[Federal Register Volume 60, Number 82 (Friday, April 28, 1995)]
[Notices]
[Pages 21018-21020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10483]



[[Page 21018]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-21025; 812-9198]


Integrity Life Insurance Company, et al.

April 24, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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APPLICANTS: Integrity Life Insurance Company (``Integrity''), National 
Integrity Life Insurance Company (``National Integrity'') (Integrity 
and National Integrity shall be referred to hereinafter as the 
``Companies''), Integrity Life Insurance Company Separate Account III 
(the ``Integrity Separate Account''), National Integrity Life Insurance 
Company Separate Account III (the ``National Integrity Separate 
Account'') (the Integrity Separate Account and the National Integrity 
Separate Account shall be referred to collectively hereinafter as the 
``Separate Accounts''), and Integrity Financial Services (``IFS'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
deduction of a mortality and expense risk charge from the assets of the 
Separate Accounts under certain flexible premium variable annuity 
contracts (the ``Contracts'') and under any materially similar 
contracts offered in the future by such Separate Accounts (the ``Future 
Contracts'') or from the assets of any other separate account 
established by either of the Companies in the future to support 
variable annuity contracts which are materially similar to the 
Contracts, and for which any National Association of Securities 
Dealers, Inc. (``NASD'') member broker-dealer other than IFS--which is 
wholly-owned by the ARM Financial Group, Inc. and registered with the 
Commission under the Securities Exchange Act of 1934--may in the future 
serve as the principal underwriter.

FILING DATES: The application was filed on August 24, 1994, and amended 
on March 31, 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 must be received by the Commission by 5:30 p.m. 
on May 19, 1995, and must be accompanied by proof of service on 
Applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests must 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 Fifth Street NW., Washington, DC 20549. 
Applicants: c/o Jorden Burt & Berenson, 1025 Thomas Jefferson Street 
NW., Suite 400 East, Washington, DC 20007-0805, Attention: Michael 
Berenson, Esq.

FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special 
Counsel, or Patrice M. Pitts, Special Counsel, Office of Insurance 
Products, Division of Investment Management, at (202) 942-0670.

