[Federal Register Volume 59, Number 174 (Friday, September 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22213]


[[Page Unknown]]

[Federal Register: September 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20523; File No. 812-9092]

 

American Enterprise Life Insurance Company, et al.

September 1, 1994.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the 
``SEC'').

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

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APPLICANTS: American Enterprise Life Insurance Company (``American 
Enterprise Life''), American Enterprise Variable Annuity Account (the 
``Variable Account''), and IDS Financial Services Inc. (American 
Enterprise Life, Variable Account, and IDS Financial Services Inc. 
shall be referred to herein collectively as ``Applicants.'')

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
1940 Act from Sections 22(d), 26(a)(2)(C), and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order permitting: (i) The 
deduction of a mortality and expense risk charge from the assets of 
existing and future subaccounts of the Variable Account or any other 
subaccounts established in the future by American Enterprise Life to 
support individual deferred fixed/variable annuity contracts (the 
``Contracts''); and (ii) the application of the ``Waiver of Withdrawal 
Charges'' benefit under certain of these Contracts.

FILING DATE: The application was filed on July 1, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and by serving 
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 September 26, 
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 issue contested. Persons may request 
notification of a hearing by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, c/o Mary Ellyn Minenko, Counsel, American Enterprise Life 
Insurance Company, IDS Tower 10, Minneapolis, MN 55440.

