[Federal Register Volume 60, Number 4 (Friday, January 6, 1995)]
[Notices]
[Pages 2164-2166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-295]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20808; File No. 812-9122]
The Ohio National Life Insurance Co., et al.
December 29, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of Application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: The Ohio National Life Insurance Company (the ``Company''),
Ohio National Variable Account D (``VAD''), and The O.N. Equity Sales
Company (``ONESCO''), collectively, the ``Applicants.''
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act, granting exemptions from Sections 26(a)(2)(C) and 27(c)(2)
thereof.
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit the issuance and sale of certain group variable
annuity contracts offered presently (the ``Contracts'') or in the
future through existing and future subaccounts of VAD, from which a
mortality and expense risk charge and/or a distribution charge may be
deducted.
FILING DATE: The application was filed initially on July 20, 1994. An
amended and restated application was filed on December 20, 1994.
HEARING OR NOTIFCATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on the application by writing to the
Secretary of the Commission and serving the Applicants with a copy of
the request, either personally, or by mail. Hearing requests must be
received by the Commission by 5:30 p.m. on January 23, 1995, and should
be accompanied by proof of service on the Applicants in the form of an
affidavit or, for lawyers, by certificate. Hearing requests should
state the nature of the interest, the reason for the request, and the
issues contested. Persons may request notification of the date of a
hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, 237 William Howard Taft Road, Cincinnati, OH 45219.
FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Attorney, at (202)
942-0670, Office of Insurance Products, Division of Investment
Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Public Reference Branch of the SEC.
Applicants' Representations
1. The Company was organized under the laws of Ohio in 1909 as a
stock life insurance company, and became a mutual life insurance
company in 1959. The Company writes life, accident and health
insurance, and annuities in 45 states and the District of Columbia.
2. Established by the Company in 1969 as a separate account under
Ohio law, VAD funds group variable annuity contracts (including the
Contracts). Income, gains and losses, whether or not realized, from
assets allocated to VAD are credited to or charged against VAD without
regard to other income, gains or losses of the Company. The assets
maintained in VAD will not be charged with any liabilities arising out
of any other business conducted by the Company. Nevertheless, all
obligations arising under the variable annuity contracts funded by VAD,
including the commitment to make annuity payments, are general
corporate obligations of the Company. Accordingly, all of the Company's
assets are available to meet its obligations under those variable
annuity contracts. VAD is registered as a unit investment trust under
the 1940 Act.
3. ONESCO, a wholly-owned subsidiary of the Company, is a
registered broker-dealer and a member of the National Association of
Securities Dealers, Inc. ONESCO is the principal underwriter of the
Contracts.
4. The Contracts are group variable annuity contracts that provide
for the accumulation of values and the payment of annuity benefits on a
variable and/or fixed basis. The Contracts are designed for the
following types of tax-qualified retirement plans (``Plans''): (a)
annuity purchase plans adopted by public school systems or by certain
tax-exempt organizations which qualify for tax-deferred treatment
pursuant to Section 403(b) of the Internal Revenue Code (the ``Code'');
(b) other employee pension or profit-sharing trusts or plans which
qualify for tax-deferred treatment under Section 401(a), 401(k) or
403(a) of the Code; and (c) state and municipal deferred compensation
plans.
5. The minimum contribution amount under each Contract is $25 per
Plan participant. Additional contributions may be made at any time, but
not more often than biweekly. Generally, maximum contributions under
the Contracts equal the maximum amounts permitted under the respective
Plan.
6. Net purchase payments under the Contracts (after deduction of
any applicable state premium tax) are allocated to one or more
subaccounts of VAD and/or to the Company's general account. Assets of
the subaccounts of VAD are invested in shares of a corresponding
portfolio of Ohio National Fund, Inc., a mutual fund having seven
diversified investment portfolios. Additional subaccounts may be
created by VAD in the future to invest in new investment portfolios of
Ohio National Fund, Inc., or in investment portfolios of other
investment companies. In the future, VAD also may offer additional
variable annuity contracts (the ``future contracts'') which are
materially similar to the Contracts.
7. The Company will assess an administration expense charge, on an
annual basis, to 0.35 percent of Contract value. The expenses
reimbursed by the administration charge include, but are not limited
to, those for: accounting, auditing, legal, and Contract owner
services; reports to regulatory authorities and Contract owners; and
[[Page 2165]] issuing Contracts. The Company will assess a charge of $5
for each transfer of Contract value among the various subaccounts.
