[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: 94-27448]


[[Page Unknown]]

[Federal Register: November 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20669; No. 812-9202]

 

The Travelers Life and Annuity Company, et al.

October 31, 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: The Travelers Life and Annuity Company (``Travelers''), The 
Travelers Fund VA For Variable Annuities (``Fund VA'') and Other 
Separate Accounts (``Other Accounts'') (collectively, ``Separate 
Accounts''), and Travelers Equities Sales, Inc. (``Sales'') 
(collectively, ``Applicants'').

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) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction from the assets of the Separate Accounts of a mortality and 
expense risk charge in connection with the offer and sale of certain 
flexible premium deferred variable annuity contracts and certificates 
offered by Travelers.

FILING DATE: The application was filed on August 29, 1994. An amended 
and restated application was filed on October 18, 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 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 Commission's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, c/o Julie E. Rockmore, Counsel and Assistant Secretary, The 
Travelers Life and Annuity Company, One Tower Square, Hartford, 
Connecticut 06183.

FOR FURTHER INFORMATION CONTACT: Yvonne 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. Travelers is a stock life insurance company currently licensed 
to conduct a life insurance and annuity business in all states except 
Alabama, Hawaii, Kansas, Maine, New Hampshire, New Jersey, North 
Carolina, Tennessee, Texas, Wyoming and New York. Travelers currently 
is seeking to obtain licensure in the remaining states, except New 
York. Travelers is a wholly owned subsidiary of The Travelers Insurance 
Company, an indirect wholly owned subsidiary of The Travelers, Inc. 
(``Travelers, Inc.'').
    2. Fund VA is a separate account established by Travelers to fund 
certain individual and group flexible premium deferred variable annuity 
contracts and certificates (``Current Contracts''). Travelers also may 
issue through Fund VA, or Other Accounts established in the future, 
other individual or group flexible premium deferred variable annuity 
contracts and certificates that are substantially identical in all 
material respects to the Current Contracts (``Future Contracts,'' 
together with Current Contracts, the ``Contracts'').
    3. Fund VA has filed with the Commission on Form N-8A a 
Notification of Registration as a unit investment trust under the 1940 
Act and a registration statement on Form N-4 under the Securities Act 
of 1933 in order to register as securities the Current Contracts. 
Future Contracts issued through Fund VA or any Other Accounts will be 
registered as securities under the 1933 Act. Other Accounts established 
in the future by Travelers to fund the Future Contracts will be 
registered with the Commission as unit investment trusts.
    4. Fund VA currently is subdivided into twenty-one subaccounts 
(``Subaccounts''), each investing exclusively in shares of 
corresponding registered open-end management investment companies 
(``Underlying Funds''). Other Subaccounts may be created in the future 
to invest in additional Underlying Funds which may now or in the future 
be made available. Each Subaccount of any Other Account established by 
Travelers in the future will invest exclusively in the shares of a 
specific corresponding open-end management investment company 
registered with the Commission. Shares of the Underlying Funds will be 
sold to Fund VA at net asset value. Each Underlying Fund is responsible 
for all of its own expenses, including applicable investment advisory 
fees.
    5. Sales, an indirect wholly-owned subsidiary of Travelers, Inc. 
and an affiliate of Travelers, will be the principal underwriter of the 
Contracts. Sales is registered as a broker-dealer under the Securities 
Exchange Act of 1934 and as an investment adviser under the Investment 
Advisers Act of 1940.
    6. The Contracts are designed for use in connection with retirement 
plans that may qualify for favorable federal income tax treatment under 
Sections 408, 403(b), 401(a), 401(k) and 457 of the Internal Revenue 
Code of 1986, as amended, and for non-qualified group and/or individual 
contracts.
    7. The Contracts provide for the allocation of purchase payments to 
the Subaccounts and/or to a fixed account funded by the general assets 
of Travelers. Certain minimum purchase payments are required under the 
Contracts, which also provide for annuity payments on a fixed or 
variable basis. Fixed payments are based on the tables shown in the 
Contracts. Variable annuity payments will increase or decrease during 
the payment period. The first payment is based on the tables shown in 
the Contracts. Subsequent payments will increase or decrease depending 
on the net investment performance of the underlying funds chosen for 
investment during the annuity payment period relative to the 3.5% 
assumed interest rate used to determine the tables shown in the 
Contracts.
    Prior to annuitization, Contract owners may transfer all or part of 
the Contract Value between Subaccounts at no cost. Currently, there are 
no restrictions on the frequency of transfers, but the right is 
reserved to limit transfers to no more than one in any six-month 
period. Currently, no charge is made for transfers among the 
Portfolios. The death benefit paid under individual Contracts and 
certain group Contracts for a death of the Annuitant prior to age 75 
will equal the greatest of: (a) Contract Value, less applicable premium 
tax or outstanding cash loans; (b) total purchase payments under the 
Contract, less prior surrenders or cash loans; or (c) Contract Value on 
the most recent fifth contract date anniversary on or immediately 
preceding the date of receipt of proof of death by Travelers, less 
applicable premium tax, outstanding cash loans or prior surrenders not 
