[Federal Register Volume 60, Number 181 (Tuesday, September 19, 1995)]
[Notices]
[Pages 48582-48585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23142]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21348; File No. 812-9622]
SAFECO Life Insurance Company, et al.
September 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: SAFECO Life Insurance Company (``SAFECO''), First SAFECO
National Life Insurance Company of New York (``First SAFECO''), SAFECO
Separate Account C (``Account C''), SAFECO Resource Variable Account B
(the ``Resource Account''), SAFECO Securities, Inc. (``SAFECO
Securities''), and PNMR Securities, Inc. (``PNMR'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(C) for
exemptions from 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
Account C, the Resource Account, or any separate account established by
SAFECO or First SAFECO in connection with certain variable annuity
contracts (``Contracts''). The exemptions also would apply to any other
registered broker-dealer, which is or will be controlling, controlled
by, or under common control with SAFECO, and which may serve in the
future as principal underwriter for variable annuity contracts that are
similar in all material respects to the Contracts and that are offered
in the future by SAFECO or First SAFECO (``Future Contracts'').
FILING DATE: The application was filed on May 31, 1995, and amended and
restated on September 6, 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 SEC
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests must be received by the SEC by 5:30 p.m. on
October 10, 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 reasons for the request, and the issues contested.
Persons may request notification of a hearing by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, P.O. Box 34690, Seattle, Washington 98124-1690, Attn:
William E. Crawford, Esq.
FOR FURTHER INFORMATION CONTACT:
Joseph G. Mari, Senior Special Counsel, or Wendy 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 Commission.
Applicants' Representations
1. SAFECO is a stock life insurance company organized under the
laws of Washington and is the depositor of Account C and the Resource
Account. First SAFECO, a wholly-owned subsidiary of SAFECO, is a stock
life insurance company organized under the laws of New York.
2. Account C and the Resource Account, organized by SAFECO under
Washington law as insurance company separate accounts to fund certain
variable annuity contracts, are registered under the 1940 Act as unit
investment trusts. Account C currently funds certain individual
variable annuity contracts (``Current C Contracts''), and will fund
certain additional forms of variable annuity contracts currently being
registered and to be offered by SAFECO through Account C (the ``Account
C Contracts''). The Resource Account currently funds certain individual
and group variable annuity contracts (``Current Resource Contracts'')
and, in the future, may fund certain additional forms of variable
annuity contracts offered by SAFECO. The Current C Contracts and the
Current Resource Contracts collectively are referred to as the
``Current Contracts''; the Current Contracts and Account C Contracts
constitute the ``Contracts.''
3. SAFECO or First SAFECO may establish one or more separate
accounts in the future (``Other Accounts'') (Other Accounts, Account C,
and Resource Account are referred to collectively as the ``Separate
Accounts'') to support certain variable annuity contracts that are
materially similar to the Contracts and are offered through any other
broker-dealer that (i) may serve in the future as principal underwriter
in respect of certain variable annuity contracts offered by SAFECO or
First SAFECO, (ii) is registered under the Securities Exchange Act of
1934 as a broker-dealer and which is or will be a member of the
National Association of Securities Dealers, Inc. (the ``NASD''), and
(iii) is controlling, controlled by, or under common control with
SAFECO (``Other Principal Underwriters'').
4. The Separate Accounts are comprised of sub-accounts each of
which invests in the corresponding portfolio or series of a management
investment company registered under the 1940 Act. SAFECO and First
SAFECO may create new sub-account(s) of the Separate Accounts.
5. SAFECO Securities, a registered broker-dealer and a member of
the NASD, is the principal underwriter of the Current C Contracts and
will be the principal underwriter of the Account C Contracts. SAFECO
Securities also is the principal underwriter for the Current Resource
Contracts, for which PNMR, a registered broker-dealer and a member of
the NASD, previously had been the principal underwriter. SAFECO
Securities or PNMR may act as principal underwriter for any Contracts
issued in the future by SAFECO or First SAFECO.
6. Applicants intend to offer the Account C Contracts to the public
for individuals who qualify for federal income tax advantages available
under Section 408 of the Internal Revenue Code of 1986, as amended
(``qualified Account C Contracts''), and for individuals desiring such
benefits who do not qualify for such tax advantages (``non-qualified
Account C Contracts''). Account C Contracts will be offered on a
flexible payment basis. Owners may allocate purchase payments to
SAFECO's general account under the fixed account portion of the Account
C Contracts, or to one of several sub-accounts of Account C.
