[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: 94-7911]


[[Page Unknown]]

[Federal Register: April 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20170; 812-8776]

 

Providentmutual Life and Annuity Company of America

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

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

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APPLICANTS: Providentmutual Life and Annuity Company of America 
(``PLACA''), Providentmutual Variable Annuity Separate Account A (the 
``PLACA Account''), Provident Mutual Life Insurance Company of 
Philadelphia (``PMLIC''), Provident Mutual Variable Annuity Separate 
Account A (the ``PMLIC Account''), and PML Securities Company (``PML 
Securities''), collectively, the ``Applicants.''
RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
1940 Act for exemptions for sections 26(a)(2) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
assessment of a mortality and expense risk charge from the assets of: 
The PLACA Account, which serves as a funding medium for certain 
variable annuity contracts issued by PLACA; the PMLIC Account, which 
serves as a funding medium for certain variable annuity contracts 
issued by PMLIC; and other separate accounts established in the future 
by PLACA or PMLIC, which will serve as funding media for variable 
annuity contracts substantially identical to those funded through the 
PLACA and PMLIC Accounts. (All such variable annuity contracts issued 
by PLACA and by PMLIC shall be referred to collectively as the 
``Contracts.'')

FILING DATE: The application was filed on January 13, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC 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 should be accompanied by proof of service on Applicants in the form 
of an affidavit or, for lawyers, by certificate. Hearing requests 
should state the nature of the interest, the reason for the request, 
and the issues contested. Persons may request notification of a hearing 
by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, c/o Linda E. Senker, Esq., Providentmutual Life and Annuity 
Company of America, 1600 Market Street, Philadelphia, PA 19103.

FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Michael V. Wible, Special Counsel, 
Office of Insurance Products, Division of Investment Management, at 
(202) 272-2060.

