[Federal Register Volume 59, Number 88 (Monday, May 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11034]
[[Page Unknown]]
[Federal Register: May 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20266; File No. 812-8858]
John Hancock Mutual Variable Life Insurance Account UV, et al.
May 2, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: John Hancock Mutual Variable Life Insurance Account UV
(``Variable Account UV''), John Hancock Variable Life Account V
(``Variable Account V''), John Hancock Mutual Life Insurance Company
(``John Hancock''), and John Hancock Variable Life Insurance Company
(``JHVLICO''). (Variable Account UV and Variable Account V shall be
referred to collectively as the ``Variable Accounts''; the Variable
Accounts, John Hancock, and JHVLICO shall be referred to collectively
as the ``Applicants.'')
RELEVANT 1940 ACT SECTIONS AND RULES: Order requested under Section
6(c) of the 1940 Act for exemptions from the following: those
provisions of the 1940 Act and those rules specified in paragraph (b)
of Rule 6e-2 thereunder, other than sections 7 and 8(a); sections
2(a)(32), 2(a)(35), 22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(a)(3),
27(c)(1), 27(c)(2), 27(d) and 27(f) of the 1940 Act; and Rules 6e-
2(b)(1), (b)(12), (b)(13)(i), (b)(13)(ii), (b)(13)(iii), (b)(13(iv),
(b)(13)(v), (b)(13)(viii), (c)(1) and (c)(4), 22c-1, and 27f-1
thereunder.
SUMMARY OF APPLICATION: Applicants seek an order permitting them to
offer and sell certain multi-option variable life insurance policies
(individually, the ``Policy,'' collectively, the ``Policies'') that
provide for the following: A death benefit which will not always vary
based on investment performance; both a contingent deferred sales
charge and a sales charge deducted from premiums, neither of which is
subject to refunds; deduction of an administrative surrender charge on
lapse or surrender; deduction from the Policy's account value of cost
of insurance charges, charges for substandard mortality risks and
incidental insurance benefits, and minimum death benefit guarantee risk
charges; values and charges based on the 1980 Commissioners' Standard
Ordinary Mortality Tables (the ``1980 CSO Tables''); elimination of, or
reduction in, front-end sales charges in certain cases; the holding of
mutual fund shares funding the Variable Accounts in an open account
arrangement, without a trust indenture and the use of a trustee; and a
``free look'' right which may provide for the return of amounts other
than total premiums paid upon cancellation of a Policy.
FILING DATE: February 25, 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 the Secretary of the
Commission, and serving 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 May 27, 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 Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, John Hancock Place, Boston, MA 02117.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Wendell M. Faria, Deputy Chief, Office
of Insurance Products, Division of Investment Management, at (202) 942-
0670.
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. An application very similar to this one was filed by Variable
Account V, JHVLICO, and John Hancock on August 18, 1987 (File No. 812-
6835). An order was granted by the Commission on December 29, 1987.\1\
A second, very similar application was filed by Variable Account UV and
John Hancock on June 3, 1993 (File No. 812-8426). An order was granted
by the Commission on September 29, 1993.\2\ Applicants are filing this
new application because John Hancock and JHVLICO are proposing to issue
a new form of Policy which contains changes in certain features of the
policies described in those 1987 and 1993 applications. The changes
relate principally to the forms of death benefit which may be elected
by the Policy owner, the minimum premium requirements, the pricing of
the Policy, and the elimination of certain Policy provisions relating
to the use of any ``excess value''\3\ available under the Policy. In
most other respects, the Policies retain the essential nature of the
policies that were the subject of the 1987 and 1993 applications.
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\1\The original application was amended on November 12, 1987.
The notice of the filing of the application was issued on November
30, 1987 (Investment Company Act Release No. 16152); an order was
granted on December 29, 1987 (Investment Company Act Release No.
16197).
\2\Investment Company Act Release No. 19746 (Sept. 29, 1993).
\3\``Excess value'' may result from favorable investment
performance, the insurers' deduction of Policy charges at less than
the maximum guaranteed rates, or the payment of premiums in excess
of the required premiums.
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2. John Hancock is a mutual life insurance company chartered under
the laws of Massachusetts in 1862. JHVLICO, a subsidiary of John
Hancock, is a stock life insurance company organized under the laws of
Massachusetts in 1979. (John Hancock and JHVLICO are sometimes referred
to herein as the ``insurers.'')
3. The Board of Directors of John Hancock established Variable
Account UV on May 10, 1993, pursuant to Massachusetts law. Each
Variable Account is registered under the 1940 Act as a unit investment
trust type of investment company. Variable Account UV and Variable
Account V are separate investment accounts of John Hancock and JHVLICO,
respectively, to which assets will be allocated from time to time to
support benefits payable under each insurer's variable life insurance
policies, including the Policies.
4. Variable Account UV and Variable Account V each consists of
seven subaccounts (the ``Subaccounts''), each of which will invest its
assets in a different portfolio of John Hancock Variable Series Trust I
(the ``Fund''). Subaccounts may be added or deleted from time to time.
5. The Policy incorporates certain fundamental features
characteristic of scheduled premium variable life insurance policies
contemplated by Rule 6e-2, including a guarantee against lapse if
specified required premiums are paid by their due dates.\4\ In
addition, Policy owners will have the options of:
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\4\The required premiums are level until the insured reaches age
70. At that time, a ``premium recalculation'' is performed, if the
Policy owner has not previously elected to have the premium
recalculated. The premium recalculation may result in lower or
higher subsequent required premiums.
In addition to the ``base policy premium'' under a Policy (i.e.,
an amount determined at Policy issuance based on the age, gender,
and smoking status of the insured,) the required premium for each
Policy year includes an additional amount if the insured is in a
substandard risk category or if optional fixed insurance benefits
have been added to the Policy by rider. Part of this additional
premium will be collected by the insurers out of any premium
payments which are paid during the year. The remaining additional
premium will be deducted from cash value in equal monthly
installments during the year.
