[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Notices]
[Pages 44914-44917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21330]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21317; File No. 812-9452]
Metropolitan Life Insurance Company, et al.
August 22, 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'').
-----------------------------------------------------------------------
APPLICANTS: Metropolitan Life Insurance Company (``Metropolitan Life'')
and Metropolitan Life Separate Account UL (``Account UL``).\1\
\1\Applicants have represented that they will file an amendment
to the application during the notice period to revise the list of
applicants.
---------------------------------------------------------------------------
RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) granting
exemptions from the provisions of Section 27(c)(2) of the 1940 Act and
from paragraph (c)(4)(v) of Rule 6e-2 and of Rule 6e-3(T) under the
1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order to permit Metropolitan
Life to deduct from premium payments received under certain individual
variable life insurance policies issued by Account UL (the ``Account
Policies''), or any other variable life insurance policies (``Future
Policies'') issued by Account UL or any other separate account
established by Metropolitan Life in the future to support scheduled
premium, single premium or flexible premium variable life insurance
policies (``Future Accounts''), an amount that is reasonable in
relation to the increased federal income tax burden of Metropolitan
Life resulting from the receipt of such premiums in connection with the
Account Policies or Future Policies (together, the ``Policies''). The
deduction would not be treated as sales load.
FILING DATE: The application was filed on January 24, 1995. An
amendment was filed on August 10, 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 Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on September 18, 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 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, DC 20549. Applicants, Christopher P.
Nicholas, Esquire, Associate General Counsel, Metropolitan Life
Insurance Company, One Madison Avenue, New York, NY 10010.
FOR FURTHER INFORMATION CONTACT: Mark C. Amorosi, Attorney, or Patrice
M. Pitts, Special Counsel, Office of Insurance Products (Division of
Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations
1. Metropolitan Life, a mutual life insurance company organized
under the laws of New York in 1868, is authorized to conduct business
in all 50 states, the District of Columbia, Puerto Rico and all
provinces of Canada. Metropolitan Life is registered as a broker-dealer
under the Securities Exchange Act of 1934, and will serve as the
principal underwriter for Account UL.
2. Account UL is a separate account established by Metropolitan
Life and registered as a unit investment trust under the 1940 Act.
Account UL has seven divisions, each of which invests in a
corresponding portfolio of the Metropolitan Series Fund, Inc. (the
``fund''). Account UL is, and any Future Account will be, used to fund
the Policies issued in reliance on the applicable provisions of either
Rule 6e-2 or Rule 6e-3(T) of the 1940 Act. All income, gains and
losses, whether or not realized, from assets allocated to Account UL or
any Future Account will be credited to or charged against Account UL or
the respective Future Account without regard to other income, gains or
losses of Metropolitan Life.
3. Metropolitan Life will deduct a charge of 1.25% (0.35% for group
contracts) of each gross premium payment under the Policies to cover
Metropolitan Life's estimated cost for the federal income tax treatment
of deferred acquisition costs resulting from changes made to the
Internal Revenue Code of 1986 (``Code'') by the Omnibus Budget
Reconciliation Act of 1990 (``OBRA 1990'').
4. OBRA 1990 amended the Code by, among other things, enacting
Section 848 thereof which requires life insurance companies to
capitalize and amortize over a period of ten years part of their
general expenses for the current year. Prior law allowed these expenses
to be deducted in full from the current year's gross income. Section
848 effectively accelerates the realization of income from insurance
contracts covered by that Section and, thus, the payment of taxes on
that income. Taking into account the time value of money, Section 848
increases the insurance company's tax burden because the amount of
general deductions that must be capitalized and amortized is measured
by the premiums received under the Policies.
5. The amount of deductions which must be amortized over ten years
pursuant to Section 848 equals a percentage of the current year's ``net
premiums'' received (i.e., gross premiums minus return premiums and
reinsurance premiums) under life insurance or other contracts as
categorized under Section 848.\2\ The
[[Page 44915]]
Policies will be categorized under Section 848 as ``specified insurance
contracts.'' Consequently, 7.7% (2.05% for group policies) of the net
premiums received must be capitalized and amortized under the schedule
set forth in Section 848(c)(1) of the Code.
