[Federal Register Volume 60, Number 79 (Tuesday, April 25, 1995)]
[Notices]
[Pages 20296-20301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10132]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21021; No. 812-8154]


General American Life Insurance Company, et al.

April 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (``1940 Act'').

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APPLICANTS: General American Life Insurance Company (``General 
American''), General American Separate Account Eleven (``Account 11'') 
and Walnut Street Securities, Inc. (``Underwriter'').

RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) granting 
exemptions from Sections 27(c)(2) and 27(e) of the 1940 Act and from 
Rules 6e-3(T)(b)(13)(vii), 6e-3(T)(c)(4)(v) and 27e-1 thereunder.

SUMMARY OF APPLICATION: Applicants request an order to permit Account 
11 and other variable life insurance separate accounts that General 
American may establish in the future (``Future Accounts'') to: (1) 
Deduct a charge from premium payments under certain variable life 
insurance contracts to compensate General American for its increased 
federal tax burden resulting from the application of Section 848 of the 
Internal Revenue Code of 1986, as amended, to the receipt of such 
payments; and (2) to permit General American not to send such contract 
owners a written notice of their refund and withdrawal rights.

[[Page 20297]] FILING DATES: The application initially was filed on 
November 9, 1992, declared inactive on August 12, 1993, and amended on 
September 12, 1994, and April 14, 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 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 May 15, 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 requestor'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, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549. Applicants: c/o Matthew P. 
McCauley, Esq., General American Life Insurance Company, 700 Market 
Street, St. Louis, Missouri 63101.

FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special 
Counsel, or Wendy Friedlander, Deputy Chief, at (202) 942-0670, Office 
of Insurance Products (Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application is available for a fee from the 
Commission's Public Reference Branch.

Applicants' Representations

    1. General American, a mutual life insurance company, is 
principally engaged in offering insurance policies and annuity 
contracts. General American is authorized to conduct business in the 
District of Columbia, all states except New York, and ten Canadian 
provinces.
    2. Account 11 is a separate account established by General American 
and registered as a unit investment trust under the 1940 Act. Account 
11 currently has 13 sub-accounts, each of which invests in 
corresponding portfolios of one of four series-type registered open-
end, diversified management investment companies (collectively, 
``Funds'').\1\ The Future Accounts will be separate accounts, as 
defined in Rule 0-1(e) under the 1940 Act, and registered as unit 
investment trusts under the 1940 Act.

    \1\The Funds include General American Capital Company, Variable 
Insurance Products Fund, Variable Insurance Products Fund II, and 
Van Eck Investment Trust.
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    3. The Underwriter acts as principal underwriter for certain 
variable life and variable annuity contracts by General American. The 
Underwriter is registered as a broker-dealer under the Securities 
Exchange Act of 1934 and is a member of the National Association of 
Securities Dealers, Inc. The Underwriter is an indirect wholly-owned 
subsidiary of General American.
    4. Account 11 currently funds two flexible premium variable life 
insurance contracts offered by General American, the VUL-95 Contract 
and the General Select Plus Contract (together, ``Existing 
Contracts''). Account 11 will, and Future Accounts may, be used to fund 
a new flexible premium variable life insurance contract (``Contract''), 
as well as other flexible premium variable life insurance contracts 
(``Future Contracts'') that in the future may be offered by General 
American. (Future Contracts and Existing Contracts are hereinafter 
referred to together as ``Other Contracts''.) Interests in all of the 
contracts are or will be registered as securities under the Securities 
Act of 1933.
    5. The Contract offers the payment of premiums in any amount and 
frequency, subject to certain limitations, three death benefit options, 
cash value, loan privileges and other traditional life insurance 
features. The Contract owner may receive a refund of premium payments 
by cancelling and returning the Contract within the latest of: (1) 20 
days of receipt (30 days for California residents, and for age 60 or 
older), (2) 45 days of signing the application, or (3) 10 days of 
General American's mailing a notice of this provision to the Contract 
owner.\2\

    \2\Contracts purchased in Kansas provide for a return of an 
amount equal to the: (1) difference between premium payments and 
amounts allocated to Account 11; and (2) cash value on the date the 
Contract is returned.
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    6. Certain charges and deductions are made under the Contract to 
compensate General American for its costs and expenses.

