[Federal Register Volume 59, Number 192 (Wednesday, October 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24615]


[[Page Unknown]]

[Federal Register: October 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20592; File No. 812-9006]

 

Teachers Insurance and Annuity Association of America, et al.

September 28, 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: Teachers Insurance and Annuity Association of America 
(``TIAA''), TIAA Separate Account VA-1 (the ``Separate Account''), and 
Teachers Personal Investors Services, Inc. (``TPIS'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for 
exemptions from Sections 12(b), 26(a)(2)(C) and 27 (c)(2) of the 1940 
Act, and Rule 12b-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
deduction of a mortality and expense risk charge from the assets of the 
Separate Account under certain variable annuity contracts.

FILING DATE: An application was filed on May 18, 1994, and amended on 
September 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 by writing to the SEC's Secretary and 
serving 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 October 
24, 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 SEC's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, D.C. 20549. Applicants, 730 Third Avenue, New 
York, NY 10007-3206.

FOR FURTHER INFORMATION CONTACT:
Wendy Finck Friedlander, Senior Attorney, at (202) 942-0682, 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. TIAA is a nonprofit corporation regulated under New York law as 
an insurance company. TIAA's purpose is to provide retirement benefits 
to teachers and other employees of nonprofit-making colleges, 
universities, and other institutions engaged in education or research 
activities. All of TIAA's stock is held by TIAA Board of Overseers, a 
New York not-for-profit membership corporation. TIAA is a companion 
organization of the College Retirement Equities Fund, a New York 
nonprofit corporation registered as a management investment company 
that issues variable annuity certificates.
    2. The Separate Account was established by TIAA under the laws of 
New York to fund certain variable annuity contracts. The Separate 
Account is registered as a management investment company on Form N-3 
under the 1940 Act. The Separate Account currently consists of one 
investment portfolio, the Stock Index Account. Other investment 
portfolios may be made available in the future.
    3. TPIS is the principal underwriter of the variable component of a 
combination fixed and variable individual deferred annuity contract 
(``Contract'') funded by the Separate Account. TPIS is a wholly-owned 
subsidiary of TIAA VA Holdings, Inc., which is, in turn, a wholly-owned 
subsidiary of TIAA. TPIS is registering as a broker-dealer under the 
Securities Exchange Act of 1934. The Contract will be offered on a 
continuous basis by registered representatives of TPIS.
    4. The Contracts are designed to provide retirement or long-term 
benefits to eligible employees, spouses or domestic partners. The 
Contracts require a minimum initial premium of $2000 except if payments 
are collected by payroll deduction by a Contractowner's employer. 
Additional premium payments of at least $100 may be paid at any time 
during the accumulation period. No sales charges are deducted from 
premium payments.
    5. Premium taxes are deducted by TIAA from premium payments prior 
to allocation to the Separate Account in states that impose a premium 
tax charge when a premium is paid. In states that impose a premium tax 
later, TIAA deducts the appropriate amount when the tax is incurred.
    6. When additional portfolios are added to the Separate Account, 
Contractowners will be allowed to transfer among available portfolios 
during the accumulation period. TIAA reserves the right to limit the 
number of transfers among portfolios to once in any 90-day period. 
Currently, no charge is made for transfers.
    7. TIAA imposes a daily administrative expense charge at an 
effective annual rate of 0.20% of the net assets of the Separate 
Account. Applicants represent that this charge is deducted in reliance 
on Rule 26a-1 under the 1940 Act and is not greater than the expected 
cost of the administrative services to be provided over the life of the 
Contract. TIAA does not expect or intend to earn a surplus from the 
administrative expense charge. The rate of the charge is guaranteed not 
to increase for the duration of the Contracts and is applicable only 
during the period from the date of issue of the Contract until the end 
of the accumulation period.
    8. A daily investment advisory fee is deducted from the net assets 
of the Separate Account and paid to Teachers Advisors, Inc. 
(``Advisors''), a wholly-owned subsidiary of TIAA VA Holdings, Inc. 
Advisors will be registered as an investment adviser under the 
Investment Advisers Act of 1940. The investment advisory fee will be 
0.30% of the average daily net assets of the Separate Account. Advisors 
has agreed to waive a portion of the advisory fee so that the current 
effective annual rate will be 0.10% of the average daily net assets of 
the Separate Account.
    9. TIAA deducts a Mortality and Expense Risk Charge that is equal, 
on an annual basis, to 0.25% of the average daily net asset value of 
the Separate Account: approximately .06% for mortality risks and .19% 
for expense risks. TIAA reserves the right to increase this charge to 
an effective annual rate of 1.00% of the net assets of each portfolio 
of the Separate Account (approximately .20% for mortality risks and 
.80% for expense risks) and guarantees that this charge will never 
exceed 1.00%.
    10. The mortality risks assumed by TIAA arise from its contractual 
obligation to make annuity payment in accordance with the provisions of 
the Contracts regardless of how long all annuitants or any individual 
annuitant lives. In addition, TIAA assumes the risk that the total 
premiums paid under a Contract less any cash withdrawals exceed the 
account value of a Contract when a death benefit becomes payable. The 
death benefit under the Contract is the greater of (a) account value or 
(b) total premiums paid less cash withdrawals.
    11. The expense risk assumed by TIAA is that actual expenses 
involved in administering the Contracts (including Contract maintenance 
costs, administrative costs, mailing costs, data processing costs, and 
costs of other services) may exceed the amount recovered from the 
administrative expense charge.

