[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Notices]
[Pages 47221-47224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22719]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22192; File No. 812-9958]
The Travelers Insurance Company, et al.
August 30, 1996.
AGENCY: The Securities and Exchange Commission (``SEC'' or
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: The Travelers Insurance Company (``Travelers''), the
Travelers Fund QP for Variable Annuities (``Account'') and Tower Square
Securities, Inc. (``Tower'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions 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 morality
and expense risk charge from the assets of the Account or other
separate accounts established by Travelers in the future (``Other
Accounts'') to support certain group variable annuity contracts
(``Current Contracts'') as well as other variable annuity contracts
that are materially similar to the Current Contracts (``Future
Contracts,'' together with the Current Contracts, ``Contracts'').
Applicants request that such exemptive relief extend to any broker-
dealer other than Tower that is affiliated with travelers, is
registered as a broker-dealer under the Securities Exchange Act of
1934, and may serve in the future as principal underwriter of the
Contracts (``Future Underwriter'').
FILING DATES: The application was filed on January 23, 1996. Amendments
to the application were filed on July 31, 1996, August 15, 1996, and
August 30, 1996.
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 should be received by the SEC by 5:30 p.m. on
September 24, 1996, 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, Kathleen A. McGah,
Counsel and Assistant Secretary, The Travelers Insurance Company, One
Tower Square, Hartford, Connecticut 06183.
FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Attorney, or Patrice M. Pitts, Special Counsel, 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. Travelers, a stock life insurance company organized in
Connecticut and an indirect wholly-owned subsidiary of Travelers Group
Inc., is the sponsor and depositor of the Account and will be the
sponsor and depositor of any Other Account. Travelers is licensed to
conduct life insurance and annuity business in all states of the United
States, the District of Columbia, Puerto Rico, Guam, the U.S. and
British Virgin Islands and the Bahamas.
2. The Account was established on December 25, 1995, as a separate
account under Connecticut law to fund group flexible premium deferred
variable annuity contracts and certificates. The Account is registered
under the 1940 Act as a unit investment trust and will be used to fund
the Contracts. The Account is divided into 27 subaccounts (the
``Subaccounts''), each of which will invest solely in shares of a
registered open-end management investment company or portfolio thereof.
3. Tower, an affiliate of Travelers and an indirect wholly-owned
subsidiary of Travelers Group Inc., is the distributor of the Current
Contracts. Tower is registered as a broker-dealer under the Securities
Exchange Act of 1934 (``1934 Act'') and is a member of the National
Association of Securities Dealers, Inc. Any Future Underwriter will be
affiliated with Travelers and registered as a broker-dealer under the
1934 Act.
4. The Current Contracts are designed to provide retirement
payments and other benefits for persons covered under certain
retirement plans qualified for federal income tax advantages available
under the Internal Revenue Code of 1986, as amended, and for persons
covered under retirement plans that do not qualify for such tax
advantages. The Current Contracts may be sold on an allocated or
unallocated basis. Purchase payments under the Current Contracts may be
made by or on behalf of a participant in a Current Contract
(``Participant'') who is covered under a retirement plan.
5. The Current Contracts provide for, among other things: (a)
minimum purchase payments; (b) allocation of purchase payments to one
or more of the Account's Subaccounts, or to the fixed account, or both;
and (c) several
[[Page 47222]]
fixed and variable annuity payment options. In addition, a death
benefit is available under allocated Current Contracts. A death benefit
is not available under unallocated Current Contracts, although one may
be added to the unallocated Current Contracts in the future.
6. Under the death benefit for allocated Current Contracts, if the
annuitant or the Current Contract owner dies before age 75 and before
the maturity date, Travelers will pay as a death benefit an amount
equal to the greater of (a) or (b) below, less any applicable premium
tax:
(a) The cash value of the Participant's individual account; or
(b) Total purchase payments made to the Participant's individual
account, less any surrenders not previously deducted.
If the annuitant or the Current Contract owner dies on or after age
75 and before the maturity date, Travelers will pay as a death benefit
the value of the Participant's individual account, less any applicable
premium tax and any surrenders not previously deducted.
7. The fees and charges assessed under the Current Contracts are
likely to vary from one Current Contract to the next depending on the
size of the Current Contract, the possible involvement of a third party
administrator (``TPA'') and a competitive bidding process which may
include negotiation. The Current Contract design allows Travelers
maximum flexibility, within the limitations imposed by law to custom
design a charge structure which is likely to be acceptable to a
prospective Current Contract owner. The application sets forth the
maximum levels for each of the types of sales charges, mortality and
expense risk charges, administrative expense charges and any allocation
and transfer fees.