(a) Premium Tax Charge

    A charge of 2.10% is deducted from each premium payment for state 
taxes assessed on premium payments received by General American. Such 
premium taxes vary from jurisdiction to jurisdiction and range between 
0.75% to 3.50%. This charge represents the average deduction considered 
necessary for General American to pay such taxes. Some jurisdictions do 
not impose a premium tax while others may impose a tax that is greater 
than or less than the 2.10% deduction under the Contract. If the 
average premium tax increases in the future, General American may 
increase this deduction.

(b) Section 848 Deferred Acquisition Costs Charge

    A charge of 1.25% (``DAC Tax Charge'') will be deducted from each 
premium payment to reimburse General American for its increased federal 
income tax burden resulting from changes made to Section 848 of the 
Internal Revenue Code of 1986 (``Code''), by the Omnibus Budget 
Reconciliation Act of 1990 (``OBRA 1990''), affecting the treatment of 
deferred acquisition costs. The requested order would permit the 
deduction of 1.25% of each premium payment under the Contract and 
Future Contracts. The 1.25% DAC Tax Charge will not be deducted under 
Existing Contracts issued prior to the receipt of the requested order. 
However, the DAC Tax Charge may be deducted under Existing Contracts 
issued after issuance of the requested order\3\ and after endorsements 
permitting the charge have been approved by insurance regulators in 
each applicable jurisdiction. Applicants represent that the DAC Tax 
Charge is a legitimate expense of the company, is not used for sales 
and distribution expenses and will be reasonably related to General 
American's increased federal tax burden.

    \3\Applicants undertake to make this representation in an 
amendment to the Application, which is to be filed during the notice 
period.
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(c) Administration Charge

    The monthly administration charge is $13 per month during the first 
Contract year, and $6 per month thereafter. This charge cannot be 
increased under a Contract once it is issued.

(d) Selection and Issue Expense Charge

    The selection and issue expense charge is $0.16 per month per 
$1,000 of face amount during the first Contract year and $0.01 per 
month per $1,000 of face amount thereafter. In the event that the face 
amount is increased (other than by a change in death benefit options or 
increasing death benefit rider), this charge is $0.16 per month per 
$1,000 of increased face amount during the first Contract year 
following the increase and $0.01 per month per $1,000 of face amount 
thereafter.

(e) Cost of Insurance Charge

    The monthly cost of insurance charge varies with each Contract 
because it is based on the attained age, rate class, and sex (except 
Montana) of the insured.

(f) Charge for Riders

    A monthly charge will be deducted for any riders. This charge will 
vary with each Contract.

(g) Mortality and Expense Risk Charge

    A daily charge equivalent to an effective annual rate of .90% of 
Account 11's average daily net assets\4\ will be deducted for General 
American's assumption of mortality and expense risks. [[Page 20298]] 

    \4\The value of Account 11's net assets will reflect the 
investment management fees and other operating expenses of the Funds 
held by Account 11.
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(h) Contingent Deferred Sales Charge (``CDSC'')

    For a period of up to 15 years after issuance of the Contract or an 
effective face amount increase, General American will impose a CDSC 
upon surrender, lapse, a requested decrease in face amount or a partial 
withdrawal that results in a decrease in face amount.
    The amount of the CDSC will depend upon a number of factors, 
including the type of event, amount of premium payments made prior to 
the event, number of Contract years that has elapsed since issuance of 
the Contract or face amount increase, as applicable.
    A separate CDSC applies to the initial face amount and to each 
increase in face amount and is deducted whenever, and to the extent 
that, a surrender, lapse or face amount decrease affects the applicable 
increment of face amount. The length of time over which a CDSC will 
apply to any increment of face amount will depend upon the attained age 
of the insured on the issue date or the effective date of the increase, 
as applicable, and the insured's sex and risk class, as follows:

                 Contingent Deferred Sales Charge Period                
                           [Duration in years]                          
------------------------------------------------------------------------
                                     Male      Male     Female    Female
          Insured's age           nonsmoker   smoker  nonsmoker   smoker
------------------------------------------------------------------------
0-50............................        15        15        15        15
51..............................        14        14        14        14
52..............................        13        13        13        13
53..............................        12        12        12        12
54..............................        11        11        11        11
55-79...........................        10        11        10        10
80..............................        10         6        10        10
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    The CDSC will equal the CDSC grading percentage\5\ multiplied by 
the sum of (1) and (2) where: (1) is 40% of the lesser of the premium 
payments made or the target premium for the Contract, and (2) is the 
excess premium surrender charge factor multiplied by premium payments 
made in excess of the target premium for the Contract. With regard to a 
face amount increase, multiplied by the sum of (1) and (2) where: (1) 
Is 40% of the lesser of the premium payments attributable to the 
increase, and (2) is the excess premium surrender charge factor 
multiplied by the premium payments attributable to the increase in 
excess of the target premium for the increase. The excess premium 
surrender charge factors vary with the attained age, sex and risk class 
of the insured. The target premium for the Contracts is somewhat less 
than the guideline annual premium (``GAP'') as defined in Rule 6e-
3(T)(c)(8).