\2\While it has no current intention to do so, Metropolitan Life
could, in the future, reinsure risks under Policies with another
insurance company. Whether a reinsurance agreement will increase or
decrease Metropolitan Life's net premiums against which the
capitalization percentage in Section 848(d) would be applied depends
on the net consideration annually flowing between Metropolitan Life
and the reinsurer under the agreement. Metropolitan Life states that
it has established the level of its deduction for the increased
federal tax liability resulting from Section 848 without regard to
the possibility that if any Policies are ever reinsured, such
reinsurance could decrease or increase the economic impact of the
deferred acquisition cost on Metropolitan Life. Consistent with the
conditions for relief, in the event that Metropolitan Life enters
into any reinsurance agreements, Metropolitan Life states that it
will monitor the reasonableness of its deduction over time based on
its experience under the reinsurance agreements.
6. Applicants quantify the increased tax burden on every $10,000 of
net premiums received for individual Policies as follows: For each
$10,000 of net premiums received by Metropolitan Life under the
individual Policies in a given year, Section 848 requires Metropolitan
Life to capitalize $770 (i.e., 7.7% of $10,000), $38.50 of which amount
may be deducted in the current year. The remaining $731.50 ($770 less
$38.50), which is subject to taxation at the corporate tax rate of 35%,
results in Metropolitan Life owing $256.03 (.35% x $731.50) more in
taxes for the current year than it otherwise would have owed prior to
the enactment of OBRA 1990. The current tax increase, however, will be
partially offset by deductions that will be allowed during the next ten
years as a result of amortizing the remainder of the $770 ($77 in each
of the following nine years and $38.50 in year ten).
7. Capital that Metropolitan Life must use to pay its increased
federal income tax burden under Section 848 will be unavailable for
investment. Applicants submit that the cost of capital used to satisfy
this increased tax burden will be essentially Metropolitan Life's
targeted after-tax rate of return (i.e., the return sought on invested
capital), 9.75%.\3\ Accordingly, Applicants submit that a discount rate
of 9.75% is appropriate for use by Metropolitan Life in evaluating the
present value of its future tax deductions resulting from the
amortization described above. Applicants state that to the extent that
the 9.75% discount rate is lower than Metropolitan Life's actual
targeted rate of return, the calculation of this increased tax burden
will continue to be reasonable over time, even if the corporate tax
rate applicable to Metropolitan Life is reduced, or its targeted rate
of return is lowered.
\3\In determining the targeted after-tax rate of return used in
arriving at the discount rate, Metropolitan Life considered a number
of factors, including: current market interest rates, inflation, the
company's anticipated long-term growth rate, the risk level that is
acceptable to the company, expected future interest rate trends, the
surplus level required by rating agencies for their top ratings and
available information about rates of return obtained by other life
insurance companies.
Applicants state that Metropolitan Life first projects its
future growth rate based on sales projections, the current interest
rates, the inflation rate, and the amount of surplus that
Metropolitan Life can provide to support such growth. Metropolitan
Life then uses the anticipated growth rate and the other factors
cited above to set a rate of return on surplus that equals or
exceeds this rate of growth. Of these other factors, market interest
rates, the acceptable risk level and the inflation rate receive
significantly more weight than information about the rates of return
obtained by other companies. Applicants state that Metropolitan Life
seeks to maintain a ratio of surplus to assets that it establishes
based on its judgement of the risks represented by various
components of its assets and liabilities. Applicants state that
maintaining the ratio of surplus to assets is critical to offering
competitively priced products and, as to Metropolitan Life, to
maintaining a competitive rating from various rating agencies.
Consequently, Applicants state that Metropolitan Life's surplus
should grow at least at the same rate as do its assets.
---------------------------------------------------------------------------
8. Using a federal corporate tax rate of 35%, and assuming a
discount rate of 9.75%, the present value of the tax effect of the
increased deductions allowable in the following ten years, which
partially offsets the increased tax burden, comes to $162.07. The
effect of Section 848 on the Policies is, therefore, an increased tax
burden with a present value of $93.96 for each $10,000 of net premiums
(i.e., $256.03 less $162.07).
9. Metropolitan Life does not incur incremental federal income tax
when it passes on state premium taxes to Policy owners because state
premium taxes are deductible in computing federal income taxes. In
contrast, federal income taxes are not so deductible. To compensate
itself fully for the impact of Section 848, Metropolitan Life must
impose an additional charge to make it whole not only for the $93.96
additional tax burden attributable to Section 848, but also for the tax
on the additional $93.96 itself. This federal tax can be determined by
dividing $93.96 by the complement of the 35% federal corporate income
tax rate (i.e., 65%), resulting in an additional charge of $114.55 for
each $10,000 of net premiums, or 1.45%.\4\
\4\For group life insurance contracts, the total charge
necessary to make Metropolitan Life whole would be 0.38%, an amount
calculated using this same methodology but substituting the group
life insurance capitalization rate of 2.05% for the 7.7% rate used
above.
