[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: 94-17587]
[[Page Unknown]]
[Federal Register: July 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20404; File No. 812-8914]
North American Security Life Insurance 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: North American Security Life Insurance Company (``Security
Life''), NASL 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 of a mortality and expense risk
charge from the assets of the Variable Account with respect to certain
flexible purchase payment individual and group deferred variable
annuity contracts.
FILING DATE: The application was filed on March 29, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing 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: John D. DesPrez, III, Esq., North American Security
Life Insurance Company, 116 Huntington Avenue, Boston, Massachusetts
02116.
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. Security Life, a wholly owned subsidiary of North American Life
Assurance Company, is a stock life insurance company organized under
the laws of Delaware in 1979. Security Life is the depositor of the
Variable Account. The Variable Account is registered under the Act as a
unit investment trust and was established, under Delaware law, to offer
certain variable annuity contracts, including the variable 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. NASL Financial also serves
as investment adviser to the Trust.
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 and group
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 that 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, Security Life 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, Security Life 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 Security Life 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 Security Life's current estimates of the
administrative costs attributable to the Contracts over their lifetime
and are not designed or expected to generate a profit. In the case of
individual Contracts, these fees are guaranteed never to be increased.
For group Contracts, these fees may be modified by Security Life on 60
days notice to the group holder of the Contract, provided that such
modification shall apply only to certificates issued under the Contract
after the effective date of the modification. 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. In the case of group Contracts only, the withdrawal
charge may be modified by Security Life on 60 days written notice to
the group holder of the Contract, provided that the modification shall
apply only to certificates issued under the Contract after the
effective date of the modification. The withdrawal charge is intended
to reimburse Security Life 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. Security Life 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. Security Life assumes this
mortality risk by virtue of annuity rates incorporated into the
Contract, which for individual Contracts cannot be changed and in the
case of group Contracts, cannot be changed for outstanding
certificates. This assures each annuitant that his longevity will not
have an adverse effect on the amount of annuity payments. Also,
Security Life guarantees that if the owner dies before the maturity
date, it will pay a death benefit. The expense risk assumed by Security
Life is the risk that the administration fees, which fees cannot be
increased for individual Contracts or outstanding certificates, may be
insufficient to cover actual expenses.To compensate it for assuming
these risks, Security Life 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.
8. The rate of the mortality and expense risk charge cannot be
increased for individual Contracts. The rate may be increased for group
Contracts but only for certificates issued after the effective date of
the Contract. Applicants acknowledge that if the mortality and expense
charge is increased, further exemptive relief may be necessary.
Security Life reserve the right to issue group Contracts and
certificates with a lower mortality and expense risk charge where it
determines that the risks of the group involved are less than for the
persons for whom the Contracts and certificates were originally
designed. If the mortality and expense risk charge is insufficient to
cover the actual cost of the mortality and expense risk undertaking,
Security Life will bear the loss. Conversely, if the charge proves more
than sufficient, the excess will be profit to Security Life 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. Security
Life 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.
Notwithstanding the foregoing, Security Life 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 Security Life
at its principal office and will be available to the Commission.
5. Security Life 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. 94-17587 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M