    \5\Grading percentages range, on a declining scale, from 100% in 
the first policy year to 0% in the 15th policy year, and vary 
depending on the sex, issue age, and risk class of the insured.
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    The CDSC for the initial face amount during the first two Contract 
years will not exceed: (a) 30% of the first GAP paid under the 
Contract; (b) 10% of the second GAP paid; and (c) 9% of premium 
payments made in excess of two GAPs. The CDSC for any increase in face 
amount during the first two Contract years following the increase will 
not exceed: (a) 30% of the first GAP attributable to the increase; (b) 
10% of the second GAP attributable to the increase; and (c) 9% of 
premium payments attributable to the increase of two GAPs.
    7. Application of Section 848 of the Code. Section 848 of the Code, 
as amended by OBRA, requires life insurance companies to capitalize and 
amortize over a period of ten years part of their general expenses for 
the current year. Prior law allowed these expenses to be deducted in 
full from the current year's gross income. Section 848 effectively 
accelerates the realization of income from certain categories of life 
insurance and other contracts (``Specified Contracts'') categorized 
under this Section and, thus, the payment of taxes on that income. The 
Contract and Other Contracts will be categorized under Section 848 as 
Specified Contracts. Taking into account the time value of money, 
Section 848 increases the insurance company's tax burden because the 
amount of general deductions that must be capitalized and amortized is 
measured by the premiums received under the Specified Contracts.
    8. The amount of deductions subject to Section 848 equals a 
percentage of the current year's net premiums received (i.e., gross 
premiums minus return premiums and reinsurance premiums) under the 
Specified Contracts. Consequently, 7.7% of the net premiums received 
must be capitalized and amortized under the schedule set forth in 
Section 848(c)(1) of the Code.
    9. The increased tax burden on every $10,000 of net premiums 
received is quantified as follows. For each $10,000 of net premiums 
received in a given year, Section 848 requires General American to 
capitalize $770 (i.e., 7.7% of $10,000), and $38.50 of this amount may 
be deducted in the current year. The remaining $731.50 ($770 less 
$38.50), which is subject to taxation at the corporate tax rate of 35%, 
results in General American owning $256.03 (.35%  x  $731.50) more in 
taxes for the current year than it otherwise would have owed prior to 
OBRA 1990. However, the current tax increase will be partially offset 
by deductions that will be allowed during the next ten years as a 
result of amortizing the remainder of the $770 ($77 in each of the 
following nine years and $38.50 in year ten).
    10. In its business judgment, General American believes it 
appropriate to use a discount rate of at least 10% in evaluating the 
present value of its future tax deductions for the following reasons. 
Capital that General American must use to pay its increased federal tax 
[[Page 20299]] burden under Section 848 will be unavailable for 
investment. The cost of capital used to pay this increased tax burden 
essentially will be General American's after tax rate of return on 
surplus (i.e., return sought on invested capital), which is 10% to 12%. 
Accordingly, Applicants assert that the after tax rate of return on 
surplus is appropriate for use in this present value calculation.
    11. In determining the after tax rate of return, General American 
considered a number of factors, including market interest rates, 
anticipated long-term growth rate, acceptable risk levels, inflation, 
and available information about the rates of return obtained by other 
mutual life insurance companies. General American represents these are 
appropriate factors to consider.
    12. General American first projects its future growth rate based on 
sales projections, current interest rates, inflation rate, and the 
amount of surplus that it can provide to support such growth. General 
American then uses these factors, giving market interest rates, 
acceptable risk level, and inflation rate significantly more weight, to 
set a rate of return on surplus equal to or in excess of the 
anticipated rate of growth. General American seeks to maintain a ratio 
of surplus to assets that it establishes based on its judgment of the 
risks represented by various components of its assets and liabilities. 
Maintaining the ratio of surplus to assets is critical to General 
American maintaining a competitive rating from various rating agencies 
and to offering competitively priced products. Consequently, General 
American's surplus must grow at least at the same rate as its assets.
    13. Using a federal corporate tax rate of 35%, and assuming a 
discount rate of 10%, the present value of the tax effect of the 
increased deductions allowable in the following ten years, which 
partially offsets the increased tax burden, comes to $160.40. The 
effect of Section 848 on the Contracts and Other Contracts is therefore 
an increased tax burden with a present value of $95.63 for each $10,000 
of net premiums received (i.e., $256.03 minus $160.40).
    14. General American does not incur incremental federal income tax 
when it passes on state premium taxes to Contract Owners because state 
premium taxes are deductible in computing federal income taxes. 
Conversely, federal income taxes are not deductible in computing 
General American's federal income taxes. To compensate General American 
fully for the impact of Section 848, General American must impose an 
additional charge to make it whole not only for the $95.63 additional 
tax burden attributable to Section 848, but also for the tax on the 
additional $95.63 itself. This federal tax can be determined by 
dividing $95.63 by the complement of 35% federal corporate income tax 
rate (i.e., 65%), resulting in an additional charge of $147.12 for each 
$10,000 of net premiums, or 1.47%.
    15. Based on its prior experience, General American reasonably 
expects to take almost all future deductions. It is General American's 
judgment that a 1.25% charge would reimburse it for its increased 
federal income tax liabilities under Section 848. Applicants represent 
that the 1.25 charge will be reasonably related to General American's 
increased federal income tax burden under Section 848. This 
representation takes into account the benefit to General American of 
the amortization permitted by Section 848 and the use of a 10% discount 
rate (which is equivalent to General American's cost of capital) in 
computing the future deductions resulting from such amortization. To 
the extent that General American's actual cost of capital exceeds an 
annual rate of 10%, the calculation of this increased tax burden will 
continue to be reasonable over time.
    16. General American believes that the 1.25% charge would have to 
be increased if future changes in, or interpretations of, Section 848 
or any successor provision result in a further increased tax burden due 
to receipt of premiums. The increase could be caused by a change in the 
corporate tax rate, or in the 7.7% figure, or in the amortization 
period. Accordingly, the Contract, Future Contracts and endorsements to 
the Existing Contracts offered after issuance of an order in this 
matter will or may reserve the right to increase, or decrease, the 
1.25% charge in response to such future changes or interpretations that 
increase or decrease its tax burden. Any increase of the charge above 
1.25% would require additional exemptive relief from the Commission 
under the 1940 Act.

