[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27447]


[[Page Unknown]]

[Federal Register: November 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20668; 812-8888]

 

Fidelity Investment Life Insurance Company, et al.

October 31, 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: Fidelity Investments Life Insurance Company (``FILI''), 
Fidelity Investments Variable Annuity Account I (the ``Variable 
Account''), and Fidelity Brokerage Services, Inc. (``FBSI'') 
(collectively, the ``Applicants'').

relEvant 1940 act sectionS: Order requested under Section 6(c) for 
exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.

summary of application: Applicants seek an order permitting, on a 
prospective basis, the deduction of mortality and expense risk charges 
from (1) the assets of the Variable Account with respect to certain 
flexible premium deferred variable annuity contracts (``Contracts'') 
and contracts offered in the future that are substantially similar in 
all material respects to the Contracts (``future contracts'') and (2) 
the assets of similar separate accounts established and maintained by 
FILI (``FILI Accounts'') with respect to future contracts. Applicants 
also request that the exemptive relief granted to FBSI extend to any 
other broker-dealer that is a member of the National Association of 
Securities Dealers and controlling, controlled by, or under common 
control with FILI (``FILI Broker-Dealers''), that may serve in the 
future as principal underwriter for the Contracts or future contracts 
offered through the Variable Account or the FILI Accounts.

filing date: The application was filed on March 11, 1994 and amended on 
October 4, 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 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 
November 25, 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 SEC's 
Secretary.

addresses: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, DC 20549. Applicants, c/o Fidelity Investments 
Life Insurance Company, 82 Devonshire Street, Mail Zone F5E, Boston, 
Massachusetts 02109, Attention: David J. Pearlman, Esq.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel at 
(202) 942-0670 or C. Gladwyn Goins, Associate Director at (202) 942-
0665, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations

    1. FILI is a stock life insurance company organized under the laws 
of the State of Utah. FILI is a wholly-owned subsidiary of FMR Corp., 
the parent company for the group of financial services companies known 
as Fidelity Investments.
    2. The Variable Account was established by FILI as a separate 
account under the laws of the state of Pennsylvania on July 22, 1987 
for the purpose of funding certain variable annuity contracts issued by 
FILI. FILI may, in the future issue other contracts funded by the 
Variable Account or other FILI Accounts and deduct mortality and 
expense risk charges under those contracts in reliance upon the 
requested exemptive order, if granted. Applicants undertake that such 
future contracts will be substantially similar in all material respects 
to the Contracts.
    3. FBSI is the principal underwriter for the Contracts. In 1988, 
FILI, the Variable Account and Fidelity Distributors Corp. (``FDC''), 
which at that time served as principal underwriter for the Contracts, 
obtained an exemptive order (the ``1988 Order'') permitting the 
deduction of mortality and expense risk charges under the Contracts.\1\ 
On January 1, 1990, as part of an internal consolidation, the 
activities of FDC and FBSI were combined and FBSI became principal 
underwriter for the Contracts. All aspects of the Contracts have 
remained precisely the same as was represented in the application 
pursuant to which the 1988 Order was granted and Contract owners have 
continued to pay precisely the same fees as they paid (or would have 
paid) when FDC served as principal underwriter.
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    \1\See Fidelity Investments Life Insurance Co., et al., Release 
Nos. IC-16615 (Oct. 28, 1988) (Notice) and IC-16656 (Nov. 28, 1988) 
(Order).
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    4. The Contracts are flexible premium deferred variable annuities. 
Annuity payments can be on a fixed basis, a variable basis, or a 
combination of both. If the Annuitant dies prior to the annuity date 
and prior to age 70, FILI will pay a death benefit equal to the greater 
of (1) the purchase payments made, less any withdrawals and charges 
thereon and (2) the Contract value as of the end of the valuation 
period in which proof of death is received at the service center.
    5. On each Contract anniversary before the annuity date, FILI 
imposes an annual maintenance charge of $30. FILI currently waives this 
charge for any Contract under which total payments, less withdrawals, 
equals at least $25,000 and for contracts purchased after May 1, 1990 
in exchange for a Fidelity Variable Annuity contract (another contract 
formerly issued by FILI). FILI reserves the right to increase this 
annual charge to not more than $50, if warranted by expenses, and to 
assess the charge against all contracts other than those issued in 
exchange for a Fidelity Variable Annuity. The charge assessed after the 
annuity date for a particular contract will never be greater than the 
charge in effect just before the annuity date. FILI also deducts a 
daily charge from the assets of the subaccounts of the Variable Account 
equivalent to an effective annual rate of .25%. Applicants state that 
the administrative charges contain no element of anticipated profit and 
their deduction meets the standard specified in Rule 26a-1 under the 
1940 Act.
    6. FILI deducts an asset charge, computed daily, for its assumption 
of mortality and expense risks. This charge is made by deducting daily 
from the assets of each subaccount attributable to the Contracts a 
percentage of those assets equal to an effective annual rate of .75%. 
Of this .75% charge, .65% is estimated to be for assuming mortality 
risks and .10% is estimated to be for assuming expense risks. The 
mortality risk FILI bears is that of making annuity payments for the 
life of an annuitant no matter how long that may be. FILI also bears a 
mortality risk by guaranteeing the death benefit if the annuitant dies 
prior to the annuity date. The expense risk is the risk that the costs 
of issuing and administering the Contracts will be greater than 
expected when setting the administrative charge. FILI will realize a 
gain from the charge for these risks to the extent that such charge is 
not needed to provide for benefits and expenses under the Contracts.
    7. A surrender charge is assessed on purchase payments withdrawn 
from the Contract within the first five Contract years and may be 
assessed on annuitizations within the first three Contract years. The 
surrender charge is 5% during the first Contract year and declines one 
percent per year thereafter. No surrender charge is imposed on total 
withdrawals in each Contract year of up to 10% of purchase payments 
(less amounts previously withdrawn that were subject to a surrender 
charge). Applicants expect that the surrender charge will not be 
sufficient to cover the expenses incurred in selling the Contracts. To 
the extent that the surrender charge is not sufficient, FILI will pay 
these expenses from its general assets which may include proceeds from 
the mortality and expense risk charge.

