[Federal Register Volume 60, Number 50 (Wednesday, March 15, 1995)]
[Notices]
[Pages 14044-14047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6354]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20948; No. 812-9074]
Aetna Insurance Company of America, et al.
March 9, 1995.
agency: Securities and Exchange Commission (``Commission'' or ``SEC'').
action: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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applicants: Aetna Insurance Company of America (``Aetna''); Variable
Annuity Account I of Aetna (``Account I''), Variable Annuity Account II
of Aetna (``Account II''), and any other Separate Accounts established
in the future by Aetna (``Future Accounts,'' and together with Accounts
I and II, ``Separate Accounts'') to support certain group and
individual deferred variable annuity contracts (``Contracts'') or other
variable annuity contracts that are substantially similar in all
material respects to the Contracts (``Other Contracts'') and that may
be issued in the future by Aetna;\1\ Aetna Life Insurance and Annuity
Company (``ALIAC''), the principal underwriter of the Contracts; and
Any Member Broker-Dealer of the National Association of Securities
Dealers, Inc. (``NASD'') That May In The Future Serve As Principal
Underwriter For The Contracts (``Future Underwriters'').
\1\Applicants have undertaken to amend their application during
the Notice Period to include the representation that Future
Contracts will be substantially similar ``in all material respects''
to the Contract.
relevant 1940 act sections: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections
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26(a)(2)(C) and 27(c)(2) of the 1940 Act.
summary of application: Applicants seeking an order permitting the
deduction of a mortality and expense risk change from the assets of the
Separate Accounts in connection with the issuance and sale of the
Contracts or Other Contracts.
filing date: The application was filed on June 24, 1994, and amended on
December 23, 1994 and February 23, 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 April 3, 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 NW., Washington, DC 20549.
Applicants, c/o Aetna Insurance Company of America, 151 Farmington
Avenue, Hartford, Connecticut 06156.
for further information contact: Yvonne M. Hunold, Assistant Special
Counsel, or Wendy F. 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. Aetna, a stock life insurance company, is a wholly-owned
subsidiary of Aetna Life Insurance and Annuity Company (``ALIAC''),
which is, in turn, a wholly-owned subsidiary of Aetna Life and Casualty
Company. Aetna is in the process of qualifying to do business and
obtaining licenses to sell insurance in all jurisdictions except New
York.
2. The Separate Accounts are or will be established by Aetna for
the purpose of funding variable annuity contracts. The Separate
Accounts are or will be registered under the 1940 Act as unit
investment trusts. Assets of the Separate Accounts will be allocated
among the shares of one or more registered open-end investment
companies (``Funds''), some of which may be managed by ALIAC or its
affiliates.
3. ALIAC is the principal underwriter of the Contracts and may act
as investment adviser to some of the Funds. ALIAC is registered as a
broker-dealer under the Securities Exchange Act of 1934 and as an
investment adviser under the Investment Advisers Act of 1940. ALIAC is
a member of NASD.
4. Non-tax qualified Contracts are funded through Account I and
Contracts purchased and used in connection with retirement plans under
Sections 401(a) or 403(b) of the Internal Revenue Code, as amended
(``Code'') are funded through Account II. Individual Contracts
qualifying for favorable federal income tax treatment under Section 408
of the Code and Contracts purchased by deferred compensation plans
under Section 457 of the Code may be funded through either Account I or
Account II.
5. The Contracts may provide for, among other things single or
installment premium payments, or a combination of the two, and deferred
or immediate annuity payments on a fixed or variable basis beginning on
a date elected by the Contract owners and in no event later than
certain contractually established dates (``Retirement Date'').