previously deducted. In the event of the death of an Annuitant on or 
after age 75, the death benefit will be Contract Value, less applicable 
premium tax or outstanding cash loans.
    8. Certain charges and deductions are assessed under the Contracts. 
An administrative charge of $15 will be deducted from Contract Value 
semi-annually for each individual Contract and for each participant 
account under a group Contract, and pro rata upon full or partial 
surrender or other termination, death of the annuitant, or commencement 
of the annuity payment period. This charge is to reimburse Travelers 
for its actual administrative costs expected to be incurred over the 
life of the Contracts. Administrative charges are guaranteed not to 
increase during the life of the Contracts.
    9. Applicable premium taxes, currently ranging from 0.5% to 5%, 
will be deducted from Contract Value upon death, surrender, 
annuitization, or from Purchase Payments at the time they are made 
under the Contract, but no earlier than when Travelers incurs a tax 
liability under state law.
    10. Contract owners may elect to participate in an asset allocation 
program (``CHART Program'') provided under the Contracts by entering 
into a separate investment advisory agreement (``Agreement'') with 
Copeland Financial Services, Inc. (``Copeland''). Copeland, an 
affiliate of Travelers, is an investment adviser registered under the 
Investment Advisers Act of 1940.
    Under the CHART Program, purchase payments and Contract values may 
be allocated among certain Subaccounts. Travelers will be authorized 
under the Agreement to redeem, in a non-taxable transaction, a 
sufficient number of units from a Contract owner's Contract Value to 
pay a quarterly fee, which will be paid directly to Copeland. In 
addition to a $30 initial fee, Copeland charges for its advisory 
services a maximum of 1.50% of the assets subject to the CHART Program. 
This fee currently is reduced by 0.25%, the amount of the fee paid to 
the investment manager of the relevant Underlying Funds, and further 
reduced for assets over $25,000 and for certain plans. Applicants 
represent that the fee payment arrangement will be operated in a manner 
substantially identical to that described in a no-action letter, 
Travelers Insurance Company, et al. (IP-7-93, avail. Sept. 3, 1993).
    11. No sales charge is deducted from premium payments under the 
Contracts. However, to pay Travelers for its costs of distributing the 
Contracts, a contingent deferred sales charge (``CDSC'') equal to 5% of 
a purchase payment will be assessed in the first five years following 
such payment for certain full or partial surrenders. After the first 
contract or certificate year, Contract owners may surrender up to 10% 
of their contract value as of the first valuation date of any given 
contract year without incurring a CDSC (``Free Withdrawal''). Free 
Withdrawals do not apply to full surrenders, and, under IRA plans, are 
only available after the annuitant has attained age 59\1/2\. 
Additionally, the CDSC is not assessed on Contract earnings which equal 
(a) Contract Value, minus (b) the sum of all purchase payments not 
previously surrendered, and minus (c) the amount of the Free 
Withdrawal, if applicable.
    For purposes of determining the CDSC, surrenders will be deemed to 
be taken first from any applicable Free Withdrawal amount, then from 
purchase payments on a first-in, first-out basis, and finally from 
Contract earnings in excess of any 10% Free Withdrawal. The CDSC cannot 
be increased during the life of the Contracts and may be waived under 
certain circumstances.
    Travelers does not expect that revenues from the CDSC will be 
sufficient to cover sales and distribution expenses incurred in 
connection with the Contracts. In that event, the excess distribution 
costs would have to be paid out of Travelers' general assets, which may 
include profits, if any, from the mortality and expense risk charges 
assessed under the Contracts. In some cases, where Travelers may expect 
to incur lower sales and administrative expenses or perform fewer 
services, it may, in its discretion, reduce or eliminate certain 
administrative and CDSC charges.
    12. A charge equal to an effective annual rate of 1.25% of net 
asset value of the Subaccounts will be imposed to compensate Travelers 
for bearing certain mortality and expense risks. Of this amount, .625% 
is for mortality and .625% is for expense risks. This charge cannot be 
increased during the life of the Contracts.
    13. The mortality risk arises from Travelers' contractual 
obligation to make Annuity Payments for the life of the annuitant under 
annuity options involving life contingencies, regardless of the 
annuitant's longevity and any improvement in life expectancy generally. 
Thus, Travelers assumes the risk that the annuitants, as a class, may 
live longer than has been estimated by its actuaries, so that payments 
guaranteed for the life of the Contracts will continue for longer than 
had been anticipated.
    14. Travelers assumes additional mortality and certain expense 
risks under the Contracts by its contractual obligation to pay the 
death benefit in a lump sum (or in the form of an annuity option) upon 
the death of the annuitant before annuity or income payments commence. 
Also, no CDSC will be assessed if the Contract Value is paid as a death 
benefit. Travelers also assumes an expense risk under the Contracts 
because the administrative charges may be insufficient to cover actual 
administrative expenses.
    15. In the event that the administrative charge and the mortality 
and expense risk charge are more than sufficient to cover Travelers' 
costs and expenses, any excess will be a profit to Travelers. While 
Travelers does not expect to profit from the administrative charges, it 
does expect a profit from the mortality and expense risk charge. Any 
profit realized from this charge would be available for any proper 
corporate purpose, including the payment of distribution expenses for 
the Contracts not reimbursed by the CDSC.