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(i) Making premium payments in excess of the required premiums, or
(ii) Omitting required premium payments due at any time when there
is any excess value under the Policy.
6. The insurers will deduct a premium expense charge of 8.6% of
each premium paid. This deduction is for sales expenses (5%) and state
premium taxes (2.35%), and a federal deferred acquisition cost tax
charge (1.25%).\5\
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\5\The deferred acquisition cost component of the premium
expense charge will be deducted by Applicants in conformity with,
and reliance upon, previously obtained exemptive relief. Investment
Company Act Rel. No. 19868 (Nov. 24, 1993), 55 SEC Docket 1446 (Dec.
7, 1993) (File No. 812-8446).
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7. The insurers will waive a portion of the sales charge deducted
from each premium paid on a Policy with a guaranteed death benefit of
$250,000 or higher. The continuation of this waiver, however, is not
contractually guaranteed, and the waiver may be withdrawn or modified
by the insurers at any time. Moreover, because the initial guaranteed
death benefit may be reduced after issue, it is possible that the
waiver could apply at some times with respect to a given Policy and not
at a subsequent time with respect to the same Policy. The deduction
from premiums for sales expenses during any Policy year is limited to
5% of premiums paid in that year that do not exceed one year's required
premium.
8. The insurers also will deduct a contingent deferred sales charge
(``CDSC'') upon surrender or lapse of a Policy during the first
thirteen Policy years. The CDSC is a percentage of the lesser of (a)
the total amount of premiums paid before the date of surrender or lapse
or (b) the sum of the base policy premiums due on or before the date of
surrender or lapse. Excess value may be withdrawn from the Policy
without imposition of any CDSCs.
9. The maximum CDSC is an amount equal to 15% of the base policy
premium for the first through sixth Policy years. The greatest CDSC
will be applied to Policies that are surrendered or lapse at the end of
Policy years six or seven. In the seventh through thirteenth Policy
years, the CDSC decreases each Policy year until it is zero in and
after the fourteenth Policy year.
10. A portion of the CDSC will be charged on a partial surrender of
the guaranteed death benefit during the first thirteen Policy years.
11. The total dollar amount of sales load under a Policy is no
higher than that permitted by Rule 6e-2(b)(13) for a conventional
scheduled premium variable life insurance policy, and a Policy owner
who surrenders his or her Policy or whose Policy lapses prior to the
fourteenth policy year pays no more dollars in sales load than could be
charged if the load were deducted entirely from premiums.
12. An issue charge will be deducted from account value on monthly
anniversaries in twelve equal installments of $20 per Policy in the
first Policy year. This charge is to help cover expenses incurred in
connection with the issuance of the Policy, other than sales expenses.
Such expenses include medical examinations, insurance underwriting
costs, and costs incurred in processing applications and establishing
permanent Policy records. This charge is not designed to yield a profit
to Applicants.
13. An administrative surrender charge may be deducted if the
Policy is surrendered or lapses in the first nine Policy years. This
charge is to compensate partially for estimated administrative expenses
such as the cost of collecting and processing premiums, processing
applications, conducting medical examinations, establishing Policy
records, determining insurability and assigning the insured to a risk
classification, and issuing the Policy. These expenses exclude any
costs properly attributable to sales or distribution activity.
14. The maximum administrative surrender charge is $5 per $1000 of
the Policy's guaranteed death benefit if the lapse or surrender is in
the first six Policy years, $4 per $1000 of its guaranteed death
benefit if the lapse or surrender is in the seventh or eighth Policy
years, and $3 per $1000 of guaranteed death benefit if the lapse or
surrender is in the ninth Policy year. For insureds age 24 or younger
at time of issue of a Policy, the charge will never exceed $200 and
will be charged only in the first four Policy years.
15. Currently, the insurers do not intend to assess an
administrative surrender charge with respect to a Policy of $250,000 or
more of guaranteed death benefit at the time of surrender or lapse. Nor
do the insurers currently intend to assess such a charge if a Policy of
less than $250,000 of guaranteed death benefit is surrendered or lapsed
after the fourth Policy year. The insurers currently intend to charge
no more than $300 for a surrender or lapse in the first four Policy
years of a Policy of less than $250,000 of guaranteed death benefit.
These lower current charges may be withdrawn or modified by the insurer
at any time.
16. A maintenance charge will be deducted from account value on
each monthly anniversary at a rate of $6 (which monthly rate may not be
raised to more than $8) per Policy. This charge is to help cover the
ongoing costs of administering a Policy, and is not designed to yield a
profit to Applicants.
17. Twenty-five dollars ($25) will be deducted from account value
upon each withdrawal of excess value. This charge will be designed only
to defray the estimated costs of effecting excess value withdrawals.
18. Each insurer will assess a daily mortality and expense risk
charge at an effective rate of 0.6% per annum of the Variable Account
assets attributable to the Policy. This charge is for the risk that
insureds may live for shorter periods of time than estimated, and that
costs of issuing and administering the Policies may be higher than
estimated.
19. Each insurer will deduct cost of insurance charges from account
value on each monthly anniversary of a Policy at rates that do not
exceed those prescribed in the 1980 CSO Tables. Generally, the actual
rates initially charged will be lower than the maximum guaranteed
rates, and insureds in a non-smoker or preferred category will have
more favorable cost of insurance rates than insureds in the standard
risk classification.
20. The insurers also will charge lower current cost of insurance
rates under a Policy with a current guaranteed death benefit of
$250,000 or more. These lower cost of insurance rates are not
contractually guaranteed, and may be changed or withdrawn by the
insurers at any time.
