[Federal Register Volume 60, Number 180 (Monday, September 18, 1995)]
[Notices]
[Pages 48185-48192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23016]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21344; File No. 812-9472]
The Northwestern Mutual Life Insurance Company, et. al.
September 11, 1995.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the
``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Northwestern Mutual Life Insurance Company
(``Northwestern''), Northwestern Mutual Variable Life Account
(``Account'') and Northwestern Mutual Investment Services, Inc.
(``NMIS'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from: the provisions of, and the rules under,
the 1940 Act--other than Sections 7 and 8(a)--specified in Rule 6e-2(b)
thereunder; and the provisions of Sections 2(a)(32), 2(a)(35), 12(b),
22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2) and 27(d) of
the 1940 Act, subparagraphs (b)(1), (b)(12), (b)(13)(i), (b)(13)(ii),
(b)(13)(iii), (b)(13)(iv), (b)(13)(v), (c)(1) and (c)(4) of Rule 6e-2,
and Rules 12b-1(a)(1) and 22c-1 under the 1940 Act.
SUMMARY OF THE APPLICATION: Applicants seek an order permitting them to
offer and sell certain scheduled premium variable life insurance
policies (``Policies'') that provide for the following: a death benefit
which may include a portion which is not guaranteed for the lifetime of
the insured; premiums, the payment of which may be suspended in defined
circumstances; optional unscheduled additional premiums; both a
contingent deferred sales charge and a sales charge deducted from
premiums, neither of which is subject to refunds; deduction of an
administrative surrender charge on lapse or surrender; deduction from
the Policy's account value of cost of insurance charges, charges for
substandard risks and incidental insurance benefits, and minimum death
benefit guarantee risk charges; values and charges based on the
Commissioners 1980 Standard Ordinary Mortality Tables (the ``1980 CSO
Tables''); the deduction from premium payments of an amount that is
reasonably related to Northwestern's increased federal tax burden
resulting from the application of Section 848 of the Internal Revenue
Code of 1986, as amended; the holding of mutual fund shares funding the
Account in an open account arrangement, without a trust indenture or
use of a trustee; and the sale of mutual fund shares to the Account
without the use of an underwriter for the mutual fund.
FILING DATE: The application was filed originally on February 8, 1995.
An amended and restated application was filed on September 7, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the exemption
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the SEC
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
October 6, 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 SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o The Northwestern
Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, WI
53202, Attn: John M. Bremer, Senior Vice President, General Counsel and
Secretary.
FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Special Counsel, or
Wendy Finck Friedlander, Deputy Chief, 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 SEC.
Applicants' Representations
1. Northwestern, a mutual life insurance company organized under
the laws of Wisconsin, is licensed to do business in all of the states
and the District of Columbia.
2. In 1983, Northwestern established the Account to fund the
Policies. The Account is organized as a separate account under
Wisconsin law, and is registered as a unit investment trust under the
1940 Act.
3. The Account has nine separate divisions (``Divisions''), each of
which invests solely in a corresponding portfolio (``Portfolio'') of
Northwestern Mutual Series Fund, Inc. (``Fund''), an open-end
management company registered under the 1940 Act. Shares of each
portfolio are purchased by Northwestern for the corresponding Account
Division at net asset value.
4. NMIS, a wholly owned subsidiary of Northwestern, serves as
investment adviser to the Fund and underwriter for the Policies. NMIS
is registered as a broker-dealer under the Securities Exchange Act of
1934, and is registered as an investment advisor under the Investment
Advisers Act of 1940.
5. The Policy incorporates certain fundamental features
characteristic of scheduled premium variable life insurance policies
contemplated by Rule 6e-2, including a guarantee against lapse if
specified required premiums are paid by their due dates. In addition,
Policy owners will have the options of: (i) Making premium payments in
excess of the required premiums, either to increase the Policy value
which supports the guaranteed face amount or to purchase variable paid-
up additional insurance, or (ii) suspending premium payments when the
Policy value already is sufficient to pay future premiums.
6. The death benefit under a Policy will vary based upon investment
performance of the Fund's Portfolios, subject to the minimum guarantee
as provided by the Policy. The minimum guaranteed death benefit
available under every Policy corresponds to the guaranteed minimum face
amount of a traditional scheduled premium variable life insurance
policy, and will neither increase nor decrease as long as premiums are
paid when due and no Policy debt is outstanding. In addition to the
minimum guaranteed feature, the death benefit may include one or more
other parts: ``Additional Protection'' which is guaranteed for only a
specified period, depending on the age and risk classification of the
insured; ``Variable paid-up additional insurance'' which may be
purchased by either paying additional premium or by applying any
dividends to purchase paid-up additions; and ``Excess Amount''--the
amount by which Policy value exceeds what is required to support the
minimum guaranteed death benefit and
[[Page 48186]]
Additional Protection--which reflects the payment of additional
premiums or Policy dividends, or favorable investment performance. Each
of these death benefit features may vary, to some degree, to reflect
investment performance.
7. Partial surrenders of the Policies will be permitted so long as
the Policy that remains meets the regular minimum size requirements. A
partial surrender will cause the Policy to be split into two; one
Policy will be surrendered, the other will continue in force on the
same terms as the original Policy except that the premiums will be
based on the reduced amount of insurance. The owner will receive a new
Policy document. The cash value and death benefit will be
proportionately reduced.
8. Premiums, dividends and most charges for the Policies follow an
annualized structure, based on the Policy anniversary, with adjustment
to reflect the dates on which events take place during a Policy year.
The Policies permit payment of premiums as often as monthly, but
Northwestern places the scheduled net annual premium in the Account on
the anniversary date at the beginning of each Policy year regardless of
the frequency on which premiums are being paid. Northwestern advances
this amount on that date (unless the entire annual premium already has
been paid), and Northwestern is reimbursed as premium payments are
thereafter received from the Policy owner. Premiums paid on other than
an annual basis are increased to: (i) reflect the time value of money,
based on an 8% interest rate; and (ii) cover the administrative costs
to process the additional premium payments.
