[Federal Register Volume 60, Number 181 (Tuesday, September 19, 1995)]
[Notices]
[Pages 48578-48580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23143]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21349; File No. 812-9388]
Integrity Life Insurance Company, et al.
September 12, 1995.
AGENCY: The Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Integrity Life Insurance Company (``Integrity''), Separate
Account I of Integrity Life Insurance Company (``Account I''), Separate
Account II of Integrity Life Insurance Company (``Account II,'' and
collectively with Account I, the ``Separate Accounts'') and Integrity
Financial Services, Inc. (``Services'').
RELEVANT 1940 ACT SECTIONS: Exemptions requested under Section 6(c)
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
SUMMARY OF THE APPLICATION: Applicants seek an order under Section 6(c)
of the 1940 Act granting exemptions from Sections 26(a)(2)(C) and
27(c)(2) to the extent necessary to permit the deduction of a mortality
and expense risk charge from the assets of the Separate Accounts or
other Separate Accounts (``Other Accounts'') established by Integrity
to support certain flexible premium variable annuity policies
(``Contracts'') as well as other variable annuity contracts that are
substantially similar in all material respects to the Contracts
(``Future Contracts''). In addition, Applicants propose that Services
replace Integrity as principal underwriter for the Contracts, and that
the order extend the same exemptions granted to Services, and to any
other broker-dealer that may in the future serve a principal
underwriter for the Contracts or Future Contracts, the same exemptions
currently granted to Integrity.
FILING DATES: The application was filed on December 22, 1994, and was
amended on August 2, 1995 and September 8, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m., on 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 requestor's interest,
the reason for the request, and the issues contested. Persons may
request notification of a hearing by writing to the Secretary of the
SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, Kevin L. Howard,
Esq., Integrity Life Insurance Company, 239 S. Fifth Street, 12th
Floor, Louisville, Kentucky, 40202.
FOR FURTHER INFORMATION CONTACT:
Pamela K. Ellis, Senior Counsel, or Wendy Finck Friedlander, Deputy
Chief, at (202) 942-0670, Office of Insurance Products, Division of
Investment Management.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the SEC's Public
Reference Branch.
Applicant's Representations
1. Integrity, a stock life insurance company, is organized in Ohio
and licensed to sell life insurance and annuities in forty-four states
and the District of Columbia. In addition, Integrity is licensed to
sell variable contracts in forty-three states and the District of
Columbia. Integrity is an indirect wholly-owned subsidiary of ARM
Financial Group, Inc. (``ARM Financial''). Integrity is currently the
principal underwriter of the Contracts and is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. (``NASD'').
2. Account I and Account II are separate accounts established by
Integrity to fund the Contracts. Both Separate Accounts are registered
under the 1940 as unit investment trusts. Interests in the Contracts
are registered as securities under the 1933 Act.
3. Account I has ten investment divisions (``Divisions''), each of
which invests in one of the ten corresponding portfolios of the
Variable Insurance Products Fund and the Variable Insurance Products
Fund II, which are both part of the Fidelity Investments (R) group of
companies (collectively, ``Trusts''). Account II has ten Divisions,
each of which invests in a corresponding portfolio of The Legends Fund,
Inc. (``Legends Fund,'' and collectively with the Trusts, ``Funds'').
The Funds are diversified, open-end management investment companies
registered under the 1940 Act.
4. Services, a wholly-owned subsidiary of ARM Financial, is
registered with the Commission under the Securities Exchange Act of
1934 as a broker-dealer and is a member of the NASD. Applicants now
seek to substitute Services for Integrity as the principal underwriter
for the Contracts.\1\
\1\The Commission has previously granted relief permitting
Integrity to deduct mortality and expense risk charges from the
assets of the Separate Accounts in connection with the sales of the
Contracts. See, Integrity Life Insurance Company, Investment Company
Act Release No. 19120 (Nov. 24, 1992) and The Equitable Life
Assurance Society of the United States, Investment Company Act
Release No. 15406 (Nov. 7, 1986) (``Existing Orders''). Applicants
are not requesting that the order sought herein amend or supersede
the Existing Orders.
