[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: 94-17588]
[[Page Unknown]]
[Federal Register: July 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20406; File No. 812-8948]
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 distribution fee and a mortality
and expense risk charge from the assets of the Variable Account with
respect to certain flexible purchase payment individual deferred
variable annuity contracts.
FILING DATE: The application was filed on April 25, 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, NW., Washington DC 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 deferred
variable annuity contracts which will provide for the accumulation of
values on a variable basis and the payment of 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. The
minimum initial purchase payment for the Contracts will be $25,000.
5. Security Life reserves the right to charge an annual
administration fee if the contract value of a Contract drops below
$10,000 as the result of a partial withdrawal. In such event, Security
Life may, on the last day of each contract year, deduct from the
contract value of such Contract an annual administration fee of $30.
This annual administration fee may also be deducted under such a
Contract if the Contract is surrendered on any date other than a
contract anniversary. In addition, Security Life will deduct from the
sub-accounts each valuation period an administration charge equal to
.25% 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.
Applicants represent that the fees are based upon Security Life's
estimates of the administrative costs for such services over the
lifetime of the Contracts, are guaranteed never to be increased, and
are not designed or expected to generate a profit. Applicants rely on
Rule 26a-1 under the Act to assess such fees.
6. No sales charge will be deducted from purchase payments as they
are made. Instead, Security Life will deduct from the sub-accounts each
valuation period a distribution fee equal to .15% of sub-account assets
on an annualized basis, and prior to the maturity date, a 3% withdrawal
charge (contingent deferred sales charge) will be assessed in
circumstances where complete or partial withdrawals are attributed to
purchase payments made within three years prior to the date of the
withdrawal. Applicants represent that the distribution fee and the
withdrawal charge are 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 rely on Rule 6c-8 under the Act to impose the
withdrawal charge.
7. To compensate it for assuming mortality and expense risks under
the Contracts, Security Life deducts from each sub-account a charge
each valuation period at an effective annual rate of 1.25%, consisting
of .80% for the mortality risks and .45% for the expense risks. The
rate of the mortality and expense risk charge cannot be increased.
8. The Mortality risk assumed by Security Life under the Contracts
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 cannot be changed.
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 cannot be increased, may be
insufficient to cover actual expenses. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality
and expense risk undertakings, 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 or distribution expense charges.
3. Applicants state that the proposed distribution fee is an
appropriate method to help defray Security Life's costs associated with
the sale of the Contracts. Applicants represent that Security Life will
monitor the performance of the Variable Account to ensure that with
respect to any Contract owner the cumulative sum of the distribution
fee and the withdrawal charge will not exceed 9% of the total premiums
paid. Applicants state that assurance that the sum of such charges will
never exceed 9% of premiums paid can be obtained by monitoring the
performance of the Variable Account. Applicants represent that if the
performance of the Variable Account should be so favorable so that it
is possible that the 9% limit may be reached under any outstanding
Contract, Security Life will promptly commence monitoring Contracts on
an individual basis to make sure that the limit is not exceeded.
4. 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.
5. Applicants acknowledge that the distribution fee and 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
distribution fee and the withdrawal charge. Notwithstanding the above,
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.
6. 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. 94-17588 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M