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. Integrity was organized in 1966 as an Arizona stock life 
insurance company and has redomesticated as an Ohio stock life 
insurance company. National Integrity was organized in 1968 as a New 
York stock life insurance company. Each of the Companies is principally 
engaged in offering life insurance policies and annuity contracts. 
National Integrity is a subsidiary of Integrity and both Companies are 
indirectly wholly-owned by The ARM Financial Group, Inc., an insurance 
holding company. The ARM Financial Group, Inc. is a holding company in 
the business of owning and managing life insurance companies that 
specialize in the design, marketing, and management of accumulation 
products.
    2. The Integrity Separate Account is a distinct investment account 
of Integrity, and the National Integrity Separate Account is a distinct 
investment account of National Integrity. Each of the Separate Accounts 
acts as a funding vehicle for the Contracts.
    3. Each Separate Account invests solely in the Schabacker Select 
Fund (the ``Portfolio''), currently the only investment portfolio of 
United Services Insurance Funds (``USIF''), a diversified, open-end 
management investment company that has filed a registration statement 
with the SEC under the 1940 Act. The Portfolio primarily invests in a 
broad range of other open-end and closed-end investment companies 
(``underlying funds''). An investor in the Portfolio may have the 
option of investing directly in the underlying funds, rather than 
indirectly through the Portfolio which will duplicate some operating 
expenses. As a result of this duplication of expenses, an investor not 
only will bear the investor's proportionate share of the expenses of 
the Portfolio, including operation costs and management fees, but also 
will indirectly share in a portion of similar expenses of the 
underlying funds. The shares of the Portfolio are purchased by each 
Company for the Company's Separate Account at net asset value, without 
a sales load.
    4. The board of directors of each of the Companies may, in the 
future, establish additional subaccounts within the same Separate 
Account (``Subaccounts''), which may invest in other portfolios of USIF 
as and when such portfolios are registered, or in other investments. 
Each Company may, in the future, establish other contracts which are 
funded by the Company's Separate Account and which are materially 
similar to the Contracts. In addition, each Company may, in the future, 
establish other separate accounts which issue contracts which are 
materially similar to the Contracts.
    5. IFS, a wholly-owned subsidiary of The ARM Financial Group, Inc. 
which is registered as a broker-dealer under the Securities Exchange 
Act of 1934, is the distributor of the Contracts.
    6. The Contracts are intended to be used in connection with 
retirement plans that qualify for Federal tax advantages and for plans 
that do not so qualify. The Contracts are flexible premium variable 
annuity contracts which provide for an initial contribution and allow 
for additional contributions at any time before the annuity payments 
begin, as long as the annuitant is living and subject to certain 
limitations.
    7. No sales load is deducted from the initial contribution or any 
additional contributions, and there are no sales charges imposed upon 
withdrawals.
    8. The Contracts are subject to an annual maintenance fee of $35 
which will be deducted on the last business day of each Contract year. 
The annual maintenance fee will be waived in any year that the account 
value of the Contract is $50,000 or more on the last business day of 
the Contract year.
    9. Prior to the retirement date, an administrative charge equal to 
0.15% annually of the net asset value of the Separate Account of each 
Company is assessed daily and will be deducted from the accumulation 
unit value of the Contract. The administrative charge is intended to 
cover the Company's ongoing administrative expenses. This charge and 
the annual maintenance fee [[Page 21019]] will not in the aggregate 
exceed the cost of services to be provided over the life of the 
Contract defined in accordance with the applicable standards in Rule 
26a-1 under the 1940 Act. The deductions for the administrative charge 
and annual maintenance fee represent reimbursement for the costs 
expected to be incurred by each Company over the life of the Contract 
for issuing and maintaining each Contract and the Company's Separate 
Account.
    10. The Contract owner will pay premium taxes, where such taxes are 
imposed by state law, and which taxes currently range up to 3.5%. These 
taxes will be deducted from the account value or contributions, as 
incurred by each Company. Any other taxes levied by any government 
entity regarding the Contracts or the Separate Accounts will be paid by 
each of the Companies.
    11. Each Company will impose a charge as compensation for bearing 
certain mortality and expense risks under the Contract. The annual 
charge is assessed daily and is based on the net asset value of each 
Separate Account. The annual mortality and expense risk charge will not 
exceed an effective annual rate of 0.50% of the net asset value of each 
Separate Account, where 0.40% is allocated to the mortality risk and 
0.10% is allocated to the expense risk. Likewise, for Future Contracts, 
the annual mortality and expense risk charge will not exceed an 
effective annual rate of 0.50% of the net asset value of the Separate 
Account attributable to such contracts, where 0.40% is allocated to the 
mortality risk and 0.10% is allocated to the expense risk.
    12. The mortality risk borne by each Company under the Contract 
arises from the Company's obligation to make annuity payments 
regardless of how long an annuitant may live. Each Company also assumes 
mortality risk as a result of death benefits which may be paid under 
the Contract and which guarantee a minimum payment in the event that 
the annuitant dies prior to the annuity date. The expense risk borne by 
each Company under the Contract is the risk that the charges for 
administrative expenses, which charges are guaranteed for the life of 
the Contract, may be insufficient to cover the actual costs of issuing 
and administering the Contract.
    13. If the mortality and expense risk charges deducted are 
insufficient to cover the actual cost of the mortality and expense 
risk, each Company will bear the loss. Conversely, if the mortality and 
expense risk charges deducted exceed the costs, the excess will be 
added to each Company's surplus and will be used for any lawful 
purpose, including any shortfalls on the costs of distributing the 
Contracts.\1\

    \1\Applicants represent that, during the notice period, the 
application will be amended to reflect this representation.
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Applicants' Legal Analysis and Conditions