FOR FURTHER INFORMATION CONTACT:Patrice M. Pitts, Attorney, Division of 
Investment Management, Office of Insurance Products, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The 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. American Enterprise Life is a stock life insurance company 
organized in 1981 under the laws of Indiana. American Enterprise Life 
became a wholly owned subsidiary of IDS Life Insurance Company (``IDS 
Life'') on September 30, 1986; previously, American Enterprise Life had 
been a wholly owned subsidiary of AMEX Life Assurance Company. IDS Life 
is a wholly owned subsidiary of IDS Financial Corporation which, in 
turn, is a wholly owned subsidiary of the American Express Company.
    2. The Variable Account was established on July 15, 1987, as a 
separate account under Indiana law to fund variable contracts issued by 
American Enterprise Life. The Variable Account is registered as a unit 
investment trust under the 1940 Act. The Variable Account has filed a 
Form N-4 registration with the Commission in connection with the 
Contracts issued by American Enterprise Life (File No. 33-54471).
    3. Each subaccount of the Variable Account will invest solely in 
the shares of one of the corresponding funds of a registered investment 
company (the ``Funds''). Currently there are six subaccounts that will 
invest in the shares of registered investment companies managed by IDS 
Life. American Enterprise Life plans, at a later date, to create 
additional subaccounts to invest in additional Funds. All Funds are or 
will be registered with the Commission as diversified open-end 
management investment companies.
    4. IDS Financial Services Inc., the principal underwriter of the 
Variable Account, is a subsidiary of IDS Financial Corporation. IDS 
Financial Services Inc. is registered as a broker-dealer under the 
Securities Exchange Act of 1934, and is a member of the National 
Association of Securities Dealers.
    5. The Contracts are designed to provide retirement and other 
benefits. Purchase payments may be accumulated before retirement on a 
variable and/or fixed basis.
    6. Contract owners must make an initial lump sum purchase payment 
and may make additional purchase payments under the Contracts. The 
initial purchase payment must be at least $5,000 for nonqualified 
Contracts and $1,000 for qualified Contracts. After making the initial 
purchase payment, Contract owners may make additional payments of at 
least $500 for nonqualified and qualified Contracts. American 
Enterprise Life reserves the right to limit total purchase payments for 
the Contracts to $1,000,000 and to change the limits on purchase 
payment amount.
    7. The Contracts provide for allocation of purchase payments to the 
subaccounts of the Variable Account and/or to a fixed account. The 
minimum value of a Contract owner's investment in a subaccount of the 
Variable Account or in a fixed account is $500.
    8. Prior to the retirement date, the Contract owner may transfer 
all or part of the Contract value held in one or more of the 
subaccounts of the Variable Account to another one or more of the 
subaccounts. Within 30 days before or after a Contract anniversary, the 
owner may transfer values from a fixed account to one or more of the 
subaccounts, but no new transfers from a subaccount to a fixed account 
may be made for six months after such a transfer. There is no charge 
for these transfers.
    9. Upon retirement, annuity payments will be made on a variable 
and/or a fixed basis. Retirement benefits may be made in a lump sum, 
under one of five annuity payment plans, or under any other arrangement 
acceptable to American Enterprise Life.
    10. American Enterprise Life will deduct an annual Contract 
administrative charge of $30 from the Contract on each Contract 
anniversary or upon total withdrawal of the Contract. American 
Enterprise Life reserves the right to waive this Contract 
administrative charge for any Contract year where the Contract value on 
the current Contract anniversary is $50,000 or more. American 
Enterprise Life also will assess the subaccounts of the Variable 
Account a daily asset charge at an effective annual rate of 0.25 
percent of net assets for administrative expenses.
    11. These administrative charges reimburse American Enterprise Life 
for the administrative services attributable to the Contracts and the 
operations of the Variable Account. These administrative charges cannot 
be increased, and the annual Contract administrative charge does not 
apply after retirement payments begin. These administrative charges 
represent reimbursement for only the actual administrative costs 
expected to be incurred over the life of the Contracts.
    12. To the extent such taxes are payable, American Enterprise Life 
will make a charge against the Contract value for any premium taxes. No 
charges currently are made for other federal, state, or local taxes. 
American Enterprise Life reserves the right to deduct such taxes from 
the Variable Account in the future.
    13. American Enterprise Life will assess the subaccounts of the 
Variable Account a daily mortality and expense risk charge equal to 
1.25 percent of the average daily net assets of the subaccounts on an 
annual basis. American Enterprise Life estimates that approximately 
two-thirds of this charge is for assumption of the mortality risk and 
one-third is for the assumption of the expense risk. This charge cannot 
be increased during the life of the Contracts.
    14. American Enterprise Life assumes certain mortality risks by its 
contractual obligation to continue to make retirement payments for the 
entire life of the annuitant under annuity options which involve life 
contingencies.
    15. American Enterprise Life assumes an expense risk because the 
administrative charges may be insufficient to cover actual 
administrative expenses. These include the costs and expenses of: 
