assessed against the Policy's actual cash
value as a transaction charge. The specific amount of the charge may
vary depending on the ages of the insureds and the premium level for a
given amount of insurance. The underwriting charge is designed to
compensate Minnesota Mutual for the administrative costs associated
with issuing and adjusting Policies, including the cost of processing
applications and adjustment requests, conducting medical examinations,
classifying risks, determining insurability and risk class and
establishing or modifying Policy records. Although the charge is not
expected to be a source of profit to Minnesota Mutual, the amount of
the charge is not guaranteed so that on adjustment the then current
underwriting charge will apply to any increase in face amount which
requires new evidence of insurability.
21. A premium tax charge of 2.5 percent of each base premium will
be deducted to cover the aggregate premium taxes payable by Minnesota
Mutual to state and local governments for the Policies. The premium tax
charge is not guaranteed and may be increased in the future, but only
as necessary to cover premium tax expenses. Also, a federal tax charge
of 1.25 percent of each base premium will be deducted to cover a
federal tax related to premium payments. The federal tax charge is not
guaranteed and may be increased in the future, but only as necessary to
cover the federal tax related to premium payments.
22. Nonrepeating premiums will be subject only to the basic sales
load of 7 percent, the 2.5 percent premium tax charge and the 1.25
percent federal tax charge. No underwriting charge will be assessed.
Minnesota Mutual intends initially to waive the assessment of any sales
charge against nonrepeating premiums, but reserves the right to impose
the sales charge at a later date.
23. In addition to deductions from premiums, Minnesota Mutual
deducts certain charges from a Policy's actual cash value, namely, an
administration charge, a face amount guarantee charge, a cost of
insurance charge and certain charges for specific Policy transactions.
The administration charge is guaranteed not to exceed $15 per month and
is currently set at $10 per month. It is designed to cover certain
administrative expenses, including those attributable to maintaining
Policy records. The charge is not expected to be a source of profit to
Minnesota Mutual. The face amount guarantee charge is guaranteed not to
exceed 3 cents per thousand dollars of face amount per month and is
currently set at 2 cents per thousand. The charge is designed to
compensate Minnesota Mutual for its guarantee that the death benefit
under the Policy will always be at least equal to the current face
amount in effect at the time of the second death regardless of the
investment performance of the sub-accounts in which net premiums have
been invested. The cost of insurance charge compensates Minnesota
Mutual for providing the death benefit under a Policy. The charge is
calculated by multiplying the net amount at risk under a Policy by a
rate which is based on the age, gender, risk class and the smoking
habits of each insured. The rate also reflects the plan of insurance
and any policy adjustments since issue. The rate cannot exceed the
maximum charges for mortality derived from the 1980 Commissioners
Standard Ordinary Mortality Table. The transaction charges consist of a
$95 charge for each policy adjustment, except for adjustments involving
only partial withdrawals when the charge will be the lesser of $95 or 2
percent of the amount withdrawn, and a charge of up to $25 for each
transfer of actual cash value among the guaranteed principal account
and sub-accounts of the Account. Initially, the charge will be $10 for
non-systematic transfers in excess of four per year. Establishing a
systematic transfer program will be deemed to be a non-systematic
transfer for purposes of determining the transfer charge. The above
charges and restrictions will not apply to a transfer of all of the
Policy value to the guaranteed principal account as a conversion
privilege.
24. The administration, face amount guarantee and cost of insurance
charges are deducted from a Policy's actual cash value on the same day
each month as the Policy issue date. Such charges are also deducted on
the occurrence of the second death, a surrender, lapse or policy
adjustment. Transaction charges are assessed against the actual cash
value of a Policy at the time of a policy adjustment or when a transfer
is made. In the case of a transfer, the charge is assessed against the
amount transferred.
25. The Policies also provide for charges against Account assets.
Minnesota Mutual will deduct a mortality and expense risk charge on
each valuation date at an annual rate of .50 percent of the Account's
assets. In addition, Minnesota Mutual reserves the right to charge or
make provision for any taxes payable by it with respect to the Account
or the Policies by a charge or adjustment to Account assets.
26. The Policies provide for a ``free look'' right, which is
available not only following issuance of the Policy, but also following
any policy adjustments involving an increase in base premium. The owner
may return his or her Policy to Minnesota Mutual or its agent by the
later of: (a) 45 days after execution of the application or request for
adjustment; (b) 10 days after receipt of the Policy or adjusted Policy
from Minnesota Mutual; or (c) 10 days after Minnesota Mutual's mailing
or delivery of a notice describing the right of withdrawal. On return
of the Policy after issue, all premiums paid will be refunded. On
return of an adjusted Policy, the requested adjustment, including the
$95 transaction charge assessed for the adjustment, will be canceled
and any increase in premium paid will be refunded.
