[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30137-30148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13893]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21104; No. 812-9200]


The Guardian Insurance & Annuity Company, Inc., et al.

May 31, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: The Guardian Insurance & Annuity Company, Inc. 
(``Guardian''), The Guardian Separate Account K (``Separate Account'') 
and Guardian Investor Services Corporation (``Guardian Services'').

RELEVANT 1940 ACT SECTIONS Order requested under Section 6(c) granting 
exemptions from the provisions of Sections 2(a)(32), 2(a)(35), 22(c), 
26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2), 27(d), and 27(e) of 
the 1940 Act, and paragraphs (b)(1), (b)(12), (b)(13)(i), (b)(13)(iii), 
(b)(13)(iv), (b)(13)(v), (b)(13)(vii), (c)(1), (c)(4) of Rule 6e-2, and 
Rules 6e-3(T)(c)(4)(v), 22c-1 and 27e-1 thereunder.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
them to offer and sell certain variable whole life insurance contracts 
with modified scheduled premiums (``Contracts'') that provide for: (1) 
A death benefit that may or may not vary based on investment 
experience; (2) a sales charge deducted from premium payments and as a 
contingent deferred sales charge; (3) a contingent deferred 
administrative charge; (4) deduction from Account Value for cost of 
insurance charges, guaranteed insurance amount charges, substandard 
mortality risks and incidental insurance benefits, including 
[[Page 30138]] a Premium Skip Option; (5) values and charges based on 
the 1980 Commissioners' Standard Ordinary Mortality Tables (``1980 CSO 
Tables''); (6) the holding of underlying fund shares by the Separate 
Account without the use of a trustee under an open account arrangement 
and without trust indenture; and (7) a waiver of notice of refund and 
withdrawal rights. Applicants also request exemptive relief to deduct a 
charge from premium payments received under the Contracts, and from 
premiums received under certain single premium, scheduled premium and 
flexible premium variable life insurance contracts (``Other 
Contracts'') to be issued by Guardian through the Separate Account or 
any other separate account established by Guardian (``Future 
Accounts''), to compensate Guardian for its increased federal tax 
burden resulting from the receipt of such premiums.\1\

    \1\Applicants represent that the application will be amended 
during the notice period to delete Future Accounts as applicants and 
to request that exemptive relief to deduct such a charge be extended 
to Future Accounts in connection with the offering of Other 
Contracts.
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FILING DATE: The application was filed on August 29, 1994 and amended 
on May 4, 1995. Applicants have represented that the application will 
be amended during the notice period to reflect certain representations 
made herein.

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 June 26, 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: Richard T. Potter, 
Esq., The Guardian Insurance & Annuity Company, Inc., 201 Park Avenue, 
South, New York, New York 10003.

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. Guardian is a stock life insurance company and a wholly-owned 
subsidiary of The Guardian Life Insurance Company of America. Guardian 
is authorized to conduct a life insurance business in all 50 States and 
the District of Columbia.
    2. The Separate Account is registered as a unit investment trust 
(``UIT) under the 1940 Act and interests in the Contracts are 
registered under the Securities Act of 1933 (``1933 Act''). Future 
Accounts will be registered under the 1940 Act as UITs. The Separate 
Account and the Future Accounts will be used to support the Contracts 
or the Other Contracts.
    The Separate Account currently consists of six investment divisions 
(``Investment Divisions''), each investing in a corresponding fund 
registered under the 1940 Act as a diversified open-end management 
company (``Fund'' or collectively, ``Funds''). The Funds serve as 
underlying funding vehicles for the Contracts. Each Fund is managed by 
a registered investment adviser. Additional Investment Divisions may be 
established in the future and may invest in the Funds or in other 
underlying investment vehicles.
    3. Guardian Services, the principal underwriter for the Contracts, 
is a registered broker-dealer under the Securities Exchange Act of 1934 
and a member of the National Association of Securities Dealers, Inc.
    4. Under the Contracts, premiums may be paid on a scheduled or an 
unscheduled basis (collectively, ``Premium Payments''), subject to 
certain exceptions and conditions. Each Premium Payment is subject to 
``Premium Assessments'' which are paid in connection with a Contract 
issued on a substandard basis and for supplemental insurance benefits 
provided by rider or endorsement. If, however, the ``Premium Skip 
Option'' is elected,\2\ 90.5% of Premium Assessment otherwise payable 
from Premium Payments is deducted from Account Value. The remaining 
Premium Payment (``Basic Scheduled Premium'')\3\ is used to purchase 
base Contract coverage and is reduced by certain Premium Charges, 
discussed below.\4\

    \2\A Premium Skip Option permits the Contract owner, after the 
first Contract Year, to skip annual Premium Payments without the 
Contract lapsing, subject to certain conditions.
    \3\The Basic Scheduled Premium initially is calculated at the 
issuance of the Contract and thereafter on each subsequent date that 
a Contract premium is due until the later of: (a) the Contract 
Anniversary nearest the insured's 70th birthday; or (b) the 10th 
Contract Anniversary (``Guaranteed Premium Period''). After the 
Guaranteed Premium Period, the Basic Scheduled Premium will be 
reviewed on each ``Contract Review Date'' (the monthly date prior to 
each Contract anniversary). If on that date the Account Value is: 
(a) less than the ``Benchmark Value,'' then the Basic Scheduled 
Premium will be increased to no more than the ``maximum'' amount set 
forth in the Contract; or (b) higher than the Benchmark Value, then 
the Basic Scheduled Premium could be reduced to no less than the 
Basic Scheduled Premium payable during the Guaranteed Premium 
Period.
    The Benchmark Value approximately equals the Account Value 
needed on a Contract Anniversary for the Contract to endow at age 
100 for the Face Amount, assuming (a) all Basic Scheduled Premiums 
are paid when due and do not increase after the Guaranteed Premium 
Period due to re-determination on a Review Date; (b) no unscheduled 
payments, partial withdrawals, reductions in Face Amount, or loans 
have been or will be made; (c) a level net annual rate of return on 
Account Value of 4%; and (d) deduction on each Monthly Date of the 
maximum Contract Charge, Administrative Charge, Guaranteed Insurance 
Amount and Cost of Insurance Charges.
    \4\The portion of a Premium Payment that consists of Premium 
Assessments is not subject to Premium Charges.
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    Each unscheduled Premium Payment also is subject to deduction of 
Premium Charges, including the remaining 9.5% of Premium Assessment 
otherwise payable from Premium Payments if the Premium Skip Option is 
in effect. Thus, Premium Assessments usually are deducted from Premium 
Payments before sales load and other charges against Premiums are 
imposed. Premium Assessments deducted from Account Value (under the 
Premium Skip Option), in effect, are deductions from amounts previously 
subject to Premium Charges (which are equal to a total of 9.5% of 
Premiums until the cumulative total of Basic Scheduled Premiums and 
unscheduled Premium Payments is an amount equal to twelve Basic 
Scheduled Premiums). Accordingly, a discounting of Premium Assessments 
deducted from Account Value reflects the fact that the deductions are 
being made from post-premium charge amounts. Net Premiums are credited 
to Account Value and allocated to the Investment Divisions, or to the 
Fix-Rate Option, as specified by the Contract owner.
    5. Two Death Benefit Options are available: (1) ``Option 1 Death 
Benefit,'' equal to the Face Amount of a Contract until the Contract 
Anniversary nearest the insured's 100th birthday; and (2) ``Option 2 
Death Benefit,'' equal to the Face Amount of a Contract plus the excess 
of Account Value on the date of death over a Contract's ``Benchmark 
Value'' for the applicable Contract Year, adjusted to the date of death 
until the Anniversary nearest the insured's 100th birthday. Under 
either Option, Death Benefits are guaranteed not to be less then a 
Contract's then-current Face Amount as long as Premium Payments are 
made, or excused, and there is no outstanding Contract Debt. If, 
however, a greater Death Benefit would be provided under either one of 
two ``Alternative Death Benefits,'' (a) the minimum death benefit 
required under Section 7702 of the Code, or (b) the variable insurance 
amount, then the greater Alternative Death Benefit will be paid. Thus, 
the Death Benefit under either Option 1 or Option 2 varies with 
investment experience when the Account Value is sufficiently large 
that: (a) the Death Benefit is increased in order for a Contract to 
qualify as life insurance for federal tax law purposes; or if greater, 
(b) the Death Benefit is increased to the variable insurance amount. 
This may occur because of favorable investment experience, unscheduled 
Premium Payments, imposition of lower than guaranteed charges, or a 
combination of these factors.
    6. Various fees and expenses are deducted from Premium Payments 
under the Contracts:
    a. Premium Charges: The following charges are deducted from each 
Premium Payment:
    (1) Sales Charge: A Premium Sales Charge equal to 6.0% of all 
Premium Payments until the cumulative total of all such Payments is 
equal to twelve Basic Scheduled Premiums; thereafter, the charge will 
be equal to 3.0% of all such payments.
    (2) Premium Tax Charge: A State Premium Tax Charge of 2.5% which is 
an approximate average of the rates Guardian expects to pay in all 
states over the lifetime of the insureds covered by the Contracts. 
Guardian reserves the right to increase if its premium taxes increase 
due to a change in state law.
    (3) Federal Premium Tax Burden Charge: A charge of 1.0% to 
compensate Guardian for an increase in its federal income tax burden 
resulting from the application of Section 848 of the Internal Revenue 
Code of 1986 (``Code''), as amended by the Omnibus Budget 
Reconciliation Act of 1990 (``OBRA'').
    (4) Processing Charge: Guardian reserves the right to impose a 
maximum charge of $2.00 from each unscheduled Premium Payment received 
for processing costs, including recordkeeping. Guardian does not expect 
a profit from this fee, if imposed.
    b. Transaction Charges: The following charges are deducted 
proportionately from Account Value attributable to the Investment 
Divisions until the Account value is depleted, and then from the Fixed-
Rate Option:
    (1) Surrender Charge: A Contingent Deferred Sales Charge (``CDSC'') 
and a Contingent Deferred Administrative Charge (``CDAC'') are deducted 
during the first 12 Contract Years upon withdrawal, surrender, 
reduction in Face Amount, or lapse.
    (A) CDSC:\5\ For an insured age 78 or less, the lesser of (i) 36% 
of the annual Basic Scheduled Premium payable for the first Contract 
Year, less the sum of 3% of all Basic Scheduled Premiums and 
unscheduled Premium Payments actually paid under the Contract up to the 
date that the Surrender Charge is incurred and any deferred sales 
charges deducted for prior Face Amount reductions; or (ii) a percentage 
of the then payable annual Basic Scheduled Premium specified in the 
following chart for the Contract Year during which the Surrender Charge 
is applied: [[Page 30139]] 

