[Federal Register Volume 59, Number 202 (Thursday, October 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26059]
[[Page Unknown]]
[Federal Register: October 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20621; File No. 812-9094]
John Hancock Mutual Life Insurance Company, et al.
October 14, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: John Hancock Mutual Life Insurance Company (``John
Hancock''), John Hancock Variable Annuity Account U (``Account U''),
John Hancock Variable Annuity Account V (``Account V''), John Hancock
Variable Life Insurance Company (``JHVLICO'', together, with John
Hancock, the ``Companies''), John Hancock Variable Annuity Account I
(``Account I'') and any other separate accounts (the ``Other
Accounts'', collectively, with Accounts U, V, and I, the ``Accounts'')
established by the Companies in the future to support certain variable
annuity contracts issued by the Companies.
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the
1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
Companies to deduct from the assets of the Accounts the mortality and
expense risk charge imposed under certain variable annuity contracts
issued by the Companies (the ``Existing Contracts'') and under any
other variable annuity contracts issued by the Companies which are
materially similar to the Existing Contracts and are offered through
any Account on a basis that is similar in all material respects to the
basis on which the Existing Contracts are offered (the ``Other
Contracts'', together, with the Existing Contracts, the
``Contracts'').\1\ The Other Contracts may be either group contracts or
individual contracts and may be either variable or combination fixed
and variable contracts.
\1\Applicants represent that the application will be amended
during the notice period to reflect this description of the Other
Contracts.
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FILING DATE: The application was filed on July 1, 1994. Applicants
represent that an amendment to the application will be filed during the
notice period.
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 this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing reequests must be received by the
Commission by 5:30 p.m. On November 8, 1994 and should be accompanied
by proof of service on Applicants in the form of an affidavit or, for
lawyers, by certificate of service. Hearing requests should state the
nature of the 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: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: Sandra M. DaDalt, Associate Counsel, John Hancock
Mutual Life Insurance Company, John Hancock Place, P.O. Box 111,
Boston, Massachusetts 02117.
FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, 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 Public
Reference Branch of the SEC.
Applicants' Representations
1. John Hancock, a mutual life insurance company chartered under
Massachusetts law, is the principal underwriter for Accounts U, V and
I. John Hancock is a registered broker-dealer under the Securities
Exchange Act of 1934 and a registered investment advisor under the
Investment Advisers Act of 1940.
2. JHVLICO, a stock life insurance company also chartered under
Massachusetts law, is a wholly-owned subsidiary of John Hancock.
3. Accounts U and V, established as separate accounts of John
Hancock under Massachusetts law on January 14, 1985 and May 11, 1987,
respectively, fund classes of variable annuity contracts which differ
in certain respects from the Contracts. Both Accounts are registered
with the Commission as unit investment trusts under the 1940 Act and
the offer and sale of interests under the variable annuity contracts
funded through the Accounts is registered under the Securities Act of
1933 (the ``1933 Act''). Applicants incorporate those registration
statements into the application by reference. The application states
that the Accounts currently have seven subaccounts. Two additional
subaccounts will be added to Account V with the introduction of the
Existing Contracts. Applicants represent that a registration statement
on Form N-4 will be filed with respect to the Existing Contracts funded
through Account V. Such registration statement is incorporated into the
application by reference.
4. Account I, a separate account of JHVLICO, was established under
Massachusetts law on June 15, 1994. Applicants state that Account I
will register with the Commission as a unit investment trust under the
1940 Act and that the offer and sale of variable annuity contracts to
be funded through Account I will be registered under the 1933 Act.
Applicants incorporate the registration statements into the application
by reference. Account I has nine subaccounts.
5. The Other Accounts will be separate accounts of either Company
used to fund Other Contracts. Applicants state that the Other Accounts
will register with the Commission under the 1940 Act.
6. The assets of Accounts U and V are, and the assets of Account I
will be, invested in shares of John Hancock Variable Series Trust I
(the ``Fund''). The Fund is a diversified, open-end management
investment company and was reorganized as a business trust under
Massachusetts law effective April 29, 1988. The Fund is the successor
to John Hancock Variable Series Fund I, Inc., which was incorporated
under Maryland law on September 23, 1985. The Fund currently has nine
portfolios, each of which has separate investment objectives and
policies.
