[Federal Register Volume 59, Number 199 (Monday, October 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25605]
[[Page Unknown]]
[Federal Register: October 17, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20609; No. 812-9102]
Jefferson-Pilot Life Insurance Company, et al.
October 7, 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: Jefferson-Pilot Life Insurance Company (``Jefferson-
Pilot''), Jefferson-Pilot Separate Account A (``Separate Account''),
Any Other Separate Account Established by Jefferson-Pilot in the Future
to Support Certain Variable Annuity Contracts Offered by Jefferson-
Pilot that are Materially Similar to Those Offered by the Separate
Account (``Other Separate Accounts''), and Jefferson-Pilot Investor
Services, Inc. (``J-P Services'').
relevant 1940 act sections: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2).
summary of application: Applicants seek an order permitting the
deduction from the assets of the Separate Account of a mortality and
expense risk charge in connection with the offer and sale of certain
variable annuity contracts offered by Jefferson-Pilot.
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 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 November 1, 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, NW., Washington, DC 20549.
Applicants, c/o J. Gregory Poole, Esq., Jefferson-Pilot Life Insurance
Company, 100 North Greene Street, Greensboro, North Carolina 27401; and
Joan E. Boros, Esq. and Jane A. Kanter, Esq., Katten, Muchin, Zavis &
Dombroff, 1025 Thomas Jefferson Street, NW., Washington, DC 20036.
for further information contact: Yvonne M. Hunold, Senior 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. Jefferson-Pilot is a stock life insurance company. Jefferson-
Pilot is the sponsor and depositor of the Separate Account and will be
the sponsor and depositor of one or more Other Separate Accounts that
it may establish in the future.
2. The Separate Account, a separate account of Jefferson-Pilot, is
registered under the 1940 Act as a unit investment trust. The Separate
Account currently is used to fund certain individual variable annuity
contracts (``contracts''), and will be used in the future to fund
certain additional variable annuity contracts that are materially
similar (``Other Contracts''), offered by Jefferson Pilot
(Collectively, ``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 (``1933 Act'').
Registration statements will be filed under the 1933 Act for any Other
Contracts offered in the future by Jefferson-Pilot.
The Separate Account currently consists of nine sub-accounts
(``Subaccounts''), of which eight are available under the Contracts.\1\
Two of the available Subaccounts invest in shares of mutual funds (``JP
Funds'') organized by Jefferson-Pilot Corporation as diversified, open-
end management investment companies registered under the 1940 Act and
those shares are registered as securities under the 1933 Act. The
remaining six available Subaccounts invest solely in shares of a
corresponding portfolio of the Variable Insurance Products fund
(``Trust'') or the Variable Insurance Products Fund II (``Trust II'')
(collectively, ``Trusts''). The Trusts are diversified, open-end
management investment companies of the series type that are registered
under the 1940 Act and whose shares are registered under the 1933 Act.
Jefferson-Pilot may determine to create additional Subaccount(s) of the
Separate Account to invest in any additional mutual fund(s) that may
now or in the future be available. Similarly, Subaccounts and/or funds
may be combined or eliminated from time-to-time.
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\1\The eight available Subaccounts include: (1) JP Capital
Appreciation Fund, Inc.; (2) JP Investment Grade Bond Fund, Inc.;
(3) CIPF Money Market Portfolio; (4) VIPF-II Asset Manager
Portfolio; (5) VIPF Equity-Income Portfolio; (6) VIPF High Income
Portfolio; (7) VIPF Growth Portfolio; and (8) VIPF Overseas
Portfolio. Certain Subaccounts are subdivided further into sub-
Subaccounts reflecting certain differences in unit values
attributable to prior tax law provisions applicable to previously
issued qualified and non-qualified Contracts.
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3. JP Investment Management Company, a wholly-owned subsidiary of
Jefferson-Pilot Corporation, is the investment adviser for the JP
funds. Fidelity Management & Research Company, a nonaffiliate, is the
investment adviser for the Trusts.
4. Investor Services, a wholly-owned subsidiary of JP Corporation,
will be the principal underwriter of the Contracts and may, in the
future, act as principal underwriter for any other Contracts offered by
Jefferson-Pilot. Investor Services is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
5. The Contracts are flexible premium variable annuity contracts
offered to individuals in connection with either nontax qualified plans
or under plans qualified for federal income tax advantages under the
Internal Revenue Code of 1986, as amended. The Contracts include the
Alpha Account Contract and the Alpha Flex Account Contract, each of
which permits premiums to vary in amount and frequency but require
certain minimum initial premium payments and additional payments. The
Contracts further provide for accumulation for premium payments before
retirement, and the receipt of annuity payments after retirement, on a
fixed basis, or on a variable basis, through use of the Separate
Account.
