[Federal Register Volume 59, Number 97 (Friday, May 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12305]


[[Page Unknown]]

[Federal Register: May 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20295 ; No. 812-8734]

 

Application for an Order Under the Investment Company Act of 1940

May 13, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

-----------------------------------------------------------------------

APPLICANTS: Fortis Benefits Insurance Company (``Fortis Benefits''), 
Variable Account C of Fortis Benefits Insurance Company (``Fortis 
Benefits Account''), First Fortis Life Insurance Company (``First 
Fortis''), Variable Account C of First Fortis Life Insurance Company 
(``First Fortis Account'') and Fortis Investors, Inc. (``Investors'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
1940 Act for exemptions from the provisions of sections 2(a)(32), 
22(c), 26(a)(2)(C), 27(a)(3), 27(c)(1), 27(c)(2) and 27(d) and Rules 
22c-1, 6e-3(T)(b)(12), 6e-3(T)(b)(13) and 6e-3(T)(d)(1)(ii) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to the extent 
necessary to permit them to issue flexible premium variable life 
insurance policies (``Policies'') that enable Fortis Benefits and First 
Fortis (the ``Insurers'') to: (1) Credit the Policy owner's account 
with ``Policy value advances'' and later recover the Policy value 
advances from the assets of the Fortis Benefits Account and the First 
Fortis Account; (2) include in the surrender charge any premium tax 
charge not previously recovered; and (3) deduct sales charges in a 
manner that may result in deductions in one period being considered to 
be higher than deductions taken out in a subsequent period.

FILING DATE: The application was filed on December 17, 1993.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on June 7, 
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 requester'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 
SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Fortis Benefits, the Fortis Benefits Account, and Investors, 500 
Bielenberg Drive, Woodbury, Minnesota 55125. First Fortis and the First 
Fortis Account, 220 Salina Meadows Parkway, suite 255, Syracuse, New 
York 13220.

FOR FURTHER INFORMATION CONTACT: Wendy Finck Friedlander, Senior 
Attorney (202) 942-0682, or Wendell Faria, Deputy Chief (202) 942-0670, 
Office of Insurance Products, Division of Investment Management.