Applicants' Legal Analysis

    1. Applicants request an order under Section 6(c) of the 1940 Act 
for exemptions from Section 27(c)(2) of the 1940 Act to the extent 
necessary to permit the deduction from premium payments of a DAC Tax 
Charge in an amount that is reasonable in relation to General 
American's increased federal tax burden based on receipt of premiums 
under the Contract. The DAC Tax Charge also may be included in Future 
Contracts and may be added to Existing Contracts issued after receipt 
of the order requested herein. Applicants also request exemptions from 
Rule 6e-3(T)(c)(4)(v) under the 1940 Act to permit the proposed DAC Tax 
Charge to be treated as other than ``sales load,'' as defined under 
Section 2(a)(35) of the 1940 Act, for purposes of Section 27 and the 
exemptions from various provisions of that Section found in Rule 6e-
3(T).
    2. Applicants also request an order under Section 6(c) exempting 
them and any Future Accounts from Section 27(e) of the 1940 Act and 
Rules 27e-1 and 6e-3(T)(b)(13)(vii) thereunder to the extent necessary 
to eliminate the requirement of written notice to owners of the 
Contract or Future Contracts concerning certain withdrawal and refund 
rights.
    3. Section 6(c) authorizes the Commission, by order and upon 
application, to exempt any person, security, or transaction, or class 
of persons, securities, or transactions, from any provisions of the 
1940 Act. The Commission grants relief under Section 6(c) to the extent 
an 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].''

