[Federal Register Volume 59, Number 102 (Friday, May 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12940]


[[Page Unknown]]

[Federal Register: May 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20309; File No. 812-8816]

 

Principal Mutual Life Insurance Company, et al.

May 20, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Principal Mutual Life Insurance Company (``Principal 
Mutual''), Principal Mutual Life Insurance Company Separate Account B 
(``Separate Account B'') and Princor Financial Services Corporation 
(``Princor'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
Act granting 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 Separate Account B of the mortality and 
expense risks charge imposed under certain flexible purchase payment 
individual variable annuity contracts (the ``Contracts'').

FILING DATE: The application was filed on February 7, 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 SEC by 5:30 p.m., on 
June 14, 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. Persons may request notification of the date of a hearing 
by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicants, The Principal Financial Group, Des Moines, IA 50392-0300.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
Wendell M. Faria, Acting Assistant Director, on (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.

Applicants' Representations

    1. Principal Mutual, a mutual life insurance company, was 
incorporated under the laws of Iowa in 1879 as Bankers Life 
Association. It changed its name to Bankers Life Company in 1911 and 
assumed its present name in 1986. Principal Mutual sells life, 
disability, and health insurance, and annuities written both on an 
individual and group basis.
    2. Separate Account B was established on January 12, 1970. It is 
registered under the Act as a unit investment trust. Under Iowa 
insurance laws and regulations the income, gains or losses, whether or 
not realized, of Separate Account B are credited to or charged against 
the assets of Separate Account B without regard to the other income, 
gains or losses, of Principal Mutual. Separate Account B is divided 
into three divisions (``Divisions'') corresponding to the three mutual 
funds (``Mutual Funds'') in which its assets may be invested. The 
Mutual Funds are diversified, open-end, management investment companies 
that serve as funding vehicles for variable insurance products of 
Principal Mutual and are not offered directly to the public. Principal 
Mutual may, at a later date, determine to create additional Divisions 
of Separate Account B to invest in any additional Mutual Fund shares 
which may be issued in the future or in the shares of other investment 
companies.
    3. Princor, a wholly-owned subsidiary of Principal Mutual, will be 
the principal underwriter of the Contracts. It is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and is a member 
of the National Association of Securities Dealers, Inc.
    4. The Contracts are flexible purchase payment individual variable 
annuity contracts which provide for the accumulation of values on a 
fixed or variable basis and the payment of annuity benefits on a fixed 
basis. The Contracts are designed to provide individuals with 
retirement benefits in connection with certain plans entitled to 
special tax treatment under the Internal Revenue Code and in connection 
with non-tax qualified retirement plans. Subject to certain 
restrictions, amounts accumulated may be transferred among Divisions of 
Separate Account B or to or from Principal Mutual's general account.
    5. The owner of a Contract may allocate purchase payments among the 
available Divisions of Separate Account B and to Principal Mutual's 
general account for accumulation on a fixed basis (the ``Fixed 
Account''). The owner may also transfer on either a scheduled or 
unscheduled basis amounts accumulated in any Division or the Fixed 
Account subject to certain restrictions. For any unscheduled transfer 
from a Division made after the twelfth such transfer in a Contract 
year, Principal Mutual may impose a transaction fee not to exceed $30. 
Such charge is designed to cover the administrative expenses associated 
with the transfer. Transfers among Divisions of Separate Account B will 
be made in reliance upon the exemptive relief provided by Rule 11a-2 
under the Act.
    6. On the last day of each Contract year prior to the commencement 
of annuity payments, Principal Mutual will deduct from the accumulated 
value of the Contract an annual fee equal to the lesser of $30 or 2% of 
the accumulated value. The fee will be deducted from the owner's 
interest in either the Fixed Account or a Division of Separate Account 
B, whichever has the greatest value. The annual fee will also be 
deducted if the Contract is surrendered on any date other than a 
Contract anniversary. No annual fee will be deducted, either annually 
or upon surrender, if the accumulated value of the Contract is at least 
$30,000 at the time the fee is to be deducted.
    7. Principal Mutual reserves the right to deduct from each Division 
of Separate Account B each valuation period an administrative expense 
charge equivalent to a nominal annual rate not greater than .15% of the 
average daily net assets of the Division. The annual fee and the 
administrative expense charge are designed to help cover administrative 
costs relating to the Contracts, such as those incurred in issuing 
Contracts, establishing and maintaining Contract records, making 
regulatory filings, furnishing notices, voting materials and other 
communications, providing computer, actuarial and accounting services, 
and processing Contract transactions. The annual fee and administrative 
expense charge are designed only to reimburse Principal Mutual for 
administrative expenses on a cumulative basis. With respect to any 
issued Contract, the annual fee is guaranteed never to be increased and 
the administrative expense charge, if imposed, is guaranteed never to 
be increased above .15% on an annualized basis. Applicants will rely on 
Rule 26a-1 under the Act for the necessary exemptive relief to impose 
