[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29792]


[[Page Unknown]]

[Federal Register: December 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20738; No. 812-9206]

 

AUSA Life Insurance Company, et al.

November 28, 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: AUSA Life Insurance Company, Inc. (``AUSA Life''), AUSA 
Endeavor Variable Annuity Account (``Variable Account''), AEGON USA 
Securities, Inc. (``AEGON Securities''), and Certain Principal 
Underwriters (``Future Underwriters'').

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 Variable Account of a mortality and 
expense risk charge in connection with the issuance and sale of certain 
flexible premium variable annuity contracts (``Contracts'').

FILING DATE: The application was filed on September 1, 1994. An Amended 
and Restated Application was filed on October 27, 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 December 27, 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, N.W., Washington, D.C. 
20549. Applicants, Craig D. Vermie, Esq., AUSA Life Insurance Company, 
Inc., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.

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. AUSA Life is a stock life insurance company that principally 
sells life insurance and annuity contracts. It currently is licensed to 
do business in the District of Columbia and all states except Alabama, 
Arkansas, Florida, Hawaii, Idaho, Montana, North Carolina, Oregon, 
Utah, Washington and Wyoming. AUSA Life is an indirect, wholly-owned 
subsidiary of AEGON USA, Inc. AEGON USA is indirectly owned by AEGON 
n.v., a Netherlands holding company conducting its business through 
subsidiary companies engaged primarily in the insurance business.
    2. The Variable Account is a separate account registered with the 
Commission under the 1940 Act as a unit investment trust. The Variable 
Account consists of several subaccounts (``Subaccounts''), each 
investing solely in a corresponding portfolio of the Endeavor Series 
Trust (``Series Fund'' or ``Series Fund Portfolios''), or in shares of 
WRL Growth Portfolio (``WRL Growth Portfolio''), a portfolio within the 
WRL Series Fund, Inc.'s (``WRL Fund''). Both the Series Fund and the 
WRL Fund are registered open-end management investment companies of the 
series type. Shares of the Series Fund Portfolios and the WRL Growth 
Portfolio will be sold to the Separate Account at net asset value. 
Series Fund Portfolios and the WRL Growth Portfolio are responsible for 
all of their respective expenses, including applicable investment 
advisory fees.
    3. AEGON Securities, an affiliate of AUSA Life, will be the 
distributor and principal underwriter of the Contracts. Broker-dealers 
other than AEGON Securities may also serve as distributors and 
principal underwriters of the Contracts (``Future Underwriters''). 
AEGON Securities is, and any Future Underwriter will be, registered as 
a broker-dealer under the Securities Exchange Act of 1934, and a member 
of the National Association of Securities Dealers, Inc.
    4. The Contracts are individual flexible premium variable annuity 
contracts offered in connection with retirement plans that may qualify 
for favorable Federal income tax treatment (``Qualified Plans'') or on 
a non-tax qualified basis (``Non-Qualified Plans''). A registration 
statement on Form N-4 to register the Contracts under the Securities 
Act of 1933 has been filed with the Commission.\1\
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    \1\Applicants state that the Contracts currently are being 
issued by International Life Investors Insurance Company (``ILI'') 
through its ILI Endeavor Variable Annuity Account (``ILI Separate 
Account''), and that the AUSA Contracts are identical to the ILI 
Contracts except for the identity of the depositor and the issuing 
separate account. Applicants further state that ILI intends to 
transfer its variable annuity business to AUSA Life through an 
exchange offer to be made in compliance with the requirements of 
Rule 11a-2 of the 1940 Act. Applicants represent that their request 
for exemptive relief is identical in all material respects to the 
relief previously granted ILI and the ILI Separate Account in 
connection with the ILI Contracts. Both ILI and AUSA Life are 
indirect wholly-owned subsidiaries of AEGON USA, Inc., an indirect 
wholly-owned subsidiary of AEGON n.v. and, thus, affiliates of each 
other.
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    5. The Contracts provide for, among other things: (a) certain 
minimum initial and subsequent premium payments, which will be credited 
with the investment experience of the selected Subaccount(s) investing 
in Series Fund Portfolios or the WRL Growth Portfolio; (b) several 
Annuity Payment Options on both a fixed and variable basis, beginning 
on the Annuity Commencement Date; and (c) the payment of a death 
benefit, which is equal to the greater of the Contract Value or Premium 
Payments (net of withdrawals) plus 5.0% annual interest.
    6. Various fees and charges are deducted under the Contracts. An 
annual policy maintenance charge of the lesser of 2% of Contract Value 
or $35 per Contract Year will be deducted prior to the Annuity 
Commencement Date, and upon a full surrender on any date other than a 
Policy Anniversary, to compensate AUSA Life for contract 
administration. A daily administrative expense charge, equal to an 
effective annual rate of .15% of the net assets of each Subaccount in 
which the Contract Owner has invested, will be deducted prior to the 
Annuity Commencement Date and, if a Variable Payment Option is 
selected, may be deducted after that Date. No charge currently is made 
for transfers among the Portfolios; however, the right is reserved to 
impose a charge of up to $25 for the thirteenth and each subsequent 
transfer thereafter during a single Contract Year. AUSA Life does not 
expect a profit from these charges. AUSA represents that it will 
monitor its administrative expenses and the proceeds of these charges 
on at least an annual basis to ensure compliance with Rule 26a-1 under 
the 1940 Act.
    7. AUSA Life will deduct applicable premium taxes from the Policy 
Value on the Annuity Commencement Date, or upon full surrender or 
payment of the Death Benefit. No charges currently are made for 
federal, state or local taxes, other than premium taxes; however, such 
taxes may be deducted in the future.
    8. No sales charge is deducted from premium payments. However, 
certain full or partial surrenders will be subject to a maximum 7% 
contingent deferred sales charge (``CDSC''), which will be imposed on a 
declining basis during the first seven Contract Years after payment of 
the premium being withdrawn. The CSDC will compensate AUSA Life for 
expenses relating to the distribution and sale of the Contracts. For 
purposes of computing the CSDC, the earliest premium payments will be 
deemed to be withdrawn first. No CSDC will be applied after the first 
Contract Year to that portion of the first surrender in the Contract 
Year equal to 10% or less of the Contract Value. The CSDC also will not 
apply under certain circumstances if the Contract Value is applied to 
provide an annuity under one of the Annuity Payment Options.
    AUSA Life does not anticipate that the CDSC will generate 
sufficient revenues to pay all its distribution costs. Excess 
distribution costs would be paid out of AUSA Life's general assets, 
which may include profits derived from the mortality and expense risk 
charge assessed under the Contracts.
    9. A daily charge equal to an effective annual rate of 1.25% of the 
value of the net assets in the Separate Account will be deducted to 
compensate AUSA Life for bearing certain mortality and expense risks 
under the Contracts. Of that amount, approximately 0.45% is for 
mortality risks and approximately 0.80% is for expense risks. This 
charge applies prior to the Annuity Commencement Date and, if a 
Variable Payment Option is selected, after that Date.
    10. The mortality risk arises from AUSA Life's contractual 
obligation to make Annuity Payments (determined in accordance with the 
annuity tables and other provisions provided in the Contracts) 
regardless of how long any individual Annuitant or all Annuitants may 
live. This undertaking assures that neither an Annuitant's own 
longevity, nor an improvement in general life expectancy, will 
adversely affect the monthly annuity payments that the Annuitant will 
receive under the Contracts. A mortality risk also is assumed in 
connection with the Death Benefit Guarantee, for which there is no 
extra charge.
    11. The expense risk assumed by AUSA Life's actual administrative 
costs will exceed the amount recovered through the administrative and 
policy maintenance charges.
    12. AUSA Life currently anticipates that the mortality and expense 
risk charge will be more than sufficient to cover its costs. 
Accordingly, any excess will be profit to AUSA Life and may be 
available to pay distribution costs for the Contracts that are not 
covered by funds derived from the CSDC.

