[Federal Register Volume 61, Number 88 (Monday, May 6, 1996)]
[Notices]
[Pages 20296-20298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11231]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21931; File No. 812-10100]
The Manufacturers Life Insurance Company of America, et al.
April 30, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemptions under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: The Manufacturers Life Insurance Company of America,
(``Company''), Separate Account Three of The Manufacturers Life
Insurance Company of America (``Account'') and ManEquity, Inc.
(``ManEquity'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Section 27(a)(3) of the 1940 Act and Rule 6e-
3(T)(b)(13)(ii) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit the front-
end sales load imposed under certain flexible premium variable life
insurance policies (``Policies'') to be eliminated for payments in
excess of one Target Premium in any Policy year.
FILING DATE: The application was filed on April 23, 1996. Applicants
represent that they will amend the application during the notice period
to conform to the representation set forth herein.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless a hearing is ordered. Interested persons may
request a hearing by writing to the SEC's Secretary 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 May 21, 1996 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 the date of a hearing by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, The Manufacturers Life Insurance Company of America,
200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
FOR FURTHER INFORMATION CONTACT:
Joyce Merrick Pickholz, 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
SEC's Public Reference Branch.
Applicants' Representations
1. The Company is a stock life insurance company organized under
the laws of the State of Pennsylvania on April 11, 1977 and
redomesticated under the laws of Michigan on December 9, 1992. The
Company is a wholly-owned subsidiary of Manulife Reinsurance
Corporation (U.S.A.), which in turn is a wholly-owned subsidiary of
Manufacturers Life, a mutual life insurance company based in Toronto,
Canada. The Company is authorized to do business in the District of
Columbia and in all states of the United States except the State of New
York.
2. The Account was established under Pennsylvania law on August 22,
1986. Since December 9, 1992, the Account has been operated under
Michigan law. The assets of the Account fund the Policies and certain
other variable life insurance policies issued by the Company. The
Account is registered under the 1940 Act as a unit investment trust.
3. ManEquity, an indirect, wholly-owned subsidiary of Manulife
Reinsurance Corporation (U.S.A.), is registered with the Commission as
a broker-dealer and is a member of the National Association of
Securities Dealers, Inc. ManEquity is the principal underwriter for the
Policies and for other variable life insurance policies and variable
annuity contracts issued by the Company.
4. The Policies are flexible-premium survivorship life insurance
policies that permit accumulation of Policy Values on a variable,
fixed, or combination of variable and fixed basis. The Company will
issue a Policy with a face amount of at least $250,000, and will
generally issue Policies only to persons who have not attained age 90.
5. A Policy owner may pay premiums at any time and in any amount,
subject to certain limitations. At a Policy's maturity, Policy Value,
minus any outstanding Policy loans and unpaid interest thereon, is paid
to the Policy owner.
6. Policy Values currently may be allocated among sub-accounts of
the Account (``Investment Accounts'') that
[[Page 20297]]
invest in nine investment company portfolios of Manulife Series Fund,
Inc. and seven portfolios of NASL Series Trust, or may be allocated to
a fixed rate (general account) option. Policy Values may be transferred
among the Investment Accounts and to and from the fixed rate option,
subject to certain restrictions described in the prospectus for the
Policies. The Policies also permit asset allocation rebalancing and
dollar cost averaging. Policy Values may be accessed by means of
partial withdrawals or a total surrender of a Policy, or by taking a
Policy loan.
7. The Policies offer a choice of two death benefit options. Under
Option 1, the death benefit is the face amount of the Policy or, if
greater, the Policy Value multiplied by the corridor percentage
applicable for the age of the youngest insured as set forth in the
``Corridor Percentage Table'' which is contained in the prospectus.
Under Option 2, the death benefit is the face amount of the Policy plus
the Policy Value, or, if greater, the Policy Value multiplied by the
corridor percentage applicable for the age of the youngest insured, as
set forth in the Corridor Percentage Table. If the Policy is in force
at the time of the last surviving insured's death, the Company will
pay, upon receipt of due proof of death, an insurance benefit based on
the death benefit option selected by the Policy owner.
8. In those states where permitted, the Policies also provide for
certain guarantees that a Policy will not go into default, even if a
combination of Policy loans, adverse investment experience or other
factors should cause the Policy's net cash surrender value to be
insufficient to meet the monthly deductions due at the beginning of a
Policy month. Depending upon the type of guarantee selected, for
additional monthly premiums set forth in the Policy, the amounts of
which are based upon (1) the supplementary benefits available under the
Policy and selected by the Policy owner and (2) the risk classification
of any life insured under the Policy, the Company will provide
guarantees against lapse if, as of the beginning of the Policy month,
the sum of all premiums paid to date less any partial withdrawals and
less any Policy debt is greater than or equal to the sum of the
premiums due for the guarantee elected since the Policy Date.
