[Federal Register Volume 59, Number 48 (Friday, March 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5676]


[[Page Unknown]]

[Federal Register: March 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20115; No. 812-8718]

 

Northwestern National Life Insurance Company, et al.

March 7, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: Nothwestern National Life Insurance Company 
(``Northwestern''), Northstar/NWNL Variable Account (``Variable 
Account''), and NWNL Northstar Distributors, Inc. (``Northstar 
Distributors'') (collectively, ``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
Investment Company Act of 1940 (``1940 Act'') granting exemptions from 
the provisions of sections 26(a)(2) and 27(c)(2) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction from the assets of the Variable Account of mortality and 
expense risk charges in connection with the offer and sale of certain 
flexible premium individual deferred variable annuity contracts.

FILING DATES: The application was filed on December 13, 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 Commission's Secretary 
and serving the 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 1, 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 Commission's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, Northwestern National Life Insurance Company, 20 Washington 
Avenue South, Minneapolis, Minnesota 55401.

FOR FURTHER INFORMATION CONTACT: Yvonne Hunold, Senior Counsel (202) 
272-2676, or Wendell M. Faria, Deputy Chief, (202) 272-2060, Office of 
Insurance Products (Division of Investment Management).

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the Commission's 
Public Reference Branch.

Applicants' Representations

    1. Northwestern, a wholly-owned subsidiary of The NWNL Companies, 
Inc., a holding company, sells life insurance and annuities, employee 
benefits, and retirement contracts in the District of Columbia and all 
states except New York. As of December 31, 1992, on a consolidated 
basis, Northwestern had $108 billion of life insurance in force and its 
assets exceeded $9 billion.
    2. The Variable Account is a separate account established by 
Northwestern to fund variable annuity contracts, including the 
Northstar/NWNL Annuity (``Northstar Annuity''). A notification of 
registration on Form N-8A to register the Variable Account as a unit 
investment trust under the 1940 Act, and a registration statement on 
Form N-4 under the Securities Act of 1933 to register the Variable 
Account and the flexible premium individual deferred retirement annuity 
contracts (``Northstar/NWNL Annuity''), have been filed with the 
Commission. The Variable Account has a subaccount (``Subaccount'') for 
each investment option offered under the Contracts. Each Subaccount 
will invest solely in a corresponding investment portfolio 
(``Portfolio'') of the Northstar/NWNL Trust (``Northstar Fund''). Other 
funds and portfolios may be made available in the future.
    Variable Account assets are owned by Northwestern but are held 
separately from its other assets. The portion of Variable Account 
assets equal to the reserves and other contract liabilities of the 
Variable Account are not chargeable with liabilities incurred in any 
other business Northwestern may conduct. Income, if any, and gains and 
losses, realized or unrealized, on the Variable Account are credited to 
or charged against the amount allocated to the Variable Account, 
without regard to other income, gains or losses of Northwestern.
    3. Northstar/NWNL Trust has filed with the Commission a 
registration statement on Form N-1A. The Northstar Fund will be a 
diversified, open-end, management investment company with a series of 
Portfolios, as defined in Rule 18f-2 under the 1940 Act. The assets of 
each Portfolio are separate from the assets of other Portfolios. Each 
Portfolio has separate investment objectives and policies and, thus, 
operates as a separate investment fund. Consequently, the investment 
performance of one Portfolio has no effect on the investment 
performance of any other Portfolio. Shares of the various Portfolios of 
the Northstar Fund will be sold to the Variable Account at net asset 
value.
    4. Northstar Distributors will serve as the distributor and 
principal underwriter of the Contracts. Northstar Distributors 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.
    5. The Northstar Annuity will be offered in connection with non-tax 
qualified plans (``Nonqualified Contracts'') or retirement plans that 
qualify for favorable federal income tax treatment (``Qualified 
Contracts''). The Northstar Annunity requires certain minimum initial 
payments. Contractowners may allocate premium payments, and later 
transfer accumulated Contract Value, among and between the different 
Subaccounts or to the Fixed Account prior to the Annunity Commencement 
Date. A Guaranteed Death Benefit will be payable.
    6. Various fees and expenses are deducted from each Contract. An 
annual contract charge of $35 per Contract Year will be deducted pro 
rata from the Fixed Account and each Subaccount in which a Contract is 
invested prior to the Annuity Commencement Date, after which it will be 
deducted in equal installments from each annuity payment. This charge 
is guaranteed not to increase and will compensate Northwestern for 
administrative services provided under the Contracts. A daily 
administration charge, equal to an annual rate of .15%, is deducted 
from the assets of the Variable Account to reimburse Northwestern for 
administrative services it provides with respect to the Variable 
Account. Currently, there are no transfer charges or processing fees 
for partial surrenders. Northwestern, however, reserves the right to 
impose a charge of up to $25 per transfer, and a charge not to exceed 
the lesser of 1% of the partial surrender amount or $25. These 
administrative charges will be deducted in reliance on Rule 26a-1 under 
the 1940 Act. Each charge represents reimbursement only for 
administrative costs expected to be incurred over the life of the 
Contract. Northwestern does not anticipate any profit from any of these 
charges.
    7. A contingent deferred sales charge (``CDSC'') may be assessed 
for partial withdrawals, surrenders, or if the Annuity Commencement 
Date is less than two years from the date a Contract is issued. The 
CDSC applies to each purchase payment for a period of up to six years 
after receipt of that payment, after which the payment may be withdrawn 
without a CDSC. Contract Value in excess of accululated purchase 
payments also may be withdrawn without a CDSC. The CDSC schedule is as 
follows:

