[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17354]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20396; No. 812-9022]

 

Pruco Life Insurance Company, et al.

July 12, 1994.
agency: Securities and Exchange Commission (``Commission'' or ``SEC'').

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

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applicants: Pruco Life Insurance Company (``Pruco''), Pruco Life 
Individual Variable Annuity Account (``Variable Account''), and Pruco 
Securities Corporation (``PruSec'') (collectively, ``Applicants'').

relevant 1940 act sections: Order requested under Section 6(c) of the 
1940 Act granting exemptions from the provisions of Sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act.

summary of application: Applicants seek an order permitting the 
deduction from the assets of the Variable Account of a mortality and 
expense risk charge in connection with the offer and sale of certain 
flexible premium combination fixed/variable annuity contracts 
(``Contracts'').

filing date: The application was filed on May 31, 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 should be received by the Commission by 5:30 
p.m. on August 8, 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 Commission's Secretary.

addresses: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, c/o Pruco Life Insurance Company, 213 Washington Street, 
Newark, New Jersey 07102-222992.

for further information contact: Yvonne M. Hunold, Senior Counsel, or 
Michael Wible, Special Counsel, at (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 Commission's 
Public Reference Branch.

Applicants' Representations

    1. Pruco, a stock life insurance company, is a wholly owned 
subsidiary of The Prudential Insurance Company of America 
(``Prudential''). Pruco is licensed to conduct business in the District 
of Columbia, Guam, and all states except New York.
    2. The Variable Account was established as a separate account by 
Pruco to fund its variable annuity contracts. The Separate Account has 
filed a notification of registration on Form N-8A and a registration 
statement on Form N-4 with the Commission as a unit investment trust 
under the 1940 Act. Applicants have filed on Form N-4 a registration 
statement to register the Contracts as securities under the Securities 
Act of 1933.
    The Variable Account currently consists of eleven subaccounts 
(Money Market, Bond, High Yield Bond, Government Securities, Common 
Stock, Stock Index, High Dividend Stock, Natural Resources, Global 
Equity, Conservatively Managed Flexible, and Aggressive Managed 
Flexible) (``Subaccounts''), each investing in shares of a 
corresponding portfolio (``Portfolio(s)'') of The Prudential Series 
Fund, Inc. (``Series Fund''). Other portfolios of the Series Fund or of 
other funds or investment vehicles may be made available for investment 
in the future through additional subaccounts.
    3. The Series Fund is a no-load, diversified, open-end management 
investment company registered under the 1940 Act. The Series Fund 
currently offers fourteen Portfolios, of which eleven are available for 
investment by the Variable Account. Prudential, an investment adviser 
registered under the Investment Advisers Act of 1940, will be the 
investment adviser for the Series Fund.
    4. PruSec is an indirect wholly-owned subsidiary of Prudential and 
the principal underwriter of the Contracts, which will be sold and 
distributed by PruSec's registered representatives. PruSec is 
registered as a broker-dealer under the Securities Exchange Act of 
1934, as amended, and is a member of the National Association of 
Securities Dealers, Inc.
    5. The Contracts are flexible premium combination fixed/variable 
annuity contracts offered in connection with either non-tax qualified 
plans or as an Individual Retirement Annuity (``IRA'') that qualify for 
favorable tax-deferred treatment under Section 408(b) of the Internal 
Revenue Code of 1986, as amended. The Contracts also may be made 
available to certain other retirement plans that qualify for special 
federal income tax treatment in the future. The Contracts initially 
will be issued as individual contracts but also may be issued as group 
contracts used in connection with either immediate or deferred 
annuities. The Contracts permit premiums to vary in amount and 
frequency but require certain minimum initial premium payments and 
additional payments. The Contracts further provide for accumulation of 
values on either a variable or a fixed basis, or both. The fixed-rate 
option is part of Pruco's general account. Premiums allocated to the 
fixed-rate option will earn interest at a minimum guaranteed effective 
annual rate of 3 percent. Initially, the fixed-rate applicable at the 
time of allocation to the fixed-rate option will be earned for a one-
year period, with a new interest rate set monthly thereafter. At the 
end of each guarantee period, amounts allocated to that period will 
automatically be ``rolled over'' and receive the new guarantee rate, 
unless transferred to the Subaccounts.
    6. During the accumulation period, a full or partial surrender of 
the Contract may be made, subject to certain minimums and constraints 
or partial withdrawals. Withdrawals from fixed-rate option guarantee 
periods maybe effected only on the maturity date.
    7. The Contracts also will provide for a death benefit and a 
variety of payout options at annuitization. The death benefits will 
equal the greater of (a) total purchase payments (less previous 
withdrawals), and (b) the Account Value. Payout options include both 
variable and fixed payment options, and payment options based on fixed 
periods or on one or more measuring lives.
    8. No sales charges are deducted under the Contracts. All expenses 
relating to the sale of the Contracts will be paid by Pruco from its 
general assets, including amounts derived from the mortality and 
expenses risk charge. Shares of the Series Fund will be sold to the 
Variable Account at the net asset value, which reflects the investment 
advisory fee and other expenses deducted from Fund assets.
    9. Various fees and expenses are deducted under the Contracts and 
the Variable Account. A charge may be deducted for state, local or 
federal premium taxes, and any income, excise, business or other type 
of tax measured by or based on the amount of premium received by Pruco. 
The tax rates currently range from 1% to 5% and may be imposed upon 
purchase payments, on Account Value upon surrender, or when converted 
into an annuity or other benefit payment. Pruco may also charge Account 