A. Deductions and Charges From Premiums
1. Northwestern will deduct from premiums 8% of each premium paid.
This deduction is for sales expenses (4.5%), state premium taxes
(2.25%), and a federal deferred acquisition cost tax charge (1.25%).
2. An annual Policy fee of up to $84.00 is deducted; Northwestern
expects to reduce the deduction to $60.00 after the first ten years.
3. For the minimum guaranteed death benefit there is an annual
charge of $0.12 per $1,000 of insurance, for the guarantee that the
amount of the death benefit will not be reduced if the net rate of
return is less than the 4% rate assumed.
4. An annual administrative expense charge of $0.12 per $1,000 of
minimum guaranteed death benefit and Additional Protection will be
deducted for the first ten years. Northwestern expects to waive the
charge thereafter. This charge is for issuance expenses (other than
sales expenses) which tend to vary with Policy amount.
5. Any extra premium charged for insureds who do not qualify for
one of the three best underwriting classifications, and any premium for
additional benefits, also are deducted before determining the net
premium to be placed in the Account.
B. Deductions and Charges From Policy Value
1. While payment of premiums is suspended,\1\ a portion of the
annual charges which ordinarily would be deducted from premiums will be
deducted instead from Policy value. This deduction also will be made
each year on the Policy anniversary.
\1\ Payment of premiums may be suspended, at the Policyowner's
option, when certain conditions are met.
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2. Northwestern will deduct cost of insurance charges from the
Policy value and from the value of any paid-up additional insurance.
Generally, these charges are assessed on each Policy anniversary at
rates that do not exceed those prescribed in the 1980 CSO Tables.
3. The Policy value also will be reduced by any surrender charges,
administrative charges, or decrease in Policy debt that may result from
a withdrawal, a decrease in the face amount of insurance, or a change
to variable benefit paid-up insurance.
C. Deductions and Charges From Assets of the Account and the Fund
1. Northwestern will assess the daily mortality and expense risk
charge at an effective rate of 0.6% per annum of the Account assets
attributable to the Policy. This charge is for the (mortality) risk
that insureds may live for shorter periods of time than estimated, and
for the (expense) risk that costs of issuing and administering the
Policies may be higher than estimated.
2. Total Fund expenses for investment advisory and other services
provided to the Fund will be assessed on a daily basis. These expenses
will vary by portfolio, and currently fall in the approximate range of
0.22% to 1.0% of assets, on an annual basis.
D. Transaction Charges
1. Twenty-five dollars ($25.00) may be deducted from the Policy
value upon each withdrawal of excess value or each transfer of invested
amounts among the Account Divisions. These charges are designed to
defray only the estimated costs of effecting the transactions.
Currently, Northwestern is waiving these charges.
2. Northwestern will assess a charge for the administrative costs
incurred in processing a partial surrender. Current estimates place
this charge at $250.
E. Surrender Charges
1. Surrender charges are deducted from the Policy value and will
reduce the Policy proceeds if a Policy is surrendered before the
premium due at the beginning of the fifteenth Policy year has been
paid. These charges include the administrative surrender charge for
issue expenses, and the premium surrender charge for sales expenses.
Both of these surrender charges are based on the minimum annual premium
for the minimum guaranteed death benefit and the Additional Protection,
excluding any amount for extra mortality benefits or for additional
Policy benefits.
2. An administrative surrender charge may be deducted if the Policy
is surrendered or lapses in the first ten (10) Policy years. This
charge provides partial compensation for estimated administrative
expenses, such as the cost of collecting and processing premiums,
processing applications, conducting medical examinations, establishing
Policy records, determining insurability and assigning the insured to a
risk classification, and issuing the Policy. These expenses exclude any
costs properly attributable to sales or distribution activity. The
maximum administrative surrender charge is $216, plus $1.08 per $1,000
of the face amount of insurance. This charge decreases to zero after
the first ten (10) Policy years.
3. Northwestern will deduct a premium surrender charge, for sales
expenses, upon surrender or lapse of a Policy during the first fifteen
(15) Policy years. The premium surrender charge is a percentage of the
annual premium for the Policy face amount (including a term insurance
premium for the portion which is not guaranteed for the lifetime of the
insured), reduced proportionately if total premiums actually paid are
less than those annual premiums due during the first five (5) Policy
years.
4. A deduction from the Policy proceeds for a proportionate part of
the surrender charges will be made if a partial surrender takes place
before the premium due at the beginning of the fifteenth Policy year
has been paid.
F. Deduction of Charge for Section 848 Deferred Acquisition Costs
1. Northwestern will deduct a charge equal to 1.25% of each premium
payment to cover the estimated cost of
[[Page 48187]]
its increased federal tax burden related to receipt of premiums in
connection with the Policies. This increased federal tax burden results
from Section 848 of the Internal Revenue Code of 1986 (as amended),
which was enacted in 1990 to modify the federal income taxation of life
insurance companies. Section 848 requires life insurance companies to
capitalize and amortize, over a period of ten years, part of their
general expenses for the current year. Under prior law, these expenses
were deductible in full from the current year's gross income.
2. The amount of deductions that would have to be amortized over
ten years rather than deducted in the year incurred is a percentage of
the current year's net premiums received in connection with certain
types of insurance contracts. The percentage varies, depending on the
type of insurance contract involved, according to a schedule set forth
in Section 848(c)(1).
3. In effect, Section 848 accelerates the realization of income
from insurance contracts covered by that section and, accordingly,
accelerates the payment of taxes on the income generated by those
contracts. Consequently, taking into account the time value of money,
the tax burden of the insurance company related to those contracts is
increased. Because the amount of general deductions that must be
capitalized and amortized is measured by premiums paid, an increased
federal tax burden results from the receipt of those premiums.