10. Based on its prior experience, Metropolitan Life expects that
all of its current and future deductions will be fully utilized. It is
Metropolitan Life's judgement that a 1.25% (0.35% for group policies)
charge would reimburse it for its increased federal income tax
liabilities under Section 848. Applicants represent that the 1.25%
(0.35% for group policies) charge will be reasonably related to
Metropolitan Life's increased federal income tax burden under Section
848. This representation takes into account the benefit to Metropolitan
Life of the amortization permitted by Section 848 and the use of a
9.75% discount rate (which is equivalent to Metropolitan Life's
targeted after-tax rate of return) in computing the future deductions
resulting from such amortization. Metropolitan Life believes that the
1.25% (0.35% for group policies) charge would have to be increased if
future changes in, or interpretations of, Section 848 or any successor
provision result in a further increased tax burden resulting from
receipt of premiums. The increase could be caused by a change in the
corporate tax rate, or in the 7.7% (2.05% for group policies) figure,
or in the amortization period.
Applicant's Legal Analysis
1. Applicants request an order of the Commission pursuant to
Section 6(c) exempting them from the provisions of Section 27(c)(2) of
the 1940 Act, and Rules 6e-2(c)(4)(v) and 6e-3(T)(c)(4)(v) thereunder,
to the extent necessary to permit deductions to be made from premium
payments received in connection with the Policies. The deductions would
be in an amount that is reasonable in relation to the increased federal
income tax burden related to the receipt of such premiums. Applicants
further request an exemption from Rules 6e-2(c)(4) and 6e-3(T)(c)(4)
under the 1940 Act to permit the proposed deductions to be treated as
other than sales load for the purposes of Section 27 of the 1940 Act
and the exemptions from that Section found in Rules 6e-2 and 6e-3(T).
2. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission may, by order upon application, conditionally or
unconditionally exempt any person, security or transaction 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 the provisions of the 1940 Act.
3. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic
payment plan certificates unless the proceeds of all payments (except
such amounts as are deducted for sales load) are held under an
indenture or agreement containing in substance the provisions required
by Sections 26(a)(2) and 26(a)(3) of the 1940 Act. Certain provisions
of Rules 6e-2 and 6e-3(T) provide a range of exemptive relief for the
offering of variable life insurance
[[Page 44916]]
policies such as the Policies, including limited relief from Section
27(c)(2).
4. Rule 6e-2(c)(4)(v) defines ``sales load'' charged on any payment
as the excess of the payment over certain specified charges and
adjustments, including ``a deduction approximately equal to state
premium taxes.'' Rule 6e-3(T)(c)(4)(v) defines ``sales load'' charged
during a contract period as the excess of any payments made during the
period over the sum of certain specified charges and adjustments,
including ``a deduction for and approximately equal to state premium
taxes.''
5. Applicants submit that, for purposes of the 1940 Act and the
Rules thereunder, the deduction for federal income tax charges proposed
to be deducted in connection with the Policies should be treated as
other than sales load, as is a state premium tax charge.
6. Applicants maintain that the requested exemptions from Rules 6e-
2(c)(4) and 6e-3(T)(c)(4) are necessary in connection with Applicants'
reliance on certain provisions of Rules 6e-2(b)(13) and 6e-3(T)(b)(13),
which provide exemptions from Sections 27(a)(1) and 27(h)(1) of the
1940 Act. Issuers may only rely on Rules 6e-2(b)(13)(i) or 6e-
3(T)(b)(13)(i) if they meet the respective Rule's alternative
limitations on sales load as defined in Rule 6e-2(c)(4) or Rule 6e-
3(T)(c)(4). Applicants state that, depending upon the load structure of
a particular Policy, these alternative limitations may not be met if
the deduction for the increase in an issuer's federal tax burden is
included in sales load. Although a deduction for an insurance company's
increased federal tax burden does not fall squarely within any of the
specified charges or adjustments which are excluded from the definition
of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4), Applicants
state that they have found no public policy reason for including them
in ``sales load.''
7. The public policy that underlies Rules 6e-2(b)(13)(i) and 6e-
3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and
27(h)(1) of the 1940 Act, is to prevent excessive sales loads from
being charged in connection with the sale of periodic payment plan
certificates. Applicants submit that the treatment of a federal income
tax charge attributable to premium payments as sales load would not
further this legislative purpose because such a deduction has no
relation to the payment of sales commissions or other distribution
expenses. Applicants state that the Commission has concurred with this
conclusion by excluding deductions for state premium taxes from the
definition of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4).
