[Federal Register Volume 60, Number 106 (Friday, June 2, 1995)]
[Notices]
[Pages 28823-28825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13467]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21097; 812-9464]


Security Equity Life Insurance Company, et al.

May 25, 1995.
agency: Securities and Exchange Commission (``SEC'').

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

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applicants: Security Equity Life Insurance Company (``Security 
Equity''), Security Equity Separate Accounts 26 and 27 (the ``Separate 
Accounts''), and G.T. Global Financial Services, Inc. (``G.T. 
Global'').

relevant act sections: Order requested under section 6(c) of the Act 
that would exempt applicants from sections 26(a)(2)(C) and 27(c)(2) of 
the Act.

summary of application: Appliants request an order to permit Security 
Equity to deduct a mortality and expense risk charge from the assets of 
the Separate Accounts in connection with the offering of certain 
flexible premium variable deferred annuity contracts (the 
``Contracts'').

filing date: The application was filed on February 2, 1995. Applicants 
have agreed to file an amendment, the substance of which is 
incorporated herein, during the notice period.

hearing or notification of hearing: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on June 19, 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 SEC's Secretary.

addresses: Secretary, SEC, 450 5th Street NW., Washington, D.C. 20549. 
Applicants, c/o Juanita M. Thomas, Esq., Assistant Counsel, Security 
Equity Life Insurance Company, 700 Market Street, St. Louis, Missouri 
63101; c/o Peter R. Guarine, Esq., G.T. Global Financial Services, 
Inc., 50 California Street, San Francisco, California 94111.

for further information contact: James M. Curtis, Senior Counsel, at 
(202) 942-0563, or Robert A. Robertson, Branch Chief, (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

supplementary information: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Security Equity is a stock life insurance company incorporated 
under the laws of New York and is licensed to do business in thirty-
eight states and the District of Columbia.
    2. The Separate Accounts were established by Security Equity as 
separate accounts under the laws of the State of New York, and each has 
been registered with the SEC under the Act as a unit investment trust. 
A registration statements has been filed under the Securities Act of 
1933 in connection with the Contracts. Each of the Separate Accounts is 
divided into divisions (``Divisions''), each of which will invest 
solely in the shares of one of the series of G.T. Global Variable 
Investment Series or G.T. Global Variable Investment Trust (a 
``Fund''), or in other similar funds available under the Contracts. 
Each Fund is a registered open-end management investment company.
    3. G.T. Global will serve as the distributor and principal 
underwriter of the Contracts. G.T. Global is registered under the 
Securities Exchange Act of 1934 as a broker-dealer and is a member of 
the National Association of Securities Dealers, Inc.
    4. The Contract is a variable flexible premium annuity contract 
designed for use as a non-qualified retirement vehicle and as an 
Individual Retirement Annuity. The Contract may be purchased with a 
minimum initial purchase payment of $2,000. Subsequent purchase 
payments must be at least $100. The Contract owner may allocated 
purchase payments among one or more Divisions of the Separate Accounts.
    5. In the event that an annuitant who is not a Contract owner dies 
prior to the annuity date and before a Contract owner, a death benefit 
is payble upon receipt of due proof that the annuitant died prior to 
the annuity date and before a Contract owner. The death benefit during 
the first six contract years is equal to the greater of the accumulated 
[[Page 28824]] value on the date of receipt of due proof of death and a 
written request for payment or the sum of all net purchase payments 
made, less partial withdrawals (including applicable charges). The 
death benefit during any subsequent six contract year period is the 
greater of accumulated value on the date of receipt of due proof of 
death and a written request for payment or the death benefit on the 
last day of the previous six contract year period plus any net purchase 
payments made less any partial withdrawals (including applicable 
charges). Notwithstanding the foregoing, if the issue date is on or 
after the annuitant's 75th birthday, the death benefit is the 
accumulated value on the date due proof of death and a written request 
for payment are received. in each case, except for Contracts with 
accumulated values of $20,000 or more, the death benefit is reduced by 
an account fee and applicable special handling fees.
    6. In the event that a Contract owner dies prior to the annuity 
date and his or her surviving spouse is not the beneficiary or 
annuitant, the beneficiary (or the beneficiary's estate) is entitled to 
receive a death benefit equal to the amount described in the preceding 
paragraph. In the event that the Contract owner dies prior to the 
annuity date and his or her surviving spouse is the annuitant or 
beneficiary, the spouse may elect to become the new owner.
    7. Security Equity will deduct an annual account administration fee 
(the ``Account Fee'') on accumulated values of less than $20,000. 
Revenues from the Account Fee will partially compensate Security Equity 
for the cost of providing administrative services relating to the issue 
and maintenance of the Contract and the Contract owner's records. The 
Account Fee will be deducted from the accumulated value of a Contract 
on each contract anniversary prior to the annuity date and upon full 
surrender of the Contract or upon the annuity date if other than a 
contract anniversary. In contract years ending prior to December 31, 
1999, the Account Fee is the lesser of $30 or 2% of the Accumulated 
Value. Thereafter, the Account Fee may be changed annually but will not 
exceed an amount that reflects the change in the Consumer Price Index 
since December 31, 1992 or $50.00. This fee will be deducted from the 
money market Division or from the Division having the largest portion 
of accumulated value under the Contract if no money market Division 
investment exists on the contract anniversary. After the annuity date, 
the Account Fee will be deducted in equal amounts from each variable 
annuity payment throughout the year. No Account Fee is deducted in 
connection with fixed annuity payments.
    8. Security Equity also will deduct a daily administration fee, 
equal to an annual rate of .15% of the average daily net assets of each 
Division. This charge is designed to reimburse Security Equity for 
those administrative expenses attributable to the Contracts, contract 
owner accounts and records, and the Separate Accounts which exceed the 
revenues received from the account fee. The administration fee is 
guaranteed not to increase for the life of the Contracts.
    9. Transfers of accumulated values under the Contracts may be made 
among the Divisions. Security Equity reserves the right to charge $25 
for each transfer in excess of twelve transfers in any contract year.
    10. Applicants represent that this charge will be deducted in 
reliance on rule 26a-1 under the Act and that the fee applicable during 
contract years ending prior to December 31, 1999 represents 
reimbursement only for administrative costs expected to be incurred 
over these contract years and the fee applicable in any contract year 
thereafter represents reimbursement only for administrative costs 
expected to be incurred over that year. Security Equity does not 
anticipate making any profit from this charge.
    11. Security Equity may assess a contingent deferred sales charge 
surrender charge (``Surrender Charge'') if any part of a Contract 
owner's accumulated value is withdrawn or if the Contract is 
surrendered. This Surrender Charge, calculated as a percentage of any 
net purchase payment, will apply to net purchase payments for seven 
years from the date the net purchase payment is received. Net purchase 
payments received more than seven years prior to the date of withdrawal 
and accumulated value in excess of accumulated net purchase payments 
(less withdrawals of net purchase payments) may be withdrawn without 
incurring a Surrender Charge. The Surrender Charge ranges from 7% to 1% 
of a net purchase payment. Notwithstanding the Surrender Charge, an 
amount equal to 10% of a Contract's accumulated value may be withdrawn 
each year (calculated as of the date of the first such withdrawal in 
that year) without incurring the Surrender Charge. The Surrender Charge 
will apply for seven complete years measured from the date a net 
purchase payment is received, according to the following schedule:

------------------------------------------------------------------------
                                                               Surrender
         Years since receipt of net purchase payment            charge  
                                                              percentage
------------------------------------------------------------------------
0...........................................................          7 
1...........................................................          6 
2...........................................................          5 
3...........................................................          4 
4...........................................................          3 
5...........................................................          2 
6...........................................................          1 
7+..........................................................          0 
------------------------------------------------------------------------

    For purposes of computing the Surrender Charge, after the 10% 
amount described above has been withdrawn for any year, net purchase 
payments are considered to be withdrawn on a first-in-first-out basis, 
and net purchase payments are considered to be withdrawn before 
earnings thereon. If, after the 10% of accumulated value has been 
withdrawn, the Contract's accumulated value is less than the sum of net 
purchase payments (less prior withdrawals of net purchase payments) the 
Surrender Charge will be assessed on accumulated value. A Surrender 
Charge is not imposed in the event of annuitization with Security 
Equity after three Contract years, or on the death of the annuitant.
    12. Security Equity does not anticipate that Surrender Charge 
revenues from the Contracts will generate sufficient funds to pay the 
cost of distributing the Contracts. If Surrender Charge revenues are 
insufficient to cover distribution expenses, the deficiency will be met 
with amounts from Security Equity's general account, which may include 
amounts derived from the mortality and expense risk charge.
    13. Security Equity may incur premium taxes relating to the 
Contracts. Security Equity may deduct any premium taxes related to a 
particular Contract upon receipt of payment, surrender, withdrawal, 
annuitization, or payment of death benefits.
    14. Security Equity proposes to impose a daily charge to compensate 
it for bearing certain mortality and expense risks in connection with 
the Contracts. This charge will be at an annual rate of 1.25% of the 
average daily net assets in the Separate Accounts. Of that amount, 
approximately 1.00% is attributable to mortality risks, and 
approximately 0.25% is attributable to expense risks. Security Equity 
guarantees that this charge will never exceed 1.25%.
    15. The mortality risk that Security Equity assumes is that 
annuitants may live for a longer period of time than estimated when the 
guarantees in the [[Page 28825]] Contract wre established. Because of 
these guarantees, each Contract owner is assured that longevity will 
not have an adverse effect on the annuity payments received. The 
mortality risk that Security Equity assumes also includes a guarantee 
to pay a death benefit. The expense risk that Security Equity assumes 
is the risk that the account fee and the daily administration fee will 
be insufficient to cover actual future administrative expenses.
    16. If the mortality and expense risk charge is insufficient to 
cover actual costs and assumed risks, the loss will fall on Security 
Equity. Conversely, if the charge is more than sufficient to cover such 
costs and risks, any excess will be profit to Security Equity. Security 
Equity currently anticipates a profit from this charge.