Applicants state that, in this respect, the impact of Section 848 can
be compared to that of a state premium tax.
4. The Policies fall under the category of ``specified contracts''
under Section 848, so that 7.7% of the net premiums received under the
Policies must be capitalized and amortized. The increased tax burden on
Northwestern resulting from this requirement can be quantified as
follows. For every $10,000 of new premiums received by Northwestern
under the Policies in a given year, the general deductions of
Northwestern are reduced by $731.50, or (a) $770 (7.7% of $10,000)
minus (b) $38.50 (one-half year's portion of the ten-year
amortization). Using a 35% corporate tax rate, this results in an
increase in tax for the current year of $256.03. This increase in tax
will be partially offset by increased deductions which 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 the
tenth).
5. To the extent that capital must be used by Northwestern to
satisfy its increased federal tax burden under Section 848 resulting
from the receipt of premiums, such capital is not available for
investment. Because the targeted rate of return for Northwestern (i.e.,
the return Northwestern seeks on invested capital) exceeds 11%,2
Northwestern submits that a discount rate of 11% is appropriate when
calculating the present value of its future tax deductions resulting
from the amortization described above. To the extent that the 11%
discount rate is lower than Northwestern's actual targeted rate of
return, a measure of comfort is provided that the calculation of
Northwestern's increased tax burden attributable to receipt of premiums
will continue to be reasonable over time, even if the corporate tax
rate applicable to Northwestern is reduced, or its targeted rate of
return is lowered.
\2\ In determining the targeted rate of return used in arriving
at this discount rate, Northwestern first identified a reasonable
risk-free rate of return that it could expect to earn over the long
term. Northwestern then determined the premium it must earn over
that risk-free rate of return given the inherently risky nature of
the insurance products it sells. Applicants represent that such
factors are appropriate to consider in determining the targeted rate
of return.
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6. Applying this 11% discount rate, and assuming a 35% corporate
tax rate, the present value of the increased deductions amounts to a
tax savings of $153.97. Thus, the present value of the increased tax
burden resulting from the effect of Section 848 of each $10,000 of net
premiums received under the policies is $102.06 ($256.03 minus
$153.97).
7. Because state premium taxes are deductible when computing an
insurance company's federal income taxes, Northwestern does not incur
incremental income tax when it passes on state premium taxes to its
policy owners. In contrast, federal income taxes are not deductible in
computing a company's federal income taxes. Therefore, to compensate
Northwestern fully for the impact of Section 848, it would be necessary
to allow Northwestern to impose an additional charge which would make
it whole not only for the $102.06 additional tax burden attributable to
Section 848, but also for the tax on the additional $102.06 itself.
This additional charge can be determined by dividing $102.06 by the
complement of the 35% federal corporate income tax rate (i.e., 65%)
resulting in an additional charge of $157.01 for each $10,000 of net
premiums, or 1.57%.
8. Tax deductions are of value to a company only to the extent that
a company has sufficient gross income to take the deductions fully.
Based on prior experience, Northwestern believes that it is reasonable
to expect that future federal income tax deductions will be taken
fully.
9. It is the judgment of Northwestern that a charge of 1.25% would
reimburse it appropriately for the impact of Section 848 on its federal
tax liabilities. Applicants represent that the proposed ``DAC tax''
charge is reasonably related to Northwestern's increased federal tax
burden under Section 848, taking into account the benefit to
Northwestern of the amortization permitted by Section 848 and the use
of an 11% discount rate in computing the future deductions resulting
from such amortization, such rate being no greater than Northwestern's
targeted rate of return.
Applicants' Legal Analysis and Conclusions
Applicants request exemptions pursuant to Section 6(c) of the 1940
Act from: the provisions of, and those rules under, the 1940 Act--other
than Sections 7 and 8(a)--specified in Rule 6e-2(b) thereunder;
Sections 2(a)(32), 2(a)(35), 12(b), 22(c), 26(a)(1), 26(a)(2),
27(a)(1), 27(c)(1), 27(c)(2) and 27(d) of the 1940 Act; and
subparagraphs (b)(1), (b)(12), (b)(13)(i), (b)(12)(ii), (b)(13)(iii),
(b)(13(iv), (b)(13)(v), (c)(1) and (c)(4) of Rule 6e-2, and Rules 12b-
1(a)(1) and 22c-1, under the 1940 Act. Applicants seek these exemptions
to the extent necessary to permit them to offer and sell the Policies.
A. Request for Exemptions Relating to Definition of ``Variable Life
Insurance Contract''
1. Rule 6c-3 under the 1940 Act grants exemptions from numerous
provisions of the 1940 Act to separate accounts of life insurance
companies that support variable life insurance policies. The exemptions
provided by Rule 6c-3 are available only to registered separate
accounts whose assets are derived solely from the sale of ``variable
life insurance contracts'' which meet the definitions set forth in Rule
6e-2(c)(1) or ``flexible premium variable life insurance contracts''
which meet the definition set forth in Rule 6e-3(T)(c)(1) under the
1940 Act, and from certain advances made by the insurer.
2. A ``variable life insurance contract'' is defined in Rule 6e-
2(c)(1) to include only life insurance policies which provide both a
death benefit and a cash surrender value which vary to reflect the
investment experience of the separate account, and which guarantee that
the death benefit will not be less than an amount stated in the policy.
The required guaranteed minimum death benefit need be provided only so
long as
[[Page 48188]]
premiums are duly paid in accordance with the terms of the policy.
