[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7256-7259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2975]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20875; File No. 812-9142]
First SunAmerica Life Insurance Company, et al.
February 1, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: First SunAmerica Life Insurance Company (``First
SunAmerica''), FS Variable Annuity Account Two (``Separate Account''),
and Vista Broker-Dealer Services, Inc. (``Vista'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 26(a) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order to permit the
deduction of mortality, expense risk, and distribution expense charges
from the assets of the Separate Account under certain variable annuity
contracts (``Contracts'') funded through the Separate Account and under
materially similar contracts (``future contracts'') funded in the
future through the Separate Account, and from the assets of any other
separate account (``future separate accounts'') established in the
future by First SunAmerica in connection with the issuance of contracts
that are materially similar to the Contracts.\1\
\1\Applicants have agreed to amend this application during the
notice period to reflect that the future contracts and contracts
issued by future separate accounts relying on the exemptive relief
requested here shall be materially similar to the Contracts.
FILING DATE: The Application was filed on August 3, 1994, and amended
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on November 22, 1994, and December 20, 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 the application by writing to the
Secretary of the Commission and serving the 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 27, 1995, and should be 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
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 Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants c/o Mark J. Mackey, Esq., Routier, Mackey and Johnson, P.C.,
1700 K Street, NW., Suite 1003, Washington, DC 20006.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Wendy Finck Friedlander, Deputy Chief,
Office of Insurance Products, Division of Investment Management, at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. First SunAmerica is a stock life insurance company organized
under the laws of the State of New York. On May 24, 1994, First
SunAmerica established the Separate Account to fund variable annuity
contracts. The Separate Account is registered under the 1940 Act as a
unit investment trust. The Separate Account and each of its portfolios
are administered and accounted for as part of the general business for
First SunAmerica, but the income, gains and losses of each portfolio
are credited to or charged against the assets held in that portfolio in
accordance with the terms of the Contracts, without regard to other
income, gains and losses of any other portfolio or arising out of any
other business First SunAmerica may conduct.
2. Vista is a broker-dealer registered under the Securities
Exchange Act of 1934, and is the distributor for the Contracts.
3. The Contracts provide for accumulation of contract values and
payments of annuity benefits on a fixed and variable basis. The
Contracts are [[Page 7257]] available for retirement plans that do not
qualify for the special federal tax advantages available under the
Internal Revenue Code (``non-qualified plans'') and for retirement
plans that do qualify for the federal tax advantages available under
the Internal Revenue Code (``qualified plans''). Purchase payments
under the Contracts may be made to the general account of First
SunAmerica under the Contract's fixed account option (``Fixed
Account''), to the Separate Account, or allocated among them. The
minimum initial purchase payment for a Contract is $5,000 for non-
qualified plans ($2,000 for qualified plans). Additional purchase
payments may be made in amounts of at least $250 ($100 in the case of
an automatic payment plan).
4. Initially, the Contracts will be funded through six portfolios
of the Separate Account. Each portfolio invests in assets in the shares
of one of six available series of Mutual Fund Variable Annuity Trust
(``Trust''): the Growth and Income Portfolio; the Capital Growth
Portfolio; the International Equity Portfolio; the Assist Allocation
Portfolio; the U.S. Treasury Income Portfolio; and the Money Market
Portfolio. The Trust is register under the 1940 Act as a diversified,
open-end, management investment company. Additional underlying funds
may become available in the future.
5. If the Contract owner dies during the accumulation period, a
death benefit will be payable to the beneficiary upon receipt by First
SunAmercia of due proof of death. The death benefit is reduced by the
premium tax incurred by First SunAmerica, if any. If the Contract owner
is younger than age 70 at the date of Contract issue, the death benefit
is equal to the greatest of: (i) The total dollar amount of purchase
payments made prior to the death of the Contract owner, reduced by any
partial withdrawals and partial annuitizations; (ii) the Contract value
at the end of the valuation period during which due proof of death (and
an election of the type of payment to the beneficiary) is received by
First SunAmerica; or (iii) the Contract value at that anniversary of
the Contract issue date preceding the date of death--increased by any
purchase payments made and reduced by any partial withdrawals and
partial annuitizations since that anniversary--which yields the
greatest result. If the Contract owner was at least age 70 on the
Contract issue date, the death benefit will equal (ii) above.
6. An annual contract administration charge of $30 is charged
against each Contract. The amount of this charge is guaranteed and
cannot be increased. This charge reimburses First SunAmerica for
expenses incurred in establishing and maintaining records relating to a
Contract. The contract administration charge will be assessed on each
anniversary of the Contract date that occurs on or prior to the annuity
date. In the event that a total surrender of Contract value is made,
the charge will be assessed as of the date of surrender without
proration. This charge is not assessed during the annuity period. The
contract administration charge is at cost with no margin included for
profit.