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

Applicant's Representations

    1. Fortis Benefits, a Minnesota corporation, is qualified to sell 
life insurance in the District of Columbia and in all states except New 
York. It is an indirect wholly-owned subsidiary of Fortis, Inc., which 
is itself indirectly owned 50% by N.V. AMEV and 50% by Compaignie 
Financiere et de Reassurance de Group AG. Fortis, Inc. manages the 
United States operations for these two foreign companies. First Fortis, 
a New York corporation, is qualified to sell life insurance in New 
York. It is a wholly-owned subsidiary of N.V. Amev.
    2. The Insurers established the Fortis Benefits Account and the 
First Fortis Account (the ``Accounts`') under the laws of Minnesota and 
New York, Respectively, as segregated investment accounts for the 
purpose of funding variable life insurance policies, including the 
policies. The Fortis Benefits Account is registered as unit investment 
trust under the 1940 Act. First Fortis intends to register the First 
Fortis Account prior to the time it offers any Policies for sale. Each 
Account currently consists of six subaccounts (``Subaccounts''), each 
of which invests, or intends to invest, exclusively in shares of a 
corresponding portfolio of Fortis Series Fund, Inc., a registered 
management investment company.
    3. Investors, also an indirect wholly-owned subsidiary of Fortis, 
Inc., is the principal underwriter for the Policies. Investors is 
registered as a broker-dealer under the Securities Exchange Act of 
1934.
    4. The Policies may be issued either on a group or individual 
basis. The forms of Policy that are the subject of this application are 
Fortis Benefits' VUL-100 Flexible Premium Variable Life Insurance 
Policy and First Fortis' VUL-500, VUL-200, and VUL-100 Flexible Premium 
Variable Life Insurance Policies. The First Fortis VUL-500 and VUL-220 
Policies permit the Policy owner to select, and change from time to 
time, between two death benefit options. One of these options, under 
which the ``Policy value'' is added to the Policy's face amount of 
insurance coverage for purposes of computing the death benefit, is not 
available under the VUL-100 Policies. The owner of any of the Policies 
also may change the face amount from time to time, subject to certain 
restrictions.
    5. The Policy owner may allocate the Policy value to one or more of 
the Subaccounts and/or to the general accounts of the Insurers.
    6. The Policies may be fully surrendered at any time for their 
surrender value and, generally after the first Policy year, the policy 
owner may make a partial withdrawal of the surrender value once a year. 
The Policy owner also may take out loans and may vary the frequency and 
amount of premium payments.
    7. The Policy will not lapse for a specified number of years if 
certain minimum premium payment requirement is based on monthly minimum 
premiums, which are also used, among other things, to make certain 
sales charge and policy value advance computations. While different 
monthly minimum premiums may be used for different purposes, in no case 
will the sum of twelve monthly minimum premiums with respect to a VUL-
500 OR VUL-220 Policy exceed the guideline annual premium with respect 
to such Policy, as defined in Rule 6e-3(T)(c)(8).
    8. Unless prohibited by applicable state insurance law, a Policy 
may be eligible for a credit in the form of a Policy value advance 
(``Advance'' on the last day of the ninth year (twelfth year in Oregon) 
and each subsequent Policy year. Except in Oregon, where there are no 
premium payment requirements for an Advance, eligible Policies may 
receive an Advance only if, as of the date of the credit, (1) The 
cumulative amount of premiums paid over the life of the Policy, less 
any outstanding policy loans, and less the cumulative amount of partial 
withdrawals taken by the Policy owner, at least equals (2) the 
cumulative monthly minimum premium payments to date. No further 
Advances will be paid if the premium requirement is not met for any 
credit.
    9. Advances paid at the end of the ninth (twelfth year in Oregon) 
and each subsequent Policy year will equal ten percent (five percent in 
Oregon), of the average of the total minimum monthly premiums for each 
year to date. Advances at the foregoing rate are not guaranteed, and 
the Insurers reserve the right to reduce them, subject to guaranteed 
minimum rates. The guaranteed rates are based on the insured's age at 
Policy issue, as follows: ages 0-40, 10%; ages 41-43, 9%; ages 44-46, 
8.25%; ages 47-50, 7.5%; ages 51-55, 6%; ages 56-60, 5.5%; and ages 61-
70 (and all ages in Oregon), 5%. These guarantees apply through the 
19th (21st in Oregon) Policy year, but not thereafter.
    10. Advances will be allocated among the general account and the 
Subaccounts on a pro rata basis in proportion to the amount of Policy 
value in each, exclusive of amounts transferred to the general account 
as a result of Policy loans. Following such allocation, these amounts 
will be credited with investment performance and otherwise be treated 
the same as any other amounts of Policy value.
    11. The Insurers will notify Policy owners that they may be 
forfeiting Advances by failing to make sufficient premium payments. An 
annual statement will inform each Policy owner of the dollar amount 
that must be paid for the year, plus any unpaid amounts from prior 
years, to be eligible for Advances, or if no such premiums must be 
paid.
    12. Unless prohibited by applicable state insurance law, a VUL-500 
or VUL-100 Policy may be eligible for an increase in Policy value in 
the form of a ``cash value bonus'' (``Bonus'') on the last day of the 
ninth and each subsequent Policy year. The amount of any Bonus is a 
percentage of the surrender value at the date of the Bonus, as follows:

     Bonus as a Percent of Surrender Value at the End of Policy Year    
------------------------------------------------------------------------
                                           9 to 19        20 and later  
  Surrender value of date of bonus   -----------------------------------
                                      VUL-500  VUL-100  VUL-500  VUL-100
------------------------------------------------------------------------
Less than $50,000...................     .00%     .00%     .00%     .00%
$50,000 to $299,999.................      .10      .30      .10      .30
$300,000 to 499,999.................      .55      .50      .55      .50
$500,000 or more....................      .55      .50      .80      .50
------------------------------------------------------------------------