    \5\The total sales charge (Premium Sales Charge and CDSC) is 
subject to a maximum of 9% of Basic Scheduled Premiums paid under 
the Contract over the shorter of 20 years or the insured's 
anticipated life expectancy.

------------------------------------------------------------------------
                      Contract year\6\                        Percentage
------------------------------------------------------------------------
1..........................................................           36
2..........................................................           33
3..........................................................           30
4..........................................................           27
5..........................................................           24
6..........................................................           21
7..........................................................           18
8..........................................................           15
9..........................................................           12
10.........................................................            9
11.........................................................            6
12.........................................................            3
13+........................................................            0
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    \6\In order to preclude the possibility that Guardian would be 
required to refund any sales load, the Contracts provide that the 
CDSC imposed during the first two Contract Years will be no greater 
than the sum of: 24% of payments made during the first Contract Year 
up to an amount equal to an annual Basic Scheduled Premium; plus 4% 
of payments made during the second Contract Year up to an amount 
equal to an annual Basic Scheduled Premium; plus 3% of all 
unscheduled payments made during the first two Contract Years.
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    (B) CDAC: The CDAC compensates Guardian for certain administrative 
expenses as follows (per $1,000 Base Contract Face Amount), subject to 
certain decreases associated with a reduction in Face Amount:

                                                             Administrative Surrender Charge                                                            
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                   Year (ages)                       1       2       3       4       5       6       7       8       9      10      11      12      13+ 
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00-27...........................................     2.4    2.20     2.0    1.80     1.6    1.40     1.2    1.00     0.8    0.60     0.4    0.20     .00
28-29...........................................     3.0    2.75     2.5    2.25     2.0    1.75     1.5    1.25     1.0    0.75     0.5    0.25     .00
30-31...........................................     3.6    3.30     3.0    2.70     2.4    2.10     1.8    1.50     1.2    0.90     0.6    0.30     .00
32-33...........................................     4.2    3.85     3.5    3.15     2.8    2.45     2.1    1.75     1.4    1.05     0.7    0.35     .00
34-80...........................................     4.8   14.40     4.0    3.60     3.2    2.80     2.4    2.00     1.6    1.20     0.8    0.40     .00
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    (2) Partial Withdrawal Administration Charge: The lesser of $25 or 
2% of the amount withdrawn for certain administrative costs. Guardian 
does not expect to profit from this charge.
    (3) Transfer Charge: Guardian reserves the right to deduct $25 for 
each transfer in excess of four transfers during a Contract Year. No 
transfer charge will be imposed in connection with dollar cost 
averaging feature or loans. Guardian does not expect to profit from 
this charge.
    (4) Premium Skip Option Charge: An amount equal to 90.5% of any 
Premium Assessment that otherwise would be deducted from an annual 
Premium will be deducted on each Contract Anniversary on which the 
``skipped'' Premium otherwise would be due or, if later, on the date 
the Premium Skip Option is effected. The remaining 9.5% is deducted as 
part of the Premium Charges for any unscheduled Premium Payment.
    c. Monthly Deductions: The following charges are deducted monthly 
proportionately from Account Value attributable to each Investment 
Division and the Fixed-Rate Option, ending on [[Page 30140]] the 
Contract Anniversary nearest the insured's 100th birthday:
    (1) Contract Charge and Administration Charge: The Contract charge 
is equal to $10 per month during Contract Years 1 through 3, and $4 per 
month thereafter (guaranteed not to exceed $8 per month). The 
Administrative Charge is equal to $0.02 to $0.04 (increasing with issue 
age) per $1,000 of Face Amount during the first 12 Contract Years, and 
$0.015 per $1,000 of Face Amount thereafter, for underwriting, issuing 
and maintaining the Contract. Guardian does not expect to profit from 
these charges.\7\

    \7\Applicants represent that each of these fees is reasonable, 
and in an amount that does not exceed the expenses to which such 
charge relates that are currently anticipated to be incurred over 
the lifetime of the Contracts. The maximum amount of each of these 
fees or charges is guaranteed not to increase during the term of the 
Contract. Guardian does not anticipate realizing a profit from these 
charges.
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    (2) Guaranteed Insurance Amount Charge: $0.01 per $1,000 of Face 
Amount to compensate Guardian for the risk it assumes by guaranteeing 
that a Contract will remain in force if all premiums have been paid 
when due and no loans have been taken, regardless of the investment 
experience of the Investment Division; and
    (3) Cost of Insurance Charge: A charge, based on the 1980 CSO 
Tables (discounted at the monthly equivalent of 4% per year), is 
deducted and calculated by multiplying the net amount at risk on a 
Monthly Date (amount by which the Death Benefit on the first day of the 
Contract month exceeds the Account Value on the same day, after monthly 
deductions for contract and administration charges and the Guaranteed 
Insurance Amount charge have been processed) by the applicable monthly 
cost of insurance rate, divided by $1,000.
    d. Separate Account Charges: Each Investment Division currently is 
assessed a charge for mortality and expense risks that Guardian 
assumes, at a current effective annual rate of .60% of the value of its 
assets. Guardian reserves the right to increase the mortality and 
expense risk charge up to a maximum effective annual rate of .90%, 
subject to further Commission authorization. Guardian assumes a 
mortality risk under the Contracts that insured may live for shorter 
periods of time than estimated, and assumes an expense risk that its 
actual costs of issuing and administering the Contracts may be more 
than it estimated. No charge currently is deducted from Separate 
Account assets for income taxes attributable to the Separate Account or 
the Contracts. Guardian reserves the right to impose such charges if 
the income tax treatment of variable life insurance changes, or if 
there is a change in Guardian's tax status.
    e. Fund Expenses: Charges for investment advisory and other 
expenses incurred by the Funds are deducted from assets of the relevant 
Fund and are indirectly borne by Contract owners.

Applicants' Legal Analysis

    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. For the reasons 
stated below, Applicants assert that the requested exemptions satisfy 
the standards of Section 6(c).

A. Request for Exemptions Relating to Definition of ``Variable Life 
Insurance Contract''

    1. Applicants note that Rule 6c-3 under the 1940 Act provides that 
a separate account that meets the requirements of Rule 6e-2(a)\8\ and 
registers as an investment company under the 1940 Act also is exempt 
from the 1940 Act provisions set forth in Rule 6e-2(b), except for 
Sections 7 and 8(a), under the same terms and conditions as a separate 
account claiming exemption directly under Rule 6e-2.\9\ Applicants 
state that the Separate Account satisfies the conditions of Rule 6e-
2(a) and, therefore, is entitled to rely on Rule 6e-3. Accordingly, the 
Separate Account is exempt from the provisions of the 1940 Act 
specified in paragraph (b) of Rule 6e-2, except for Sections 7 and 8(a) 
of the 1940 Act, under the same terms and conditions as a separate 
account claiming exemption under Rule 6e-2.