7. During the accumulation period, amounts allocated to the
Separate Account may be transferred among the portfolios and/or the
Fixed Account. Both before and after the annuity date, Contract values
may be transferred from the Separate Account to the Fixed Account. The
first fifteen transactions effecting such transfers in any Contract
year are permitted without the imposition of a transfer fee. A transfer
fee of $25 is assessed on the sixteenth and each subsequent transaction
within the Contract year. This fee will be deducted from Contract
values that remain in the portfolio (or, where applicable, the Fixed
Account) from which the transfer was made. If such remaining Contract
value is insufficient to pay the transfer fee, then the fee will be
deducted from transferred Contract values. The transfer is at cost with
no anticipation of profit.
8. Although there is a free withdrawal amount that applies to the
first withdrawal during a contract year after the first, a contingent
deferred sales charge (the ``Withdrawal Charge'') may be imposed upon
certain withdrawals. Withdrawal Charges will vary in amount depending
upon the contribution year of the purchase payment at the time of
withdrawal. The Withdrawal Charge is deducted from remaining Contract
value so that the actual reduction in Contract value as a result of the
withdrawal will be greater than the withdrawal amount requested and
paid. So that all withdrawals are allocated to purchase payments to
which the lowest Withdrawal Charge (if any) applies, withdrawals will
be allocated first to investment income, if any, which generally may be
withdrawn free of Withdrawal Charge, and then to purchase payments on a
first-in, first-out basis.
9. Earnings in a Contract owner's account, and purchase payments no
longer subject to the Withdrawal Charge, may be withdrawn at any time
free of the Withdrawal Charge. There also may be a free withdrawal
amount for the first withdrawal during a Contract year after the first
Contract year. The additional free withdrawal amount is equal to 10% of
purchase payments made more than one year before the date of withdrawal
that remain subject to the Withdrawal Charge and that have not
previously been withdrawn, less earnings in the Contract owner's
account.
10. Any amounts withdrawn that exceed the limits described about
may be subject to a Withdrawal Charge in accordance with the table
shown below.
Withdrawal Charge Table
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Applicable
withdrawal
Contribution year\2\ charge
percentage
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Zero....................................................... 6
First...................................................... 6
Second..................................................... 5
Third...................................................... 4
Fourth..................................................... 3
Fifth...................................................... 2
Sixth...................................................... 1
Seventh and later.......................................... 0
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\2\Applicants represent that, with respect to a given purchase payment,
a contribution year is a year starting from the date of the purchase
payment in one calender year and ending on the anniversary of such
date in the succeeding calendar years. The contribution year in which
a purchase payment is made is ``contribution year zero,'' and
subsequent contribution years are successively numbered.
The Withdrawal Charge may be reduced or waived in certain
circumstances, as described in the prospectus for the Contracts.
11. First SunAmerica deducts a distribution expense charge from
each portfolio of the Separate Account during each valuation period
that is equal, on an annual basis, to 0.15% of the net asset value of
each portfolio. This charge is designed to compensate First SunAmerica
for assuming the risk that the cost of distributing the Contracts will
exceed the revenues from the Withdrawal Charge. In no event will this
charge be increased. The distribution expense charge is assessed during
both the accumulation period and the annuity period; it is not applied
to Contract values allocated to the Fixed Account.
12. Annuity payments will not be affected by the mortality
experience (death rate) of (i) persons receiving such payments or (ii)
the general population. The annuity rates may not be changed under the
Contract. First SunAmerica deducts a mortality risk charge from the
Separate Account for assuming the risks that: (i) The life expectancy
of an annuitant will be greater than that assumed in the guaranteed
annuity purchase rates; (ii) the Withdrawal [[Page 7258]] Charge may be
waived in the event of the death of the owner; and (iii) the death
benefit must be provided before the annuity date. The charge is
deducted from each portfolio of the Separate Account during each
valuation period at an annual rate of 0.90% of the net asset value of
each portfolio. If the mortality risk charge is insufficient to cover
the actual costs of assuming the mortality risks, First SunAmerica will
bear the loss; if the charge proves more than sufficient, the excess
will be a gain to First SunAmerica. To the extent First SunAmerica
realizes any gain, those amounts may be used at its discretion--
including to offset losses experienced when the mortality risk charge
is insufficient. The mortality risk charge may not be increased under
the Contract.
13. First SunAmerica bears the risk that the contract
administration charge will be insufficient to cover the cost of
administering the Contracts. For assuming this expense risk, First
SunAmerica deducts an expense risk charge form the Separate Account
during each valuation period at an annual rate of 0.35% of the net
asset value of each portfolio. If the expense risk charge is
insufficient to cover the actual cost of administering the Contracts,
First SunAmerica will bear the loss; if the charge is more than
sufficient, the excess will be a gain to First SunAmerica. To the
extent First SunAmerica realizes any gain, those amounts may be used at
its discretion--including to offset losses when the expense risk charge
is insufficient. The expense risk charge may not be increased under the
Contract.
