[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19447]
[[Page Unknown]]
[Federal Register: August 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20441; 812-8894]
John Hancock Variable Life Insurance Company, et al.
August 4, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of Application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: John Hancock Variable Life Insurance Company (``JHVLICO'');
John Hancock Variable Life Account U (``Account U''); John Hancock
Mutual Life Insurance Company (``John Hancock''); and John Hancock
Mutual Variable Life Insurance Account UV (``Account UV''). (JHVLICO,
Account U, John Hancock, and Account UV shall be referred to
collectively as the ``Applicants.'')
RELEVANT 1940 ACT SECTIONS AND RULES: Order requested under Section
6(c) of the 1940 Act for exemptions from Section 27(a)(3) thereof and
Rules 6e-3(T)(b)(13)(ii) and (d)(1) thereunder.
SUMMARY OF APPLICATION: The Applicants seek an order permitting them to
offer and sell certain variable life insurance policies that provide
for the following: (i) a sales charge structure in which no sales
charge is deducted from premiums in excess of the policy's target
premium in any year, and a sales charge is deducted from subsequent
target premium payments; (ii) a non-guaranteed waiver of a portion of
any sales charge otherwise deductible from premiums where the policy
has a current sum insured of $250,000 or higher; (iii) the exclusion
from any contingent deferred sales charge of premiums paid in excess of
one year's base policy target premium in any of the first three policy
years; and (iv) a partial waiver of the otherwise applicable contingent
deferred sales charge in the case of a policy surrender during the
second policy year.
FILING DATE: March 18, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the Application
will be granted unless the Commission orders a hearing. Interested
persons may request a hearing by writing the Secretary of the
Commission, and serving the Applicants with copies of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m., on August 29, 1994, and should be accompanied
by proof of service on the 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, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, John Hancock Place, Boston, MA 02117.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Michael V. Wible, Special Counsel,
Division of Investment Management, Office of Insurance Products, at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the Application.
The complete Application is available for a fee from the Commission's
Public Reference Branch.
Applicant's Representations
1. JHVLICO, a wholly-owned subsidiary of John Hancock, is a stock
life insurance company chartered under the laws of Massachusetts in
1979. Account U, which is registered under the 1940 Act as a unit
investment trust, is a separate investment account of JHVLICO. Account
U funds scheduled premium variable life insurance policies and single
premium variable life insurance policies issued by JHVLICO in reliance
on Rule 6e-2 of the 1940 Act. JHVLICO and its Account U also intend to
issue certain flexible premium variable life insurance policies (the
``Account U Policies''), in reliance on Rule 6e-3(T) under the 1940
Act.
2. John Hancock is a mutual life insurance company chartered under
the laws of Massachusetts in 1862. Account UV, which is registered
under the 1940 Act as a unit investment trust, is a separate investment
account of John Hancock. Account UV funds: (i) Flexible premium
variable life insurance policies based on the joint lives of two
insureds, issued by John Hancock in reliance on Rule 6e-3(T); and (ii)
scheduled premium, annual premium and single premium policies issued by
John Hancock in reliance on Rule 6e-2 under the 1940 Act. John Hancock
and its Account UV intend to issue certain flexible premium variable
life insurance policies (the ``Account UV Policies), in reliance on
Rule 6e-3(T) under the 1940 Act. (The Account U Policies and the
Account UV Policies are substantially identical and are referred to
herein collectively as the ``Policies.''\1\)
\1\The Applicants have obtained exemptive relief from the
Commission to the extent necessary to permit Account U and Account
UV to support variable life insurance policies issued in reliance on
both Rules 6e-2 and 6e-3(T) under the 1940 Act. Investment Company
Act Release Nos. 19898 (Nov. 24, 1993)(order), and 19817 (Oct. 27,
1993)(notice), File No. 812-8446.
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3. John Hancock is a registered under the Securities Exchange Act
of 1934 as a broker-dealer, and is the principal underwriter for
Account U, Account UV and the Policies.
4. Like other variable life insurance policies issued in reliance
on Rule 6e-3(T), the Policies provide for premium flexibility, together
with a death benefit and a surrender value that may increase or
decrease daily depending, in part, on the investment performance of an
underlying mutual fund.
5. Each year, as specified in the Policy, John Hancock and JHVLICO
(collectively, the ``Companies'') will deduct from each premium payment
a charge equal to 4% of premiums paid in such year up to one ``target
premium'', to cover sales expenses. No sales charge will be deducted
from premiums paid in excess of one target premium in any Policy year.
