[Federal Register Volume 64, Number 60 (Tuesday, March 30, 1999)]
[Notices]
[Pages 15191-15197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7685]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23750; File No. 812-11288]
Security Benefit Life Insurance Company, et al.
March 23, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemptions under the Investment
Company Act of 1940 (``1940 Act''.
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APPLICANTS: Security Benefit Life Insurance Company (``Security
Benefit''), T. Rowe Price Variable Annuity Account (``Separate
Account''), First Security Benefit Life Insurance and Annuity Company
of New York (``Security Benefit--NY,'' together with Security Benefit,
the ``Insurers''), T. Rowe Price Variable Annuity Account of First
Security Benefit Life Insurance and Annuity Company of New York
(``Separate Account--NY,'' together with Separate Account, the
``Separate Accounts'') and T. Rowe Price Investment Services, Inc.
(``Distributor'') (collectively referred to herein as ``Applicants'').
RELEVANT 1940 ACT SECTIONS: Exemption requested under Section 6(c) of
the 1940 Act from Sections 2(a)(32), 22(c), 27(i)(2)(A) and Rule 22c-1
thereunder and an amendment of an Order of Approval requested under
Section 11 of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order on behalf of
themselves, on behalf of any other person that may become a principal
underwriter for contracts issued by the Insurers (``Future
Underwriters'') that are similar in all material respects to the
flexible premium deferred or single premium immediate variable annuity
contracts described in the Application (the ``Contracts''), and on
behalf of such other separate accounts as the Insurers shall establish
in the future, which at any time may offer variable annuity contracts
on a basis which is similar in all material respects to the
arrangements described with respect to the Contracts (``Other Separate
Accounts'') (a) exempting such persons from the provisions of Sections
2(a)(32), 22(c)
[[Page 15192]]
and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder, to the
extent necessary to assess a withdrawal charge, as described herein,
against Contract owners and (b) amending an Order of Approval, granted
on April 4, 1995, pursuant to Section 11 of the 1940 Act, to approve,
to the extent necessary, the terms of a payment arrangement whereby
purchasers of Contracts may apply redemption proceeds from shares of a
registered open-end investment company for which the Distributor serves
as principal underwriter (the ``T. Rowe Price Public Funds'') as a
premium payment for a Contract, a conversely, to apply the proceeds of
a withdrawal or annuity payment under the Contracts to the purchase of
shares of a T. Rowe Price Public Funds(s).
FILING DATE: The application was filed on August 27, 1998, amended and
restated on January 20, 1999, and amended and restated on March 19,
1999.
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
Commission 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 April 16, 1999, and should be accompanied by
proof of service on Applicants, in the form of an affidavit or, for
lawyers, a certificate of service. Hearings 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o Amy J. Lee,
Esq., Security Benefit Life Insurance Company, 700 Harrison Street,
Topeka, Kansas 66636, and Darrell N. Braman, Esq., T. Rowe Price
Investment Services, Inc., 100 E. Pratt Street, Baltimore, Maryland
21202. Copies to Keith T. Robinson, Esq., Dechert Price & Rhoads, 1775
Eye Street, N.W., Washington, D.C. 20006-2401.
FOR FURTHER INFORMATION CONTACT: Martha Peterson, Attorney, or Susan
Olson, Branch Chief, 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 is available for a fee from the
Public Reference Branch of the Commission, 450 Fifth St., N.W.,
Washington, D.C. 20549-0609 (tel. (202) 942-8090).
Applicants' Representations
Background for Request for Exemptions From Certain Provisions of the
1940 Act
1. Security Benefit is a stock life insurance company organized
under the laws of Kansas. Security Benefit is ultimately controlled by
Security Benefit Mutual Holding Company, a Kansas mutual holding
company. Security Benefit is licensed to conduct life insurance
business in the District of Columbia and all state except new York.
2. Security Benefit--NY is a stock life insurance company organized
under the laws of New York. Security Benefit--NY is a wholly owned
subsidiary of Security Benefit Group, Inc., a financial services
holding company which is wholly owned by Security Benefit. Security
Benefit--NY offers the Contracts in New York and is admitted to do
business in that state.