Applicants' Legal Analysis

    1. Applicants request an order under Section 6(c) of the 1940 Act 
granting exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to the extent necessary to permit the deduction of a mortality and 
expense risk charge from the assets of: (a) Fund VA in connection with 
the offering of Current Contracts; (b) Fund VA in connection with the 
offering of Future Contracts; and (c) any Other Accounts established in 
the future by Travelers in connection with the offering of Future 
Contracts. 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.
    2. Applicants represent that the terms of the relief requested with 
respect to any Future Contracts funded by Fund VA or the Other Accounts 
are consistent with the standards set forth in Section 6(c) of the 1940 
Act. Applicants represent that the Future Contracts will be 
substantially identical in all material respects to the Current 
Contracts. Applicants state that without the requested relief, 
Travelers would have to request and obtain exemptive relief for Fund 
VA, or each new Other Account, to fund Future Contracts. Applicants 
assert that these additional requests for exemptive relief would 
present no issues under the 1940 Act not already addressed in this 
application. Further, if Travelers were to repeatedly seek exemptive 
relief with respect to the same issues addressed in this application, 
investors would not receive additional protection or benefit and could 
be disadvantaged by increased overhead of Travelers. Applicants argue 
that the requested relief is appropriate in the public interest because 
the relief will promote competitiveness in the variable annuity market 
by eliminating the need for Travelers to file redundant exemptive 
applications, thereby reducing administrative expenses and maximizing 
efficient use of resources. Applicants believe that both the delay and 
the expense of repeatedly seeking exemptive relief would impair 
Travelers' ability to effectively take advantage of business 
opportunities as they arise.
    3. 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 the 
purposes fairly intended by the policy and provisions of the 1940 Act.
    4. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, 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.
    5. Applicants represent that the 1.25% mortality and expense risk 
charge is reasonable in relation to the risks assumed by Travelers 
under the Contracts and is within the range of industry practice for 
comparable annuity contracts. This representation is based upon 
Traveler's analysis of publicly available information about similar 
industry products, taking into consideration such factors as guaranteed 
minimum death benefits, minimum initial and subsequent purchase 
payments, other contract charges, the manner in which charges are 
imposed, market sector, investment options, and availability of the 
contract for use in qualified and non-qualified plans. Travelers 
represents that it will maintain at its principal office, available to 
the Commission, memoranda setting forth in detail the variable annuity 
products analyzed in the course of, and the methodology used in, and 
the results of, its comparative review.
    6. 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 not reimbursed by the CDSC. 
Travelers has concluded that there is a reasonable likelihood that the 
proposed distribution financing arrangements will benefit the Separate 
Accounts and investors in the Contracts. The basis for that conclusion 
is set forth in a memorandum which will be maintained by Travelers at 
its principal office and will be available to the Commission.
    7. Travelers also represents that the Separate Accounts will invest 
only in underlying mutual funds which have undertaken, in the event 
they should adopt a plan under Rule 12b-1 to finance distribution 
expenses, to have a board of directors or trustees, a majority of whom 
are not ``interested persons'' of the such fund within the meaning of 
Section 2(a)(19) of the 1940 Act, formulate and approve any such plan.

Conclusion

    For the reasons set forth above, Applicants submit 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27448 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M