A. DAC Tax Charge

    1. Section 27(c)(2). Section 27(c)(2) prohibits any deduction from 
premium payments made under periodic payment plan certificates other 
than a deduction for ``sales load.'' ``Sales load'' is defined under 
Section 2(a)(35), in relevant part, as the difference between the price 
of a security to the public and that portion of the proceeds from its 
sale which is received and invested or held for investment by the 
issuer (or in the case of a unit investment trust, by the depositor or 
trustee), less any portion of such difference deducted for trustee's or 
custodian's fees, insurance premiums, issue taxes, or administrative 
expenses or fees which are not properly chargeable to sales or 
promotional activities.
    Sales loads on periodic payment plan certificates are limited by 
Sections 27(a)(1) and 27(h)(1) to 9% of total payments.
    2. Rule 6e-3(T)(b). Certain provisions of Rule 6e-3(T) provide 
exemptive relief from Section 27(c)(2) if the separate account issues 
flexible premium variable life insurance contracts, as defined in 
subparagraph (c)(1) of that Rule. Rule 6e-3(T)(b)(13)(iii) provides 
exemptive relief from Section 27(c)(2) to permit an insurer to make 
certain deductions, other than sales load, including ``[t]he deduction 
of premium or other taxes imposed by any State or other governmental 
entity.'' [[Page 20300]] 
    3. Applicants assert that the proposed deduction with respect to 
Section 848 of the Code arguably is covered by subparagraph 
(b)(13)(iii)(E) of Rule 63-3(T), but that the language of paragraph 
(c)(4) of the Rule appears to require that deductions for federal tax 
obligations from receipt of premium payments be treated as ``sales 
load.'' Applicants state that they request relief from Section 27(c)(2) 
only to preclude the possibility that a charge related to the increased 
burden resulting from Section 848 is not covered by the exemption 
provided by Rule 6e-3(T)(b)(13)(iii)(E). Applicants submit that the 
public policy reasons underlying subparagraph (b)(13)(iii)(E) provide 
support for the exemption requested.
    4. Rule 6e-3(T)(c)(4). Paragraph (b)(1), together with paragraph 
(c)(4), of Rule 6e-3(T) provide an exemption from the Section 2(a)(35) 
definition of ``sales load'' by substituting a new definition to be 
used for purposes of the Rule.
    Rule 6e-3(T)(c)(4) defines ``sales load'' during a period as the 
excess of any purchase payments made during that period over certain 
itemized charges and adjustments, including a deduction for state 
premium taxes. Under a literal reading of paragraph (c)(4) of the Rule, 
a deduction for an insurer's increased federal tax burden does not fall 
squarely into those itemized charges or deductions, arguably causing 
the deduction to be treated as part of ``sales load.'' Applicants 
maintain, however, that there is no public policy reason why a tax 
burden charge designed to cover the expense of federal taxes should be 
treated as sales load or otherwise be subject to the sales load limits 
of Rule 6e-3(T). Moreover, Applicants assert that nothing in the 
administrative history of Rule 6e-3(T) suggests that the Commission 
intended to treat tax charges as sales load.
    5. Applicants argue that the exemption is necessary in order for 
Account 11 and any Future Account to rely on subparagraph (c)(13)(i), 
which provides critical exemptions from Sections 27(a)(1) and 27(h)(1) 
of the 1940 Act. Applicants note that issuers and their affiliates may 
only rely, however, on subparagraph (b)(13)(i) if they meet its 
alternate limits that apply to sales load as defined in paragraph 
(c)(4). Applicants represent that they and Future Accounts could not 
meet these limits if the DAC Tax charge is included in sales load.
    6. Applicants assert that the public policy that underlies 
paragraph (b)(13) of Rule 6e-3(T), and particularly subparagraph 
(b)(13)(i), like that which underlies Sections 27(a)(1) and 27(h)(1), 
is to prevent excessive sales loads from being charged for the sale of 
periodic payment plan certificates. Applicants argue that this 
legislative purpose is not furthered by treating a federal income tax 
charge based on premium payments as a sales load because the deduction 
is not related to the payment of sales commissions or other 
distribution expenses. Applicants assert that the Commission has 
concurred with this conclusion by excluding deductions for state 
premium taxes from the definition of sales load in paragraph (c)(4) of 
each Rule.
    7. Applicants suggest that the source for the definition of ``sales 
load'' found in paragraph (c)(4) of Rule 6e-3(T) supports this 
analysis. In adopting paragraph (c)(4) of the Rule, the Commission 