Processing purchase payments, retirement payments, withdrawals and 
transfers; furnishing confirmation notices and periodic reports; 
calculating mortality and expense risk charges; preparing voting 
materials and tax reports; updating registration statements; and 
covering actuarial and other expenses.
    16. American Enterprise Life assumes additional mortality and 
certain expense risks under the Contracts through its contractual 
obligation to pay a death benefit in a lump sum (or in the form of an 
annuity payment plan) upon the death of owner or annuitant prior to the 
retirement date. If the owner or the annuitant both were age 75 or 
younger on the date the Contract was issued, and all withdrawals made 
from the Contract have been without withdrawal charge, the beneficiary 
receives the greater of: (i) The Contract value; or (ii) the total 
purchase payments paid less any amounts withdrawn; or (iii) on or after 
the fifth Contract anniversary, the death benefit as of the most recent 
fifth Contract anniversary adjusted by adding any purchase payments 
made since that most recent fifth Contract anniversary and by 
subtracting any amounts withdrawn since that most recent fifth Contract 
anniversary. If the owner or annuitant both were age 75 or younger on 
the date the Contract was issued, but withdrawals subject to a 
withdrawal charge have been made from the Contract, or if either the 
owner or annuitant were age 76 or older on the date the Contract was 
issued, the beneficiary receives the Contract value.
    17. If the administrative charges and the mortality and expense 
risk charge are insufficient to cover the expenses and costs assumed, 
the loss will be borne by American Enterprise Life. Conversely, if the 
amount deducted proves more than sufficient, the excess will represent 
a profit to American Enterprise Life. American Enterprise Life does not 
expect to profit from the administrative charges. American Enterprise 
Life does expect to profit from the mortality and expense risk charge. 
Any profit would be available to American Enterprise Life for any 
proper corporate purpose including, among other things, payment of 
distribution expenses.
    18. No sales charge is collected or deducted at the time purchase 
payments are applied under the Contracts. A contingent deferred sales 
charge (``withdrawal charge'') will be assessed on certain full or 
partial withdrawals. The amounts obtained from the contingent deferred 
sales charge will be used to help defray expenses incurred in 
connection with the sale of the Contracts, including commissions and 
other promotional or distribution expenses associated with the printing 
and distribution of prospectuses and sales material.
    19. A withdrawal charge applies if all or part of the Contract 
value is withdrawn from new payments. For the Contract year of the 
withdrawal, new payments are purchase payments received during the 
Contract year of withdrawal and during the six immediately preceding 
Contract years. Old payments are purchase payments received in any 
Contract year six or more years prior to the Contract year of 
withdrawal. American Enterprise Life determines the withdrawal charge 
by multiplying each of the new payments by the applicable withdrawal 
charge percentages, and then summing the total withdrawal charges.
    20. The new payment withdrawal charge percentage depends on the 
number of Contract years since the payment was received by American 
Enterprise Life. The withdrawal charge begins at 7 percent in the first 
contract year from payment receipt and declines by 1 percent per 
Contract year to 0 percent after seven Contract years from payment 
receipt. The withdrawal charge cannot be increased during the life of 
the Contracts.
    21. Each year Contract owners may withdraw up to 10 percent of 
their Contract value at their prior Contract anniversary and Contract 
earnings (current Contract value less purchase payments not previously 
withdrawn) in excess of the annual 10 percent free withdrawal amount 
without incurring a withdrawal charge. In addition, there is no 
withdrawal charge on retirement payments under an annuity payment plan, 
and payments made in the event of the death of the owner or annuitant. 
For purposes of determing the amount of any withdrawal charge, 
withdrawals will be deemed to be taken: first, from the 10 percent of 
Contract value at the prior Contract anniversary not previously 
withdrawn this Contract year; next, from Contract earnings, if any, in 
excess of the annual 10 percent free withdrawal amount; next, from old 
payments not previously withdrawn; and last, from new payments.
    22. In some cases American Enterprise Life may expect to incur 
lower sales and administrative expenses or to perform fewer services. 
In those cases, American Enterprise Life may, in its discretion, reduce 
or eliminate certain administrative and withdrawal charges. American 
Enterprise Life expects this to occur infrequently, if at all.
    23. To the extent permitted by state law, American Enterprise Life 
provides a ``Waiver of Withdrawal Charges'' benefit under the Contract 
when the Contract owner and the annuitant both are younger than age 76 
on the date that the Contract is issued. This ``Waiver of Withdrawal 
Charges'' benefit provides that withdrawal charges will be waived if 
American Enterprise Life receives satisfactory proof that, as of the 
date the Contract owner requests the withdrawal, the owner or annuitant 
is confined to a hospital or a nursing home and has been for the prior 
60 days. To qualify, the nursing home must meet the following criteria: 
be licensed by an appropriate licensing agency to provide nursing care; 
provide 24-hour-a-day nursing services; have a doctor available for 
emergency situations; have a nurse on duty or on call at all times; 
maintain clinical records; and have appropriate methods for 
administering drugs.