Bonuses at the foregoing rates are not guaranteed, and each Insurer 
retains the right, with respect to its Policies, in its sole discretion 
to reduce or discontinue Bonuses upon one year's notice. Bonuses will 
be credited with investment performance and otherwise will be treated 
the same as any other amounts of Policy value. Bonuses will be 
allocated among the general accounts and the Subaccounts on a pro rata 
basis and will be fully vested.
    13. A premium tax charge is assessed in the amount of 2.3% of all 
premium payments through monthly deductions from Policy value under the 
VUL-500 and VUL-220 Policies and daily deductions from Policy value 
under all Policies. Any portion of such amounts that is not recovered 
by the Insurers pursuant to the monthly and/or daily deductions may be 
deducted as part of the surrender charge.
    14. A sales charge also is assessed in the amount of 7.5% of all 
premium payments through monthly deductions from Policy value under the 
VUL-500 and VUL-220 Policies and daily deductions from Policy value 
under all of the Policies. Any amount of the sales charge that is not 
recovered by the Insurers through these monthly and/or daily deductions 
may be deducted as a contingent deferred sales charge as part of the 
surrender charge.
    15. The monthly deduction under the VUL-500 and VUL-220 Policies 
for premium tax and sales charges totals $4.00 per month, and the daily 
deduction under all of the Policies is at an aggregate annual rate of 
.27% of the value of the Policy's net assets in the Accounts. These 
deductions will be waived to the extent that the cumulative amount of 
all such deductions would exceed 9.8% (7.5% for sales charges and 2.3% 
for premium tax charges) of all premium payments made to date. Premium 
tax and sales charge deductions will not be made at any time when 
similar deductions for Advances are being made.
    16. As part of the surrender charge, the VUL-500 and VUL-220 
Policies impose an additional contingent deferred sales charge 
(``CDSC'') in the amount of 22% and 12%, respectively, of premium paid 
in the first two Policy years that are not in excess of the sum of 
twelve monthly minimum premiums.
    17. An additional CDSC also will be payable under the VUL-500 and 
VUL-220 Policies on certain total surrenders or Policy lapses following 
an increase in face amount requested by a Policy owner. The maximum 
additional CDSC will be 22% and 12%, respectively, of the lesser of: 
(1) The sum of twelve monthly minimum premiums for the face amount 
increase or (2) the amount of actual premium payment deemed 
attributable to the increase which are made not later than two years 
after the date of this increase. Any such additional CDSC arising from 
a face amount increase is payable only as part of the surrender charge.
    18. A charge for other Policy issuance expenses also is imposed 
under certain Policies. This charge is $5.00 per thousand dollars of a 
Policy's initial face amount and also will be imposed following any 
increase in face amount. This charge is deducted only under the VUL-500 
and VUL-200 Policies and only as part of the surrender charge. 
Applicants represent that this charge will not exceed the amount 
permitted by Rule 6e-3(T)(b)(13)(iii)(A).
    19. The surrender charge may be assessed upon the lapse or full 
surrender of a Policy before the eleventh Policy anniversary or the 
eleventh anniversary of a face amount increase. No surrender charge is 
deducted upon a partial withdrawal of Policy value or a face amount 
decrease. The maximum surrender charge is the sum of: (1) Any portion 
of the current 2.3% premium tax charge and the 7.5% sales charge that 
has not yet been collected through the monthly and/or daily deductions; 
(2) any additional CDSCs with respect to the VUL-500 or VUL-220 
Policies; and (3) the charge for other Policy (or increase) issuance 
expenses with respect to the VUL-500 or VUL-220 Policies.
    20. The entire surrender charge is subject to an overall upper 
limit or ``cap,'' based on the insured's age and the face amount or 
face amount increase, as follows:

------------------------------------------------------------------------
                                                              Overall   
                                                            ``Cap'' on  
                                                             surrender  
                                                            charge (per 
 Insured person's age at time of policy issuance or face     thousand   
                 amount increase (years)                    dollars of  
                                                          face amount or
                                                          of face amount
                                                             increase)  
------------------------------------------------------------------------
0-30 Years..............................................           $9.00
31-40...................................................           10.00
41-45...................................................           12.00
46-50...................................................           14.00
51-55...................................................           16.00
56-60...................................................           21.00
61-65...................................................           28.00
66-70...................................................           40.00
------------------------------------------------------------------------

The cap decreases on the fifth and each subsequent Policy anniversary, 
or face amount increase, anniversary until it reaches zero on the 
eleventh Policy anniversary or increase anniversary. There is no 
surrender charge on surrenders or lapses as of the later of the 
eleventh Policy anniversary or the eleventh anniversary of any face 
amount increase.
    21. The amount of any Advance paid by the Insurer is subject to 
recovery through the following deductions made after the payment of the 
Advance: $4.00 per month (as part of the monthly deduction) under the 
VUL-500 and VUL-220 Policies, plus a daily deduction under all of the 
Policies at an annual rate of .27% of the value of the Policy's net 
assets in the Accounts. These deductions continue until their 
cumulative amount equals the cumulative amount of Advances actually 
credited to the Policy.
    22. The monthly deduction from Policy value includes: (1) Premium 
tax and sales charges or recovery of Advances; (2) the cost of 
insurance charge; (3) a monthly charge for the guaranteed death benefit 
in the amount of $.01 per thousand dollars of face amount under the 
Policy or any optional riders; (4) the charge for optional insurance 
benefits added by riders; and (5) the monthly administrative expense 
charge of $4.50 per Policy. The Insurers reserve the right to raise the 
monthly administrative expense charge to not more than $7.50 per month 
and to impose an additional monthly administrative expense charge of up 
to $.13 per thousand dollars of face amount then in force. Applicants 
represent that this charge will not exceed the amount permitted by Rule 
6e-3(T)(b)(13)(iii)(A).
    23. A daily charge at an annual rate of .90% of the average daily 
value of the net assets in the Account that are attributable to the 
Policies is made for mortality and expense risks assumed by the 
Insurers.
    24. The Insurers reserve the right to deduct (1) Charges to defray 
their administrative expenses in effecting transfers of Policy value or 
partial withdrawals and (2) charges for any federal income taxes that 
the Insurers may incur.