8. The administration expense and transfer charges will be deducted
from VAD assets in reliance upon Rules 26a-1 and 11a-2 under the 1940
Act, and no relief is requested in connection with the deduction of
those charges. Neither of these charges is designed to produce a
profit, but rather to reimburse the Company for expenses incurred.
9. When applicable, the Company will deduct state premium taxes.
Where permitted, the Company will assess a premium tax charge when
annuity payments begin; otherwise, a premium tax charge will be
deducted from premium payments. The Company will deduct a premium tax
charge in reliance on Rule 26a-2 of the 1940 Act and, therefore,
requests no relief connection with the deduction of such a charge.
10. The Company will assess a contingent deferred sales charge
(``CDSC'') for partial withdrawals or surrenders in the first seven
years after a Plan participant's account has been established under the
Contract. The CDSC will be deducted as a percentage of the amount
withdrawn, and declines from 7 percent in the first year to 1 percent
in the seventh year.
11. The prospectuses for the Contracts will disclose that, to the
extent that the amount of the CDSC received by the Company is
insufficient to recover the fees paid to ONESCO for sales commissions,
any deficiency will be made up from the assets in the general account
of the Company. Those general account assets include, among other
things, any profit from mortality and expense risk charges. The CDSC
will be deducted in reliance on Rule 6c-8 under the 1940 Act.
12. The Contracts provide that the Company has the right to deduct
up to 0.40 percent of contract value, on an annual basis, for
distribution expenses. This ``distribution charge'' is designed to
compensate the Company for assuming the risk that the cost of
distributing the Contracts will exceed the revenues from the CDSC.
Whether the Applicants actually impose a distribution charge depends
upon their assessment of the profitability of selling and administering
the Contracts without such a charge. If sufficient sales levels are
achieved without the charge, there may be no need to impose the charge,
or at least no need to impose it at the maximum (0.40 percent) rate.
13. If and to the extent that a distribution charge is imposed, the
Company will monitor VAD to ensure that aggregate deductions for
distribution expense and sales charges deducted upon partial
withdrawals or surrender do not exceed 9 percent of aggregate
contributions to be made by or on behalf of any Plan participant.
14. Although the distribution charge will not be imposed initially
and may never be imposed, the prospectus for the Contracts will include
a description of the distribution expense charge and a representation
that aggregate deductions for distribution expense and sales charges
deducted upon partial withdrawals or surrender will not exceed 9
percent of aggregate contributions made by any Contract owner.
15. The Company will assess a mortality and expense risks charge
equal, on an annual basis, to 1 percent of Contract value. The Company
estimates that 0.40 percent of the charge is for assumption of
mortality risks, and 0.60 percent is for the assumption of expense
risks. The Company hopes to realize a profit from this charge. If,
however, the charge is insufficient to cover the actual mortality and
expense risks involved, the loss will fall on the Company.
16. The mortality risk arises from the Company's guarantee that it
will make annuity payments in accordance with annuity rate provisions
established at the time the Contract is issued for the life of the
annuitant, no matter how long the annuitant lives. The expense risk
assumed by the Company is that the costs of administering the Contracts
during the accumulation and annuity periods will exceed the amounts
received from the administrative expense charge assessed by the
Company.
17. Changes in annuity rates specified in a Contract may not be
effected without the consent of the Contract holder unless a Contract
has been in effect for at least 5 years and the Contract holder has
been given 5 years' notice of the change; changes in annuity rates
apply only to participant accounts established after the effective date
of such changes. The administrative charge of 0.35 percent, the
distribution charge of 0.40 percent, and the mortality and expense
risks charge of 1 percent assessed under the Contracts may be modified
during the first five years of a Contract only by written agreement
with the Contract holder. Thereafter, changes in those charges may be
made on any Contract anniversary, provided that the Contract holder is
given 90 days notice of such changes. Any modification in
adminstrative, distribution, and/or mortality and expense risks charges
effected pursuant to a written agreement with the Contract holder would
not affect the rights of a participant, contingent annuitant, or
beneficiary in or to any annuity effected before the date of the
modification, unless (i) the modification was necessary to secure a tax
benefit for the Contract holder or the participants, or (ii) a ruling
or determination by a court of law or a governmental agency indicated
that the modification was necessary in order to satisfy the
requirements of any law or regulation administered by that agency.
