95-20772. First Variable Life Insurance Company, et al.  

  • [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 
    
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    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
    
    

Document Information

Published:
08/22/1995
Department:
Securities and Exchange Commission
Entry Type:
Notice
Action:
Notice of Application for an Order under the Investment Company Act of 1940 (``1940 Act'').
Document Number:
95-20772
Dates:
Applicants filed their application on December 19, 1994, and filed amended applications on May 22, 1995, July 21, 1995, and August 15, 1995.
Pages:
43634-43637 (4 pages)
Docket Numbers:
Rel. No. IC-21283, No. 812-9376
PDF File:
95-20772.pdf