[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17586]
[[Page Unknown]]
[Federal Register: July 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20405; File No. 812-8994]
First North American Life Assurance Company, et al.
July 13, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: First North American Life Assurance Company (``First North
American''), FNAL Variable Account (``Variable Account''), NASL
Financial Services, Inc. (``NASL Financial'') and Wood Logan Associates
Inc. (``Wood Logan'').
Relevant 1940 Act Sections: Exemption requested under Section 6(c) from
Sections 26(a)(2)(C) and 27(c)(2).
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit the deduction from the assets of the Variable
Account of a mortality and expense risks charge imposed under certain
flexible purchase payment individual deferred variable annuity
contracts.
FILING DATE: The application was filed on May 19, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
person may request a hearing on this application by writing to the
Secretary of the SEC 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 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. Notification of the date of a
hearing may be requested by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington D.C.
20549. Applicants: Kenneth H. Conrad, First North American Life
Assurance Company, Corporate Center at Rye, 555 Theodore Fremd Avenue,
Rye, New York 10580.
FOR FURTHER INFORMATION CONTACT:
Joyce M. Pickholz, Senior Counsel, or Michael V. 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 SEC's Public
Reference Branch.
Applicants' Representations
1. First North American, a wholly owned subsidiary of North
American Security Life Insurance Company (``Security Life''), is a
stock life insurance company organized under the laws of New York in
1992. Security Life is a wholly owned subsidiary of North American Life
Assurance Company. First North American is the depositor of the
Variable Account. The Variable Account is registered under the Act as a
unit investment trust and was established under New York law to offer
certain variable annuity contracts, including the variable annuity
contracts described in the application (the ``Contracts''). The
Variable Account is divided into sub-accounts which invest in
corresponding portfolios of NASL Series Trust (the ``Trust'').
2. NASL Financial, a wholly owned subsidiary of Security Life, is
the principal underwriter of the Contracts. It is a broker-dealer
registered under the Securities Exchange Act of 1934 (``1934 Act'') and
a member of the National Association of Securities Dealers, Inc. NASL
Financial also serves as investment adviser to the Trust and is
registered as an investment adviser under the Investment Advisers Act
of 1940.
3. Wood Logan, a Connecticut corporation registered as a broker-
dealer under the 1934 Act, serves as the exclusive promotional agent
for the Contracts.
4. The Contracts are flexible purchase payment individual deferred
variable annuity contracts which will provide for the accumulation of
values and the payment of annuity benefits on a fixed or variable
basis. The Contracts are designed for use in connection with retirement
plans which may or may not qualify for special income tax treatment
under the Internal Revenue Code of 1986, as amended.
5. Prior to the maturity date, First North American will, on the
last day of each contract year, deduct from the accumulated value of
each Contract an annual administration fee of $30. This annual
administration fee will also be deducted when a Contract is surrendered
on any date other than a contract anniversary. However, if prior to the
maturity date the contract value exceeds $100,000 at the time of the
fee's assessment, the fee will be waived. During the annuity period,
the fee is deducted on a pro-rata basis from each annuity payment. In
addition, First North American will deduct from the sub-accounts each
valuation period an administration charge equal to .15% of the sub-
account assets on an annualized basis. These fees are intended to
compensate First North American for the cost of providing
administrative services attributable to the Contracts and the
operations of the Variable Account and the Company in connection with
the Contracts. The fees are based upon First North American's current
estimates of the administrative costs attributable to the Contracts
over their lifetime and are not designed or expected to generate a
profit. These fees are guaranteed never to be increased. Applicants
will rely on Rule 26a-1 under the Act for the necessary exemptive
relief to charge such fees.
6. No sales charge will be deducted from purchase payments as they
are made. Instead, a withdrawal charge (contingent deferred sales
charge) will be assessed in some circumstances when the contract value
is completely or partially withdrawn prior to the maturity date.