The Companies intend to make this deduction only in the first ten
Policy years, but the Companies reserve the right to deduct this charge
for a longer period.
6. For Policies having a current sum insured (i.e., face amount) of
at least $250,000, the Companies will waive one-half of any sales
charge that otherwise would be deducted from premium payments. The
continuation of this waiver is not guaranteed, and the Companies may
withdraw it at any time.
7. The Companies will deduct a contingent deferred sales charge
(``CDSC'') only if a Policy is surrendered in full or stays in default
past its grace period. This charge is computed as a percentage of base
Policy target premiums (target premiums less any component thereof that
is attributable to additional rider benefits), according to the
following schedule:
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For surrenders or lapses
effective during Maximum contingent deferred sales charge
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Policy year 1.................... 26% of premiums received in Policy year 1 up to 1 base Policy target
premium.\2\
Policy year 2.................... 26% of premiums received in Policy years 1 and 2 up to 1 base Policy target
premium in each year.
Policy years 3-7................. 26% of premiums received in Policy years 1, 2 and 3 up to 1 base Policy
target premium in each year.
Policy year 8.................... 83.33% of the maximum CDSC for Policy year 7.
Policy year 9.................... 66.66% of the maximum CDSC for Policy year 7.
Policy year 10................... 50% of the maximum CDSC for Policy year 7.
Policy year 11................... 33.33% of the maximum CDSC for Policy year 7.
Policy year 12................... 16.67% of the maximum CDSC for Policy year 7.
Policy years 13 and later........ 0.
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8. The Applicants represent that the base Policy target premium for
a Policy will never exceed the Policy's ``guideline annual premium'' as
defined in Rule 6e-3(T)(c)(8).
\2\The amount of the CDSC is calculated on the basis of the base
Policy target premium for the age of the insured at the time of
issue of the Policy.
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9. The Companies also will deduct from each premium payment a
charge, currently equal to 1.25% of each premium payment, to cover the
estimated cost of the federal income tax treatment of the Policies'
deferred acquisition costs--commonly referred to as the ``DAC tax.''\3\
This DAC tax charge may be increased, for Policies not yet issued, to
correspond with changes in the federal income tax treatment of the
Policies' deferred acquisition costs.
\3\The Applicants have obtained exemptive relief from the
Commission to the extent necessary to permit the deduction of DAC
tax charges. Investment Company Act Release Nos. 19898 (Nov. 24,
1993)(order), and 19817 (Oct. 27, 1993)(notice), File No. 812-8446.
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10. Certain other charges and deductions are made, including a
state premium tax charge, an administrative surrender charge, an issue
charge, a maintenance charge, an insurance charge, a charge for
mortality and expense risks, a charge for any extra mortality risks, a
charge for any optional rider benefits and a charge for partial
withdrawals. The Companies also reserve the right to impose a charge
for taxes other than the DAC tax charge, if such taxes are incurred in
the future.
11. The Applicants represent that, except to the extent that
exemptive relief has been obtained from the Commission pursuant to this
or any other applicable exemptive application, all charges under the
Policies will comply with all of the applicable limitations, terms,
conditions and requirements of the 1940 Act and the rules promulgated
thereunder. To the extent permitted by the 1940 Act and the rules
thereunder, the sales and administrative charges under the Policies may
be reduced in the case of sales to a class of associated individuals or
to a trustee, employer, or similar entity where the Companies
anticipate that the sales to members of the class will result in lower
than normal sales or administrative expenses.
Applicants' Legal Analysis
1. Section 27(a)(3) of the 1940 Act generally provides that the
amount of sales charge deducted from any of the first twelve monthly
payments on a periodic payment plan certificate may not exceed
proportionately the amount deducted from any other such payment, and
that the amount deducted from any subsequent payment may not exceed
proportionately the amount deducted from any other subsequent payment.
2. With limited exceptions, Rule 6e-3(T)(b)(13)(ii) grants an
exemption from Section 27(a)(3), provided that the proportionate amount
of sales charge deducted from any payment during the contract period
does not exceed the proportionate amount deducted from any prior
payment.
3. With respect to sales charges deducted from other than premiums,
Rule 6e-3(T)(d)(1) provides in pertinent part, and with limited
exceptions, that Rule 6e-3(T)(b)(13)(ii) shall be deemed to be
satisfied if the amount of sales load deducted pursuant to any method
permitted under Rule 6e-3(T)(d) does not exceed the proportionate
amount of sales load deducted prior thereto pursuant to the same
method.
