[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Notices]
[Pages 46322-46324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22067]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21325; No. 812-9506]
IDS Life Insurance Company, et al.
August 29, 1995.
agency: Securities and Exchange Commission (``SEC'' or ``Commission'').
action: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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applicants: IDS Life Insurance Company (``IDS'') and IDS Life Variable
Life Separate Account (``Separate Account'').
relevant 1940 act sections: Order requested under Section 6(c) granting
exemptions from Section 27(c)(2) of the 1940 Act and Rule 6e-3(T)(c)(4)
thereunder.
summary of application: Applicants request an order that will permit
the Separate Account, and any future separate accounts established by
IDS (``Future Accounts''), to deduct from premium payments of certain
flexible premium variable life insurance policies, an amount that is
reasonably related to the IDS's increased Federal tax burden resulting
from the receipt of those premium payments pursuant to the application
of Section 848 of the Internal Revenue Code of 1986, as amended.
filing date: The application was filed on March 1, 1995, and was
amended on July 24, 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 Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on September 25, 1995, and should be 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 Commission.
addresses: Secretary, Securities and Exchange Commission, 450 5th
Street, NW., Washington, DC 20549. Applicants: Mary Ellyn Minenko,
Counsel, IDS Life Insurance Company, IDS Tower 10, Minneapolis,
Minnesota 55440.
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: The following is a summary of the
application; the complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. IDS is a stock life insurance company, organized in Minnesota,
and is an indirect subsidiary of American Express Company.
2. The Separate Account is a separate account established by IDS
and registered under the 1940 Act as a unit investment trust.
Currently, the Separate Account has 6 subaccounts each of which invests
in a corresponding portfolio of IDS Life Series Fund, Inc., a
registered open-end management investment company. The Separate Account
is used to fund: (1) Certain individual flexible premium variable life
insurance contracts (``Existing Policies''); (2) certain flexible
survivorship variable life insurance policies (``Current Policies'')
for which a registration statement has been filed recently with the
Commission to register interests in the Current Policies under the
Securities Act of 1933; and (3) certain flexible variable life
insurance policies developed by IDS Life in the future (``Future
Policies'') (Current Policies, together with Future Policies,
``Policies'').
3. IDS is the principal underwriter for the Policies. IDS is a
registered broker-dealer under the Securities Exchange Act of 1934, and
is a member of the National Association of Securities Dealers, Inc.
4. Applicants propose to deduct a charge to reimburse IDS for the
increase in its Federal income taxes resulting from the application of
Section 848 of the Internal Revenue Code of 1986 (``Code''), as
amended. The charge will be reasonably related to IDS's increased
Federal tax burden, and will be deducted from premiums received.
5. The Omnibus Budget Reconciliation Act of 1990 (``OBRA 1990''),
amending Section 848 of the Code, requires life insurance companies to
capitalize and amortize over ten years certain general expenses for the
current year. Prior law allowed these expenses to be deducted in full
from the current year's gross income. Section 848, as amended,
effectively accelerates the realization of income from specified
contracts and, consequently, the payment of taxes on that income.
Taking into account the time value of money, Section 848 increases the
insurance company's tax burden because the amount of general deductions
that must be capitalized and amortized is measured by the premiums
received under the Policies.
6. The amount of deductions subject to Section 848 equals a
percentage of the current year's net premiums received (i.e., gross
premiums minus return premiums and reinsurance premiums) under life
insurance or other contracts categorized under this Section. The
Policies will be categorized under Section 848 as life insurance
contracts requiring 7.7% of the net premiums received to be capitalized
and amortized under the schedule set forth in Section 848(c)(1).
7. The increased tax burden on every $10,000 of net premiums
received under the Policies is quantified by Applicants as follows. For
each $10,000 of net premiums received in a given year, IDS
[[Page 46323]]
must capitalize $770 (i.e., 7.7% of $10,000), and $38.50 of this amount
may be deducted in the current year. The remaining $731.50 ($770 less
$38.50) is subject to taxation at the corporate tax rate of 35% and
results in $256.02 (.35% x $731.50) more in taxes for the current
year than IDS otherwise would have owed prior to OBRA 1990. However,
the current tax increase will be offset partially by deductions allowed
during the next ten years, which result from amortizing the remainder
of the $770 ($77 in each of the following nine years and $38.50 in year
ten).
