[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Notices]
[Pages 47217-47219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22720]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22190; File No. 812-10178]
The Lincoln National Life Insurance Company, et al.
August 29, 1996.
AGENCY: U.S. Securities and Exchange Commission (``SEC'' or
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Lincoln National Life Insurance Company (``Lincoln
Life''), Lincoln National Variable Annuity Account L (``Account L''),
Lincoln Life & Annuity Company of New York (``Lincoln Life of NY''),
Lincoln Life & Annuity Variable Annuity Account L (``Account L-NY''),
and LNC Equity Sales Corporation.
RELEVANT ACT SECTIONS: Order requested pursuant to Section 6(c) of the
1940 Act from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants request an order pursuant to Section
6(c) of the Investment Company Act of 1940 (1940 Act) granting
exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to
permit the deduction of a mortality and expense risk charge of 1.20%
from: the assets of Account L or Account L-NY (collectively, the
``Accounts'') in connection with the offer and sale of certain group
variable annuity contracts (``Contracts'') and any contracts (``Future
Contracts'') issued in the future by Lincoln Life or Lincoln Life of NY
that are materially similar to the Contracts; the assets of other
separate accounts ``Future Accounts'') established in the future by
Lincoln Life or Lincoln Life of NY to fund Contracts and Future
Contracts. Exemptive relief also is requested to the extend necessary
to permit the offer and sale of Contracts and Future Contracts for
which certain broker-dealers other than LNC Equity Sales Corporation
serve as distributors and/or principal underwriters.
FILING DATE: The application was filed on June 3, 1996, and amended
and restated on August 28, 1996.
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
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 23,
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 writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: SEC, Secretary, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, John L. Steinkamp, Esq., Vice President & Associate
General Counsel, The Lincoln National Life Insurance Company, 1300
South Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46801.
FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, Staff Attorney, or Patrice M. Pitts, Special
Counsel, Office of Insurance Products, Division of Investment
Management, at (202 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the Public Reference Branch of the SEC.
Applicants' Representations
1. Lincoln Life, a stock life insurance company incorporated under
the laws of the State of Indiana in 1905, is principally engaged in the
sale of life insurance and annuity policies. Lincoln Life is wholly-
owned by Lincoln National Corporation, a publicly-held insurance and
financial services holding company.
2. Account L was established by Lincoln Life as a separate account
under the laws of the State of Indiana in 1996, pursuant to a
continuing resolution of Lincoln Life's board of directors.
3. Lincoln Life of NY, a stock life insurance company incorporated
under the laws of the State of New York, in 1996, is principally
engaged in the sale of life insurance and annuity policies in the state
of New York. Lincoln Life of NY is a wholly-owned subsidiary of Lincoln
Life.
4. Account L-NY was established as a separate investment account
under the laws of the State of New York on July 24, 1996, pursuant to a
resolution of the board of directors of Lincoln Life of NY.
5. Lincoln Life and Lincoln Life of NY (collectively, the
``Companies'') each will offer three group variable annuity contracts--
Group Variable Annuity I, Group Variable Annuity II, and Group Variable
Annuity III. The Contracts issued by Lincoln Life of NY are identical
in all relevant respects to the Contracts issued by Lincoln Life, but
for the identity of the insurance company issuing the Contracts and the
separate account supporting the Contracts and any differences relating
to state law
[[Page 47218]]
requirements. The contracts may be purchased with an initial
contribution in connection with retirement plans that qualify for
favorable federal income tax treatment as well as in connection with
retirement plans that do not qualify for such treatment.
6. Each of the Accounts consists of subaccounts (``Subaccounts'').
Each Subaccount invests net contributions received under the Contracts
in shares of one or more of the investment portfolios of the Dreyfus
Stock Index Fund, the Dreyfus Variable Insurance Products Fund, the
Fidelity Variable Insurance Products Fund, the Fidelity Variable
Insurance Products Fund II, the Twentieth Century TCI Portfolios, Inc.,
the T. Rowe Price International Series, Inc., the Acacia Capital
Corporation, and such other registered investment companies as the
Companies may make available under their Contracts from time to time
(each, a ``Fund''), or any combination thereof. Each Fund is an open-
end management investment company and, except for the Dreyfus Stock
Index Fund, has a number of classes or series, in accordance with Rule
18f-2 under the 1940 Act.
7. The Contracts also permit premium payments to be deposited in a
guaranteed interest division which is part of the general account of
Lincoln Life or Lincoln Life of NY, and in one or more Subaccounts.
