[Federal Register Volume 61, Number 148 (Wednesday, July 31, 1996)]
[Notices]
[Pages 40040-40043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19374]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22096; No. 812-9996]
Keyport Life Insurance Company, et al.
July 25, 1996.
Agency: Securities and Exchange Commission (``Commission'').
Action: Notice of Application for an Order pursuant to the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Keyport Life Insurance Company (``Keyport''), KMA Variable
Account (``KMA Account''), Variable Account A (``Account A''),
Independence Life and Annuity Company (``Independence life''),
Independence Variable Annuity Separate Account (``VA Account''),
Liberty Life Assurance Company of Boston (``Liberty Life,'' together
with Keyport and Independence Life, the ``Insurance Companies''),
Variable Account K (``Account K,'' together with KMA Account, Account A
and VA Account, the ``Separate Accounts''), and Keyport Financial
Services Corporation (``KFSC'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the 1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction of mortality and expense risk charges
[[Page 40041]]
from the assets of: (a) the Separate Accounts in connection with the
offering of certain flexible premium variable annuity contracts
(``Existing Contracts''); and (b) any other separate account (``Future
Accounts'') established by Applicants in connection with the offering
of variable annuity contracts (``Future Contracts,'' together with
Existing Contracts, ``Contracts'') which are substantially similar in
all material respects to the Existing Contracts. Exemptive relief also
is requested to the extent necessary to permit the offer and sale of
Contracts for which certain broker-dealers other than KFSC (``Future
Underwriters'') serve as the principal underwriter.
FILING DATE: The application was filed on February 16, 1996, and
amended on July 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 20, 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 Bernard R.
Beckerlegge, Esq., General Counsel, Keyport Life Insurance Company, 125
High Street, Boston, Massachusetts 02110.
FOR FURTHER INFORMATION CONTACT: Kevin M. Kirchoff, Senior Counsel,
Office of Insurance Products (Division of Investment Management), at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the Public
Reference Branch of the Commisison.
Applicants' Representations
1. Keyport is a stock life insurance company authorized to do
business in the Virgin Islands, the District of Columbia and all states
except New York. Keyport is an indirect subsidiary of Liberty Mutual
Insurance Company (``Liberty Mutual'').
2. Independence Life, a Rhode Island corporation and subsidiary of
Keyport, is authorized to do business in the District of Columbia and
all states except New York.
3. Liberty Life is a stock life insurance company incorporated in
Massachusetts and licensed to do business in all states and in the
District of Columbia. Liberty Life is a subsidiary of Liberty Mutual
and Liberty Mutual Fire Insurance Company.
4. Keyport established KMA Account and Account A pursuant to the
laws of Rhode Island on January 9, 1980, and January 30, 1996,
respectively. Independence Life established VA Account pursuant to the
laws of Michigan on June 26, 1987. Liberty Life established Account K
pursuant to the laws of Massachusetts on September 13, 1989, Each of
the Separate Accounts is divided into sub-accounts (``Sub -Accounts'')
that correspond to portfolios of certain registered investment
companies (``Existing Funds''). The Separate Accounts now or in the
future may serve as funding media for the Contracts.
5. Future Accounts will be registered pursuant to the 1940 Act as
either open-end management investment companies or unit investment
trusts. Separate Accounts and Future Accounts may invest in Existing
Funds and in other management investment companies (''Other Funds'').
Future Accounts organized as open-end management investment companies
also may invest directly in portfolio securities.
6. KFSC, the principal underwriter of the Contracts, is registered
as a broker-dealer pursuant to the Securities Exchange Act of 1934 and
is a member of the National Association of Securities Dealers, Inc.
(``NASD''). Keyport is the corporate parent of KFSC.
7. Future Underwriters will be members of the NASD, and will
control, be controlled by, or be under common control with any of
Keyport, Independence Life or Liberty Life.
8. The Existing Contracts are group flexible purchase payment
variable annuities. Certificates will be issued to individuals under
group contracts. The Contracts also may be offered as individual
contracts. The Contracts will be offered through various distribution
channels, including banks and affiliated and unaffiliated broker-
dealers (''Channels''). The Contracts will accommodate varying design
requests of the Channels by offering choices of various fees, charges
and certain contract features (including death benefits, funding media,
withdrawal rights, transfer privileges, annuity options, dollar cost
averaging, systematic withdrawals and account rebalancing).
9. The Existing Contracts will be offered with a variety of
investment options, including Steinroe Trust, Keyport Trust and Manning
& Napier Insurance Fund, each of which is registered pursuant to the
1940 Act as an open-end management investment company.
10. Three alternative death benefits will be offered, all or only
certain of which may be available under a particular Contract. At the
time of issuance of a Contract, the death benefit is the initial
purchase payment; thereafter, the death benefit is as follows:
a. Death Benefit 1 is the prior death benefit plus any additional
purchase payments, less any partial withdrawals, including the amount
of any applicable surrender charge.
b. Death Benefit 2 at issue is the initial purchase payment.