Applicant's Request for Relief and Legal Analysis

    1. Applicants request exemptions from sections 26(a)(2)(C) and 
27(c)(1) of the 1940 Act to the extent necessary to permit the 
deduction of monthly and/or daily charges to recover Advances.
    2. Section 27(c)(2) provides that an investment company may not 
offer periodic payment plan certificates unless, among other things, 
the proceeds of all payments (other than the sales load) on such 
certificates are deposited with a trustee or custodian having the 
qualifications prescribed in section 26(a)(1) and are held by the 
trustee or custodian under an indenture or agreement containing, in 
substance, the provisions required by section 26(a)(2).
    3. Section 26(a)(2)(C) provides that no payments to the depositor 
of, or principal underwriter for, a registered unit investment trust 
(or any affiliated person or agent of such depositor or principal 
underwriter) shall be allowed the trustee or custodian as an expense, 
except for payment of a fee not exceeding such reasonable amount as the 
Commission may prescribe, for performing bookkeeping and other 
administrative services of a character normally performed by the 
trustee or custodian.
    4. Applicants submit that the recovery of all or part of an Advance 
returns to the Insurer its own assets and that such recovery is not a 
payment of the sort addressed by section 26(a)(2)(C). Applicants state 
that, in this respect, deductions to recover Advances are similar to 
the removal from separate account assets of amounts necessary to secure 
Policy loans, or to secure additional Policy loans that are made 
automatically in order to ``capitalize'' loan interest that the Policy 
owner has not otherwise paid. Similarly, Applicants submit that 
deductions to recover Advances may reasonably be viewed as capital 
adjustments rather than a charge or expense subject to section 
26(a)(2)(C).
    5. Section 27(c)(2) requires only that the ``proceeds'' or 
``payments'' (i.e., amounts paid by the investor) be deposited with a 
trustee and held subject to the requirements of section 26. Applicants 
believe that the statutory language lends support to the conclusion 
that recovery of Advances is outside the ambit of those provisions, 
insofar as the Advance does not constitute ``proceeds'' of ``payments'' 
made by an investor, but is rather an advance made by each Insurer from 
its own funds.
    6. Advances provide a significant potential benefit to eligible 
Policy owners by increasing the amount available to earn a return for 
the Policy owner. In many cases, an Advance will not be recovered or 
will be partially recovered because no CDSC for unrecovered Advances is 
imposed upon death of the insured, surrender, partial withdrawal or 
lapse. The total amount deducted to recover Advances under any Policy 
will never exceed the amount of Advances actually paid.
    7. The Policy owner receives a further benefit during the time when 
deductions for Advances are being made because similar monthly and/or 
daily deductions for premium taxes and sales charges are suspended. 
Deferred premium tax and sales charges are equal to the monthly and/or 
daily deduction for Advances, assuming the 9.8% maximum on the monthly 
and/or daily premium taxes and sales charge deductions otherwise would 
not have been reached.
    The monthly and/or daily deductions for premium taxes and sales 
charges resume after Advances have been fully recovered, unless total 
deductions for premium taxes and sales charges have reached 9.8% of all 
premiums paid to date. The Policy owner is not deemed to have ``paid'' 
any deferred periodic premium tax and sales charges that otherwise 
would have been deducted during the period when deductions to recover 
Advances were being made. The deferral of these charges enhances the 
value of the Advance feature by tending to offset the deductions made 
to recover Advances.
    8. An Advance will increase Policy value and, consequently, may 
increase the amount of certain charges that are deducted on the basis 
of a percentage of Account for Fortis Series' assets: i.e., the 
mortality and expense risk charge and the Fortis Series' investment 
advisory fee. The increased asset-based charges are the price paid for 
the opportunity of having accounts attributable to the transaction 
participate in the investment performance of the Accounts. Increased 
asset-based charges can be avoided in each case by allocating the 
Policy value to the Insurer's general account, rather than to the 
Accounts.
    9. There is no assurance that separate account investment 
performance earned on Advances will be sufficient to offset the 
additional asset-based charges resulting from the Advances. The timing 
of the Advances and the deductions to recover them are factors that 
indirectly determine the amount of return that would be credited. A 
Policy owner who wants to be assured of earning a rate of return 
greater than the rate of asset-based charges can allocate amounts 
attributable to Advances to the Insurer's general account.
    10. Advances involve various costs to the Insurers, including the 
costs of amounts advanced and developing and administering the Advance 
feature. Each if the development and administration costs are 
disregarded, Applicants assert that there is no reasonable set of 