    \8\Rule 6e-2(a) states that ``a separate account * * * shall, 
except for the exemptions provided in paragraph (b) [of Rule 6e-2], 
be subject to all provisions of [the 19040 Act] * * * as though such 
separate account were a registered investment company issuing 
periodic payment plan certificates,'' provided that the conditions 
set forth in Rule 6e-2(a) are met. Thus, Rule 6e-2(a) contemplates 
that a variable life separate account relying on Rule 6e-2 will not 
be registered under the 1940 Act.
    \9\Accordingly, all registered separate accounts issuing 
variable life insurance products do so in reliance on Rule 6c-3, and 
not directly in reliance on Rules 6e-2 or 6e-3(T), as applicable. 
Applicants represent that the application will be amended during the 
notice period to reflect these statements.
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    Rule 6e-2(c)(1) defines a ``variable life insurance contract'' to 
include only life insurance contracts that provide both a death benefit 
and a cash surrender value which vary to reflect the investment 
experience of the separate account, and that guarantee that the death 
benefit will not be less than an initial dollar amount stated in a 
contract. The required guaranteed minimum death benefit need be 
provided only so long as payments are duly made in accordance with the 
contract's terms.
    2. Applicants submit that under the Contracts the Death Benefit 
varies to reflect investment experience within the meaning of Rule 6e-
2(c)(1). Applicants concede, however, that the Death Benefit is not 
precisely the type of variable death benefit contemplated when Rule 6e-
2 was adopted, and that the Contracts also contain other provisions 
that are not specifically addressed in Rule 6e-2.
    3. Applicants believe that Option 2 Death Benefit falls within the 
requirement that it ``vary to reflect the investment experience of the 
separate account,'' although it varies only when Account Value exceeds 
Benchmark Value. Applicants submit that this situation is analogous to 
more conventional scheduled premium variable life insurance contracts 
where death benefits are increased when investment experience exceeds 
an assumed investment rate. Applicants assert that Rule 6e-2(c)(1) 
clearly contemplates that a death benefit would vary only if it exceeds 
a guaranteed minimum death benefit.
    4. Applicants state, however, that Option 1 will fail to satisfy 
this requirement if the Death Benefit has not been otherwise increased 
to provide the minimum death benefit required by Section 7702 of the 
Code of the variable insurance amount.
    5. Applicants request exemptions from the definition of ``variable 
life insurance contract'' in Rule 6e-2(c)(1) and from all Sections of 
the 1940 Act and rules thereunder specified in Rule 6e-2(b) (other than 
Sections 7 and 8(a)), under the same terms and conditions applicable to 
a separate account that satisfies the conditions set forth in Rule 6e-
2(a), and to the extent necessary to permit the offer and sale of the 
Contracts in reliance on Rule 6e-2, except as otherwise set forth 
herein.\10\

    \10\Both Death Benefit Options provide for a guaranteed minimum 
death benefit at least equal to the Contract's initial Face Amount, 
as required by Rule 6e-2(c)(1). The Contracts also permit a 
reduction in Face Amount (including reductions through partial 
withdrawals). Certain provisions of Rule 6e-2, such as paragraph 
(c)(3), recognize the existence of partial withdrawals; in addition, 
partial withdrawals and reductions in Face Amount are common 
features in Contracts governed by Rule 6e-2. Applicants do not seek 
exemptive relief in this regard.
    Applicants also state that they believe the Contract Options 
provide an additional benefit to a Contract owner by making it 
possible to continue insurance protection and participation in the 
Separate Account, if desired, even though the Contract owner may not 
continue to pay Contract Premiums. Similarly, Applicants believe the 
existence of the Primary Insured Term Rider and Fixed-Rate Option 
enhance the benefits available to a Contract owner. Applicants 
believe the availability of these options does not modify the basic 
characteristics of the Contract and, therefore, is consistent with 
the fundamental nature of the Contracts as variable life insurance 
contracts under paragraph (c)(1) of Rule 6e-2. [[Page 30141]] 
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    6. Applicants submit that the definition of ``variable life 
insurance contract'' in Rule 6e-2(c)(1) was drafted at a time when all 
the variable life insurance contracts then contemplated clearly met 
this definition, and that the considerations that led the Commission to 
grant the exemptions in Rule 6e-2 did not depend in any material way 
upon the fact that the death benefit, as well as cash values, varied 
with investment experience. Nor did such considerations depend on 
whether a scheduled premium contract also provided for substantial 
premium payment flexibility and other features so long as the scheduled 
premiums, if paid when due, provided for a minimum death benefit 
guaranteed to at least equal the initial face amount.
    7. Applicants further submit that the extent to which favorable 
investment experience is used to increase death benefits rather than 
cash values differs considerably among the contracts offered by 
different issuers in reliance on Rule 6e-2. Applicants also submit 
that, under all contract designs, the degree to which investment 
performance changes the death benefit necessarily has an impact on cash 
values under the Contracts.
    8. Applicants represent, that, generally, higher death benefits 
require higher cost of insurance deductions which, in turn, result in 
lower cash values. Applicants state that it is desirable for purchasers 
to be free to choose a benefit structure which they believe suits their 
own needs with respect to the relationship of cash value, death benefit 
and investment performance. Applicants also state that Contract owners 
can do this by, for example, deciding whether to apply excess value to 
purchase extra death benefit. Using excess value for this purpose will 
maximize the guaranteed death benefit in the event of favorable 
investment experience, but will cause Account Value to be less than it 
otherwise would be.
    9. Applicants also submit that the considerations that led the 
Commission to adopt Rules 6c-3 and 6e-2 apply equally to the Separate 
Account and the Contracts, and that the exemptions provided by these 
rules would be granted to the Separate Account and to the other 
Applicants on the terms specified in those rules, except to the extent 
that further exemption from those terms is specifically requested 
herein.

B. Request for Exemptions Relating to Sales and Administrative Charges

    1. Applicants request exemptions from Sections 2(a)(32), 2(a)(35), 
22(c), 26(a)(2), 27(a)(1), 27(c)(2), 27(d) and Rules 6e-2(b)(1), 
(b)(12), (b)(13)(i), (b)(13)(iv), (b)(13)(v) and (c)(4), and Rule 22c-1 
to the extent necessary to permit deductions of: (a) part of a 
Contract's sales charge from premium payments and part from Account 
Value as a CDSC, and (b) the CDAC from Account Value. Both the CDSC and 
the CDAC will be deducted on surrender, Face Amount reduction 
(including upon partial withdrawals), or lapse.
    2. Section 2(a)(35) and Rules 6e-2 (b)(1) and (c)(4). Applicants 
assert that Section 2(a)(35)\11\ and Rules 6e-2 (b)(1) and (c)(4)\12\ 
may be read to contemplate that the sales charge for a variable life 
insurance contract will be deducted from premium payments. Applicants 
submit that Guardian's deduction of the CDSC from Account Value may be 
deemed inconsistent with these provisions. Further, deduction of the 
CDSC also may be deemed inconsistent with Rule 6e-2(c)(4) because, in 
order to facilitate the payment and other flexibility features under 
the Contracts, the CDSC is computed based on the lesser of actual 
payments made or Basic Scheduled Premiums payable (rather than as the 
excess of actual premium payments made over certain amounts, as 
required by the literal terms of that provision). Accordingly, 
Applicants request exemptions from Section 2(a)(35) and Rule 6e-2 
(b)(1) and (c)(4) to the extent necessary to permit part of the 
Contracts' sales charge to be deducted from premium payments and part 
as a CDSC upon surrender, Face Amount reduction (including upon partial 
withdrawal) or lapse of a Contract.