27. The Policy contains no specific provision for conversion to a
fixed
[[Page 37508]]
benefit policy as contemplated by paragraph (b)(13)(v)(B) of Rule 6e-2;
however, fixed insurance coverage providing the benefits contemplated
by that paragraph may be obtained by transferring all of the Policy
value, and allocating all premiums, to the guaranteed principal
account. So long as both insureds are alive, the owner of a Policy may
ask to exchange the Policy for two individual policies insuring each of
the insureds separately. Minnesota Mutual will require evidence of
insurability to make the exchange. The two new policies will be issued
on a variable or fixed benefit basis using a policy form in use on the
date of the exchange; each new policy will have one-half of the death
benefit, cash value and loan, if any, of the Policy being exchanged.
Applicants' Legal Analysis
Non-Variable Death Benefit
1. Under the Policies the actual cash value will vary with the
investment performance of the sub-accounts selected by the owner so
long as the Policy has not been surrendered or lapsed. The death
benefit also will vary with such investment performance if the owner
has selected the protection option. All Policies permit the owner to
select the protection option at the time of purchase or to subsequently
change to the protection option provided there is satisfactory evidence
of the insured's insurability. However, the protection option is
available only until the Policy anniversary nearest the younger
insured's age 70; at that anniversary the death benefit option will be
changed to the cash option. Whenever the cash option death benefit is
in effect under a Policy, that Policy will fail to satisfy the
conditions of clause (i) of the definition of variable life insurance
contract and clause (i) of Rule 6e-2(b)(12) unless and until the Policy
value exceeds the net single premium for the then current face amount.
Applicants request exemptions from Sections 22(c), 22(d), 22(e) and
27(c)(1) of the Act, Rule 22c-1 and paragraphs (b)(12)(i) and (c)(1)(i)
of Rule 6e-2 to the extent necessary to permit provision in the
Policies for the cash option death benefit.
2. Applicants submit that no purpose would be served in prohibiting
the cash option death benefit under the Policies or the required change
to the cash option death benefit at the younger insured's age 70.
Except for the amount of the death benefit and the cost of insurance
charges which reflect the amount at risk, a Policy with the cash option
death benefit will operate in the same manner as one with the
protection option in effect. The cash option death benefit may be
viewed by some Policy owners as preferable, because the amounts at risk
under the Policy will be smaller than under the protection option; as a
result, the cost of insurance will be less, thereby permitting a more
rapid increase in the actual cash value of the Policy. Applicants
believe that a purchaser of a variable life insurance policy should not
be compelled to have a death benefit which varies with the investment
performance of the separate account. Further, prohibiting the change in
death benefit to the cash option would preclude Minnesota Mutual's
offering certain plans of insurance with the protection option, because
the large amounts at risk in relation to the Policy values that may
exist at older ages under the protection option are incompatible with
the amount at risk to Policy value ratios contemplated, and inherent in
the Policy's guarantees, for certain plans of insurance, including
whole life plans.
Change in Face Amount
3. Although all Policies provide for a guaranteed death benefit at
least equal to the initial face amount, any Policy with a protection
plan of insurance will provide for a scheduled reduction in face amount
at the end of the initial term. Moreover, any Policy, including a
Policy with a whole life plan of insurance, may be adjusted to a new
face amount, which may be less than the initial face amount, and the
death benefit guarantee will thereafter be applicable to the face
amount as adjusted. Applicants request exemption from clause (ii) of
Rule 6e-2(c)(1) to the extent necessary to permit the issuance of
Policies with a scheduled decrease in the initial face amount, and the
subsequent adjustment of Policies to a face amount less than the
initial face amount.
4. Applicants submit that there are no policy reasons for not
permitting scheduled reductions in face amount. Policies with such
reductions will require smaller premium payments than comparable whole
life Policies, and therefore may be more affordable to many purchasers,
particularly younger persons who may not have reached their maximum
earnings potential at a time when their insurance needs may be
greatest. The scheduled reduction in face amount will be fully
disclosed so that a Policy owner may understand the nature of the
insurance coverage provided by his or her Policy. Finally, the amount
of reduced insurance is guaranteed regardless of the investment
performance of the sub-accounts selected by the owner, so that the
death benefit guarantee, although changed in amount, will continue
until the second death.
5. Exemptive relief from clause (ii) of Rule 6e-2(c)(1) is also
required to permit owners to adjust their Policies subsequent to issue,
which adjustments may decrease the face amount of insurance. Applicants
submit that it is in the best interests of purchasers of the Policies
that they have the flexibility to increase or decrease the face amount
of coverage of their Policies in light of their current insurance needs
and economic circumstances. Since, in computing a new face amount,
premium or plan in connection with an adjustment, Minnesota Mutual will
use the greater of the Policy's then Policy value or its tabular cash
value, the adjustment will not impair the face amount guarantee
previously in effect.
