[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13499-13503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6030]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20941; No. 812-9232]
Security Benefit Life Insurance Company, et al.
March 6, 1995.
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: Security Benefit Life Insurance Company (``SBL''), T. Rowe
Price Variable Annuity Account (``SBL Separate Account''), Pioneer
National [[Page 13500]] Life Insurance Company (``SBL-NY,'' together
with SBL, the ``Insurance Companies''), T. Rowe Price Variable Annuity
Account of First Security Benefit Life Insurance and Annuity Company of
New York (``NY-Separate Account,'' together with SBL Separate Account,
the ``Accounts'') and T. Rowe Price Investment Services, Inc.
(``Investment Services'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c)
granting exemptions from the provisions of Sections 26(a)(2)(C) and
27(c)(2), and pursuant to Section 11 approving the terms of a payment
arrangement.
SUMMARY OF APPLICATION: Applicants seek an order (1) pursuant to
Section 6(c) of the 1940 Act, permitting the deduction of a mortality
and expense risk charge from the assets of: (a) the Accounts in
connection with the offer and sale of certain variable annuity
contracts (``Current Contracts''); (b) the Accounts in connection with
the issuance of variable annuity contracts that are substantially
similar in all material respects to the Current Contracts (``Future
Contracts,'' together with Current Contracts, the ``Contracts''); and
(c) any other separate account established in the future by the
Insurance Companies in connection with the issuance of Contracts; and
(2) pursuant to Section 11 of the 1940 Act, approving the terms of a
payment arrangement involving certain mutual funds and variable annuity
contracts.
FILING DATE: The application was filed on September 16, 1994, and
amended on February 3, 1995.
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 March 31, 1995, 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, c/o Roger K. Viola, Esq., Security Benefit Life
Insurance Company, 700 Harrison Street, Topeka, Kansas 66636, and Nancy
M. Morris, Esq., T. Rowe Price Investment Services, Inc., 100 East
Pratt Street, Baltimore, Maryland 21202. Copies of Jeffrey S. Puretz,
Esq., Dechert Price & Rhoads, 1500 K Street, N.W., Suite 500,
Washington, D.C. 20005 and Steven B. Boehm, Esq., Sutherland, Asbill &
Brennan, 1275 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C.
20004.
FOR FURTHER INFORMATION CONTACT:
Kevin Kirchoff, Senior Attorney, or Wendy 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 Commission's
Public Reference Branch.
Applicants' Representations
1. SBL is a mutual life insurance company organized under the laws
of the State of Kansas. SBL-NY is a domestic stock life insurance
company organized under the laws of the State of Kansas. All of SBL-
NY's outstanding stock is owned by Pioneer National Corporation, a
Kansas corporation (``PNC''), which is a wholly-owned subsidiary of
Security Benefit Group, Inc., (``SBG''), a wholly-owned subsidiary of
SBL. SBL-NY will be merged into a newly-formed New York insurance
company in the near future with the resulting entity to be named the
``First Security Benefit Life Insurance and Annuity Company of New
York'' for the purpose of marketing a form of the Contracts in New
York.
2. The Accounts are separate investment accounts established by the
Insurance Companies for the purpose of investing purchase payments
received under the Contracts. Each of the Accounts is a unit investment
trust which has filed a registration statement on Form N-4 under the
Securities Act of 1933 to register the offering of the Contracts.
Each Account is currently divided into five Subaccounts that will
invest exclusively in shares of the corresponding portfolio of one of
the following mutual funds: (1) T. Rowe Price International Series,
Inc.; (2) T. Rowe Price Equity Series, Inc.; and (3) T. Rowe Price
Fixed Income Series, Inc. (collectively the ``Funds''). Each of the
Funds is a Maryland corporation and is currently registered under the
1940 Act as an open-end management investment company. The shares of
the Funds are purchased by the Insurance Companies for the Subaccounts
at the Fund's net asset value per share.
The Insurance Companies may in the future establish additional
separate accounts to support variable annuity contracts substantially
similar in all material respects to the Contracts.
3. T. Rowe Price Associates, Inc. (``T. Rowe Price'') serves an
investment adviser to each Fund, except the T. Rowe Price International
Series, Inc. Rowe Price-Fleming International, Inc. (``Price-
Fleming''), an affiliate of T. Rowe Price, serves as investment adviser
to the T. Rowe Price International Services, Inc. Each of T. Rowe Price
and Price-Fleming is registered with the Commission as an investment
adviser pursuant to the Investment Advisers Act of 1940.
4. Investment Services will be the principal underwriter of the
Contracts. Investment Services is a wholly-owned subsidiary of T. Rowe
Price. Investment Services is a broker-dealer registered under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Investment Services receives no
compensation for acting as principal underwriter under distribution
agreements with the Insurance Companies. Investment Services also is
the distributor of shares of the T. Rowe Price Public Funds, currently
consisting of 36 open-end management investment companies. Each such
fund is offered directly to the public and is managed by T. Rowe Price,
Price Fleming, or an affiliate thereof.