    \11\``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.''
    \12\Under Rule 6e-2(b)(1), ``sales load'' has the meaning set 
forth in Rule 6e-2(c)(4), which defines ``sales load'' charged on 
any payment as the excess of the payment over the sum of certain 
other amounts.
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    In addition, Applicants argue that Rule 6e-2(c)(4) can be construed 
to allow the imposition of a sales charge on other than premiums 
because the definition of ``sales load'' in the Rule does not reflect 
the actual methodology of administering variable life insurance 
contracts, referring in subparagraphs (i) and (ii), for example, to 
other amounts that are not deducted from payments. To this extent, 
Applicants assert that the applicability of the definition need not be 
limited to any particular form of sales load. Accordingly, Applicants 
submit that the CDSC is consistent with the definition of ``sales 
load'' set forth in Rule 6e-2(c)(4). Applicants, however, request the 
exemptions noted above in order to avoid any question concerning full 
compliance with the 1940 Act and any regulations thereunder.
    3. Section 27(a)(1) and Rule 6e-2(b)(13)(i). Section 27(a)(1) 
limits sales load in terms of a maximum percentage of payments to be 
made on a periodic payment plan certificate. Rule 6e-2(b)(13)(i) limits 
the amount of sales charges on a variable insurance contract to a 
maximum of 9% of the payments to be made under the contract during a 
period equal to or the lesser of (a) 20 years or (b) the anticipated 
life expectancy of the insured, based on the 1958 Commissioners' 
Standard Ordinary Mortality Table (``1958 CSO Tables'').
    Applicants assert that Section 27(a)(1) and Rule 6e-2(b)(13)(i) 
could be read to contemplate that the sales charge under the Contracts 
will be deducted from Premium Payments prior to their allocation to the 
Separate Account. Consequently, Guardian's deduction of part of its 
sales charge as a CDSC may be deemed inconsistent with the foregoing 
provisions to the extent that the sales charge is deducted from other 
than premium payments. Applicants thus request exemptions from Section 
27(a)(1) and Rule 6e-2(b)(13)(i) to the extent necessary to permit part 
of the Contracts' sales charge to be deducted as a CDSC upon surrender, 
Face Amount reduction (including upon partial withdrawal) or lapse.
    4. Sections 26(a)(2) and 27(c)(2). Applicants state that Sections 
26(a)(2)\13\ [[Page 30142]] and 27(c)(2)\14\ may be read to require 
that proceeds of all Premium Payments under a Contract be deposited in 
the Separate Account, and that no payment be made from the Separate 
Account to any Applicant, or any affiliated person thereof, except for 
bookkeeping and other administrative services. Accordingly, Guardian's 
imposition of the CDSC may be deemed to be inconsistent with the 
foregoing provisions to the extent that the deduction could constitute 
payment for an expense not specifically permitted. Applicants thus 
request exemptions from Sections 26(a)(2) and 27(c)(2) to the extent 
necessary to permit the CDSC to be deducted upon surrender, Face Amount 
reduction (including upon partial withdrawal) or lapse of a Contract.

    \13\Section 26(a)(2) provides, in relevant part, that: ``no 
principal underwriter for a depositor of a registered unit 
investment trust shall sell any security of which the trust is the 
issuer unless the instrument pursuant to which the security is 
issued provides that no payment to the depositor of or the principal 
underwriter for such trust, or to any affiliated person of such 
depositor or underwriter, shall be allowed the trustee or custodian 
as an expense, expect that provision may be made for the payment to 
any such person of a fee, not exceeding such reasonable amount as 
the Commission may prescribe, as compensation for performing 
bookkeeping and other administrative services of a character 
normally performed by the trustee or custodian itself.''
    \14\Section 27(c)(2) provides, in relevant part, that: ``it 
shall be unlawful for any registered investment company issuing 
periodic payment plan certificates, or for any depositor of or 
underwriter for such company, to sell any such certificate unless 
the proceeds of all payments on such certificate (except such 
amounts as are deducted for sales load) are deposited with a trustee 
or custodian having specified qualifications and are held by such 
trustee or custodian under an indenture or agreement containing 
specified provisions.''
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    5. Sections 2(a)(32), 27(c)(1) and 27(d), Rules 6e-2(b)(12), 
(b)(13)(iv) and (b)(13)(v). Sections 2(a)(32), 27(c)(1) and 27(d) 
prohibit Applicants from selling a Contract unless it is a ``redeemable 
security,'' defined under Section 2(a)(32) as entitling an owner of a 
Contract, upon surrender, to receive approximately his or her 
proportionate share of the Separate Account's current net assets. 
Section 27(d) provides a Contract owner with certain surrender and 
sales charge refund rights.
    Rules 6e-2(b)(12), (b)(13)(iv) and (b)(13)(v) provide exemptions 
from Section 27(a)(1), and Rule 6e-2(b)(13)(iv) and (b)(13)(v) afford 
exemptions from Section 27(d), to the extent necessary for cash value 
to be regarded as satisfying the redemption and sales charge refund 
requirements of the 1940 Act. Applicants note, however, that the 
exemptions afforded by Rules 6e-2(b)(12), 6e-2(b)(13)(iv) and 
(b)(13)(v) may not contemplate the deduction of the Surrender Charge 
(i.e., the CDSC and the CDAC). Guardian's deduction of the Surrender 
Charge can be viewed as reducing the proceeds that the Contract owner 
would receive on surrender below a Contract owner's proportionate share 
of the Separate Account's current net assets.
    Further, Applicants note that Rule 6e-2 was adopted at a time when 
less flexibility regarding payments and other contract features was 
offered than subsequently has been permitted. Because of these 
features, Applicants state that it is unclear how the technical sales 
load computation provisions in Rule 6e-2 apply to the Contracts. 
Accordingly, because certain provisions of the Contracts' sales charge 
structure may be inconsistent with the provisions of Sections 2(a)(32), 
27(c)(1) and 27(d) and paragraphs (b)(12), (b)(13)(iv) and (b)(13)(v) 
of Rule 6e-2, Applicants request exemptions from those provisions to 
the extent necessary to permit part of the Contracts' sales charge to 
be deducted from Premium Payments and part to be deducted as a CDSC, 
and to permit the deduction of the CDAC on surrender, Face Amount 
reduction (including upon partial withdrawal) or lapse.
    In addition, Applicants submit that, although Section 2(a)(32) does 
not specifically contemplate the imposition of a sales charge and an 
administrative charge at the time of redemption, such charges are not 
necessarily inconsistent with the definition of ``redeemable 
security.'' Applicants further submit that the charges are little 
different, for this purpose, from the ``redemption'' charge authorized 
in Section 10(d)(4) of the 1940 Act. Applicants argue that Congress 
intended that such a redemption charge, expressly described as a 
``discount from net asset value,'' be deemed consistent with the 
concept of ``proportionate share'' under Section 2(a)(32).
    Consistent with Section 2(a)(32), Applicants therefore assert that 
the Contracts will be ``redeemable securities'' because the Contracts 
provide for full surrender for the Net Cash Surrender Value and are 
expected to provide for partial withdrawals of Cash Surrender Value in 
excess of the Benchmark value. Applicants represent that the prospectus 
for the Contracts will disclose the contingent deferred nature of part 
of the sales charge and of the administrative charges. Accordingly, 
Applicants state that there will be no restriction on, or impediment 
to, surrender that should cause the Contracts to be considered other 
than a redeemable security. Upon surrender or lapse, a Contract owner 
will receive his or her proportionate share of the Separate Account 
(i.e., the amount of net Basic Scheduled Premiums and unscheduled 
payments made, reduced by the amount of all charges and deductions and 
increased or decreased by the amount of investment performance credited 
to a Contract).
    6. Section 22(c) and Rules 6e-2(b)(12) and 22c-1. Applicants state 
that Rule 22c-1 prohibits the redemption of a Contract except at its 
current net asset value next computed after receipt of the request for 
surrender or partial withdrawal. Rule 6e-2(b)(12) provides exemptions 
from the redemption procedures mandated by Rule 22c-1. Nonetheless, 
Applicants submit that the rule may not contemplate the deduction of 
the Surrender Charge, which can be viewed as causing a Contract to be 
redeemed at a price based on less than a Contract's current net asset 
value next computed after full or partial surrender of a Contract. 
Consequently, the Surrender Charge may be deemed to be inconsistent 
with the foregoing rules.
    Applicants submit that Rule 22c-1 and Rule 6e-2(b)(12) together 
impose requirements with respect to both the amount payable on 
surrender and the time as of which such amount is calculated. The 
requirement of these rules regarding the amount payable to a Contract 
owner on surrender is essentially the same as the requirements that are 
explicit or implicit in certain other provisions of the 1940 Act and 
rules thereunder from which Applicants are requesting exemptions.
    Regarding the timing requirement of Rule 22c-1, Applicants state 
that they will determine the Net Cash Surrender Value under a Contract 
consistent with their current procedures and in accordance with Rules 
6e-2(b)(12)(i) and 22c-1, and on a basis next computed after receipt of 
a Contract owner's request for surrender of a Contract or partial 
withdrawal. In addition, Applicants assert that the Commission's 
purpose in adopting Rule 22c-1 was to minimize (i) dilution of the 
interests of the other security holders and (ii) speculative trading 
practices that are unfair to such holders. Applicants state that the 
CDSC would in no way have the dilutive effect that Rule 22c-1 is 
designed to prohibit because a surrendering Contract owner would 
``receive'' no more than an amount equal to the Net Cash Surrender 
Value determined pursuant to the formula set out in his or her Contract 
and after receipt of the request. Further, variable life insurance 
contracts do not lend themselves to the kind of speculative short-term 
trading that Rule 22c-1 was aimed against, and, further, the CDSC would 
discourage, rather than encourage, any such trading. [[Page 30143]] 
    7. In support of their request for exemptions relating to sales and 
administrative charges, discussed above, Applicants submit that the 
deduction on a contingent deferred basis of part of the sales charge 
and the administrative charge will be advantageous to Contract owners 
for the following reasons.
    a. First, the deferred charge structure has been accepted as an 
appropriate feature of life insurance products under Rule 6e-3(T) as 
well as pursuant to exemptive relief granted by the Commission, expands 
investors choices without sacrificing investor protection, and 
reinforces the intention that the product be held as a long term 
investment.
    b. Second, the amount of a Contract owner's premium payment 
allocated to the Separate Account and available to earn a return for a 
Contract owner will be greater than it otherwise would have been if the 
sales and administrative charges were deducted from Premiums.
    c. Third, Applicants represent that the total dollar amount of a 
sales load payable under a Contract is no higher than would be 
permitted by Rule 6e-2(b)(13), if taken entirely as front-end 
deductions from Premium Payments under a Contract for which all Premium 
Payments have been paid, as well as from any unscheduled Premium 
Payments. Moreover, for a Contract owners who does not lapse or 
surrender in the early Contract years, the dollar amount of the sales 
load is lower than otherwise would be permitted if taken entirely as 
front-end deductions. Furthermore, no Surrender Charge is deducted from 
any Death Benefit paid under a Contract.
    Similarly, the total dollar amount of the CDAC under a Contract is 
no higher than if the charge were taken in full for the first Contract 
year, and is less for Contract owners who do not lapse, reduce the Face 
Amount by request or partial withdrawal, or surrender prior to the 
thirteenth Contract year. Applicants represent that this charge has not 
been increased to take into account the time value of money or the fact 
that not all Contract owners will incur the charge. Applicants state 
that Guardian does not anticipate a profit on the CDAC.\15\