3. Each Separate Account is a unit investment trust and meets the
definitions of ``separate account'' in Section 2(a)(37) under the 1940
Act. Each Separate Account is divided into subaccounts
(``Subaccounts'') that will invest exclusively in shares of the
corresponding portfolio (``Portfolio'') of one of the following mutual
funds; (1) T. Rowe Price International Series, Inc.; (2) T. Rowe Price
Equity Series, Inc. and (3) T. Rowe Price Fixed Income Series, Inc.
(collectively the ``Underlying Funds''). Each of the Underlying Funds
is a Maryland corporation and is currently registered under the 1940
Act as an open-end management investment company.
4. The Distributor, a wholly-owned subsidiary of T. Rowe Price
Associates, Inc.,, is the principal underwriter for the Contracts. The
Distributor is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended (the ``1934 Act''), and is a member of
the National Association of Securities Dealers, Inc. (the ``NASD'').
Each Future Underwriter will be registered as a broker-dealer under the
1934 Act and will be a member of the NASD.
5. The Contracts consist of flexible premium deferred variable
annuity contracts currently issued by Security Benefit and Security
Benefit--NY (the ``Deferred Contracts'') and single premium immediate
variable annuity contracts to be issued by Security Benefit and
Security Benefit--NY (the ``Immediate Contracts'').
6. The Contracts are available for purchase as non-tax qualified
retirement plans. The Contracts are also eligible for use in connection
with tax qualified retirement plans, including plans that meet the
requirements of Section 408 of the Internal Revenue Code of 1986, as
amended (the ``Code'').
7. The Deferred Contracts provide for accumulation of values on
either a variable basis, a fixed basis or both during the accumulation
phase of the Contracts. The Deferred and Immediate Contracts also
provide several options for fixed or variable (or a combination of
fixed and variable) annuity payments. Annuity payments are based on the
annuity rates for the options provided. Payments made under fixed
annuity options will be guaranteed by Security Benefit or Security
Benefit--NY, as the case may be.
8. The net premium for Deferred and Immediate Contracts may be
allocated to one or more of the Subaccounts of the Separate Account or
Separate Account--NY, or the Insurer's general account, where such
premium is credited with a fixed rate of interest. Each Subaccount of
the Separate Account and Each Subaccount--NY of the Separate Account--
NY, will invest exclusively in shares of the corresponding Portfolio of
one of the Underlying Funds. Shares of each of the Portfolios are
purchased by Security Benefit and Security Benefit--NY for the
corresponding Subaccount or Subaccount--NY, respectively, at the
Portfolio's net asset value per share, i.e., without any sales load.
All dividends and capital gain distributions received from a Portfolio
will be reinvested automatically in such Portfolio at net asset value
per share, unless otherwise instructed by Security Benefit or Security
Benefit--NY, as appropriate. Other insurance companies may invest in
each Underlying Fund and Portfolio.
9. None of the Underlying Funds, the Portfolios or any investment
adviser of a Portfolio is an affiliated person of Security Benefit or
Security Benefit--NY, although it is possible that Security Benefit or
Security Benefit--NY may be deemed to be an affiliated person of a
Portfolios and an Underlying Fund at a future date by virtue of the
Separate Account or Separate Account--NY's ownership of shares in
Portfolio.
10. If any Owner (or Annuitant, if the Owner is not a natural
person) dies during the accumulation phase under the Deferred
Contracts, the Insurer will pay the death benefit proceeds to the
Designated Beneficiary upon receipt of due proof of the Owner's death
and instruction regarding payment of the Designated Beneficiary. The
death benefit proceeds consist of the death benefit less any
uncollected premium taxes. Under the Deferred and Immediate Contracts,
in the event of the
[[Page 15193]]
Owner's death on or after the Annuity Payout Date, the death benefit is
determined under the terms of the Annuity Option.
11. Under the Deferred Contracts, if the Annuitants dies during the
Accumulation Period, the Owner may designate a new Annuitant within 30
days. If a new Annuitant is not named, the Issuer will designate the
Owner as Annuitant.
12. The Contracts offer the following nine Annuity Options: Option
1--Life Income, Option 2--Life Income with Period Certain; Option 3--
Life Income with Installment or Unit Refund; Option 4--Joint and Last
Survivor, Option 5--Fixed Period; Option 6--Fixed Payment, Option 7--
Age Recalculation; Option 8--Perod Certain; and Option 9--Life Income
with Liquidity; Annuity Options 1 through 4 and 8 are available as
either a fixed or variable annuity; Option 9 is available only as a
variable annuity; and Options 5 through 7 are available as a fixed
annuity, a variable annuity or a combination fixed and variable
annuity.