7. The Existing Contracts are individual combination fixed/variable
annuity contracts, issued to plans qualifying for special tax treatment
under the Internal Revenue Code of 1986 (the ``Code''). The Existing
Contracts will also be issued to individual persons doing their own
retirement planning, and to plans and trusts that do not qualify for
special tax treatment under the Code. The Existing Contracts will be
deferred annuity contracts that are deemed to be ``periodic payment
plan certificates'' within the meaning of Section 2(a)(27) of the 1940
Act.
8. The Companies will deduct any premium tax levied by any
governmental entity as a result of the Contracts or the Accounts.
Purchase payments received under the Contracts will be allocated, after
the deduction of applicable premium taxes, to any one or more of the
subaccounts of the appropriate Account or to a fixed annuity account of
either of the Companies at the discretion of the owner of the Contract.
The application states that the applicable premium taxes are determined
by the then current state of residence of the Contract owner. Premium
taxes currently range from 0.04% to 5% of purchase payments or of the
amount annuitized. Applicants state that, where permitted by state law,
the premium taxes will be deducted upon annuitization. In all other
jurisdictions, the taxes will be deducted upon the death of the
annuitant, surrender or withdrawal as directed by the law of the
Contract owner's state of residence.
9. A death benefit, payable in a single sum or under an optional
method of settlement, is provided if the annuitant dies before the
maturity, surrender, or termination of a Contract. The death benefit
will be the greatest of:
(a) The amount of the purchase payments made under the Contract
reduced by all prior withdrawals and any withdrawal charges;
(b) The Accumulated Value of the Contract next determined following
receipt by the applicable Company of due proof of death; or
(c) Where permitted by state law, the Accumulated Value of the
Contract as of any third interval Contract anniversary preceding the
Contract anniversary nearest the Annuitant's 81st birthday, plus the
purchase payments made under the Contract, less any withdrawals and any
withdrawal charges imposed since such Contract anniversary.\2\
Applicants state that the ``stepped-up'' death benefit described in
clause (c) above is provided to owners of the Contracts at no
additional cost.
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\2\The Accumulated Value of a Contract equals the sum of:
(a) The payments made to the appropriate Account prior to
annuitization adjusted to reflect the investment performance of the
applicable subaccounts and any transfers, withdrawals, or charges
associated with those subaccounts; and
(b) The payments made prior to annuitization to the fixed
account options, adjusted for interest credited, transfers,
withdrawals and charges.
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10. The Companies impose an annual Contract fee of $30 on Contracts
having an Accumulated Value of less than $10,000. This fee will be
deducted at the beginning of each Contract year after the first year
and upon surrender. The application states that the Companies reserve
the right to increase this fee to $50.\3\
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\3\Applicants represent that the application will be amended
during the notice period to include this statement.
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11. The application states that the Companies furnish certain
administrative and clerical services to their respective Accounts. For
these services, the Companies make a daily charge to each Account equal
to .35% on an annual basis of the current value of the net assets of
that Account that are attributable to the Contracts. The application
states that this charge is guaranteed and cannot be increased. Each
Company represents that the .35% charge has been set at a level which
is not expected to generate revenues that would, together with the
revenues from the Contract fee, exceed the Company's administrative
costs with respect to the Contracts. Applicants represent that the
Companies will deduct both the annual Contract fee and the annual
administrative charge in reliance upon and in conformity with all of
the requirements of Rule 26a-1 under the 1940 Act.\4\
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\4\Applicants represent that the application will be amended
during the notice period to include this representation.
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12. A contingent deferred sales charge (the ``Sales Charge'') of up
to 8% of the premium payments received is imposed upon withdrawal or
surrender within the first seven years of the Contract. The Sales
Charge is a percentage of the amount of each purchase payment that is
withdrawn. The percentage declines depending upon how many years have
passed since the withdrawn purchase payment was originally credited to
a Contract owner.
13. The Companies will impose a daily charge equal to an annual
effective rate of 1.15% of the value of the net assets of the Accounts
to compensate each Company for its assumption of mortality and expense
risks in connection with the Contracts. Applicants state that
approximately .45% of the 1.15% charge is attributable to mortality
risk, and approximately .70% is attributable to expense risk. The
application states that the Companies reserve the right to change the
proportion if these estimates change. Applicants represent that the
charge for mortality and expense risks will not increase. If the
mortality and expense risk charge is insufficient to cover actual costs
of the risks undertaken, the Companies will bear the loss. Conversely,
if the charge exceeds costs, this excess will be profit to the
Companies and will be available for any corporate purpose, including
payment of expenses relating to the distribution of the Contracts.