3. The death benefit will vary with investment performance when the
value is sufficiently large that, in order to qualify the Policy as
life insurance for federal income tax purposes, the death benefit must
be increased. This could happen, for example, because of very favorable
investment performance, the payment of additional premiums, or both. In
addition, to some degree, each of the possible additional components of
the death benefit--i.e., the Additional Protection, the Variable paid-
up additional insurance, and Excess Amount--also will vary to reflect
investment performance.
4. Applicants submit that the death benefit under the Policy varies
to reflect investment experience within the meaning of Rule 6e-2(c)(1).
Applicants concede, however, that the death benefit under the Policy is
not precisely the type of variable death benefit contemplated when Rule
6e-2 was adopted, and that the Policy contains other provisions that
are not specifically addressed in Rule 6e-2. Accordingly, Applicants
request exemptions from the definition of ``variable life insurance
contract'' in Rule 6e-2(c)(1) and from all sections of and rules under
the 1940 Act--other than Sections 7 and 8(a)--specified in Rule 6e-
2(b), under the same terms and conditions applicable to a separate
account that satisfies the conditions set forth in Rule 6e-2(a), and to
the extent necessary to permit the offer and sale of the Policy in
reliance on Rule 6e-2, except as otherwise set forth in the
application.
5. Applicants submit that the definition of ``variable life
insurance contract'' in Rule 6e-2(c)(1) was drafted at a time when less
flexibility regarding premium payments and other policy features were
offered than subsequently have been permitted. The Policy provides
considerable latitude for the purchaser to select the desired
combination of minimum guaranteed death benefit, Additional Protection,
and Variable paid-up additional insurance. While such a choice may not
have been contemplated when Rule 6e-2 was drafted, Applicants submit
that purchasers are well served by the opportunity to choose a
combination of features which they believe suits their own need with
respect to the relationship of cash value, death benefit and investment
performance.
6. Applicants further submit that the considerations that led the
Commission to adopt Rules 6c-3 and 6e-2 apply equally to the Account
and the Policy, and that the exemptions provided by those rules should
be granted to Applicants on the terms specified in those rules, except
to the extent that further exemption from those terms is specifically
requested.
B. Request for Exemptions Relating to Sales Charges
1. Sections 26(a)(2) and 27(c)(2) may be construed to require that
the proceeds of all payments under a Policy be deposited in the Account
and that no payment be made from the Account to Northwestern or any
affiliated person of Northwestern, except for bookkeeping and other
administrative services. The premium surrender charge (for sales
expenses) may be deemed inconsistent with the foregoing provisions, to
the extent that the deduction from the Policy value would constitute
payment for an expense not specifically permitted. Applicants request
exemptions from Sections 26(a)(2) and 27(c)(2) to the extent necessary
to permit the premium surrender charge to be deducted upon surrender or
lapse of a Policy, as described in the application.
2. Section 2(a)(35) and Rules 6e-2(b)(1) and 6e-2(c)(4) may be
construed to contemplate that the sales charge for a variable life
insurance policy will be deducted from premiums. The deduction of a
premium surrender charge under the Policies may be deemed inconsistent
with those provisions. Applicants request exemptions from Section
2(a)(35) and Rules 6e-2(b)(1) and 6e-2(c)(4), to the extent necessary
to permit part of the Policy's sales charge to be deducted from premium
payments, and part as a surrender charge.
3. Applicants submit that Rule 6e-2(c)(4) may be construed to
comprehend a sales charge imposed on other than premiums. This is
because the definition is an intellectual construct rather than a
reflection of the actual methodology of administering variable life
insurance policies, referring in paragraphs (i) and (ii), for example,
to other amounts that are not deducted from premiums.
4. Section 27(a)(1) and Rule 6e-2(b)(13)(i) may be construed to
contemplate that the sales charge under a policy will be deducted from
premiums. Northwestern's deduction of part of its sales charge on a
contingent deferred basis may be deemed inconsistent with the foregoing
provisions, to the extent that the sales charge is deducted from other
than premiums. Applicants request an exemption from those provisions to
the extent necessary to permit part of the Policy's sales charge to be
deducted from premium payments, and part to be deducted as a surrender
charge.
5. In pertinent part, Sections 2(a)(32), 27(c)(1), and 27(d)
prohibit Applicants from selling the Policy unless it is a ``redeemable
security.'' \3\ Subparagraphs (b)(12), (b)(13)(iv), and (b)(13)(v) of
Rule 6e-2 afford exemptions from Section 27(c)(1), and subparagraphs
(b)(13)(iv) and (b)(13)(v) of Rule 6e-2 afford exemptions from Section
27(d), to the extent necessary for cash value to be regarded as
satisfying the redemption and sales charge refund requirements of the
1940 Act. However, the exemptions afforded by subparagraphs (b)(12),
(b)(13)(iv), and (b)(13)(v) of Rule 6e-2 may not contemplate a
contingent deferred sales charge. Moreover, Northwestern's deduction of
the premium surrender charge may be viewed as reducing the proceeds
that the Policy owner would receive on surrender below the Policy
owner's proportionate share of the current net assets of the Account.
Applicants request an exemption from the foregoing provisions to the
extent necessary to permit part of the sales charge under a Policy to
be deducted from premium payments, and part to be deducted as a
surrender charge.
\3\ A ``redeemable security,'' as defined in Section 2(a)(32),
entitles a Policy owner to receive his or her approximate
proportionate share of the current net assets of the Account upon
surrender.
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6. Applicants represent that Rule 6e-2 was adopted at a time when
less flexibility regarding premium payments and other policy features
were offered than subsequently have been permitted. Because of these
features, particularly premium flexibility, it is possible that the
premiums actually received by the insurance company by the date of
surrender or lapse of a Policy may be less than the full amount of
scheduled minimum premiums paid on or before the relevant due dates. It
is unclear how the technical sales load computation provisions in Rule
6e-2 apply under such circumstances, particularly with respect to the
premium surrender charge.
