[Federal Register Volume 59, Number 185 (Monday, September 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23663]


[[Page Unknown]]

[Federal Register: September 26, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20562; File No. 812-8974]

 

Massachusetts Mutual Life Insurance Company, et al.

September 19, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (``1940 Act'' or ``Act'').

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APPLICANTS: Massachusetts Mutual Life Insurance Company 
(``MassMutual''), MML Bay State Life Insurance Company (``MML Bay 
State''), Massachusetts Mutual Variable Annuity Separate Account 3 
(``Separate Account 3''), MML Bay State Variable Annuity Separate 
Account 1 (``Separate Account 1'') (Separate Account 3 and Separate 
Account 1, collectively, the ``Separate Accounts''), and MML Investors 
Services, Inc. (``MMLISI'') (MassMutual, MML Bay State, the Separate 
Accounts, and MMLISI, collectively, ``Applicants'').

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

SUMMARY OF APPLICATION: Applicants seek an Order to permit the 
deduction of a mortality and expense risk charge and enhanced death 
benefit expense charge in connection with the offer and sale of certain 
flexible premium variable annuity contracts to be funded by the 
Separate Accounts (``Contracts'').

FILING DATE: The Application was originally filed on May 6, 1994, and 
Amendment No. 1 to and Restatement of the Application was filed on June 
20, 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 serving 
the 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 October 
14, 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: William D. Wilcox, Esq., 
Massachusetts Mutual Life Insurance Company, 1295 State Street, 
Springfield, MA 01111; and Michael Berenson, Esq., Jorden Burt Berenson 
& Klingensmith, Suite 400 East, 1025 Thomas Jefferson Street, NW., 
Washington, DC 20007-0805.

FOR FURTHER INFORMATION CONTACT:
W. Thomas Conner, Attorney, 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.