Cost of Insurance Based on 1980 Commissioners Standard Ordinary
Mortality Table (``1980 Table'')
6. In defining sales load, paragraph (c)(4) of Rule 6e-2 permits
the exclusion of the cost of insurance based on the 1958 Commissioners
Standard Ordinary Mortality Table (``1958 Table'') and the assumed
investment rate specified in the contract. Under the Policies, the cost
of insurance is guaranteed not to exceed the maximum charges for
mortality derived from the 1980 Table. Applicants request exemption
from Sections 2(a)(35) and 27(a)(1) of the Act and paragraphs (b)(1),
(b)(13)(i) and (c)(4) of Rule 6e-2 to the extent necessary to permit
the deduction of cost of insurance charges not to exceed the charges
derived from the 1980 Table for purposes of calculating ``sales load.''
7. The 1980 Table reflects more current mortality experience.
Moreover, except for young male insureds at certain ages, the table
provides for lower cost of insurance charges. If Minnesota Mutual were
to compute sales load on the basis of cost of insurance charges derived
from the 1958 Table, it would be able to increase the amount of the
gross premiums under most of the Policies it issues and to treat the
increase as attributable to cost of insurance when in fact such would
not be the case.
Deduction of Proposed Federal Tax Charge
8. Applicants requests an exemption from the provisions of Sections
2(a)(35), 27(a)(1) and 27(c)(2) of the Act an paragraphs (b)(1),
(b)(13)(i) and (c)(4) of Rule 6e-2 to the extent necessary to permit
deductions to be made from premium payments received under the Policies
in an amount that is reasonable in relation to Minnesota Mutual's
[[Page 37509]]
increased federal income tax burden related to the receipt of such
premiums and to treat such deductions as other than ``sales load'' for
the purposes of the Act and Rule 6e-2.
9. The Policies provide for a deduction of a federal tax charge
from each premium payment, including nonrepeating premiums. The current
charge proposed to be deducted is 1.25 percent of the premium.
Minnesota Mutual may increase the federal tax charge, but only to the
extent necessary to cover the federal tax related to premium payments.
Applicants submit that the proposed deduction to cover such charges is
akin to a state premium tax charge in that it is an appropriate charge
related to Minnesota Mutual's tax burden attributable to premiums
received and therefore that the proposed deduction be treated as other
than sales load, as is a state premium tax charge, for purposes of the
Act.
10. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA
1990''), Congress amended the Internal Revenue Code of 1986 (``Code'')
by, among other things, enacting Section 848 thereof, Section 848
requires an insurance company to capitalize and amortize over a period
of ten years part of the company's general expenses for the current
year. Under prior law, these general expenses were deductible in full
from the current year's gross income. The effect of Section 848 is to
accelerate the realization of income from insurance contracts covered
by that section and, accordingly, the payment of taxes on the income
generated by those contracts. The amount of general deductions that
must be capitalized and amortized over ten years, rather than deducted
in the year incurred, is based solely upon ``net premiums'' received in
connection with certain types of insurance contracts. The Policies fall
into the category of life insurance contracts, and under Section 848,
7.7 percent of the year's net premiums received must be capitalized and
amortized.
11. The increased tax burden on Minnesota Mutual resulting from
Section 848 may be quantified as follows. For each $10,000 of net
scheduled premiums received by Minnesota Mutual under the Policies in a
given year, Section 848 requires Minnesota Mutual to capitalize $770
(7.7 percent of $10,000) and $38.50 of this $770 may be deducted in the
current year. This leaves $731.50 ($770 minus $38.50) subject to
taxation at the corporate tax rate of 35 percent, which results in
Minnesota Mutual owing $256.03 (.35 x $731.50) more in taxes for the
current year than would have been owed by Minnesota Mutual prior to
OBRA 1990. This current increase in federal income tax will be
partially offset by deductions that will be allowed during the next ten
years as a result of amortizing the remainder of the $731.50 ($77 in
each of the following nine years and $38.50 in year ten).
12. In the business judgment of Minnesota Mutual, a discount rate
of at least 10 percent is appropriate for use in calculating the
present value of Minnesota Mutual's future tax deductions resulting
from the amortization described above. Minnesota Mutual seeks an after
tax rate of return on the investment of its surplus of 10 percent. To
the extent that surplus must be used by Minnesota Mutual to meet its
increased federal tax burden under Section 848 resulting from the
receipt of premiums, such surplus is not available to Minnesota Mutual
for investment. Thus, the cost of ``capital'' used to satisfy Minnesota
Mutual's increased federal income tax burden under Section 848 is, in
essence, Minnesota Mutual's after-tax rate of return on surplus.