intended to tailor the general terms of Section 2(a)(35) to flexible 
premium variable life insurance contracts to ease verification by the 
Commission of compliance with the sales load limits of subparagraph 
(b)(13)(i) of the Rule. Just as the percentage limits of Section 
27(a)(1) and 27(h)(1) depend on the definition of sales load in Section 
2(a)(35) for their efficacy, the percentage limits in subparagraph 
(b)(13)(i) of Rule 6e-3(T) depend on paragraph (c)(4), which does not 
depart, in principle, from Section 2(a)(35).
    8. Applicants further suggest that the exclusion from the 
definition of ``sales load'' under Section 2(a)(35) of deductions from 
premiums for ``issue taxes'' indicates that it is consistent with the 
policies of the 1940 Act to exclude from the definition of ``sales 
load'' in Rule 6e-3(T) deductions made to pay an insurer's costs 
attributable to its federal tax obligations. By extension, it is 
equally consistent to exclude such charges from Rule 6e-3(T)(c)(4) 
definition of sales load. Additionally, the exclusion of administrative 
expenses or fees that are ``not properly chargeable to sales or 
promotional activities'' also suggests that the only deductions 
intended to fall within the definition of ``sales load'' are those that 
are properly chargeable to sales or promotional activities. The 
proposed deductions will be used to compensate General American for its 
increased federal tax burden attributable to the receipt of premiums 
and not for sales or promotional activities. Therefore, the language in 
Section 2(a)(35) further indicates that not treating such deductions as 
sales load is consistent with the policies and provisions of the 1940 
Act.
    9. Finally, Applicants submit that it is probably an historical 
accident that the exclusion of premium tax in subparagraph (c)(4)(v) of 
Rule 6e-3(T) from the definition of ``sales load'' is limited to state 
premium taxes. When Rule 6e-3(T) was adopted and later amended, the 
additional Section 848 tax burden attributable to the receipt of 
premiums did not yet exist.
    10. Applicant's Conditions for DAC Tax Relief: Applicants agree to 
the following conditions:
    (a) General American will monitor the reasonableness of the 1.25% 
DAC Tax Charge;
    (b) The registration statement for any variable life insurance 
contract under which the 1.25% charge is deducted will include: (1) 
disclosure of the charge; (2) disclosure explaining the purpose of the 
charge; and (3) a statement that the charge is reasonable in relation 
to General American's increased federal tax burden under Section 848 of 
the Code; and
    (c) General American also will include as an exhibit to the 
registration statement for any variable life insurance contract under 
which the 1.25% charge is deducted an actuarial opinion as to: (1) the 
reasonableness of the charge in relation to General American's 
increased federal tax burden under Section 848 of the Code; (2) the 
reasonableness of the after-tax rate of return that is used in 
calculating such charge; and (3) the appropriateness of the factors 
taken into account by General American in determining such after-tax 
rate of return.
    11. Request for Class Relief. Applicants also request exemptions to 
deduct the DAC Tax Charge for any Future Account established by General 
American to support Future Contracts, as defined in Rule 6e-3(T)(c)(1). 
Applicants assert that granting exemptive relief to deduct the 1.25% 
DAC Tax Charge from the assets of any Future Account established in 
connection with the issuance of Future Contracts would promote 
competitiveness in the variable life insurance market by eliminating 
the need for General American to file redundant exemptive applications, 
thereby reducing its administrative expenses and maximizing the 
efficient use of its resources. Applicants further represent that the 
delay and expense involved in having repeatedly to seek exemptive 
relief would impair General American's ability effectively to take 
advantage of business opportunities as they arise. Further, any 
additional requests for exemptive relief for such Future Accounts would 
present no issues under the 1940 Act that have not already been 
addressed in this application. Without the requested relief, General 
American would have to [[Page 20301]] obtain exemptions for each Future 
Account with respect to the same issues addressed in this application. 
Thus, investors would receive no benefit or additional protection and 
might be disadvantaged by General American's increased overhead 
expenses.
    12. Applicants submit that, for the reasons stated above, it 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 to deduct a DAC Tax Charge and to exclude it 
from sales load.