During the accumulation period, each Company permits transfers of all
or part of a Contract participant's account balance from the guaranteed
interest division to a Subaccount, from any one Subaccount to another,
or from any Subaccount to the guaranteed interest division.
8. LNC Equity Sales Corporation serves as the distributor and
principal underwriter of the Contracts and also may serve as the
distributor and principal underwriter of Future Contracts. LNC Equity
Sales Corporation is registered under the Securities Exchange Act of
1934 as a broker-dealer and is a member of the National Association of
Securities Dealers, Inc. LNC Equity Sales Corporation is an indirect
wholly-owned subsidiary of Lincoln National Corporation.
9. Broker-dealers other than LNC Equity Sales also may serve as
distributors and principal underwriters of the Contracts and Future
Contracts. Any such other broker-dealer (``Future Broker-Dealer'') will
be registered under the Securities Exchange Act of 1934 as a broker-
dealer and will be a member of the National Association of Securities
Dealers, Inc.
10. Each Company deducts $25 (or the balance of a Contract
participant's account, if less) per year from each Contract
participant's account balance on the last business day of the month in
which a participation anniversary occurs. The annual administration
charge is deducted only during the accumulation period. Under
prescribed circumstances, each Company may waive or reduce the annual
administration charge under a Contract. In addition, a Contractowner
may pay the annual administration charge on behalf of the participants
under its Contract. Applicants represent that each Company deducts the
annual administration charge in reliance on Rule 26a-1 under the 1940
Act, and does not anticipate any profit from this charge.
11. The Companies do not deduct a sales charge from premium
payments made under Contracts, but do deduct a contingent deferred
sales charge (``CDSC'') on certain full and partial withdrawals of
account balance by participants in Group Variable Annuity I and Group
Variable Annuity II contracts. The CDSC is designed to cover expenses
relating to the sale of Contracts, including commissions and other
promotional expenses. During the first six Contract years, the CDSC
under a Group Variable Annuity I Contract is 5% of the gross withdrawal
amount; the CDSC declines 1% each year thereafter until the charge is
0% in the eleventh and subsequent years. The Companies may impose a
CDSC of up to 6% of the gross withdrawal amount on certain total and
partial withdrawals of the account balance of a Group Variable Annuity
II Contract participant.
12. Each Company will waive the CDSC under its Group Variable
Annuity I and Group Variable Annuity II contracts if, at the time of
the withdrawal request, the Company receives proof necessary to verify
that: (a) the participant has attained the age of 59\1/2\; (b) the
participant has died; (c) the participant has incurred a disability as
defined under the Contract; (d) the participant has terminated
employment with the employer (under the Group Variable Annuity II
contracts the participant also must be at least 55 years of age).
Contractowners of Group Variable Annuity I or Group Variable Annuity II
contracts may identify other circumstances under which a CDSC may be
waived--e.g., in the event of ``financial hardship.'' Contracts
providing such additional benefits to participants may have a declared
guaranteed interest rate in the guaranteed interest division which is
lower than that for Contracts not providing such benefits.
13. Each Company also may reduce or eliminate the CDSC under any
Group Variable Annuity I or Group Annuity II contract on any withdrawal
to the extent the Company anticipates that it will incur lower sales
expenses or perform fewer sales services because of economies arising
from (i) the size of the group covered under a Contract, (ii) an
existing relationship with the Contractowner, (iii) the utilization of
mass enrollment procedures, or (iv) the performance of sales functions
by the Contractowner which the Company would otherwise be required to
perform. Death benefit payments and amounts subject to annuitization
are not subject to a CDSC. In no event will a CDSC, when added to any
CDSC previously imposed as a result of a prior withdrawal, exceed 8.5%
of the cumulative contributions to a Contract participant's account.
14. Each Company imposes a daily charge to compensate it for
bearing certain mortality and expense risks in connection with the
Contracts. This charge is equal to an effective annual rate of 1.20% of
the value of the net assets in each Account, and it will not increase.
Of that amount, approximately.95% is attributable to mortality risks,
and approximately .25% is attributable to expense risks.
15. The mortality risk borne by each Company arises from its
contractual obligation to make annuity payments regardless of how long
all annuitants or any individual annuitant may live. The expense risk
assumed by each Company is the risk that the Company's actual
administrative costs will exceed the amount recovered through the
annual administration charge. If the mortality and expense risk charge
is insufficient to cover actual costs and assumed risks, the loss will
fall on the Company. Conversely, if the charge is more than sufficient
to cover costs, any excess will be profit to such Company. Each Company
may realize a profit from the mortality and expense risk charges.