Applicant's Representations

    1. MassMutual is a mutual life insurance company organized under 
the laws of the Commonwealth of Massachusetts. MML Bay State is a life 
insurance company organized under the laws of the State of Missouri and 
is a wholly-owned subsidiary of MassMutual. MMLISI is the principal 
underwriter of the Contracts and also is a wholly-owned subsidiary of 
MassMutual.
    2. Separate Account 3 was established on January 12, 1994 to fund 
Contracts issued by MassMutual. Separate Account 1 was established on 
January 14, 1994 to fund Contracts issued by MML Bay State. Each 
Separate Account is registered as a unit investment trust under the 
1940 Act.
    3. The Separate Accounts will be used for the purpose of investing 
purchase payments received under the Contracts. The Contracts require 
certain minimum initial payments and permit additional flexible 
purchase payments. A Contract owner may, after deductions of applicable 
charges, direct allocation of purchase payments among the various 
divisions of the Separate Accounts. Additionally, both MassMutual and 
MML Bay State will make available, in a limited number of states, a 
flexible account (the ``Fixed Account'') to which purchase payments may 
be allocated. The Fixed Account will include a market value adjustment 
feature. Each Separate Account has filed a registration statement on 
Form N-4 with the Commission in connection with the Contracts.
    4. Each Separate Account is divided into twelve divisions. Each 
division invests in corresponding shares of either MML Series 
Investment Trust or Oppenheimer Variable Account Funds (collectively, 
the ``Trusts''). The Trusts are registered with the SEC as diversified 
open-end management investment companies.
    5. The Contracts provide for certain charges. An administrative 
charge is assessed annually and upon the surrender or the payment of a 
death benefit under the Contracts. The administrative charge will be 
waived if a Contract's accumulated value is at least $50,000 as of the 
date of assessment. The administrative charge currently is $30 per year 
and will not be increased above $50 per year.
    6. In addition to the $30 annual administrative charge, an annual 
administrative charge equal to 0.15% of the assets of each Separate 
Account will be deducted for administrative charges (the $30 annual 
administrative charge and the 0.15% annual administrative charge, 
collectively, the ``administrative charges''). The administrative 
charges are intended to reimburse MassMutual or MML Bay State for 
expenses related to the maintenance of the Contracts and for operation 
of the Separate Accounts in connection with the Contracts. Applicants 
represent that these fees are based on current estimates by MassMutual 
and MML Bay State of administrative costs for these services over the 
lifetime of the Contracts. These charges are guaranteed never to be 
increased beyond stated maximums during the term of a Contract, and 
such fees are neither designed nor expected to generate a profit. 
Applicants rely on Rule 26a-1 under the 1940 Act to assess such fees.
    7. While no sales charges are deducted when premium payments are 
received, the Contracts are subject to a schedule of contingent 
deferred sales charges (``sales charge''). A sales charge may be 
imposed upon full or partial redemptions, upon maturity of the 
Contract, and upon certain death benefits. Sales charges are based on 
the purchase payments made and the time that has passed since receipt 
of such payment. The part of the sales charge related to a purchase 
payment is a level percentage of that payment depending on the years 
that have passed since the purchase payment was received. During the 
first year since payment, the sales charge is 7 percent. For each 
successive year, the sales charge decreases 1 percent until it becomes 
zero in the eighth year. The amount deducted for sales charges at any 
time, plus any sales charges previously deducted, will not be more than 
7% of the total purchase payments made to that time. In addition, 
during each Contract year, a Contract owner may redeem the following 
amounts without incurring a sales charge: (1) All unredeemed purchase 
payments that are at least seven years old, and (2) 10% of the 
unredeemed purchase payments that are less than seven years old.
    8. An annual charge will be assessed against the assets of each 
Separate Account for mortality and expense risks assumed by MassMutual 
or MML Bay State. The mortality and expense risk charge currently is 
1.15% and will not be increased above 1.25%. Of the current 1.15% 
mortality and expense risk charge, 0.30% is for the mortality risk 
assumed and 0.85% is for the expense risk assumed.
    9. MassMutual and MML Bay State will assume mortality risks under 
the Contracts by their contractual obligation to make periodic payments 
in accordance with annuity rates and other Contract provisions 
regardless of how long an annuitant might live. This obligation assures 
each annuitant that neither the annuitant's own longevity nor an 
improvement in life expectancy generally will have an adverse effect on 
the payments received under the Contracts.
    10. MassMutual and MML Bay State will assume expense risks under 
the Contracts by their contractual obligation to administer the 
Contracts even if the administrative charges are insufficient to cover 
the administrative expenses associated with the Contracts.
    11. An annual charge of 0.10% will be assessed against the assets 
of each Separate Account to reimburse MassMutual and MML Bay State for 
bearing the risks associated with providing certain enhanced death 
benefits under the Contracts. A death benefit is paid upon the death of 
either the Contract owner or the annuitant. If an owner and annuitant 
are the same, the death benefit paid will be the annuitant death 
benefit.
    If the Contract owner dies before the maturity date of the 
Contract, the beneficiary named in the Contract will receive the cash 
redemption value of the Contract. If the annuitant dies before the 
maturity date of the Contract, the beneficiary named in the Contract 
will receive the greater of two enhanced death benefits, depending on 
the Contract owner's state.
    Under the first alternative, if the annuitant dies before the 
maturity date, the beneficiary named in the Contract will receive the 
greater of: (a) The total of all purchase payments made to the 
Contract, less all partial redemptions, accumulated at 5% to the 
annuitant's 75th birthday and 0% thereafter, but not more than two time 
purchase payments less redemptions; or (b) the accumulated value of the 
Contract less any applicable administrative charge (and any sales 
charge, if the annuitant's age on the Contract date exceeds 75).
    The death benefit described above may not be available in certain 
states for annuitants whose issue age is less than 76. In those 
instances, the death benefit during the first three years will be equal 
to the greater of: (a) The total of all purchase payments made to the 
Contract less all partial redemptions; or (b) the accumulated value of 
the Contract less any applicable administrative charge. During any 
subsequent three Contract year period, the death benefit will be the 
greater of: (a) The death benefit on the last day of the previous three 
Contract year period plus any purchase payments made less all partial 
redemptions since then; or (b) the accumulated value of the Contract 
less any applicable administrative charge.
    12. MassMutual and MML Bay State currently will permit a Contract 
owner to make up to 14 transfers among the divisions of the Separate 
Accounts (and the Fixed Account if available) each Contract year 
without charge during the accumulation period of the Contracts. 
Transfers in excess of 14 will result in the imposition of a $20 fee. 
MassMutual and MML Bay State reserve the right to change the number of 
transfers that may be made without charge. The Contracts provide, 
however, that the number of transfers that may be made without 
incurring a charge will be at least four per Contract year during the 
accumulation period. Amounts applied under a variable payment option 
during the payout period may be transferred once every 90 days. 
MassMutual and MML Bay State reserve the right to change transfer 
limitations.
    13. Premium taxes ranging up to 3.5% of purchase payments are 
imposed by certain municipalities and states. Under current practice, 
MassMutual and MML Bay State will deduct amounts owned for premium 
taxes from a Contract's accumulated value at annuitization, maturity, 
or full surrender. Both MassMutual and MML Bay State have reserved the 
right to deduct amounts owned for premium taxes from premium payments.

