[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: 94-2242]


[[Page Unknown]]

[Federal Register: September 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20522; No. 812-9014]

 

Equitable Life Insurance Company of Iowa, et al.

August 31, 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: Equitable Life Insurance Company of Iowa (``Equitable''), 
Equitable Separate Account A (``Separate Account''), and Equitable of 
Iowa Securities Network, Inc. (``Equitable Securities'') (collectively, 
``Applicants'').

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

SUMMARY OF APPLICATION: Applicants seek an order permitting: (a) the 
deduction of mortality and expenses risk charges from the assets of the 
Separate Account in connection with the offering of individual deferred 
variable annuity contracts (``Contracts''); (b) the deduction of 
mortality and expense risk charges from the assets of any other 
separate account established by Equitable in the future to fund other 
variable annuity contracts (``Other Contracts'') that will be similar 
to the Contracts; and (c) the waiver, under certain circumstances, of 
the contingent deferred withdrawal charge that would otherwise be 
imposed on certain 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 
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 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 issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, c/o John Merriman, Equitable Life Insurance Company 
of Iowa, 604 Locust Street, Des Moines, Iowa 50309.

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. Equitable is a stock life insurance company and a wholly-owned 
subsidiary of Equitable of Iowa Companies, an Iowa corporation. 
Equitable currently is licensed to do business in the District of 
Columbia and all states except Hawaii, Maine, New Hampshire, New York 
and Vermont.
    2. The Separate Account is a registered unit investment trust under 
the 1940 Act that currently is used to fund the Equitable Contracts. 
The Separate Account has filed a registration statement on Form N-4 to 
register the Contracts as securities under the Securities Act of 1933. 
The Separate Account currently consists of ten sub-accounts 
(``Subaccounts'') which invest in shares of one of ten corresponding 
portfolios currently offered by the Equi-Select Series Trust 
(``Trust''). Additional Subaccounts may be created in the future to 
invest in any additional portfolios of the Trust which may be added in 
the future.
    3. The Trust is a series fund consisting of the Money Market, 
Mortgage-Backed Securities, International Fixed Income, Advantage, 
Government Securities, International Stock, Short-Term Bond, OTC, 
Research, and Total Return Portfolios. The Trust is a registered open-
end management investment company under the 1940 Act. Equitable 
Investment Services, Inc. is the investment adviser for the Trust.
    4. Equitable Securities, a wholly-owned subsidiary of Equitable of 
Iowa Companies and an affiliate of Equitable, will distribute the 
Contracts. Equitable Securities is in the process of registering as a 
broker-dealer under the Securities Exchange Act of 1934 and is applying 
for membership in the National Association of Securities Dealers, Inc.
    5. The Contracts are individual flexible purchase payment deferred 
variable and fixed annuity contracts that are available in connection 
with retirement plans which may or may not qualify for Federal income 
tax advantages under the Internal Revenue Code. The Contracts require 
certain minimum initial purchase payments and minimum subsequent 
payments. The Contracts provide for certain guaranteed death benefits 
equal to the greater of: (a) The sum of the Purchase Payments less any 
withdrawals including any applicable Withdrawal Charge and any 
applicable taxes not previously deducted; or (b) the Contract Value 
less any applicable taxes not previously deducted; or, if death occurs 
after the end of the eighth Contract Year, (c) the Contract Value at 
the end of the eighth Contract Year less any withdrawals including any 
applicable CDSC incurred since the end of the eighth Contract Year and 
any applicable taxes not previously deducted.
    6. Various fees and expenses are deducted under the Contracts and 
the Variable Account. Premium taxes or other taxes payable to a state 
or other governmental entity will be advanced by Equitable at the time 
purchase payments are made and then deducted from Contract Value at 
annuitization, withdrawal, or death if Equitable is unable to obtain a 
refund. Equitable reserves the right to deduct premium taxes when 
incurred. Premium taxes range from 0% to 4%.
    7. Administrative charges will be assessed to reimburse Equitable 
for expenses incurred in establishing and maintaining the Contracts and 
Separate Account. These charges include: (a) An Annual Contract 
Maintenance Charge of $30, which is deducted from Contract Value on 
each Contract Anniversary prior to the Maturity Date, or at the time of 
total withdrawal on other than the Contract Anniversary; and (b) an 
Administrative Charge equal on an annual basis to .15% of the average 
daily net asset value of the Separate Account, which is deducted on 
each Valuation Date. Equitable represents that the Administrative 
Charge will not exceed expenses and will not increase should it prove 
to be insufficient. Equitable relies on Rule 26a-1 with respect to 
these administrative charges assessed under the Contract. Equitable 
does not intend to profit from the administrative charges.
    8. Contract owners may transfer all or part of their interest in a 
Subaccount or in the Fixed Account prior to the Maturity Date. A 
transfer charge of $25 or 2% of the amount transferred, if less, will 
be deducted for each transfer after 12 transfers in a Contract year, 
subject to certain limitations. For any Contract Year, a Contract owner 
may transfer only 10% of purchase payments and 10% of any earnings 
attributable to those purchase payments from the Fixed Account to a 
Subaccount. There is no limitation on the transfer of purchase payments 
received at least eight years prior to the request for transfer, and 
any earnings thereon.
    9. No sales charges are deducted from premium payments under the 
Contracts. A contingent deferred sales charge (``CDSC'') in the amount 
of up to 8% of total premiums paid is imposed on a declining basis over 
a nine-year period on withdrawals prior to the Maturity Date. No CDSC 
is assessed (a) upon withdrawal, once each Contract Year after the 
first Contract Year, of up to 10% of the total of all purchase payments 
made at the beginning of a Contract Year, less any purchase payments 
previously withdrawn, and (b) under the Waiver of Withdrawal Charge 
(``Waiver'') benefit provided under the Contract for withdrawals under 
circumstances involving hospitalization and/or confinement to an 
eligible nursing home for 30 consecutive days. In the event that the 
CDSC is insufficient to cover distribution expenses, the deficiency 
will be met from Equitable's assets, which may include amounts derived 
from the charge for mortality and expenses risks.
    10. Equitable will assume certain mortality and expense risks under 
the Contracts. A daily charge equal to an annual rate of 1.25% of the 
value of the average daily net asset value of the Separate Account will 
be deducted on each Valuation Date to compensate Equitable for assuming 
such risks. Of this amount, approximately .90% is attributable to 
mortality risks, and .35% is attributable to expense risks. The 
aggregate charge is guaranteed not to increase for the duration of the 
Contracts. This charge may be a source of profit for Equitable, which 
may be used for, among other things, the payment of distribution 
expenses. Equitable currently anticipates a profit from this charge.
    11. The mortality risk assumed under the Contracts arises from 
Equitable's contractual obligation to make annuity payments after the 
Maturity Date for the life of the Annuitant and to waive the CDSC in 
the event of the Annuitant's death. The expense risk assumed is that 
all actual expenses involved in administering the Contracts may exceed 
the amount recovered by Equitable from the administrative charges, 
which are guaranteed not to increase for the life of the Contract.

