[Federal Register Volume 59, Number 15 (Monday, January 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1544]
[[Page Unknown]]
[Federal Register: January 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20021; File No. 812-8714]
Security Life of Denver Insurance Co., et al.
January 18, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or
``Commission'').
ACTION: Notice of Application for Exemptions under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Security Life of Denver Insurance Company (``Security
Life''), Security Life Separate Account A1 (the ``Account''), certain
separate accounts that may be created in the future, and SLD Equities,
Inc. (``SLD Equities'').
RELEVANT ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the Act.
SUMMARY OF APPLICATION: Applicants seek an order to permit them to
deduct a mortality and expense risk charge from the assets of the
Account, which funds certain deferred variable annuity contracts (the
``Contracts'') featuring an enhanced death benefit.
FILING DATE: The application was filed on December 3, 1993.
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 SEC's Secretary and
serving 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 February
14, 1994, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, Security Life Center, 1290 Broadway, Denver, Colorado
80203-5699.
FOR FURTHER INFORMATION CONTACT:
C. Christopher Sprague, Senior Staff Attorney, at (202) 504-2802, or
Michael V. Wible, Special Counsel, at (202) 272-2060, Office of
Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
Application. The complete Application is available for a fee from the
Commission's Public Reference Branch.
Applicant's Representations
1. Security Life is a stock life insurance company organized under
the laws of Colorado and is the depositor of the Account. The Account
was organized under Colorado law, and is registered under the Act as a
unit investment trust. That portion of the assets of the Account that
is equal to the reserves and other Contract liabilities with respect to
the Account is not chargeable with liabilities arising out of any other
business of Security Life. Any income, gains, or losses, realized or
unrealized, from assets allocated to the Account are credited to or
charged against the Account without regard to other income, gains, or
losses of Security Life. The Account is divided into six divisions,
each of which invests exclusively in shares of The Palladian Trust (the
``Trust''). The Trust is registered under the Act as an open-end
management investment company.
2. SLD Equities, a registered broker-dealer and a wholly-owned
subsidiary of Security Life, will be the principal underwriter of the
Contracts.
3. The Contracts provide for retirement payments or other long-term
benefits for persons covered under plans that receive favorable federal
income tax treatment under the Internal Revenue Code of 1986 and for
persons desiring such benefits who do not qualify for such tax
advantages. The minimum initial purchase payment is $25,000 for a non-
qualified Contract and $1,500 for a qualified Contract. The minimum
additional purchase payment is $500 for a non-qualified Contract and
$250 for a qualified Contract. Annuity payments under a Contract may be
received on a variable basis.
4. The administrative charges to be assessed under the Contracts
will be (a) an administrative charge of $30 per Contract year, during
the accumulation period only, if total purchase payments in the first
Contract year are less than $100,000 and (b) a daily asset-based
charge, at an annual effective rate of 0.15%, during both the
accumulation and annuity periods. Security Life guarantees that it will
not raise these administrative charges for the duration of the
Contracts. Security Life also represents that it does not expect that
the total revenues from the administrative charges will be greater than
the total expected cost of administering the Contracts, on average,
excluding costs that properly are categorized as distribution expenses,
over the period that the Contracts are in force.
5. If more than one demand partial withdrawal occurs during a
Contract year, there will be a charge of the lesser of $25 of 2% of the
amount withdrawn for each additional demand partial withdrawal.
Security Life represents that it does not expect that the total
revenues from the partial withdrawal transaction charge will be greater
than the total expected cost of administering demand partial
withdrawals, on average, over the period that the Contracts are in
force.
6. The Contracts will permit transfers among the divisions of the
Account, subject to certain conditions. Prior to the annuity date, an
Owner will be able to make up to 12 transfers each Contract year at no
charge. Each additional transfer will be subject to a charge of $25.
After the annuity date, an Owner will be able to make no more than four
transfers each Contract year. No charge will be assessed for a transfer
after the annuity date. Security Life represents that it does not
expect that the total revenues from the excess transfer charges will be
greater than the total expected cost of administering excess transfers,
on average, over the period that the Contracts are in force. Security
Life represents that the amount that it will recover for premium taxes
will not be greater than the amount of premium taxes required to be
paid.
7. No front-end sales charge will be imposed when purchase payments
are applied under the Contracts. However, a surrender charge will be
assessed if the Contract is surrendered or partial withdrawals
exceeding certain amounts are taken during the six year period from the
date Security Life receives and accepts each purchase payment. The
surrender charge in the first Contract year is 7%, and reduces by 1%
each Contract year thereafter; there is no surrender charge applicable
to the withdrawal of payments that are six or more years old. In no
event is the surrender charge greater than the amount withdrawn.
