[Federal Register Volume 59, Number 72 (Thursday, April 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8927]


[[Page Unknown]]

[Federal Register: April 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20202; File No. 812-8246]

 

The Manufacturers Life Insurance Company of America, et al.

April 7, 1994.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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APPLICANTS: The Manufacturers Life Insurance Company of America (the 
``Company''), Separate Account Two of the Manufacturers Life Insurance 
Company of America (the ``Separate Account''), and ManEquity, Inc.

RELEVANT 1940 ACT SECTION: Order requested under section 6(c) of the 
1940 Act for exemptions from sections 26(a)(2)(C) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction from the assets of the Separate Account of the mortality and 
expense risks charge imposed under certain individual flexible payment 
variable annuity contracts (the ``Contracts'').

FILING DATE: The application was filed on January 13, 1993 and amended 
on March 8, 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 Commission's Secretary 
and serving the Applicants with a copy of the request, personally or by 
mail. Hearing requests must be received by the Commission by 5:30 p.m., 
on May 3, 1994, and should be accompanied by proof of service on the 
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 the date of a hearing by writing to the 
Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. The Company and the Separate 
Account, 1600 Market Street, Philadelphia, PA 19103. ManEquity, Inc., 
200 Bloor Street East, Toronto , Ontario M4W 1E5.

FOR FURTHER INFORMATION CONTACT:
Joyce M. Pickholz, Senior Counsel, or Wendell M. Faria, Acting 
Assistant Director, on (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. The Company is a stock life insurance company organized under 
the laws of Pennsylvania in 1977 and redomesticated under the laws of 
Michigan on December 9, 1992. It is an indirect wholly-owned subsidiary 
of The Manufacturers Life Insurance Company, a mutual life insurance 
company based in Toronto, Canada.
    2. The Separate Account is a separate account of the Company 
established under the laws of Pennsylvania for the purpose of funding 
variable annuity policies. Since December 9, 1992, it has operated 
under the laws of Michigan. Assets of the Separate Account will be 
invested in shares of Manulife Series Fund, Inc. ManEquity, Inc. an 
indirect wholly-owned subsidiary of The Manufacturers Life Insurance 
Company, will be the principal underwriter of the variable annuity 
contracts funded through the Separate Account.
    3. The Contracts are individual annuity contracts designed for use 
in connection with plans which are entitled to special tax treatment 
under the Internal Revenue Code of 1986, and under plans or trusts not 
entitled to any special tax treatment. They provide for the 
accumulation of values on a fixed, variable or fixed and variable basis 
and for the payment of annuity benefits on a fixed basis only.
    4. The Contracts provide for the deduction of a record-keeping 
charge equal to 2% of the contract value up to a maximum of $30 per 
year. The charge will be deducted from the guaranteed interest account, 
the fixed account and the Separate Account in the same proportion that 
the value in each bears to the Contract value. The Company will also 
deduct an administrative charge of .20% per year from the value of the 
Contractowner's assets allocated to the Separate Account. The Contracts 
permit one free transfer per month of assets among the sub-accounts of 
the Separate Account and one additional transfer per month subject to a 
$35 charge. There is a $5 charge per transfer or series of transfers 
occurring on any one transfer date under a dollar cost averaging 
program if the Contract value is under $15,000. A $15 charge is 
assessed for each transfer or series of transfers on one date if the 
contractowner chooses to participate in an asset allocation balance 
program. The Company also reserves the right to impose an 
administrative charge not to exceed $150 for a partial withdrawal or 
full surrender under a special policy access provision that allows a 
terminally ill Contractowner to make one such withdrawal or surrender 
without application of any withdrawal charges. The Applicants state 
that they propose to rely on Rules 26a-1 and 6c-8(c) under the 1940 Act 
to permit the imposition of these charges. The Company does not expect 
to recover from any of these charges any amount in excess of its 
accumulated expenses in connection with the administrative activities 
for which the charge is made. The Contracts also provide for the 
deduction of any premium taxes or similar state or local tax 
attributable to a Contract.
    5. No sales charge will be deducted from purchase payments as they 
are made. Instead, a withdrawal charge will be assessed on amounts 
surrendered or withdrawn during a Contract year which exceed 10% of the 
Contract value as of the most recent Contract anniversary. Those 
amounts will be deemed to be purchase payments. The withdrawal charge 
will be based upon when the purchase payments to which such amounts are 
deemed attributable were made. The charge begins at 8% of purchase 
payments withdrawn. When three complete Contract years have elapsed 
since a purchase payment was made, the charge is reduced to 6% of that 
purchase payment and it declines 2% per year thereafter. The oldest 
previously unliquidated purchase payment will be deemed to have been 
liquidated first, then the next oldest and so forth. In no event will 
the sum of the withdrawal charges exceed 8% of the total purchase 
payments made.
    6. The Company proposes to deduct a mortality and expense risks 
charge (1) daily, from the assets of the Separate Account, at an annual 
rate of .80% and (2) monthly, from the Contract value in the Separate 
Account and the Fixed Account at an annual rate of .45%. The Company 
estimates that approximately .85% of each charge is attributable to the 
mortality risks assumed by the Company in connection with the Contracts 
and .40% is attributable to the expense risks. According to the 
Applicants, the mortality risks assumed are the risks that (i) 
annuitants may live for longer periods of time than the periods 
indicated in the mortality tables on which the Company calculated the 
annuity tables in the Contracts, (ii) mortality will cause a Contract 
to terminate prematurely before the assumed annuitization date and 
(iii) the risk that mortality will cause the Company to incur higher 
costs than anticipated for certain benefits payable on the death of the 
Contractowner. The expense risks assumed are that expenses in 
administering the Contracts will be greater than the Company estimated.
    7. The Company is aware that deducting a portion of the mortality 
and expense risks charge monthly instead of daily is slightly different 
from typical industry practice. To assure that the less frequent 
deduction of the 0.45% portion of the mortality and expense risks 
charge does not result in that charge being effectively larger for 
Contractowners than a solely daily charge at an annual rate of 1.25%, 
the 0.45% charge will be administered as a 0.449928% charge. As a 
result, the overall effective rate would be 1.24225%, as compared to an 
effective rate of 1.24226% if the charge were deducted as a daily 
charge at an annual rate of 1.25%.
    8. Applicants submit that if the mortality and expense risks charge 
is insufficient to cover the actual cost of the mortality and expense 
risks assumed, the Company will bear the loss. Conversely, if the 
charge proves more than sufficient, the excess will be profit to the 
Company and will be available for any proper corporate purpose 
including, among other things, payment of distribution expenses.