16. Each Company also deducts a charge for the premium taxes paid
on contributions to a Contract. Various states levy a premium tax
charge currently ranging from .5% to 4% of premium payments on variable
annuity contracts.
17. If a Contract participant should die during the accumulation
period, the Company will pay the greater of (a) net contributions or
(b) the Contract participant's account balance less any outstanding
loan. Although each Company incurs a risk in connection with this death
benefit guarantee, there is no extra charge for this death benefit.
[[Page 47219]]
Applicants' Legal Analysis and Conditions
1. Section 6(c) of the 1940 Act authorizes the SEC to grant an
exemption from any provision, rule or regulation of the 1940 Act to the
extent 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 1940 Act
to do so.
2. 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 loads, are
deposited with a qualified bank and are held under arrangements which
prohibit any payment to the depositor or principal underwriter except a
reasonable fee, as the SEC may prescribe, for performing bookkeeping
and other administrative duties normally performed by the bank itself.
3. Applicants seek an order under Section 6(c) of the 1940 Act
granting exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to the extent necessary to permit the deduction of a mortality and
expenses risk charge from the assets of the Accounts and Future
Accounts under the Contracts and Future Contracts. Applicants also seek
exemptive relief for Future Broker-Dealers that may serve as
distributors and/or principal underwriters for Contracts and Future
Contracts.
4. Applicants state that the terms of the relief requested with
respect to any Future Contracts funded by the Accounts and Future
Accounts are consistent with the standards set forth in Section 6(c) of
the 1940 Act. Applicants represent that the Future Contracts will be
materially similar to the Current Contracts. Applicants state that
without the requested relief, each Company would have to request and
obtain exemptive relief for the Accounts and Future Accounts to fund
each Future Contract. Applicants assert that these additional requests
for exemptive relief would present no issues under the 1940 Act not
already addressed in this application, and the requested relief is
appropriate in the public interest because the relief will promote
competitiveness in the variable annuity market by eliminating the
Applicants' need to file redundant exemptive applications, thereby
reducing administrative expenses and maximizing efficient use of
resources.
5. Applicants represent that the 1.20% mortality and expense risk
charge under the Contracts is reasonable in relation to the risks
assumed by each Company under the Contracts, and is within the range of
industry practice for comparable annuity contracts, based on a review
of the publicly available information regarding products of other
companies. Each Company represents that it will maintain at its
principal offices, and make available upon request to the Commission or
its staff, a memorandum detailing the variable annuity products
analyzed, the methodology used in, and the results of, the comparative
review.
6. Each Company represents that, before issuing any Future
Contracts, it will make the same determinations on the same basis as to
the mortality and expense risk charges under such contracts, and will
maintain at its principal offices, and will make available upon request
to the Commission or its staff, a memorandum setting forth in detail
the methodology used in making such determinations.
7. Applicants acknowledge that the CDSC may be insufficient to
cover all distribution costs, and that 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 this, each Company has concluded that there is
reasonable likelihood that the proposed distribution financing
arrangement made with respect to the Contracts and Future Contracts
will benefit the Accounts and Future Accounts, Contractowners and
Future Contractowners, and Contract and Future Contract participants.
The basis for such conclusion is set forth in a memorandum which will
be maintained by the Company at its home office and will be available
to the Commission or its staff upon request.
8. Each Company represents that, before issuing Future Contracts,
it will conclude that there is a reasonable likelihood that the
distribution financing arrangements proposed for such contracts will
benefit the Accounts and Future Accounts, Future Contractowners, and
Future Contract participants. Each Company represents that it will
maintain at its executive office, and will make available upon request
to the Commission or its staff, a memorandum setting forth the basis
for such conclusion.
9. The Company also represents that the Accounts and Future
Accounts will invest only in underlying investment companies which have
undertaken to have a board of directors or a board of trustees, as
applicable, a majority of whom are not '`interested persons'' of such
Accounts and Future Accounts--within the meaning of Section 2(a)(19) of
the 1940 Act, formulate and approve any plan under Rule 12b-1 under the
1940 Act to finance distribution expenses.
Conclusion
For the reasons set forth above, Applicants represent that the
requested exemptions are necessary and appropriate in the public
interest and consistent with the protection of investors and 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. 96-22720 Filed 9-5-96; 8:45 am]
BILLING CODE 8010-01-M
