[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
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0........................................................... 7
1........................................................... 6
2........................................................... 5
3........................................................... 4
4........................................................... 3
5........................................................... 2
6........................................................... 1
7+.......................................................... 0
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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