Because the order requested herein would permit deduction of mortality
and expense risks charges of up to 1 percent, additional exemptive
relief would be necessary to increase the mortality and expense risk
charge in excess of that amount. The Contracts also provide that the
mortality and expense risks charge may not be increased more frequently
than once per year, and that the sum of the mortality and expense risks
charge, the distribution charge, and the administrative charge may
never exceed 2 percent.
Applicants' Legal Analysis
1. The Applicants request that the Commission, under Section 6(c)
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and
27(c)(2) thereof to the extent necessary to permit the issuance and
sale of Contracts and any future contracts funded by existing and
future subaccounts of VAD, from which a mortality and expense risk
charge and/or a distribution charge may be deducted.
2. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission, by order upon application, may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes thereof, from any provision of the 1940 Act or any
rule or regulation thereunder, if and 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.
3. The Applicants submit that extending the requested relief to
future subaccounts of VAD and to the future contracts is appropriate in
the public interest. Such an order would eliminate the need for the
Company to file redundant exemptive applications, thereby reducing its
administrative expenses and maximizing the efficient use of its
resources. Both the delay and expense of repeatedly seeking exemptive
relief in connection with new subaccounts or in connection with
materially similar contracts would impair the ability of the Company to
[[Page 2166]] take effective advantage of business opportunities that
might arise. Investors would not receive any benefit or additional
protection by requiring the company to seek exemptive relief repeatedly
with respect to the issues addressed in this application.
4. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act require, among
other things, that all payments received under a periodic payment plan
certificate sold by a registered unit investment trust, any depositor
thereof or underwriter therefor be held by a qualified bank as trustee
or custodian, under arrangements which prohibit any payment to the
depositor or principal underwriter except for the payment of a fee, not
exceeding such reasonable amount as the Commission may prescribe, for
bookkeeping and other administrative services.
5. The Applicants submit that the Company is entitled to reasonable
compensation for its assumption of mortality and expense risks under
the Contracts, and represent that the mortality and expense risks
charge of 1.00 percent per annum proposed for the Contracts is within
the range of industry practice for comparable variable annuity
products. The Applicants represent that this representation is based
upon an analysis made by the Company of publicly available information
about selected similar industry products, taking into consideration
such factors as annuity purchase rate guarantees, current levels of
charges, any contractual right to increase charges above current
levels, the existence of other charges, and the contractual right to
make free withdrawals. The Company will maintain at its home office,
and make available to the Commission, memoranda setting forth the
products analyzed in the course of, and the methodology and results of,
the comparative survey conducted.
6. Applicants acknowledge that the Company's revenues from the CDSC
and distribution charge (if any) assessed under the Contracts could be
insufficient to cover the costs of distributing the Contracts. If so,
the excess distribution costs would be paid from the Company's general
assets, including the profits (if any), from the mortality and expense
risks charge assessed. In such circumstances, a portion of the
mortality and expense risks charge might be viewed as covering a
portion of the costs relating to the distribution of the Contracts.
7. The Applicants submit that, notwithstanding the foregoing, the
Company has concluded that there is a reasonable likelihood that the
proposed distribution financing arrangements made with respect to the
Contracts will benefit VAD and the contract owners. The basis for that
conclusion is set forth in a memorandum which will be maintained by the
Company at its service office and will be available to the Commission.
8. The Company represents that VAD will invest only in underlying
mutual funds which have undertaken to have a board of directors, a
majority of the members of which are not ``interested persons'' of that
fund (within the meaning of Section 2(a)(19) of the 1940 Act),
formulate and approve any plan to finance distribution expenses in
accordance with Rule 12b-1 under the 1940 Act.
9. Applicants submit that, because the aggregate distribution
charges (if any) and sales charges will never exceed 9 percent,
Applicants will deduct no more to pay for distribution of the Contracts
than is permitted by the 1940 Act and Rule 6c-8 thereunder. Because
those charges will be deducted from Contract value over a period of
many years, rather than from contributions to the Plans, Plan
participants will have more funds available for investment than if a
front-end sales charge of 9 percent were deducted.
Conclusion
The Applicants submit that, for the reasons and upon the facts set
forth above, the requested exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to permit the deduction of a mortality and
expense risks charge and/or a distribution charge under the Contracts
and the future contracts funded through existing and future subaccounts
of VAD meet the statutory standards of Section 6(c) of the 1940 Act.
Accordingly, the Applicants assert that the requested exemptions are
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,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-295 Filed 1-5-95; 8:45 am]
BILLING CODE 8010-01-M