8. Applicants assert that the source for the definition of ``sales
load'' found in the Rules supports this analysis. Applicants state that
the Commission's intent in adopting such provisions was to tailor the
general terms of Section 2(a)(35) of the 1940 Act to variable life
insurance contracts. Section 2(a)(35) excludes deductions from premiums
for ``issue taxes'' from the definition of ``sales load'' under the
1940 Act. Applicants submit that this suggests that it is consistent
with the policies of the 1940 Act to exclude from the definition of
``sales load'' in Rules 6e-2 and 6e-3(T) deductions made to pay an
insurance company's costs attributable to its tax obligations.
9. Section 2(a)(35) also excludes administrative expenses or fees
that are ``not properly chargeable to sales or promotional
activities.'' Applicants maintain that this suggests that the only
deductions intended to fall within the definition of ``sales load'' are
those that are properly chargeable to such activities. Applicants
submit that because the proposed deductions will be used to compensate
Metropolitan Life for its increased federal income tax burden
attributable to the receipt of premiums and are not properly chargeable
to sales or promotional activities, the language in Section 2(a)(35) is
another indication that not treating such deductions as ``sales load''
is consistent with the policies of the 1940 Act.
10. Applicants assert that the terms of the relief requested with
respect to Policies to be issued through Account UL or through Future
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 Future Policy. Applicants
state that such additional requests for exemptive relief would present
no issues under the 1940 Act not already addressed in this request for
exemptive relief.
11. Applicants assert that the requested relief is appropriate in
the public interest because it would promote competitiveness in the
variable life insurance market by eliminating the need for Applicants
to file redundant exemptive applications, thereby reducing
administrative expenses and maximizing efficient use of resources. The
delay and expense involved in having to seek repeated exemptive relief
would impair the ability of Applicants to take advantage fully of
business opportunities as those opportunities arise.
12. Applicants state 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 to seek exemptive relief
repeatedly with respect to the same issues addressed in this
application, investors would not receive any benefit or additional
protection thereby and might be disadvantaged as a result of increased
overhead expenses for Applicants.
Conditions for Relief
1. Applicants represent that Metropolitan Life will monitor the
reasonableness of the charge to be deducted pursuant to the requested
exemptive relief.
2. Applicants represent that the registration statement for each
Policy under which the charge referenced in paragraph one of this
section is deducted will: (i) disclose the charge; (ii) explain the
purpose of the charge; and (iii) state that the charge is reasonable in
relation to the increased federal income tax burden under Section 848
of the Code resulting from the receipt of premiums.
3. Applicants represent that the registration statement for each
Policy under which the charge referenced in paragraph one of this
section is deducted will contain as an exhibit an actuarial opinion as
to: (i) The reasonableness of the charge in relation to the increased
federal income tax burden under Section 848 resulting from the receipt
of premiums; (ii) the reasonableness of the after tax rate of return
that is used in calculating such charge; and (iii) the appropriateness
of the factors taken into account in determining the after tax rate of
return.
4. Applicants represent that Metropolitan Life will not rely on any
exemptive relief granted pursuant to this application to impose a
charge in excess of 1.25% of premiums, if any such excess over 1.25%,
expressed as a percentage of premiums, exceeds the amount, also
expressed as a percentage of premiums, necessary to make Metropolitan
Life whole from any additional tax burden that results from any change
in the Code or regulations thereunder that increases (a) the current
35% maximum corporate income tax rate applicable to Metropolitan Life,
(b) the percentage of Metropolitan Life's premiums that must be treated
as deferred expenses under the Code, or (c) the period of time over
which such expenses must be amortized. For purposes of calculating, as
a percentage of premiums, the additional tax burden on Metropolitan
Life resulting from any such change, Applicants represent that
[[Page 44917]]
Metropolitan Life will use the same methodology and assumptions as are
set forth in the application for calculating its tax burden under the
current tax law and regulations. Applicants also represent that even if
the charge is increased to more than 1.25% without obtaining additional
exemptive relief, the overall rate of the charge will continue to be
subject to the above conditions.
Conclusion
Applicants submit that, for the reasons and upon the facts set
forth above, the requested exemptions from Section 27(c)(2) of the 1940
Act and Rules 6e-2(c)(4)(v) and 6e-3(T)(c)(v) thereunder to permit the
deduction of up to 1.25% of premium payments under the Policies,
without treating such deduction as sales load, meet the standards in
Section 6(c) of the 1940 Act. In this regard, Applicants assert that
granting the relief requested in the application would be 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. 95-21330 Filed 8-28-95; 8:45 am]
BILLING CODE 8010-01-M