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. PMLIC is a mutual life insurance company chartered under 
Pennsylvania law and authorized to transact life and annuity business 
in all states and the District of Columbia. PLACA, a stock life 
insurance company chartered under Delaware law and authorized to 
transact life insurance and annuity business in the District of 
Columbia and all states other than New York and Maine, is a wholly-
owned subsidiary of PMLIC.
    2. PML Securities, a wholly-owned indirect subsidiary of PMLIC, is 
registered with the Commission under the Securities Exchange Act of 
1934 as a broker-dealer, and is a member of the National Association of 
Securities Dealers, Inc. PML Securities will serve as the distributor 
and principal underwriter for the Contracts.
    3. The PLACA Account was established by PLACA as a separate 
investment account under Delaware insurance law on January 6, 1994, as 
a funding medium for variable annuity contracts. The PMLIC Account was 
established by PMLIC as a separate investment account under 
Pennsylvania insurance law on January 4, 1994, as a funding vehicle for 
variable annuity contracts. Initially, the PLACA and PMLIC Accounts 
each will consist of five subaccounts: Equity, Small Cap, Managed, 
Bond, and Money Market (collectively, the ``Subaccounts,'' 
individually, the ``Subaccount''). The PLACA Account and the PMLIC 
Account each will be registered under the 1940 Act as a unit investment 
trust.
    4. Each Subaccount will invest exclusively in the shares of a 
designated investment portfolio of the Quest for Value Accumulation 
Trust (the ``Fund''). In the future, PMLIC and PLACA may establish 
other subaccounts which will invest in specified portfolios of the Fund 
or other investment funds.
    5. The Contracts may be purchased on a non-tax qualified basis 
(``Nonqualified Contracts'') or they may be purchased and used in 
connection with qualified retirement plans or as individual retirement 
annuities that quality for favorable federal income tax treatment 
(``Qualified Contracts''). The Contracts require a minimum initial 
premium payment of at least $2,000. Subsequent premium payments must be 
a least $100 for Nonqualified Contracts, and $50 for Qualified 
Contracts. The Contract owner may allocate premium payments to one or 
more Subaccounts, each of which will invest in a corresponding 
portfolio of the Fund. Premium payments will be credited with the 
investment experience of the appropriate Subaccount(s). The Contract 
owner also may allocate premium payments to the PLACA guaranteed 
account or the PMLIC guaranteed account, depending upon which company 
issues the Contract, and such payments will be credited with interest 
as provided for in the Contracts. (The guaranteed accounts of PLACA and 
PMLIC are part of those companies' respective general accounts.)
    6. Prior to the earlier of the maturity date or the death of the 
annuitant, a Contract owner may transfer Contract account values 
between the Subaccounts. The Contract owner also may surrender all or 
withdraw a portion of the Contract account value before the earlier of 
the maturity date or the death of the annuitant.
    7. Each of the Contracts provides for a series of annuity payments 
beginning on the maturity date. The Contract owner may select from 
three fixed annuity payment options.
    8. In the event that the Contract owner or--if the Contract owner 
is not the annuitant--the annuitant dies prior to the maturity date, a 
guaranteed death benefit is payable upon receipt of due proof of death 
as well as proof that the Contract owner or the annuitant (as 
appropriate) died prior to the maturity date. On the date the Contract 
is issued, the guaranteed death benefit will equal the amount of the 
initial premium. After the date of issue through the first Contract 
anniversary, the death benefit will equal the greater of:
    (1) The Contract account value on the date of receipt of due proof 
of death; or
    (2) The sum of all the premiums paid through the date of death, 
less withdrawals (including applicable surrender charges).
    During each Contract year after the first Contract anniversary, 
through (and including) the Contract anniversary immediately following 
the Contract owner's or--if the Contract owner is not the annuitant--
the annuitant's 80th birthday, the death benefit will equal the greater 
of:
    (1) The Contract account value on the date of receipt of due proof 
of death; or
    (2) The product of 1.05 and the sum of (A) the guaranteed death 
benefit as of the previous Contract anniversary and (B) any premiums 
paid during the previous Contract year, less any withdrawals (including 
any surrender charges applicable through the sixth Contract 
anniversary).
    After the Contract anniversary immediately following the Contract 
owner's or--if the Contract owner is not the annuitant--the annuitant's 
80th birthday, the death benefit will equal the greater of:
    (1) The Contract account value on the date of receipt of due proof 
of death; or
    (2) The sum of (A) the guaranteed death benefit as of the Contract 
anniversary immediately preceeding the Contract owner's or annuitant's 
(as applicable) 80th birthday and (B) the premiums paid during the 
previous Contract year, less any withdrawals.
    9. Contracts funded through separate accounts established in the 
future by PLACA and PMLIC may have the following guaranteed death 
benefit: In the event that an annuitant dies prior to the end of the 
sixth Contract year, a death benefit is payable upon receipt of due 
proof of death as well as proof that the annuitant died prior to the 
maturity date. The death benefit is equal to the greater of:
    (1) The Contract account value on the date of receipt of due proof 
of death; or
    (2) The premiums paid, less withdrawals (including applicable 
surrender charges).
    In the event that the annuitant dies after the end of the sixth 
