[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