------------------------------------------------------------------------
                                                               CDSC as  
                                                              percentage
               Years since payment received                    of each  
                                                               purchase 
                                                               payment  
------------------------------------------------------------------------
0..........................................................            7
1..........................................................            7
2..........................................................            5
3..........................................................            5
4..........................................................            4
5..........................................................            3
6..........................................................            2
7..........................................................           0 
------------------------------------------------------------------------

    After the first Contract Year, up to 10 of total purchase payments 
to which the CDSC would otherwise apply may be withdrawn once each year 
without incurring the CDSC. The CDSC will apply to subsequent 
withdrawals. After the annual free surrender each year, purchase 
payments are considered to be withdrawn on a first-in first-out basis, 
and before earnings thereon. A CDSC is not imposed in event of 
annuitization after the first two Contract years or upon payment of the 
Death Benefit.
    Northwestern does not currently anticipate that the CDSC will 
generate sufficient funds to pay the cost of distributing the 
Contracts. If the CDSC is insufficient to pay the cost of distributing 
the Contracts, the deficiency will be met from Fixed Account assets, 
which may include amounts derived from the mortality and expense risks 
charge discussed below.
    8. An annual charge of 1.25% of the Variable Account's assets will 
be deducted for mortality and expense risks assumed by Northwestern, of 
which approximately .85% is for mortality risks and .40% for expense 
risks. The 1.25% rate is guaranteed not to increase. If the charge is 
insufficient to cover the assumed risks, the loss will be assumed by 
Northwestern. Conversely, the charge may be a source of profit for 
Northwestern which will be added to its surplus. Northwestern currently 
anticipates a profit from this charge. Any profits which may result 
from this charge may be used by Northwestern for, among other things, 
the payment of distribution, sales and other expenses.
    The mortality risk assumed by Northwestern under the Contracts 
arises from its contractual obligation to make periodic annuity 
payments in accordance with annuity tables and other contract 
provisions regardless of how long all Annuitants or any one Annuitant 
may live. Thus, it is assured that neither an Annuitant's longevity nor 
an improvement in life expectancy, generally, will adversely affect 
monthly annuity payments.
    Northwestern also incurs a mortality risk in connection with the 
Guaranteed Death Benefit. Prior to age 85, and during the first seven 
Contract Years, the Death Benefit is the greatest of (a) all purchase 
payments less any withdrawals, or (b) the Contract Value. Prior to age 
85 and after the seventh Contract Year, the Guaranteed Death Benefit is 
the greatest of (a) all purchase payments less any withdrawals, (b) the 
Contract Value, or (c) the Contract Value on the most recent Contract 
Anniversary, plus any purchase payments since that anniversary and 
minus any withdrawals since that anniversary. There is no extra charge 
for this guarantee.
    The expense risk assumed by Northwestern is that its actual 
administrative expenses will exceed the amounts recovered through the 
administration charges.
    9. Northwestern will pay premium taxes, if any, when due and 
reserves the right to deduct the amount of the tax either from purchase 
payments or at a later date. No other charges currently are made 
against the Variable Account for federal, state or local taxes, but 
these charges for taxes, or the economic burden resulting from such 
taxes, may be imposed in the future.
    10. The Fund will pay its investment adviser a fee for managing its 
investments and business affairs. Each portfolio of the Fund is 
responsible for all its operating expenses.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the 1940 Act to the 
extent that the exemption is ``necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 
Act.''
    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 held under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties is normally performed by 
the bank itself.
    3. Applicants request exemptions from sections 26(a)(2) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the assets of the Variable Account of the 1.25% charge 
for the assumption of mortality and expense risks. Applicants represent 
that the charge is consistent with the protection of investors because 
it is a reasonable and proper insurance charge to compensate 
Northwestern for assuming the mortality and expense risks. Northwestern 
represents that the 1.25% per annum mortality and expense risks charge 
is within the range of industry practice for comparable annuity 
products. This representation is based upon an analysis of publicly 
available information about similar industry products, taking into 
consideration such factors as the current charge levels, existence of 
charge level guarantees, and guaranteed annuity rates. Northwestern 
will maintain at its administrative offices, available to the 
Commission, a memorandum setting forth in detail the products analyzed 
in the course of, and the methodology and results of, its comparative 
survey.
    4. The charge for mortality and expense risks may be a source of 
profit which would increase Northwestern's general assets available to 
pay distribution expenses not reimbursed by a sales charge. There is a 
reasonable likelihood that the proposed distribution financing 
arrangements will benefit the Variable Account and the Contractowners. 
The basis for that conclusion will be set forth in a memorandum which 
will be maintained by Northwestern at its administrative offices and 
made available to the Commission upon request.
    5. The Variable Account will only invest in management investment 
companies which undertake, in the event any such company adopts a plan 
under Rule 12b-1 to finance distribution expenses, to have a board of 
directors or trustees, a majority of whom are not interested persons, 
formulate and approve any such plan.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exceptions requested are necessary and 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 Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5676 Filed 3-10-94; 8:45 am]
BILLING CODE 8010-01-M