13. Under the Deferred Contracts, the Owner may select the Annuity
Payout Date and Annuity Option at the time of application. If no
Annuity Payout Date is selected, the Annuity Payout Date will be the
later of the Annuitant's seventieth birthday or the tenth annual
Contract anniversary. If no Annuity Option is selected, the Insurer
will use Life Income with 10 years period certain. The Owner may change
the Annuity Payout Date, Annuity Option or Annuitant prior to the
Annuity Payout Date.
14. Under the Immediate Contracts, the owner selects the Annuity
Payout Date and Annuity Option at the time of application. The Annuity
Payout Date must be within 30 days of the issue date. The Owner may not
change the Annuity Payout Date, Annuity Option or Annuitant under the
Immediate Contracts.
15. If a variable annuity under Option 1 through 4, 8 or 9 is
selected, annuity payments are calculated on the basis of payment
units. The number of payment units used to calculate each annuity
payment is determined as of the Annuity Payout Date Account Value as of
the Annuity Payout Date of the Deferred contracts, or the initial
premium for the Immediate Contracts, less any premium taxes, is divided
by $1,000 and the result is multiplied by the rate per $1,000 set forth
in the annuity tables specified in the Contracts to determine the
initial annuity payment for a variable annuity.
16. The initial variable annuity payment is divided by the value as
of the Annuity Payout Date of the payment unit for the applicable
Subaccount to determine the number of payment units to be used in
calculating subsequent annuity payments. The number of payment units
will remain constant for subsequent annuity payments, unless the Owner
exchanges payment units among Subaccounts or makes a withdrawal under
Option 8 or during the Liquidity Period under Option 9.
17. Subsequent annuity payments are calculated by multiplying the
number of payment units allocated to a Subaccount by the value of the
payment unit as of the date of the annuity payment. If the annuity
payment is allocated to more than one Subaccount, the annuity payment
is equal to the sum of the payment amount determined for each
Subaccount. Annuity payments under Option 9 are made monthly, but the
amount is reset only once each year on the 12-month anniversary of the
Annuity Payout Date.
18. Option 9, designated the ``Life Income with Liquidity Option,''
provides monthly annuity payments for the life of the annuitant or the
lives of the annuitant and a joint annuitant with a period certain of
15 years (or a shorter period under certain circumstances).\1\ Annuity
payments under Option 9 are guaranteed never to be less than 80 percent
of the initial annuity payment (the ``Floor Payment''). The amount of
annuity payments under Option 9 will remain level for 12-month
intervals, subject to reset on each anniversary of the initial annuity
payment. In the event of the death of a joint annuitant, annuity
payments continue to the surviving joint annuitant at the level
indicated at the time that Option is selected, which may be 100%, 75%,
66\2/3\%, or 50% of annuity payments.
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\1\ The period certain may not extend beyond the life expectancy
of the annuitant(s) for Contracts issued in connection with tax-
qualified retirement plans.
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19. Under Option 9, the Contract owner may allocate premium only to
certain subaccounts of the relevant separate account, and no portion of
the premium may be allocated to the Insurer's general account. The
Contract owner may withdraw Account Value only during the Liquidity
Period under Option 9. The Liquidity Period for the Immediate Contracts
is the period from the date the Contract begins in force through the
date preceding the 61st annuity payment. The Liquidity Period for the
Deferred Contracts is the period from the Annuity Payout Date through
the date preceding the 61st annuity payment.
20. Under the Deferred Contracts, full or partial withdrawals of
Account Value are allowed at any time during the accumulation phase.
Under the Deferred and Immediate Contracts, full and partial
withdrawals of Account Value are allowed on or after the Annuity Payout
Date under Annuity Option 5, 6, or 7 and during the Liquidity Period
under Option 9. If a variable annuity under Annuity Option 8 is
selected, the Owner may withdraw the present value of future annuity
payments commuted at the assumed interest rate. Withdrawals under
Option 9 are subject to a Withdrawal Charge discussed below.