8. Applicants seek to impose a daily asset-based charge equal to
1.55% annually to compensate Security Life for certain mortality and
expense risks it bears under the Contracts. Security Life will assume
several mortality risks under the Contracts. First, Security Life
assumes a mortality risk arising from the fact that the Contract does
not impose any surrender charge on the death benefit. Second, Security
Life assumes an additional mortality risk by its contractual obligation
to continue to make annuity payments for the entire life of the
Annuitant under annuity options involving life contingencies. Third,
Security Life will assume a mortality risk because of its promise to
pay a death benefit to the beneficiary if the Owner dies prior to the
annuity date. 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 a Contract. At
the same time, Security Life assumes the risk that Annuitants as a
group will live longer than Security Life's annuity tables had
predicted, which would require Security Life to pay out more in annuity
income than planned. The contracts contain annuity tables that are
based on the 1983a Individual Annuity Mortality Table and, for variable
annuity options, alternative net investment factors of 3% or 5%.
Security Life guarantees these annuity tables for the duration of the
Contracts.
9. In general, the Contracts provide for a death benefit that is
the greatest of: (a) The purchase payments made (less partial
withdrawals and any surrender and partial withdrawal transaction
charges taken), accumulated at 7% per year (the interest rate for any
Owner of attained age 75 or greater is 0%) up to a maximum of two times
the sum of all purchase payments (less partial withdrawals and any
surrender and partial withdrawal transaction charges taken); (b) the
accumulation value at the time of death; and (c) the step-up benefit
plus purchase payments made, less partial withdrawals and any surrender
and partial withdrawal transaction charges taken since the last step-up
anniversary. The step-up benefit at issue is the initial purchase
payment. At each step-up anniversary, the current accumulation value is
compared to the prior determination of the step-up benefit, increased
by purchase payments made and reduced by partial withdrawals and any
surrender and partial withdrawal transaction charges taken since that
anniversary. The greater of these becomes the new step-up benefit. The
step-up anniversaries are the Contract date and every sixth Contract
anniversary thereafter (i.e., sixth, twelfth, eighteenth, etc. Contract
anniversaries). The death benefit equal to the accumulation value, or
to the sum of the purchase payments made less partial withdrawals and
any surrender and partial withdrawal transaction charges taken,
constitutes the basic death benefit. The death benefit in excess of the
foregoing basic death benefit, including purchase payments accumulated
at 7% interest as described above, and the step-up benefits as
described above, constitutes the enhanced death benefit.
10. In addition to mortality risks, Security Life will assume an
expense risk under the Contracts. This risk arises because the
administrative charges under outstanding Contracts, which cannot be
raised, may be insufficient to cover actual administrative expenses.
11. As compensation for assuming these mortality and expense risks,
Security Life proposes to assess against the Account a daily charge at
an annual aggregate rate of 1.55%. Approximately 1.20% of this annual
charge is allocated to the mortality risks that Security Life will
assume, and 0.35% is allocated to the expense risks that Security Life
will assume. Of the 1.20% charge allocated to the mortality risk, 0.90%
is for the cost of the basic death benefit and the other mortality
risks assumed by Security Life under the Contracts, and 0.30% is for
the cost of the enhanced death benefit. Security Life will assess the
charge for mortality and expense risks during the accumulation period
and annuity period, except that Security Life will not assess the 0.30%
charge for the enhanced death benefit during the annuity period.
Security Life guarantees that it will not raise the charge for the
duration of the Contracts.
12. If the administrative charges and the mortality and expense
risk charge are insufficient to cover the expenses and costs assumed,
the loss will be borne by Security Life. Conversely, if the amount
deducted proves more than sufficient, the excess will be profit to
Security Life. Security Life represents that it likely will earn a
profit from the mortality and expense risk charge. To the extent that
the surrender charge is insufficient to cover the actual costs of
distribution, the expenses will be paid from Security Life's general
account assets, which will include profit, if any, derived from the
mortality and expenses risk charge.
13. Applicants request that the order also permit the deduction of
the mortality and expense risk charge from the assets of any other
separate account established by Security Life in the future to support
deferred variable annuity contracts, which contracts are offered on a
basis that is similar in all material respects to the basis on which
the Contracts are offered.