8. In most cases, only one of two administrative charges will apply
to allocated Current Contracts. These charges cannot be increased
during the life of the Current Contracts. The charges represent
reimbursement of only the actual administrative costs expected to be
incurred over the life of the Current Contracts and are not designed to
yield a profit. Applicants will rely on Rule 26a-1 in deducting these
charges.
9. A maximum semiannual policy fee of $15 may be deducted from each
Participant's individual account during the accumulation period.
Travelers also may assess an annual administrative charge to compensate
it for certain administrative and operating expenses of the underlying
funds. The administrative charge, equal to a maximum of 0.10% annually,
may be deducted on each valuation date from amounts held in the
underlying funds. This charge will apply during both the accumulation
and the annuity periods.
10. The level of the semiannual policy fee and of the
administrative expense charge during the accumulation period (but not
the annuity period) is subject to negotiation. In determining the level
of the semiannual fee and the administrative charge during the
accumulation period, Travelers considers the following factors: (a) the
size and characteristics of the Current Contract and the group to which
it is issued, including the total annual amount of the purchase
payments per Participant, the expected turnover of employees, whether
the Current Contract owner will remit purchase payment allocations
electronically, and any other factors pertaining to the characteristics
of the group or the plan which may enable Travelers to reduce the
expense of administration; (b) determination of Travelers' anticipated
expenses in administering the Current Contract, such as billing for
purchase payments, producing periodic reports, providing for the direct
payment of Current Contract charges rather than having them deducted
from Current Contract values, and any other factors pertaining to the
level and expense of administrative services which will be provided
under the Current Contract; and (c) the involvement of a TPA and/or
agent.
11. No sales charge is deducted at the time purchase payments are
applied under the Current Contracts. A contingent deferred sales charge
or a surrender charge, as negotiated, will be assessed upon certain
full or partial surrenders. The amounts obtained from the contingent
deferred sales charge or surrender charge will be used to defray
expenses incurred in the sale and marketing of the Current Contracts.
12. A sales charge may apply if all or part of the Current Contract
value is surrendered during the first eight years following a purchase
payment. The maximum contingent deferred sales charge is 5% of each
purchase payment for a period of five years from the date the purchase
payment was made. The maximum surrender charge is 5% of the amount
surrendered for the first two Current Contract years; up to 4% in years
three and four; up to 3% in years five and six; up to 2% in years seven
and eight and 0% in the ninth year. The surrender charge cannot be
increased during the life of the Current Contracts. Travelers does not
expect that the contingent deferred sales charge will cover sales and
distribution expenses incurred in connection with the Current
Contracts.
13. The contingent deferred sales charge and the surrender charge
can be reduced or restructured if Travelers anticipates that it will
incur decreased sales-related expenses because of the nature of the
plan to which the Current Contract is issued or the involvement of a
TPA. When considering a change in the sales charges, Travelers will
take into account: (a) the expected level of initial agent or Travelers
involvement during the establishment and maintenance of the Current
Contract including the amount of enrollment activity required, and the
amount of service required by the Current Contract owner; (b) Current
Contract owner, TPA or agent involvement in conducting ongoing
enrollment of subsequently eligible Participants; (c) the expected
level of commission Travelers may pay to the TPA or agent for
distribution expenses; and (d) any other factors which Travelers
anticipates will increase or decrease the sales-related expenses
associated with the sale of the Current Contract.
14. To compensate Travelers for assuming certain mortality and
expense risks, Travelers will deduct a mortality and expense risk
charge equal, on an annual basis, to 1.20% (approximately 0.90% for
mortality risk and 0.30% for expense risk) of the average daily net
assets allocated to each underlying fund.
15. The mortality and expense risk charge is subject to
negotiation. In determining the level of the mortality and expense risk
charge, Travelers will consider the size of the plan, the number of
employees, plan participants, and the demographics of the participants
which may reduce mortality and expense risks of the plan. Once
established, this charge cannot be increased during the life of the
Current Contract.
16. Travelers assumes certain mortality risks by its contractual
obligation to continue to make annuity payments for the life of the
annuitant under annuity obligations that involve 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 the Current Contracts.
This relieves the annuitant from the risk of outliving the amounts
accumulated for retirement. Applicants state that these amounts are
guaranteed for the life of the Current Contracts. Travelers assumes
additional mortality and certain expense risks under the Current
[[Page 47223]]
Contracts by its contractual obligation to pay a death benefit in a
lump sum (or in the form of an annuity option) upon the death of the
annuitant or Current Contract owner prior to the maturity of the
Current Contract.