21. The insurers reserve the right to make charges for federal,
state, and local taxes. Fund investment advisory expenses and certain
other operating expenses of the Fund are indirectly borne by Policy
owners.
22. The insurers impose two death benefit guarantee risk charges:
(i) A monthly charge of up to $0.03 (currently $0.01) per $1,000 of
guaranteed death benefit; and
(ii) Up to 3% (currently 1.5%) of the amount applied on a premium
recalculation, where the new level premium is less than what it would
have been had the Policy originally been issued without the premium
recalculation feature. These charges compensate the insurers for the
risk that they assume in guaranteeing death benefits under the
Policies, including the risk that the account value will not be
sufficient to support the guarantees.
23. Under the laws of some states, the insurers may now or in the
future be required to credit investment losses and gains during the
``free look'' period to Policy owners who exercise their ``free look''
right. In such cases, and under the terms of the Policy, the insurers
will refund the sum of the account value as of the date the insurers
receive the returned Policy, plus the sum of all charges deducted from
premium payments and all other charges imposed on amounts allocated to
the Variable Accounts.
Applicants' Legal Analysis and Conclusions
Applicants request exemptions pursuant to section 6(c) of the 1940
Act from: Those provisions of the 1940 Act and those rules specified in
paragraph (b) of Rule 6e-2 thereunder, other than sections 7 and 8(a);
sections 2(a)(32), 2(a)(35), 22(c), 26(a)(1), 26(a)(2), 27(a)(1),
27(a)(3), 27(c)(1), 27(c)(2), 27(d) and 27(f) of the 1940 Act; and
Rules 6e-2(b)(1), (b)(12), (b)(13)(i), (b)(13)(ii), (b)(13)(iii),
(b)(13)(iv), (b)(13)(v), (b)(13)(viii), (c)(1) and (c)(4), 22c-1, and
27f-1 thereunder. Applicants seek these exemptions to the extent
necessary to permit them to offer and sell the Policies.
A. Request for Exemptions Relating To Definition of ``Variable Life
Insurance Contract''
1. Rule 6c-3 grants exemptions from numerous provisions of the 1940
Act to separate accounts of life insurance companies that support
variable life insurance policies. The exemptions provided by Rule 6c-3
are available only to registered separate accounts whose assets are
derived solely from the sale of ``variable life insurance contracts''
that meet the definition set forth in Rule 6e-2(c)(1) or ``flexible
premium variable life insurance contracts'' that meet the definition
set forth in Rule 6e-3(T)(c)(1) under the 1940 Act, and from certain
advances made by the insurer.
2. A ``variable life insurance contract'' is defined in Rule 6e-
2(c)(1) to include only life insurance policies that provide both a
death benefit and a cash surrender value which vary to reflect the
investment experience of the separate account, and that guarantee that
the death benefit will not be less than an amount stated in the policy.
The required guaranteed minimum death benefit need be provided only so
long as premiums are duly paid in accordance with the terms of the
policy.
3. At the time of application for a Policy, the owner may select
from three death benefit options. One of the options is a variable
death benefit which generally is equal to the sum of the guaranteed
death benefit and any excess value. The remaining two options provide a
level death benefit which generally is equal to the guaranteed death
benefit.
4. The variable death benefit under the Policy will vary based upon
investment performance to the extent that favorable investment
performance creates excess value that is applied to increase the
guaranteed death benefit. The death benefit under any Policy will vary
with investment performance when the account value is sufficiently
large that, in order to qualify the Policy as life insurance for
federal income tax purposes, the death benefit must be increased. This
could happen, for example, because of very favorable investment
performance, the payment of excess premiums, or both. Indeed, in
anticipation of such variations, the Policy owner, by choosing among
the available death benefit options, determines whether the ``guideline
premium and cash value corridor test'' or the ``cash value accumulation
test'' (as defined in each case in section 7702 of the Internal Revenue
Code) will be used for this purpose.
5. Applicants submit that the death benefit under the Policy varies
to reflect investment experience within the meaning of Rule 6e-2(c)(1).
Applicants concede, however, that the death benefit under the Policy is
not precisely the type of variable death benefit contemplated when Rule
6e-2 was adopted, and that the Policy contains other provisions that
are not specifically addressed in Rule 6e-2. Accordingly, Applicants
request exemptions from the definition of ``variable life insurance
contract'' in Rule 6e-2(c)(1) and from all sections of the 1940 Act and
rules thereunder specified in Rule 6e-2(b) (other than sections 7 and
8(a)), under the same terms and conditions applicable to a separate
account that satisfies the conditions set froth in Rule 6e-2(a), and to
the extent necessary to permit the offer and sale of the Policy in
reliance on Rule 6e-2, except as otherwise set forth herein.
6. Applicants submit that the definition of ``variable life
insurance contract'' in Rule 6e-2(c)(1) was drafted at a time when all
the variable life insurance policies then contemplated clearly met this
definition, and that the considerations that led the Commission to
grant the exemptions in Rule 6e-2 did not depend in any material way
upon the fact that the death benefit, as well as cash values, varied
with investment experience. Nor did such consideration depend on
whether a scheduled premium policy also provided for substantial
premium payment flexibility and other features so long as the scheduled
premiums, if paid when due, provided for a minimum death benefit
guaranteed to at least equal the initial face amount.
7. Applicants submit that, under the types of variable life
insurance policies that have been issued in reliance on Rule 6e-2, the
extent to which favorable investment experience is used to increase
death benefits rather than cash values differs considerably among the
policies offered by different issuers. Applicants further submit that,
under all policy designs, the degree to which investment performance
changes the death benefit necessarily has an impact on cash values
under the policy.