7. Applicants submit that, although the definition of ``redeemable
security'' found in Section 2(a)(32) does not expressly provide for the
imposition of a sales charge at the time of redemption, such a charge
is not necessarily inconsistent with the definition of ``redeemable
security.'' Applicants further submit that the premium surrender charge
is similar to the ``redemption'' charge authorized in Section 10(d)(4)
of the 1940 Act, and that Congress obviously intended that such a
``redemption charge''--which is expressly described as a ``discount
from net asset value''--be deemed consistent
[[Page 48189]]
with the concept of ``proportionate share'' under Section 2(a)(32).
8. Applicants submit that there will be no restriction on, or
impediment to, surrender that should cause the Policy to be considered
other than a redeemable security within the meaning of the 1940 Act and
the rules thereunder. The Policy provides for surrender and withdrawals
of excess Policy value. The prospectus for the Policy will disclose the
contingent deferred nature of part of the sales charge. Upon surrender
or lapse, a Policy owner will receive his or her ``proportionate
share'' of the Account--i.e., the amount of net premiums paid, reduced
by the amount of all charges and increased by the amount of all return
credited to the Policy.
9. Rule 22c-1, adopted pursuant to Section 22(c), prohibits
Applicants from redeeming a Policy except at a price based on the
current net asset value of the Policy that is next computed after
receipt of the request for full or partial surrender of the Policy.
Rule 6e-2(b)(12) affords exemptions from Rule 22c-1. Rules 22c-1 and
6e-2(b)(12), read together, impose requirements with respect to both
the amount payable on surrender and the time as of which such amount is
calculated. The proposed premium surrender charge may be deemed
inconsistent with Section 22(c) and Rule 22c-1 to the extent that the
sales charge can be viewed as causing a Policy to be redeemed at a
price based on less than the current net asset value that is next
computed after full or partial surrender of the Policy.
10. Applicants submit that the premium surrender charge will not
have the dilutive effect which Rule 22c-1 is designed to prohibit
because a surrendering Policy owner would receive no more than an
amount equal to the cash surrender value determined pursuant to the
formula set out in his or her Policy and after receipt of his or her
request. Furthermore, variable life insurance policies, by nature, do
not lend themselves to the kind of speculative short-term trading that
Rule 22c-1 was aimed against and, even if they could be so used, the
surrender charge would discourage, rather than encourage, any such
trading.
11. Applicants submit that deduction of part of the sales charge as
a deferred charge on surrender or lapse will be more favorable to
Policy owners than deduction of the same amount of charge from
premiums. First, the amount of the Policy owner's premium payment that
will be allocated to the Account and be available to earn a return for
the Policy owner will be greater than it would be if the sales charge
were deducted from premiums. Second, the total dollar amount of sales
load under a Policy is no higher than that permitted by Rule 6e-
2(b)(3)(13) for a conventional scheduled premium variable life
insurance policy. For a Policy owner who does not lapse or surrender in
the early Policy years, the dollar amount of sales load is lower than
would be permitted if taken entirely as front-end deductions from
premium payments made under a Policy. Third, the cost of insurance
charge imposed will be less than it otherwise would be if the same
amount of sales charge were deducted from premium payments, because the
allocation of a greater amount of the Policy owner's premium to the
Account reduces the amount at risk (i.e., the amount of death benefit
less the Policy value) upon which the cost of insurance charge is
based. Moreover, Applicants represent that the proposed sales load
structure provides equitable treatment to both surrendering and
persisting Policy owners. That is, if the insurer is not permitted to
charge a sales load in the form of a contingent deferred charge, it
would have to deduct the sales load entirely from premium payments,
thereby charging persisting Policy owners more than may otherwise be
necessary to recover the distribution costs attributable to such Policy
owners.
12. The premium surrender change, although imposed on other than
the premium, will cover expenses associated with the offer and sale of
the Policy, just as other forms of sales loads do. Applicants submit
that the mere fact that the timing of the imposition of the surrender
charge may not fall neatly within the literal pattern of all provisions
discussed above, does not change its essential nature as a sales
charge. Moreover, Applicants represent that proposed amendments to Rule
6e-2 would permit assessment of a sales charge on a contingent deferred
basis.
13. Applicants represent that the percentages of sales load never
will exceed the sum of 30% of the premium payments paid for the first
Policy year plus 10% of premium payments paid for the second Policy
year, and will not exceed 9% of premium payments expected to be paid
over the lesser of 20 years or the expected lifetime of the insured.
For this reason, Applicants submit that the Policy is consistent with
the principles and policies underlying the sales load limitations in
Section 27(a)(2) of the 1940 Act, and Rules 6e-2 (b)(13)(i) and
(b)(13)(v).
14. Applicants submit that premium and other flexibility options
under the Policy are a potential benefit to Policy owners.
C. Request for Exemptions Relating to Collection of Administrative
Surrender Charge
1. Although the expenses that the administrative surrender charge
is designed to recover are associated with the issuance of a Policy,
Northwestern will deduct the administrative surrender charge from the
Policy Value--not premiums--in the event of early surrender or lapse of
a Policy, and such a deduction will reduce the proceeds otherwise
payable. Such a deduction of the administrative surrender charge
pursuant to the Policies may be deemed to violate Sections 2(a)(32),
22(c), 27(c)(1), 27(d), and Rule 22c-1 for essentially the same reasons
as the premium surrender charge might be deemed to violate those 1940
Act sections and rules. Accordingly, Applicants request exemptions from
the foregoing provisions of the 1940 Act to the extent necessary to
permit the deduction of the administrative surrender charge upon early
surrender or lapse of a Policy.