Generally, a withdrawal charge only applies to the withdrawal of
purchase payments that have been in the Contract less than seven
complete years. The withdrawal charge is a percentage of the amount
withdrawn which is subject to the charge, which percentage declines 6-
6-5-5-4-3-2% over the first seven years that a purchase payment has
been in the Contract. Withdrawals are allocated first to earnings and
then to purchase payments on a first-in-first-out basis. There is no
withdrawal charge with respect to withdrawals of investment earnings
and certain other free withdrawal amounts. Under no circumstances will
the total of all withdrawal charges exceed 6% of total purchase
payments made. The withdrawal charge is intended to reimburse First
North American for compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses
relating to sales activity. Applicants will rely on Rule 6c-8 under the
Act for the necessary exemptive relief to permit imposition of the
withdrawal charge.
7. First North American assumes mortality and expense risks under
the Contracts. The mortality risk is the risk that annuitants may live
for a longer period of time than estimated. First North American
assumes this mortality risk by virtue of annuity rates incorporated
into the Contract, which cannot be changed. This assures each annuitant
that his longevity will not have an adverse effect on the amount of
annuity payments. Also, First North American guarantees that if the
owner dies before the maturity date, it will pay a death benefit. The
expense risk assumed by First North American is the risk that the
administration fees, which fees cannot be increased, may be
insufficient to cover actual expenses. To compensate it for assuming
these risks, First North American will deduct from each sub-account a
charge each valuation period at an effective annual rate of 1.25%,
consisting of .80% for mortality risks and .45% for expense risks. The
rate of the mortality and expense risk charge cannot be increased. If
the mortality and expense risk charge is insufficient to cover the
actual cost of the mortality and expense risk undertaking, First North
American will bear the loss. Conversely, if the charge proves more than
sufficient, the excess will be profit to First North American and will
be available for any proper corporate purpose including, among other
things, payment of distribution expenses.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission, by order upon application, may conditionally or
unconditionally exempt any persons, securities, or transactions from
any provision of the 1940 Act 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. Section 27(c)(2) of the 1940 Act prohibits the issuer of a
periodic payment plan certificate, and any depositor or underwriter for
such issuer, from selling such periodic payment plan certificate unless
proceeds of payments on such certificates (other than sales loads) are
held under an indenture or agreement containing specified provisions.
Section 26(a)(2) and the Rules thereunder do not permit a deduction
from the assets of a separate account for mortality and expense risk
charges.
3. Applicants represent that the 1.25% mortality and expense risk
charge is within the range of industry practice for comparable annuity
products. Applicants state that this representation is based upon an
analysis of publicly available information about selected similar
industry products, taking into consideration such factors as the method
used in charging sales loads, any contractual right to increase charges
above current levels and the existence of charges against separate
account assets for other than mortality and expense risks. First North
American will maintain at its principal office, available to the
Commission, a memorandum setting forth in detail the products analyzed
in the course of, and the methodology and results of, the comparative
survey made.
4. Applicants acknowledge that the withdrawal charge will be
insufficient to cover all costs relating to the distribution of the
Contracts and that, if a profit is realized from the mortality and
expense risk charge, all or a portion of such profit may be offset by
distribution expenses not reimbursed by the withdrawal charge. First
North American has concluded that there is a reasonable likelihood that
the proposed distribution financing arrangements made with respect to
the Contracts will benefit the Variable Account and the contract
owners. The basis for such conclusion is set forth in a memorandum
which will be maintained by First North American at its principal
office and will be available to the Commission.
5. First North American represents that the Variable Account will
invest only in an underlying mutual fund which undertakes, in the event
it should adopt any plan under Rule 12b-1 to finance distribution
expenses, to have such plan formulated and approved by a board of
directors, a majority of the members of which are not ``interested
persons'' of such fund within the meaning of section 2(a)(19) of the
Act.
Conclusion
Applicants submit that for the reasons and upon the facts set forth
above, 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. 94-17586 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M