Contract year, but before the maturity date, the death benefit is the 
greatest of:
    (a) The Contract account value as of the end of the sixth Contract 
year, less any subsequent withdrawals;
    (b) The Contract account value on the date of receipt of due proof 
of death; or
    (c) The premiums paid, less withdrawals (including any applicable 
surrender charges).
    10. For Contracts issued by PMLIC to residents of New York state, 
premium taxes may be deducted from any death benefit.
    11. PLACA and PMLIC each will deduct an annual contract maintenance 
fee of $30 from the Contract account value on each Contract anniversary 
prior to and including the maturity date (and upon a full surrender or 
on the maturity date, if other than a Contract anniversary) to 
compensate them for administrative services provided to Contract 
owners. This fee is guaranteed not to increase for the duration of the 
Contract, and is applicable only prior to and on the maturity date.
    12. PLACA and PMLIC each will assess a daily charge equal to an 
effective annual rate of 0.15% of the value of the net assets in the 
PLACA Account and the PMLIC Account, respectively. This charge is 
designed to compensate each company for certain administrative services 
provided to Contract owners, is guaranteed not to increase for the 
duration of the Contract, and is applicable only prior to the maturity 
date.
    13. Applicants represent that these administrative charges will be 
deducted in reliance on Rule 26a-1 under the Act, and will represent 
reimbursement only for administration costs expected to be incurred 
over the life of the Contract. PLACA and PMLIC neither anticipate nor 
intend to make any profit from these administrative charges.
    14. In the future, PLACA and PMLIC each may assess a transfer 
charge under the Contracts. For instance, prior to the maturity date, a 
$25 charge under the Contracts may be assessed for the thirteenth and 
each subsequent transfer request made by the Contract owner during a 
single Contract year. Applicants represent that the transfer charge, if 
assessed, will be deducted in reliance upon Rule 26a-1 of the 1940 Act, 
and that such charge represents reimbursement for administrative costs 
expected to be incurred over the life of the Contract.
    15. A contingent deferred sales charge (``CDSC'') of up to 6% of 
the amount withdrawn is assessed on certain full surrenders or partial 
withdrawals of Contract account value during the first six Contract 
years. The CDSC is designed to cover expenses relating to the sales of 
the Contracts, including commissions to registered representatives and 
other promotional expenses. The aggregate CDSCs are guaranteed never to 
exceed 8.5% of the premium payments. During the first Contract year, 
any amounts surrendered or withdrawn are subject to the CDSC. After the 
first Contract year, the portion of the first and second withdrawals in 
a Contract year equal to 10% or less of the Contract account value as 
of the beginning of the Contract year is not subject to the sales 
charge.
    16. Neither PLACA nor PMLIC anticipates that the CDSCs will 
generate sufficient revenues to pay the cost of distributing the 
Contracts. If these charges are insufficient to cover PLACA's or 
PMLIC's expenses, the deficiency will be met from each company's 
general account assets, which may include amounts derived from the 
charge for mortality and expense risks discussed below.
    17. PLACA will deduct the aggregate premium taxes paid on behalf of 
a particular Contract either:
    (i) From premiums as they are received; or
    (ii) From the Contract proceeds upon (A) a withdrawal from or full 
surrender of a Contract, or (B) application of the proceeds to a 
payment option. Premium taxes currently range up to 3.5%. For Contracts 
issued by PMLIC to Maine residents, an aggregate premium tax of 2% of 
premiums paid will be deducted from Contract proceeds upon (i) a 
withdrawal from or full surrender of a Contract, or
    (ii) Application of the proceeds to a payment option. For Contracts 
issued by PMLIC to New York residents, any premium tax assessed will be 
2% of any amounts surrendered, withdrawn, paid as a death benefit, or 
applied to a payment option.
    18. PLACA and PMLIC each assess a daily charge to compensate it for 
bearing certain mortality and expense risks in connection with the 
Contracts. This charge is equal to an effective annual rate of 1.25% of 
the value of the net assets in the Account, and applies only prior to 
and on the maturity date. Of that amount, approximately 0.70% is 
attributable to mortality risk, and approximately 0.55% is attributable 
to expense risk. PLACA and PMLIC each guarantee that the mortality and 
expense risk charge will never exceed 1.25%. If the mortality and 
expense risk charge is insufficient to cover PLACA's or PMLIC's actual 
costs and assumed risks, the loss will fall on PLACA and PMLIC. 
Conversely, if the charge is more than sufficient to cover costs, any 
excess will be profit to either PLACA or PMLIC. PLACA and PMLIC each 
currently anticipate a profit from the mortality and expense risk 
charge.
    19. The mortality risks borne by PLACA and PMLIC arise from their 
respective contractual obligations to make annuity payments (determined 
in accordance with the annuity tables and other provisions contained in 
the Contract), regardless of how long all annuitants or any individual 
annuitant may live. This undertaking assures that neither an 
annuitant's own longevity, nor an improvement in general life 
expectancy, will adversely affect the monthly annuity payments that the 
payee will receive under the Contract. PLACA and PMLIC each assume the 
risk that its actual administrative costs will exceed the amount 
recovered through the Contract administrative charges.
    20. PLACA and PMLIC each also incur a risk in connection with the 
death benefit guarantee. There is no extra charge for this guarantee.

