[Federal Register Volume 59, Number 185 (Monday, September 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23663]
[[Page Unknown]]
[Federal Register: September 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20562; File No. 812-8974]
Massachusetts Mutual Life Insurance Company, et al.
September 19, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'' or ``Act'').
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APPLICANTS: Massachusetts Mutual Life Insurance Company
(``MassMutual''), MML Bay State Life Insurance Company (``MML Bay
State''), Massachusetts Mutual Variable Annuity Separate Account 3
(``Separate Account 3''), MML Bay State Variable Annuity Separate
Account 1 (``Separate Account 1'') (Separate Account 3 and Separate
Account 1, collectively, the ``Separate Accounts''), and MML Investors
Services, Inc. (``MMLISI'') (MassMutual, MML Bay State, the Separate
Accounts, and MMLISI, collectively, ``Applicants'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions from Section 26(a)(2)(C) and 27(c)(2)
thereof.
SUMMARY OF APPLICATION: Applicants seek an Order to permit the
deduction of a mortality and expense risk charge and enhanced death
benefit expense charge in connection with the offer and sale of certain
flexible premium variable annuity contracts to be funded by the
Separate Accounts (``Contracts'').
FILING DATE: The Application was originally filed on May 6, 1994, and
Amendment No. 1 to and Restatement of the Application was filed on June
20, 1994.
HEARING OR NOTIFICATION OF HEARING: An Order granting the Application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the Secretary of the SEC and serving
the 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
14, 1994, and should be accompanied by proof of service on the
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, NW., Washington, DC 20549. Applicants: William D. Wilcox, Esq.,
Massachusetts Mutual Life Insurance Company, 1295 State Street,
Springfield, MA 01111; and Michael Berenson, Esq., Jorden Burt Berenson
& Klingensmith, Suite 400 East, 1025 Thomas Jefferson Street, NW.,
Washington, DC 20007-0805.
FOR FURTHER INFORMATION CONTACT:
W. Thomas Conner, Attorney, 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 SEC's Public
Reference Branch.
Applicant's Representations
1. MassMutual is a mutual life insurance company organized under
the laws of the Commonwealth of Massachusetts. MML Bay State is a life
insurance company organized under the laws of the State of Missouri and
is a wholly-owned subsidiary of MassMutual. MMLISI is the principal
underwriter of the Contracts and also is a wholly-owned subsidiary of
MassMutual.
2. Separate Account 3 was established on January 12, 1994 to fund
Contracts issued by MassMutual. Separate Account 1 was established on
January 14, 1994 to fund Contracts issued by MML Bay State. Each
Separate Account is registered as a unit investment trust under the
1940 Act.
3. The Separate Accounts will be used for the purpose of investing
purchase payments received under the Contracts. The Contracts require
certain minimum initial payments and permit additional flexible
purchase payments. A Contract owner may, after deductions of applicable
charges, direct allocation of purchase payments among the various
divisions of the Separate Accounts. Additionally, both MassMutual and
MML Bay State will make available, in a limited number of states, a
flexible account (the ``Fixed Account'') to which purchase payments may
be allocated. The Fixed Account will include a market value adjustment
feature. Each Separate Account has filed a registration statement on
Form N-4 with the Commission in connection with the Contracts.
4. Each Separate Account is divided into twelve divisions. Each
division invests in corresponding shares of either MML Series
Investment Trust or Oppenheimer Variable Account Funds (collectively,
the ``Trusts''). The Trusts are registered with the SEC as diversified
open-end management investment companies.
5. The Contracts provide for certain charges. An administrative
charge is assessed annually and upon the surrender or the payment of a
death benefit under the Contracts. The administrative charge will be
waived if a Contract's accumulated value is at least $50,000 as of the
date of assessment. The administrative charge currently is $30 per year
and will not be increased above $50 per year.
6. In addition to the $30 annual administrative charge, an annual
administrative charge equal to 0.15% of the assets of each Separate
Account will be deducted for administrative charges (the $30 annual
administrative charge and the 0.15% annual administrative charge,
collectively, the ``administrative charges''). The administrative
charges are intended to reimburse MassMutual or MML Bay State for
expenses related to the maintenance of the Contracts and for operation
of the Separate Accounts in connection with the Contracts. Applicants
represent that these fees are based on current estimates by MassMutual
and MML Bay State of administrative costs for these services over the
lifetime of the Contracts. These charges are guaranteed never to be
increased beyond stated maximums during the term of a Contract, and
such fees are neither designed nor expected to generate a profit.