8. Applicants assert that, generally speaking, higher death
benefits require higher cost of insurance deductions, which in turn
result in lower cash values. Applicants submit that it is desirable for
purchasers to be free to choose a benefit structure which they believe
suits their own needs with respect to the relationship of cash value,
death benefit and investment performance. Applicants represent that
Policy owners can do this within the framework of the Policy by, for
example, deciding which of the three available death benefit options to
select.
9. Applicants further submit that the considerations that led the
Commission to adopt Rules 6c-3 and 6e-2 apply equally to each Variable
Account and the Policy, and that the exemptions provided by these rules
should be granted to Applicants on the terms specified in those rules,
except to the extent that further exemption from those terms is
specifically requested herein.
10. Applicants note that proposed amendments to Rule 6e-2 would
amend Rule 6e-2(c)(1) to require only that the death benefit may vary
based on investment performance.
B. Request for Exemptions Relating to Sales Charges
1. Sections 26(a)(2) and 27(c)(2) may be construed to require that
proceeds of all payments under a Policy be deposited in the appropriate
Variable Account and that no payment be made from the Variable Account
to either insurer or any affiliated person of either insurer, except
for bookkeeping and other administrative services. Each insurer's
imposition of a CDSC may be deemed inconsistent with the foregoing
provisions, to the extent that the deduction would constitute payment
for an expense not specifically permitted. Applicants request
exemptions from sections 26(a)(2)(C) and 27(c)(2) to the extent
necessary to permit the CDSC to be deducted, as described herein, upon
surrender (full or partial) or lapse of a Policy.
2. Section 2(a)(35) and Rules 6e-2 (b)(1) and (c)(4) may be
construed to contemplate that the sales charge for a variable life
insurance policy will be deducted from premiums. Each insurer's
deduction of a CDSC may be deemed inconsistent with these provisions.
Applicants request exemptions from section 2(a)(35) and Rules 6e-2
(b)(1) and (c)(4), to the extent necessary to permit part of the
Policy's sales charge to be deducted from premium payments, and part as
a CDSC.
3. Applicants submit that Rule 6e-2(c)(4) can be construed to
comprehend a sales charge imposed on other than premiums. This is
because the definition is an intellectual construct rather than a
reflection of the actual methodology of administering variable life
insurance policies, referring, in paragraphs (i) and (ii), for example,
to other amounts that are not deducted from premiums.
4. Section 27(a)(1) and Rule 6e-2(b)(13)(i) may be construed to
contemplate that the sales charge under the Policy will be deducted
from premiums. Each insurers's deduction of part of its sales charge on
a contingent deferred basis may be deemed inconsistent with the
foregoing provisions, to the extent that the sales charge is deducted
from other than premiums. Applicants request an exemption from these
provisions to the extent necessary to permit part of the Policy's sales
charge to be deducted from premium payments, and part to be deducted as
a CDSC.
5. Sections 2(a)(32), 27(c)(1), and 27(d), in pertinent part,
prohibit Applicants from selling the Policy unless it is a ``redeemable
security.''\6\ Rules 6e-2(b)(12), (b)(13)(iv), and (b)(13)(v) afford
exemptions from section 27(c)(1), and Rules 6e-2(b)(13)(iv) and
(b)(13)(v) afford exemptions from section 27(d), to the extent
necessary for cash value to be regarded as satisfying the redemption
and sales charge refund requirements of the 1940 Act. However, the
exemptions afforded by Rules 6e-2(b)(12), (b)(13)(iv), and (b)(13)(v)
may not contemplate a contingent deferred sales charge. Moreover, the
insureds' deduction of the CDSC may be viewed as reducing the proceeds
that the Policy owner would receive on surrender below the Policy
owner's proportionate share of the Variable Account's current net
assets. Applicants request an exemption from the foregoing provisions
to the extent necessary to permit part of the Policy's sales charge to
be deducted from premium payments, and part to be deducted as a CDSC.
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\6\Section 2(a)(32) offers the following definition of
``redeemable security'': ``Any security, other than short-term
paper, under the terms of which the holder, upon its presentation to
the issuer or to a person designated by the issuer, is entitled * *
* to receive approximately his proportionate share of the issuer's
current net assets, or the cash equivalent thereof.''
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6. Applicants represent that Rule 6e-2 was adopted at a time when
less flexibility regarding premium payments and other policy features
was offered than subsequently has been permitted. Because of these
features, particularly premium flexibility, less than the full amount
of required premiums may be paid on or before the relevant due dates.
It is unclear how the technical sales load computation provisions in
Rule 6e-2 apply under such circumstances, particularly with respect to
a contingent deferred sales charge.
7. Applicants submit that the CDSC is similar to the ``redemption''
charge authorized in section 10(d)(4) of the 1940 Act, and that
Congress obviously intended that such a redemption charge, which is
expressly described as a ``discount from net asset value,'' be deemed
consistent with the concept of ``proportionate share'' under section
2(a)(32).
8. Applicants submit that there will be no restriction on, or
impediment to, surrender that should cause the Policy to be considered
other than a redeemable security within the meaning of the 1940 Act and
the rules thereunder. The Policy provides for full or partial surrender
and withdrawals of excess value. The prospectus for the Policy will
disclose the contingent deferred nature of part of the sales charge.
Upon surrender or lapse, a Policy owner will receive his or her
``proportionate share'' of the Variable Account--i.e., the amount of
net premiums paid, reduced by the amount of all charges and increased
by the amount of all return credited to the Policy.
9. Rule 22c-1, adopted pursuant to section 22(c), prohibits
Applicants from redeeming a Policy except at a price based on the
current net asset value of the Policy that is next computed after
receipt of the request for full or partial surrender of the Policy.