13. In determining the after-tax rate of return used in arriving at
the 10 percent discount rate, Minnesota Mutual considered a number of
factors, including market interest rates, Minnesota Mutual's
anticipated long-term growth rate, the risk level for this type of
business that is acceptable to Minnesota Mutual, inflation, and
available information about the rates of return obtained by other
mutual life insurance companies. Minnesota Mutual represents that these
factors are appropriate factors to consider in determining its cost of
capital. Minnesota Mutual first projects its future growth rate based
on sales projections, current interest rates, the inflation rate, and
the amount of surplus that it can provide to support such growth. It
then uses the anticipated growth rate and the other factors cited above
to set a rate of return on surplus that equals or exceeds this rate of
growth. Of these other factors, market interest rates, the acceptable
risk level and the inflation rate receive significantly more weight
than information about the rates of return obtained by other companies.
14. Minnesota Mutual seeks to maintain a ratio of surplus to assets
that it establishes based on its judgment of the risks represented by
various components of its assets and liabilities. Consequently,
Minnesota Mutual's surplus must grow at least at the same rate as its
assets. On the basis of the foregoing, Applicants submit that Minnesota
Mutual's after-tax rate of return on surplus is appropriate for use in
the present value calculation of future tax benefits. Minnesota Mutual
undertakes to monitor the tax burden imposed on it and to reduce the
federal tax charge to the extent of any significant decrease in the tax
burden.
15. If a corporate federal income tax rate of 35 percent and a
discount rate of 10 percent are used, the present value of the federal
income tax effect of the increased deductions allowable in the
following ten years, which partially offsets the increased federal
income tax burden is $160.40. The effect of Section 848 on Minnesota
Mutual in connection with the Policies is, therefore, an increased
federal income tax burden with a present value of $95.63 for each
$10,000 of net premiums, i.e., $256.03 minus $160.40. Federal income
taxes are not deductible in computing Minnesota Mutual's federal income
taxes. To compensate Minnesota Mutual fully for the impact of Section
848, therefore, it would be necessary to allow Minnesota Mutual to
impose an additional charge that would compensate it not only for the
$95.43 additional federal income tax burden attributable to Section 848
but also for the federal income tax on the additional $95.43 itself.
This federal income tax can be determined by dividing $95.43 by the
complement of the 35 percent federal corporate income tax rate, i.e.,
65 percent, resulting in an additional charge of $147.12 for each
$10,000 of net premiums, or 1.47 percent.
16. Based on prior experience, Minnesota Mutual expects that all of
its current and future deductions will be fully taken. It is Minnesota
Mutual's judgment that a charge of 1.25 percent would reimburse
Minnesota Mutual in part for the impact of Section 848 on Minnesota
Mutual's federal income tax liabilities. The charge to be deducted by
Minnesota Mutual is reasonably related to Minnesota Mutual's increased
federal income tax burden under Section 848, taking into account the
benefit to Minnesota Mutual of the amortization permitted by Section
848 and the use by Minnesota Mutual of a discount rate of 10 percent in
computing the future deductions resulting from such amortization.
17. While Minnesota Mutual believes that a charge of 1.25 percent
of premiums would reimburse it in part for the impact of Section 848 as
currently written on Minnesota Mutual's federal income tax liabilities,
Minnesota Mutual also believes that it may have to increase this charge
either to recover in full the impact of Section 848 as presently
written or to recover any increased federal income tax burden resulting
from a future change in
[[Page 37510]]
Section 848, or the interpretation thereof, or any successor or related
provisions. Such an increase could result from, among other things, a
change in the corporate federal income tax rate, a change in the 7.7
percent figure, or a change in the amortization period. Accordingly,
Minnesota Mutual has reserved the right to increase the federal tax
charge to the extent necessary to cover the federal tax related to
premium payments.
18. The requested exemptions are necessary in connection with
Applicants' reliance on certain provision of Rule 6e-2(b)(13),
particularly paragraph (b)(13)(i), which provides as here pertinent an
exemption from Section 27(a)(1). Issuers and their affiliates may rely
on Rule 6e-2(b)(13)(i) only if they meet the Rule's limitations on
``sales load'' as defined in Rule 6e-2(c)(4). Depending upon the load
structure of a particular Policy, these limitations may not be met if
the deduction for the increase in Minnesota Mutual's federal tax burden
is included in sales load. Although a deduction for an insurance
company's increased federal tax burden does not fall squarely within
any of the specified charges or other amounts which are excluded from
the definition of sales load in Rule 6e-2(c)(4), applicants have found
no public policy reasons for including them in ``sales load.''