Applicants' Legal Analysis and Conditions

    1. Sections 26(a)(2) 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 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.
    2. Applicants request an order under Section 6(c) exempting the 
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 Separate Account under the Contracts.
    3. Applicants represent that the Mortality and Expense Risk Charge 
is within the range of industry practice with respect to comparable 
annuity products. Applicants base this representation on an analysis of 
publicly available information about similar annuity products, taking 
into consideration such factors as the current charge levels, existence 
of charge level guarantees, any death benefit guarantees, guaranteed 
annuity rates, and other policy options. TIAA represents that it will 
maintain at its administrative offices a memorandum, available to the 
Commission, setting forth in detail this analysis.
    4. If the Mortality and Expense Risk Charge is insufficient to 
cover actual costs, the loss will be borne by TIAA. Conversely, if the 
amount deducted proves more than sufficient, the excess will be a 
profit to TIAA. TIAA does not expect a profit from this charge during 
the first years of the Separate Account's operation. To the extent this 
charge results in a surplus to TIAA, such surplus will be available for 
use by TIAA for the payment of distribution, sales, and other expenses. 
Applicants represent that no separate charge for distribution expenses 
will be imposed upon the assets of the Separate Account unless and 
until the requirements of Rule 12b-1 under the 1940 Act have been 
complied with.
    5. TIAA represents that it has concluded that there is a reasonable 
likelihood that the proposed distribution financing arrangement will 
benefit the Separate Account and Contractowners. The basis for this 
conclusion is set forth in a memorandum that will be maintained by TIAA 
at its administrative offices and that will be available to the 
Commission upon request.
    6. TIAA represents that it will have a board of directors, a 
majority of whom are not interested persons within the meaning of 
Section 2(a)(19) of the 1940 Act, formulate and approve any plan under 
Rule 12b-1 to finance distribution expenses.
    7. Applicants also request an order under Section 6(c) of the 1940 
Act exempting them from Section 12(b) of the 1940 Act and Rule 12b-1 
thereunder, insofar as this proposed distribution financing arrangement 
might be deemed to involve the direct or indirect use of assets in the 
Separate Account for distribution.
    8. Section 12(b) of the 1940 Act prohibits a registered investment 
company from acting as a distributor of securities of which it is the 
distributor, except through an underwriter. Rule 12b-1 prohibits any 
such company directly or indirectly from financing distribution of the 
company's shares except in compliance with the rule's requirements. The 
rule requires that a company financing distribution of its shares 
formulate a written plan describing all material aspects of the 
proposed arrangement and that the plan be approved initially by the 
company's shareholders, directors, and disinterested directors. The 
directors must vote annually to continue a plan and the directors must 
conclude that there is a reasonable likelihood that implementation or 
continuation of the plan will benefit the company and its shareholders.
    9. Applicants expect to finance the expenses of distributing the 
Contracts through the use of TIAA's general assets, which may be 
attributable in part to any surplus from the Mortality and Expense Risk 
Charge. Thus, the proposed distribution financing arrangement might be 
deemed to involve the direct or indirect use of assets in the Separate 
Account for distribution. Accordingly, Applicants represent that this 
aspect of the requested relief is solely ``defensive,'' i.e., to 
clarify that the current distribution financing arrangement is not 
subject to Section 12(b) or Rule 12b-1 thereunder. Applicants contend 
that the requested exemptive relief is not intended to cover the 
imposition of a separate charge for distribution expenses against the 
assets in the Separate Account, and acknowledge that any such 
distribution charge would only be assessed in compliance with Rule 12b-
1.
    10. Applicants assert that Rule 12b-1 was not intended to apply to 
managed accounts, and that the rule's provisions are directed only at 
traditional mutual funds and should not be applied to managed accounts. 
Applicants further assert that the protections of Rule 12b-1 are not 
necessary in the case of managed accounts. Applicants state that 
Commission review under Section 26 and 27 of the 1940 Act of the 
reasonableness of asset charges of managed accounts, and explicit 
prospectus disclosure that the asset charge may be used for 
distribution expenses, provide sufficient protection for Contractowners 
and obviate the need for a managed account to comply with the 
requirements of Rule 12b-1.
    11. Applicants assert that the application of Rule 12b-1 to managed 
accounts would produce a burdensome and inequitable treatment of these 
accounts, would place them at an unfair competitive disadvantage with 
respect to trust accounts offering similar annuity contracts, and would 
create an artificial distinction between managed and trust accounts not 
justified by policy considerations.

Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested exemptions from Sections 12(b), 26(a)(2)(C) 
and 27 (c)(2) of the 1940 Act, and Rule 12b-1 thereunder, to deduct the 
Mortality and Expense Risk Charge from the assets of the Separate 
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 purposes fairly intended by 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. 94-24615 Filed 10-4-94; 8:45 am]
BILLING CODE 8010-01-M