14. Applicants state that the Companies assume a mortality risk
inherent in the death benefit provided for in the Contracts. Where the
death benefit is paid prior to the Contract's maturity date, Applicants
state that the risk assumed is that the amount paid will exceed the
Contract's Accumulated Value. Additionally, Applicants state that there
is also the risk that no surrender charge will be imposed on a payment
under a death benefit or on the payment of a life annuity to the
beneficiary following the death of an owner who is not the annuitant.
15. Applicants state that the Companies also assume an expense risk
under the Contracts. According to Applicants, this is the risk that the
charges for administrative services under the Contracts will be
insufficient to cover actual administrative expenses.
Applicants' Legal Analysis and Conditions
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant the exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act in connection with Applicants' assessment of
the daily charge for the mortality and expense risks under the
Contracts. Applicants state that the terms of the relief requested with
respect to the Contracts funded by the Accounts are consistent with the
standards enumerated in Section 6(c) of the 1940 Act. Applicants state
that without the requested relief, they would have to request and
obtain exemptive relief for each Other Account funding Contracts.
Applicants assert that these additional requests for exemptive relief
would present no issues under the 1940 Act not already addressed in
this application. Additionally, Applicants note that the requested
relief is consistent with the authority of the Commission, pursuant to
Section 6(c) of the 1940 Act, to issue exemptive orders to a class or
classes of persons or transactions. Finally, Applicants note that, in
connection with future contracts and future separate accounts, the
Commission previously has granted exemptive relief, similar to that
requested by Applicants, from the provisions of Sections 26(a)(2)(C)
and 27(c)(2) of the 1940 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in pertinent
part, prohibit a registered unit investment trust and any depositor
thereof or underwriter therefor from selling periodic payment plan
certificates unless the proceeds of all payments (other than sales
load) are deposited with a qualified bank as trustee or custodian and
held under arrangements which prohibit any payment to the depositor or
principal underwriter except a fee, not exceeding such reasonable
amount as the Commission may prescribe, for performing bookkeeping and
other administrative services of a character normally performed by the
bank itself.
3. Applicants assert that the charge for mortality and expense
risks is reasonable compensation for the risks assumed.
4. Applicants represent that the charge of 1.15% for the mortality
and expense risks assumed by the Companies is within the range of
industry practice with respect to comparable annuity products.
Applicants state that this representation is based upon the Companies'
analysis of publicly available information regarding similar variable
annuity contracts, taking into consideration such factors as: the
rating of the company; the size of the company; and, the type of
retirement program for which the annuity is intended. Applicants
represent that each of the Companies will maintain at its principal
office, available to the Commission, a memorandum setting forth in
detail the variable annuity products analyzed and the methodology and
results of the Companies' comparative review.
5. Applicants acknowledge that the Sales Charge may be insufficient
to cover all costs relating to the distribution of the Contracts. To
the extent distribution costs are not covered by the Sales Charge, each
of the Companies will recover its distribution costs from the assets of
its respective general account. These assets may include gains from
either operations with respect to the Contracts or from charges imposed
under the Contracts. Applicants represent that the Companies have
concluded that there is a reasonable likelihood that the proposed
distribution financing arrangement will benefit the Accounts and the
owners of the Contracts. The basis for such conclusion is set forth in
a memorandum which will be maintained by each Company at its principal
office and will be made available to the Commission.
6. The Companies also represent that the Accounts will invest only
in management investment companies which undertake, in the event such
company adopts a plan under Rule 12b-1 of the 1940 Act to finance
distribution expenses, to have such plan formulated and approved by
either the company's board of directors or the board of trustees, as
applicable, a majority of whom are not interested persons of such
company within the meaning of the 1940 Act.
Conclusion
Applicants assert that for the reasons and upon the facts set forth
above, the requested exemptions from Sections 26(a)(2)(C) and 27(c)(2)
of the 1940 Act 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26059 Filed 10-19-94; 8:45 am]
BILLING CODE 8010-01-M