Applicants' Legal Analysis

    1. Applicants request an exemption under section 6(c) of the Act 
from sections 26(a)(2)(C) and 27(c)(2) of the Act to permit the 
deduction of a mortality and expense risk charge from the assets of the 
Separate Account under the Contracts.
    2. Section 26(a)(2)(C) provides that no payment to the depositor 
of, or principal underwriter for, a registered unit investment trust 
shall be allowed the trustee or custodian as an expense except 
compensation, not exceeding such reasonable amount as the SEC may 
prescribe, for performing bookkeeping and other administrative duties 
normally performed by the trustee or custodian. Section 27(c)(2) 
prohibits a registered investment company, or a depositor or 
underwriter for such company, from selling periodic payment plan 
certificates unless the proceeds of all payments on such certificates, 
other than sales loads, are deposited with a trustee or custodian 
having the qualifications prescribed in Section 26(a)(1), and held by 
such trustee or custodian under an agreement containing substantially 
the provisions required by Sections 26(a)(2) and 26(a)(3) of the Act. 
Security Equity's deduction of a mortality and expense risk charge from 
the assets of the Separate Accounts may be deemed to be a payment 
prohibited by sections 26(a)(2)(c) and 27(c)(2).
    3. Section 6(c) authorizes the SEC to exempt any person, security 
or transaction, or any class or classes of persons, securities or 
transactions from the provisions of the Act and the rules promulgated 
thereunder if and to the extent that such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    4. Applicants believe that Security Equity is entitled to 
reasonable compensation for its assumption of mortality and expense 
risks. Applicants represent that the 1.25% mortality and expense risk 
charge under the Contracts is consistent with the protection of 
investors because it is a reasonable and proper insurance charge. In 
return for this amount, Security Equity guarantees certain annuity 
rates and assumes certain risks in the Contracts. The mortality and 
expense risk charge is a reasonable charge to compensate Security 
Equity for the risk that annuitants under the Contracts will live 
longer than has been anticipated in setting the annuity rates 
guaranteed in the Contracts; for the risk that the accumulated value 
under a Contract, less any otherwise applicable charges, will be less 
than the death benefit; and for the risk that administrative expenses 
will be greater than amounts derived from the account and 
administrative fees and other administrative charges.
    5. Security Equity represents that the 1.25% charge for mortality 
and expense risks assumed by Security Equity is within the range of 
industry practice with respect to comparable annuity products. This 
representation is based upon Security Equity'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. Security Equity 
will maintain at its home office or at General American Life Insurance 
Company, available to the SEC, a memorandum setting forth in detail the 
products analyzed in the course of, and the methodology and results of, 
its comparative survey.
    6. Applicants acknowledge that if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be viewed by the SEC as being offset by distribution expenses not 
reimbursed by revenues from the Surrender Charge. Security Equity has 
concluded that there is a reasonable likelihood that the proposed 
distribution financing arrangements will benefit the separate Accounts 
and the Contract owners. The basis for such conclusion is set forth in 
a memorandum which will be maintained by Security Equity at its home 
office or by its service provider, General American Life Insurance 
Company, at its National Service Center and will be available to the 
SEC.
    7. Security Equity also represents that the Separate Accounts will 
only invest in management investment companies which undertake, in the 
event such company adopts a plan under rule 12b-1 of the Act to finance 
distribution expenses, to have a board of directors, a majority of whom 
are not interested persons of the company, formulate and approve any 
such plan under rule 12b-1.

Conclusion

    For the reasons set forth above, applicants believe that the 
requested 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 Act.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13467 Filed 6-1-95; 8:45 am]
BILLING CODE 8010-01-M