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the Act
granting exemptions from sections 26(a)(2)(C) and 27(c)(2) of the Act
to the extent necessary to permit the deduction of the mortality and
expense risk charge. Applicants submit that their request for an order
that applies to the Account and to future separate accounts issuing
contracts that are substantially similar to the Contracts is
appropriate in the public interest. Such an order would promote
competitiveness in the variable annuity contract market by eliminating
the need for Security Life to file redundant exemptive applications,
thereby reducing its administrative expenses and maximizing the
efficient use of its resources. The delay and expense involved in
having to repeatedly seek exemptive relief would impair Security Life's
ability to effectively take advantage of business opportunities as they
arise. Applicants further submit that the requested relief is
consistent with the purposes of the Act and the protection of investors
for the same reasons. If Security Life were required to repeatedly seek
exemptive relief with respect to the same issues addressed in this
Application, investors would not receive any benefit or additional
protection thereby. Thus, Applicants believe that the requested
exemptions 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 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) prohibit a registered unit
investment trust and any depositor or underwriter thereof from selling
periodic payment plan certificates unless the proceeds of all payments
are deposited with a trustee or custodian having the qualifications
prescribed by section 26(a)(1) of the Act and are held under an
agreement that provides that no payment to the depositor or principal
underwriter shall be allowed except as a fee, not exceeding such
reasonable amount as the Commission may prescribe, for bookkeeping and
other administrative services. Applicants' proposed mortality and
expense risk charge would not be considered a bookkeeping and
administrative expense.
3. Applicants have concluded that the mortality and expense risk
charge of 1.25% (which includes the basic mortality risk charge of
0.90% and the expense risk charge of 0.35%), or 1.55% (which includes
the foregoing charge of 1.25% and the enhanced mortality risk charge of
0.30%), is reasonable in relation to the risks assumed by Security Life
under the Contracts and reasonable in amount as determined by industry
practice with respect to comparable annuity products. Applicants state
that these determinations are based on their analysis of publicly
available information about similar industry practices, taking into
consideration such factors as current charge levels and benefits
provided, the existence of expense charge guarantees, and guaranteed
annuity rates. Security Life undertakes to maintain at its home office,
and make available to the Commission or its staff upon request, a
memorandum setting forth in detail the methodology used in making the
foregoing determinations.
4. Applicants assert that the mortality risk charge of 0.30% for
the enhanced death benefit is reasonable in relation to the risks
assumed by Security Life under the Contracts. In arriving at this
determination, Security Life conducted a large number of trials at
different issue ages to determine the expected cost of the enhanced
death benefit. First, hypothetical asset returns were projected using
generally accepted actuarial simulation methods. For each asset return
pattern generated, hypothetical accumulated values were calculated by
applying the projected asset returns to the initial value in a
hypothetical account. Each accumulated value so calculated was then
compared to the amount of the enhanced death benefit payable in the
event of the hypothetical Owner's death during the year in question. By
analyzing the results of a statistically valid number of such
simulations, Security Life was able to determine actuarially the level
cost of providing the enhanced death benefit. Based on this analysis,
Security Life determined that the mortality risk charge of 0.30% was a
reasonable charge for providing the enhanced death benefit. Security
Life undertakes to maintain at its home office a memorandum, available
to the Commission and its staff upon request, setting forth in detail
the methodology used in determining that the risk charge of 0.30% for
the enhanced death benefit is reasonable in relation to the risks
assumed by Security Life under the Contracts.
5. The surrender charge may be insufficient to cover all costs
relating to the distribution of the Contracts. In that event, 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 surrender charge. Notwithstanding the foregoing,
Security Life has concluded that there is a reasonable likelihood that
the proposed distribution financing arrangements will benefit the
Account and its Owners. Security Life undertakes to maintain at its
home office, and make available upon request to the Commission and its
staff, a memorandum setting out the basis for such conclusion.
6. Security Life also represents that the Account will invest only
in an underlying mutual fund which undertakes, in the event it should
adopt any plan under Rule 12b-1 to finance distribution expenses, to
have such plan formulated and approved by a board of directors, a
majority of the members of which are not ``interested persons'' of such
fund within the meaning of Section 2(a)(19) of the Act.
Applicants' Conclusion
Applicants submit that, for all of the reasons stated herein, the
requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the Act
meet the standards set out in Section 6(c) of the Act. Applicants
assert that the exemptions requested are 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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1544 Filed 1-21-94; 10:00 am]
BILLING CODE 8010-01-M