17. Travelers assumes an additional expense risk because the
maximum administrative charges may be insufficient to cover actual
administrative expenses. These include the costs and expenses of: (a)
processing purchase payments, death claims, annuity payments,
surrenders and transfers; (b) periodic and other reports; (c) providing
on-line information about the Current Contracts; (d) calculating
mortality and expense risk charges; (e) preparing voting materials and
tax reports; (f) updating registration statements for the Current
Contracts; and (g) actuarial and other expenses.
18. If the mortality and expense risk charge and the administrative
expense charges are insufficient to cover the expenses and costs
assumed, the loss will be borne by Travelers. Conversely, if the amount
deducted for the mortality and expense risk proves more than
sufficient, the excess will represent profit to Travelers. Travelers
does not expect to profit from administrative expense charges deducted
from the Account under the Current Contracts; Travelers does expect to
profit from the mortality and expense risk charge. Any profit realized
from this charge will be available to Travelers for any proper
corporate purpose, including, among other things, payment of
distribution expenses.
19. Certain state and local governments impose premium taxes. Such
taxes currently range from 0.5% to 5.0% and depend on the state of the
Current Contract owner's residence or the state in which the Current
Contract was sold. A deduction for premium taxes may be made when a
Current Contract is purchased, when a Current Contract is surrendered,
when retirement payments begin, or upon payment of a death benefit.
20. Prior to the maturity date, all or any part of the Current
Contract value may be reallocated among the underlying funds without
fee, penalty or charge. Applicants state that there currently are no
restrictions on the frequently of transfers, but Travelers reserves the
right to limit transfers to one in any six-month period.
Applicant's Legal Analysis
1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, 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 load, 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.
2. 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 Act 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.
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 Account or Other Account that issue the
Contracts. Applicants also request that such relief extend to any
Future Underwriter.
4. Applicants submit that the request for future relief is
consistent with the standards set forth in Section 6(c) of the 1940
Act. Such future relief will promote competitiveness in the variable
annuity market by eliminating the need for Travelers to file redundant
exemptive applications, thereby reducing administrative expenses and
maximizing the efficient use of its resources. The delay and expense
involved in repeatedly having to seek exemptive relief would impair
Travelers' ability effectively to take advantage of business
opportunities as these opportunities arise. If Travelers 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. Rather, Applicants asserts, investors
may be disadvantaged as a result of Travelers; increased overhead
expenses.
5. Applicants represent that even the maximum level of the
mortality and expense risk charge under the Contracts is reasonable in
relation to the risks assumed by Travelers under the Contracts and is
within the range of industry practice for comparable variable annuity
contracts. Applicants state that Travelers has reviewed publicly-
available information about other annuity products, taking into
consideration such factors as: estimated costs, now and in the future;
guaranteed minimum death benefits; minimum initial and subsequent
purchase payments; other contract charges; the manner in which charges
are imposed; market sector; investment options under contracts; and
availability of the Contract for use in connection with qualified and
nonqualified plans. Applicants state that Travelers will maintain at
its principal office, and make available on request of the Commission
or its staff, a memorandum setting forth in detail the variable annuity
products analyzed and the; methodology used in, and the results of, its
comparative review.
6. Applicants acknowledge that the surrender charge may be
insufficient to cover all costs relating to the distribution of the
Contracts and that, if a profit is realized from the mortality and
expense risk charge, all or a portion of the profit may be offset by
distribution expenses not reimbursed by the contingent deferred sales
charge. In such circumstances, a portion of the mortality and expense
risk charge might be viewed as providing for a portion of the cost
relating to distribution of the Contracts.
7. Notwithstanding the foregoing, Travelers has concluded that
there is a reasonable likelihood that the proposed distribution
financing arrangements used in connection with the Contracts will
benefit the Account, Other Accounts, and owners of the Contracts. The
basis for such conclusion is set forth in a memorandum that will be
maintained by Travelers at is principal officer and will be available
to the Commission or its staff upon request.
8. Travelers represents that the Account and Other Accounts will
invest only in underlying mutual funds which, in the event they should
adopt any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, would have such a plan formulated and approved
by a board of directors, a majority of the members of which are not
``interested person'' of such fund within the meaning of Section
2(a)(19) of the 1940 Act.
Conclusion
Applicants submit that, for the reasons stated in the application,
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 under the
Contracts are necessary and appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policies and provisions of the 1940 Act.
[[Page 47224]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22719 Filed 9-5-96; 8:45 am]
BILLING CODE 8010-01-M