Rule 6e-2(b)(12) affords exemptions from Rule 22c-1. Rules 22c-1 and
6e-2(b)(12), read together, impose requirements with respect to both
the amount payable on surrender and the time as of which such amount is
calculated. Each insurer's CDSC may be deemed inconsistent with section
22(c) and Rule 22c-1 to the extent that the sales charge can be viewed
as causing a Policy to be redeemed at a price based on less than the
current net asset value that is next computed after full or partial
surrender of the Policy.
10. Applicants submit that the CDSC will not have the dilutive
effect which Rule 22c-1 is designed to prohibit because a surrendering
Policy owner would ``receive'' no more than an amount equal to the cash
surrender value determined pursuant to the formula set out in his
Policy and after receipt of his request. Furthermore, variable life
insurance policies, by nature, do not lend themselves to the kind of
speculative short-term trading that Rule 22c-1 was aimed against, and,
even if they could be so used, the CDSC would discharge, rather than
encourage, any such trading.
11. Applicants submit that deduction of part of the sales charge as
a deferred charge on surrender or lapse will be more favorable to
Policy owners than deduction of the same amount of charge from
premiums. First, the amount of the Policy owner's premium payment that
will be allocated to the Variable Account, and be available to earn a
return for the Policy owner, will be greater than it would be if the
sales charge were deducted from premiums. Second, the total dollar
amount of sales load under a Policy is no higher than that permitted by
Rule 6e-2(b)(13) for a conventional scheduled premium variable life
insurance policy; for a Policy owner who does not lapse or surrender in
the early Policy years, the dollar amount of sales load is lower than
would be permitted if taken entirely as front-end deductions from a
Policy's premium payments. Third, the cost of insurance charge imposed
will be less than it otherwise would be if the same amount of sales
charge were deducted from premium payments, because the allocation of a
greater amount of the Policy owner's premium to the Variable Account
reduces the amount at risk (i.e., the amount of death benefit less the
account value) upon which the cost of insurance charge is based.
Moreover, Applicants represent that the insurers' sales load structures
provide equitable treatment to both surrendering and persisting Policy
owners.
12. The CDSC, although imposed on other than the premium, will
cover expenses associated with the offer and sale of the Policy, just
as other forms of sales loads do. Applicants submit that the mere fact
that the timing of the imposition of the CDSC may not fall neatly
within the literal pattern of all provisions discussed briefly above,
does not change its essential nature as a sales charge. Moreover,
Applicants represent that proposed amendments to Rule 6e-2 would permit
assessment of a sales charge on a contingent deferred basis, and that
such charges also are authorized by Rule 6e-3(T) for insurance policies
able to rely on that Rule.
13. Applicants represent that the insurers' respective percentages
of sales load will never exceed the sum of 30% of the premium payments
paid for the first Policy year plus 10% of premium payments paid for
the second Policy year, and will not exceed 9% of premium payments
expected to be paid over the lesser of 20 years or the expected
lifetime of the insured. For this reason, Applicants submit that the
Policy is consistent with the principles and policies underlying the
sales load limitations in section 27(a)(2), Rule 6e-2 (b)(13)(i) and
(b)(13)(v).
14. Applicants submit that premium and other flexibility options
under the Policy are a potential benefit to Policy owners.
C. Request for Exemptions Relating To Collection of Administrative
Surrender Charge
1. Applicants' deduction of the administrative surrender charge
pursuant to the Policies may be deemed to violate sections 2(a)(32),
22(c), 27(c)(1), 27(d), and Rule 22c-1 for essentially the same reasons
as the CDSC might be deemed to violate those 1940 Act provisions and
rules. Applicants request exemptions from the foregoing provisions to
the extent necessary to permit the deduction of the administrative
surrender charge upon early surrender or lapse of a Policy.
2. Applicants submit that imposition of the administrative
surrender charge is more favorable to Policy owners than a charge
deducted entirely from premiums or from account value over the life of
the Policy. The reduction of the owner's investment in the Variable
Account is less than it would be were this charge taken in full in the
first Policy year. This results in a larger account value initially
earning a return for the Policy owner. For a Policy owner who does not
lapse or surrender in the early Policy years, the total dollar amount
of the charges for issuance and maintenance expenses is lower than the
insurers would be permitted to deduct from premium payments or by way
of periodic deductions from a Policy's account value. As to all Policy
owners, the total dollar amount of the administrative surrender charge
will be no higher than the insurers would be permitted to deduct if
this charge were in the form of a deduction from premium payments and/
or from account value prior to a Policy's lapse or surrender.
3. Applicants represent that this charge has not been increased to
take account of the time value of money (i.e., the insurers' respective
investment costs attributable to deferment of the charge) or the fact
that not all Policy owners would incur the charge.
4. Neither insurer anticipates making a profit on the
administrative surrender charge.
5. Administrative charges deducted in the form of a surrender
charge are specifically permitted by Rule 6e-3(T) for variable life
insurance policies offered and sold in reliance on that rule.
Applicants submit that their requested relief with respect to the
administrative surrender charge under the Policies is equally
appropriate.
D. Request for Exemptions Relating To Deduction of Insurance Charges
From Account Value
1. Sections 26(a)(2) and 27(c)(2) of the 1940 Act may be construed
to prohibit the insurers from deducting certain insurance charges from
the account value.\7\ Applicants request exemptions from the foregoing
sections and Rule 6e-2(b)(13)(iii)\8\ to the extent necessary to permit
deduction of certain insurance charges from account value, as described
herein.
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\7\The insurers seek to deduct the following insurance charges
from account value: cost of insurance charges; charges assessed for
incidental insurance benefits or for substandard risk
classifications; the charge deducted for the risk of guaranteeing
the guaranteed death benefit; and the charges imposed for assuming
the risk of the additional death benefit guarantees associated with
certain required premium reductions as a result of premium
recalculations.