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5. Integrity, the Separate Accounts, and Services will enter into
an agreement under which Services will become principal underwriter for
the Contracts. Integrity and Services propose to enter into selling
agreements with broker-dealers for the distribution of the Contracts.
6. The Contracts are flexible premiums variable annuity contracts.
Contract owners (``Participants'') may allocate premium payments to one
or more of the Separate Accounts' Divisions, or to one or more of
Integrity's guaranteed periods, or both. Amounts allocated to guarantee
periods accumulate on a fixed basis, except as adjusted for any
applicable value adjustment.
7. A death benefit is available under the Contracts if a
Participant dies prior to his or her retirement date. The amount of the
death benefit is equal to the greatest of (1) the Participant's annuity
value, (2) the minimum death benefit, which equals total contributions
less the sum of the market value
[[Page 48579]]
adjusted withdrawals, and (3) the Participant's highest annuity value
at the beginning of any participation year, plus subsequent
contributions and minus subsequent withdrawals (``Enhanced Death
Benefit'').
8. Retirement benefits under the Contracts may take the form of a
lump sum payment or an annuity. The retirement benefits are calculated
as of the retirement date selected by the Participant. If no annuity
payment option is elected by the retirement date, Integrity will deem
the retirement date to have been extended.
9. Certain charges and fees are assessed under the Contracts. Until
annuity payments begin, Participants may transfer their Contract values
among Divisions of the relevant Separate Account and the relevant
guarantee periods, except that transfers to any guarantee period must
be to a newly elected guarantee period at the current guaranteed
interest rate. No fee currently is imposed for a Participant's first
twelve transfers per participation year. Integrity reserves the right
to impose a fee of up to $25 for each transfer in excess of twelve per
participation year. The transfer fee will be paid to Integrity to
compensate it for the anticipated actual administrative expenses
relating to transfers and is guaranteed not to increase during the life
of the Contracts. In addition, Applicants reserve the right to impose a
transfer fee in connection with Future Contracts of up to $25 on
transfers beginning with the first transfer of Contract values in any
participation year. No charges will be assessed for transfers made
under Integrity's dollar cost averaging program.
10. A contingent deferred sales charge (``CDSC'') may be imposed on
certain withdrawals. The amount of the CDSC decreases annually from 7%
to 0% over 7 participation years. No CDSC will be applied to partial
withdrawals made during any participation year that do not exceed the
specified amount. In addition, Integrity may waive the CDSC in certain
circumstances.
11. If a Participant's Contract value is less than $50,000 on the
last day of any participation year prior to the Participant's
retirement date, Integrity charges an annual administrative charge of
$30. In addition, all Contracts are subject to a daily charge equal, on
an annual basis, to .15% of the net asset value of the relevant
Separate Account to cover policy administration expenses. These daily
and annual fees are guaranteed for the life of the Contracts and will
not exceed the cost of services to be provided over the life of the
Contract.
12. Integrity imposes charges as compensation for bearing certain
mortality and expense risks under the Contracts. The amount of the
mortality and expense risk charges under the Contracts is equal, on an
annual basis, to 1.20% (of which .35% is attributable to mortality
risks and .85% to expense risks) of the daily net asset value of the
relevant Separate Account. For the Future Contracts, the annual
mortality and expense risk charge will not exceed an effective annual
rate of 1.20% of the net asset value of any Separate Account, or of
Other Accounts, attributable to such contracts.
13. Integrity assumes the mortality risk that the life expectancy
of the annuitant will be greater than that assumed in the guaranteed
annuity purchase rates, thus requiring Integrity to pay out more in
annuity income than it had planned. Integrity assumes an additional
mortality risks because of its contractual obligation to provide a
minimum death benefit and an Enhanced Death Benefit prior to the
annuity date. Thus, Integrity assumes the risk that it may not be able
to cover its distribution expenses and that the owner may die at a time
when the amount of the death benefit payable exceeds the then net
surrender value of the Contracts. The expense risk assumed by Integrity
is that the administration charge will be sufficient to cover the
actual cost of administering the Contracts.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 to the
extent that the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, in relevant part,
prohibit a registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank and held under arrangements which prohibit any payment
to the depositor or principal underwriter except a reasonable fee, as
the Commission may prescribe, for performing bookkeeping and other
administrative duties normally performed by the bank itself.
