[Federal Register Volume 60, Number 11 (Wednesday, January 18, 1995)]
[Notices]
[Pages 3692-3694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1107]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20828; File No. 812-9250]


The Penn Insurance and Annuity Company, et al.

January 10, 1995.
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: The Penn Insurance and Annuity Company (``Company''), PIA 
Variable Annuity Account I (``Separate Account''), and Horner, Townsend 
& Kent, Inc. (``Horner'').

relevant 1940 act sectionS: Order requested under Section 6(c) for 
exemptions from Sections 22(d), 26(a)(2) and 27(c)(2) of the 1940 Act.

summary of the application: Applicants seek an order to permit the 
Company (i) to deduct a mortality and expense risk charge under certain 
variable annuity contracts from the assets of the Separate Account, or 
any other separate account established by the company in the future to 
support materially similar variable annuity contracts (the 
``Contracts''), and (ii) to waive the contingent deferred sales charge 
for defined ``medically related free withdrawals'' and ``disability 
related free withdrawals'' under the Contracts.

filing date: The application was filed on September 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 on this application by writing to the 
Secretary of the SEC 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 February 6, 1995 and accompanied by proof of service on 
the Applicants in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state of the nature of 
the interest, the reason for the request and the issues contested. 
Persons may request notification of a hearing by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicants: C. Ronald Rubley, Associate General Counsel, The Penn 
Mutual Life Insurance Company, Independence Square, Philadelphia, 
Pennsylvania 19172.

FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Staff Attorney, or Wendy Finck Friedlander, Deputy 
Chief, 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 Public 
Reference Branch of the SEC.

Applicants' Representations

    1. The Company is a Delaware stock life insurance company. The 
Company is a wholly owned subsidiary of The Penn Mutual Life Insurance 
Company (``Penn Mutual'').
    2. The Separate Account is a segregated investment account 
established under Delaware law on July 13, 1994 by the executive 
committee of the Company's board of directors. The Separate Account is 
registered under the 1940 Act as a unit investment trust.
    3. Horner, a wholly owned subsidiary of Penn Mutual, is registered 
as a broker-dealer under the Securities Exchange Act of 1934. Horner 
will serve as the principal underwriter. The Contracts will be sold by 
licensed insurance agents who are registered representatives of Horner 
or of a registered broker-dealer who has entered into a selling 
agreement with Horner.
    4. The Contracts are individual combination variable and fixed 
annuity contracts. The amounts and timing of purchase payments under 
the Contracts will be determined by Contract Owners, except as follows. 
The minimum initial purchase payment is $2,000 for Contracts qualifying 
as individual retirement annuities under Section 408 of the Internal 
Revenue Code of 1986, as amended, and for Contracts qualifying as tax 
deferred annuities under Section 403(b) of the Internal Revenue Code. 
The minimum initial purchase payment for non-qualifying Contracts is 
$5,000. The minimum subsequent purchase payment is $250 for all 
Contracts. Payments under a Contract in excess of $1 million require 
the Company's prior approval.
    5. The Contracts provide for five forms of annuity payment options: 
(1) an annuity for a specified number of years; (2) a life annuity; (3) 
a life annuity with payments guaranteed for 10 or 20 years; (4) a joint 
and survivor annuity; or (5) such other form of annuity as the Company 
may agree upon with the Contract Owner. Except for an annuity for a 
specified number of years, which is available only on a fixed basis, 
all of the options may be elected on a variable or fixed basis.
    6. Two forms of administrative charges are deducted from the 
Contracts. First, the application states that on every contract 
anniversary prior to the Annuity Date and on every other date when the 
Variable Account Value is reduced to zero through a withdrawal or 
transfer, the Company will deduct from the Variable Account Value a 
contract administration charge of $30 or, if less, 2% of the Variable 
Account Value. However, if the Variable Account Value is greater than 
$50,000, there will be no such deduction. The application states that 
the charge is made by cancelling accumulation units credited to the 
Contract, with the charge allocated pro rata among the subaccounts 
comprising the Variable Account Value. Second, the Company will also 
deduct from the Separate Account a daily administration charge equal to 
an effective annual rate of 0.15% of the daily net assets of the 
Separate Account. The application states that these administration 
charges are guaranteed not to increase. The Company also states that 
the administrative charges are intended not to exceed the Company's 
anticipated administrative expenses over the periods the Contracts are 
in force. The Company represents that these charges will be deducted in 
reliance on Rule 26a-1 under the 1940 Act.
    7. A contingent deferred sales charge (the ``Sales Charge'') of up 
to 6% may be deducted in the event of full or partial withdrawal from 
the contract value prior to the Annuity Date. The Sales Charge will be 
imposed only on withdrawals of purchase payments in cases where the 
purchase payment was made within seven years of the date of 
[[Page 3693]] the withdrawal. Purchase payments will be treated as 
withdrawn on a first in, first out basis. The following table shows the 
schedule of the Sales Charge that will be applied to withdrawal of a 
purchase payment:

------------------------------------------------------------------------
                                                              Applicable
    Number of full contract years since purchase payment        charge  
                                                              (percent) 
------------------------------------------------------------------------
0..........................................................            6
1..........................................................            6
2..........................................................            5
3..........................................................            4
4..........................................................            3
5..........................................................            2
6..........................................................            1
7..........................................................            0
------------------------------------------------------------------------

    The Sales Charge may be reduced on Contracts sold to a trustee, 
employer or similar party pursuant to a retirement plan or to a group 
of individuals, if such sales are expected to involve reduced sales 
expenses. The Applicant represents that the reduction will not be 
unfairly discriminatory to any Contract Owner.
    8. The Contracts provide that several types of withdrawals may be 
made without incurring a Sales Charge.
    a. Seven-Year-Old Purchase Payments. The Contract Owner may 
withdraw any purchase payment which was made more than seven years 
before the withdrawal without incurring a contingent deferred sales 
charge.
    b. 15% Free Withdrawals. On the last day of the first Contract Year 
and once each Contract Year thereafter, the Contract Owner may withdraw 
15% of the total purchase payments without incurring the contingent 
deferred sales charge.
    c. Medically Related Free Withdrawal. After the first Contract Year 
and before the Annuity Date, the Contract Owner may withdraw, without 
incurring a contingent deferred sales charge, up to the lesser of 
$500,000 or the Contract Value if certain medically related 
contingencies occur. This free withdrawal is available if the Contract 
Owner is (1) first confined in a nursing home or hospital while the 
Contract is in force and remains confined for at least 90 days in a row 
or (2) first diagnosed as having a fatal illness (an illness expected 
to result in death within two years for 80% of diagnosed cases) while 
the Contract is in force. This benefit is not available if the Contract 
Owner's age at time of issue is greater than 75 or if the Contract 
Owner has certain pre-existing conditions.
    d. Disability Related Free Withdrawal. After the first Contract 
Year, the Contract Owner may withdraw, without incurring a contingent 
deferred sales charge, part or all of the Contract Value if the 
Contract Owner becomes totally disabled.
    e. Other Free Withdrawals. There is no contingent deferred sales 
charge imposed upon minimum distributions which are required by the 
Internal Revenue Code qualified Contracts.
    9. For all Contracts issued in connection with the Separate 
Account, the Company deducts a Mortality and Expense Risk Charge that 
is equal, on an annual basis, to 1.25% of the average daily net assets 
of the Separate Account: approximately 0.90% for mortality risks and 
0.35% for expense risks.
    The mortality risks assumed by the Company arise in part from the 
Company's guarantee that it is obligated to make annuity payments at 
least equal to payments calculated based on annuity tables provided in 
the Contracts, regardless of how long an annuitant lives and regardless 
of any general improvement in life expectancy.
    The Company also assumes a mortality risk in connection with the 
provision of a death benefit. If the Contract Owner dies prior to the 
Annuity Date, the Company will pay the beneficiary the greater of (1) 
the Contract Value (i.e., the Variable Account Value plus the Fixed 
Account Value) for the valuation period in which proof of death and any 
other required information needed to make payment is received at the 
Company's office; or (2) the sum of the Fixed Account Value on the date 
the above information is received at the Company's office and the net 
purchase payments allocated to the Separate Account.
    The application states that where the Contract Owner dies before 
the age of 80 and where permitted by state law, an ``enhanced death 
benefit'' will be paid to the beneficiary if it is greater than the 
death benefit described previously. The ``enhanced death benefit'' is 
the sum of: (1) The Fixed Account Value, and (2) the net purchase 
payments allocated to the Separate Account plus interest accumulated at 
an annual interest rate of 5% through the Contract Owner's attained age 
69, and interest accumulated at an annual interest rate of 3% for years 
subsequent to attained age 70.
    The expense risk assumed by the Company is the risk that the 
Company's administrative charges will be insufficient to cover actual 
administrative expenses over the life of the contract.