Additionally, Contract owners may allocate premium payments to: (a) One
or more of the Funds available under a Contract; (b) in some Contracts
to a fixed Interest Option, which is part of Aetna's general account;
and (c) in some Contracts to a Credited Interest Option, with or
without a market value adjustment upon redemption prior to the end of a
guaranteed term, and assets attributable to such an option may be held
in Aetna's general account or in a non-insulated, none-utilized
separate account of Aetna.\2\
\2\Applicants are not requesting Commission review of whether
the Fixed Interest Option or any other Credited Interest Option
under the Contracts are securities required to be registered under
the 1933 Act. Applicants will not consider any order issued as a
result of this application to be an expression of any view by the
Commission on this issue.
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6. The Contracts provide for the payment of a standard death
benefit equal to the greater of (i) the cash value of the Contract
account, or (ii) the sum of purchase payments less any withdrawals, or
(iii) the contract holder's account value at the most recent seventh
year anniversary of the Contract adjusted for purchase payments,
withdrawals and amounts applied to an annuity option. The Contracts
also provide for the payment of an enhanced death benefit equal to the
greater of (i) the cash value of the Contract account, or (ii) during
the first year of the Contract, the amount of premiums paid (adjusted
for any withdrawals and any amount paid to an annuity option), or (iii)
during subsequent years of the Contract, an [[Page 14045]] amount
determined by increasing premiums paid in prior years by a
contractually-determined factor (adjusted for any withdrawals or any
amounts paid for an annuity option), or (iv) cash value on the most
recent seventh year anniversary of the Contract, adjusted for purchase
payments, withdrawals and amounts applied to an annuity option.\3\
\3\The death benefit calculations in (iii) under the standard
death benefit and in (ii), (iii) and (iv) under the enhanced death
benefit apply until the Certificate Holder or annuitant reaches the
death benefit maximum age shown in the Contract. Thereafter, the
death benefit is only adjusted for purchase payments, withdrawals
and amounts applied to annuity options. Currently, there is no
limitation on the maximum death benefit payable under the standard
death benefit or the enhanced death benefit; however, Aetna reserves
the right in the future to impose a limitation on the maximum
allowable death benefit under (iii) under the standard and under
(ii), (iii) and (iv) under the enhanced death benefit.
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7. Various fees and charges are deducted under the Contracts. Aetna
may impose a maximum annual maintenance charge of $35 under the
Contracts for administrative services provided to Contract holders.
Aetna currently deducts a $30 annual maintenance charge from Cash Value
on the Contract date, on each Contract Anniversary prior to the
Retirement Date, and upon termination of the Contract. In addition,
Aetna reserves the right to deduct a daily administrative expense
charge of up to 0.25%, on an annual basis, of the net asset value of
the Separate Accounts, to cover its administrative expenses during the
accumulation period and the annuity period. Of the 0.25% maximum
administrative expense charge, Aetna currently deducts 0.15% annually
of the average daily net assets of the Separate Accounts during the
accumulation period. An administrative charge currently is not imposed
during the annuity period.
8. No charge currently is made for transfers of cash values among
the Funds or from a Fund to a Fixed or Credited Interest Option during
the accumulation period. Aetna reserves the right to establish a
minimum amount for transfers and to impose a transfer charge of up to
$10 for each transfer request after the first twelve requests in each
Contract year to reimburse Aetna for its transfer administrative costs
during the accumulation period. No transfer fees are charged during the
annuity period.
9. No profit is anticipated from the maintenance charge, transfer
fee and administrative expense charges, which will not be greater than
Aetna's average expected cost of the services to be provided, defined
in accordance with Rule 26a-1 under the 1940 Act. Applicants intend to
rely on Rules 26a-1 and 6c-8(c) under the 1940 Act for the necessary
exemptive relief to permit imposition of these fees. Aetna 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.