19. The public policy that underlies Rule 6e-2(b)(13)(i), like that
which underlies Section 27(a)(1) of the Act, 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
federal income tax charge attributable to premium payments as sales
load would not in any way further this legislative purpose because such
a deduction has no relation to the payment of sales commissions or
other distribution expenses. Applicants assert that the Commission
appears to have concurred with this rationale by excluding deductions
for state premium taxes from the definition of sales load in Rule 6e-
2(c)(4). The source for the definition of sales load found in the Rule
supports this analysis. The Commission's intent in adopting paragraph
(c)(4) of rule 6e-2 was to tailor the general terms of Section 2(a)(35)
of the Act to variable life insurance contracts. Section 2(a)(35)
excludes deductions from premiums for ``issue taxes'' from the
definition of sales load in the Act. This suggests, Applicants argue,
that it is consistent with the policies of the Act to exclude from the
definition of sales load in Rule 6e-2(c)(4) deductions made to pay an
insurance company's costs attributable to its tax obligations. Section
2(a)(35) also excludes administrative expenses or fees that are ``not
properly chargeable to sales or promotional activities.'' This 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 deductions will be used to compensate Minnesota
Mutual for its increased federal income tax burden attributable to the
receipt of premiums, and are not properly chargeable to sales or
promotional activities, the deductions should not be treated as sales
load for purposes of the Act and Rule 6e-2.
20. Applicants agree that if the requested order is granted, such
order may be expressly conditioned on Applicants' compliance with the
following undertakings:
(a) Minnesota Mutual will monitor the federal tax burden
attributable to its receipt of premiums under the Policies and will
reduce the federal tax charge to the extent of any significant decrease
in the tax burden;
(b) the registration statement for the Policies will: (1) disclose
the federal tax charge; (2) explain the purpose of the charge; and (3)
state that the charge is reasonable in relation to Minnesota Mutual's
increased federal income tax burden under Section 848 of the Code
resulting from the receipt of premiums; and
(c) the registration statement for the Policies will contain as an
exhibit an actuarial opinion as to: (1) the reasonableness of the
charge in relation to Minnesota Mutual's increased federal income tax
burden under Section 848 resulting from the receipt of premiums; (2)
the reasonableness of the after-tax rate of return that is used in
calculating such charge and the relationship that such charge has to
Minnesota Mutual's cost of capital; and (3) the appropriateness of the
factors taken into account by Minnesota Mutual in determining the
after-tax rate of return.
Anticipated Life Expectancy Based on 1980 Table
21. Under the Policies, there is a basic sales load of seven
percent and a first year sales load of up to 23 percent. The first year
sales load is adjusted so that all sales load charges will average not
more than nine percent of the base premiums scheduled to be paid over
the lesser of: (a) 15 years from the date of Policy issue or
adjustment; or (b) the anticipated joint life expectancy of the
insureds at Policy issue or adjustment based on the 1980 Table. Since
longevity is generally greater under the 1980 Table, the period for
compliance with the nine percent sales load limitation contained in the
Policies could be longer than the period contemplated by paragraph
(b)(13)(i). Applicants request exemption from Section 27(a)(1) of the
Act and paragraph (b)(13)(i) of Rule 6e-2 to the extent necessary to
permit the anticipated joint life expectancy of the insureds to be
determined on the basis of the 1980 Table for purposes of calculating
the period over which sales loads may not exceed 9 percent.
22. The Policies have been designed on the basis of the 1980 Table
for all purposes. Presumably, the purpose of the life expectancy
provision in paragraph (b)(13)(i) of the Rule is to provide a realistic
limitation on the number of payments that can reasonably be anticipated
under a scheduled premium contract issued for an older insured.
Applicants submit that the more current 1980 Table is appropriate for
this purpose.
First Year Sales Load on Policy Adjustments
23. Applicants propose to assess a new first year sales load upon
any adjustment of a Policy involving an increase in the base premium
and to continue to assess a first year sales load if an adjustment is
made during a period when a first year sales load is currently being
taken. A policy adjustment is essentially the issuance of a new Policy
in exchange for an old Policy with the higher of the tabular cash value
or the Policy value of the old Policy being transferred to the new
Policy at no load except for a charge of $95 (the lesser of $95 or 2
percent in the case of a partial withdrawal) to cover administrative
expenses associated with the reissue.
24. If a policy adjustment is reviewed as an exchange, the exchange
would be permitted under the terms of Rule 11a-2 under the Act, and a
new first year sales load could be assessed without need for exemptive
relief. However, since an adjustment is made in accordance with the
terms of the Policies, the adjusted Policy could be viewed as a
continuation of the old Policy, and a new first year sales load
assessed as a result of an adjustment involving an increase in base
premium might result in the aggregate sales loads exceeding nine
percent if the 20 year period in which to comply with the nine percent
ceiling were measured from the date of issue as opposed to the date of
adjustment. In order to resolve the uncertainty of whether, for sales
load purposes, an adjustment can be viewed as an exchange, Applicants
request exemption from Section 27(a)(1)
[[Page 37511]]
of the Act and Rule 6e-2(b)(13)(i) to the extent necessary to permit
the assessment of a new first year sales load upon an adjustment of a
Policy involving an increase in base premium, which sales load may be
in addition to a first year sales load being taken at the time the
adjustment is made.