8. It is IDS's business judgment that it is appropriate to use a
discount rate of at least 10% in evaluating the present value of its
future tax deductions for the following reasons. Capital that IDS must
use to pay its increased federal tax burden under Section 848 will be
unavailable for investment. The cost of capital used to satisfy this
increased tax burden essentially will be IDS's after-tax rate of return
(i.e., the return sought on invested capital), which is in excess of
10%. Accordingly, Applicants submit that the targeted rate of return is
appropriate for use in this present value calculation.
9. In determining the rate of return used in arriving at the
discount rate, IDS considered a number of factors. These factors
include current market rates, inflation, and expected future interest
rate trends.
10. Using a federal corporate tax rate of 35%, and assuming a
discount rate of 10%, the present value of the increased tax burden
resulting from Section 848 on each $10,000 of net premium is $95.62.
11. IDS does not incur incremental federal income tax when it
passes on state premium taxes to Policy owners because state premium
taxes are deductible in computing federal income taxes. Conversely,
federal income taxes are not deductible in computing IDS's federal
income taxes. To compensate IDS fully for the impact of Section 848,
IDS must impose an additional charge to make it whole for the $95.62
additional tax burden attributable to Section 848, as well as the tax
on the additional $95.62 itself, which can be determined by dividing
$95.62 by the complement of 35% federal corporate income tax rate
(i.e., 65%), resulting in an additional charge of $147.11 for each
$10,000 of net premiums, or 1.47%.
12. Based on its prior experience, IDS reasonably expects to fully
take almost all future deductions. It is IDS's judgment that a 1.25%
charge would reimburse it for the increased federal income tax
liabilities under Section 848. Applicants represent that the 1.25%
charge will be reasonably related to IDS's increased federal income tax
burden under Section 848. This representation takes into account the
benefit to IDS of the amortization permitted by Section 848 and the use
of a 10% discount rate (which is equivalent to IDS's targeted rate of
return) in computing the future deductions resulting from such
amortization. IDS also may add this 1.25% charge to the Existing
Policies, but only with respect to sales of new policies, not on
additional premiums paid to currently-held policies. (SEC File Nos.
811-4298/33-11165).\1\
\1\ Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
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Applicants' Legal Analysis
1. Applicants request an order under Section 6(c) of the 1940 Act
granting exemptions from Sections 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) to allow the deduction of a charge from premiums to
compensate IDS for its increased federal tax burden based on receipt of
these premiums under the Policies, and under the Existing Policies. The
charge will be in an amount that is reasonably related to IDS's
increased federal tax burden. Applicants assert that it is appropriate
to deduct a charge for an insurer's increased tax burden attributable
to premiums received, and to exclude the deduction of this charge from
sales load, because it is a legitimate expense of the company and not
for sales and distribution expenses.
2. Section 6(c) authorizes the Commission, by order and upon
application, to exempt any person, security, or transaction, or class
of persons, securities, or transactions, from any provisions of the
1940 Act. The Commission grants relief under Section 6(c) to the extent
an 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].''
3. The Separate Account is, and the Future Accounts will be,
regulated under the 1940 Act as issuers of periodic payment plan
certificates. Accordingly, the Separate Account, the Future Accounts,
and IDS (as depositor and principal underwriter) are deemed to be
subject to Section 27 of the 1940 Act.
4. Section 27(c)(2) prohibits the sale of periodic payment plan
certificates unless the following conditions are met. The proceeds of
all payments (except amounts deducted for ``sales load'') must be held
by a trustee or custodian having the qualifications established under
Section 26(a)(1) for the trustees of unit investment trusts. These
proceeds also must be held under an indenture or agreement that
conforms with the provisions of Section 26(a)(2) and Section 26(a)(3)
of the 1940 Act.