2. Applicants submit that imposition of the administrative
surrender charge is more favorable to Policy owners than a charge
deducted entirely from premiums or from the Policy value over the life
of the Policy. Because the reduction of the Policy owner's investment
in the Account is less than it would be were the administrative
surrender charge taken in full in the first Policy year, there is a
larger Policy value initially earning a return for the Policy owner. In
addition, for a Policy owner who does not lapse or surrender in the
early Policy years, the total dollar amount of the charges for issuance
and maintenance expenses is no more than Northwestern would be
permitted to deduct from premium payments or by way of periodic
deductions from Policy value. Also, the total dollar amount of the
administrative surrender charge will be no higher than Northwestern
would be permitted to deduct if this charge were in the form of a
deduction from premium payments and/or from the Policy value prior to
the lapse or surrender of a Policy.
3. Applicants represent that the administrative surrender charge
has not been increased to take account of the time value of money
(i.e., the investment costs attributable to deferment of the charge) or
the fact that not all Policy owners would incur the charge.
4. Northwestern does not intend to make a profit on the
administrative surrender charge.
5. Administrative charges deducted in the form of a surrender
charge are
[[Page 48190]]
specifically permitted by Rule 6e-3(T)(b)(13)(iv)(C) for variable life
insurance policies offered and sold in reliance on the rule. Applicants
submit that the relief requested herein with respect to the
administrative surrender charge under the Policies is equally
appropriate.
D. Request for Exemptions Relating to Deduction of Insurance Charges
From Policy Value
1. Sections 26(a)(2) and 27(c)(2) may be construed to prohibit
Northwestern from deducting certain insurance charges from the Policy
value. Applicants request exemptions from the foregoing sections and
Rule 6e-2(b)(13)(iii) \4\ to the extent necessary to permit the
deduction of certain insurance charges from Policy value, as described
in the application.
\4\ In pertinent part, Rule 6e-2(b)(13)(iii) provides an
exemption from Sections 26(a)(2) and 27(c)(2), subject to certain
conditions which Applicants submit that they satisfy.
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2. Applicants submit that the deduction of cost of insurance
charges from the Policy value is fair and reasonable, and in accordance
with the practice under most other variable life insurance policies.
3. Applicants further submit that deduction from the Policy value
of charges for substandard risks and incidental insurance benefits also
is reasonable and appropriate. If all such charges were required to be
deducted solely from premiums, it would be necessary for Northwestern
to: (a) reduce the premium flexibility under the Policy; and/or (b)
limit further the classes of insureds for whom the Policy will be
available, and limit or eliminate the kinds of rider benefits that
Northwestern intends to make available.
4. Applicants submit that Rule 6e-3(T) authorizes deductions from
account value for all of these insurance charges in connection with
policies eligible to rely on that rule, and that proposed amendments to
Rule 6e-2 would authorize deductions from account value of the risk
charges for guaranteed benefits.
5. Applicants submit that their method of deducting cost of
insurance charges is fair and reasonable, and consistent with general
industry practice.
6. Applicants submit that charges for substandard risks and
incidental insurance benefits must be deducted from Policy value, as a
practical matter.
7. The Policy provides for an annual charge, based on the face
amount of insurance, for the death benefit guarantee. Generally, this
charge is deducted from annual premiums, but if payment of premiums is
suspended, the charge will be deducted from Policy value. In addition,
an annual cost of insurance charge based on the amount at risk and the
attained age and risk classification of the insured is deducted from
Policy value; this charge also applies to the values which support any
variable paid-up additional insurance.
8. Applicants represent that the proposed method of deducting
insurance charges is not designed to yield more revenues than if these
charges were assessed solely against premiums.
9. Northwestern represents that these risk charges are reasonable
in relation to the risks assumed under the Policy. The methodology used
to support this representation is based on an analysis of the pricing
structure of the Policies--including other charges, and an analysis of
the various risks--including special risks arising out of provisions
that allow additional and unscheduled premium payments and, in certain
circumstances, suspension of premium payments. Northwestern undertakes
to keep and make available to the Commission the documentation used to
support this representation.
10. Northwestern further represents that there is a reasonable
likelihood that the distribution financing arrangement of the Account
will benefit the Account and Policy owners. Northwestern will keep and
make available to the Commission on request a memorandum setting forth
the basis for this representation.
11. Applicants agree that if the requested order is granted, such
order will be expressly conditioned on Applicants' compliance with the
following: the Account will invest only in management investment
companies which have undertaken, in the event they should adopt any
plan under Rule 12b-1 under the 1940 Act to finance distribution
expenses, to have a board of directors, a majority of whom are not
interested persons of the company, formulate and approve such plan.
E. Request for Exemptions Relating to Use of 1980 Standard Ordinary
Mortality Tables
1. Section 27(a)(1) prohibits an issuer of periodic payment plan
certificates from imposing a sales load exceeding 9% of the payments to
be made on such certificates. Rule 6e-2(b)(13)(i) provides an exemption
from Section 27(a)(1) to the extent that the sales load, as defined in
Rule 6e-2(c)(4), does not exceed 9% of the payments to be made on the
variable life insurance policy during the period equal to the lesser of
20 years or the anticipated life expectancy of the insured, based on
the Commissioners 1958 Standard Ordinary Mortality Table (the ``1958
CSO Table'').
2. Rule 6e-2(c)(4), in defining ``sales load,'' contemplates the
deduction of an amount for the cost of insurance based on the 1958 CSO
Table and the assumed investment return specified in the Policy.
Following the adoption of Rule 6e-2, the National Association of
Insurance Commissioners adopted the 1980 CSO Tables, which reflect more
recent information and data about mortality. The guaranteed cost of
insurance rates under the Policy are based on the 1980 CSO Tables.
Applicants request exemptions from Section 27(a)(i) and Rules 6e-
2(c)(1), 6e-2(b)(13)(i), and 6e-2(4) to the extent necessary to permit
cost of insurance to be calculated based on the 1980 CSO Tables, for
purposes of testing compliance with those rules and that statutory
provision.