10. No charge currently is deducted for premium taxes. Aetna
reserves the right, however, to deduct such taxes from cash value under
the Contracts at the time such taxes are payable. Aetna reserves the
right to offer Other Contracts that permit the deduction of premium
taxes from cash values or purchase payments. No charges currently are
made for federal, state or local taxes, other than premium taxes, that
Aetna incurs or that may be attributable to a Separate Account or the
Contracts. Aetna reserves the right to deduct such taxes in the future
for any such tax or economic burden from any sales load payable to
Aetna with respect to the Contracts. Aetna will not deduct any such
taxes from the assets of the Separate Accounts unless it has been
specifically authorized to do so by the Commission. Applicants intend
to rely on Rule 26a-2(d) under the 1940 Act to permit the deduction of
taxes from the assets of a Separate Account.
11. No sales charge is deducted from premium payments. Aetna
reserves the right to deduct a contingent deferred sales charge
(``CDSC'') of up to 9% of the amount withdrawn, on partial or full
Contract surrenders and withdrawals of Account Value, and upon election
of certain annuity payment options, to compensate Aetna for its
distribution expenses. The CDSC is applied to purchase payments and not
to any increases in Account Value. The maximum CDSC currently is 7%,
decreasing by up to 1% per year after payment of a purchase payment
until it reaches zero after seven years. The aggregate CDSC is
guaranteed never to exceed 8.5% of aggregate premium payments. The CDSC
may be waived under certain specified circumstances. Amounts
attributable to purchase payments are considered withdrawn before
amounts attributable to income, and the oldest purchase payments are
considered withdrawn first when determining the amount of CDSC that
should be applied.
12. Aetna anticipates that the CDSC will not generate revenues that
will be sufficient to pay all its distribution costs. Excess
distribution costs, thus, would be paid out of Aetna's general assets,
which may include profits derived from the mortality and expense risk
charge assessed under the Contracts. Applicants will rely on Rule 6c-8
under the 1940 Act to deduct the CDSC.
13. A daily charge will be deducted from the net assets of the
Separate Accounts to compensate Aetna for assuming certain mortality
and expense risks. Aetna currently charges 0.35% for the expense risk,
0.75% for standard mortality risks, and 0.15% for the enhanced death
benefit, or a current total charge of 1.25%. Aetna reserves the right
to charge up to .90% on an annual basis for standard mortality risks,
in which event the charge for mortality and expense risks would be at a
maximum annual rate of 1.40% of net assets.
14. The mortality risk arises from Aetna's contractual obligation
to make annuity payments (in accordance with the annuity tables and
other provisions in the Contracts) regardless of how long any
individual annuitant or all annuitants may live. The mortality risk is
that an annuitant will live longer than predicted by Aetna's actuarial
projections, thereby resulting in higher than expected annuity
payments. 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. Aetna also assumes a mortality risk in
that Aetna may be obligated to pay either a standard death benefit or
an enhanced death benefit in excess of a contract holder's account
value.
15. The expense risk assumed by Aetna is the risk that charges for
administration expenses, which are guaranteed not to increase for the
life of the Contracts, may be insufficient to cover the actual costs of
issuing and administering the Contracts or Other Contracts.
16. Aetna currently anticipates that, under ordinary circumstances,
the mortality and expense risk charge will be more than sufficient to
cover its costs. Accordingly, any excess will be profit to Aetna and
may be available to pay distribution costs for the Contracts that are
not covered by funds derived from the CDSC.
Applicants' Legal Analysis
1. Applicants request exemptions under Section 6(c) from Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent necessary to
permit the deduction of a mortality and expense risk charge from the
assets of the Separate Accounts in connection with funding the
Contracts and Other Contracts. Applicants further request that such
exemptive relief be extended [[Page 14046]] to ALIAC as principal
underwriter for the Aetna Contracts and to Future Underwriters, a class
consisting of broker-dealers who may, in the future, act as principal
underwriters of the Contracts. Applicants submit 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 state that the terms of the relief requested with
respect to any Other Contracts funded by the Separate Accounts or
distributed by any Future Underwriter are consistent with the standards
set forth in Section 6(c) of the 1940 Act. Without the requested
relief, exemptive relief would have to be requested for each new
separate account established to fund the Other Contracts or for each
Future Underwriter. Such additional requests for exemptive relief would
present no issues under the 1940 Act not already addressed in this
application. The requested relief would eliminate the need for the
filing of redundant exemptive applications, thereby reducing
administrative expenses, maximizing efficient use of resources and,
thus, promoting competitiveness in the variable annuity market. Both
the delay and the expense of repeatedly seeking exemptive relief would,
Applicants assert, impair Aetna's ability to effectively take advantage
of business opportunities as they arise. If Aetna were repeatedly to
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 Aetna's increased overhead.