5. The Contracts are available for purchase as non-tax qualified
retirement plans. The Contracts are also eligible for use in connection
with tax qualified retirement plans that meet the requirements of
Sections 403(b) and 408 of the Internal Revenue Code of 1986, as
amended (the ``Code''). The minimum initial premium is $10,000 ($5,000
if made pursuant to an automatic investment program) to purchase a
Contract in connection with a non-tax qualified retirement plan and
$2,000 ($25 if made pursuant to an automatic investment program) to
purchase a Contract in connection with a qualified plan. Subsequent
premium payments are flexible, although they must be for at least
$1,000 ($200 if made pursuant to a automatic investment program) for
Contracts purchased in connection with a non-tax qualified retirement
plan, and $500 ($25 if made pursuant to an automatic investment
program) for Contracts purchased in connection with a tax qualified
plan. The Insurance Companies may reduce the minimum premium
requirements under certain circumstances, such as for group or
sponsored arrangements.
6. Premiums that are intended to accumulate on a variable basis may
be allocated to one or more of the [[Page 13501]] Subaccounts of the
Accounts with respect to the Contracts. Premiums that are allocated to
a Subaccount are invested exclusively in shares of the corresponding
portfolio of the Funds. Amounts held in a Subaccount will increase or
decrease in dollar value depending on the investment performance of the
corresponding portfolio of the Fund in which the Subaccount invests.
The Owner bears the investment risk for amounts allocated to a
Subaccount.
Premiums that are intended to accumulate on a fixed basis may be
allocated to the Insurance Company's Fixed Account. Amounts allocated
to the Fixed Account earn interest at a guaranteed annual effective
rate of at least 3%, compounded daily.
7. Contract owners may change the allocation of Contract Value up
to six times a year. Additional changes in allocation may be made under
allocation programs made available in connection with the Contracts.
Contract owners may make partial withdrawals within limits and
surrender their Contracts at any time before the annuity date. Each
partial withdrawal must be for at least $500 and, after the withdrawal,
the remaining value in the Contract must be at least $2,000.
8. Contract owners may apply their Contract Value to any of the
several annuity options offered under the Contracts. Both fixed and
variable options are available.
9. The Contracts also provide for the payment of a death benefit.
If the Owner (or Annunitant, if the Owner is not a natural person) dies
during the Accumulation Period, the Insurance Companies will pay death
benefit proceeds to the Beneficiary upon receipt of due proof of the
Owner's death and instructions regarding payment to the Beneficiary.
10. The death benefit proceeds will be the death benefit reduced by
any outstanding Contract debt and any uncollected premium taxes. If the
Owner dies during the Accumulation Period and the issue age of each
Owner was 75 or younger on the date the Contract was issued, the amount
of the death benefit will be the greater of (1) the Contract's value as
of the date that due proof of death and instructions regarding payment
are received by an Insurance Company at its Home Office, (2) the
aggregate premium payments received less any reductions caused by
previous withdrawals, or (3) the stepped-up death benefit. The stepped-
up death benefit is (a) the highest death benefit on any annual
Contract anniversary that is both an exact multiple of five and occurs
prior to the oldest Owner attaining age 76, plus (b) any purchase
payments made since the applicable fifth annual Contract anniversary,
less (c) any withdrawals since the applicable fifth annual Contract
anniversary. If the Owner dies during the Accumulation Period and the
Contract was issued after age 75, the amount of the death benefit will
be the Contract's value as of the date that due proof of death and
instructions regarding payment are received by an Insurance Company at
its Home Office. On the death of any Owner on or after the annuity
payout date, any guaranteed payments remaining unpaid will continue to
be paid to the Annuitant pursuant to the Annuity Option in force at the
date of death. No death benefit will be paid if the Owner dies after
the annuity payout date.
11. The Insurance Companies will deduct a daily charge from the
assets of the Accounts for mortality and expense risks and costs
assumed by them under the Current Contracts. The mortality and expense
charge under the Current Contracts is equal to an annual rate not to
exceed .55% of the average daily net assets of each Subaccount that
funds the Contracts. The .55% charge consists of approximately .30% for
mortality risk and .25% for expense risk and costs. This charge is
intended to compensate the Insurance Companies for certain mortality
and expense risks and costs the Insurance Companies assume in offering
and administering the Current Contracts and in operating the Accounts.