    \15\Guardian intends to rely on Rule 6e-2(b)(13)(iii)(C) with 
regard to the CDAC.
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    d. Fourth, the allocation of a greater amount of Premium Payments 
to the Separate Account initially reduces the net amount at risk (Death 
Benefit less Account Value), upon which the cost of insurance charge is 
based.
    8. Applicants submit that if Guardian is not permitted to charge 
sales and administrative charges in the form of contingent deferred 
charges and deducts these charges entirely from premiums, it could be 
charging continuing Contract owners more than otherwise may be 
necessary to recover the distribution and issuance costs attributable 
to such Contract owners. Applicants contend that their charge 
structure, by contrast, provides greater equity among both Contract 
owners who surrender and those who continue as Contract owners.
    9. Applicants state that the CDSC, consistent with the definition 
in Section 2(a)(35), is an amount ``chargeable to sales or promotional 
activities.'' Although not imposed on ``payments,'' Applicants submit 
that the charge will cover expenses associated with the offer and sales 
of the Contracts, including commissions paid to sales personnel, 
promotional expenses and sales administration expenses. Similarly, the 
CDAC is for estimated administrative expenses connected with the 
Contracts. Applicants represent that these administrative expenses 
exclude any costs properly attributable to sales or distribution 
activity.
    10. Applicants contend that the fact that the timing of the 
imposition of the Surrender Charge may not fall within the literal 
pattern of all the provisions discussed herein does not change the 
essential nature of the sales charge structure.
    11. Although the methodology for computing sales charges under the 
Contracts may not have been contemplated by Rule 6e-2 as originally 
adopted, Applicants represent that the percentage of sales load imposed 
during the first two Contract Years will be no greater than the sum of: 
30% of payments made during the first Contract Year up to an amount 
equal to an annual Basic Scheduled Premium, plus 10% of payments made 
during the second Contract Year up to an amount equal to an annual 
Basic Scheduled Premium, plus 9% of all unscheduled Premium Payments 
made during the first two Contract Years. Additionally, the percentage 
of sales load under the Contract will not exceed 9% of Basic Scheduled 
Premiums expected to be paid over the shorter of 20 years or the 
expected life expectancy of the insured. Moreover, Guardian does not 
anticipate making a profit on the CDAC. Therefore, Applicants submit 
that the Contract is consistent with the principals and policies 
underlying the limitations of Section 27 and Rule 6e-2(b)(13).

C. Deductions From Account Value of the Cost of Insurance, Guaranteed 
Insurance Amount Charge and Premium Assessments

    1. Applicants submit that Sections 26(a)(2) and 27(c)(2), read 
together, could be interpreted to prohibit Guardian from deducting the 
following charges from Account Value: (a) Cost of insurance charge, (b) 
guaranteed insurance amount charge, and (c) if a Contract Premium is 
``skipped,'' charges for Premium Assessments in connection with the 
Premium Skip Option. Accordingly, Applicants request exemptions from 
Sections 26(a)(2) and 27(c)(2) and Rule 6e-2(b)(13)(iii)\16\ to the 
extent necessary to permit deduction of these charges from Account 
Value.\17\ Applicants submit that, as described above, the method of 
deducting these charges is fair and reasonable in that the charges are 
not designed to yield more revenues than if they were assessed solely 
against premium payments.

    \16\Rule 6e-2(b)(13)(iii) provides an exemption from Sections 
27(c)(2) and 26(a)(2), subject to certain conditions, which 
Applicants submit they satisfy as noted herein.
    \17\Applicants state that they are not seeking exemptions from 
these provisions with regard to the maximum handling fee for 
unscheduled premium payments that may be imposed under the Contracts 
(which will be deducted from premium payments in reliance on Rule 
6e-2(c)(4)(iv), or the CDAC, the partial withdrawal charge, the 
transfer charge that may be imposed under the Contracts, or the 
Contract and Administration Charges deducted as part of the monthly 
deduction (each of which will be deducted pursuant to Rule 6e-
2(b)(13)(iii). Applicants state that each of these charges is 
reasonable, and in an amount that does not exceed the expenses to 
which such charge relates that are currently anticipated to be 
incurred by Guardian over the lifetime of the insureds covered by 
the Contracts. Applicants represent that the maximum amount of each 
of these fees and charges is guaranteed not to increase during the 
term of the Contracts. Guardian does not anticipate realizing a 
profit on these fees or charges.
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    2. Cost of Insurance Charges. Applicants submit that the method of 
deducting this charge is fair and reasonable. Applicants represent that 
they believe all other variable life insurance contracts provide for 
cost of insurance deductions from cash value, which under a Contract 
consists of the unloaned Account Value.
    3. Premium Assessments. As described above, Premium Assessments are 
deducted from Premium Payments before the Basic Scheduled Premium (net 
of Premium Charges) is allocated to the Separate Account. However, 
when, pursuant to the Premium Skip Option, Premiums are ``skipped,'' 
and not paid, an amount equal to 90.5% of any Premium Assessment that 
otherwise would be deducted from a premium will be deducted from 
Account Value on [[Page 30144]] each Contract Anniversary on which the 
``skipped'' Premium otherwise would be due or, in later, on the date 
the Premium Skip Option is effected. The remaining 9.5% is deducted as 
part of the Premium Charges when any unscheduled Premium Payment is 
made. Thus, part of the Premium Charges applied to any unscheduled 
Payment is to collect charges covered by Rules 6e-2(c)(4)(vi) and 
(vii), which refer to charges for substandard risk and for incidental 
insurance benefits deducted from Account Value.
    Applicants represent that if Premium Assessments were required to 
be deducted solely from Premiums, it would be necessary for Guardian: 
(a) to reduce Contract payment flexibility, and/or (b) further limit 
the classes of insureds for whom a Contract will be available and limit 
or eliminate the rider benefits to be made available under a Contract. 
Applicants submit that purchasers and prospective purchasers of a 
Contract would find these results undesirable.
    Rule 6e-2(c)(4), among other things, requires that charges referred 
to in Rule 6e-2(c)(4)(vi) and (vii) be subtracted from gross payments 
in determining amounts of ``sales load.'' Rule 6e-2(c)(7) requires the 
amount of gross premiums attributable to such charges to be subtracted 
for purposes of determining the amount of ``payments'' on which sales 
load percentages are calculated in order to evaluate compliance with 
Rule 6e-2's various sales load limitations. Accordingly, Applicants 
subtract any Premium Assessments (including that deducted from Premiums 
and from Account Value upon exercise of Premium Skip Option) from 
Premium Payments to compute ``sales load'' under Rule 6e-2(c)(4) and to 
compute the amount of payments under Rule 6e-2(c)(7).
    Where, because of the payment and other flexibility features of a 
contract, the entire Premium for a Contract Year is not paid, Rule 6e-
2(c)(7) might still require Applicants to deduct certain amounts from 
any payments that were made, for sales load compliance purposes. These 
deductions would be for payments made that would be deemed 
``attributable'' to charges for substandard risks and incidental 
insurance benefits. If this were so, Applicants would subtract the same 
amount in determining the amount of sales load under paragraph (c)(4) 
of Rule 6e-2. The amount would be the same, because part of any 
payments deemed ``attributable'' to such charges would, in effect, be 
deducted as a portion of Premium Charges, and part would be deducted as 
a portion of Account Value upon exercise of the Premium Skip Option.
    4. Guaranteed Insurance Amount Charge. Applicants represent that 
the guaranteed insurance amount charge compensates Guardian for the 
risk that it assumes in guaranteeing death benefits under a Contract. 
Applicants submit that this charge essentially is an insurance charge 
that was not contemplated at the time that the 1940 Act was adopted. 
Although Rule 6e-2(c)(4)(iii) provides for such a charge, it does not 
expressly authorize it to be deducted from Account Value.
    Applicants submit that Rule 6e-3(T) authorizes deductions from 
Account Value for a minimum death benefit guarantee charge in 
connection with variable life insurance contracts qualified to rely on 
that rule, conditioned on the life insurer's making certain 
representations. Further, proposed amendments to Rule 6e-2 would 
similarly authorize such deductions from Account Value. Accordingly, 
Guardian makes the following representations and undertakings, which 
are consistent with the proposed amendments:
    (a) The level of the guaranteed insurance amount charge is 
reasonable in relation to the risks assumed by Guardian under the 
Contracts. The methodology used to support this representation is based 
on an analysis of the pricing structure of the Contracts, including all 
charges, and an analysis of the various risks, including special risks 
arising out of Contract provisions that allow unscheduled payments and, 
in certain circumstances, skipping Premiums. Guardian undertakes to 
keep and make available to the Commission on request the documents or 
memoranda used to support this representation.
    (b) Guardian has concluded that: the proceeds from the sales 
charges may not cover the expected costs of distribution; surplus 
arising from the guaranteed insurance amount charge (among other 
sources) may be used to cover the distribution costs; and there is a 
reasonable likelihood that the distribution financing arrangements of 
the Separate Account will benefit the Separate Account and the 
Contracts owners. Guardian undertakes to keep and make available to the 
Commission on request a memorandum setting forth basis of this 
representation; and
    (c) The Separate Account will invest only in management investment 
companies that have undertaken, in the event they should adopt any plan 
under Rule 12b-1 to finance distribution expenses, to have a board of 
directors (or trustees, as appropriate), a majority of whom are not 
interested persons of the company, formulate and approve such plan.

