[Federal Register Volume 59, Number 64 (Monday, April 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7910]


[[Page Unknown]]

[Federal Register: April 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20171; 812-8752]

 

AUSA Life Insurance Company, Inc. et al.

March 28, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or 
``Commission'').

ACTION: Notice of application for exemptions under the Investment 
Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: AUSA Life Insurance Company, Inc. (``AUSA''), Diversified 
Investors Variable Funds (the ``Account''), and Diversified Investors 
Securities Corp. (``DISC'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) for 
exemptions from sections 26(a)(2) and 27(c)(2) of the 1940 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 group variable annuity contracts (the 
``Contracts'').

FILING DATES: The application was filed on January 3, 1994 and amended 
on March 10, 1994.

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 April 22, 
1994, and must be accompanied by proof of service on the Applicants in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests must 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 5th Street, NW., Washington, DC 20549. 
Applicants, 4 Manhattanville Road, Purchase, New York 10577.

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 
SEC's Public Reference Branch.

Applicants' Representations

    1. AUSA is a stock life insurance company that was incorporated 
under New York law, and it is an indirect, wholly-owned subsidiary of 
AEGON USA, Inc. On November 30, 1993, AUSA established the Account as a 
separate account under New York insurance law. Although AUSA is the 
legal holder of the Account's assets, such assets will be segregated 
from AUSA's other assets, and will not be chargeable with liabilities 
arising out of any other business that AUSA may conduct. AUSA will at 
all times maintain assets in the Account with a total market value that 
is at least equal to the reserve and other Contract liabilities of the 
Account. The Account's assets may include accumulations of the charges 
that AUSA assesses against the Contracts participating in the Account. 
The Account consists of ten subaccounts, each of which invests in a 
series of one of the following open-end, diversified management 
investment companies: Diversified Investors Portfolios, the Calvert 
Socially Responsible Series of Acacia Capital Corporation, and the 
Managed International Portfolio of Scudder Variable Life Investment 
Fund.
    2. DISC will be the principal underwriter and distributor of the 
Contracts. DISC is registered as a broker-dealer under the Securities 
Exchange Act of 1934, and is a member of the National Association of 
Securities Dealers, Inc.
    3. The Contracts may be purchased as a funding vehicle for 
retirement plans maintained by state educational organizations and 
certain tax-exempt organizations, IRA programs for employees of taxed 
and tax-exempt organizations and members of associations, Internal 
Revenue Code section 401(a) and 401(k) plans, and corporate non-
qualified deferred compensation plans. During the period prior to the 
annuity purchase date, the Contractholder may allocate purchase 
payments among the Account's ten subaccounts. The Contractholder also 
may surrender all or part of the Contract at any time prior to the 
annuity purchase date subject, however, to restrictions that may be 
imposed by the applicable retirement plan. No surrender charge is 
imposed under the Contract. On the annuity purchase date, subject to 
certain limitations, the Contractholder may apply the accumulation 
value to one of several payment options, including a fixed annuity.
    4. On each Contract anniversary prior to the annuity purchase date, 
AUSA may deduct a contract charge from the Contractholder's 
accumulation account to reimburse AUSA for administrative expenses 
relating to the maintenance of the Contracts. Initially, this charge 
will not be imposed, but any such charge that AUSA does assess would 
not exceed $50. AUSA does not anticipate that it would receive any 
profit from this charge. Deductions may be made from purchase payments 
for premium or similar taxes.
    5. Applicants seek to impose a charge to compensate AUSA for 
bearing certain mortality and expense risks under the Contracts. The 
charge is equal to a maximum effective annual rate of 1.25% of the 
value of the net assets in the Account. Of that amount, approximately 
0.80% is attributable to mortality risks and approximately 0.45% is 
attributable to expense risks. If the mortality and expense risk charge 
is insufficient to cover actual costs and assumed risks, the loss will 
be borne by AUSA. Conversely, if the charge is more than sufficient to 
cover costs, any excess will be profit to AUSA. AUSA does not 
anticipate making a profit from this charge. The mortality risk borne 
by AUSA arises from its obligation to make monthly annuity payments 
regardless of how long all annuitants may live. The expense risk borne 
by AUSA is that the annual contract charge AUSA may impose under the 
Contracts may be insufficient to cover the actual administrative costs 
incurred by AUSA. The cost of distributing the Contracts will be paid 
from AUSA's general account funds, which may include amounts derived 
from the mortality and expense risk charge.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the 1940 Act 
granting exemptions from sections 26(a)(2) and 27(c)(2) of the 1940 Act 
to the extent necessary to permit the deduction of the mortality and 
expense risk charge. Sections 26(a)(2) 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 1940 
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.
    2. Applicants represent that the mortality and expense risk charge 
is a reasonable and proper insurance charge to compensate AUSA for 
assuming the risk that annuitants under the Contracts will live longer 
as a group than has been anticipated in setting the annuity rates 
guaranteed in the Contracts and for the risk that the administrative 
expense will be greater than amounts that may be derived from any 
annual Contract charge imposed.
    3. AUSA represents that the charge of 1.25% for mortality and 
expense risks is within the range of industry practice with respect to 
comparable annuity products. This representation is based upon AUSA's 
analysis of publicly available information about similar industry 
products, taking into consideration such factors as current charge 
levels, the existence of charge level guarantees, and guaranteed 
annuity rates. AUSA 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. Applicants acknowledge that if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be viewed as being offset by distribution expenses not reimbursed by a 
sales charge. AUSA has concluded that there is a reasonable likelihood 
that the proposed distribution financing arrangements will benefit the 
Account and the Contract-holders. The basis for such conclusion is set 
forth in a memorandum which will be maintained by AUSA at its 
administrative offices and will be available to the Commission.
    5. AUSA also represents that the Account will only invest in 
management investment companies which undertake, in the event 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 of the company, formulate and approve any 
such plan under Rule 12b-1.

Applicants' Conclusion

    Applicants submit that, for all of the reasons stated herein, the 
requested exemptions from sections 26(a)(2) and 27(c)(2) of the 1940 
Act meet the standards set out in section 6(c) of the 1940 Act. 
Applicants assert that the requested exemptions 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 1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7910 Filed 4-1-94; 8:45 am]
BILLING CODE 8010-01-M