Applicants' Legal Analysis:

    1. Applicants request exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the assets of the Separate Account of the 1.25% charge 
for the assumption of mortality and expense risks. Applicants further 
request that such exemptive relief be extended to Future Underwriters, 
a class consisting of broker-dealers who may, in the future, act as 
principal underwriters of the Contracts. Applicants assert 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.
    Applicants state that the terms of the relief requested with 
respect to any Future Underwriter are consistent with the standards set 
forth in Section 6(c) of the 1940 Act. Applicants state that without 
the requested relief, exemptive relief would have to be requested for 
each new principal underwriter. Applicants assert that these additional 
requests for exemptive relief would present no issues under the 1940 
Act not already addressed in this application. Applicants state that, 
if AUSA Life 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 AUSA Life. 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 the filing of redundant exemptive applications, thereby 
reducing administrative expenses and maximizing efficient use of 
resources. Both the delay and the expense of repeatedly seeking 
exemptive relief would, Applicants believe, impair AUSA Life's ability 
to effectively take advantage of business opportunities as they arise.
    2. Section 6(c) of the 1940 Act authorizes the Commission to grant 
an exemption from any provision, rule or regulation of the 1940 Act to 
the extent that it 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. 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 deposit 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 submit that AUSA Life is entitled to reasonable 
compensation for its assumption of mortality and expense risks. 
Applicants represent that the mortality and expense risk charge of 
1.25% under the Contracts is a reasonable and proper insurance charge 
to compensate AUSA Life for assuming certain risks under the Contracts, 
including the risk that: (a) Annuitants under the Contracts will live 
longer as a group than has been anticipated in setting the annuity 
rates guaranteed in the Contracts; and (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. Thus, 
Applicants assert that this charge is consistent with the protection of 
investors.
    4. AUSA Life represents that the 1.25% mortality and expense risk 
charge is within the range of industry practice for comparable annuity 
contracts. This representation is based upon AUSA Life'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, guaranteed death benefits, and guaranteed 
annuity rates. AUSA Life will maintain at its administrative offices, 
available to the Commission, a memorandum setting forth in detail the 
product analyzed in the course of, and the methodology and results of, 
its comparative review.
    5. 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. 
AUSA Life has concluded that there is a reasonable likelihood that the 
proposed distribution financing arrangements will benefit the Separate 
Account and Contract Owners. The basis for that conclusion is set forth 
in a memorandum which will be maintained by AUSA Life at its 
administrative offices and will be available to the Commission.
    6. AUSA Life also represents that the Separate Account will only 
invest in management investment companies which undertake, in the event 
they should adopt a plan under Rule 12b-1 to finance distribution 
expenses, to have a board of directors of 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 represent 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. 94-29792 Filed 12-2-94; 8:45 am]
BILLING CODE 8010-01-M