21. The Insurer will deduct a daily charge from the assets of the
Separate Account or the Separate Acount-NY for mortality and expense
risks assumed by it under the Contracts. The mortality and expense risk
under the Contracts during the accumulation phase of the Deferred
Contracts and after the Annuity Payout Date for all options, except
Option 9, is equal to an annual rate of 0.55% of the average daily net
assets of each Subaccount or Subaccount-NY that funds the Contracts.
The mortality and expense risk charge for Contracts that have
annuitized under Option 9 is expected to be equal to an annual rate of
1.40% of the average daily net assets of each Subaccount or Subaccount-
NY that funds such Contracts.
22. With respect to Option 9, the Insurer assumes the risks
associated with guaranteeing that the annuity payment will never be
less than the Floor Payment. The Insurer is entering into a reinsurance
arrangement with an unaffiliated insurance company to support its
guarantee of the Floor Payment, and the increased mortality and expense
risk charge for Option 9 reflects the costs of such reinsurance. The
reinsurer will charge the Insurer an asset-based charge equal to a
certain percentage of assets allocated to Option 9 under the Contracts
and the withdrawal charges imposed under the Contracts will also be
paid to the reinsurer. The reinsurance cost will be based upon the
reinsurer's estimate of the cost to purchase financial instruments to
hedge against the risks assumed (``Hedge Costs''). The reinsurer also
expects to profit from the reinsurance arrangement to the extent that
it has accurately estimated the ongoing cost of hedging the risks
assumed with respect to Option 9 under the Contracts. The reinsurer
will agree to assume the risks, and not to increase the charges, during
the life of any Contract issued under the arrangement. The Insurers may
elect in the future to hedge the risks associated with Option
[[Page 15194]]
9 themselves in lieu of entering into the reinsurance arrangement.
23. Various states and municipalities impose a tax on premiums on
annuity contracts received by insurance companies. The Insurer assesses
a premium tax charge to reimburse itself for premium taxes that it
incurs. This charge will be deducted upon annuitization or upon full or
partial withdrawal if premium taxes are incurred; however, the Insurer
reserves the right to deduct premium taxes when due. Premium tax rates
currently range from 0% to 3.5%, but are subject to change by a
government entity.
24. The Insurer will deduct a Withdrawal Charge from full or
partial withdrawals made during the Liquidity Period under Option 9.
The Withdrawal Charge does not apply to any of the other annuity
options under the Contracts. The Withdrawal Charge is based upon the
year in which the withdrawal is made measured from the Annuity Payout
Date. The Withdrawal Charge is applied to the amount of the withdrawal
at a rate of 5 percent in the first year from the Annuity Payout Date,
decreasing to 0 percent in the sixth year from the Annuity Payout Date.
A partial withdrawal and any associated Withdrawal Charge is deducted
from the Subaccounts in the same proportion as the withdrawal is
allocated. A partial withdrawal under Option 9 will result in a
reduction of the annuity payment, Floor Payment and payment units used
to calculate annuity payments in the same proportion as the withdrawal
reduces Account Value.
25. The Withdrawal Charges collected by the Insurers will be paid
to the reinsurer each month pursuant to a reinsurance agreement, in
whole or in part (depending upon the Subaccount from which the
withdrawal is made), for assuming the risk associated with the Floor
Payment under Option 9. The reinsurer purchases financial hedging
instruments to hedge against the potential losses resulting from the
risk assumed. The reinsurer bears the risk that the amount of the Floor
Payment will exceed the amount of the annuity payment based upon the
performance of the underlying Subaccount(s) and will pay any such
shortfall to the Insurers. The Withdrawal Charge is designed so that if
a Contract owner surrenders a Contract or withdraws from Account Value
under Option 9 prior to expiration of the Liquidity Period, the
reinsurer may recover the costs incurred in purchasing such financial
hedging instruments.
The Withdrawal charge may be more or less than the Hedge Costs
actually incurred by the reinsurer.
26. Each of Security Benefit and Security Benefit--NY guarantees
that the charge for mortality and expense risk charges and the
Withdrawal Charge will not increase with respect to a Contract once it
has been issued. The charge may be increased with respect to new issues
of the Contract
Background For Request for Amended Order
27. An Order of Approval pursuant to Section 11 of the 1940 Act was
granted to Applicants on April 4, 1995 approving the terms of a payment
arrangement whereby purchasers of Deferred Contracts would direct the
Distributor to redeem shares of a T. Rowe Price Public Fund(s) and
forward redemption proceeds therefore to an Insurer as a premium
payment for a Deferred Contract, and conversely, to apply the proceeds
of a withdrawal or an annuity payment from the Deferred Contracts to
the purchase of shares of a T. Rowe Price Public Fund(s).