14. Applicants represent that the aggregate amount of any
Withdrawal Charges imposed and distribution expense charges paid will
never exceed 9% of purchase payments previously made, and that First
SunAmerica will monitor each owner's account for the purpose of
ensuring that this limitation is not exceeded. Applicants undertake to
include in the prospectus forming part of the registration statement
for the Contracts statements describing the purpose of the distribution
expense charge, and statements that the staff of the Commission deems
such charge to constitute a deferred sales charge. Applicants undertake
to abide by the representations and undertaking set forth in this
paragraph relating to the distribution expense charge in connection
with any future contracts, as well as materially similar contracts
funded through future separate accounts, relying on the requested
order.
Applicants' Legal Analysis
1. Applicants hereby request that the Commission, under Section
6(c) of the 1940 Act, grant exemptions from Section 26(a)(2) and
27(a)(2) thereof to the extent necessary to permit the deduction of
mortality and expense risk charges and a distribution expense charge:
(i) From the Separate Account under the Contracts and under any future
contracts; and (ii) from the assets of any future separate accounts
which offer contracts materially similar to the Contracts.
2. Pursuant to Section 6(c) of the 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.
3. Sections 26(a)(2) 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.
4. Applicants believe that extending the requested relief to the
future contracts, as well as to materially similar contracts funded
through future separate accounts, 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. Applicants
submit that such an order would promote competitiveness in the variable
annuity contract market by eliminating the need for First SunAmerica to
file redundant exemptive applications, thereby reducing First
SunAmerica's administrative expenses and maximizing the efficient use
of First SunAmerica's resources. The delay and expense involved in
having to seek exemptive relief repeatedly would impair the First
SunAmerica's ability effectively to take advantage of business
opportunities as they arise. Applicants further submit that the
requested relief is consistent with the purposes of the 1940 Act and
the protection of investors for the same reasons. Applicants submit
that if First SunAmerica were required repeatedly to seek exemptive
relief with respect to the issues addressed in this application,
investors would not receive any benefit or additional protection
thereby.
5. Applicants assert that the aggregate of the mortality and
expense risk charges, 1.25%, is reasonable in relation to the risks
assumed by First SunAmerica under the Contracts and reasonable in
amount, as determined by industry practice with respect to comparable
annuity products. Applicants state that these determinations are based
on their analysis of publicly available information about similar
industry practices, taking into consideration such factors as current
charge levels and benefits provided, the existence of expense charge
guarantees, and guaranteed annuity rates. First SunAmerica undertakes
to maintain at its home office, and make available to the Commission
upon request, a memorandum detailing the methodology used in making
these determinations.
6. Similarly, before relying on any exemptive relief granted herein
with respect to any future contracts or any materially similar
contracts funded through future separate accounts, Applicants will
determine that the mortality and expense risk charges under any such
contracts will be reasonable in relation to the risks assumed by First
SunAmerica and reasonable in amount, as determined by industry practice
with respect to comparable annuity products. First SunAmerica will
maintain at its home office, and make available to the Commission upon
request, a memorandum detailing the methodology used in making these
determinations.
7. First SunAmerica submits that there is a reasonable likelihood
that the Separate Account's distribution financing arrangement will
benefit the Separate Account and its investors. First SunAmerica
represents that it will maintain and make available to the Commission
upon request a memorandum setting forth the basis for such conclusion.
Similarly, before relying on any exemptive relief granted herein with
respect to any future contracts or to any materially similar contracts
issued by future separate accounts, Applicants will determine that
there is a reasonable likelihood that the distribution financing
arrangement will benefit the Separate Account (or [[Page 7259]] future
separate accounts) and its (or their) investors. First SunAmerica will
maintain and make available to the Commission upon request a memorandum
setting forth the basis for such determination.
8. First SunAmerica further represents that the assets of the
Separate Account and any future separate accounts that rely on the
requested order will be invested only in management investment
companies that undertake, in the event they should adopt a plan for
financing distribution expenses pursuant to Rule 12b-1 under the 1940
Act, to have such plan formulated and approved by their board of
directors, the majority of whom are not ``interested persons'' of the
management investment company within the meaning of Section 2(a)(19) of
the 1940 Act.
Conclusion
Applicants submit that for the reasons and upon the facts set forth
above, the exemptions from Sections 26(a)(2) and 27(c)(2) of the 1940
Act to the extent necessary to permit the deduction of mortality,
expense risk, and distribution expense charges from the assets of the
Separate Account under the Contracts and under any future contracts,
and from the assets of any future separate accounts offering contracts
which are materially similar to the Contracts, meet the statutory
standards of Section 6(c) of the 1940 Act. Accordingly, the Applicants
assert that the requested exemptions are 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.
For the Commission, by the Division of investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2975 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M