[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29272]


[[Page Unknown]]

[Federal Register: November 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20720; File No. 812-9130]

 

Aid Association for Lutherans, et al.

November 18, 1994.
AGENCY: Securities and Exchange Commission (the ``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: Aid Association for Lutherans (``AAL''), AAL Variable 
Annuity Account I (the ``Account''), any other separate account 
established by AAL in the future to support certain variable annuity 
contracts issued by AAL (``Other Accounts''; together with the Account, 
the ``Separate Account,'' unless the context otherwise requires) and 
AAL Capital Management Corporation (``AALCMC''), (collectively, the 
``Applicants'').

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 to permit the 
deduction of a mortality and expense risk charge from the assets of the 
Account in connection with the offering of certain variable annuity 
certificates issued by AAL through the Account (the ``Account 
Certificates''). Applicants also seek an order to permit the deduction 
of a mortality and expense risk charge from the assets of the Account 
and of any Other Account, in connection with the future offering of 
variable annuity contracts issued by AAL through the Account or any 
Other Account, respectively, which contracts are similar in all 
material respects to the Account Certificates (the ``Other Account 
Certificates''; together with the Account Certificates, the 
``Certificates,'' unless the context otherwise requires).

filing date: The application was filed on July 28,1994 and amended on 
November 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 SEC'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 December 
13, 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 
reasons 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, 4321 North Ballard Road, 
Appleton, WI 54919.

