[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18029]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20410; File No. 812-8928]
Preferred Life Insurance Company of New York, et al.
July 18, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Amended Order under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Preferred Life Insurance Company of New York (``Company''),
Preferred Life Variable Account C (``Variable Account''), and NALAC
Financial Plans, Inc.
RELEVANT 1940 ACT SECTIONS: Amended Order requested under Section 6(c)
of the 1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2)
of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an Amended Order to permit the
deduction of a mortality and expense risk charge under certain variable
annuity contracts from the assets of the Variable Account, or any other
separate account established by the Company in the future to support
materially similar variable annuity contracts.
FILING DATE: Applicants initially filed an application on February 7,
1989. Notice of the Application for Exemption was published on March
22, 1989 (Release No. IC-16890, File No. 812-7238) and an Order
Granting Exemptions was issued on April 20, 1989 (Release No. IC-
16934). The Applicants filed this Application for an Amended Order on
April 7, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the Application
for an Amended Order and superseding the existing Order will be issued
unless the Commission orders a hearing. Interested persons may request
a hearing by writing to the Secretary of the SEC and serving the
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 August 12, 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. 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 SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants: 152 West 57th Street,
18th Floor, New York, NY 10019.
FOR FURTHER INFORMATION CONTACT:
W. Thomas Conner, Attorney, or Michael V. Wible, Special Counsel,
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 SEC's Public
Reference Branch.
Applicants' Representations
1. The Company is a stock life insurance company organized under
the laws of the state of New York. The Company is a wholly-owned
subsidiary of Allianz Life Insurance Company of North America
(``Allianz''). Allianz is a stock life insurance company organized
under the laws of Minnesota.
2. The Variable Account is a segregated investment account of the
Company and is registered under the 1940 Act as a unit investment
trust. The Variable Account was established to fund certain variable
annuity contracts (``Contracts'') issued by the Company. The Variable
Account is subdivided into sub-accounts, each of which invests in a
fund of the Franklin Valuemark Funds, a Massachusetts business trust
registered under the 1940 ``Act'' as a diversified open-end management
investment company.
3. NALAC Financial Plans, Inc., a broker-dealer registered under
the Securities Exchange Act of 1934, is the distributor of the
Contracts.
4. The Contracts are individual flexible payment deferred variable
annuity contracts (``Deferred Contracts'') or individual immediate
variable annuity contracts (``Immediate Contracts''). The Contracts are
available in connection with retirement plans that qualify for Federal
tax advantages and for plans that do not so qualify.
5. The Contracts provide for certain charges. Any premium taxes or
other taxes payable to a state or other governmental entity will be
charged against the Contract values. The Company may, in its sole
discretion, pay taxes when due and deduct that amount from the Contract
at a later date.
6. Owners of Deferred Contracts may transfer all or a part of their
interest in a sub-account to another sub-account. The Company reserves
the right to charge, per transfer, the lesser of $25 or 2% of the
amount transferred. Prior to the date annuity payments begin (``Annuity
Date''), there is no charge for the first three transfers per Contract
year. Currently, the Company permits twelve transfers per Contract year
without a transfer fee.
Owners of Immediate Contracts may transfer all or part of their
interest in a sub-account to another sub-account without the imposition
of any transfer fee.
7. For Deferred Contracts, the Company will deduct an annual
contract maintenance charge of $30. Applicants represent that this
charge has not been set at a level greater than actual cost and
contains no element of profit. There is no contract maintenance charge
for Immediate Contracts.
8. The Company deducts an administrative expense charge that is
equal on an annual basis to .15% of the average daily net assets of the
Variable Account. This charge, together with the contract maintenance
charge, is designed to reimburse the Company for the expenses it incurs
in the establishment and maintenance of the Contracts and the Variable
Account. The Company does not intend to profit from this charge. Should
this charge be insufficient, the Company will not increase this charge
and will incur the loss. Applicants rely on Rule 26a-1 to deduct the
contract maintenance charge and the administrative expense charge.
Applicants represent that the administrative expense charge will be
reduced in the future to the extent that the amount of this charge is
in excess of that necessary to reimburse the Company for its
administrative expenses.
9. The Contracts do not provide for a front-end sales charge to be
deducted from purchase payments. Under the Deferred Contracts, a
contingent deferred sales charge (``CDSC'') is imposed on full or
partial surrenders to reimburse the Company for expenses incurred in
connection with the promotion, sale, and distribution of the Contracts.