25. Applicants submit that collection of a new first year sales
load upon an adjustment involving an increase in base premium is
appropriate in view of the fact that such an adjustment is not expected
to occur in typical cases without substantial sales effort for which
first year sales compensation from Minnesota Mutual will be required.
Applicants assert that, in adopting Rule 6e-3(T) under the Act, the
commission appears to have recognized that a first year sales load
should be allowed for an increase in face amount provided the free look
and conversion rights applicable upon issuance of a contract are
available for the incremental insurance coverage. Applicants submit
that under the Policies an improvement in plan is comparable to an
increase in face amount and that a new first year sales load is
appropriate regardless of the form in which the enhanced insurance
coverage resulting from the increase in premium is taken. The terms of
the Policies permit an owner to obtain at any time the equivalent of a
fixed dollar adjustable life insurance policy, and Minnesota Mutual
will provide a free look right with respect to any adjustment involving
an increase in base premium.
26. Applicants further submit that the continued assessment of an
existing first year sales load in addition to a new first year sales
load is appropriate in the circumstances where it arises. If an
adjustment is made when a first year sales load is being taken--during
the twelve month period following issuance of the Policy or a prior
policy adjustment--the uncollected portion of such sales load will be
assessed during the twelve month period following the adjustment. The
continued assessment of such first year sales load is warranted in this
circumstance as it permits Minnesota Mutual to recover as a sales load
no more than what it would have received had the adjustment not
occurred. Where the adjustment made is one resulting in an increase in
base premium, the only change in the first year sales load applicable
to the base premium previously in effect is that its assessment is made
over a new twelve month period. Assessing the uncollected portion of
the first year sales load applicable to the premium previously in
effect over a new twelve month period is to the advantage of the Policy
owner because it results in a greater portion of the base premium being
available for investment and an earlier increase in Policy value.
27. Where an adjustment results in the assessment of a new first
year sales load or the continued assessment of an existing first year
sales load, the aggregate sales loads thereafter will not exceed nine
percent of the base premiums scheduled to be made over the lesser of 15
years, the premium paying period or the anticipated joint life
expectancy of the insureds. Moreover, the aggregate sales loads
assessed under the Policies will not exceed the sum of the sales loads
that would have been assessed if the increase in face amount or
improvement in plan of insurance resulting from the increase in premium
were provided under a separate Policy. Applicants submit that the
proposed sales load pattern is consistent with the purposes of Section
27(a)(1) of the Act and Rule 6e-(b)(13)(i).
Increase in Proportionate Amount of Sales Load After Policy Adjustments
or Payment of Nonrepeating Premiums
28. As noted above, Applicants propose to impose a new first year
sales load whenever the owner of a Policy requests an adjustment
involving an increase in base premium. The collection of a new first
year sales load against the increase in the base premium will result in
an increase in the percentage sales load deducted from the total base
premium in violation of the Act and Rule, except in the unusual
circumstance where a sales load in the same proportionate amount was
deducted from the immediately preceding payment. An increase in the
percentage sales load deducted from the total base premium also may
occur as a result of the payment of a nonrepeating premium or a policy
adjustment involving a decrease in premium. For example, if the 7
percent basic sales load were to be deducted from the nonrepeating
premium, the payment of such a premium during the first year following
issuance of the Policy or a policy adjustment would result in an
increase in percentage sales load, since the nonrepeating premium would
be subject only to the basic sales load of 7 percent while the next
scheduled premium would be subject to a new first year sales load. If,
at the time of payment of the nonrepeating premium, the waiver of the
basic sales charge, presently contemplated, were in effect, the payment
of such premium at any time would result in an increase in the
percentage sales load, since the next scheduled payment would be
subject to a sales load. Finally, an adjustment during the first Policy
year which reduces the amount of the premium from a greater than whole
life premium will result in an increase in percentage sales load, since
the portion of any premium in excess of the whole life premium is
subject to the basic sales load only. Applicants request exemption from
Section 27(a)(3) of the Act and paragraph (b)(13)(ii) of Rule 6e-2 to
the extent necessary to permit increases in the proportionate amount of
sales load deducted from premiums following certain policy adjustments
or the payment of nonrepeating premiums.
29. The reasons for allowing a new first year sales load following
policy adjustments involving an increase in base premium apply also to
this requested ``stair-step'' relief. Applicants assert that exemptive
relief to permit an increase in percentage sales load after the payment
of a nonrepeating premium is appropriate in order to encourage the
payment of such premiums and to avoid assessing a sales load in excess
of the charge Minnesota Mutual considers necessary to provide for its
anticipated sales expenses. Similarly, exemptive relief to permit a
percentage increase in sales load upon a reduction in premium under
plans which are greater than whole life is justified by the advantage
to Policy owners in having a sales load schedule in which the first
year sales load is confined to the whole life premium. Applicants
submit that it is not in the interest of investors to require the
imposition of sales loads in excess of those deemed necessary by
investment companies and their sponsors.