7. Applicants state that the minimum initial purchase payment for
an Account C Contract is $2,000 for a qualified Account C Contract and
$5,000 for a non-qualified Account C Contract. The minimum additional
purchase payment is $250, except for additional purchase payments made
through a systematic investing program, in which case the minimum
payment is $100.
8. Regarding the Current C Contracts and the Current Resource
Contracts, Applicants only seek relief to assess mortality and expense
risk charges from the assets of the Separate Accounts in connection
with the offering of variable annuity contracts that are materially
similar to those contracts. SAFECO, the
[[Page 48583]]
Resource Account and SAFECO Securities were granted exemptive relief
under Section 6(c) of the 1940 Act from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act permitting the assessment of a
mortality and expense risk charge (the ``Resource Application'') to the
extent set forth therein.\1\ Applicants represent that no material
facts contained in the Resource Application have changed since the
issuance of the Resource Order and incorporate that application herein
by reference. SAFECO, Account C and PNMR were granted exemptive relief
under Section 6(c) oft he 1940 Act from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act permitting the deduction of a
mortality and expense risk charge (the ``Account C Application'') to
the extent set forth therein.\2\ Applicants represent that no material
facts contained in the Account C Application have changed since the
issuance of the Account C Order and incorporate that application herein
by reference.
\1\Safeco Life Insurance Company, Investment Company Act Release
Nos. 15396 (Nov. 5, 1986) (notice) and 15459 (Dec. 5, 1986)
(``Resource Order'').
\2\Safeco Life Insurance Company, Investment Company Act Release
Nos. 20043 (Jan. 28, 1994) (notice) and 20097 (Feb. 25, 1994) (the
``Account C Order'').
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9. Certain charges and fees are assessed under the Contracts. A
Contract owner will be able to make up to twelve transfers each
Contract year at no charge. Each additional transfer will be subject to
a charge of $10, which, according to Applicants, will not exceed the
average costs associated with administering the Contracts.
10. Contract owners will be permitted to make one withdrawal of
Contract Value (the amount that the Contract provides for investment at
any time), subject to the other limitations and charges under the
Contracts, without the assessment of an excess withdrawal charge. A
maximum charge of $25 is assessed for each withdrawal in excess of one
withdrawal per Contract year.
11. For non-qualified Account C Contracts, SAFECO intends to
deduct, as a charge against Contract Value, an amount equal to and for
premium taxes. For qualified Account C Contracts, SAFECO intends to pay
premium taxes, although SAFECO reserves the right to deduct, as a
charge against Contract Value, an amount equal to and for premium
taxes. For non-qualified Current Contracts, SAFECO deducts, as a charge
against Contract Value, an amount equal to and for premium taxes. For
qualified Current Contracts, SAFECO has reserved the right to deduct,
as a charge against Contract Value, an amount equal to and for premium
taxes. Premium taxes generally range up to 3.5%.
12. No front-end sales charge is imposed when purchase payments are
applied under the Account C Contracts. However, a contingent deferred
sales charge (``CDSC'') is assessed if the Account C Contract is
surrendered or partial withdrawals exceeding certain amounts are taken
during the six-year period from the issue date of the Account C
Contract. Each Contract year, an Account C Contract owner generally may
withdraw a total of 10% of the Contract Value as of the date of the
withdrawal, without payment of the CDSC. The percentage imposed at the
time of surrender or partial withdrawal depends on when the Account C
Contract is surrendered or partial withdrawals are taken. The maximum
CDSC is 7% of the amount withdrawn during the first Contract year. The
percentage scales downward by one percent each year. In no event will
the CDSC under the Account C Contracts be greater than 9% of purchase
payments.
13. Applicants submit that proceeds from the CDSC may not cover the
expected cost of distributing the Contracts and that any shortfall will
be recovered from SAFECO's or First SAFECO's general assets, which may
include revenue from the mortality and expense risk charge deducted
from the Separate Accounts.
14. The administrative charges to be assessed with respect to the
Account C Contracts will be (i) an annual administration maintenance
charge, currently $30 per Contract year, and (ii) an asset-related
administration charge at an annual rate of approximately .15%, which
rate may not be increased for the duration of the Account C Contracts.
The annual administration maintenance charge is imposed only on Account
C Contracts with a Contract Value less than $100,000. SAFECO states
that it may change the annual administration maintenance charge over
the period that the Account C Contracts are in force, but in no event
will the annual administration maintenance charge exceed $40 per
Contract year.
