[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]


-----------------------------------------------------------------------

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'').

-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \3\Applicants represent that they will amend the application 
during the notice period to make this representation.
---------------------------------------------------------------------------

    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