[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Notices]
[Pages 43634-43637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20772]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21283; No. 812-9376]
First Variable Life Insurance Company, et al.
August 15, 1995.
agency: Securities and Exchange Commission (``SEC'' or ``Commission'').
action: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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applicants: First Variable Life Insurance Company (``First Variable''),
First Variable Annuity Fund E (``Separate Account''), and First
Variable Capital Services, Inc. (``Capital Services'').
relevant 1940 act sections: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act.
summary of application: Applicants seek an order to permit the
deduction of a mortality and expense risk charge from the assets of the
Separate Account or any other separate account (``Other Accounts'')
established by First Variable to support certain variable annuity
contracts (``Contracts'') as well as other variable annuity contracts
that are substantially similar in all material respects to the
Contracts (``Future Contracts''). This order will supersede prior
orders issued by the Commission permitting Applicants to issue variable
annuity contracts that provide for the deduction of mortality and
expense risk charges from the Separate Account.
filing date: Applicants filed their application on December 19, 1994,
and filed amended applications on May 22, 1995, July 21, 1995, and
August 15, 1995.
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 SEC's Secretary and
serving applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on
September 11, 1995, and should 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 requestor'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 SEC.
addresses: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, Arnold Bergman, First
Variable Life Insurance Company, 600 Atlantic Avenue, 28th Floor,
Boston, Massachusetts 02210.
for further information contact: Pamela K. Ellis, Senior Counsel, or
Wendy Finck Friedlander, Deputy Chief 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.
[[Page 43635]]
Applicants' Representations
1. First Variable, a stock life insurance company, is organized in
Arkansas, and licensed to do business in the District of Columbia, the
United States Virgin Islands, and all states except New York.
2. The Separate Account is a separate account established by First
Variable to fund the Contracts. The Separate Account is registered with
the Commission as a unit investment trust under the 1940 Act, and
interests in the Contracts are registered as securities under the
Securities Act of 1933.
3. Capital Services will serve as the distributor and the principal
underwriter for the Contracts. Capital Services, a wholly owned
subsidiary of First Variable, is registered under the Securities
Exchange Act of 1934 as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc.
4. First Variable Advisory Services Corp., a wholly owned
subsidiary of First Variable, is the investment advisor for the Trust.
5. By orders of the Commission,\1\ Applicants were granted
exemptions under Section 6(c) of the 1940 Act from the provisions of
Section 26(a)(2) and 27(c)(2) to the extent necessary to permit the
deduction of mortality and expense risk charges from the assets of the
Separate Account in connection with the issuance of certain variable
annuity contracts. Applicants now request that such orders be
superseded by the order requested in this application.
\1\ First Variable Life Ins. Co., Inv. Co. Act Rel. Nos. 18741
(Jun. 1, 1992) (Order), and 18695 (May 6, 1992) (Notice); Monarch
Life Ins. Co., Act Rel. Nos. 18165 (May 23, 1991) (Order), and 18117
(Apr. 26, 1991) (Notice); and First Variable Life Ins. Co., Inv. Co.
Act Rel. Nos. 15701 (Apr. 24, 1987) and 15644 (Mar. 26, 1987)
(collectively, ``Existing Orders'').
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6. The Contracts are three variable annuity contracts: VISTA
Contracts, Direct Annuity Contracts, and Direct Annuity Plus Contracts.
First Variable will make the Contracts available for use by individuals
in retirement plans which may or may not qualify for federal tax
advantages under the Internal Revenue Code. Each of the Contracts
requires certain minimum initial purchase payments. Subsequent purchase
payments will be at least $100 for the VISTA Contracts and the Direct
Annuity Contracts. For the Direct Annuity Plus Contracts, the minimum
subsequent purchase payments will be $500 for non-qualified Contracts
and $100 for qualified Contracts.
7. The purchase payments under the Contacts will be allocated to
the Separate Account and/or to the general account. The Separate
Account is divided into subaccounts (``Subaccounts''), which will
invest in the shares of one of the portfolios of Variable Investors
Series Trust (``Trust''). The Trust is an open-end, management
investment company and currently has seven portfolios. First Variable
may establish additional Subaccounts and may substitute or add
additional portfolios of the Trust or, where appropriate, of other
registered, open-end investment companies.
8. The Contracts provide for a death benefit if the annuitant dies
during the accumulation period. For the VISTA Contracts, the death
benefit is the greater of: (1) The aggregate value; or (2) the sum of
purchase payments less any withdrawals; or (3) the aggregate value as
of the first day of the current five year Contract period \2\ plus any
purchase payments made since that day and less any amounts withdrawn
since that day. Where permitted by state law, First Variable will
provide a death benefit for its Direct Annuity Contracts that will be
the greater of: (1) The purchase payments, less any withdrawals
including any applicable Withdrawal Charge, as defined below; \3\ (2)
the Contract value; or (3) the Contract value as of the first day of
the current five year Contract period plus any purchase payments made
since that day and less any amounts withdrawn since that day.