Applicants submit, therefore, that the requested relief 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.
3. 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.
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 submit that Aetna is entitled to reasonable
compensation for its assumption of mortality and expense risks.
Applicants represent that the mortality and expense risk charge under
the Contracts with the standard death benefit is a reasonable and
proper insurance charge to compensate Aetna 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; (b) the cash
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.
6. Aetna represents that the annual charge of 1.25% of net assets
for mortality and expense risks (.90% and .35%, respectively) assumed
by it in connection with the standard death benefit is within the range
of industry practice for comparable annuity contracts. This
representation is based upon Aetna'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, and guaranteed annuity rates. Applicants represent that
Aetna will maintain at its principal offices, available to the
Commission, a memorandum setting forth in detail the products analyzed
in the course of, and the methodology and results of, its comparative
survey.\4\
\4\Applicants have undertaken to amend their application during
the Notice Period to include this representation.
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7. Applicants further represent that the additional mortality risk
charge of 0.15% for the enhanced death benefit is reasonable in
relation to the risks assumed under the Contracts. Based on an
actuarial analysis of the cost of providing an enhanced death benefit,
it was determined that the additional mortality risk charge of up to
0.15% was a reasonable charge for providing the enhanced death benefit
in relation to the risks assumed by Aetna under the Contracts. Aetna
will maintain at its principal offices,\5\ available to the Commission,
upon request, a memorandum setting forth in detail the methodology used
in determining that the additional risk charge of up to 0.15% for the
enhanced death benefit is reasonable in relation to the risks assumed
by Aetna under the Contracts.
\5\Applicants have undertaken to amend their application during
the Notice Period to include this representation.
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8. Similarly, prior to making available any Other Contracts through
the Separate Accounts, Applicants represent that the mortality and
expense risk charges under such Other Contracts will be within the
range of industry practice for comparable contracts. Aetna undertakes
to maintain at its principal offices, available to the Commission upon
request, memoranda setting forth in detail the products analyzed in the
course of, and the methodology and results of, of its comparative
surveys and analyses in reaching these determinations.
9. 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
deducted under the Contracts. Aetna has concluded that there is a
reasonable likelihood that the proposed distribution financing
arrangements will benefit the Separate Accounts and the Contract
holders. The basis for that conclusion is set forth in a memorandum
which will be maintained by Aetna at its administrative offices and
will be available to the Commission.
10. Applicants represent that Other Contracts will be offered only
if Aetna concludes that the proposed distribution financing arrangement
will benefit such Other Contracts and the 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 Aetna at its administrative offices and will be made
available to the Commission, upon request.\6\
\6\Applicants have undertaken to amend their application during
the Notice Period to include these representations.
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11. Accordingly, Applicants assert that the deduction for the
assumption of mortality and expense risks is 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.
12. Aetna also represents that the Separate Accounts 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 or trustees, a
[[Page 14047]] majority of whom are not ``interested persons'' of the
company, formulate and approve any such plan in accordance with Rule
12b-1.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested to permit the daily deduction from the assets of
the Separate Accounts of the charge for assumption of mortality and
expense risks, including an enhanced death benefit, at a maximum annual
rate of 1.40% of net assets, 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. 95-6354 Filed 3-14-95; 8:45 am]
BILLING CODE 8010-01-M