Thereafter, the death benefit is calculated for each valuation period
by adding any additional purchase payments, and deducting any partial
withdrawals. The certificate value for each certificate anniversary
(the ``Anniversary Value'') is determined. Each Anniversary Value is
increased by any purchase payments made after that anniversary. This
resultant value is then decreased by an amount calculated at the time
of any partial withdrawal made after that anniversary. The amount is
calculated by taking the amount of any partial withdrawal, and dividing
by the certificate value immediately preceding the partial withdrawal,
and then multiplying by the Anniversary Value immediately preceding the
withdrawal. The greatest Anniversary Value, as so adjusted, (the
``greatest Anniversary Value'') is the death benefit unless the sum of
net purchase payments is higher. The sum of net purchase payments will
be the death benefit if such amount is higher than the greatest
Anniversary Value.
c. Death Benefit 3 is calculated for each valuation period by
applying a death benefit interest rate to the previously calculated
death benefit, adding any purchase payments made during the current
valuation period, and deducting any partial withdrawals (including any
applicable surrender charge) taken during the current valuation period.
The death benefit interest rate is applied to each separate purchase
payment until it equals the maximum guaranteed death benefit.
Initially, the maximum guaranteed death benefit is equal to a multiple
of two times the initial and each additional purchase payment made.
Thereafter, the maximum guaranteed death benefit at of the effective
date of a partial withdrawal
[[Page 40042]]
is reduced first by the amount of the withdrawal representing
appreciation and second in proportion to the reduction in certificate
value for any partial withdrawal representing purchase payments.
11. Partial withdrawals may be permitted during the accumulation
period without imposition of a surrender charge, as follows:
a. In any certificate year, Contract owners may withdraw an
aggregate amount not to exceed, at the time of the withdrawal: (i) the
certificate value, less (ii) the portion of the purchase payments not
previously withdrawn.
b. In any certificate year after the first, Contract owners may
withdraw the positive difference, if any, between the amount withdrawn
pursuant to ``a'' above, in any such subsequent year and a specified
percentage (currently 10 percent) of the certificate value as of the
preceding certificate anniversary.
Surrender charges will be deducted with respect to withdrawals in
excess of these amounts. The Contracts will provide varying free
withdrawal amounts, minimum withdrawal amounts and minimum required
remaining certificate values.
12. Applicants contemplate offering the Contracts with the
following payment options: (a) income for a fixed number of years; (b)
life income with 10 years of payments guaranteed; and (c) joint and
last survivor income. Each option is available in two forms--as a
variable annuity for use with the Separate Accounts and Future Accounts
and as a fixed annuity for use with the general accounts of the
Insurance Companies. Applicants do not currently anticipate offering
any additional variable annuity options, but may offer additional fixed
annuity options. Other fixed annuity options may be arranged by mutual
consent.
13. The Contracts will specify minimum amounts to be transferred
and minimum required remaining values in the Sub-Account from which the
transfer is made, the number of transfers that can be made during the
accumulation period and annuity period and the limitations on transfers
from the fixed account. The Contracts will reserve the right to impose
a charge for transfers exceeding a specified number.
14. The Contracts may offer dollar cost averaging, Sub-Account
rebalancing and programs of systematic monthly transfer between Sub-
Accounts and withdrawals.
15. The Contracts will provide for variations in sales load
structures, including an asset-based charge, a contingent deferred
sales charge (``CDSC''), or both. Applicants state that sales loads in
the aggregate will not exceed 9 percent of purchase payments.
16. Charges for mortality and expense risks will range from a
minimum charge of 0.35 percent to a maximum charge of 1.25 percent per
annum. Variations in the mortality and expense risk charge from the
minimum charge will be based on additional mortality and expense risks
experienced by Applicants as a result of the particular Contract design
features. The mortality and expense risk charge may be a source of
profit for Applicants and the excess may be used for, among other
things, the payment of distribution expenses.
17. The mortality and expense risk charge is imposed to compensate
Applicants for bearing certain mortality and expense risks under the
Contracts. Applicants assert that the mortality and expense risk charge
is a reasonable charge to compensate Applicants for the risks that: (a)
annuitants will live longer than was anticipated when the annuity rates
guaranteed in the Contracts were set; (b) the death benefit will be
greater than the Contract value; and (c) administrative expenses will
exceed the charges guaranteed for the Contracts.
18. Other charges will be deducted in any appropriate manner
permitted and subject to the conditions and requirements of applicable
rules under the 1940 Act including, but not limited to, any ``at-cost''
standards. Applicants represent that the administrative charges will
represent compensation for the administrative costs, without profit,
expected to be incurred over the duration of the Contracts.
Applicants' Legal Analysis
1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank and held under arrangements that prohibit any payment to
the depositor or principal underwriter except a reasonable fee, as the
Commission may prescribe, for performing bookkeeping and other
administrative services.