\8\In pertinent part, Rule 6e-2(b)(13)(iii) provides an
exemption from sections 26(a)(2)(C) and 27(c)(2), subject to certain
conditions which Applicants represent that they satisfy.
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2. Applicants submit that deduction of cost of insurance charges
from account value is fair and reasonable, and in accordance with the
practice of most other variable life insurance policies. Applicants
further submit that deduction of a portion of the charges for
substandard risks and incidental insurance benefits from account value
is also reasonable and appropriate. If all such charges were required
to be deducted solely from premiums, it would be necessary for the
insurers to (a) reduce the premium flexibility under the Policy and/or
(b) further limit the classes of insureds for whom the Policy will be
available and limit or eliminate the kinds of rider benefits the
insurers intend to make available.
3. Applicants submit that their methods of deducting insurance
charges is not designed to yield more revenues than if these charges
were assessed solely against premiums.
4. Applicants submit that Rule 6e-3(T) authorizes deductions from
account value for all of these insurance charges in connection with
policies eligible to rely on that rule, and that proposed amendments to
Rule 6e-2 would authorize deductions from account value of this risk
charges for guaranteed benefits.
5. Applicants submit that each insurer's method of deducting cost
of insurance charges is fair and reasonable, and consistent with
general industry practice.
6. Applicants submit that charges for substandard risks and
incidental insurance benefits must be deducted from account value, as a
practical matter.
7. Each insurer assesses two death benefit guarantee risk charges.
These charges compensate each insurer for the risk it assumes in
guaranteeing death benefits under the Policy, including the risk that
the account value will not be sufficient to support the guarantees.
Because of the Policy owner's flexibility with respect to the payment
of premiums, the insurer's method of assessing the risk charges for the
death benefit guarantees permits each Policy owner to pay charges more
commensurate with the risks under his or her own Policy. Applicants
submit that it is more appropriate and suitable to deduct those charges
from the account value than from premiums, as deducting the charges
from premiums would require Policy owners who pay more premiums to
subsidize the guarantee risks assumed under the Policies of Policy
owners who pay fewer premiums.
8. Each insurer represents that the level of the death benefit
guarantee risk charges is reasonable in relation to the risks assumed
by each insurer under the Policy. The methodology used to support this
representation is an analysis of each insurer's mortality risks, taking
into account such factors as each insurer's contractual right to
increase insurance charges above current levels, the level of risk
inherent in the various insurance benefits provided by the Policy and
the possibility of ``anti-selection'' risks resulting from Policy
owners' exercise of the various flexibility features under the Policy,
all based on each insurer's experience with other insurance products.
Each insurer undertakes to keep and make available to the Commission on
request the documents or memoranda used to support this representation.
9. Each insurer further represents that there is a reasonable
likelihood that the distribution financing arrangement of each Variable
Account will benefit the Variable Account and Policy owners. Each
insurer will keep and make available to the Commission on request a
memorandum setting forth the basis of this representation.
10. Applicants agree that if the requested order is granted, such
order will be expressly conditioned on Applicants' compliance with the
following: Each Variable Account will invest only in management
investment companies which have undertaken, in the event they should
adopt any plan under Rule 12b-1 to finance distribution expenses, to
have a board of directors, a majority of whom are not interested
persons of the company, formulate and approve such plan.
E. Request for Exemptions Relating to Use of 1980 CSO Tables
1. Rule 6e-2(b)(1) makes the definition of ``sales load'' in Rule
6e-2(c)(4) applicable to the Policy. Section 27(a)(1) of the 1940 Act
prohibits an issuer of periodic payment plan certificates from imposing
a sales load exceeding 9% of the payments to be made on such
certificates. Rule 6e-2(b)(13)(i) provides an exemption from section
27(a)(1) to the extent that ``sales load,'' as defined Rule 6e-2(c)(4),
does not exceed 9% of the payments to be made on the variable life
insurance policy during the period equal to the lesser of 20 years or
the anticipated life expectancy of the insured based on the 1958 CSO
Table.
2. Rule 6e-2(c)(4), in defining ``sales load,'' contemplates the
deduction of an amount for the cost of insurance based on the 1958 CSO
Tables and the assumed investment return specified in the Policy.
Following the adoption of Rule 6e-2, the National Association of
Insurance Commissioners adopted the 1980 CSO Tables. The guaranteed
cost of insurance rates under each insurer's Policy are based on the
1980 CSO Tables. Applicants request exemptions from section 27(a)(1)
and Rules 6e-2(b)(1), (b)(13)(i), and (c)(4) to the extent necessary to
permit cost of insurance to be calculated for purposes of testing
compliance with the rule based on the 1980 CSO Tables.
3. Applicants represent that proposed amendment to Rule 6e-2 would
permit use of either the 1958 or the 1980 CSO Tables for purposes of
Rule 6e-2(b)(13)(i) and (c)(4), depending on which relates to the
insurance rates guaranteed under an insurance policy.\9\
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\9\In addition, Applicants note that Rule 6e-3(T) requires that
the 1980 CSO Tables be used for all policies offered in reliance on
that Rule.
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4. Applicants represent that state insurance laws require that each
insurer use 1980 CSO Tables in establishing premium rates and
determining reserve liabilities for the Policy.
5. Applicants further represent that cost of insurance charges
based on the 1980 CSO Tables generally are lowered than those based on
the 1958 CSO Tables, and that, for the most part, this results in lower
charges and higher Policy values than if the charges are based upon the
1958 CSO Tables. Furthermore, Applicants assert that the mortality
rates reflected in the 1980 CSO Tables more nearly approach the
mortality experience which they expect under the Policy.
F. Request for Exemptions Relating to ``Stair-Step'' Requirements
1. Section 27(a)(3) of the 1940 Act generally provides that the
amount of sales charge deducted from any of the first twelve monthly
payments on a periodic payment plan certificate may not exceed
proportionately the amount deducted from any other such payment and
that the amount deducted from any subsequent payment cannot exceed
proportionately the amount deducted from any other subsequent payment.