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.

Section 22(d)

    2. 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. Applicants recognize that the Waiver benefit could be 
viewed as causing the Contracts to be sold at other than a uniform 
offering price.
    3. Rule 6c-8 adopted under the 1940 Act permits variable annuity 
separate accounts to impose a deferred sales charge, without imposing 
conditions on the ability of an investment company involved to provide 
for variations in the deferred sales charges. Rule 6c-8, however, does 
not provide an exemption from Section 22(d). Rule 22d-1 is not directly 
applicable to the proposed Waiver benefit because that Rule has been 
interpreted as granting relief only for scheduled variations in front-
end loads, not deferred sales loads such as the CDSC. 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 do not believe that the Waiver benefit reflects differences 
in sales costs or services and, consequently, do not rely on Rule 22d-2 
for the requested relief, even assuming that the rule does apply to 
deferred sales loads.
    4. Nonetheless, Applicants submit that the proposed Waiver benefit 
is consistent with the policies of Section 22(d) and the rules 
promulgated thereunder, including the policy of preventing an 
investment company from discriminating among investors by charging 
different prices to different investors. Applicants represent that, 
where the Waiver benefit is permitted by state law, the benefit will be 
uniformly available to any Contract owner if the annuitant under the 
Contract satisfies the relevant conditions and, therefore, the benefit 
will not unfairly discriminate among Contract owners. Moreover, 
Applicants assert that the benefit is advantageous to Contract owners 
by permitting any such owner, upon a triggering of the Waiver benefit, 
to surrender the Contract without imposition of the CDSC. Further, 
Applicants assert that the Waiver benefit will not result in dilution 
of the interests of any other Contract owner or result in the 
occurrence of any of the abuses that Section 22(d) is designed to 
prevent.
    5. Applicants submit that the proposed Waiver benefit meets the 
substantive requirements of Rule 22d-1 in that Applicants specifically 
state that: (a) the benefit will be uniformly available to all eligible 
Contract owners except where prohibited by state law; and (b) the 
benefit will be adequately described in the Separate Account prospectus 
for the Contracts. Applicants also note that the public offering of the 
Contracts has not yet commenced and, thus, there are no existing 
Contract owners.

Sections 26(a)(2)(C) and 27(c)(2)

    6. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and its depositor or underwriter from 
selling periodic payment plan certificates unless the proceeds of all 
payments, other than sales load, are deposited with a qualified bank as 
trustee or custodian. Further, the proceeds are required to be held 
under arrangements which 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 normally performed by the bank itself.
    7. Applicants request exemptions from Sections 26(a)(2) and 
27(c)(2) to the extent necessary to permit the deduction of a maximum 
charge for assumption of mortality and expense risks from the assets 
of: (a) The Separate Account in connection with the ofering of the 
Contracts, and (b) any other separate account established by Equitable 
in the future to support any Other Contracts. 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 
for the following reasons.
    8. Applicants submit that Equitable is entitled to reasonable 
compensation for its assumption of mortality and expense risks. 
Applicants represent that the proposed mortality and expense risk 
charge is within the range of industry practice for comparable variable 
annuity contracts. This representation is based upon Applicants' 
analysis of the mortality risks, taking into consideration such factors 
as guaranteed annuity purchase rates, current charge levels, benefits 
provided, and industry practice with respect to comparable variable 
annuity contracts. Equitable undertakes to maintain at its principal 
office, available to the Commission, a memorandum setting forth in 
detail the products analyzed and the methodology and results of this 
analysis.
    9. 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 not reimbursed by the CDSC. 
Equitable 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 Equitable at its 
principal office and will be available to the Commission.
    10. Applicants submit that without the requested relief for future 
separate accounts issuing Other Contracts, they would have to 
repeatedly request and obtain exemptive relief which would present no 
issues under the 1940 Act that have not already been addressed in this 
Application. Eliminating redundant exemptive applications would reduce 
administrative expenses and maximize the efficient use of resources, 
thus, promoting competitiveness in the variable annuity market. 
Further, the delay and expense of repetitive exemptive applications 
would impair Equitable's ability to effectively take advantage of 
business opportunities as they arise and investors would not receive 
any benefit or additional protection.
    11. Applicants also represents that the Separate Account will 
invest only in underlying mutual funds that undertake, in the event 
that they 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 funds, formulate and approve 
any such plan.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2242 Filed 8-8-94; 8:45 am]
BILLING CODE 8010-01-M