9. The Company deducts a charge of 2.35% of each premium payment
for state and local taxes and a charge of 1.25% of each premium payment
to reimburse the Company for a portion of its increased federal tax
liability in connection with receipt of premiums under the Policies
under Section 848 of the Internal Revenue Code of 1986, as amended. The
Company currently intends to cease these deductions at the end of the
tenth Policy year, but reserves the right to continue these deductions
beyond the tenth Policy year.
10. The Policies have a front-end sales load equal to 5.5% of all
premiums paid in each Policy year up to one Target Premium; \1\ for
premium payments in excess of one Target Premium in a Policy year there
is no front-end sales charge. This deduction is guaranteed to cease at
the end of the tenth Policy year, or ten years after a face amount
increase, as applicable. Payments made after ten Policy years, (or, if
there has been a face amount increase, ten Policy years after that
increase) are not subject to a front-end sales charge.
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\1\ A Target Premium is a measure of premium specified in a
policy that varies from insured to insured and never exceeds a
Guideline Annual Premium (``GAP''), as defined in Rule 6e-3(T)(c)(8)
under the 1940 Act.
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11. In addition, the Company will assess surrender charges upon the
surrender of a Policy, on certain partial withdrawals under a Policy,
in the event of a decrease in the face amount of a Policy or a
cancellation of an increase, and in the event that a Policy lapses. If
applicable, these charges will be assessed if any of these transactions
occurs within the applicable surrender charge period as set forth in
the Policy. There are two surrender charges: a deferred underwriting
charge (``DUC'') and a contingent deferred sales charge (``CDSC'').
12. The DUC is $4 for each $1,000 of face amount of life insurance
coverage initially purchased or added by increase. This charge applies
only to the first $1,000,000 of face amount initially or the first
$1,000,000 of each subsequent increase in face amount. The DUC is
designed to cover the administrative expenses associated with
underwriting and Policy issuance.
13. The maximum CDSC under the Policies is equal to one Target
Premium multiplied by percentages shown in Table 1 of the prospectus
for the Policies, which percentage grade down over fifteen Policy years
to 0% (but in no event will the sum of the CDSC and the front-end sales
charge exceed the amount permitted by Section 27(a)(2) of the 1940
Act). Except for surrenders to which the sales charge limitations
provisions described below apply, 100% of the CDSC will be in effect
for at least the first six Policy years for lives insured with either
an average issue age (or average attained age at the time of a face
amount increase) of 0-75. For average ages higher than 75, the CDSC
will grade down more rapidly, at a rate that is also set forth in Table
1 of the prospectus.
14. In order to determine the CDSC applicable to a face amount
increase, the Company will treat a portion of the Policy Value on the
date of increase as a premium attributable to the increase. In
addition, a portion of each premium paid on or subsequent to the
increase will be attributed to the increase. In each case, the portion
attributable to the increase will be the ratio of the GAP for the
increase to the sum of the GAPs for the initial face amount and all
increases including the requested increase.
15. If a Policy is surrendered or lapsed, or a face amount decrease
is requested at any time during the first two years after issuance (for
corporate owned Policies) or after an increase in face amount, the
Company will forego taking that part of the CDSC with respect to
``premiums'' paid for the initial face amount or that increase
(including the portion of Policy Value treated as premiums for the
increase, as described above), whichever is applicable, which exceeds
the sum of (i) 30% of the premiums paid up to the lesser of one GAP or
the cumulative premiums paid to the surrender date, plus (ii) 10% of
the premiums paid in excess of one GAP, up to the lesser of two GAPs or
the cumulative premiums paid to the surrender date, plus (iii) 9% of
the premiums paid in excess of two GAPs, reduced by the amount of all
sales charges previously taken.
16. Since a CDSC is deducted when a Policy terminates for failure
to make the required payment following a Policy default, the sales
charge limitation described above will apply if the termination occurs
during the two-year period following issuance or any increase in face
amount. If the Policy terminates during the two years after a face
amount increase, the limitation will relate only to the CDSC applicable
to the increase.
17. A monthly charge (at a minimum rate of $30 per Policy month and
a maximum rate of $60 per month) is deducted from the Policy Value for
administration of the policies. The monthly administration charge is
$.04 per $1,000 of ace amount until the later of the youngest living
life insured's attained age 55 or the end of the fifteenth Policy year.
Thereafter, the charge is $0.
