[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17586]


[[Page Unknown]]

[Federal Register: July 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20405; File No. 812-8994]

 

First North American Life Assurance Company, et al.

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

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

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APPLICANTS: First North American Life Assurance Company (``First North 
American''), FNAL Variable Account (``Variable Account''), NASL 
Financial Services, Inc. (``NASL Financial'') and Wood Logan Associates 
Inc. (``Wood Logan'').

Relevant 1940 Act Sections: Exemption requested under Section 6(c) from 
Sections 26(a)(2)(C) and 27(c)(2).

SUMMARY OF APPLICATION: Applicants seek an order to the extent 
necessary to permit the deduction from the assets of the Variable 
Account of a mortality and expense risks charge imposed under certain 
flexible purchase payment individual deferred variable annuity 
contracts.

FILING DATE: The application was filed on May 19, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
person may request a hearing on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m., on 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. Notification of the date of a 
hearing may be requested by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington D.C. 
20549. Applicants: Kenneth H. Conrad, First North American Life 
Assurance Company, Corporate Center at Rye, 555 Theodore Fremd Avenue, 
Rye, New York 10580.

FOR FURTHER INFORMATION CONTACT:
Joyce M. Pickholz, Senior Counsel, or Michael V. 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 SEC's Public 
Reference Branch.

Applicants' Representations

    1. First North American, a wholly owned subsidiary of North 
American Security Life Insurance Company (``Security Life''), is a 
stock life insurance company organized under the laws of New York in 
1992. Security Life is a wholly owned subsidiary of North American Life 
Assurance Company. First North American is the depositor of the 
Variable Account. The Variable Account is registered under the Act as a 
unit investment trust and was established under New York law to offer 
certain variable annuity contracts, including the variable annuity 
contracts described in the application (the ``Contracts''). The 
Variable Account is divided into sub-accounts which invest in 
corresponding portfolios of NASL Series Trust (the ``Trust'').
    2. NASL Financial, a wholly owned subsidiary of Security Life, is 
the principal underwriter of the Contracts. It is a broker-dealer 
registered under the Securities Exchange Act of 1934 (``1934 Act'') and 
a member of the National Association of Securities Dealers, Inc. NASL 
Financial also serves as investment adviser to the Trust and is 
registered as an investment adviser under the Investment Advisers Act 
of 1940.
    3. Wood Logan, a Connecticut corporation registered as a broker-
dealer under the 1934 Act, serves as the exclusive promotional agent 
for the Contracts.
    4. The Contracts are flexible purchase payment individual deferred 
variable annuity contracts which will provide for the accumulation of 
values and the payment of annuity benefits on a fixed or variable 
basis. The Contracts are designed for use in connection with retirement 
plans which may or may not qualify for special income tax treatment 
under the Internal Revenue Code of 1986, as amended.
    5. Prior to the maturity date, First North American will, on the 
last day of each contract year, deduct from the accumulated value of 
each Contract an annual administration fee of $30. This annual 
administration fee will also be deducted when a Contract is surrendered 
on any date other than a contract anniversary. However, if prior to the 
maturity date the contract value exceeds $100,000 at the time of the 
fee's assessment, the fee will be waived. During the annuity period, 
the fee is deducted on a pro-rata basis from each annuity payment. In 
addition, First North American will deduct from the sub-accounts each 
valuation period an administration charge equal to .15% of the sub-
account assets on an annualized basis. These fees are intended to 
compensate First North American for the cost of providing 
administrative services attributable to the Contracts and the 
operations of the Variable Account and the Company in connection with 
the Contracts. The fees are based upon First North American's current 
estimates of the administrative costs attributable to the Contracts 
over their lifetime and are not designed or expected to generate a 
profit. These fees are guaranteed never to be increased. Applicants 
will rely on Rule 26a-1 under the Act for the necessary exemptive 
relief to charge such fees.
    6. No sales charge will be deducted from purchase payments as they 
are made. Instead, a withdrawal charge (contingent deferred sales 
charge) will be assessed in some circumstances when the contract value 
is completely or partially withdrawn prior to the maturity date. 
Generally, a withdrawal charge only applies to the withdrawal of 
purchase payments that have been in the Contract less than seven 
complete years. The withdrawal charge is a percentage of the amount 
withdrawn which is subject to the charge, which percentage declines 6-
6-5-5-4-3-2% over the first seven years that a purchase payment has 
been in the Contract. Withdrawals are allocated first to earnings and 
then to purchase payments on a first-in-first-out basis. There is no 
withdrawal charge with respect to withdrawals of investment earnings 
and certain other free withdrawal amounts. Under no circumstances will 
the total of all withdrawal charges exceed 6% of total purchase 
payments made. The withdrawal charge is intended to reimburse First 
North American for compensation paid to cover selling concessions to 
broker-dealers, preparation of sales literature and other expenses 
relating to sales activity. Applicants will rely on Rule 6c-8 under the 
Act for the necessary exemptive relief to permit imposition of the 
withdrawal charge.
    7. First North American 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. First North American 
assumes this mortality risk by virtue of annuity rates incorporated 
into the Contract, which cannot be changed. This assures each annuitant 
that his longevity will not have an adverse effect on the amount of 
annuity payments. Also, First North American guarantees that if the 
owner dies before the maturity date, it will pay a death benefit. The 
expense risk assumed by First North American is the risk that the 
administration fees, which fees cannot be increased, may be 
insufficient to cover actual expenses. To compensate it for assuming 
these risks, First North American will deduct from each sub-account a 
charge each valuation period at an effective annual rate of 1.25%, 
consisting of .80% for mortality risks and .45% for expense risks. The 
rate of the mortality and expense risk charge cannot be increased. If 
the mortality and expense risk charge is insufficient to cover the 
actual cost of the mortality and expense risk undertaking, First North 
American will bear the loss. Conversely, if the charge proves more than 
sufficient, the excess will be profit to First North American and will 
be available for any proper corporate purpose including, among other 
things, payment of distribution expenses.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act provides, in pertinent part, that 
the Commission, by order upon application, may conditionally or 
unconditionally exempt any persons, securities, or transactions from 
any provision of the 1940 Act 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.
    2. Section 27(c)(2) of the 1940 Act prohibits the issuer of a 
periodic payment plan certificate, and any depositor or underwriter for 
such issuer, from selling such periodic payment plan certificate unless 
proceeds of payments on such certificates (other than sales loads) are 
held under an indenture or agreement containing specified provisions. 
Section 26(a)(2) and the Rules thereunder do not permit a deduction 
from the assets of a separate account for mortality and expense risk 
charges.
    3. Applicants represent that the 1.25% mortality and expense risk 
charge is within the range of industry practice for comparable annuity 
products. Applicants state that this representation is based upon an 
analysis of publicly available information about selected similar 
industry products, taking into consideration such factors as the method 
used in charging sales loads, any contractual right to increase charges 
above current levels and the existence of charges against separate 
account assets for other than mortality and expense risks. First North 
American will maintain at its principal office, available to the 
Commission, a memorandum setting forth in detail the products analyzed 
in the course of, and the methodology and results of, the comparative 
survey made.
    4. Applicants acknowledge that the withdrawal charge 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 withdrawal charge. First 
North American has concluded that there is a reasonable likelihood that 
the proposed distribution financing arrangements made with respect to 
the Contracts will benefit the Variable Account and the contract 
owners. The basis for such conclusion is set forth in a memorandum 
which will be maintained by First North American at its principal 
office and will be available to the Commission.
    5. First North American represents that the Variable Account will 
invest only in an underlying mutual fund which undertakes, in the event 
it 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, 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 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17586 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M