Otherwise, the death benefit will be the greater of: (1) The purchase
payments, less any withdrawals including any applicable Withdrawal
Charges; or (2) the Contract value. The death benefit for the Direct
Annuity Plus Contracts will be the greater of the purchase payments,
less any withdrawals, or the Contract value.
\2\ The first five year Contract period begins on the issue
date, the second five year Contract period begins on the fifth
Contract anniversary, and so forth.
\3\ See infra at Paragraph 9.
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9. Certain charges and fees are assessed under the Contracts. In
the case of the VISTA and Direct Annuity Contracts, prior to the
annuity date, amounts allocated to the Separate Account may be
transferred among Subaccounts without the imposition of any fee or
charge if there have been no more than 12 transfers for the VISTA
Contracts, or more than six transfers for the Direct Annuity Contracts,
made in the Contract year. Subsequent transfers within a Contract year,
however, will be assessed a $25 per transfer, or, if less, 2% of the
amount transferred. First Variable will not impose a transfer fee on
any transfers made by the owners of the Direct Annuity Plus Contracts.
Applicants represent that the transfer fee is at cost with no
anticipation of profit.
10. A withdrawal charge (``Withdrawal Charge'') may be imposed on
certain withdrawals. The owner may withdraw the owner's interest in a
Contract in whole or in part prior to the date annuity payments
commence.\4\ For the VISTA Contracts, an owner may make such
withdrawals without charge in an amount not to exceed the withdrawal
privilege amount (``Privilege Amount''). The Privilege Amount is equal
to the sum of 10% of the new purchase payments not previously
withdrawn, plus 100% of the excess of the value of a Contract over new
purchase payments not previously withdrawn. New purchase payments are
purchase payments made in the current and four previous Contract years.
It is assumed that purchase payments are withdrawn in the order in
which they were made. In the event that a withdrawal exceeds the
Privilege Amount for the VISTA Contracts, the Withdrawal Charge is
determined by multiplying the excess of the amount withdrawn over the
Privilege Amount by a percentage that decreases annually from 5% to 0%
over six Contract years.
\4\ Although the VISTA Contracts provide that an owner may not
make more than four partial withdrawals in any Contract year, First
Variable does not and will not enforce this limitation.
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No Withdrawal Charge will be assessed on withdrawals from the
Direct Annuity Contracts unless the withdrawals exceed the free
withdrawal amount (``Free Amount''). The Free Amount is determined as
the sum of 10% of premiums that remain subject to the Withdrawal
Charge, plus the excess of the Contract value over purchase payments
not previously withdrawn, plus any purchase payments no longer subject
to the Withdrawal Charge. Should the withdrawal exceed the Free Amount,
the Withdrawal Charge for the Direct Annuity Contracts will be
determined by multiplying the excess of the amount over the Free Amount
by a percentage that decreases annually from 7% to 0% over six years
from the Contract anniversary since the purchase payment. Purchase
payments are deemed to be withdrawn in the order in which they are
made. An owner may make a withdrawal each Contract year of the Free
Amount provided that the minimum partial withdrawal amount is $1,000 or
the owner's entire interest in the Subaccount, if less.
There will be no Withdrawal Change imposed on withdrawals made
under the Direct Annuity Plus Contracts.
11. First Variable deducts on each valuation date an administration
charge.
[[Page 43636]]
For the VISTA and Direct Annuity Contracts, the administrative charge
is equal, on an annual basis, to .15% of the net asset value of the
Separate Account. For the Direct Annuity Plus Contracts, the
administrative charge is equal, on an annual basis, to .25% of the
average daily net asset value of the Separate Account. First Variable
submits that it incurs additional administrative expenses for the
Direct Annuity Plus Contracts because it permits an owner to make
unlimited transfers without the imposition of any fee or charge.
12. An annual contract maintenance charge of $30 will be charged
against each Contract (for the VISTA Contracts, it is only deducted
during the accumulation period). For the VISTA Contracts, in the case
of a total withdrawal occurring 31 or more days after the beginning of
the Contract year, the full charge of $30 will be deducted. For the
Direct Annuity Contracts, if the annuity date is not the Contract
anniversary, a pro rata portion of the annual contract maintenance
charge will be deducted on the annuity date. For the Direct Annuity
Plus Contracts, if the Contract value on a Contract anniversary is at
least $50,000, then no annual contract maintenance charge will be
deducted (if a total withdrawal is made on other than a Contract
anniversary and the Contract value for the valuation period during
which the total withdrawal is made is less than $50,000, the full
annual contract maintenance charge will be assessed at the time of the
withdrawal).
13. The administration charge and the annual contract maintenance
charge are designed to compensate First Variable for assuming
administrative expenses related to the Separate Account and the
issuance and maintenance of the Contracts. These charges will not be
increased by First Variable. First Variable represents that it does not
intend to profit from the administration charge and the annual contract
maintenance charge.
14. First Variable deducts a mortality and expense risk charge from
each Separate Account. First Variable represents that the aggregate
morality and expenses risk charge is equal, on an annual basis, to
1.25% of the net asset value of each Subaccount of the Separate
Account. Of this amount, approximately .80% is for mortality risks and
.45% is for expense risks.\5\
\5\ Under the Existing Orders, First Variable deducts on each
valuation date a mortality and expense risk charge which is equal,
on an annual basis, to 1.25% (consisting of approximately .75% for
mortality risks and .50% for expense risks).