Applicants' Legal Analysis and Conditions

    1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act requires that 
all payments received under a periodic payment plan certificate be held 
by a qualified trustee or a custodian and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except 
for the payment of a fee, not exceeding such reasonable amount as the 
Commission may prescribe, for bookkeeping and other administrative 
services.
    2. Applicants submit that the Company is entitled to reasonable 
compensation for its assumption of mortality and expense risks, and 
Applicants represent that the aggregate of (i) the daily charge of .80% 
per annum and (ii) the monthly charge of .45% per annum is within the 
range of industry practice for comparable annuity products. Applicants 
state that this representation is based upon an analysis made by the 
Company of publicly available information about selected similar 
industry products, taking into consideration such factors as the right 
to increase charges above current levels, the existence of other 
charges, the number of transfers permitted without charge and the 
nature of the free withdrawal provisions. Applicants represent that the 
Company will maintain at its service office, available to the 
Commission, a memorandum setting forth in detail the products analyzed 
in the course of, and the methodology and results of, the comparative 
survey made.
    3. Applicants submit that for it to be administratively possible 
for the Contracts to be issued by the Separate Account (as opposed to a 
new separate account), the accumulation unit values calculated on a 
daily basis must equal the accumulated unit values calculated for 
existing variable annuity contracts issued by the Separate Account. 
That can only be accomplished by deducting a portion of the Contract's 
mortality and expense risks charge at the Contract level. By splitting 
the charge into two components, the Company can avoid the cost of 
establishing, administering and auditing a new separate account. Such 
costs would otherwise have to be passed on to Contractowners in some 
form.
    4. Applicants acknowledge that the withdrawal charge under the 
Contracts is expected to be insufficient to cover all costs relating to 
the distribution of the Contracts and that if a profit is realized from 
the mortality and expense risks charge, all or a portion of such profit 
may be offset by distribution expenses not reimbursed by the withdrawal 
charge. In such circumstances a portion of the mortality and expense 
risks charge might be viewed as providing for a portion of the costs 
relating to distribution on the Contracts. Notwithstanding the 
foregoing, the Company has concluded that there is a reasonable 
likelihood that the proposed distribution financing arrangements made 
with respect to the Contracts will benefit the Separate Account and the 
Contractowners. The basis for such conclusion is set forth in a 
memorandum which will be maintained by the Company at its service 
office and will be available to the Commission.
    5. The Company represents that the Separate Account will invest 
only in an underlying mutual fund which undertakes, in the event it 
should adopt any plan under Rule 12b-1 under the 1940 Act to finance 
distribution expenses, to have such plan formulated and approved by the 
particular company's 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 1940 Act.
    6. Applicants agree to the following conditions if the order is 
granted: (1) The fee table examples in the prospectus for the Contracts 
will reflect all applicable charges in a manner that will permit 
comparison with other contracts on the same basis as if the daily and 
monthly portions of the mortality and expense risks charge were 
combined; (2) all advertisements of the performance of the sub-accounts 
of the Separate Account will reflect the impact of both elements of the 
mortality and expense charge; (3) if the size of this charge is 
discussed in advertising, it will be presented as a 1.25% charge, with 
part deducted daily and part monthly; and (4) changes in accumulation 
unit values will not be advertised.

Conclusion

    Applicants submit that for the reasons and upon the facts set forth 
above, their request for exemptions from sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8927 Filed 4-13-94; 8:45 am]
BILLING CODE 8010-01-M