B. Waiver of Notice of Withdrawal and Refund Rights

    1. Section 27(e) requires, with respect to any periodic payment 
plan certificate sold subject to Section 27(d), written notification of 
the right to surrender and receive a refund of the excess sales load. 
Section 27(d) requires the refund of any excess sales load paid during 
the first eighteen months after issuance of a periodic payment plan 
certificate. Rule 27e-2 establishes the requirements for the notice 
mandated by Section 27(e) and prescribes Form N-271-1 for that purpose. 
Rule 6e-3(T)(b)(13) modifies the requirements of Section 27 and the 
rules thereunder. Rule 6e-3(T)(b)(13)(vii) adopts Form N-27-1, 
originally intended for application to contractual plans, and requires 
it to be sent to a contract owner upon issuance of the contract and 
again during any lapse period in the first two contract years. The Form 
requires statements of (1) the contract owner's right to a refund of 
the excess sales load for a surrender during the first two contract 
years, (2) the date that the right expires, and (3) the circumstances 
in which the right may not apply upon lapse. Thus, Section 27(e) of the 
1940 Act and Rules 27e-1 and 6e-3(T)(b)(13)(vii), in effect, require a 
notice of right of withdrawal and refund, on Form N-271-1, to be 
provided to owners of the Contracts or Future Contracts (``Contract 
Owners'') entitled to a refund of sales load in excess of the limits 
stated in paragraph (b)(13)(v)(A) of Rule 6e-3(T).
    2. Applicants note that the CDSC may be deducted upon surrender, 
face amount reduction or lapse of the Contract, which does not assess 
any other sales charges. The CDSC does not, during the first two 
Contract years, or during the first two Contract years after the 
increase in face amount, exceed the limits described under paragraph 
(b)(13)(v)(A) of Rule 6e-3(T), beyond which sales charges are 
characterized as ``excess sales charges.'' Thus, Applicants assert that 
no ``excess sales charge'' is ever paid by a Contract Owner 
surrendering, reducing the face amount, or lapsing in the first two 
Contract years, or during the first two Contract years after the 
increase in face amount. Moreover, Applicants state that the Contract 
does not impose an excess sales load upon lapse, thus negating the 
value of a notice being sent during the lapse period.
    3. Rule 27e-1, pursuant to which Form N-271-1 was first prescribed, 
specifies in paragraph (e) that a notice need be mailed when there is 
otherwise no entitlement to receive any refund of sales charges. 
Moreover, Rule 27e-1 and Rule 6e-2, from which Rule 6e-3(T) was 
derived, were adopted in the context of front-end loaded products only 
and in the broader context of the companion requirements in Section 27 
for the depositor or underwriter to maintain segregated funds as 
security to assure the refund of any excess sales charges.
    4. Applicants submit that requiring of a Form N-271-1 could confuse 
Contract Owners or encourage them to surrender during the first two 
Contract years, or surrender or decrease face amount during the first 
two Contract years following a face amount increase, when it may not be 
in their best interests to do so. A Contract Owner with a declining 
contingent deferred sales load, unlike a contract with a front-end 
sales charge, does not foreclose the opportunity, at the end of the 
first two Contract years, to receive a refund of monies spent. Such a 
Contract Owner has not paid any excess sales charge and, as the 
deferred sales charge declines over the life of the Contract, may never 
pay it. Applicants thus assert that encouraging a surrender during the 
first two Contract years could cost such a Contract owner more in total 
sales load, relative to total premium payments, than would otherwise be 
paid if the Contract were held for the long-term period originally 
intended.
    5. Applicants submit that the absence of excess sales charge and, 
therefore, the absence of an obligation to assure repayment of that 
amount, do not create a right in a Contract owner which Form N-271-1 
was designed to highlight. In the absence of this right, the 
notification contemplated by Form N-271-1 is an unnecessary and 
counter-productive administrative burden the cost of which appears 
unjustified. Any other purpose potentially served by Form N-271-1 would 
already be addressed by the required Form N-271-2 Notice of Withdrawal 
Right, generally describing the charges associated with the Contract, 
and prospectus disclosure detailing the sales load design. Neither 
Congress, in enacting Section 27, nor the Commission, in adopting Rule 
27e-1, contemplated the applicability of Form N-271-1 in the context of 
a contract with a declining contingent deferred sales load.

C. Applicants' Conclusion

    For the reasons and upon the facts set forth above, Applicants 
submit that the exemptions requested under Section 6(c) of the 1940 Act 
form: (1) Section 27(c)(2) of the 1940 Act and Rule 6e-3(T)(c)(4)(v) 
thereunder to permit General America to deduct up to 1.25% from premium 
payments as a DAC Tax Charge, and (2) under Section 27(e) of the 1940 
Act and Rules 27e-1 and 6e-3(T)(b)(13)(vii) thereunder to permit the 
elimination of the requirement of written notice to owners of the 
Contract or Future Contracts concerning certain withdrawal and refund 
rights, are appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10132 Filed 4-24-95; 8:45 am]
BILLING CODE 8010-01-M