28. The Distributor proposes to make the payment arrangement
available to owners and purchasers of the Immediate Contracts and any
substantially similar variable contracts to be offered by Applicants.
Use of this arrangement would be entirely elective; no Contract owner
or purchaser would be required to use the payment arrangement to
purchase a Contract or shares of a T. Rowe Price Public Fund.
29. Because the T. Rowe Price Public Funds do not impose sales load
charges and the Contracts do not impose any sales load charges,
Applicants represent that there is no possibility that any sales load
would be deducted in connection with the application of redemption
proceeds from a T. Rowe Price Public Fund to premium payments on a
Contract or the application of withdrawal proceeds or annuity payments
from a Contract to the purchase of shares of T. Rowe Price Public Fund.
The Withdrawal Charge applicable to withdrawal under Option 9 is
designed to recover the Hedge Costs of the reinsurer in connection with
the Floor Payment and other guarantees associated with Option 9. Any
exchanges deemed to be made in connection with the payment arrangement
would be effected at net asset value, except where the Withdrawal
Charge or premium tax may be deducted.
Applicants' Legal Analysis
For Exemption From Certain Provisions of the 1940 Act
1. Section 6(c) 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. Applicants state
that because the provisions described below may be inconsistent with
certain aspects of the Withdrawal Charge structure, Applicants are
seeking exemptions from Sections 2(a)(32), 27(i)(2)(A) and 22(c) of the
1940 Act and Rule 22c-1 thereunder, to the extent necessary pursuant to
Section 6(c) to assess the Withdrawal Charge against Contracts
annuitized under Option 9 in the event of a surrender or partial
withdrawal from the Contracts prior to expiration of the Liquidity
Period. Applicants seek exemptions therefrom in order to avoid any
questions concerning the Contracts' compliance with the 1940 Act and
rules thereunder. Rule 6c-8 under the 1940 Act exempts a registered
separate account and its depositor or principal underwriter from
certain provisions of the Act to permit imposition of a deferred sales
load on variable annuity contracts participating in such separate
account. Applicants state that Rule 6c-8 was not available with respect
to imposition of the Withdrawal Charge because it is a charge for an
optional insurance benefit rather than a deferred sales load. For the
reasons discussed below, Applicants assert that the deduction of the
Withdrawal Charge is in the public interest and consistent with the
protection of investors and purposes fairly intended by the 1940 Act.
Applicants reserve the right to assert in any proceeding before the
Commission or in any suit or action in any court that the Commission
does not have authority to regulate such charges.
2. Section 2(a)(32) of the 1940 Act defines ``redeemable security''
as any security under the terms of which the holder, upon its
presentation to the issuer, is entitled to receive approximately his or
her proportionate share of the issuer's current net assets, or the cash
equivalent thereof. Applicants state that a charge such as the
Withdrawal Charge may not be contemplated by Section 2(a)(32), and thus
may be deemed inconsistent with the foregoing provision, to the extent
that the charge can be viewed as causing a Contract to be redeemed at a
price based on less than the current net asset value that is next
computed after surrender or after partial withdrawal from the Contract.
Although Applicants do not concede that relief is necessary,
[[Page 15195]]
Applicants request relief from Section 2(a)(32) to permit the deduction
of the Withdrawal Charge.
3. As discussed above, Applicants state that the Withdrawal Charge
compensates the Insurers (and indirectly the reinsurer) for the risks
assumed should a Contract owner who selects Option 9 surrender or
partially withdraw from a Contract during the Liquidity Period.
Applicants assert that the Floor Payment represents an optional
insurance benefit for which each insurer is entitled to receive
compensation. Applicants further assert that the Withdrawal charge is
not assessed at redemption for administrative expenses,\2\ and that no
portion of the Withdrawal charge is paid to, or otherwise used to
offset the expenses of the Underlying Funds, their advisers or any of
their affiliates. Applicants state that the deduction of the Withdrawal
Charge is a legitimate charge for an optional insurance benefit under
the Contracts. In this manner, Applicants argue that the Withdrawal
charge is similar to other charges made by insurers, and approved by
the Commission, at redemption for optional insurance benefits, such as
enhanced death benefits.\3\
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\2\ John P. Reilly & Assoc. (pub avail. July 12, 1979) (``a
mutual fund may make a charge to cover administrative expenses
associated with redemption, but if that charge should exceed 2
percent, its shares may not be considered redeemable'').