2. Section 6(c) of the 1940 Act authorizes the Commission to exempt
any person, security or transaction, or any class or classes of
persons, securities or transactions, from the provisions of the 1940
Act and the rules thereunder, if and to the extent that such exemption
is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
3. Applicants request an order pursuant to Section 6(c) of the 1940
Act granting exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof
to the extent necessary to permit them to assess charges for mortality
and expense risks ranging from a minimum of 0.35 percent to a maximum
of 1.25 percent per annum from the assets of the Separate Accounts
under the Contracts and Future Accounts under Future Contracts.
Applicants also seek exemptive relief for Future Underwriters to serve
as principal underwriters of the Contracts.
4. Applicants submit that the relief requested with respect to the
Contracts meets the standards set forth in Section 6(c) of the 1940 Act
and is consistent with existing precedent. Applicants assert that,
without the requested relief, they would be required to request and
obtain exemptive relief in the future in connection with the Contracts.
Applicants represent that such additional requests for exemptive relief
would present no issues under the 1940 Act that have not already been
addressed in their current application.
5. Applicants state that the requested relief is appropriate in the
public interest because it would promote competitiveness in the
variable annuity market by eliminating the need for each Applicant and
its affiliates to file redundant exemptive applications, thereby
reducing administrative expenses and maximizing the efficient use of
resources. Applicants assert that investors would not receive any
benefit or additional protection by requiring Applicants repeatedly to
seek exemptive relief with respect to the same issues addressed in this
application. Applicants assert that the delay and expense involved
would impair the ability of Applicants to take effective advantage of
business opportunities as they arise and would disadvantage investors
as a result of the increased expenses of Applicants.
6. Applicants submit that the exemptive relief requested with
respect to the offering of the Contracts through Future Underwriters is
consistent with the standards set forth in Section 6(c) of the 1940
Act. Applicants assert that, without the requested relief, they would
be required to request and obtain exemptive relief in connection with
Future Underwriters. Applicants represent that such requests for
exemptive relief would present no issues under the 1940 Act that are
not addressed in their current application.
7. Applicants submit that the mortality and expense risk charges
are
[[Page 40043]]
reasonable and proper insurance charges imposed to compensate
Applicants for bearing certain mortality and expense risks under the
Contracts.
Applicants' Conditions
1. Applicants represent that the mortality and expense risk charges
will range from a minimum of 0.35 percent to a maximum of 1.25 percent,
that each form of the Contracts will include a mortality and expense
risk charge that is within the range of industry practice for
comparable variable annuity contracts, and the differentials between
mortality and expense risk charges for different forms of the Contracts
are reasonable in relation to the differentials in mortality or expense
risks assumed. Applicants undertake not to offer any form of the
Contracts without first making the required analysis and determinations
that the mortality and expense risk charge is within the range of
industry practice and that the differentials between mortality and
expense risk charges for different forms of the Contracts are
reasonable in relation to the differentials in mortality or expense
risks assumed. Applicants state that these determinations will be made
with respect to all forms of the Contracts, based on analysis by
Applicants of publicly available information about similar industry
products, taking into consideration such factors as current charge
levels and benefits provided, the existence of expense charge
guarantees and guaranteed annuity rates. Each Applicant undertakes to
maintain at its principal office, available to the Commission upon
request, a memorandum setting forth in appropriate detail the products
analyzed, the methodology, and the results of the analysis, in making
the foregoing determinations.
2. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge under the Contracts, all or a portion
of such profit may be available to pay distribution expenses not
reimbursed by the CDSC. Applicants state that, notwithstanding the
foregoing, Applicants will not commence offering a form of the
Contracts until the relevant Applicant has concluded that there is a
reasonable likelihood that the proposed distribution financing
arrangements will benefit the Separate Account of the Applicant and the
affected Contract owners. Each Applicant represents that is will
maintain at its principal office, and make available to the Commission,
upon request, a memorandum setting forth the basis for such conclusion.
3. Each form of the Contracts will be offered by a separate
prospectus and statement of additional information that will be filed
pursuant to either Rule 497 or Rule 485 under the Securities Act of
1933. Applicants undertake to include in the letter transmitting each
such filing representations that the relevant Applicants have made
determinations that: (a) the mortality and expense risk charge is
within the range of industry practice; (b) the differential between
mortality and expense risk charges provided by the form of the Contract
and such charges provided by other forms of the Contracts is reasonable
in relation to the differentials in mortality or expense risks assumed;
and (c) there is a reasonable likelihood that the distribution
financing arrangements will benefit the Separate Account of the
Applicant and the affected Contract owner.
4. Each Applicant represents that its Separate Account will invest
only in a management investment company that undertakes, in the event
it adopts a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, to have such plan formulated and approved by a
board of directors, a majority of whom are not interested persons of
such investment company.
5. Each Applicant undertakes to abide by the terms and conditions
of any rule that may be adopted by the Commission in the future with
regard to the deduction of mortality and expense risk charges.
Conclusion
For the reasons summarized above, Applicants submit that the
exemptions requested are 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19374 Filed 7-30-96; 8:45 am]
BILLING CODE 8010-01-M