assumptions under which (1) the value to the Insurers of (a) the 
revenues from deductions for Advances plus (b) any increased mortality 
and expense risk charge and advisory fee revenues resulting from 
Advances would exceed (2) the Insurers' additional cost associated with 
Advances. Advances and related charges thus could not be said to 
involve any ``back door'' attempt to impose additional charges to 
Policy owners.
    11. Deductions for Advances are designed to reimburse the Insurers 
for amounts advanced out of their own funds to the Policy owner. 
Applicants represent that deductions for Advances do not contain hidden 
charges, are not intended to finance sales expenses, and do not result 
in profits to the Insurers. Such deductions, as well as the possibility 
of increased asset-based charges, will be fully disclosed in the 
prospectus for the Policies.
    12. Applicants submit that life insurance policies are typically 
unprofitable to an insurance company in the policies' early years 
because of high initial issuance costs and relatively small asset-based 
revenues. Advances and Bonuses are benefits intended to attract 
prospective purchasers and encourage Policy owners to retain and make 
regular premium payments in order to enhance the Insurers' financial 
strength and stability. To the extent that the objectives of the 
Advances and Bonuses are achieved, the Insurers may not need to raise 
their charges for cost of insurance and administrative expenses for 
certain Policy features; rather, the Insurers may be able to offer 
additional investment options or reduce charges under the Policies in 
the future. Policy owners also may benefit from lower expense ratios of 
the management investment company funding the Policies as a result of 
increased assets.
    13. Applicants submit the Advances and Bonuses also will promote 
fairness between persisting and surrendering Policy owners. Persisting 
Policy owners make substantial premium payments and accumulate 
substantial amounts of cash value and, thus, generate greater profits 
for the Insurers. It is therefore equitable for persisting Policy 
owners to receive additional benefits in the form of Advances and 
Bonuses.
    14. The Insurers have designed Advances and Bonuses and their 
method of operation so as to address state regulatory concerns. All 
sales illustrations used by the Insurers specifically will disclose the 
amount of any Advances and the rate of any Bonuses that are assumed by 
any illustrations.
    15. Applicants also request exemptions from sections 2(a)(32), 
22(c), 27(c)(1) and 27(d) and Rules 6e-3 (T)(b)(12), 6e-3(T)(b)(13) and 
22c-1 to the extent necessary to permit the amount of any premium tax 
charges that have not been previously collected by means of a deduction 
from Policy value to be included in the Surrender Charge.
    16. Sections 2(a)(32), 27(c)(1) and 27(d) prohibit Applicants from 
selling interests under a Policy unless they are redeemable securities 
entitling a Policy owner, upon surrender, to receive his or her 
proportionate share of the Account's current net assets. Section 
2(a)(32) defines a ``redeemable security'' as any security which 
entitles the holder, upon its presentation to the issuer, to receive 
approximately a proportionate share of the issuer's current net value, 
or the cash equivalent thereof. Section 27(c)(1) provides that no 
issuer of a periodic payment plan certificate shall sell such 
certificate unless the certificate is a ``redeemable security.'' 
Section 27(d) requires that the holder of a periodic payment plan 
certificate be able to surrender the certificate under certain 
circumstances and recover certain amounts of sales charges.
    Rule 22c-1 prohibits Applicants from redeeming interests under a 
Policy except at a price based on the current net asset value that is 
next computed after receipt of the request for full or partial 
redemption of interests under the Policy.
    Rule 6e-3(T)(b)(12) and 6e-3(T)(b)(13) provide exemptions from 
sections 22(c) and 27(c)(1), and Rule 6e-3(T)(b)(13) provides an 
exemption from section 27(d), to the extent necessary for the payment 
of a flexible contract's cash value to be regarded as satisfying the 
requirements of those provisions if specified conditions are satisfied. 
Applicants represent that the Policies satisfy all such conditions.
    17. The method adopted under the Policy for deducting all or part 
of the charges for premium taxes on a basis other than from premium 
payments is more favorable to investors because more Policy value is 
available to earn a return for the investor. Applicants represent that 
(1) No premium tax charge will be designed to yield a profit, (2) the 
total amount charged for premium taxes, including any amounts that may 
subsequently be deducted from premium payments, will be no greater than 
if all such charges were taken from premiums when paid, and (3) the 
premium tax charges will not take into account the ``time value'' of 
money, which would increase the charge to factor in the investment cost 
to the Insurers of deferring collection of the charge.
    18. Applicants further request an exemption from the ``stair step'' 
requirements of section 27(a)(3) and Rules 6e-3(T)(b)(13)(ii) and 6e-
3(T)(d)(1)(ii).
    19. Section 27(a)(3) prohibits the sale of Policies if the sales 
