[Federal Register Volume 59, Number 184 (Friday, September 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23540]
[[Page Unknown]]
[Federal Register: September 23, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20559; File No. 812-8952]
The American Franklin Life Insurance Company, et al.
September 16, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: The American Franklin Life Insurance Company (``American
Franklin''), Separate Account VUL-2 of The American Franklin Life
Insurance Company (the ``Separate Account'') and Franklin Financial
Services Corporation.
RELEVANT SECTIONS OF THE ACT AND RULES: Order requested under Section
6(c) of the Act exempting Applicants from Section 27(a)(3) of the Act
and Rule 6e-3(T)(b)(13)(ii) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit them to issue flexible premium variable life
insurance policies (``Policies'') that provide for a front-end sales
load on premium payments made in any given year up to a maximum amount
and no sales charge on premiums in excess of that amount.
FILING DATE: The Application was filed on April 28, 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 on the 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 October 11, 1994, and should be accompanied
by proof of service on Applicants in the form of an affidavit or, for
lawyers, by certificate. 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 the date of a hearing by
writing to the Secretary of the SEC.
ADDRESSES: Secretray, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, Franklin Square,
Springfield, Illinois 62713.
FOR FURTHER INFORMATION CONTACT:
Wendy Finck Friedlander, Senior Attorney, 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. American Franklin is a stock life, accident and health insurance
company organized under the laws of Illinois and licensed in forty-six
states and the District of Columbia. It is a wholly-owned subsidiary of
The Franklin Life Insurance Company, in turn a wholly-owned subsidiary
of American Franklin Company, in turn a wholly-owned subsidiary of
American Brands, Inc.
2. The Separate Account was established by American Franklin under
Illinois law and is registered under the Act as a unit investment
trust. The Separate Account has eight investment divisions, each of
which invests in shares of a corresponding portfolio of either the
Variable Insurance Products Fund or of the Variable Insurance Products
Fund II (together, the ``Funds''). Fidelity Management & Research
Company, a registered investment adviser under the Investment Advisers
Act of 1940, manages the investment operations of the Funds. Franklin
Financial Services Corporation, a wholly-owned subsidiary of The
Franklin Life Insurance Company and a registered broker-dealer, is the
principal underwriter of the Policies.
3. The Policies are flexible premium variable life insurance
contracts. Each Policy has a planned periodic premium, although a
Policy owner may pay other premiums at any time and in any amount,
within certain limits. The Policies provide for a front-end sales load
equal to 5% of each premium paid during any Policy year until the total
premiums for that Policy year are equal to one ``target premium.''\1\
No front-end sales charge is deducted from premiums paid in excess of
one target premium during any Policy year.
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\1\A target premium is defined as the hypothetical premium equal
to the annual premium necessary to maintain a fixed-benefit whole
life policy on the life of a person of the same age and sex as the
insured person under a Policy and with a face amount equal to the
face amount of such Policy. Applicants represent that a target
premium will never exceed the guideline annual premium prescribed by
Rules 6e-3(T)(c)(8).
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4. Within the first ten years, if a Policy is surrendered or, in
some instances, lapses or if the face amount of the Policy is reduced,
a contingent deferred sales charge (``CDSC'') will be assessed against
the account value of the Policy. Subject to a maximum surrender charge,
the amount of the CDSC equals 25% of actual premiums paid during the
first Policy year up to one target premium, plus 9% of any additional
premiums actually paid during the first ten Policy years. The maximum
total CDSC is 50% of one target premium.
5. Applicants represent that the aggregate of the front-end sales
load and the CDSC assessed in connection with a Policy will not exceed
sales load limitations specified in Rule 6e-3(T)(b)(13)(i)(A).
Specifically, the total sales load under a Policy will not exceed 180%
of the Guideline Annual Premium, or nine percent of the sum of the
Guideline Annual Premiums that would be paid over a twenty year period
or the life expectancy of the insured if it is less than twenty years.
Applicants further represent that the sales expense deductions and
surrender charges imposed under the Policies during the first two
policy years will not equal or exceed the amount that would give rise
to an obligation to refund excess sales load pursuant to Rule 6e-
3(T)(b)(13)(v) if a Policy were surrendered during the first two policy
years.\2\ Applicants represent that the prospectus for the Policies
will contain disclosure informing Policy owners how to minimize sales
charge deductions from premiums paid.
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\2\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
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Applicants' Legal Analysis
1. Section 27(a)(3) of the Act provides that the amount of sales
charge deducted from any of the first twelve monthly payments on a
periodic payment plan certificate by any registered investment company
issuing such certificates, or any depositor or underwriter for such
company, may not exceed proportionately the amount deducted from any
other such payment, and that the amount deducted from any subsequent
payment may not exceed proportionately the amount deducted from any
other subsequent payment. Rule 6e-3(T)(b)(13)(ii) provides an exemption
from Section 27(a)(3) provided that the proportionate amount of sales
charge deducted from any payment does not exceed the proportionate
amount deducted from any prior payment, unless an increase is caused by
reductions in the annual cost of insurance or reduction in sales load
for amounts transferred to a variable life insurance policy from
another plan of insurance.
2. Under the Policy's sales load structure, no front-end sales load
will be deducted from premiums in excess of one target premium paid
during that Policy year. Thus, according to Applicants, a Policy owner
could pay a premium in any given Policy year from which no front-end
sales load deduction is made, then pay the initial premium in the next
Policy year from which a front-end sales load will be deducted.
Applicants state that this scenario would appear to give rise to a
violation of the so-called ``stair-step'' provisions in Section
27(a)(3) of the Act. Moreover, the exemption provided by Rule 6e-
3(T)(b)13(ii) does not appear to apply to this situation.
3. Applicants submit that the higher sales charge on the first
target premium paid under a Policy in any Policy year as compared with
that imposed on premiums in excess of such target premium (``Excess
Premiums'') reflects the fact that American Franklin will incur lower
overall distribution costs (e.g., sales commissions) in connection with
Excess Premiums over the life of the Policies. Applicants state that
American Franklin could impose the higher front-end sales load equally
on all premium payments up to the maximum permitted limits. The
Policy's design, however, provides a benefit to Policy owners by
passing on to them a portion of American Franklin's lower distribution
costs with respect to the Excess Premiums.
4. Applicants submit that the sales load structure in the Policy is
designed to give Policy owners flexibility with respect to premium
payments while permitting American Franklin to deduct only those
charges deemed necessary to support the benefit guarantees under the
Policies. Applicants state that Section 27(a)(3), and the other sales
load limitations in the Act, were designed to address the perceived
abuses of periodic payment plans that deducted large amounts of front-
end sales charges early in the life of the plan so that an investor who
redeemed in the early periods recouped little of his or her investment.
Applicants contend that the deduction of a front-end load on only the
premiums paid up to one target premium per Policy year does not
implicate these policy concerns. Applicants state that by spreading
sales charges more evenly and fairly over the life of a Policy, the
sales load structure results in a greater proportion of the Policies'
sales charges to be deducted later than if sales expenses were deducted
solely from premium payments.
Conclusion
For the reasons stated above, Applicants submit that the requested
exemptions, in accordance with the standards of Section 6(c) of the
Act, are consistent with the protection of Policy owners 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. 94-23540 Filed 9-22-94; 8:45 am]
BILLING CODE 8010-01-M