Applicants' Legal Analysis

    1. Sections 26(a)(2)(C) and 27(c)(2) taken together are intended to 
provide for the protection of the assets of investment companies that 
issue periodic payment plan certificates. Section 27(c)(2) of the Act 
prohibits the issuer of a periodic payment plan certificate and any 
depositor or underwriter for such periodic payment plan certificate 
from selling such certificates unless all proceeds of payments on such 
certificates (other than any sales load) are deposited with a qualified 
bank acting as trustee or custodian, and held under an indenture or 
agreement containing specified provisions. Section 26(a) of the Act 
requires that such indenture or custodian agreement must provide, among 
other things that such bank shall not allow as an expense any payment 
to the depositor or principal underwriter except a fee, not exceeding 
such reasonable amount as the Commission may prescribe, for bookkeeping 
and other administrative services of a character normally performed by 
the bank itself.
    2. Applicants request an 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 and the enhanced death benefit charge from the 
assets of the Separate Accounts in connection with the issuance by 
MassMutual and MML Bay State of the Contracts to the funded by the 
Separate Accounts.
    3. Applicants represent that the guaranteed mortality and expense 
risk charges of 1.25% are reasonable in relation to the risks assumed 
by MassMutual and MML Bay State under the Contract and are reasonable 
in amount as determined by industry practice with respect to comparable 
annuity products. Applicants represent that the 1.25% mortality and 
expense risk charge is within the range of industry practice for 
comparable annuity contracts issued by other insurance companies. This 
representation is based on MassMutal's and MML Bay State's analysis of 
publicly available information about such other contracts, taking into 
consideration such factors as current charge levels, the manner in 
which charges are imposed, guarantees of charge levels or annuity 
rates, and the markets in which the Contracts will be offered. 
Applicants undertake to maintain at MassMutual's home office and MML 
Bay State's principal office and to make available to the Commission 
(or its staff) upon request, memoranda setting forth in detail the 
products analyzed, the methodology used, and the results of their 
respective comparative reviews.
    4. Applicants acknowledge that the withdrawal charges under the 
Contracts may be insufficient to cover all costs relating to the 
distribution of the Contracts. In such circumstances, the charges for 
mortality and expense risk may be a source of the profit that would be 
available to pay MassMutual's and/or MML Bay State's distribution 
expenses not reimbursed by applicable sales charges. MassMutual and MML 
Bay State have concluded that there is a reasonable likelihood that the 
proposed distribution financing agreements benefit both the Separate 
Accounts and the Contract owners. The basis for this conclusion is set 
forth in memoranda that will be maintained by MassMutal and MML Bay 
State at their home office and principal office, respectively. These 
memoranda will be available to the Commission (or its staff) upon 
request.
    5. Applicants represent that the Separate Accounts 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.
    6. Applicants assert that the mortality risk charge of 0.10% for 
the enhanced death benefits offered is reasonable in relation to the 
risks assumed by MassMutual and MML Bay State under the Contracts. In 
arriving at this determination, MassMutual and MML Bay State conducted 
a large number of trials at various issue ages to determine the 
expected cost of the enhanced death benefit. First, hypothetical asset 
returns were projected using generally accepted actuarial simulation 
methods. For each asset return pattern thus generated, hypothetical 
accumulated values were calculated by applying the projected asset 
returns to the initial value in a hypothetical account. Each 
accumulated value so calculated was then compared to the amount of the 
enhanced death benefit payable in the event of the hypothetical 
Contract owner's death during the year in question. By analyzing the 
results of several thousand such simulations, MassMutual and MML Bay 
State were able to determine actuarily the level cost of providing the 
enhanced death benefit. Based on this analysis, MassMutual and MML Bay 
State determined that a mortality risk charge of 0.10% was a reasonable 
charge for providing the enhanced death benefit. Memoranda is available 
to the Commission (or its staff) upon request setting forth in detail 
the methodology used in determining that the risk charge of 0.10% for 
the enhanced death benefit is reasonable in relation to the risks 
assumed by MassMutual and MML Bay State under the Contracts.

Conclusion

    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 
provision or provisions of the 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 submit, for all of the reasons 
stated in the application, that their exemptive requests meet the 
standards set out in Section 6(c), are well precedented, and that an 
Order should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23663 Filed 9-23-94; 8:45am]
BILLING CODE 8010-01-M