3. Applicants represent that proposed amendments to Rule 6e-2 would
require use of the 1980 CSO Tables for purposes of Rules 6e-2(b)(13)(i)
and 6e-2(c)(4), where the 1980 CSO Tables relate to the insurance rates
guaranteed under an insurance policy.
4. Applicants further represent that because cost of insurance
charges based on the 1980 CSO Tables generally are lower than those
based on the 1958 CSO Table, lower charges and higher Policy values
generally result if charges are based on the 1980, rather than the
1958, CSO Tables.
F. Request for Exemptions Relating to the DAC Tax
1. Section 2(a)(35), in pertinent part, defines ``sales load'' as
the difference between the price of a security to the public and that
portion of the proceeds from its sale that is received and invested or
held for investment by the depositor, less any portion of such
difference deducted for trustee's or custodian's fees or other fees
that are not properly chargeable to sales or promotional activities.
2. Section 27(c)(2) prohibits a registered investment company or a
depositor or underwriter for such company from making any deduction
from payments made under periodic plan certificates other than a
deduction for sales load. Sections 27(a)(1) and 27(h)(1) of the 1940
Act, as modified by Rule 6e-2(b)(13)(i), limit the amount of sales load
that can be deducted in connection with variable life insurance
policies issued in reliance on Rule 6e-2.
3. Applicants state that Rules 6e-2(b)(13)(iii) and 6e-
3(T)(b)(13)(iii) each
[[Page 48191]]
provide exemptive relief from Section 27(c)(2) to permit an insurer to
deduct certain charges other than sales load, including deductions to
pay the insurer's tax liabilities--imposed by any State or other
governmental entity--arising as a result of its receipt of premium
payments. Applicants seek relief from Section 27(c)(2) only to the
extent necessary to permit deductions from premium payments received in
connection with the Policies in an amount that is reasonable in
relation to Northwestern's increased federal tax burden related to the
receipt of such premiums. Applicants also request exemptions from Rule
6e-2(c)(4)(v) so that the proposed ``DAC tax'' charge is treated as
other than sales load for purposes of Section 27 and the provisions of
Section 27 referred to in Rule 6e2.
4. The exemption requested by Applicants is necessary in order for
them to rely on certain provisions of Rule 6e-2(b)(13)(i), which
provides exemptions from Sections 27(a)(1)and 27(h)(1). Issuers and
their affiliates may rely on subparagraph (b)(13)(i) of Rule 6e-2 only
if they meet the limitations on ``sales load,'' as defined in paragraph
(c)(4) of that rule. Applicants state that these limitations may not be
met if the deduction for an increase in Northwestern's federal tax
burden is included in sales load.
5. Rule 6e-2(c)(4) defines ``sales load'' as the excess of premium
payments over certain itemized charges and adjustments. Applicants
submit that a deduction for an insurer's increased federal tax burden
as described above does not fall squarely into any of those itemized
charges or adjustments. Arguably, then, such a deduction may be treated
as ``sales load'' under a literal reading of Rule 6e-2(c)(4).
6. Applicants submit that there is no public policy reason for
including deductions made to pay federal taxes in sales load, nor is
there any language in the releases in which the Commission adopted Rule
6e-2 or adopted and amended Rule 6e-3(T) suggesting that the exclusion
from the definition of sales load of deductions for tax liabilities
attributable to premiums was based on the type of governmental entity
imposing the taxes.
7. Applicants submit that the public policy underlying Rule 6e-
2(b)(13)(i), like that underlying Sections 27(a)(1) and 27(h)(1), 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 tax burden charge attributable to premium payments as
sales load would not further this objective because such a deduction
bears 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 Rule 6e-2(c)(4).
8. Applicants assert that the source for the definition of sales
load found in Rule 6e-2(c)(4) supports this analysis. Applicants submit
that the Commission's intent in adopting subparagraph (c)(4) of Rule
6e-2 was to tailor the general terms of Section 2(a)(35) to variable
life insurance contracts. Just as the percentage limits of Sections
27(a)(1) and 27(h)(1) depend on the definition of sales load in Section
2(a)(35) for their efficacy, the percentage limits in subparagraph
(b)(13)(i) of Rule 6e-2 depend on subparagraph (c)(4). Applicants
submit, therefore, that Rule 6e-2(c)(4) does not depart, in principle,
from Section 2(a)(35).
9. Applicants assert that Section 2(a)(35) excludes from the
definition of ``sales load'' deductions from premiums for ``issue
taxes.'' Applicants submit that this suggests that excluding deductions
made to pay an insurer's costs attributable to its tax obligations from
the definition of ``sales load'' in Rule 6e-2 is consistent with the
policies of the 1940 Act.
10. Applicants further submit that the reference in Section
2(a)(35) to administrative expenses or fees that are ``not properly
chargeable to sales or promotional activities'' suggests that the only
deductions intended to fall within the definition of ``sales load'' are
those properly chargeable to such activities. Because the proposed
deductions will be used to compensate Northwestern for its increased
federal tax burden attributable to the receipt of premiums, and are not
properly chargeable to sales or promotional activities, Applicants
assert that the language in Section 2(a)(35) also indicates that not
treating such deductions as sales load is consistent with the policies
of the 1940 Act.
11. Applicants represent that Northwestern will monitor the
reasonableness of the ``DAC tax'' charge to be deducted. Applicants
represent, further, that the registration statement for the Policies
will: (a) Disclose the charge; (b) explain the purpose of the charge;
and (c) state that the charge is reasonable in relation to
Northwestern's increased federal tax burden under Section 848 resulting
from the receipt of premiums. Applicants also represent that the
registration statement for the Policies will contain as an exhibit an
actuarial opinion as to: (a) The reasonableness of the charge in
relation to Northwestern's increased federal tax burden under Section
848 resulting from the receipt of premiums; (b) the reasonableness of
the targeted rate of return that is used in calculating such charge;
and (c) the appropriateness of the factors taken into account in
determining such targeted rate of return.