The Contracts also provide a death benefit that is the greatest of:
(1) Purchase payments made (less partial withdrawals and any surrender
and partial withdrawal transaction charges); (2) Accumulation Value at
the end of the valuation period; and (3) the ``step-up'' death
benefit,\2\ plus purchase payments made, less withdrawals and any
surrender or withdrawal charges taken since the last ``step-up'' death
benefit anniversary. The ``basic'' death benefit is equal to the
Accumulation Value, or to the sum of the purchase payments made less
partial withdrawals and any surrender and partial withdrawal
transaction charges taken. The death benefit in excess of the ``basic''
death benefit and the ``step-up'' death benefit, constitutes the
``step-up'' death benefit.
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\2\The step-up death benefit is the initial purchase payment. At
each step-up death benefit anniversary, the current Accumulation
Value is compared to the prior determination of the step-up benefit,
increased by purchase payments made and reduced by partial
withdrawals and any surrender and partial withdrawal transaction
charges taken since that anniversary. The greater of these becomes
the new step-up benefit. The step-up anniversaries are (i) With
respect to the Alpha Account Contract, the Contract date and every
sixth Contract anniversary thereafter, and (ii) with respect to the
Alpha Flex Account Contract, the Contract date and every eighth
Contract anniversary thereafter; provided, however, the step-up
death benefit will no longer increase once the Annuitant reaches age
75.
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6. No sales charges are deducted from premium payments under the
Contracts. However, a contingent deferred sales charge (``CDSC'') will
be assessed if the Contract is surrendered or partial withdrawals
exceeding certain amounts are taken during (i) The six-year period from
the date purchase payments are received and accepted, with respect to
the Alpha Account Contract, and (ii) the eight-year period from the
date purchase payments are received and accepted, with respect to the
Alpha Flex Account Contract. With respect to the Alpha Account
Contract, the maximum CDSC imposed is 6% of the amount withdrawn during
the first two Contract years, scaled downward until the seventh
Contract Year when there will be no charge. With respect to the Alpha
Flex Account Contract, the maximum CDSC imposed is 8% of the amount
withdrawn in the first Contract Year, scaled downward until the ninth
Contract year, when there will be no charge. After the first Contract
year, a Contract owner may withdraw once each Contract year 10% of the
Accumulation Value as of the last Contract anniversary as well as
purchase payments held beyond the applicable CDSC period, without the
assessment of a CDSC. In no event will the CDSC under either Contract
exceed 9% of purchase payments.
Proceeds from the CDSC may not cover the expected costs of
distributing the Contracts. Any shortfall will be recovered from
Jefferson-Pilot's general assets, which may include revenues from the
mortality and expense risk charge deducted from the Separate Account.
7. Various fees and expenses are deducted under the Contracts and
the Separate Account. A charge may be deducted for premium taxes when
annuity payments begin or from purchase payments, as required by the
particular jurisdiction. Applicable premium taxes depend on the payor's
then current place of residence and generally range from 0% to 5.0% of
purchase payments or the amount annuitized. Jefferson-Pilot represents
that the amount that it will recover for premium taxes will not be
greater than the amount of premium taxes required to be paid.
8. The administrative charges to be assessed include (i) An Annual
Contract Fee of $35 per Contract year during the Accumulation Period
only, and (ii) an Administrative Expense Fee equal to an annual rate of
.15% of the assets of the Separate Account during the Accumulation and
the Annuity Periods. Jefferson-Pilot guarantees that it will not raise
these administrative charges for the duration of the Contracts.
Jefferson-Pilot also represents that it does not expect that the total
revenues from the administrative charges will be greater than the total
expected cost of administering the Contracts, on average, excluding
distribution costs, over the period that the Contracts are in force.
9. There will be a charge of $25 for each transfer after the first
twelve transfers in each Contract year prior to the Annuity Date and
for each transfer after the first four transfers after the Annuity
Date. Jefferson-Pilot does not include periodic automatic transfers
made under the Dollar Cost Averaging Program when calculating the free
transfers that may be made during the Accumulation Period. Jefferson-
Pilot represents that it does not expect that the total revenues from
the excess transfer charge will be greater than the total expected cost
of administering transfers, on average, over the period that the
Contracts are in force.
10. A daily charge equal to an annual rate of 1.25% of the value of
the net assets in each Subaccount attributable to the Contracts will be
imposed to compensate Jefferson-Pilot for bearing certain mortality and
expense risks it assumes in offering and administering the Contracts
and in operating the Separate Account. Of this amount, .65% is
attributable to mortality risks, and .60% is attributable to expense
risks. The charge for mortality and expenses risks will be assessed
during the Accumulation Period and the Annuity Period. The aggregate
charge is guaranteed by Jefferson-Pilot not to increase for the
duration of the Contracts. The charge may be a source of profit for
Jefferson-Pilot, which will be added to its general account assets and
may be used for, among other things, the payment of distribution, sales
and other expenses. Jefferson-Pilot currently anticipates a profit from
this charge.