3. Applicants request an order under Section 6(c) exempting them
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent
necessary to permit the deduction of the mortality and expense risk
charge from the assets of the Separate Accounts or Other Accounts that
issue the Contracts or Future Contracts. Applicants also propose that
Services replace Integrity as principal underwriter for the Contracts,
and that the order extend the same exemptions granted to Services, and
to any other broker-dealer that may in the future serve a principal
underwriter for the Contracts or Future Contracts, the same exemptions
currently granted to Integrity. Any such principal underwriter will be
wholly-owned, directly or indirectly, by ARM Financial.
4. Applicants submit that their request for an order is appropriate
in the public interest. Such an order would promote competitiveness in
the variable annuity contract market by eliminating the need for
Integrity to file redundant exemptive applications, thereby reducing
Integrity's administrative expenses and maximizing the efficient use of
Integrity's resources. The delay and expense involved in having
repeatedly to seek exemptive relief would impair Integrity's ability
effectively to take advantage of business opportunities as these
opportunities arise. Applicants further submit that the requested
relief is consistent with the purposes of the 1940 Act and the
protection of investors for the same reasons. If Integrity were
required repeatedly to seek exemptive relief with respect to the same
issues addressed in this Application, investors would not receive any
benefit or additional protection thereby. Thus, Applicants believe that
the requested exemptions are 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.
5. Applicants represent that they have reviewed publicly-available
information regarding the aggregate level of the mortality and expense
risk charges under variable annuity contracts comparable to the
Contracts currently being offered in the insurance industry taking into
consideration such factors as current charge levels, the manner in
which charges are imposed, the presence of charge-level or annuity-rate
guarantees and the markets in which the Contracts will be offered.
Based upon the foregoing, Applicants further represent that the
mortality and expense risk charges under the Contracts are within the
range of industry practice for comparable contracts. Applicants will
maintain and make available to the Commission, upon request, a
[[Page 48580]]
memorandum outlining the methodology underlying this representation.
Similarly, prior to making available any Future Contracts through the
Separate Accounts or Other Accounts, Applicants will represent that the
mortality and expense risk charges under any such contracts will be
within the range of industry practice for comparable contracts.
Applicants will maintain and make available to the Commission, upon
request, a memorandum outlining the methodology underlying such
representation.
6. Applicants do not believe that the contingent withdrawal charges
under the Contracts will necessarily cover the expected costs of
distributing the Contracts. Any ``shortfall'' will be made up from
Integrity's general account assets which will include amounts derived
from mortality and expense risk charges. Integrity has concluded that
there is a reasonable likelihood that the distribution financing
arrangement being used in connection with the Contracts will benefit
the Separate Accounts and the Contract owners. Integrity will keep and
make available to the Commission, upon request, a memorandum setting
forth the basis for this representation. Similarly, Integrity will
maintain and make available to the Commission, upon request, a
memorandum setting forth the basis for the same representation with
respect to Future Contracts offered by the Separate Accounts or by
Other Accounts established by Integrity.
7. Applicants represent that the Separate Accounts and Other
Accounts will invest only in a management investment company which has
undertaken, in the event such company adopts a plan under Rule 12b-1
under the 1940 Act to finance distribution expenses, to have a board of
directors (or trustees), a majority of whom are not ``interested
persons'' of the management investment company within the meaning of
Section 2(a)(19) of the 1940 Act, formulate and approve any plan under
Rule 12b-1 to finance distribution expenses.
Conclusion
Applicants assert that, for the reasons and upon the facts set
forth above, the requested exemptions from sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to deduct the mortality and expense risk
charge from the assets of the Separate Accounts or Other Accounts that
issue the Contracts and/or the Future Contracts, and in connection with
Contracts or Future Contracts for which broker-dealers other than
Services will serve as principal underwriter, meet the applicable
statutory standards in Section 6(c) of the 1940 Act. Applicants assert
that the exemptions requested are necessary and appropriate in the
public interest and consistent with the protection of investors and the
policies 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. 95-23143 Filed 9-18-95; 8:45 am]
BILLING CODE 8010-01-M