A. Front-End Sales Charge Limitation
1. The Companies will not impose the 4% front-end sales charge upon
the amount of any premium payments received in any Policy year that is
in excess of the target premium for that year. Consequently, the front-
end sales charge may apply to some premium payments and not to others.
The Applicants request an exemption from Section 27(a)(3) and Rules 6e-
3(T) (b)(13)(ii) and (d)(1) (also referred to herein collectively as
the ``stair-step provisions'') to the extent necessary to permit this
sales charge structure.
2.The Applicants represent that the sales charge deducted from the
first target premium paid under a Policy in any Policy year, as
compared with the absence of such a charge deducted from premiums in
excess thereof, in part reflects the fact that lower overall
distribution costs (e.g., commissions paid to sales persons) are
incurred in connection with such excess premiums over the life of the
Policies. To deduct a sales charge from the excess premiums would
generate more revenue than either Company believes is necessary to
adequately defray such expenses. The Applicants submit that the
structure of the front-end sales load under the Policies provides a
significant benefit to Policy owners by passing through to them lower
distribution costs with respect to excess premiums.\4\ The Applicants
further submit that it would not be in the interest of Policy owners to
require the deduction from excess premiums of a sales charge that is
higher than the Applicants deem necessary.
\4\The Applicants submit that the flexibility in the timing and
amount of premium payments afforded Policy owners are desirable
features. The Applicants also note that, subject to the other
exemptive relief requested in the application, the Policies would
continue to comply with all of the other sales charge limitations
and requirements in Rule 6e-3(T), even if the front-end sales charge
were deducted from all premium payments. Such a front-end charge
structure, however, also would clearly be less favorable to Policy
owners than that provided under the Policies.
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3. In addition, the Applicants represent that the proposed sales
load structure would not deduct large amounts of front-end sales
charges so early in the life of the Policy that an investor redeeming
in the early periods would recoup little of his or her investment, a
perceived abuse of periodic plan certificates identified by Commission
staff in past no-action letters.\5\
\5\See, e.g., Western Reserve Life Insurance Co. (avail. Aug.
28, 1987); United Investors Life Insurance Co. (avail. July 9,
1987).
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4. The Applicants represent that the sales charge structure under
the Policies is relatively straightforward and easily understood, as
compared with that of many other variable life insurance policies that
are currently being offered. The Applicants further represent that
owners of Policies will benefit from the sales charge structure of the
Policies, and that the prospectuses for the Policies will contain
disclosure informing owners how to minimize sales charge deductions
from premiums paid.
5. The Applicants submit that the Commission has indicated that the
policies underlying the ``stair-step'' requirement in Rule 6e-3(T)
would not be contravened by fluctuations in sales load which result
from factors beyond the control of Policy issuers (such as the
Companies),\6\ and that this principle is equally applicable in the
present circumstance.
\6\Investment Company Act Release No. 15651, at note 139 (Mar.
30, 1987).
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B. Front-End Sales Charge Reduction for Large Policies
1. Each Company will waive a portion of any sales charge that
otherwise would be deducted from premiums paid on a Policy with a
current sum insured of at least $250,000. The continuation of this
waiver is not contractually guaranteed, and the waiver may be withdrawn
or modified by each Company at any time.
2. Under certain circumstances, the Policy owner may take action
that results in a Policy's sum insured being reduced after issue. For
example, under certain of the available death benefit options, a
partial withdrawal of the Policy's cash surrender value reduces the sum
insured on a dollar-for-dollar basis. Because the waiver of a portion
of the front-end sales charge applies only when the current sum insured
is at least $250,000, and because the waiver is not guaranteed, it is
possible that the reduction could apply at some times with respect to a
given Policy and not at subsequent times with respect to the same
Policy. The Applicants request an exemption from Section 27(a)(3) and
Rules 6e-3(T) (b)(13)(ii) and (d)(1) to the extent necessary to permit
this sales charge structure.
3. The Applicants submit that reduction of these charges will not
unduly complicate the sales charge structure, and represent that the
operation of the sales charge reduction will be fully disclosed in the
prospectuses pertaining to the Policies. The Applicants submit that the
reduction will clearly be of benefit to those Policy owners to whom it
applies.
C. CDSC Structure
1. The maximum CDSC under the Policies is 26% of premiums paid in
each of the first three Policy years that are not in excess of one base
Policy target premium. Premiums paid in excess of one year's base
Policy target premium in any of the first three Policy years are not
subject to any CDSC. Thus, the CDSC may apply to some premium payments
made during the first three Policy years, but not to others. This could
be interpreted to be prohibited by Section 27(a)(3) and Rules 6e-3(T)
(b)(13)(ii) and (d)(1).