5. ``Sales load'' is defined under Section 2(a)(35), in relevant
part, as:
The difference between the price of a security to the public and
that portion of the proceeds from its sale which is received and
invested or held for investment by the issuer (or in the case of a
unit investment trust, by the depositor or trustee), less any
portion of such difference deducted for trustee's or custodian's
fees, insurance premiums, issue taxes, or administrative expenses or
fees which are not properly chargeable to sales or promotional
activities.
Sales loads on periodic payment plan certificates are limited by
Sections 27(a)(1) and 27(h)(1) to a maximum of 9% of total payments.
6. Certain provisions of Rule 6e-3(T) provide a range of exemptive
relief. Rule 6e-3(T) provides exemptive relief if the separate account
issues flexible premium variable life insurance contracts, as defined
in subparagraph (c)(1) of that Rule.
7. Applicants state that paragraph (b)(13)(iii)(E) of Rule 6e-3(T)
provides exemptive relief from Section 27(c)(2) to permit an insurer to
make certain deductions, other than sales load, including the insurer's
tax liabilities from receipt of premium payments imposed by states or
by other governmental entities. Applicants assert that the proposed
deduction with respect to Section 848 of the Code arguably is covered
by subparagraph (b)(13)(iii) of Rule 6e-3(T). Applicants note, however,
that the language of paragraph (c)(4) of the Rule appears to require
that deductions for federal tax obligations from receipt of premium
payments be treated as ``sales load.''
8. Applicants state that paragraph (b)(1), together with paragraph
(c)(4), of Rule 6e-3(T) provides an exemption from the Section 2(a)(35)
definition of ``sales load'' by substituting a new definition to be
used for the purposes of the Rule. Rule 6e-3(T)(c)(4) defines ``sales
load'' during a period as the excess of any payments made during that
period over certain specified charges and adjustments, including a
deduction for state premium taxes. Under a literal reading of paragraph
(c)(4) of the Rule, a deduction for an insurer's increased federal tax
burden does not fall squarely into those itemized charges or
deductions,
[[Page 46324]]
arguably causing the deduction to be treated as part of ``sales load.''
9. Applicants state that the public policy that underlies paragraph
(b)(13) of Rule 6e-3(T), and particularly subparagraph (b)(13)(i), like
that which underlies paragraphs (a)(1) and (h)(1) of Section 27, is to
prevent excessive sales loads from being charged for the sale of
periodic payment plan certificates. Applicants submit that this
legislative purpose is not furthered by treating a federal income tax
charge based on premium payments as a sales load because the deduction
is not related to the payment of sales commissions or other
distribution expenses.
10. Applicants assert that the standards of Section 6(c) are
satisfied because the requested relief is appropriate in the public
interest and consistent with the purposes of the 1940 Act and the
protection of investors. The exemptive relief would eliminate the need
for IDS to file additional exemptive applications for each Policy or
Future Policy to be issued through a Future Account with respect to the
same issues under the 1940 Act that have been addressed in this
application, and thus would promote competitiveness in the variable
life insurance market by avoiding delay, reducing administrative
expenses, and maximizing efficient use of resources. Applicants further
assert that the exemptive relief would enhance IDS's ability to
effectively take advantage of business opportunities as they arise. If
IDS were required to repeatedly seek exemptive relief with respect to
the same issues addressed in the application, investors would not
receive any benefit or additional protection thereby and might be
disadvantaged as a result of increased overhead expenses.
Conditions for Relief
1. IDS will monitor the reasonableness of the 1.25% charge.
2. The registration statement for each Policy under which the 1.25%
charge is deducted will: (a) disclose the charge; (b) explain the
purpose of the charge; and (c) state that the charge is reasonable in
relation to IDS's increased federal tax burden under Section 848 of the
Code.
3. The registration statement for each Policy providing for the
1.25% deduction will contain as an exhibit an actuarial opinion as to:
(a) The reasonableness of the charge in relation to IDS's increased
federal tax burden under Section 848 of the Code 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 by IDS in determining
such targeted rate of return.
Conclusion
For the reasons and upon the facts set forth above, Applicants
submit that the requested exemptions to permit IDS to deduct 1.25% of
premium payments under the Policies 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22067 Filed 9-5-95; 8:45 am]
BILLING CODE 8010-01-M