18. A cost of insurance charge that is guaranteed to be no more
than that permitted under the applicable 1980 Commissioners Standard
Ordinary Mortality Table is deducted from Policy Value each month. This
charge compensates the Company for the death
[[Page 20298]]
benefits provided under the Policies and varies from insured to insured
based upon issue age, gender (except where unisex rates are mandated by
law), smoking status and risk class. Cost of insurance rates on amounts
added by face increase are based on the same factors, but determined
based upon the time of increase instead of issue.
19. A mortality and expense risk charge is deducted from Policy
Value at the beginning of each Policy month, at a rate of .067% through
the later of the tenth Policy year and the youngest life insured's
attained age 55. Currently, it is expected that this charge will reduce
to .0215 per month thereafter, although the Company reserves the right
not to reduce this charge.
20. Charges will be imposed on certain transfers of Policy Values,
including a $35 charge for transfers in any Policy month after the
first transfer, a $15 charge for each asset allocation rebalancing
transfer and a $5 charge for each dollar cost averaging transfer when
Policy Value does not exceed $15,000.
Applicants' Legal Analysis
1. Section 27(a)(3) of the 1940 Act provides that the amount of
sales charge deducted from any of the fist twelve monthly payments of a
periodic payment plan certificate may not exceed proportionately the
amount deducted from any other such payment, and that the amount
deducted from any subsequent payment may not exceed proportionately the
amount deducted from any other subsequent payment. This prohibition is
commonly referred to as the ``stair-step'' rule.
2. Rule 6e-3(T)(b)(13)(ii) provides an exemption from Section
27(a)(3), provided that the proportionate amount of sales charge
deducted from any payment does not exceed the proportionate amount
deducted from any prior payment.
3. Under the Policies described herein, a Policy owner paying
premiums in excess of the Target Premium in any of the first ten Policy
years will pay a 5.5% front-end sales load on the portion of the
premium up to the Target Premium, but will pay no front-end sales load
on premiums about the Target Premium in that year. Applicants submit
that this sales load structure could be deemed to violate Section
27(a)(3). In addition, a Policy owner paying more than a Target Premium
in any of the first ten Policy years who subsequently makes a premium
payment equal to the Target Premium will pay a higher front-end sales
in that subsequent Policy year. Consequently, the exemption provided in
Rule 6e-3(T)(b)(13)(ii) would be unavailable.
4. According to the Applicants, Section 27 was designed to protect
Policy owners against sales load structures that deducted large amounts
of front-end sales charges so early in the life of a Policy that little
of the Policy owner's early payments were actually invested, or if an
owner redeemed in the early years of an investment, that investor would
recoup little of his or her investment upon redemption. Applicants
assert that the front-end sales load structure under the Policies does
not present these concerns. Rather, Applicants state that they expect
that by imposing a lower front-end sales load on premiums in excess of
the Target Premium, the Company will lower the aggregate level of sales
load paid in each of the first ten Policy years (or the first ten years
after a face amount increase).
5. Applicants state that the Company's front-end sales load
structure significantly benefits Policy owners by eliminating sales
charges on payments in excess of Target Premiums in any Policy year.
According to the Applicants, the Company could avoid the stair-step
issue presented by Section 27(a)(3) and Rule 6e-3(T) simply by imposing
a higher front-end load on the full amount of premium payments in each
Policy year, including amounts over the Target Premium. Under this
arrangement, however, a Policy owner would pay a higher overall sales
load, and would be left with a smaller percentage of his or her premium
payment for investment under the Policy. Further, if the Company were
to impose the higher sales charge on premiums about the Target Premium,
it would generate more revenue from the Policies than it believes
necessary to support the distribution costs associated with the
Policies.
6. Rule 6e-3(T)(b)(13)(ii) contains an exception to its policy
prohibiting increases in sales load that allow insurance companies to
charge a lower sales charge or amounts transferred to a flexible
premium variable life insurance policy from another plan of insurance,
and thereafter to impose a full sales charge on later premium payments.
Applicants contend that this exception implicitly recognizes that
insurance companies incur lower costs on premium payments that consist
of amounts transferred from other policies and permits insurance
companies to pass those costs savings through to Policy owners. For the
same reason, Applicants submit that the Company should be permitted to
pass through to Policy owners its reduced costs with respect to
premiums about the Target Premium by reducing its front-end sales load
on premiums above the Target Premium in each Policy year that a front-
end sales load applies.
Conclusion
For the reasons set forth above, Applicants submit that the
requested exemptions from the provisions of Section 27(a)(3) of the
1040 Act and Rule 6e-3(T)(b)(13)(ii) thereunder, are in accordance with
the standards of Section 6(c) of the 1940 Act, and with the protection
of investors and the purposes and policies of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-11231 Filed 5-3-96; 8:45 am]
BILLING CODE 8010-01-M