Deduction of Charges From Account Assets
30. Applicants propose to deduct certain charges from assets of the
Account other than for administrative services, such as charges for the
cost of insurance and charges for the face amount guarantee. Applicants
request exemption from Sections 26(a) (1) and (2) and 27(c)(2) of the
Act and paragraph (b)(13)(iii) of Rule 6e-2 to the extent necessary to
permit the deduction from Account assets of the charges it proposes to
make under the Policies for the cost of insurance and the face amount
guarantee.
31. Applicants argue that the Commission appears to have recognized
the appropriateness of deducting cost of insurance charges and charges
for guaranteed death benefit risks from separate account assets.
Paragraphs (b)(13)(iii) (E) and (F) of Rule 6e-3(T) provide exemptive
relief to permit the
[[Page 37512]]
deduction of cost of insurance charges and charges for guaranteed death
benefit risks, respectively, for flexible premium variable life
policies, and the Commission's proposed amendments to Rule 6e-2 would
also expressly provide such relief. Here, Minnesota Mutual's charge for
the cost of insurance is in an amount not in excess of the cost of
insurance derived from the 1980 Table, and its charge for the face
amount guarantee at a maximum rate of 3 cents per thousand dollars of
face amount per month, a charge for the risks associated with the
guaranteed death benefit, is reasonable in light of the risks assumed.
Minnesota Mutual has prepared a memorandum setting forth the basis for
its conclusion as to the face amount guarantee charge, including the
methodology it used to support that conclusion, which is based on an
analysis of the pricing structure of the Policies and an analysis of
the various risks associated with the Policies, including the special
risks arising from the ability to adjust a Policy using the higher of
its tabular cash value and the Policy value. Minnesota Mutual will keep
and make available to the Commission upon request a copy of such
memorandum. Minnesota Mutual also represents that the sales charges
under the Policies are excepted to cover the costs of distributing the
Policies.
Conversion to Fixed Benefit Adjustable Life Policy
32. A principal feature of the Policies is that the initial face
amount of insurance may change either automatically or at the
initiative of the Policy owner. As has been noted, Policies may be
issued with a scheduled reduction in face amount. They may also be
issued with a scheduled increase in face amount if they are projected
to become paid-up on a date other than a Policy anniversary. In
addition, when a Policy becomes paid-up, Minnesota Mutual will
determine a new face amount, which will be at least equal to the face
amount previously in effect. Finally, an owner may increase or decrease
the face amount of a Policy, subject to certain limitations, as part of
a Policy adjustment, and a change in face amount will occur in
connection with the automatic conversion from the protection option
death benefit to the cash option death benefit at the Policy
anniversary nearest the younger insured's age 70.
33. Applicants assert that the conversion right required by the
Rule is satisfied by the owner's right under the Policy to transfer all
of the Policy value to the guaranteed principal account without charge,
and to thereafter allocate all new premiums to the guaranteed principal
account. Since a Policy, the benefits of which are based exclusively on
the guaranteed principal account, may have a plan of insurance other
than for the whole life, and have a face amount at the time the owner
exercises this ``conversion'' right either greater or less than the
initial face amount of the Policy, the conversion right provided by the
Policies may not satisfy the requirements of paragraph (b)(13)(v)(B).
Applicants request exemption from Section 27(d) of the Act and
paragraph (b)(13)(v)(B) of Rule 6e-2 to the extent necessary to permit
the conversion right provided by the Policies to have a death benefit
equal to the Policy's then current face amount and a plan of insurance
which may be less than for the whole of life.
34. The conversion right to the Policies in essence provides a
Policy owner with the right to obtain fixed benefit coverage that most
closely corresponds to the owner's then current variable life insurance
coverage. This right is not confined to the two year period
contemplated by the Rule, but is available so long as a Policy is in
force and all scheduled premiums have been paid. In view of the
adjustable features of the Policies, the current face amount and plan
of insurance presumably reflect the owner's judgment as to the type and
amount of insurance coverage most appropriate in view of his or her
current circumstances. In Applicants' opinion, the same type and amount
of fixed benefit coverage should be available upon conversion.
Moreover, to require the owner of a Policy having a term plan of
insurance to take a whole life policy upon exercise of the conversion
right could well discourage exercise of the right, as it would force
the owner to accept a policy design differing substantially from the
one he or she has.