\3\ United Investors Life Ins. Co., Investment Company Act
Release No. 22715 (June 18, 1997) (order), Investment Company Act
Release No. 22680 (May 22, 1997) (notice) (prorated optional death
benefit charge assessed at contract surrender); Companion Life Ins.
Co., Investment Company Act Release No. 21944 (May 8, 1996) (order),
Investment Company Act Release No. 21887 (Apr. 10, 1996) (notice)
(prorated enhanced death benefit charge assessed at contract
surrender); United of Omaha, Investment Company Act Release No.
21205 (July 15, 1995) (order), Investment Company Act Release No.
21153 (June 20, 1995) (notice) (prorated enhanced death benefit
charge assessed at contract surrender).
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4. Moreover, Applicants submit that although Section 2(a)(32) does
not specifically contemplate the imposition of a charge at the time of
redemption, such a charge is not necessarily inconsistent with the
definition of ``redeemable security.'' Indeed, a withdrawal charge is
little different, for this purpose, from the ``redemption'' charge
authorized in Section 10(d)(4) of the 1940 Act. Applicants argue that
Congress obviously intended that such a redemption charge, which is
expressly described as a ``discount from net asset value,'' be deemed
consistent with the concept of ``proportionate share'' under Section
2(a)(32).
5. Consistent with Section 2(a)(32), therefore, Applicants submit
that the Contracts are ``redeemable securities.'' The Contracts provide
for surrender and partial withdrawal of Account Value. The Contracts
and the prospectuses for the Contracts will disclose the contingent
nature of the Withdrawal Charge. Accordingly, Applicants state that
there will be no restriction on, or impediment to, surrender or partial
withdrawal that should cause the Contracts to be considered other than
redeemable securities within the meaning of the 1940 Act and rules
thereunder. Upon surrender or partial withdrawal of a Contract for
which the Contract owner has annuitized under Option 9, Applicants
state that Contract owners will receive their ``proportionate share''
of the Separate Account or Separate Account--NY; namely, the amount of
the premium reduced by the amount of all applicable charges and
increased or decreased by the amount of investment performance credited
to the Contract.
6. Section 22(c) of the 1940 Act empowers the Commission to ``make
rules and regulations applicable to registered investment companies and
to principal underwriters of, and dealers in, the redeemable securities
of any registered investment company.'' Rule 22c-1 under the 1940 Act
imposes requirements with respect to both the amount payable on
redemption of a redeemable security and the time as of which such
amount is calculated. Specifically, Rule 22c-1, in pertinent part,
prohibits a registered investment company issuing a redeemable security
and its principal underwriter from selling, redeeming, or repurchasing
any such security, except at a price based on the current net asset
value of such security which is next computed after receipt of a tender
of such security for redemption, or of an order to purchaser or sell
such security. Although Applicants do not concede that relief from
Section 22(c) and Rule 22c-1 is necessary, to the extent that the
imposition of the Withdrawal Charge may be viewed as causing a Contract
to be redeemed at a price that is computed at less than current net
asset value, Applicants request relief from Section 22(c) and Rule 22c-
1.
7. Applicants submit that the deduction of the Withdrawal Charge
will comply with the requirements of such rule. Regarding the amount
payable, Applicants submit (as discussed above) that the assessment of
the Withdrawal Charge upon surrender or partial withdrawal of a
Contract for which the Owner has annuitized under Option 9 does not
alter a Contract owner's current net asset value. Furthermore,
consistent with the requirements of Rule 22c-1, Applicants will
determine the net cash surrender value under a Contract in accordance
with Rule 22c-1 on a basis next computed after receipt of a Contract
owner's request for surrender or partial withdrawal. Accordingly,
Applicants submit that they will comply with both the amount payable
and timing requirement of Rule 22c-1.
8. In addition, Applicants assert that the deduction of the
Withdrawal Charge is consistent with the policy behind Rule 22c-1.