the annual fee and the administrative expense charge.
    8. Principal Mutual will deduct amounts necessary to cover any 
premium taxes required by state or local law. Such deductions may be 
made from purchase payments when received or from the Contract's 
accumulated value when surrendered (in whole or in part) or applied to 
provide annuity payments. Applicants will rely on Rule 26a-2(d) under 
the Act to permit the deduction of such taxes from the assets of 
Separate Account B.
    9. No sales charge will be deducted from purchase payments as they 
are made. Instead, Principal Mutual will deduct a surrender charge 
(contingent deferred sales charge) on certain total and partial 
surrenders of the Contract on or prior to the commencement of annuity 
payments. The surrender charge is intended to partially reimburse 
Principal Mutual for expenses incurred in the sale of the Contracts, 
including commissions and other promotional or distribution expenses 
associated with the marketing of the Contracts.
    10. The surrender charge is a percentage of the purchase payments 
withdrawn or surrendered which were received by Principal Mutual during 
the seven-year period prior to the withdrawal or surrender. The 
applicable percentage is based on the number of completed Contract 
years between the Contract year in which the purchase payment was paid 
and the Contract year of surrender. For purchase payments received less 
than three completed Contract years at the time of surrender, the 
surrender charge is six percent of the purchase payment. For purchase 
payments received three or more completed Contract years at the time of 
surrender, the surrender charge is reduced one percent each Contract 
year, so that purchase payments held for three completed Contract years 
are subject to a five percent charge, purchase payments held for four 
completed Contract years are subject to a four percent charge, and so 
forth. Purchase payments held for seven or more completed Contract 
years are not subject to any surrender charge. For purposes of 
calculating the surrender charge, amounts surrendered are deemed to be, 
first, purchase payments made in Contract years no longer subject to a 
surrender charge, then, amounts entitled to a free surrender privilege 
and, then, purchase payments made on a first-in, first-out basis. The 
amount of the surrender charge may be reduced in circumstances 
permitted by the Act and the rules thereunder.
    11. Pursuant to a free surrender privilege, no surrender charge 
will apply to surrenders made during a Contract year in an amount not 
exceeding the greater of (i) the Contract's accumulated value minus 
purchase payments not surrendered and (ii) an amount equal to (a) ten 
percent of purchase payments still subject to a surrender charge as of 
the last Contract anniversary plus (b) 10 percent of any purchase 
payments made since the last Contract anniversary reduced by (c) any 
partial surrenders made since the last Contract anniversary. In 
addition, no surrender charge applies to amounts used to provide 
annuity payments or a death benefit payment or amounts distributed to 
satisfy the minimum distribution requirements of section 401(a)(9) of 
the Internal Revenue Code. Finally, if permitted by state law, the 
surrender charged will be waived, pursuant to a rider to the Contracts 
and subject to the conditions set forth therein, as to the payment of 
any amounts after the first Contract anniversary as a result of the 
owner's or annuitant's being confined to a health care facility (as 
defined in the rider), having been diagnosed as having a terminal 
illness (as defined in the rider) or being totally and permanently 
disabled (as defined in the rider). Applicants will rely on Rule 6c-8 
under the Act for the necessary exemptive relief to permit imposition 
of the surrender charge.
    12. Principal Mutual will also deduct a $30 transaction charge for 
each unscheduled partial surrender made after the first such surrender 
during a Contract year. Such charge, designed to cover the 
administrative expenses associated with the surrender, will be deducted 
from the owner's interest in the Fixed Account or each Division of 
Separate Account B from which the surrender is made in the same 
proportion that the amount surrendered from the Fixed Account or such 
Division bears to the total amount surrendered. Applicants will rely on 
Rule 26a-1 under the Act for the necessary exemptive relief to charge 
such fee.
    13. Principal Mutual assumes mortality and expense risks under the 
Contracts. The mortality risk is the risk that annuitants may live for 
a longer period of time than estimated. Principal Mutual assumes this 
mortality risk by virtue of annuity rates incorporated into the 
Contract which cannot be changed. This assures each annuitant that 
neither his longevity nor an improvement in life expectancy generally 
will have an adverse effect on the amount of annuity payments. Also, 
Principal Mutual guarantees that if the annuitant dies before the 
commencement of annuity payments it will pay a minimum death benefit. 
The expense risk assumed by Principal Mutual is the risk that actual 
administration expenses incurred in connection with issuing and 
administering the Contracts will exceed the limits on administrative 
charges set in the Contracts.
    14. To compensate it for assuming these risks, Principal Mutual 
deducts from each Division a charge each valuation period equivalent to 
an annual rate of 1.25% of the average daily net assets of the 
division, consisting of .80% for mortality risks and .45% for expense 
risks. The rate of the mortality and expense risk charge cannot be 
increased, and the charge is assessed only during the period prior to 
the commencement of annuity payments. If the charge is insufficient to 
cover the actual cost of the mortality and expense risk undertaking. 
Principal Mutual will bear the loss. Conversely, if the charge proves 
more than sufficient, the excess will be profit to Principal Mutual and 
will be available for any proper corporate purpose including, among 
other things, payment of distribution expenses.