2. Rule 6e-2(b)(13)(ii) grants an exemption from section 27(a)(3),
provided that the proportionate amount of sales load deducted from any
payment during the contract period shall not exceed the proportionate
amount deducted from any prior payment, unless the increase is caused
by the grading of cash values into reserves or reductions in the annual
cost of insurance.
3. Applicants represent that section 27(a)(3) of the 1940 Act and
Rule 6e-2(b)(13)(ii)--commonly referred to as the ``stair-step''
provisions--may be deemed inconsistent with deduction of a deferred
sales charge. Moreover, Rule 6e-2 was adopted at a time when less
flexibility regarding premium payments and other policy features was
offered than has been permitted subsequently. Because of these
``flexibility features,'' particularly premium flexibility, more or
less than the full amount of the required premiums may be paid on or
before the relevant due dates. For these reasons, Applicants request an
exemption from section 27(a)(3) and Rule 6e-2(b)(13)(ii) to the extent
necessary to permit deduction of the front-end sales charge as part of
the premium expense charge, and deduction of the CDSC on surrender or
lapse of a Policy or partial surrender of the basic death benefit.
4. Applicants do not believe that either section 27(a)(3) or Rule
6e-2(b)(13)(ii) apply to deferred sales loads. In this regard,
Applicants assert that both the statutory provision and the rule apply
by their terms only to ``amounts deducted from payments,'' and a
deferred sales load is not deducted from payments.
5. Applicants note that proposed amendments to Rule 6e-2 would
modify the stair-step provisions to make them applicable to sales loads
deducted other than from payments. Applicants assert that if a
modification is necessary to apply these provisions to a deferred sales
load, then without such modification the provisions should not apply.
6. Applicants represent that the CDSC (if calculated as a
percentage of based policy premiums due to date) never increases from
year to year; the total increase annually by 15% of one year's based
policy premium in the early years and is reduced in later years. In no
case is the percentage increase in the CDSC (if calculated as a
percentage of one year's base policy premium) for any year greater than
that for the previous year.
7. In addition, Applicants represent that each insurer will waive a
portion of any sales charge otherwise deducted from premiums paid on a
Policy with a guaranteed death benefit of at least $250,000. The
continuation of this waiver is not contractually guaranteed, however,
and the waiver may be withdrawn or modified by each insurer at any
time. Because the waiver of the front-end sales charge applies only
when the guaranteed death benefit is at least $250,000, it is possible
that the waiver could apply at some times with respect to a given
Policy and not at a subsequent time with respect to the same Policy.
Because section 27(a)(3) and Rule 6e-2(b)(13)(ii) appear to prohibit
this condition, Applicants request an exemption from those provisions
to the extent necessary to permit them to waive the sales charge
deducted from premiums under the circumstances described herein.
8. The insurers will not impose the 5% front-end sales charge upon
the amount of any premium payments received in any Policy year that are
in excess of the annual required premium for the year (``Excess
Premiums''). Accordingly, the front-end sales charge may apply to some
premium payments and not to others. Because section 27(a)(3) and Rule
6e-2(b)(13)(ii) appear to prohibit this, Applicants request an
exemption from those provisions to the extent necessary to omit
deducting any sales charge from Excess Premiums.
9. The insurers have designed the Policies so that they are
``refund proof''--i.e., they never will require the repayment of any
sales charges pursuant to Rule 6e-2(b)(13)(v)(A). The Policies would
remain refund proof, and (subject to the exemptive relief requested in
the application) would continue to comply with all of the other sales
charge limitations and requirements in Rule 6e-2, even if the front-end
sales charge were deducted from all premium payments. This front-end
charge structure, however, also would be less favorable to Policy
owners than that provided under the Policies.
10. The higher sales charge on the first required premium paid
under a Policy in any Policy year, as compared with that imposed on
Excess Premiums, in part reflects the fact that the insurers will incur
lower overall distribution costs (e.g., commissions paid to sales
persons) in connection with Excess Premiums over the life of the
Policies. To impose the full 5% sales charge on Excess Premiums would
generate more revenue than the insurers believe is necessary to
adequately defray such expenses. Thus, Applicants' design provides a
significant benefit to Policy owners by passing through to them a
portion of the insurers' lower distribution costs with respect to
Excess Premiums. Applicants submit that it would not be in the interest
of Policy owners to require the imposition of a sales charge on Excess
Premiums that is higher than Applicants deem necessary.
11. Applicants represent that the prospectus for the Policies will
contain disclosure informing Policy owners how to minimize sales charge
deductions from premiums paid.
12. Applicants assert that the stair-step requirements are designed
to discourage unduly complicated sales load structures. Applicants
submit that the sales charge design of the Policy is not unduly
complicated and will be fully disclosed in the prospectus pertaining to
the Policy.
13. Applicants submit that sales charges are not designed to
generate more revenues from later payments than from earlier payments.
14. Applicants represent that the precise amount of sales load
assessed depends on, among other things, the degree to which a Policy
owner exercises the premium and other flexibility features of the
Policy. The exercise of these features is within the sole control of
the Policy owner. Applicants note that in amending Rule 6e-3(T), the
Commission specifically indicated that sales charge policies underlying
the stair-step requirement are not contravened by fluctuations in sales
load which result from factors beyond the issuer's control. Applicants
submit that this principle should be equally applicable in the present
context.
G. Request for Exemptions Relating To Custodianship Arrangements
1. In pertinent part, sections 26(a)(1) and (a)(2) of the 1940 Act
prohibit Applicants from selling the Policy unless it is issued
pursuant to a trust indenture or other such instrument that designates
one or more trustees or custodians, qualified as specified, to have
possession of all securities in which each insurer and the applicable
Variable Account invest.