Applicants note that the Commission's purpose in adopting Rule 22c-1
was to minimize (i) dilution of the interest of other security holders
and (ii) speculative trading practices that are unfair to such
holders.\4\ Applicants state that the Withdrawal Charge will in no way
have the dilutive effect that Rule 22c-1 is designed to prohibit,
because a surrendering Contract owner will ``receive'' no more than an
amount equal to the Account Value determined pursuant to the formula
set out in the Contract after receipt of the Owner's withdrawal
request. Furthermore, Applicants state that variable annuities, by
nature, do not lend themselves to the kind of speculative short-term
trading that Rule 22c-1 was aimed against and, even if they could be so
used, the Withdrawal Charge would discourage, rather than encourage,
any such trading.
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\4\ Investment Company Act Rel. No. 5519 at 1 (Oct. 16, 1968).
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9. Applicants assert that the deduction of the Withdrawal Charge
upon surrender or partial withdrawal from Contracts for which the Owner
has annuitized under Option 9 will be advantageous to Contract owners
for a number of reasons. First, a deferred charge structure has long
been accepted as an appropriate feature of variable annuities. The
existence of products with deferred charges provides investors a
valuable choice, and the Commission and its staff have supported
efforts to expand investor choice without sacrificing investor
protection.\5\ In this context, Applicants state that a deferred charge
structure also reinforces the intention that the product be held as a
long-term investment.
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\5\ See Protecting Investors: A Half Century of Investment
Company Regulation (May 1992), Introduction of Richard C. Breeden,
Chairman.
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10. Second, Applicants state that the amount of the Contract
owners' premiums that will be allocated to the Separate Account or
Separate Account--NY, and that will be available to earn a return for
the Contract owners, will be greater than it would be if the charges
were deducted from the premiums. Applicants note that the
[[Page 15196]]
Commission recognized this in authorizing deferred sales charges for
variable annuity contracts.\6\
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\6\ Applicants state that the Commission has noted the argument
that ``a deferred sales load is more advantageous to investors that
a front-end sales load because the amount of investors' money
available for investment is not reduced as in the case of a front-
end sales load.'' Investment Company Act Rel. NO. 13048 (Feb. 28,
1993) (proposing Rule 6c-8, subsequently adopted to permit
contingent deferred sales loads in connection with variable annuity
contracts).
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11. Finally, Applicants state that the charge structure provides
equitable treatment to all Contract owners who annuitize under Option
9. Applicants state the Option 9 charge structure was established so
that an Insurer may recover its costs over the life of the Contract. If
Contract owners who select Option 9 could surrender or partially
withdraw from the Contracts prior to the Liquidity Period expiration
date without the imposition of the Withdrawal Charge, the Insurer might
not be able to fully recover its costs. Applicants note that the
Insurers could have elected not to impose a Withdrawal Charge and
simply to have imposed a higher mortality and expense risk charge. In
this event the Insurer could be charging persisting Contract owners who
choose Option 9 more than otherwise would be necessary to recover the
costs attributable to such Contract owners. Accordingly, Applicants
submit that the Contracts will satisfy the requirements of Rule 22c-1.
12. Applicants submit that the assessment of a Withdrawal Charge
should not be construed as a restriction on redemption, and therefore,
maintain that such contract is a redeemable security as required by
Section 27(i)(2)(A) of the 1940 Act. Applicants also maintain that the
Contracts for which Contract owners choose Option 9 are redeemable
securities, and that the Withdrawal Charge upon surrender or partial
withdrawal represents nothing more than the deduction of an insurance
charge.
For an Amended Order
13. While Applicants do not concede that Commission approval is
required for the payment arrangement described in its application, to
avoid any possibility that questions may be raised as to the potential
applicability of Section 11, the Applicants request that the Commission
issue an amended order under Section 11, to the extent necessary,
approving the terms of the payment arrangement summarized above.
Applicants believe such approval is 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.
14. Section 11 does not set forth any specific standards for
Commission approval of exchange offers. Applicants submit that the
public policy underlying Section 11 may be inferred from Section
1(b)(1) of the 1940 Act and the legislative history of the 1940 Act for
guidance in determining whether to grant approval of an exchange offer
pursuant to Section 11 of the 1940 Act.