The mortality risk borne by the Insurance Companies is the risk
that the persons on whose lives annuity payments depend, as a group,
will live longer than the Insurance Companies' actuarial tables
predict. In this event, the Insurance Companies guarantee that annuity
payments will not be affected by a change in mortality experience that
results in the payment of greater annuity income than assumed under the
Annuity Options in the Contract. The Insurance Companies also assume a
mortality risk in connection with the death benefit under the Contract.
The Contracts do not include charges for administrative expenses.
All administrative charges related to the Contracts are paid by the
Insurance Companies. The Insurance Companies expect a profit from the
mortality and expense risk charge that may be used to pay
administrative costs. The expense risk borne by the Insurance Companies
is that the anticipated profits from the mortality and expense risk
charge will be insufficient to pay for the administrative expenses.\1\
\1\Applicants have undertaken to amend their application during
the notice period to include these representations.
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12. The mortality and expense risk charge under the Current
Contracts is equal to an annual rate of .55% of the average daily net
assets of each subaccount that funds the Contracts. The Insurance
Companies may issue Future Contracts with a mortality and expense risk
charge not exceeding 1.00%.
13. The Insurance Companies may realize a profit from this charge
to the extent it is not needed to cover mortality and administrative
expenses, but the Insurance Companies may realize a loss to the extent
the charge is not sufficient. The Insurance Companies may use any
profit derived from this charge for any lawful purpose, including
payment of any distribution expenses.
14. Contract purchasers and owners may own shares of a T. Rowe
Price Public Fund(s), and may desire to transfer funds from a T. Rowe
Price Public Fund(s) to a Contract as a premium payment. In addition,
Contract owners may desire to invest proceeds from a redemption,
withdrawal or surrender under the Contracts or annuity payments payable
thereon, in shares of a T. Rowe Price Public Fund(s). Investment
Services proposes to accommodate such investors with a payment
arrangement facilitating such transfers. Use of this arrangement would
be entirely elective; no Contract owner or purchaser would be required
to use the payment arrangement to purchase a Contract or shares of a T.
Rowe Price Public Fund.
15. Because neither the T. Rowe Price Public Funds nor the
Contracts impose sales load charges, there is no possibility that any
sales load would be deducted in connection with the application of
redemption proceeds from a T. Rowe Price Public Fund to premium
payments on a Contract, or the application of redemption proceeds or
annuity payments from a Contract to the purchase of shares of T. Rowe
Price Public Fund. However, applicable premium taxes may be deducted in
connection with the first annuity payment or the payment of redemption
proceeds under the Contract.
Applicants' Legal Analysis and Conditions
1. Applicants request an order of the Commission under Section 6(c)
for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act
to the extent necessary to permit the [[Page 13502]] deduction of a
maximum charge of 1.00% for the assumption of mortality and expense
risks from the assets of: (a) the Accounts in connection with the
issuance of the Current Contracts; (b) the Accounts in connection with
the issuance of any Future Contracts; and (c) any other separate
account established in the future by the Insurance Companies in
connection with the issuance of Future Contracts. Applicants believe
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.
2. Applicants submit that their request for exemptive relief for
deduction of a maximum 1.00% mortality and expense risk charge from the
assets of the Accounts, or any other separate account established by
the Insurance Companies in the future, in connection with the issuance
of Future Contracts, would promote competitiveness in the variable
annuity contract market by eliminating the need for the Insurance
Companies to file redundant exemptive applications, thereby reducing
the Insurance Companies' administrative expenses and maximizing the
efficient use of their resources. Applicants further submit that the
delay and expense involved in having repeatedly to seek exemptive
relief would impair the Insurance Companies' ability effectively to
take advantage of business opportunities as they arise. Further, if the
Insurance Companies were required repeatedly to seek exemptive relief
with respect to the same issues regarding a mortality and expense risk
charge addressed in this Application, investors would not receive any
benefit or additional protection thereby. Thus, Applicants believe that
the requested exemptions regarding a mortality and expense risk charge
are appropriate in the public interest and consistent with the
protection of investors and purposes fairly intended by the policy and
provisions of the 1940 Act.
3. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 Act 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.
4. 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 depositor 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.
5. Applicants represent that the maximum 1.00% mortality and
expense risk charge under the Contracts is within the range of industry
practice for comparable annuity contracts. This representation is based
upon Applicants' analysis of similar industry products, taking into
account such factors as annuity purchase rate guarantees, death benefit
guarantees, other contract charges, the frequency of charges, the
administrative services performed by the companies with respect to the
contracts, the means of promotion, the market for the contracts,
investment options under the contracts, and the tax status of the
contracts. Applicants represent that the Insurance Companies will
maintain at their home offices, available to the Commission, a
memorandum setting forth in detail the products analyzed in the course
of, and the methodology and results of, their comparative survey.
6. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge under the Contracts, all or a portion
of such profit may be available to pay distribution expenses. The
Insurance Companies have concluded that there is a reasonable
likelihood that the proposed distribution financing arrangements will
benefit the Accounts and the Contract owners. The basis for that
conclusion is set forth in a memorandum which will be maintained by the
Insurance Companies at their home offices and will be made available to
the Commission. Applicants represent that Future Contracts will be
offered only if the Insurance Companies conclude that the proposed
distribution financing arrangement will benefit such Future Contracts
and the Accounts or other separate accounts established in connection
with their issuance and the Contract owners. The basis for such
conclusion will be set forth in a memorandum which will be maintained
by the Insurance Companies at their home offices and will be made
available to the Commission.\2\
\2\Applicants have undertaken to amend their application during
the notice period to include these representations.
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7. Applicants also represent that the Accounts will invest only in
underlying open-end 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 or trustees, a
majority of whom are not ``interested persons'' of such company within
the meaning of Section 2(a)(19) of the 1940 Act, formulate and approve
any such plan.
8. Section 11(a) of the 1940 Act makes it unlawful, in relevant
part, for a registered open-end investment company or any of its
principal underwriters:
To make or cause to be made an offer to the holder of a security
of such company or of any other open-end investment company to
exchange his security for a security in the same or another such
company on any basis other than the relative net asset values of the
respective securities to be exchanged, unless the terms of the offer
have first been submitted to and approved by the Commission or are
in accordance with such rules and regulations as the Commission may
have prescribed in respect of such offers which are in effect at the
time such offer is made.
9. Section 11(c) of the 1940 Act provides that, irrespective of the
basis of exchange, subsection (a) shall be applicable:
(1) to any offer of exchange of any security of a registered
open-end investment company for a security of a registered unit
investment trust * * *; and (2) to any type of offer of exchange of
the securities of registered unit investment trusts * * * for the
securities of any other investment company.
10. The Commission has promulgated Rules 11a-2 and 11a-3 under
Section 11, each of which permits the making of certain exchange offers
without prior Commission approval provided that specified conditions
are met.
Rule 11a-2 permits offers of exchange to be made by registered
insurance company separate accounts to holders of variable contracts
supported by separate accounts having the same or an affiliated
insurance company depositor or sponsor, provided that, with respect to
variable annuity contracts, (1) the exchange is made on the basis of
the relative net asset values of the securities to be exchanged (less
any administrative fee disclosed in the offering account's registration
statement); and (2) any sales loads which may be imposed are calculated
and deducted in accordance with the terms and conditions of Rule 11a-2.
Rule 11a-3 permits a fund or its principal underwriter to make
exchange offers to shareholders in that fund or another fund in the
same group of funds [[Page 13503]] on a basis other than net asset
value. The rule permits the imposition of certain sales loads and/or
other fees in connection with the exchange, provided that (1) any
administrative fee or scheduled variation thereof is applied uniformly
to all security holders of the specified class; (2) any redemption fee
or scheduled variation thereof is applied uniformly and does not exceed
the redemption fee applicable to the redemption of the exchanged
security in the absence of an exchange; (3) adequate disclosure is made
with respect to the fees charged and the limitations and any rights of
termination applicable to an exchange offer; and (4) sales loads are
calculated and deducted in accordance with the terms and conditions of
Rule 11a-3.
Rule 11a-2 thus permits offers of exchange between insurance
company separate accounts having the same or affiliated depositor or
sponsor and Rule 11a-3 permits certain exchange offers between funds in
the same group of funds. However, neither rule permits exchanges
between a publicly-offered management investment company and a separate
account.
11. Applicants state that, because neither the T. Rowe Price Public
Funds nor the Contracts impose sales load charges, no sales load will
be deducted in connection with the application of redemption proceeds
from a T. Rowe Price Public Fund to premium payments on a Contract, or
the application of redemption proceeds or annuity payments from a
Contract to the purchase of shares of T. Rowe Price Public Fund. Thus,
there is no possibility of the abuse contemplated by Section 11(a)
(i.e., offers of exchange made solely for the purpose of assessing
additional selling charges). The payment arrangement is consistent with
the intent and purposes of Rules 11a-2 and 11a-3 and would satisfy the
conditions established by those rules if the Applicants were eligible
to rely on them.
12. Applicants believe that exemptive relief is necessary,
appropriate and fully consistent with the purpose of Section 11 of the
1940 Act, and that the payment arrangement would not result in any of
the abuses the section was enacted to prevent. The payment arrangement
provides substantial benefits to Contract purchasers and owners by
providing a convenient means of making premium payments and of
investing proceeds from a redemption, withdrawal or surrender under the
Contracts. The payment arrangement is consistent with the protection of
investors and with the purposes fairly intended by the policy and
provisions of the 1940 Act.
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.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-6030 Filed 3-10-95; 8:45 am]
BILLING CODE 8010-01-M