D. Request for Exemptions Relating to Use of 1980 CSO Tables

    1. As discussed above, Rule 6e-2(b)(1) makes the definition of 
``sales load'' in Rule 6e-2(c)(4) applicable to the Contracts. Section 
27(a)(1) prohibits an issuer of periodic payment plan certificates from 
imposing a sales load exceeding 9% of the payments to be made on such 
certificates. Rule 6e-2(b)(13)(i) provides an exception from Section 
27(a)(1) to the extent that sales load, as defined in Rule 6e-2(c)(4), 
does not exceed 9% of payments to be made on the variable life 
insurance contract during the period equal to the lesser of 20 years or 
the anticipated life expectancy of the insured based on the 1958 CSO 
Tables. Rule 6e-2(c)(4), in defining sales load, contemplates the 
deduction of an amount for the cost of insurance based on the 1958 CSO 
Tables and an assumed investment rate specified in the contract.\18\

    \18\An assumed investment rate of 4% is specified in the 
Contract and used for purposes of determining the required Basic 
Scheduled Premiums. ``Assumed investment rate'' is defined by Rule 
6e-2(c)(5) to be the net rate of investment return specified in the 
contract which would result in neither an increase nor a decrease in 
the variable death benefit of the contract above or below the 
guaranteed minimum death benefit. Applicants submit that this 
definition accurately describes the Contract's 4% assumed investment 
rate only so long as all other assumptions used in establishing 
Basic Scheduled Premiums holds true and only until the Death Benefit 
is increased in order for the Contract to qualify as life insurance 
for federal tax law purposes or the variable insurance amount is 
applicable. Applicants assert, however, the Rule 6e-2(c)(5) has 
never been interpreted to require that a contract's death benefit 
always vary in relation to performance above or below the assumed 
investment rate. Applicants believe it is appropriate to consider 4% 
to be the assumed investment rate for purposes of Rule 6e-2(c)(5) 
and, thus, seek no exemptive relief in this regard.
---------------------------------------------------------------------------

    2. Applicants assert it is appropriate that the deduction for the 
cost of insurance be based on the 1980 CSO Tables in determining what 
is deemed to be the sales load under the Contracts because: (a) the 
1980 CSO Tables\19\ reflect more recent information and data about 
mortality than the 1958 CSO Tables; (b) use of either the 1958 CSO 
Tables or the 1980 CSO Tables be permitted under proposed amendments to 
Rule 6e-2 for purposes of Rule 6e-2(b)(13)(i) and (c)(4), depending on 
which relates to the insurance rates guaranteed under a contract; and 
(c) the [[Page 30145]] 1980 CSO Tables must be used for all contracts 
that rely on Rule 6e-3(T).

    \19\Applicants state that the 1980 CSO Tables were adopted by 
the National Association of Insurance Commissioners subsequent to 
adoption of Rule 6e-2 by the Commission.
---------------------------------------------------------------------------

    3. Applicants further represent that: (a) Guardian uses the 1980 
CSO Tables to establish Premium rates and determine reserve liabilities 
for the Contracts; (b) the guaranteed cost of insurance rates under the 
Contracts are based on the 1980 Tables; (c) the mortality rates 
reflected in the 1980 CSO Tables more nearly approach the mortality 
experience which Guardian believes will apply to the Contracts; and (d) 
for Contracts issued for insured at advance ages, appropriate 
adjustments have been made in the CDSC structure to ensure that, 
subject to the other exemptive relief requested herein, the 9% standard 
prescribed by Rule 6e-2(b)(13)(i) will be met over the expected 
lifetimes of such insureds, based on the 1980 CSO Tables.

E. Request for Exemptions Relating to Custodianship Arrangements

    1. Applicants state that Section 26(a)(1) and Section 26(a)(2), in 
effect, prohibit Applicants from selling the Contracts unless the 
Contracts are issued pursuant to a trust indenture or other such 
instrument that designates one or more qualified trustees or custodians 
to have possession of all securities in which Guardian and the Separate 
Account invest. Applicants submit that Section 27(c)(2), in effect, 
could be read to prohibit Applicants from selling the Contracts unless 
the proceeds of all Premium Payments are deposited with a qualified 
trustee or custodian. Applicants further submit that Rule 6e-
2(b)(13)(iii), in relevant part, provides an exemption from Sections 
26(a)(1), 26(a)(2) and 27(c)(2), provided that Guardian complies with 
all other applicable provisions of Section 26 as though it were a 
trustee or custodian for the Separate Account and assuming it meets the 
other requirements set forth in the rule.
    2. Applicants assert that the holding of Fund shares by Guardian 
and the Separate Account under an open account arrangement, without 
having possession of share certificates and without a trust indenture 
or other such instrument, may be deemed to be inconsistent with the 
foregoing provisions. Nevertheless, Applicants represent that current 
industry practice calls for separate accounts organized as UITs, such 
as the Separate Account, to hold shares of management investment 
companies in uncertificated form. This practice is believed to 
contribute to efficiency in the purchase and sale of such shares by 
separate accounts and to bring about cost savings generally. Therefore, 
Applicants submit that the requirements of the 1940 Act and Rule 6e-2 
regarding share ownership are in-consistent with current industry 
practice and its rationale.
    3. Applicants further note that the Commission has adopted and 
proposed the following rules which would grant the requested 
exemptions: (a) Rules 6e-3(T)(b)(13)(iii)(B) and (C), in effect, grant 
the requested exemptions, but only for contracts covered by Rule 6e-
3(T); (b) proposed Rule 6e-2(b)(13)(iii)(B) would permit a life 
insurer, such as Guardian, to hold the assets of a separate account 
without a trust indenture or other such instrument; (c) proposed Rule 
6e-2(b)(13)(iii)(C) would permit a separate account organized as a UIT 
to hold the securities of registered investment companies, such as the 
Funds, that offer shares to the Separate Account in uncertificated 
form; and (d) Rule 26a-2, adopted by the Commission, affords exemption 
essentially similar to those requested here regarding variable annuity 
contracts. Applicants presume, based on information and belief, that 
the Commission adopted or proposed the foregoing exemptive rules based 
on a determination that safekeeping of separate account assets does not 
necessarily depend on the presence of a trustee, custodian or trust 
indenture or the issuance of share certificates, where state insurance 
law protects separate account assets, and open account arrangements 
foster administrative efficiency and cost savings.
    4. The proposed exemptive provisions of Rule 6e-2(b)(13)(iii)(B) 
and (C) subject a life insurer to certain conditions. Guardian 
represents that it will: (a) comply with conditions of Rule 6e-
2(b)(13)(iii)(B) and (C); (b) comply with all other applicable 
provision of Section 26 as if it were a trustee or custodian for the 
Separate Account (subject to the other exemptive relief requested in 
this application); and (c) will file with the insurance regulatory 
authority of Delaware an annual statement of its financial condition in 
the form prescribed by the National Association of Insurance 
Commissioners, which most recent statement indicates that it (i) has a 
combined capital and surplus of not less than $1 million, (ii) is 
examined from time-to-time by the insurance regulatory authority of 
Delaware as to its financial condition and other affairs, and (iii) is 
subject to supervision and inspection with respect to its separate 
account operations.
    5. Applicants further believe that the Commission has determined 
that compliance with such conditions, which contemplate state 
protection of separate account assets, will help assure that the 
exemptions will be consistent with the public interest, the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act.
F. Request for Exemptions Relating to Waiver of Notice of Withdrawal 
and Refund Rights