2. The Applicants represent that they could have structured their
26% CDSC to apply to all premiums up to three base Policy target
premiums, regardless of when paid. The Applicants further represent
that although that structure would comply with all provisions of the
1940 Act and the rules promulgated thereunder (subject only to the
other exemptive relief requested herein), it would result in a higher
CDSC for Policy owners who pay excess premiums in at least one of the
first three Policy years, or who pay a total of less than three base
Policy target premiums during the first three Policy years. The
Applicants submit that the CDSC structure under the Policies is more
favorable to purchasers than would be the case if, as generally
contemplated by Rule 6e-3(T), the amount of sales charge with respect
to any premium payments did not depend on the year in which such
payments were made.
3. The Applicants represent that the CDSC with respect to the first
base Policy target premium in each of the first three Policy years, as
compared with the absence of such a charge with respect to any premiums
in excess thereof paid during those first three years, in part reflects
the fact that lower overall distribution costs (e.g., commissions paid
to sales persons) are incurred in connection with such excess premiums.
The Applicants submit that to impose a CDSC upon such excess premiums
paid during any of the first three Policy years would generate more
revenues than either Company believes is necessary to adequately defray
such expenses.
4. The Applicants submit that all of the arguments set forth above
concerning the inapplicability of the front-end sales charge to
premiums paid in excess of specified amounts during any Policy year
equally support the inapplicability of the CDSC to premiums paid in
excess of one base Policy target premium during any of the first three
Policy years. The Applicants submit that Policy owners will benefit
from the sales charge structure, and represent that the prospectuses
for the Policies will contain disclosure informing owners how to
minimize the amount of CDSC with respect to the premiums they pay.
5. If a Policy were surrendered during the second Policy year, the
maximum total sales charge (including both the 4% front-end charge and
the 26% CDSC) would be 60% of base Policy target premiums paid to date.
Imposition of the full CDSC in such a case could cause the total sales
charges to exceed the amount permitted by Rule 6e(3)(T)(b)(13)(v)(A),
as applied pursuant to Rule 6e-3(T)(d)(1)(i)--i.e., 40% of the first
two guideline annual premiums paid under a Policy.
6. To ensure compliance with the ``refund'' requirements that are,
in effect, imposed by Rules 6e-3(T) (b)(13)(ii) and (d)(1) in the event
of a surrender during the second Policy year, the Companies will agree
in the Policies to waive a portion of the CDSC, equal to 20% of
premiums paid in the second Policy year, up to one base Policy target
premium.
7. Although this waiver formula has been designed to ensure that no
violation of Rule 6e-3(T)(b)(13)(v)(A) will occur, the formula can
result in the imposition of a CDSC that is lower than what the rule
would permit. To that extent, the expiration of the waiver after the
end of the second Policy year could be deemed to cause an increase in
the CDSC that would be prohibited under the stair-step provisions.
8. The Applicants represent that the CDSC never increases as a
percentage of base Policy target premiums paid in each year, except to
the extent that the expiration of the partial waiver of the CDSC after
the end of the second Policy year is deemed to cause such an increase.
The Applicants further represent that the sole purpose of the partial
waiver is to implement the sales load refund mandated by Rule 6e-
3(T)(B)(13)(v)(A) and (d)(1).
9. The Applicants submit that it would be anomalous if the 1940 Act
and the rules promulgated thereunder were to prohibit the expiration of
the partial waiver after the end of the second Policy Year--i.e., at
the very time when, under the specific terms of Rule 6e-3(T), the
Companies' obligations to make the waiver expires. The Applicants
further submit that the fact that the waiver formula can result in a
lower CDSC than might be permitted under Rule 6e-3(T) is a clear
benefit to Policy Owners.
Applicants' Conclusion
Section 6(c) of the 1940 Act provides, in pertinent part, that the
Commission, by order upon application, may conditionally or
unconditionally exempt any person, security of transaction, or any
class or classes of 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. For the reasons expressed in this
application, the Applicants submit that the requested exemption from
Section 27(a)(3) of the 1940 Act and Rules 6e-3(T) (b)(13)(ii) and
(d)(1) thereunder meet the standards of Section 6(c) of the 1940 Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19447 Filed 8-9-94; 8:45 am]
BILLING CODE 8010-01-M