35. The proposed amendments to Rule 6e-2 would revise paragraph
(b)(13)(v)(B) so as to permit conversion to a fixed benefit policy
other than for the whole of life. The amendment would permit the life
insurer ``to convert to any type of life insurance policy other than a
flexible or scheduled contract, rather than to covert only to a whole
life insurance policy * * *.'' Similar flexibility is presently
available for flexible premium contracts under the comparable
provisions of paragraph (b)(13)(v)(B) of Rule 6e-3(T). In addition,
Rule 6e-3(T) allows conversion to a policy with either the same death
benefit or net amount at risk as the flexible premium contract at the
time of conversion as opposed to the date of issue. The absence of a
similar provision in Rule 6e-2 may reflect, not only the fact that Rule
6e-2, unlike Rule 6e-3(T) does not contemplate increases in insurance
benefits at the request of the contract holder, but also a
determination that the conversion right should not be impaired by poor
investment performance. As the changes in face amount under the
Policies will never be as a result of poor investment performance,
there is no valid reason for restricting the conversion right to the
death benefit selected at issue.
Modified Free Look Right Procedures
36. Applicants request relief from Section 27(f) of the Act and
Rules 27f-1 and 6e-2(b)(13)(viii)(C) thereunder to the extent necessary
to permit personal delivery to policy owners of free look right notices
which contain information comparable to that required by Form N-27I-2,
but which are not in the format required by that Form. Rule 6e-
3(T)(b)(13)(viii) provides an exemption from Section 27(f) and Rule
27f-1 with respect to flexible premium variable life insurance
contracts conditioned on the provision of free look rights
substantially identical to those prescribed in rule 6e-2. Rule 6e-
3(T)(13)(viii)(C), however, permits those involved with issuing and
selling flexible premium variable life insurance policies: (a) to
modify the free look notice format provided in Form N-27I-2, provided
that the information presented in the modified notice is comparable to
that required by Form N27I-2; and (b) send the free look notice either
by personal delivery or first class mail.
37. Applicants submit that whether a life insurance policy has a
scheduled premium structure or a flexible premium structure is
irrelevant to the design or method of delivery appropriate for free
look right notices associated with the policy. In either case, the free
look right and the notices thereof are occasioned by a sales load
structure that imposes on some payments a sales load of greater than 9
percent of the payment. So long as an adequate free look right and
reliable means of providing policy owners specific notice of that right
are present, the particular design of the notice or the mode of
delivery selected should be of no consequence. Applicants assert that
the Commission appears to have recognized this by proposing to amend
paragraph (b)(13)(viii)(C) of Rule 6e-2 to afford persons involved with
issuing and selling scheduled premium policies the same degree of free
look notice format and delivery flexibility as presently afforded in
connection with flexible premium policies.
[[Page 37513]]
Offer of Exchange
38. The owners of a Policy may ask, so long as both insureds are
alive, to exchange the Policy for two individual policies insuring each
of the insureds separately. Since the individual policies may be
variable life policies issued by a separate account of Minnesota
Mutual, including the Account, which is registered under the Act as a
unit investment trust, the exchange provision may be viewed as an offer
of exchange within the prohibition of Sections 11 (a) and (c).
Applicants request an order pursuant to Section 11 of the Act
permitting the exchange of a Policy for two individual variable
insurance policies in accordance with the provision described above.
39. An exchange pursuant to the Policy provision is subject to
satisfactory evidence of insurability of both insureds. If the exchange
is permitted by Minnesota Mutual, each of the new individual policies
issued will have one-half of the death benefit, Policy value and Policy
loan of the Policy surrendered, and the scheduled premiums to be paid
to the new policies will be based on the age, gender and risk class of
each insured on the date of exchange. The purpose of Section 11 is to
prevent ``switching.'' ``Switching'' is a term of art that refers to
the practice of inducing security holders of one investment company to
exchange their securities for those of a different investment company
solely for the purpose of exacting additional selling charges. Because
the new policies together will have a policy value equal to the policy
value of the surrendered security, the exchange will be made on the
basis of the relative net asset values of the policies involved.
Furthermore, no charge, administrative or otherwise, will be made in
connection with the exchange, and no sales charge will be imposed under
the new policies on policy values transferred to the new policies in
connection with the exchange. Applicants conclude that the terms of the
proposed offer of exchange do not involve any of the switching abuses
that led to the adoption of Section 11 of the Act.
Class Relief
40. Extending the relief herein requested to Future Contracts,
Future Accounts and Future Underwriters is appropriate in the public
interest. An order so providing should promote competitiveness in the
variable life insurance market by eliminating the need for filing
redundant exemptive applications, thereby reducing Minnesota Mutual's
costs. The delay and expense of repeatedly seeking exemptive relief for
substantially similar contracts, new separate accounts or new principal
underwriters could impair Minnesota Mutual's ability to take effective
advantage of business opportunities that might arise. There is no
benefit or additional protection afforded to investors by requiring
Applicants to repeatedly seek exemptive relief with respect to the same
issues addressed in this application.
Conclusion
For the reasons summarized above, Applicant 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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18173 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M