    1. Section 27(e) and Rules 27e-1 and 6e-2(b)(13)(vii),\20\ in 
effect require a notice of right of withdrawal and refund on Form N-
271-1 to be provided to Contract owners entitled to a refund of sales 
load in excess of the limits permitted by Rule 6e-2b(13)(v). The 
Contracts limit the amount of the CDSC that may be deducted by excess 
sales load limits consistent with those set forth in Rule 6e-
2(b)(13)(v)(A). Thus, under the Contracts' sales load structure, no 
excess sales load will be paid by or refunded to a Contract owner 
surrendering, effecting a Face Amount reduction or lapsing in the first 
two Contract years.\21\

    \20\Section 27(e) requires, with respect to any periodic payment 
plan certificate sold subject to Section 27(d) (which requires the 
refund of any excess sales load paid during the first 18 months 
after issuance), written notification of the right to surrender and 
receive a refund of the excess sales load. Rule 27(e) establishes 
the requirements for the notice mandated by Section 27(e) and 
prescribes Form N-271-1 for that purpose. Rule 6e-2(b)(13), which 
modifies the requirements of Section 27 and the rules thereunder, 
adopts Form N-271-1 and requires it to be sent to a contract owner 
upon issuance of a contract and again during any lapse period in the 
first two contract years. The Form requires statements of (i) the 
contract owner's right to receive back excess sales load for a 
surrender during the first two contract years, (ii) the date that 
the right expires, and (iii) the circumstances in which the right 
may not apply upon lapse.
    \21\Applicants submit that the application of the technical 
sales load computation provisions in Rule 6e-2 to a modified 
scheduled premium contract is unclear. Applicants state that the 
reduction of the CDSC during the first two Contract Years is 
intended to reflect the requirements of Rule 6e-2 and take into 
account the Contract's payment flexibility in a manner that is 
consistent with Rule 6e-3(T)(b)(13)(v)(A), which specifically 
addresses flexible premium variable life insurance products.
---------------------------------------------------------------------------

    2. Rule 27e-1(a) specifies that no notice need be mailed when there 
is otherwise no entitlement to receive any refund of sales load. Rule 
27e-1 and Rule 6e-2 were both 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 
load.
    3. Applicants submit that requiring delivery of Form N-271-1 could 
confuse Contract owners and potentially encourage a Contract owner to 
surrender during the first two Contract Years against the Contract 
owner's best [[Page 30146]] interest to do so. Further, an owner of a 
variable insurance contract with a declining deferred sales charge, 
unlike a front-ended contract, does not foreclose his or her 
opportunity at the end of the first two contract years to receive a 
refund of monies spent. Not only has such an owner not paid any excess 
load, but because the deferred charge declines over the life of the 
Contract, the Contract owner may never have to pay it. Applicants 
submit that encouraging a surrender during the first two Contracts 
years could cost a Contract owner more in total sales load (relative to 
total payments) than he or she otherwise would pay if the Contract, 
which is designed as a long-term investment vehicle, were held for the 
period originally intended.
    4. Because of the absence of excess sales load, and therefore, the 
absence of an obligation to assure repayment of that amount, Applicants 
believe that the Contracts do not create the right in a Contract owner 
which Form N-271-1 was designed to highlight. In the absence of this 
right, Applicants submit that the notification contemplated by Form N-
271-1 creates an unnecessary and counterproductive administrative 
burden the cost of which appears unjustified. Any other purpose 
potentially served by the Form would already be addressed by the 
required Form N-271-2 Notice of Withdrawal Right, generally describing 
the charges associated with a Contract, and prospectus disclosure 
detailing a Contract's sales load structure. Applicants assert that 
neither Congress, in enacting Section 27, nor the Commission, in 
adopting Rule 27e-1 and Rule 6e-2, could have contemplated the 
applicability of Form N-271-1 in the context of a Contract with a 
declining contingent deferred sales charge.