Applicants' Legal Analysis

    1. Applicants request that the Commission, pursuant to section 6(c) 
of the 1940 Act, grant exemptions from sections 26(a)(2)(C) and 
27(c)(2) thereof to the extent necessary to permit the assessment of a 
daily charge for mortality and expense risks under the Contracts.
    2. Applicants represent that the terms of the class relief 
requested with respect to any future Contracts funded by the PLACA 
Account, by the PMLIC Account, or other separate accounts established 
by PLACA or PMLIC are consistent with the standards enumerated in 
section 6(c) of the 1940 Act. Without the requested relief, PLACA and 
PMLIC each would have to request and obtain exemptive relief for each 
new separate account it establishes to fund any future Contracts. Such 
additional requests for exemptive relief would present no issues under 
the 1940 Act that have not already been addressed in this application.
    3. The Applicants represent that the requested class relief is 
appropriate in the public interest because it would promote 
competitiveness in the variable annuity market by eliminating the need 
for PLACA and PMLIC to file redundant exemptive applications, thereby 
reducing their administrative expenses and maximizing the efficient use 
of their resources. The delay and expense involved in having to seek 
exemptive relief repeatedly would impair each company's ability to 
effectively take advantage of business opportunities that arise.
    4. The Applicants represent that, for the same reasons, the 
requested relief is consistent with the purposes of the 1940 Act and 
the protection of investors. If PLACA and PMLIC each were required to 
seek exemptive relief repeatedly with respect to the same issues 
addressed in this application, investors would not receive any benefit 
or additional protection thereby. Indeed, they might be disadvantaged 
as a result of each company's increased overhead expenses.
    5. Sections 26(a)(2)(C) and 27(c)(2), as herein pertinent, prohibit 
a registered unit investment trust and any depositor thereof or 
underwriter therefor from selling periodic payment plan certificates 
unless the proceeds of all payments (other than sales load) are 
deposited with a qualified bank as trustee or custodian and held under 
arrangements which prohibit any payment to the depositor or principal 
underwriter except a fee, not exceeding such reasonable amounts as the 
SEC may prescribe, for performing bookkeeping and other administrative 
services.
    6. Applicants submit that both PLACA and PMLIC are entitled to 
reasonable compensation for their respective assumption of mortality 
and expense risks. Applicants represent that the 1.25% mortality and 
expense risk charge assessed under the Contracts is consistent with the 
protection of investors because it is a reasonable and proper insurance 
charge. Applicants further submit that the mortality and expense risk 
charge is a reasonable charge to compensate PLACA and PMLIC for the 
risk that annuitants under the Contracts will live longer than has been 
anticipated in setting the annuity rates guaranteed in the Contracts, 
for the risk that the Contract account value will be less than the 
death benefit, and for the risk that administrative expenses will be 
greater than amounts derived from the Contract administrative charges.
    7. PLACA and PMLIC each represent that the charge of 1.25% for 
mortality and expense risks assumed by PLACA and PMLIC is within the 
range of industry practice with respect to comparable variable annuity 
products. This representation is based upon PLACA's and PMLIC'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. PLACA and PMLIC each will maintain at its administrative 
offices, and have 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.
    8. Applicants acknowledge that the proceeds of CDSCs may be 
insufficient to cover all costs relating to the distribution of the 
Contracts. Applicants also acknowledge that if a profit is realized 
from the mortality and expense risk charge, all or a portion of such 
profit may be viewed by the Commission as being offset by distribution 
expenses not reimbursed by the sales charge. PLACA and PMLIC each have 
concluded that there is a reasonable likelihood that the proposed 
distribution financing arrangements will benefit the PLACA and PMLIC 
Accounts and the Contract owners. The basis for such conclusion is set 
forth in a memorandum which will be maintained by PLACA and PMLIC at 
their respective administrative offices and will be available to the 
Commission.
    9. PLACA and PMLIC each represent that the PLACA and PMLIC Accounts 
will invest only in management investment companies which undertake, in 
the event such companies adopt plans to finance distribution expenses 
under Rule 12b-1 under the 1940 Act, 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.

Conclusion

    Applicants assert that, for the reasons set forth above, the 
requested exemptions from section 26(a)(2) and 27(c)(2) of the 1940 Act 
to the extent necessary to permit the deduction of a mortality and 
expense risk charge under the Contracts meet the standards in section 
6(c) of the 1940 Act. Applicants assert that the requested exemptions 
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, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7911 Filed 4-1-94; 8:45 am]
BILLING CODE 8010-01-M