Applicants' Legal Analysis

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant exemptions from Sections 22(d), 26(a)(2)(C) and 
27(c)(2) thereof to the extent necessary to permit: (i) The assessment 
of a mortality and expense risk charge with respect to the Contracts; 
and (ii) the application of the ``Waiver of Withdrawal Charges'' 
benefit with respect to certain Contracts.
    2. Section 6(c) of the 1940 Act, in pertinent part, provides that 
the Commission, by order upon application, may conditionally or 
unconditionally exempt any person, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provisions of the 1940 Act 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 Act. Applicants state that the terms of the 
relief requested with respect to any future Contracts funded by the 
subaccounts of the Variable Account, and by new subaccounts established 
in the future, are consistent with the standards enumerated in Section 
6(c) of the 1940 Act. Without the requested relief, American Enterprise 
Life would have to request and obtain exemptive relief for each new 
subaccount it establishes to fund any materially similar Contracts it 
issues in the future. Applicants assert that these additional requests 
for exemptive relief would present no issues under the 1940 Act that 
have not already been addressed in this application.
    3. Applicants represent that the requested relief is appropriate in 
the public interest because it would promote competitiveness in the 
variable annuity market by eliminating the need for American Enterprise 
Life to file redundant exemptive applications, thereby reducing its 
administrative expenses and maximizing the efficient use of its 
resources. The delay and expense involved in having to seek exemptive 
relief repeatedly would impair American Enterprise Life's ability to 
effectively take advantage of business opportunities that arise.
    4. Applicants also represent that, for the reasons enumerated in 
paragraph 3 of this section, the requested relief is consistent with 
the purposes of the 1940 Act and the protection of investors. If 
American Enterprise Life were required to seek exemptive relief 
repeatedly with respect to the same issues addressed in this 
application, investors would not receive any benefit or additional 
protection thereby. Indeed, they might be disadvantaged as a result of 
American Enterprise Life's increased overhead expenses.
    5. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and any depositor thereof or 
underwriter therefor from selling periodic payment plan certificates 
unless the proceeds of all payments (except such amounts as are 
deducted for sales load) are deposited with a trustee or custodian 
having the qualifications prescribed by Section 26(a)(1) of the 1940 
Act and are held under an agreement which provides that no payment to 
the depositor or principal underwriter shall be allowed except as a 
fee, not exceeding such reasonable amount as the Commission may 
prescribe, for bookkeeping and other administrative services.
    6. American Enterprise Life states that it has reviewed publicly 
available information regarding products of other companies taking into 
consideration such factors as current charge levels, charge guarantees, 
sales loads, withdrawal charges, availability of funds, investment 
options available under annuity contracts, and market sector. Based 
upon this review, American Enterprise Life has concluded that the 
mortality and expense risk charge described herein is within the range 
of charges determined by industry practice. American Enterprise Life 
will maintain at its executive office, and make available on request of 
the Commission or its staff, a memorandum setting forth in detail the 
variable annuity products analyzed and the methodology, and results of, 
its comparative review.
    7. Applicants acknowledge that the withdrawal charge may be 
insufficient to cover all distribution costs and that, if a profit is 
realized from the mortality and expense risk charge, all or a portion 
of that profit may be offset by distribution expense not reimbursed by 
the withdrawal charge. American Enterprise Life 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 investors in the Contracts. The basis for such 
conclusion is set forth in a memorandum which will be maintained by 
American Enterprise Life at its executive office and will be available 
to the Commission or its staff on request.
    8. American Enterprise Life represents that each Variable Account 
will invest only in an underlying mutual fund which, in the event it 
should adopt any plan under Rule 12b-1 to finance distribution 
expenses, would 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 
1940 Act.
    9. Section 22(d) of the 1940 Act prohibits a registered investment 
company, its principal underwriter or a dealer in its securities from 
selling any redeemable security issued by such registered investment 
company to any person except at a public offering price described in 
the prospectus. Rule 6c-8 adopted under the 1940 Act permits variable 
annuity separate accounts to impose a deferred sales charge. Although 
Rule 6c-8, unlike proposed Rule 6c-10, does not impose any conditions 
on the ability of the investment company involved to provide for 
variations in the deferred sales charges, Rule 6c-8 (again unlike 
proposed Rule 6c-10) does not provide an exemption from Section 22(d). 
Applicants recognize that the proposed waiver of the withdrawal charge 
in connection with the ``Waiver of Withdrawal Charges'' benefit could 
be viewed as causing the Contracts to be sold at other than a uniform 
offering price. Rule 22d-1 is not directly applicable to Applicants' 
proposed waiver of the withdrawal charge because that Rule has been 
interpreted as granting relief only for scheduled variations in front-
end loads, not deferred sales loads such as the withdrawal charge.
    10. Rule 22d-2 under the 1940 Act exempts registered variable 
annuity accounts, their principal underwriters, dealers and their 
sponsoring insurance companies from Section 22(d) to the extent 
necessary to permit variations in the sales load or in any 
administrative charge or other deductions from the purchase payments, 
provided that such variations reflect differences in costs or services, 
are not unfairly discriminatory, and are adequately described in the 
prospectus. Applicants, however, do not represent that the ``Waiver of 
Withdrawal Charges'' benefit reflects differences in sales costs or 
services and, for that reason, Applicants do not rely on Rule 22d-2 for 
the requested relief, even assuming that Rule 22d-2 does apply to 
deferred sales loads.
    11. Applicants submit that the proposed waiver is consistent with 
the policies of Section 22(d) and the rules promulgated thereunder. One 
of the purposes of Section 22(d) is to prevent an investment company 
from discriminating among investors by charging different prices to 
different investors. Applicants represent that, to the extent permitted 
by state law, the ``Waiver of Withdrawal Charges'' benefit will be 
available to any eligible Contract owner if the owner or the annuitant 
are confined to a hospital or a nursing home and have been for the 60 
days prior to the request for withdrawal; therefore, the benefit will 
not unfairly discriminate among Contract owners. Applicants argue that 
the benefit is advantageous to Contract owners by permitting any such 
owner, upon a triggering of the ``Waiver of Withdrawal Charges'' 
benefit, to make withdrawals from the Contract without imposition of 
the withdrawal charge. Applicants further state that the ``Waiver of 
Withdrawal Charges'' benefit will not result in dilution of the 
interests of any other Contract owners. Finally, Applicants argue that 
waiving the withdrawal charge under such circumstances will not result 
in the occurrence of any of the abuses that Section 22(d) is designed 
to prevent.
    12. Applicants represent that the ``Waiver of Withdrawal Charges'' 
benefit meets the substantive requirements of Rule 22d-1 in that 
Applicants specifically represent that the ``Waiver of Withdrawal 
Charges'' benefit will be uniformly available to all eligible Contract 
owners except where prohibited under state law, and that the ``Waiver 
of Withdrawal Charges'' benefit will be adequately described in the 
prospectus for the Contracts. Applicants also note that there are no 
existing Contract owners since the public offering of the Contracts has 
not yet commenced.

Conclusion

    For the reasons stated above, 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. Applicants 
assert that their exemptive requests therefore meet the standards set 
forth in Section 6(c), and that an order should be granted. 
Accordingly, Applicants request exemptions pursuant to Section 6(c) of 
the 1940 Act from the operation of the provisions of Sections 22(d), 
26(a)(2)(C), and 27(c)(2) to the extent necessary to permit: (i) The 
assessment of the mortality and expense charge with respect to the 
Contracts; and (ii) the application of the ``Waiver of Withdrawal 
Charges'' benefit with respect to certain Contracts.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22213 Filed 9-8-94; 8:45 am]
BILLING CODE 8010-01-M