load deducted from any one of the first twelve monthly payments thereon 
``exceeds proportionately the amount deducted from any other such 
payment, or the amount deducted from any other subsequent payment.''
    20. Rule 6e-3(T)(b)(13)(ii) provides an exemption from Section 
27(a)(3) provided that the proportionate amount of sales load deducted 
from any payment shall not exceed the proportionate amount deducted 
from any prior payment. Rule 6e-3(T)(d)(1)(iii)(A) provides that, with 
respect to sales charges deducted other than from premiums (excluding 
asset-based sales charges), Rule 6e-3(T)(b)(13)(ii) is deemed satisfied 
if ``the amount of sales load deducted pursuant to any method . . . 
does not exceed the proportionate amount of sales load deducted prior 
thereto pursuant to the same method.'' Rule 6e-3(T)(d)(1)(ii)(B) 
provides comparable relief for asset-based sales charges, provided that 
``the percentage of assets taken as sales load does not exceed any of 
the percentages previously taken pursuant to the same method.''
    21. Applicants request an exemption from these ``stair step'' 
requirements because of the following three aspects of the Policies. 
First, part of the $4.00 monthly charge deducted pursuant to each 
Policy is a sales charge. While this charge will not change from month-
to-month, it will vary from month-to-month as a percentage of premiums 
paid and as a percentage of the Policy value. Assessing part of the 
sales charge as a flat monthly deduction rather than deducting it from 
premium payments is beneficial to Policy owners because (1) a greater 
amount is available to earn an investment return, (2) deductions will 
be more predictable than deducting the entire sales charge through a 
daily percentage charge, and (3) there will be an enhanced ability to 
make plans based on expected amounts of sales charge deductions.
    22. Second, the monthly and/or daily sales charge deductions may 
cease for certain periods of time and subsequently be resumed. These 
charges are suspended when deductions to recover Advances are being 
made and when the maximum amount of such charges, as a percentage of 
premium payments, has been reached. Sales charges also will cease if 
additional deductions would cause sales charges to exceed permitted 
maximums, as a percentage of premiums actually paid. These situations 
create a question regarding compliance with the requirements of Rule 
6e-3(T)(d)(1)(ii) (A) and (B), respectively, that the proportionate or 
percentage amount of sales charges deducted not exceed the 
proportionate or percentage amount previously deducted pursuant to this 
same method.
    23. Applicants assert that, if section 27(a)(3) and the related 
provisions of Rule 6e-(3T) are interpreted to prevent the resumption of 
sales charge deductions from contract assets, the utility of policy 
designs providing for such deductions would be greatly reduced. 
Deducting part of the sales charges from Policy value, rather than from 
premium payments, is advantageous to Policy owners because more assets 
are put to work as Policy value with the potential of earning a return 
for the Policy owner's benefit.
    24. Third, Rule 6e-3(T)(c)(4) defines ``sales load'' for any 
contract period as the excess of premium payments over changes in 
``cash value'' (other than from investment performance) and certain 
enumerated charges. An increase or decrease in a Policy's cash value 
resulting from the payment of an Advance or a Bonus or from subsequent 
deductions to recover an Advance could be deemed to result in an 
increase or decrease in the otherwise applicable sales load for the 
contract period in which the transaction occurs. The stair step 
provisions could apply because the operation of the Advance or Bonus 
could cause such sales load to be at a higher rate than in a preceding 
period or at a lower rate than in a subsequent period. Applicants 
submit that the Advances and Bonuses provide a significant potential 
benefit to Policy owners and that the Policies' charge structure 
complies with Rules 6e-3(T)(b)(13)(ii) and (d)(1)(ii).
    25. The stair step issues under the Policies result from the 
imposition of deferred sales charges in the form of monthly and/or 
daily deductions and, in the case of Policies that are surrendered or 
lapse before a certain time, the surrender charge. The stair step 
issues under the Policies do not result from early deduction of front-
end charges. No sales charges will be deducted from premiums. Although 
sales charges will be deducted through several different types of 
deductions, the rate of these charges will never increase.

Conclusion

    Section 6(c) of the 1940 Act, in pertinent part, provides that the 
Commission may, by order upon application, conditionally or 
unconditionally exempt any person, security or transaction, or any 
classes thereof from any provisions of the 1940 Act or rules 
thereunder, if and to the extent that such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act. For all the reasons set forth above, 
Applicants submit that their requested exemptive relief meets these 
standards for exemptive relief under section 6(c) and, therefore, 
should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12305 Filed 5-19-94; 8:45 am]
BILLING CODE 8010-01-M