    1. 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.
    2. Sections 26(a)(2) and 27(c)(2) of the 1940 Act, in pertinent 
part, prohibit a registered unit investment trust, and any depositor or 
underwriter thereof, from selling periodic payment plan certificates 
unless the proceeds of all payments are deposited with a qualified 
trustee or custodian and are held under arrangements which prohibit any 
payment to the depositor or principal underwriter except for a fee, not 
exceeding such reasonable amounts as the Commission may prescribe, for 
performing bookkeeping and other administrative services.
    3. Applicants request an order under Section 6(e) exempting them 
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent 
necessary to permit the deduction of a mortality and expense risk 
charge from the assets of the Separate Account funding the Contracts 
and Future Contracts. Applicants also request that the order permit the 
deduction of a mortality and expense risk charge from the assets of any 
other separate account established by either of the Companies in the 
future to support variable annuity contracts which are materially 
similar to the Contracts, and for which any NASD member broker-dealer 
other than IFS may in the future serve as the principal underwriter. 
Any such future principal underwriter will be wholly-owned, directly or 
indirectly, by the ARM Financial Group, Inc., and be registered with 
the Commission under the Securities Exchange Act of 1934.
    4. Applicants submit that the requested relief is appropriate in 
the public interest because such an order would promote competitiveness 
in the variable annuity contract market by eliminating the need for the 
Companies to file redundant exemptive applications, which reduces each 
Company's resources. Applicants further submit that investors would not 
receive any benefit or additional protection by the Company being 
required repeatedly to seek exemptive relief regarding the same issues 
addressed in this application.
    5. Applicants represent that the mortality and expense risk charges 
under the Contracts are within the range of industry practice for 
comparable variable annuity contracts. Applicants base this 
representation on their review of publicly available information 
regarding the aggregate level of the mortality and expense risk charges 
under variable annuity contracts currently being offered in the 
insurance industry which are comparable to the Contracts. In this 
regard, Applicants have taken into consideration such factors as 
current charge levels, the manner in which charges are imposed, the 
presence of charge-level or annuity-rate guarantees, and the markets in 
which the Contracts will be offered. Applicants will maintain and make 
available to the Commission upon request a memorandum setting forth in 
detail the products analyzed in the course of, and the methodology and 
results of, the comparative survey.
    6. Similarly, prior to making available any Future Contracts and 
prior to making available any materially similar contracts through 
other separate accounts established by either of the Companies in the 
future, Applicants will represent that the mortality and expense risk 
charges under any such contracts will be within the range of industry 
practice for comparable contracts. Applicants will maintain and make 
available to the Commission upon request a memorandum setting forth in 
detail the products analyzed in the course of, and the methodology and 
results of, the comparative survey.
    7. The Contracts do not provide for a sales charge to cover the 
costs incurred in distributing the Contracts, and there are no sales 
charges imposed upon surrender or partial withdrawal of a Contract. 
Applicants represent that the costs related to the distribution of the 
Contracts will be paid from the assets of the general account of the 
Company, which amounts will be derived in part from gains from 
operations regarding the Contracts and from the mortality and expense 
risk charge. Each Company has concluded that there is a reasonable 
likelihood that the distribution financing arrangement being used in 
connection with the Contracts and the Future Contracts will benefit the 
Company's Separate Account and the Contract owners. The Companies will 
maintain and make available to the Commission upon request a 
[[Page 21020]] memorandum setting forth the basis for this 
representation.
    8. Applicants further represent that each Separate Account, and 
other separate accounts established in the future, will invest only in 
underlying funds which have undertaken to have a board of directors/
trustees, a majority of whom are not interested persons of any such 
funds, formulate and approve any plan under Rule 12b-1 under the 1940 
Act to finance distribution expenses.

Applicants' Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policies and provisions of the 1940 
Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10483 Filed 4-27-95; 8:45 am]
BILLING CODE 8010-01-M