Applicants' Legal Analysis and Conditions

    1. Pursuant to Section 6(c) of the 1940 Act, the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of persons, 
securities or transactions, from any provision or provisions of the 
1940 Act or from any rule or regulation thereunder, if and to the 
extent that such 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.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and any depositor or underwriter 
thereof from selling periodic payment plan certificates unless the 
proceeds of all payments are deposited with a qualified trustee or 
custodian and held under arrangements which prohibit any payment to the 
depositor or principal underwriter except a fee, not exceeding such 
reasonable amounts as the Commission may prescribe, for performing 
bookkeeping and other administrative services.
    3. Applicants request an order under Section 6(c) exempting them 
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent 
necessary to permit the deduction of the mortality and expense risk 
charge from the assets of the Separate Account under the Contracts. 
Applicants request that the order also permit the deduction of the 
Mortality and Expense Risk Charge from the assets of any other separate 
account established by the Company in the future to support variable 
annuity contracts offered on a basis similar in all material respects 
to the basis on which the Contracts are offered.
    4. Applicants submit that their request for an order that applies 
to the Separate Account and to future separate accounts issuing 
contracts that are similar in all material respects to the Contracts is 
appropriate in the public interest. Such an order would promote 
competitiveness in the variable annuity contract market by eliminating 
the need for the Company to file redundant exemptive applications, 
thereby reducing its administrative expenses and maximizing the 
efficient use of its resources.\1\ Applicants further represent that 
the requested relief is consistent with the purposes of the 1940 Act 
and the protection of investors for the same reasons. Investors would 
not receive any additional benefit or additional protection by the 
Company being required to repeatedly seek exemptive 
[[Page 3694]] relief with respect to the same issues addressed in this 
application.