15. With respect to the concern articulated in Section 1(b)(1) that
offeres of exchange offers may not receive sufficient disclosure,
Applicants submit that investors for the Contracts will receive
adequate, accurate and explicit information, fairly presented,
concerning investment in the T. Rowe Price Public Funds and in the
Contracts, and that the prospectus for the Contracts will disclose the
principal tax consequences of the exchange offer. With respect to the
concern reflected in the legislative history that exchange offers may
be made to collect additional sales loads, Applicants assert that this
concern is irrelevant to their circumstances. As noted above, the
payment arrangement does not offer any opportunity for the imposition
of any sales loads or other profits. The Withdrawal Charge applicable
to withdrawals under Option 9 is designed to recover the Hedge Costs of
the reinsurer in connection with the Floor Payment and other guarantees
associated with Option 9; therefore, the Applicants do not derive any
benefit or profit from the withdrawal charges. Accordingly, the
Withdrawal Charge does not have the potential for abuse associated with
a sales load.
16. Moreover, Applicants assert that the payment arrangement is
designed for the convenience of investors--not to assess sales charges,
the principal abuse at which Section 11 is directed. The payment
arrangement offers Contract purchasers and owners the flexibility to
make payments expeditiously with funds from any source chosen by them,
including proceeds from redemptions of T. Rowe Price Public Fund share
or under the Contracts. Applicants state that the payment arrangement
is intended solely as an administrative convenience to allow those
Contract purchasers and owners who from time to time are or become T.
Rowe Price Public Fund shareholders to implement their investment
decisions in accordance with their preferred methods.
17. Absent the payment arrangement, Applicants assert that
investors would experience an investment delay. Investors who have
already determined that a Contract would provide valuable benefits
should not be forced to delay investment. Applicants argue that the
payment arrangement therefore serves the public interest because it
offers those investors who are so interested a means of minimizing the
potential loss of return on the investment of their assets due to the
delay from processing the liquidation of one investment and purchase of
another. As indicated above, the payment arrangement would be wholly
elective on the investor's part.
18. Applicants submit that the payment arrangement complies with
the general principles of Section 11(a) and Rules 11a-2 and 11a-3. Any
exchanges deemed to be made in connection with the payment arrangement
would be effected at net asset values, except where the Withdrawal
Charge or premium tax may be deducted. In those transactions in which
Withdrawal Charge or premium tax may be deducted, Applicants state that
the exchange arguably may not be deemed to be made at relative net
asset value. However, Applicants state that Rule 11a-2 and Rule 11a-3
permit administrative fees to be deducted upon an exchange and
utilization of the payment arrangement would not cause a premium tax or
Withdrawal Charge to be deducted that would not have been deducted if
the Contract Owner had not elected to utilize the payment arrangement.
Class Relief
19. Applicants seek the relief requested in the application not
only with respect to themselves and the Contracts described above, but
also with respect to Other Separate Accounts and Future Underwriters.
Applicants represent that the terms of the relief requested with
respect to Other Separate Accounts and Future Underwriters are
consistent with standards set forth in Section 6(c) of the 1940 Act.
Applicants state that the Commission has granted comparable class
relief in the past.
20. Applicants state that without the requested relief, the
Distributor and the Insurer would have to request and obtain Commission
approval for any Future Underwriters and Other Separate Accounts that
may be established in the future to fund the Contracts. Applicants
assert that these additional requests would present no issues under the
1940 Act not already addressed in this application. Applicants state
that if the Distributor and Insurer were to repeatedly seek exemptive
relief with respect to the same issues addressed in this application,
investors would not receive additional protection or benefit, and
investors and Insurers could be
[[Page 15197]]
disadvantaged by increased overhead costs. Applicants argue that the
requested relief and order will promote competitiveness in the variable
annuity market by obviating the filing of redundant exemptive
applications, thereby reducing administrative expenses and maximizing
efficient use of resources and enhancing the Applicant's ability to
effectively take advantage of business opportunities as such arise.
Applicants submit, for all the reasons stated herein, that their
request for approval 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, and that an
order of the Commission should, therefore, be granted.
Conclusion
For the reasons stated above, Applicants request that the
Commission issue an order granting the exemptions and an amended order
as described above. Applicants believe that the requested exemptions
and the amended order, in accordance with the standards of Section
6(c), 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 Divisions of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7685 Filed 3-29-99; 8:45 am]
BILLING CODE 8010-01-M