12. Applicants assert that it is proper for an insurer to deduct a
charge for the tax burden attributable to premiums received from
variable life insurance policies, and to exclude such a deduction from
sales load, because the deduction for the insurer's increased federal
tax burden is a legitimate expense of the company, and is not for sales
and distribution expenses. Applicants note that the Commission has
previously considered similar deductions for premium taxes in
connection with its adoption of Rule 6e-2 and Rule 6e-3(T). In each
case, the Commission permitted deductions for such taxes to be made and
to be treated as other than sales load. Applicants assert that the
proprietary of a charge for an insurers tax burden attributable to
premiums received is the same whether such burden arises under state or
federal law.
G. Request for Exemptions Relating to Custodianship Arrangements
1. In pertinent part, Sections 26(a)(1) and 26(a)(2) prohibit
Applicants from selling the Policy unless it is issued pursuant to a
trust indenture or other such instrument that designates one or more
trustees or custodians, qualified as specified, to have possession of
all securities in which the Account invests.
2. In pertinent part, Section 27(c)(2) may be read to prohibit
Applicants from selling the Policy unless the proceeds of all purchase
payments are deposited with a trustee or custodian as specified.
3. Rule 6e-2(b)(13)(iii) affords an exemption from Sections
26(a)(1), 26(a)(2), and 27(c)(2), provided that the life insurer
complies, to the extent applicable, with all other provisions of
Section 26 as if it were a trustee or custodian for the Account, and
assuming that it meets the other requirements set forth in the rule.
4. Applicants represent that the holding of Fund shares by the
Account or its depositor under an open account arrangement--without
having possession of share certificates and without a trust indenture
or other such instrument--may be deemed inconsistent with the foregoing
provisions. Accordingly, Applicants request exemptions from Sections
[[Page 48192]]
26(a)(1), 26(a)(2) and 27(c)(2), to the extent necessary.
5. Applicants represent that current industry practice calls for
unit investment trust separate accounts, such as the Account, to hold
shares of management investment companies in uncertificated form.
Applicants further represent that holding shares of underlying
management investment companies in uncertificated form contributes to
efficiency in the operation and sale of such shares by separate
accounts, and generally saves costs.
6. Applicants note that, in contrast to the Policies (which are
covered by Rule 6e-2), policies covered by Rule 6e-3(T) may rely on
Rules 6e-3(T)(b)(13)(iii) (B) and (C) which, in effect, afford the
exemptions requested here by the Applicants. The Commission has
proposed amendments to Rule 6e-2(b)(13)(iii) to permit life insurers to
hold the assets of a separate account without a trust indenture or
other such instrument, and to permit a separate account organized as a
unit investment trust to hold the securities of any registered
investment company that offers its shares to the separate account in
uncertificated form. Applicants also note that the Commission has
adopted 1940 Act Rule 26a-2 which affords exemptions in connection with
variable annuity separate accounts that are essentially similar to
those requested here. Accordingly, Applicants presume that the
Commission adopted or proposed the foregoing exemptive rules based on a
determination that, where state insurance law protects separate account
assets and open account arrangements foster administrative efficiency
and cost savings, safekeeping of separate account assets does not
necessarily depend on the presence of a trustee, custodian or trust
indenture, or the issuance of share certificates.
7. Northwestern represents that: it will comply with all other
applicable provisions of Section 26 of the 1940 Act as if it were a
trustee or custodian for its Account (subject to the other exemptive
relief requested in the application); it will file with the insurance
regulatory authority of Wisconsin an annual statement of its financial
condition in the form prescribed by the National Association of
Insurance Commissioners--the most recent such statement indicated that
Northwestern has a combined capital and surplus of at least $1 million;
it is examined from time to time by the insurance regulatory authority
of Wisconsin as to its financial condition and other affairs; and it is
subject to supervision and inspection with respect to its separate
account operations.
H. Request for Exemptions Relating to Sale of Fund Shares Without an
Underwriter
1. Section 12(b) of the 1940 Act provides, in pertinent part, that
it shall be unlawful for any registered open-end company to act as a
distributor of securities of which it is the issuer, except through an
underwriter, in contravention of such rules and regulations as the
Commission may prescribe. Rule 12b-1(a)(1) provides, in pertinent part,
that, except in compliance with the provisions of that rule, it shall
be unlawful for a registered open-end management investment company to
act as a distributor of securities of which it is the issuer, except
through an underwriter.
2. Applicants request exemption from Section 12(b) and Rule 12b-
1(a)(1) to the extent necessary to permit the Fund to sell the shares
of its portfolios to the Account without the use of an underwriter, on
the condition that Applicants not use the Fund's assets for
distribution expenses unless the Fund complies with 1940 Act Rule 12b-
1(b).
3. Applicants state that shares of the Fund Portfolios have been
and will be sold only to the Account and to other separate accounts of
Northwestern, except for the seed money shares purchased by
Northwestern itself. The shares will be sold at net asset value without
any sales charge or underwriting spread. Applicants represent that the
Fund bears no expenses for distribution of its shares.
4. Applicants submit that, in view of the foregoing facts, no
useful purpose would be served by requiring the Fund to use an
underwriter for the sale of the shares of its portfolios to the
Account. Direct sales of these shares to the Account would not expose
the Fund to any underwriting risks, since such shares are issued only
when requests for their purchase are received from the Account. Nor
would the direct sales to the Account create any expenses for the Fund.
Conclusion
Applicants assert that, for the reasons set forth above, the
requested exemptions meet the standards of Section 6(c) of the 1940
Act. The requested exemptions 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,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23016 Filed 9-15-95; 8:45 am]
BILLING CODE 8010-01-M