Applicants rely on Rule 26a-1 under the 1940 Act to assess such fees.
7. While no sales charges are deducted when premium payments are
received, the Contracts are subject to a schedule of contingent
deferred sales charges (``sales charge''). A sales charge may be
imposed upon full or partial redemptions, upon maturity of the
Contract, and upon certain death benefits. Sales charges are based on
the purchase payments made and the time that has passed since receipt
of such payment. The part of the sales charge related to a purchase
payment is a level percentage of that payment depending on the years
that have passed since the purchase payment was received. During the
first year since payment, the sales charge is 7 percent. For each
successive year, the sales charge decreases 1 percent until it becomes
zero in the eighth year. The amount deducted for sales charges at any
time, plus any sales charges previously deducted, will not be more than
7% of the total purchase payments made to that time. In addition,
during each Contract year, a Contract owner may redeem the following
amounts without incurring a sales charge: (1) All unredeemed purchase
payments that are at least seven years old, and (2) 10% of the
unredeemed purchase payments that are less than seven years old.
8. An annual charge will be assessed against the assets of each
Separate Account for mortality and expense risks assumed by MassMutual
or MML Bay State. The mortality and expense risk charge currently is
1.15% and will not be increased above 1.25%. Of the current 1.15%
mortality and expense risk charge, 0.30% is for the mortality risk
assumed and 0.85% is for the expense risk assumed.
9. MassMutual and MML Bay State will assume mortality risks under
the Contracts by their contractual obligation to make periodic payments
in accordance with annuity rates and other Contract provisions
regardless of how long an annuitant might live. This obligation assures
each annuitant that neither the annuitant's own longevity nor an
improvement in life expectancy generally will have an adverse effect on
the payments received under the Contracts.
10. MassMutual and MML Bay State will assume expense risks under
the Contracts by their contractual obligation to administer the
Contracts even if the administrative charges are insufficient to cover
the administrative expenses associated with the Contracts.
11. An annual charge of 0.10% will be assessed against the assets
of each Separate Account to reimburse MassMutual and MML Bay State for
bearing the risks associated with providing certain enhanced death
benefits under the Contracts. A death benefit is paid upon the death of
either the Contract owner or the annuitant. If an owner and annuitant
are the same, the death benefit paid will be the annuitant death
benefit.
If the Contract owner dies before the maturity date of the
Contract, the beneficiary named in the Contract will receive the cash
redemption value of the Contract. If the annuitant dies before the
maturity date of the Contract, the beneficiary named in the Contract
will receive the greater of two enhanced death benefits, depending on
the Contract owner's state.
Under the first alternative, if the annuitant dies before the
maturity date, the beneficiary named in the Contract will receive the
greater of: (a) The total of all purchase payments made to the
Contract, less all partial redemptions, accumulated at 5% to the
annuitant's 75th birthday and 0% thereafter, but not more than two time
purchase payments less redemptions; or (b) the accumulated value of the
Contract less any applicable administrative charge (and any sales
charge, if the annuitant's age on the Contract date exceeds 75).
The death benefit described above may not be available in certain
states for annuitants whose issue age is less than 76. In those
instances, the death benefit during the first three years will be equal
to the greater of: (a) The total of all purchase payments made to the
Contract less all partial redemptions; or (b) the accumulated value of
the Contract less any applicable administrative charge. During any
subsequent three Contract year period, the death benefit will be the
greater of: (a) The death benefit on the last day of the previous three
Contract year period plus any purchase payments made less all partial
redemptions since then; or (b) the accumulated value of the Contract
less any applicable administrative charge.
12. MassMutual and MML Bay State currently will permit a Contract
owner to make up to 14 transfers among the divisions of the Separate
Accounts (and the Fixed Account if available) each Contract year
without charge during the accumulation period of the Contracts.
Transfers in excess of 14 will result in the imposition of a $20 fee.
MassMutual and MML Bay State reserve the right to change the number of
transfers that may be made without charge. The Contracts provide,
however, that the number of transfers that may be made without
incurring a charge will be at least four per Contract year during the
accumulation period. Amounts applied under a variable payment option
during the payout period may be transferred once every 90 days.
MassMutual and MML Bay State reserve the right to change transfer
limitations.
13. Premium taxes ranging up to 3.5% of purchase payments are
imposed by certain municipalities and states. Under current practice,
MassMutual and MML Bay State will deduct amounts owned for premium
taxes from a Contract's accumulated value at annuitization, maturity,
or full surrender. Both MassMutual and MML Bay State have reserved the
right to deduct amounts owned for premium taxes from premium payments.