FOR FURTHER INFORMATION CONTACT:
Joyce M. Pickholz, 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. AAL is a fraternal benefit society organized under the laws of 
the State of Wisconsin in 1902. AAL is owned by and operated for the 
benefit of its members, and is a tax-exempt, non-profit organization 
under applicable provisions of the Internal Revenue Code of 1986, as 
amended (the ``Code''). AAL is authorized under the laws of Wisconsin 
to engage in the writing of life insurance, annuity contracts and other 
insurance products. AAL is currently licensed to transact insurance and 
annuity business in all 50 states and the District of Columbia. On 
December 31, 1993, AAL had total assets of approximately $12 billion. 
AAL serves as sponsor and depositor of the Account.
    2. The Account is a legally segregated asset account of AAL 
established under the laws of the state of Wisconsin in December, 1994. 
That portion of the assets of the Account equal to the reserves and 
other contract liabilities of the Account is not chargeable with 
liabilities arising out of any other business AAL may conduct. Any 
income, gains or losses, realized or unrealized, from assets allocated 
to the Account are, in accordance with the Account Certificates funded 
through the Account, credited to or charged against the Account, 
without regard to other income, gains or losses of AAL. The Account 
will be subdivided into five subaccounts (``Subaccounts''), and will 
invest in corresponding shares of a mutual fund or investment portfolio 
of The AAL Variable Product Series Fund, Inc. (``Fund''). At a later 
date, consistent with then applicable law, AAL may add, delete, modify 
or combine Subaccounts or invest the assets of any new Subaccount in a 
new portfolio of the Fund or in any other investment company.
    3. AALCMC, an indirectly wholly-owned subsidiary of AAL, will be 
the principal underwriter of the Account Certificates. AALCMC may act 
as principal underwriter for any Other Account Certificates issued by 
AAL in the future. AALCMC is registered with the Commission as a 
broker-dealer under the Securities Exchange Act of 1934, and is a 
member of the National Association of Securities Dealers, Inc.
    4. The Account Certificates are designed to provide benefits under 
retirement programs that qualify for favorable tax deferred treatment 
under the Code. They may also be used to provide retirement benefits on 
a non-tax deferred basis. The Account Certificates provide for flexible 
premium payments. Each premium payment must be at least $50. AAL will 
terminate any Certificate and pay the accumulated value of the 
Certificate to the owner, if on the anniversary of the Certificate 
issue date, the accumulated value of that Certificate is less than 
$600, and no premium payment has been received by AAL's service center 
for at least 36 months. AAL reserves the right to limit the total 
amount of all premium payments that it will accept on any Certificate 
to $1 million. Premium payments accumulated before retirement are 
accumulated before retirement on a variable basis through use of the 
Account. Any annuity benefits received after retirement are paid from a 
fixed account, which is a part of AAL's general account.
    5. A $25 annual maintenance charge will be deducted under each 
Certificate on the last day of the Certificate year, or at the time of 
any earlier surrender of the Certificate. The maintenance charge will 
not be deducted if the sum of premiums received by AAL, less the sum of 
any withdrawals and withdrawal charges from this Certificate, is $5,000 
or more at the time the deduction would otherwise be made. This charge 
will not apply on or after the annuity commencement date. AAL 
represents that it does not expect that the total revenue from the 
maintenance charge will exceed the expected costs of administering the 
Account Certificates, on average, excluding costs that are properly 
categorized as distribution expenses.
    6. Certificate owners may make two transfers from one or more 
Subaccounts of the Account to one or more other Subaccounts or to the 
fixed account in each Certificate Year without charge. Thereafter, each 
transfer in the Certificate Year will be subject to a $10 transfer 
charge, which will be applied against the Subaccounts from which 
transfers are made according to the ratio that the amounts transferred 
from each Subaccount bear to the total amount transferred from the 
Subaccounts. AAL represents that it does not expect that total revenue 
from the transfer charge will exceed the total expected costs of 
administering transfers.
    7. Although no front-end sales charge will be imposed when purchase 
payments are applied under the Account Certificates, a surrender charge 
may be assessed if the Certificate is surrendered or a withdrawal is 
made. The amount of the charge reduces annually from 7% to 0 over 8 
Certificate years. Each withdrawal must be at least $25. No surrender 
charge is applicable to 10% of the accumulated value of a Certificate 
that is surrendered, or to 10% of the accumulated value at the time of 
the first withdrawal, in any Certificate year (10% on an annualized 
basis if multiple withdrawals are made). Withdrawal or surrender 
charges will be waived if the withdrawal or surrender is made more than 
three years after the issue date and the value is applied to either of 
two types of settlement options under the Certificate. Charges will 
also be waived if the Certificate owner or the owner's spouse is 
confined as an inpatient of a licensed hospital, nursing home facility, 
and/or hospice facility for at least 30 consecutive days and the 
withdrawal or surrender is made while the owner or spouse is confined 
or within 90 days after discharge from the facility and written proof 
of confinement satisfactory to AAL is sent to AAL's service center. 
Applicants state that the charge may be insufficient to cover all costs 
relating to the distribution of the Account Certificates.
    8. AAL is currently exempt from state premium taxes. In the event 
that AAL at some time in the future becomes subject to premium taxes 
and Account Certificates subject to a premium tax, the amount of the 
tax may be deducted, either from premium payments when received, or 
from the amount applied to effect any annuity at the time annuity 
payments commence, depending on applicable law.
    9. AAL will assume a mortality risk by its contractual obligation 
to pay a death benefit to the beneficiary if the annuitant under an 
Account Certificate dies during the accumulation period. Generally 
speaking, the Account Certificates provide a death benefit that is 
guaranteed to be the greatest of: (i) The accumulated value of the 
Certificate on the death proceeds calculation date; (ii) the sum of all 
premiums paid less the sum of any withdrawals as of the death proceeds 
calculation date; (iii) the accumulated value of the Certificate on the 
minimum death proceeds valuation date preceding the death proceeds 
calculation date, plus the sum of all premiums paid since that minimum 
death proceeds valuation date, less the sum of any withdrawals since 
that death proceeds valuation date; or (iv) the minimum required by 
law. The first minimum death proceeds valuation date is the Certificate 
issue date. Thereafter, the minimum death proceeds valuation date is 
every seventh anniversary of the Certificate issue date. After the age 
of 80, the death benefit is the accumulated value of the Certificate on 
the death proceeds calculation date. Thus, AAL assumes the risk that 
the annuitant may die during the accumulation period at a time when the 
death benefit guaranteed by the Certificate may be higher than the 
accumulated value of the Certificate. Also, because the Certificate 
does not impose any surrender charge on the death benefit, AAL assumes 
the risk that the owner will die at a time when the amount of the death 
benefit payable exceeds the then net surrender value of the 
Certificate.
    10. AAL will assume an additional mortality risk by its contractual 
obligation to continue to make annuity payments for the entire life of 
the annuitant under annuity options involving life contingencies. This 
assures each annuitant that neither the annuitant's own longevity nor 
an improvement in life expectancy generally will have an adverse effect 
on the annuity payments received under a Certificate. Also, AAL assumes 
the risk that annuitants as a group will live a longer time than AAL's 
annuity tables predict, which would require AAL to pay out more in 
annuity income than it had planned. Finally, AAL will assume an 
additional mortality risk under its annuity purchase rate tables which 
are guaranteed for the life of a Certificate. In addition to mortality 
risks, AAL will assume an expense risk under the Account Certificates 
because the maintenance charge deducted under the Account Certificates 
to cover administrative expenses, may not be sufficient to cover the 
expenses actually incurred.
    11. As compensation for assuming mortality and expense risks, AAL 
will assess each Subaccount of the Separate Account with a daily charge 
at an annual aggregate rate of 1.25%. AAL has determined that such a 
charge is within the range of industry practice. Of the charge of 
1.25%, .80% will be allocated to mortality risks and .45% will be 
allocated to the expense risks. If the mortality and expense risk 
charge and the maintenance charge are insufficient to cover the 
expenses and costs assumed, the loss will be borne by AAL. Conversely, 
if the amounts deducted prove more than sufficient, the excess will be 
profit to AAL. AAL expects to make a profit from the mortality and 
expense risk charge. To the extent that the surrender charge, is 
insufficient to cover the actual costs of distribution, the expenses 
will be paid from AAL's general account assets, which will include 
profit, if any, derived from the mortality and expense risk charge.