11. Jefferson Pilot assumes certain mortality risks under the
Contracts. The mortality risk arises from Jefferson-Pilot's contractual
obligation to make periodic annuity payments (determined in accordance
with Jefferson-Pilot's annuity tables, which are based on the 1983
Table of Individual Annuity Mortality and, for variable annuity
options, on an assumed investment rate of 3\1/2\%, and other Contract
provisions) regardless of how long all annuitants or any individual
annuitant lives. Contract owners thus are assured that neither
annuitant's longevity nor an improvement in life expectancy generally
(which is greater than expected) will adversely effect annuity payments
the payee will receive under the Contracts. This eliminates the risk of
outliving the funds accumulated for retirement. Mortality risk also is
assumed in connection with payment of the death benefit prior to the
Annuity date because the death benefit guarantee could exceed the
Account Value. Also, Jefferson-Pilot assumes a mortality risk arising
from the fact that the Contract does not impose any surrender charge on
the death benefits.
12. The expense risk assumed by Jefferson-Pilot is that its actual
expenses in issuing and administering the Contracts and operating the
Separate Account will exceed the amount recovered through 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 purposes
fairly intended by the policy and provisions of the 1940 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank and held under arrangements which prohibit any payment
to the depositor or principal underwriter except a reasonable fee, as
the Commission may prescribe, for performing bookkeeping and other
administrative duties normally performed by the bank itself.
3. Applicants request, under Section 6(c) of the 1940 Act,
exemptions from Sections 26(a)(2) and 27(c)(2) to the extent necessary
to permit the deduction from the assets of the Separate Account of the
charge for mortality and expense risks. 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.
4. Applicants submit that the relief requested with respect to any
Other Contracts funded by the Separate Account or by any other separate
account that is established by Jefferson-Pilot in the future to support
materially similar contracts to those offered by the Separate Account,
is appropriate in the public interest and consistent with the
protection of investors and the purposes of the 1940 Act, and, thus, is
consistent with the standards of Section 6(c) of the 1940 Act. Without
the requested relief for the Other Contracts, Applicants 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.
Applicants represents that the delay and expense of repetitive
exemptive applications would impair Jefferson-Pilot's ability to
effectively take advantage of business opportunities as they arise,
would deny investors any benefit or additional protection, and would
disadvantage investors as a result of increased overhead costs.
Applicants thus believe that the requested exemption is 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.
5. Applicants contend that Jefferson-Pilot is entitled to
reasonable compensation for its assumption of mortality and expense
risks. Applicants represent that the mortality and expense risk charge
is consistent with the protection of investors because it is a
reasonable and proper insurance charge. The charge is a reasonable
charge to compensate Jefferson-Pilot for the risks that: (a) Annuitants
under the Contract will live longer individually or as a group than has
been anticipated in setting the annuity rates guaranteed in the
Contracts; (b) the Account Value will be less than the death benefit;
and (c) administrative expenses will be greater than amounts derived
from the administrative charges.
6. Applicants represent that the 1.25% mortality and expense risk
charge under the Contracts is within the range of industry practice for
comparable annuity products. This determination is based upon
Applicants' analysis of publicly available information about similar
industry products, taking into consideration such factors as current
charge levels and benefits provided, the existence if expense charge
guarantees and guaranteed annuity rates. Applicants represent that
Jefferson-Pilot undertakes to maintain at its home office, available to
the Commission upon request, a memorandum setting forth in detail the
products analyzed, and the results of the analysis, in making the
foregoing determination.\3\
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\3\Applicants represent that they will amend the application
during the notice period to make this representation.
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7. 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. Jefferson-Pilot has
concluded that there is a reasonable likelihood that the proposed
distribution financing arrangements will benefit the Separate Account
and the Contract owners. The basis for that conclusion is set forth in
a memorandum which will be maintained by Jefferson-Pilot at its
administrative offices and will be available to the Commission.
8. Applicants also represents that the Separate Account will invest
only in open-end management investment companies that undertake, in the
event that such company should adopt a plan under Rule 12b-1 of the
1940 Act to finance distribution expenses, to have a board of directors
(or trustees), a majority of whom are not ``interested persons'' of the
company, formulate and approve any such plan.
Conclusion
For the reasons set forth above, Applicants represents 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 policy and provisions of the 1940 Act.
Accordingly, Applicants request relief from Sections 26(a)(2)(C) and
27(c)(2) to the extent necessary to permit the assessment and deduction
of the mortality and expense risk charge under the Contracts.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25605 Filed 10-14-94; 8:45 am]
BILLING CODE 8010-01-M