Applicants' Legal Analysis

    1. Applicants request exemptive relief on a prospective basis from 
the provisions of Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to 
permit the deduction of the mortality and expense risk charges under 
the Contracts and any future contracts offered through the Variable 
Account or through similar separate accounts established and maintained 
by FILI, whether currently existing or created in the future. 
Applicants also request that such exemptive relief extend to any other 
National Association of Securities member broker-dealer controlling, 
controlled by or under common control with FILI, whether existing or 
created in the future, that may serve in the future as principal 
underwriter of the Contracts or of future contracts offered through the 
Variable Account or other FILI Accounts.
    2. Section 27(c)(2) of the 1940 Act prohibits the issuer of a 
periodic payment plan certificate, and any depositor or underwriter for 
such issuer, from selling such periodic payment plan certificate unless 
proceeds of payments on such certificates (other than sales loads) are 
held under an indenture or agreement containing specified provisions. 
Section 26(a)(2) and the Rules thereunder do not permit a deduction 
from the assets of a separate account for mortality and expense risk 
charges.
    3. Applicants submit that their request for an order that applies 
to (1) contracts offered in the future by the Variable Account or other 
FILI Separate Accounts that are substantially similar in all material 
respects to the Contracts described in the application, and (2) other 
FILI Broker-Dealers which may serve in the future as principal 
underwriter in respect of the Contracts or of future contracts offered 
by the Variable Account or other FILI Separate Accounts, is appropriate 
in the public interest. Such an order would promote competitiveness in 
the variable annuity contract market by eliminating the need for FILI 
to file redundant exemptive applications, thereby reducing its 
administrative expenses and maximizing its use of its resources. The 
delay and expense involved in having to repeatedly seek exemptive 
relief would impair FILI's ability to effectively take advantage of 
business opportunities as they arise. Applicants further submit that 
the requested relief is consistent with the purposes of the 1940 Act 
and the protection of investors for the same reasons. If FILI were 
required to repeatedly seek exemptive relief with respect to the same 
issues addressed in the application, investors would not receive any 
benefit or additional protection thereby.
    4. Applicants submit that FILI is entitled to reasonable 
compensation for its assumption of mortality and expense risks and that 
the change in principal underwriter in no way affects the findings the 
SEC made in granting the 1988 Order. Applicants represent that the 
charge of .75% made under the Contracts for mortality and expense risks 
is consistent with the protection of investors because it is a proper 
insurance charge.
    5. FILI further represents that the charge of .75% for mortality 
and expense risks is within the range of industry practice with respect 
to comparable annuity products. This representation is based upon 
FILI's analysis of publicly available information about similar 
industry products, taking into consideration such factors as current 
charge levels, the existence of charge level guarantees, and guaranteed 
annuity rates. FILI will maintain at its executive office, and make 
available to the SEC upon request, a memorandum setting forth in detail 
the products analyzed in the course of, and the methodology and results 
of, its comparative survey.
    6. Applicants represent that prior to making available any future 
contracts, they will make a determination that the mortality and 
expense risks under any such contract will be within the range of 
industry practice for comparable contracts. Applicants will also 
maintain and make available to the Commission, upon request, a 
memorandum outlining the methodology underlying such determination. 
Further, such mortaility and expense risk charge would not exceed 1.25% 
of the daily assets of the Variable Account or other FILI Separate 
Account.
    7. Applicants acknowledge that if a profit is realized from the 
mortality and expense risk charges, all or a portion of such profit may 
be viewed as being used to cover distribution expenses. Notwithstanding 
the foregoing, FILI has concluded that there is a reasonable likelihood 
that the proposed distribution financing arrangements will benefit the 
Variable Account and Contract owners. The basis for such conclusion is 
set forth in a memorandum which will be maintained by FILI at its 
executive office and which will be made available to the Commission 
upon request.
    8. FILI represents that the Variable Account and other FILI 
Separate Accounts will invest only in a management investment company 
which has undertaken, in the event such company adopts 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 such open-end management investment company, formulate and 
approve any plan under Rule 12b-1 to finance distribution expenses.

Conclusion

    Applicants submit that the exemptive relief requested in the 
application 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27447 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M