Applicants' Legal Analysis

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
assessment of the mortality and expense risks charge under the Account 
Certificates. Applicants believe that the requested exemptions meet the 
standards of Section 6(c) of the 1940 Act. Applicants also believe that 
the terms of the relief requested with respect to any Other Account 
Certificates funded by the Account or any Other Account, in the future, 
are consistent with the standards enumerated in Section 6(c) of the 
Act. Applicants undertake that Other Account Certificates funded by the 
Account or any Other Account, in the future, will be substantially 
similar in all material respects to the Account Certificates.
    2. Applicants assert that without the requested relief, they would 
have to request and obtain exemptive relief in connection with Other 
Account Certificates to the extent required. Applicants represent that 
any such additional request for exemption would present no issues under 
the 1940 Act that have not already been addressed in this application. 
Applicants submit that the requested relief is appropriate in the 
public interest, because it would promote competitiveness in the 
variable annuity contract market by eliminating the need for AAL to 
file redundant exemptive applications, thereby reducing its 
administrative expenses and maximizing the efficient use of its 
resources. The delay and expense involved in having to repeatedly seek 
exemptive relief would impair AAL's ability to effectively take 
advantage of business opportunities as they arise. Applicants further 
submit that if AAL were required to repeatedly seek exemptive relief 
with respect to the same issues addressed in this application, 
investors would not receive any benefit or additional protection 
thereby. Indeed, they might be disadvantaged as a result of AAL's 
increased overhead expenses.
    3. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust, and any depositor thereof or 
principal underwriter therefor, from selling periodic payment plan 
contracts unless the proceeds of all payments (except such amounts as 
are deducted for sales load) are deposited with a trustee or custodian 
having the qualifications prescribed by Section 26(a)(1) of the 1940 
Act and held under an agreement that provides that no payment to the 
depositor or principal underwriter shall be allowed except as a fee, 
not exceeding such reasonable amount as the Commission may prescribe, 
for bookkeeping and other administrative services.
    4. Applicants represent that they have determined that the 
mortality and expense risk charge is within the range of industry 
practice for comparable variable annuity contracts. Applicants state 
that they have reviewed publicly available information reflected in an 
actuarial survey regarding products of other companies taking into 
consideration such factors as minimum death benefit guarantees, 
guaranteed annuity purchase rates, administrative fees, current charge 
levels and the manner in which charges are imposed, the existence of 
charge level guarantees, and the markets in which the Account 
Certificates will be offered. AAL represents that it will maintain at 
its principal office, and make available on request to the Commission 
and its staff, a memorandum setting forth in detail the variable 
annuity products analyzed and the methodology and results of the 
aforesaid comparative review.
    5. Applicants acknowledge that the surrender charge may be 
insufficient to cover all costs relating to the distribution of the 
Account Certificates and that, if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be offset by distribution expenses not reimbursed by the surrender 
charge. In such circumstances, a portion of the mortality and expense 
risk charge might be viewed as providing for a portion of the costs 
relating to distribution of the Account Certificates. Notwithstanding 
the foregoing, AAL has concluded that there is a reasonable likelihood 
that the proposed distribution financing arrangements made with respect 
to the Account Certificates will benefit the Separate Account and 
Account Certificate owners. AAL represents that it will maintain at its 
principal office, and make available on request to the Commission and 
its staff, a memorandum setting out the basis for such conclusion.
    6. AAL represents that the Separate Account will invest only in an 
underlying mutual fund that undertakes, in the event it should adopt 
any plan under Rule 12b-1 under the 1940 Act to finance distribution 
expenses, to have such plan formulated and approved by a board of 
directors, a majority of the members of which are not ``interested 
persons'' of such fund within the meaning of Section 2(a)(19) of the 
1940 Act.

Applicants' 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-29272 Filed 11-28-94; 8:45 am]
BILLING CODE 8010-01-M