Value or the Separate Account for any taxes attributable to the 
Separate Account or the Contract, including income taxes incurred by 
Pruco attributable to the Separate Account.
    10. Initially, Pruco will charge $15 for each transfer or 
withdrawal from or among the Subaccounts after the first four transfers 
or withdrawals in each Contract year. No charge is imposed for 
transfers or withdrawals in connection with dollar cost averaging, the 
systematic withdrawal programs or from the fixed-rate option. 
Initially, an annual maintenance fee of $30 may be deducted 
proportionately from Contract Value allocated among the Subaccounts and 
the fixed-rate option if the Contract Value is less than $10,000 on 
December 31 or at the time a full withdrawal is effected. Pruco 
reserves the right to deduct a separate charge against the assets in 
the Separate Account to compensate it for administration of the 
Contract and the Separate Account, but does not currently intend to do 
so. This charge is guaranteed not to exceed .15% for the duration of 
the Contract.
    Applicants represent that current and future charges for 
administration of the Contract will be deducted from the Subaccounts in 
reliance on Rule 26a-1 under the 1940 Act and will not be greater than 
the cost of administrative services provided under the Contract. Pruco 
does not expect or intend to make a profit from these charges.
    11. A daily charge equal to an annual rate of .95% of the value of 
the net assets in each Subaccount attributable to the Contracts will be 
imposed to compensate Pruco for bearing certain mortality and expense 
risks it assumes in offering and administering the Contracts and in 
operating the Variable Account. Of this amount, .63% is attributable to 
mortality risks, and .32% is attributable to expense risks. The 
aggregate charge is guaranteed by Pruco not to increase. The charge may 
be a source of profit for Pruco, which will be added to its surplus and 
may be used for, among other things, the payment of distribution, sales 
and other expenses. Pruco currently anticipates a profit from this 
charge.
    12. The mortality risk arises from Pruco's contractual obligation 
to make periodic annuity payments (determined in accordance with 
Pruco's annuity tables and other Contract provisions) regardless of how 
long all annuitants or any individual annuitant lives. Contract owners 
thus are assured that neither annuitant's longevity nor an improvement 
in life expectancy generally (which is greater than expected) will 
adversely effect annuity payments the payee will receive under the 
Contracts. This eliminates the risk of outliving the funds accumulated 
for retirement. Morality risk also is assumed in connection with 
payment of the death benefit because the death benefit guarantee could 
exceed the Account Value. There is no charge for the guaranteed death 
benefit.
    13. The expense risk assumed by Pruco is that its actual expenses 
in issuing and administering the Contracts and operating the Variable 
Account will exceed the amount recovered through the administrative 
charges.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the 1940 Act to the 
extent that the 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.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositor or 
principal underwriter, from selling periodic payment plan certificates 
unless the proceeds of all payments, other than sales loads, are 
deposited with a qualified bank and held under under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties normally performed by the 
bank itself.
    3. Applicants request exemptions from Sections 26(a)(2) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the assets of the Separate Account of the charge for 
mortality and expense risks. Applicants believe that the requested 
exemptions are necessary and appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    4. Applicants submit that Pruco is entitled to reasonable 
compensation for its assumption of mortality and expense risks. 
Applicants represent that the mortality and expense risk charge is 
consistent with the protection of investors because it is a reasonable 
and proper insurance charge. The charge is a reasonable charge to 
compensate Pruco for the risks that: (a) Annuitants under the Contract 
will live longer individually or as a group than has been anticipated 
in setting the annuity rates guaranteed in the Contracts; (b) the 
Account Value will be less than the death benefit; and (c) 
administrative expenses will be greater than amounts derived from the 
administrative charges.
    5. Applicants represent that the .95% mortality and expense risk 
charge under the Contracts is within the range of industry practice for 
comparable annuity products. This representation is based upon 
Applicants' analysis of publicly available information about similar 
industry products, taking into consideration such factors as current 
charge levels, the existence of charge level guarantees, death benefit 
guarantees, and guaranteed annuity rates. Applicants represent that 
Pruco will maintain at its administrative offices, available to the 
Commission, a memorandum setting forth in detail the products analyzed 
in the course of, and the methodology and results of, its comparative 
survey.
    6. Applicants acknowledge that, if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be available to pay distribution expenses. Pruco has concluded that 
there is a reasonable likelihood that the proposed distribution 
financing arrangements will benefit the Variable Account and the 
Contract Owners. The basis for that conclusion is set forth in a 
memorandum which will be maintained by Pruco at its administrative 
offices and will be available to the Commission.
    7. Applicants also represents that the Variable Account will invest 
only in open-end management investment companies that undertake, in the 
event that such company should adopt a plan under Rule 12b-1 to finance 
distribution expenses, to have a board of directors (or trustees), a 
majority of whom are not ``interested persons'' of the company, 
formulate and approve any such plan.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act. 
Accordingly, Applicants request relief from Sections 26(a)(2)(C) and 
27(c)(2) to the extent necessary to permit the assessment and deduction 
of the mortality and expense risk charge under the Contracts. 
Applicants assert that the requested exemptions are necessary and 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17354 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M