The CDSC applies only to purchase payments received within five years
of the date of surrender. No CDSC is imposed on distributions made as
annuity payments. In calculating the CDSC, purchase payments are
allocated to the amount surrendered on a first-in, first-out basis. The
amount of the CDSC is calculated by (i) allocating purchase payments to
the amount surrendered; (ii) multiplying each allocated purchase
payment that has been held under the Contract by a percentage
corresponding to the period for which the payment was held; and (iii)
adding the product of each multiplication in (ii) above. Under certain
of the Deferred Contracts, the percentages are as follows:
------------------------------------------------------------------------
Years since payment Percentage
------------------------------------------------------------------------
0-1....................................................... 5
1-2....................................................... 5
2-3....................................................... 4
3-4....................................................... 3
4-5....................................................... 1.5
5+........................................................ 0
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Under other of the Deferred Contracts, the percentages are as
follows:
------------------------------------------------------------------------
Years since payment Percentage
------------------------------------------------------------------------
0-1....................................................... 6
1-2....................................................... 5
2-3....................................................... 4
3-4....................................................... 3
4-5....................................................... 1.5
5+........................................................ 0
------------------------------------------------------------------------
In no event will the aggregate CDSC exceed 9% of the total purchase
payments made. A Contract owner may surrender no more than once
annually 15% of purchase payments less prior surrenders without
incurring a CDSC. The Company may eliminate or reduce the CDSC under
Company procedures then in effect. There is no CDSC imposed on
Immediate Contracts.
10. For all Contracts issued in connection with the Variable
Account, the Company deducts a mortality and expense risk charge that
is equal, on an annual basis, to 1.25% of the average daily net assets
of the Variable Account. Of this 1.25% charge, approximately .90% is
for mortality risks and .35% is for expense risks.
The mortality risks assumed by the Company arise from its
contractual obligation to make annuity payments after the Annuity Date
for the life of the annuitant in accordance with the annuity rates
guaranteed in the Contracts. The expense risk assumed by the Company is
that all actual expenses involved in administering the Contracts,
including Contract maintenance costs, administrative costs, mailing
costs, data processing costs, legal fees, accounting fees, filing fees,
and the costs of other services may exceed the amount recovered from
the contract maintenance charge and the administrative expense charge.
Applicants' Legal Analysis and Conditions
1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust and any depositor or underwriter
thereof from selling periodic payment plan certificates unless the
proceeds of all payments are deposited with a qualified trustee or
custodian and held under arrangements that prohibit any payment to the
depositor or principal underwriter except a fee, not exceeding such
reasonable amounts as the Commission may prescribe, for performing
bookkeeping and other administrative services.
2. Applicants request an amended order under Section 6(c) of the
1940 Act exempting them from Sections 26(a)(2)(C) and 27(c)(2) of the
1940 Act to the extent necessary to permit the deduction of the
mortality and expense risk charge from the assets of the Variable
Account under the Contracts. Applicants request that the Amended Order
also permit the deduction of the mortality and expense risk charge from
the assets of any other separate account established by the Company in
the future to support variable annuity contracts offered on a basis
similar in all material respects to the basis on which the Contracts
are offered.
3. Applicants submit that their request for an Amended Order that
applies to the Variable Account and to future separate accounts issuing
contracts that are substantially similar to the Contracts is
appropriate in the public interest. Such an amended order would promote
competitiveness in the variable annuity contract market by eliminating
the need for the Company to file redundant exemptive applications,
thereby reducing its administrative expenses and maximizing the
efficient use of its resources. Applicants further submit that the
requested relief is consistent with the purposes of the 1940 Act and
the protection of investors for the same reasons. Investors would not
receive any benefit or additional protection by the Company by being
required repeatedly to seek exemptive relief with respect to the same
issues addressed in this application.
4. Applicants represent that the mortality and expense risk charge
is reasonable in relation to the risks undertaken by the Company and
within the range of industry practice with respect to comparable
annuity products. Applicants base this representation on an analysis of
the mortality risks, taking into consideration such factors as any
contractual right to increase charges above current levels, the
guaranteed annuity purchase rates, the expense risks taking into
consideration the existence of charges against separate account assets
for other than mortality and expense risks, and the estimated costs,
now and in the future, for certain product features as well as an
examination of comparable annuity products. The Company represents that
it will maintain at its principal office a memorandum, available to the
Commission, setting forth in detail this analysis.
5. If a profit is realized from the mortality and expense risk
charge, all or a portion of such profit may be viewed as being offset
by distribution expenses not reimbursed by the CDSC. The Company
represents that there is a reasonable likelihood that the proposed
distribution financing arrangements will benefit the Variable Account
and Contract owners. The basis for such conclusion will be set forth in
a memorandum maintained by the Company at its principal office and
available to the Commission upon request.
6. The Company represents that the Variable Account will invest
only in management investment companies that undertake, in the event
the company adopts a plan to finance distribution expenses under Rule
12b-1 under the 1940 Act, to have a board of directors, a majority of
whom are not interested persons of the company within the meaning of
Section 2(a)(19) of the 1940 Act, formulate and approve any such plan.
Conclusion
Applicants assert that, for the reasons and upon the facts set
forth above, the requested exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to deduct the mortality and expense risk
charge from the assets of the Variable Account under the Contracts meet
the standards in Section 6(c) of the 1940 Act. Applicants assert that
the exemptions requested are necessary and appropriate in the public
interest and consistent with the protection of investors and the
policies 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. 94-18029 Filed 7-22-94; 8:45am]
BILLING CODE 8010-01-M