    \1\Applicants represent that, during the Notice Period, the 
application will be amended to reflect this representation.
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    5. Applicants represent that the mortality and expense risk charge 
is reasonable in relation to the risks undertaken by the company and 
within the range of industry practice with respect to comparable 
annuity products. Applicants base this representation on an analysis of 
the mortality risks, taking into consideration such factors as any 
contractual right to increase charges above current levels, the 
guaranteed annuity purchase rates, the nature of the death benefit 
provided, the number of transfers permitted without charge and the 
ability to make free withdrawals. The Company represents that it will 
maintain at its principal office a memorandum, available to the 
Commission upon request, setting forth in detail this analysis.
    6. Applicants acknowledge that it is possible that the Company's 
revenues from the contingent deferred sales charge could be less than 
its costs of distributing the Contracts. In that case, the excess 
distribution costs would have to be paid out of the Company's general 
assets, including the profits, if any, from the mortality and expense 
risk charge. In those circumstances, a portion of the mortality and 
expense risk charge might be viewed as offsetting a portion of the 
costs relating to the distribution of the Contracts. The Company 
represents that there is a reasonable likelihood that the proposed 
distribution financing arrangements will benefit the Separate Account 
and Contract Owners. The basis for such a conclusion will be set forth 
in a memorandum maintained by the Company at its principal office and 
available to the Commission upon request.
    7. The Company represents that the Separate Account will invest 
only in management investment companies that undertake, in the event 
the company adopts a plan to finance distribution expenses under Rule 
12b-1 under the 1940 Act, to have a board of directors, a majority of 
whom are not interested persons of the company within the meaning of 
Section 2(a)(19) of the 1940 Act, formulate and approve any such plan.
    8. Pursuant to Section 6(c) of the 1940 Act, the Applicants also 
request that the Commission issue an order to provide exemptive relief 
from Section 22(d) to the extent necessary to permit the Applicants to 
waive the contingent deferred sales charge under the Contracts and 
Future Contracts in the event of the contingencies triggering the right 
to make the medically related or a disability related free withdrawal 
as defined above.
    9. Section 22(d) of the 1940 Act prohibits a registered investment 
company, its principal underwriter or a dealer in its securities from 
selling any redeemable security issued by such registered investment 
company to any person except at a public offering price described in 
the prospectus. Rule 6c-8 adopted under the 1940 Act permits variable 
annuity separate accounts to impose a deferred sales charge. Although 
Rule 6c-8, unlike proposed Rule 6c-10, does not impose any conditions 
on the ability of the investment company involved to provide for 
variations in the deferred sales charges, Rule 6c-8 (again unlike 
proposed Rule 6c-10) does not provide an exemption from Section 22(d). 
Applicants recognize that the proposed waiver of the contingent 
deferred sales charge in connection with ``medically related free 
withdrawals'' or ``disability related free withdrawals'' described 
above could be viewed as causing the Contracts to be sold at other than 
a uniform offering price. Rule 22d-1 is not directly applicable to 
Applicants' proposed waiver of the contingent deferred sales charge 
because that rule has been interpreted as granting relief only for 
scheduled variations in front-end sales loads, not deferred sales 
loads.
    10. Rule 22d-2 under the 1940 Act exempts registered variable 
annuity accounts, their principal underwriters, dealers and their 
sponsoring insurance companies from Section 22(d) to the extent 
necessary to permit variations in the sales load or in any 
administrative charge or other deductions from the purchase payments, 
provided that such variations reflect differences in costs or services, 
are not unfairly discriminatory and are adequately described in the 
prospectus. Applicants, however, do not represent that the waiver of 
the withdrawal charge under the defined circumstances reflects 
differences in sales costs or services, and, for that reason, 
Applicants do not rely on Rule 22d-2 for the requested relief, even 
assuming that Rule 22d-2 does apply to deferred sales loads.
    11. Applicants submit that the proposed waiver is consistent with 
the policies of Section 22(d) and the rules promulgated thereunder. One 
of the purposes of Section 22(d) is to prevent an investment company 
from discriminating among investors by charging different prices to 
different investors. Applicants represent that, to the extent permitted 
by state law, the provisions relating to ``medically related free 
withdrawals'' or ``disability related free withdrawals'' will be 
included in all Contracts. Eligibility will be based on the Contract 
Owner experiencing the defined medically related contingencies. 
Therefore, the benefit will not unfairly discriminate among Contract 
Owners. Applicants submit that the waiver is advantageous to Contract 
Owners by permitting them, upon experiencing a defined contingency, to 
make withdrawals from the Contract without imposition of the contingent 
deferred sales charge. Applicants represent that the waiver will not 
result in dilution of the interests of any other Contract Owners. 
Applicants also submit that waiving the contingent deferred sales 
charge under such circumstances will not result in the occurrence of 
any of the abuses that Section 22(d) is designed to prevent.
    12. Applicants represent that the waiver of the contingent deferred 
sales charge in connection with ``medically related free withdrawals'' 
and ``disability related free withdrawals'' meets the substantive 
requirements of Rule 22d-1 in that the waiver will be uniformly 
available to all eligible Contract Owners, except where prohibited by 
state law, and that this provision will be adequately described in the 
prospectus of the Contracts.

Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested exemptions from Sections 22(d), 26(a)(2) and 
27(c)(2) of the 1940 Act to permit the Company (i) to deduct the 
mortality and expense risk charge from the assets of the Separate 
Account under the Contracts and (ii) to waive the contingent deferred 
sales charge for defined ``medically related free withdrawals'' and 
``disability related free withdrawals'' under the Contracts meet the 
standards in Section 6(c) of the 1940 Act. Applicants assert that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
policies 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. 95-1107 Filed 1-17-95; 8:45 am]
BILLING CODE 8010-01-M