G. Deduction of Charge for Section 848 Deferred Acquisition Costs

    1. Applicants request exemptive relief from Section 27(c)(2) of the 
1940 Act to permit the deduction of the 1.0% charge from each Premium 
Payment received under the Contracts, and from premiums received under 
Other Contracts to be issued by Guardian through the Future Accounts to 
reimburse Guardian for its increased federal tax burden resulting from 
the application of Section 848 of the Code, as amended, to the receipt 
of those premiums. Applicants also request exemptions from subparagraph 
(c)(4)(v) of Rules 6e-2 and 6e-3(T) under the 1940 Act to permit the 
proposed deductions 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 
Rules 6e-2 and 6e-3(T), respectively.
    2. Applicants state that Section 848, as amended, requires life 
insurance companies to capitalize and amortize over ten years certain 
general expenses for the current year rather than deduct these expenses 
in full from the current year's gross income, as allowed under prior 
law. Section 848 effectively accelerates the realization of income from 
specified contracts and, consequently, the payment of taxes on that 
income. 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 Contracts.
    3. Deductions subject to Section 848 equal a percentage of the 
current year's net premiums received (i.e., gross premiums minus return 
premiums and reinsurance premiums) under life insurance or other 
contracts categorized under this Section. The Contracts will be 
categorized under Section 848 as life insurance contracts requiring 
7.7% of the net premiums received to be capitalized and amortized under 
the schedule set forth in Section 848(c)(1).
    4. The increased tax burden on every $10,000 of net premiums 
received under the Contracts is quantified by Applicants as follows. 
For each $10,000 of net premiums received in a given year, Guardian 
must 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) is subject to taxation at the corporate tax rate of 35% and 
results in $256.03 (.35%  x  $731.50) more in taxes for the current 
year than Guardian otherwise would have owned prior to OBRA 1990. 
However, the current tax increase will be offset partially by 
deductions allowed during the next ten years, which result from 
amortizing the remainder of the $770 ($77 in each of the following nine 
years and $38.50 in year ten).
    5. It is Guardian's business judgement that it is appropriate to 
use a discount rate of 10% in evaluating the present value of its 
future tax deductions for the following reasons. Guardian has computed 
its cost of capital as the after-tax rate of return that it seeks to 
earn on its surplus, which is in excess of 10%. To the extent that 
surplus must be used by Guardian to pay its increased federal tax 
burden under Section 848, such surplus will be unavailable for 
investment. Thus, the cost of capital used to satisfy this increased 
tax burden essentially will be the after-tax rate of return Guardian 
seeks on its surplus, which is in excess of 10%. Accordingly, 
Applicants submit that the rate of return on surplus is appropriate for 
use in this present value calculation.
    6. To the extent that the 10% discount rate is lower than 
Guardian's actual rate of return on surplus, the calculation of this 
increased tax burden will continue to be reasonable over time, even if 
the corporate tax rate applicable to Guardian is reduced, or its 
targeted rate of return is lowered.
    7. In determining the after-tax rate of return used in arriving at 
the discount rate, Guardian considered a number of factors that apply 
to itself and to its parent, including market interest rates, 
anticipated long-term growth rates, the risk level for this type of 
business that is acceptable, inflation, and available information about 
the rate of return obtained by other life insurance companies. Guardian 
represents that these are appropriate factors to consider.
    8. First, Guardian projects its future growth rate, including the 
future growth rate of its parent, based on sales projections, current 
interest rates, inflation rate and amount of surplus that can be 
provided to support such growth. Guardian then uses the anticipated 
growth rate and the other factors to set a rate of return on surplus 
that equals or exceeds this rate of growth. Of these other factors, 
market interest rates, acceptable risk level and inflation rate receive 
significantly more weight than information about the rates of return 
obtained by other companies.
    9. Guardian and its parent seek to maintain a ratio of surplus to 
assets that is established 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 offering 
competitively priced products and to maintaining the superior ratings 
now assigned to Guardian and its parent by various rating agencies. 
Consequently, Guardian's surplus should grow at least at the same rate 
as its assets.
    10. 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 $152.96. The 
effect of Section 848 on the Contracts is therefore an increased tax 
burden with a present value of $91.15 for each $10,000 of net premiums 
(i.e., $244.11 less $152.96).
    11. Guardian does not incur incremental federal income tax when it 
passes on state premium taxes to Contract Owners because state premium 
[[Page 30147]] taxes are deductible in computing federal income taxes. 
Conversely, federal income taxes are not deductible in computing 
Guardian's federal income taxes. To compensate Guardian fully for the 
impact of Section 848, Guardian must impose an additional charge to 
make it whole for the $91.15 additional tax burden attributable to 
Section 848, as well as the tax on the additional $91.15 itself, which 
can be determined by dividing $91.15 by the complement of 35% federal 
corporate income tax rate (i.e., 65%), resulting in an additional 
charge of $140.23 for each $10,000 of net premiums, or 1.40%.
    12. Based on its prior experience, Guardian reasonably expects to 
fully take almost all future deductions. It is Guardian's judgment that 
a charge of 1.00% of Basic Scheduled Premiums and unscheduled Premium 
Payments would reimburse it for the increased federal income tax 
liabilities under Section 848. Applicants represent that the 1.00% 
charge will be reasonably related to Guardian's increased federal 
income tax burden under Section 848. This representation takes into 
account the benefit to Guardian of the amortization permitted by 
Section 848 and the use of a 10% discount rate (which is equivalent to 
Guardian's rate of return on surplus) in computing the future 
deductions resulting from such amortization.
    13. Guardian believes, however, that the 1.00% 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. The Contracts will reserve the right to increase the 1.00% 
charge in response to future changes in, or interpretations of, Section 
848 or any successor provisions that increase Guardian's tax burden.
    14. Applicants assert that it is appropriate to deduct this charge, 
and to exclude the deduction of this charge from sales load, because it 
is a legitimate expense of the company and not for sales and 
distribution expenses. Applicants represent that this charge will be 
reasonably related to Guardian's increased federal tax burden.
    15. The Separate Account is, and the Future Accounts will be, 
regulated under the 1940 Act as issuers of periodic payment plan 
certificates. Accordingly, the Separate Account, the Future Accounts, 
Guardian (as depositor), and Guardian Services (as principal 
underwriter) are deemed to be subject to Section 27 of the 1940 Act.
    16. Section 27(c)(2) prohibits the sale of periodic payment plan 
certificates unless the following conditions are met. The proceeds of 
all payments (except amounts deducted for ``sales load'' must be held 
by a trustee or custodian having the qualifications established under 
Section 26(a)(1) for the trustees of UITs. Sales loads, as defined 
under Section 2(a)(35), are limited by Sections 27(a)(1) and 27(h)(1) 
to a maximum of 9% of total payments on periodic payment plan 
certificates. These proceeds also must be held under an indenture or 
agreement that conforms with the provisions of Section 26(a)(2) and 
Section 26(a)(3) of the 1940 Act.
    17. Certain provisions of Rules 6e-2 and 6e-3(T) provide a range of 
exemptive relief. Rule 6e-2 provides exemptive relief if the separate 
account issues scheduled variable life insurance contracts as defined 
in Rule 6e-2(c)(1). Rule 6e-3(T) provides exemptive relief if the 
separate account issues flexible premium variable life insurance 
contracts, as defined in subparagraph (c)(1) of that Rule.
    18. Applicants state that paragraph (b)(13)(iii) of Rule 6e-2 
implicitly provides, and paragraph (b)(13)(iii) of Rule 6e-3(T) 
explicitly provides, exemptive relief from Section 27(c)(2) to permit 
an insurer to make certain deductions, other than sales load, including 
the insurer's tax liabilities from receipt of premium payments imposed 
by states or by other governmental entities. Applicants assert that the 
proposed deduction with respect to Section 848 of the Code arguably is 
covered by subparagraph (b)(13)(iii) of each Rule. Applicants note, 
however, that the language of paragraph (c)(4) of the Rules appears to 
require that deductions for federal tax obligations from receipt of 
premium payments be treated as ``sales load.''
    19. Applicants state that paragraph (b)(1), together with paragraph 
(c)(4), of each Rule provides an exemption from the Section 2(a)(35) 
definition of ``sales load'' by substituting a new definition to be 
used for purposes of each respective Rule. Rule 6e-2(c)(4) defines 
``sales load'' charged on any payment as the excess of the payment over 
certain specified charges and adjustments, including a deduction for 
state premium taxes. Rules 6e-3(T)(c)(4) defines ``sales load'' during 
a period as the excess of any payments made during that period over 
certain specified charges and adjustments, including a deduction for 
state premium taxes. Under a literal reading of paragraph (c)(4) of the 
Rules, 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.''
    20. Applicants state that the public policy that underlies 
paragraph (b)(13) of each Rule, and particularly subparagraph 
(b)(13)(i), like that which underlies paragraphs (a)(1) and (h)(1) of 
Section 27, is to prevent excessive sales loads from being charged for 
the sale of periodic payment plan certificates. Applicants submit 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.
    21. Applicants submit that the source for the definition of ``sales 
load'' found in paragraph (c)(4) of each Rule supports this analysis. 
Applicants believe that, in adopting paragraph (c)(4) of each Rule, the 
Commission intended to tailor the general terms of Section 2(a)(35) to 
variable life insurance contracts to ease verification by the 
Commission of compliance with the sales load limits of subparagraph 
(b)(13)(i) of each 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, Applicants assert that the percentage 
limits in subparagraph (b)(13)(i) of each Rule depend on paragraph 
(c)(4) of each Rule, which does not depart, in principal, from Section 
2(a)(35).
    22. Applicants submit that the exclusion from the definition of 
``sales load'' under Section 2(a)(35) of deductions from premiums for 
``issue taxes'' suggests that it is consistent with the policies of the 
1940 Act to exclude from the definition of ``sales load'' in Rules 6e-2 
and 6e-3(T) deductions made to pay an insurer's costs attributable to 
its federal tax obligations. 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. 
Applicants state that the proposed deductions will be used to 
compensate Guardian for its increased federal tax burden attributable 
to the receipt of premiums and not for sales or promotional activities. 
Therefore, Applicants believe the language in [[Page 30148]] Section 
2(a)(35) further indicates that not treating such deductions as sales 
load is consistent with the policies of the 1940 Act.
    23. Finally, Applicants submit that it is probably an historical 
accident that the exclusion of premium tax in subparagraph (c)(4)(v) of 
Rules 6e-2 and 6e-3(T) from the definition of ``sales load'' is limited 
to state premium taxes. When these Rules were each adopted and, in the 
case of Rule 6e-3(T), later amended, the additional Section 848 tax 
burden attributable to the receipt of premiums did not yet exist.
    24. Applicants submit that the terms of the relief requested with 
respect to Other Contracts to be issued through Future Accounts are 
also consistent with the standards of Section 6(c). Without the 
requested relief, Guardian would have to request and obtain such 
exemptive relief for each Other Contract to be issued through a Future 
Account. Such additional requests for expensive relief would present no 
issues under the 1940 Act that have not already been addressed in this 
Application.
    25. The requested relief is appropriate in the public interest 
because it would promote competitiveness in the variable life insurance 
market by eliminating the need for Guardian to file redundant exemptive 
applications regarding the federal tax charge, thereby reducing its 
administrative expenses and maximizing the efficient use of its 
resources. The delay and expense involved in having to repeatedly seek 
exemptive relief would impair Guardian's ability to effectively take 
advantage of business opportunities as they arise.
    26. The requested relief is consistent with the purposes of the 
1940 Act and the protection of investors for the same reasons. If 
Guardian were required to repeatedly seek exemptive relief with respect 
to the same issues regarding the federal tax charge addressed in this 
Application, investors would not receive any benefit or additional 
protection thereby and might be disadvantaged as a result of Guardian's 
increased overhead expenses.
    27. Conditions for Relief:
    a. Guardian will monitor the reasonableness of the charge to be 
deducted pursuant to the requested exemptive relief.
    b. The registration statement for the Contracts, and for any Other 
Contracts under which the above-referenced federal tax charge is 
deducted, will: (a) disclose the charge; (b) explain the purpose of the 
charge; and (c) state that the charge is reasonable in relation to 
Guardian's increased federal tax burden under Section 848 of the Code.
    c. The registration statement for the Contracts, and for such Other 
Contracts, providing for the above-referenced deduction will contain as 
an exhibit an actuarial opinion as to: (1) The reasonableness of the 
charge in relation to Guardian's increased federal tax burden under 
Section 848 of the Code resulting from the receipt of premiums; (2) the 
reasonableness of the rate of return on surplus that is used in 
calculating such charge; and (3) the appropriateness of the factors 
taken into account by Guardian in determining such targeted rate of 
return.

Conclusion

    For the reasons and upon the facts set forth above, Applicants 
submit that the requested exemptions from Sections 2(a)(32), 2(a)(35), 
22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2), 27(d), and 
27(e) of the 1940 Act and paragraphs (b)(1), (b)(12), (b)(13)(i), 
(b)(13)(iii), (b)(13)(iv), (b)(13)(v), (b)(13)(vii), (c)(1), (c)(4) of 
Rule 6e-2, and Rules 6e-3(T)(c)(4)(v), 22c-1 and 27e-1 thereunder, 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 and, therefore, satisfy the 
standards set forth in Section 6(c) of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13893 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M