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15. First Variable assumes the mortality risk that the life
expectancy of the annuitant will be greater than that assumed in the
guaranteed annuity purchase rates, thus requiring First Variable to pay
out more in annuity income than it had planned. Furthermore, First
Variable assumes the mortality risk that it will waive the Withdrawal
Charge in the event of the death of the owner under certain Contracts.
Thus, First Variable assumes the risk that it may not be able to cover
its distribution expenses and that the owner may die at a time when the
amount of the death benefit payable exceeds the then net surrender
value of the Contracts. The expense risk assumed by First Variable is
that the Contract administration charge and the annual contract
maintenance charge will be insufficient to cover the cost of
administering the Contracts.
16. In the event the mortality and expense risk charges are more
than sufficient to cover First Variable's costs and expenses, any
excess will be a profit to First Variable. Any profit realized by these
charges may be used by First Variable to, among other things, offset
losses experienced when the Withdrawal Charges are insufficient. The
mortality and expense risk charges may not be increased under the
Contracts.
17. Various jurisdictions levy premium taxes on annuity premiums
received by life insurance companies. First Variable may charge
Contracts the amount of any tax levied as a result of the issuance,
maintenance, surrender, or annuitization of a Contract at the time the
purchase payment is received, or, if not previously deducted, such tax
may be deducted: (1) At the annuity commencement date; (2) in the event
of the annuitant's or owner's death prior to the annuity commencement
date; (3) in the event of partial or total withdrawal; and (4) when
payable by First Variable. For the Direct Annuity Contracts, First
Variable intends to advance any premium taxes when due at the time
purchase payments are made and then deduct premium taxes from an
owner's Contract value at the time annuity payments begin or upon
surrender if First Variable is unable to obtain a refund. For the
Direct Annuity Plus Contracts, First Variable intends to deduct premium
taxes when incurred. First Variable represents that state premium taxes
may range up to 4% of purchase payments.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule, or regulation of the 1940 to the
extent that the 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, in relevant part,
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 which
prohibit any payment to the depositor or principal underwriter except a
reasonable fee, as the Commission may prescribe, for performing
bookkeeping and other administrative duties normally performed by the
bank itself.
3. Applicants request exemptions from Sections 26(a)(2) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction from the assets of the Separate Account and the Other
Accounts in connection with the Contracts and Future Contracts of the
1.25% charge for the assumption of mortality and expense risks.
Applicants believe that the terms of the relief requested with respect
to any Future Contracts funded by Other Accounts are consistent with
the standards enumerated in Section 6(c) of the 1940 Act. Without the
requested relief, Applicants would have to request and obtain exemptive
relief for each new Other Account it establishes to fund any Future
Contract. Applicants submit that any such additional request for
exemption would present no issues under the 1940 Act that have not
already been addressed in this application.
Applicants submit that the requested relief is appropriate in the
public interest, because it would promote competitiveness in the
variable annuity contract market by eliminating the need for Applicants
to file redundant exemptive applications, thereby reducing their
administrative expenses and maximizing the efficient use of their
resources. The delay and expense involved in having repeatedly to seek
exemptive relief would reduce Applicants' ability effectively to take
advantage of business opportunities as they arise.
Applicants further submit that the requested relief is consistent
with the purposes of the 1940 Act and the protection of investors for
the same reasons. If Applicants were required repeatedly to seek
exemptive relief with respect to the same issues addressed in this
application, investors would not receive any benefit or additional
[[Page 43637]]
protection thereby. Investors might be disadvantaged as a result of
Applicants' increased overhead expenses.
Applicants thus believe that the requested exemption is 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.
4. Applicants represent that the 1.25% per annum mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts. This representation is based upon an
analysis of publicly available information about similar industry
products, taking into consideration such factors as, among others, the
current charge levels, guaranteed annuity rates, and other contact
charges and options. First Variable will maintain at its principal
offices, available to the Commission, a memorandum setting forth in
detail the products analyzed in the course of, and the methodology and
results of, Applicants' comparative review.
5. First Variable has conducted that there is a reasonable
likelihood that the Separate Account's and Other Accounts' proposed
distribution financing arrangements will benefit the Separate Account
and the Other Accounts and their investors. First Variable represents
that it will maintain and make available to the Commission upon request
a memorandum setting forth the basis of such conclusion.
6. The Separate Account and Other Accounts will be invested only in
management investment companies that undertake, in the event they
should adopt a plan for financing distribution expenses pursuant to
Rule 12b-1 under the 1940 Act, to have such plan formulated and
approved by their board members, the majority of whom are not
``interested persons'' of the management investment company within the
meaning of Section 2(a)(19) of the 1940 Act.
Conclusion
For the reasons set forth above, Applicants represent that 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 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20772 Filed 8-21-95; 8:45 am]
BILLING CODE 8010-01-M