Applicants' Legal Analysis
1. Sections 26(a)(2)(C) and 27(c)(2) taken together are intended to
provide for the protection of the assets of investment companies that
issue periodic payment plan certificates. Section 27(c)(2) of the Act
prohibits the issuer of a periodic payment plan certificate and any
depositor or underwriter for such periodic payment plan certificate
from selling such certificates unless all proceeds of payments on such
certificates (other than any sales load) are deposited with a qualified
bank acting as trustee or custodian, and held under an indenture or
agreement containing specified provisions. Section 26(a) of the Act
requires that such indenture or custodian agreement must provide, among
other things that such bank shall not allow as an expense any payment
to the depositor or principal underwriter except a fee, not exceeding
such reasonable amount as the Commission may prescribe, for bookkeeping
and other administrative services of a character normally performed by
the bank itself.
2. Applicants request an order under Section 6(c) of the 1940 Act
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 and the enhanced death benefit charge from the
assets of the Separate Accounts in connection with the issuance by
MassMutual and MML Bay State of the Contracts to the funded by the
Separate Accounts.
3. Applicants represent that the guaranteed mortality and expense
risk charges of 1.25% are reasonable in relation to the risks assumed
by MassMutual and MML Bay State under the Contract and are reasonable
in amount as determined by industry practice with respect to comparable
annuity products. Applicants represent that the 1.25% mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts issued by other insurance companies. This
representation is based on MassMutal's and MML Bay State's analysis of
publicly available information about such other contracts, taking into
consideration such factors as current charge levels, the manner in
which charges are imposed, guarantees of charge levels or annuity
rates, and the markets in which the Contracts will be offered.
Applicants undertake to maintain at MassMutual's home office and MML
Bay State's principal office and to make available to the Commission
(or its staff) upon request, memoranda setting forth in detail the
products analyzed, the methodology used, and the results of their
respective comparative reviews.
4. Applicants acknowledge that the withdrawal charges under the
Contracts may be insufficient to cover all costs relating to the
distribution of the Contracts. In such circumstances, the charges for
mortality and expense risk may be a source of the profit that would be
available to pay MassMutual's and/or MML Bay State's distribution
expenses not reimbursed by applicable sales charges. MassMutual and MML
Bay State have concluded that there is a reasonable likelihood that the
proposed distribution financing agreements benefit both the Separate
Accounts and the Contract owners. The basis for this conclusion is set
forth in memoranda that will be maintained by MassMutal and MML Bay
State at their home office and principal office, respectively. These
memoranda will be available to the Commission (or its staff) upon
request.
5. Applicants represent that the Separate Accounts will invest only
in management investment companies that undertake, in the event the
company adopts a plan to finance distribution expenses under Rule 12b-1
under the 1940 Act, to have a board of directors, a majority of whom
are not interested persons of the company within the meaning of Section
2(a)(19) of the 1940 Act, formulate and approve any such plan.
6. Applicants assert that the mortality risk charge of 0.10% for
the enhanced death benefits offered is reasonable in relation to the
risks assumed by MassMutual and MML Bay State under the Contracts. In
arriving at this determination, MassMutual and MML Bay State conducted
a large number of trials at various issue ages to determine the
expected cost of the enhanced death benefit. First, hypothetical asset
returns were projected using generally accepted actuarial simulation
methods. For each asset return pattern thus generated, hypothetical
accumulated values were calculated by applying the projected asset
returns to the initial value in a hypothetical account. Each
accumulated value so calculated was then compared to the amount of the
enhanced death benefit payable in the event of the hypothetical
Contract owner's death during the year in question. By analyzing the
results of several thousand such simulations, MassMutual and MML Bay
State were able to determine actuarily the level cost of providing the
enhanced death benefit. Based on this analysis, MassMutual and MML Bay
State determined that a mortality risk charge of 0.10% was a reasonable
charge for providing the enhanced death benefit. Memoranda is available
to the Commission (or its staff) upon request setting forth in detail
the methodology used in determining that the risk charge of 0.10% for
the enhanced death benefit is reasonable in relation to the risks
assumed by MassMutual and MML Bay State under the Contracts.
Conclusion
Section 6(c) of the 1940 Act, in pertinent part, provides that the
Commission, by order upon application, may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities, or transactions, from any
provision or provisions of the Act to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Applicants submit, for all of the reasons
stated in the application, that their exemptive requests meet the
standards set out in Section 6(c), are well precedented, and that an
Order should, therefore, be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23663 Filed 9-23-94; 8:45am]
BILLING CODE 8010-01-M