2. In pertinent part, section 27(c)(2) of the 1940 Act may be read
to prohibit Applicants from selling the Policy unless the proceeds of
all purchase payments are deposited with a trustee or custodian as
specified.
3. Rule 6e-2(b)(13)(iii) under the 1940 Act affords an exemption
from sections 26(a)(1), 26(a)(2), and 27(c)(2), provided that each
insurer complies, to the extent applicable, with all other provisions
of section 26 as if it were a trustee or custodian for the Variable
Account, and assuming that each insurer meets the other requirements
set forth in the rule.
4. Applicants represent that the holding of Fund shares by each
insurer and each Variable Account under an open account arrangement,
without having possession of share certificates and without a trust
indenture or other such instrument, may be deemed inconsistent with the
foregoing provisions. Accordingly, Applicants request exemptions from
those provisions, to the extent necessary.
5. Applicants represent that current industry practice calls for
unit investment trust separate accounts, such as the Variable Accounts,
to hold shares of management investment companies in uncertificated
form. Applicants further represent that holding shares of underlying
management investment companies in uncertificated form contributes to
efficiency in the purchase and sale of such shares by separate accounts
and generally saves costs.
6. Applicants note that, in contrast to the Policy (which is
covered by Rule 6e-2), policies covered by Rule 6e-3(T) may rely on
Rules 6e-3(T)(b)(13)(iii) (B) and (C) which, in effect, afford the
exemptions requested here by the Applicants. The Commission has
proposed amendments to Rule 6e-2(b)(13)(iii) to permit life insurers
(such as the insurers) to hold the assets of a separate account without
a trust indenture or other such instrument, and to permit a separate
account organized as a unit investment trust (such as the Variable
Accounts) to hold the securities of any registered investment company
(such as the Fund) that offers its shares to the separate account in
uncertificated form. Applicants also note that the Commission has
adopted Rule 26a-2 which affords exemptions in connection with variable
annuity separate accounts that are essentially similar to those
requested here. Accordingly, Applicants presume that the Commission
adopted or proposed the foregoing exemptive rules based on a
determination that, where state insurance law protects separate account
assets and open account arrangements foster administrative efficiency
and cost savings, safekeeping of separate account assets does not
necessarily depend on the presence of a trustee, custodian or trust
indenture, or the issuance of share certificates.
7. Each insurer represents that: it will comply with all other
applicable provisions of section 26 as if it were a trustee or
custodian for its Variable Account (subject to the other exemptive
relief requested in the application); it will file with the insurance
regulatory authority of Massachusetts an annual statement of its
financial condition in the form prescribed by the National Association
of Insurance Commissioners--the most recent such statement indicated
that each insurer has a combined capital and surplus of at least
$1,000,000; it is examined from time to time by the insurance
regulatory authority of Massachusetts as to its financial condition and
other affairs; and it is subject to supervision and inspection with
respect to its separate account operations.
H. Request for Exemption Relating To ``Free Look'' Right
1. Section 27(f) of the 1940 Act provides that periodic payment
plan certificate holders may, within a specified time period, surrender
their certificates and receive the account value plus all deductions
from gross purchase payments; Rule 27f-1 provides for notices in
connection therewith.
2. Rule 6e-2(b)(13)(viii) provides an exemption from section 27(f)
and Rule 27f-1, provided that the Policy owner has the right to:
(i) Return the Policy no later than 45 days after execution of the
application for the Policy or, if later, within 10 days after receipt
of the Policy or the notice of right of withdrawal by the owner; and
(ii) Receive a refund of all payments made thereunder.
3. Each insurer intends generally to comply with Rule 6e-
2(b)(13)(viii), but anticipates that under the laws of some states, it
may now or in the future be required to credit investment losses and
gains during the ``free look'' period to Policy owners who exercise
their ``free look'' right.
4. Applicants assert that section 27(f) presumes that the security
owner will bear any investment gains and losses during the ``free
look'' period, and that Rule 6e-3(T)(b)(13)(viii) would permit each
insurer's proposed ``free look'' procedures for a policy relying on
that Rule. Applicants also note that no state laws required return of
account value pursuant to ``free look'' procedures at the time Rule 6e-
2 was adopted, and that under the policy designs prevalent at time, the
amount of investment depreciation or appreciation during the ``free
look'' period was not likely to be great because premiums in excess of
scheduled premiums were not permitted to be paid, and relatively large
front-end charges reduced the amount initially allocated to the
separate account. For these reasons, and because no state laws required
``free look'' right procedures when Rule 6e-2 was adopted, Applicants
do not regard as particularly significant the failure of Rule 6e-
2(b)(13)(viii) to authorize such ``free look'' procedures.
5. Applicants request an exemption from section 27(f) and Rules
27f-1 and 6e-2(b)(13)(viii) to the extent necessary to permit the
``free look'' procedures the insurers have prescribed for the Policies.
Conclusion
Applicants assert that, for the reasons set forth above, the
requested exemptions from (i) those provisions of the 1940 Act and
those rules specified in paragraph (b) of Rule 6e-2 thereunder, other
than sections 7 and 8(a), as well as (ii) sections 2(a)(32), 2(a)(35),
22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(a)(3), 27(c)(1), 27(c)(2),
27(d) and 27(f), and Rules 63-2 (b)(1), (b)(12), (b)(13)(i),
(b)(13)(ii), (b)(13)(iii), (b)(13)(iv), (b)(13)(v), (b)(13)(viii),
(c)(1) and (c)(4), 22c-1, and 27f-1, meet the standards of section 6(c)
of the 1940 Act. 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. 94-11034 Filed 5-6-94; 8:45 am]
BILLING CODE 8010-01-M