15. SAFECO represents that it does not expect that the total
revenues from the administrative charges will be greater than the total
expected cost of administering the Contracts, on average, excluding
costs that are properly categorized as distribution expenses, over the
period that the Contracts are in force. Applicants represent that they
rely on and are in compliance with the requirements of Rule 26a-1 in
connection with charges under the Contracts.
16. Applicants propose to deduct a daily charge for mortality and
expense risks from the assets of the Separate Accounts. With respect to
the Account C Contracts, SAFECO will assess the Separate Accounts with
a daily charge for mortality and expense risks at an aggregate annual
rate of 1.25%. Approximately .90% of the annual charge is allocated to
the mortality risks and .35% is allocated to the expense risks.
17. SAFECO will assume a mortality risk by its contractual
obligation to pay a death benefit to the beneficiary if the owner, as
defined in the Account C Contract (``Account C Contract Owner''), dies
prior to the Annuity Date. Applicants assert that the Account C
Contracts provide a guaranteed death benefit that is the greater of:
(a) the Contract Value at the time of notification of death and
election of a settlement option, but not later than six months
following the date of death; or (b) the previous minimum guaranteed
death benefit. Applicants represent that the minimum guaranteed death
benefit is reset at the end of each sixth Contract Year (the ``Six Year
Contract Anniversary''), as described below. At each Six Year Contract
Anniversary the last minimum guaranteed death benefit value on record
is compared to the then current Contract Value. The greater of the two
values becomes the new minimum guaranteed death benefit value. At the
first Six year Contract Anniversary the last minimum guaranteed death
benefit value of record is the sum of all payments less any withdrawals
during the first six Contract Years; that value will be compared to
Contract Value. The minimum guaranteed death benefit value is fixed as
of the last Six Year Contract Anniversary preceding the Account C
Contract Owner's 76th birthday. If an Account C Contract Owner makes
withdrawals during the period between Six Year Contract Anniversaries,
the minimum guaranteed death benefit value is reset to equal the sum
of: (a) The previous minimum guaranteed death benefit value; multiplied
by (b) the Contract Value after the withdrawal; divided by (c) the
Contract Value before the withdrawal. Similarly, if an Account C
Contract Owner makes purchase payments during the period between Six
Year Contract Anniversaries, the previous minimum guaranteed death
benefit is adjusted to reflect the amount of the purchase payments.
18. Applicants also represent that SAFECO assumes a similar
mortality risk under the Current Contracts. The
[[Page 48584]]
Current Contracts provide a guaranteed death benefit that is the
greater of: (1) Net purchase payments plus any deposits less any
withdrawals (including any applicable charges) at the time of death; or
(2) the Contract Value determined as of the ``Valuation Period'' (as
defined in the Current Contract), next following the date both proof of
death and an election of a single sum payment or of a form of annuity
payment is received by SAFECO.
19. SAFECO also represents that it assumes a mortality risk by its
contractual obligation to continue to make annuity payments for the
life of the annuitant under annuity options involving life
contingencies. This assures each annuitant that neither the annuitant's
own longevity nor an improvement in life expectancy generally will have
an adverse effect on the annuity payments received under an Account C
Contract. This relieves the annuitant from the risk of outliving the
amounts accumulated for retirement. At the same time, SAFECO represents
that it assumes the risk that annuitants as a group will live a longer
time than SAFECO's annuity tables predict, which would require SAFECO
to pay out more in annuity income than planned. SAFECO assumes an
additional mortality risk because the Account C Contract does not
impose CDSC or similar charge on the death benefit or upon
annuitization.
20. In addition to mortality risks, SAFECO asserts that it assumes
an expense risk under the Contracts because the administrative charges
under the Contracts may be insufficient to cover actual administrative
expenses.
21. Applicants represent that if the administrative charges and
mortality and expense risk charges assessed against Separate Account
assets are insufficient to cover the expenses and costs assumed, the
loss will be borne by SAFECO or First SAFECO. If the amount deducted
for mortality and expense risk charges proves more than sufficient, the
excess will be profit to SAFECO or First SAFECO. SAFECO anticipates
earning a profit from the mortality and expense risk charge.
Applicants' Legal Analysis
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and
27(c)(2) thereof to the extent necessary to permit the deduction of a
mortality and expense risk charge from the assets of the Separate
Accounts under the Contracts and Future Contracts as described herein.
2. Section 6(c) of the 1940 Act, in relevant part, provides that
the Commission may issue an order exempting any person, security or
transaction, or any class or classes of persons, securities or
transactions, from any provision or provisions of the 1940 Act as may
be 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.
3. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust and any depositor thereof or principal
underwriter therefor, from selling periodic payment plan certificates
unless the proceeds of all payments (other than sales load) are
deposited with a qualified trustee or custodian and held under an
agreement that provides that no payment to the depositor or principal
underwriter shall be allowed except as a fee, not exceeding such
reasonable amount as the Commission may prescribe, for bookkeeping and
other administrative services.
4. Applicants assert that the requested exemptions meet the
standards of Section 6(c) of the 1940 Act, and that the terms of the
relief requested with respect to the Contracts or Future Contracts
funded by a Separate Account and distributed by SAFECO Securities, PNMR
or any Other Principal Underwriters are consistent with the standards
set forth in Section 6(c) of the 1940 Act. Applicants state that
without the requested future relief, they would have to request and
obtain exemptive relief in connection with Contracts or Future
Contracts to the extent required. 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, the
Account C Application, and the Resource Application.
5. Applicants submit that the requested exemptive relief is
appropriate in the public interest because it would promote
competitiveness in the variable annuity contract market by eliminating
the need for SAFECO, First SAFECO and their appropriate affiliates to
file redundant exemptive applications, thereby reducing administrative
expenses and maximizing the efficient use of resources. The delay and
expense involved in having to seek exemptive relief repeatedly would
impair SAFECO's, First SAFECO's, Other Accounts', and Other Principal
Underwriters' ability effectively to take advantage of business
opportunities as they arise. If SAFECO and First SAFECO were required
to seek exemptive relief repeatedly with respect to the issues
addressed in this Application, the Resource Application and the Account
C Application, investors would not receive any benefit or additional
protection thereby. Indeed, they might be disadvantaged as a result of
SAFECO's and First SAFECO's increased overhead expenses. Applicants
further submit that, for the same reasons, the requested relief is
consistent with the purposes of the 1940 Act and the protection of
investors.
6. Applicants represent that the mortality and expense risk charge
of 1.25% is within the range of industry practice for comparable
annuity products. Applicants state that this determination is based on
their analysis of publicly available information about similar industry
practices, taking into consideration such factors as current charge
levels and benefits provided, the existence of expense charge
guarantees, and guaranteed annuity rates. SAFECO and First SAFECO
undertake to maintain at their home offices, and make available to the
Commission upon request, a memorandum setting forth in appropriate
detail the products analyzed, the methodology, and the results of the
analysis relied upon, in making the foregoing determination.
7. Similarly, Applicants represent, regarding the Future Contracts,
that the mortality and expense risk charges under any Future Contracts
will be within the range of industry practice for comparable annuity
products. Applicants state that this determination will be based on
their analysis of publicly available information about similar industry
practices, taking into consideration such factors as current charge
levels and benefits provided, the existence of expense charge
guarantees, and guaranteed annuity rates. SAFECO and First SAFECO
undertake to maintain at their home offices, and make available to the
Commission upon request, a memorandum setting forth in appropriate
detail the products analyzed, the methodology, and the results of the
analysis relied upon, in making the foregoing determination.
8. The CDSC may be insufficient to cover all costs relating to the
distribution of the Contracts. In that event, if a profit is realized
from the mortality and expense risk charge, all or a portion of such
profit may be offset by distribution expenses not reimbursed by the
CDSC. Notwithstanding the foregoing, SAFECO has concluded that there is
a reasonable likelihood that the proposed distribution financing
arrangements will benefit the Separate Accounts and Contract owners.
[[Page 48585]]
SAFECO undertakes to maintain at its home office, and make available
upon request to the Commission and its staff, a memorandum setting out
the basis for such conclusion.
9. SAFECO and First SAFECO also represent that the Separate
Accounts will invest only in an underlying mutual fund which
undertakes, in the event it should adopt any plan pursuant to Rule 12b-
1 of the 1940 Act to finance distribution expenses, to have such plan
formulated and approved by a board of directors, a majority of the
members of which are not ``interested persons'' of such fund within the
meaning of Section 2(a)(19) of the 1940 Act.
Conclusion
Applicants submit, for the reasons stated herein, that the
requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to permit the assessment of a mortality and expense risk charge
meet the standards set out in Section 6(c) of the 1940 Act.
Accordingly, Applicants assert that 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,
pursuant to delegated authority.
Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 95-23142 Filed 9-18-95; 8:45 am]
BILLING CODE 8010-01-M