Applicants' Legal Analysis

    1. Sections 26(a)(2)(C) and 27(c)(2) of the Act requires that all 
payments received under periodic payment plan certificates by held by a 
qualified trustee or 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 Principal Mutual is entitled to 
reasonable compensation for its assumption of mortality and expense 
risks and Applicants represent that the 1.25% charge for the Contracts 
is within the range of industry practice for comparable annuity 
products. Applicants state that this representation is based upon an 
analysis by Principal Mutual of publicly available information about 
selected similar industry products. Principal Mutual shall maintain at 
its principal office, available to the Commission upon request, 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 acknowledge that the surrender charge under the 
Contracts will 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 risk charge, all or a portion of such profit may 
be offset by distribution expenses not reimbursed by the surrender 
charge. In such circumstances a portion of the mortality and expense 
risk charge might be viewed as providing for a portion of the costs 
relating to distribution of the Contracts. Notwithstanding the 
foregoing, Principal Mutual has concluded that there is a reasonable 
likelihood that the proposed distribution financing arrangements made 
with respect to the Contracts will benefit Separate Account B and the 
Contract owners. The basis for the conclusion is set forth in a 
memorandum which will be maintained by Principal Mutual at its 
principal office and will be available to the Commission upon request.
    4. Principal Mutual represents that Separate Account B will invest 
only in underlying mutual funds which undertake, in the event such 
funds should adopt any plan under Rule 12b-1 to finance distribution 
expenses, to have such plan formulated and approved by a 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 
Act.

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 Act is necessary and appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.


    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12940 Filed 5-26-94; 8:45 am]
BILLING CODE 8010-01-M