[Federal Register Volume 60, Number 119 (Wednesday, June 21, 1995)]
[Notices]
[Pages 32387-32391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15118]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21137; No. 812-9400]


Western National Life Insurance Company, et al.

June 15, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to the Investment 
Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: Western National Life Insurance Company (``Western 
National''), WNL Separate Account A (the ``Separate Account''), and WNL 
Brokerage Services, Inc. (``WNL'').

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of 
the 1940 Act granting exemptions from the provisions of Sections 
2(a)(32), 22(c), 26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) thereof.

SUMMARY OF APPLICATION: Applicants seek an order granting exemptive 
relief to the extent necessary to permit the issuance of variable 
annuity contracts (``Existing Contracts'') providing for a recapturable 
bonus equal to one percent of initial purchase payments, and the 
deduction of mortality and expense risk and enhanced death benefit 
charges from the assets of the Separate Account. Exemptive relief also 
is requested to the extent necessary to permit the provision of the 
recapturable bonus in connection with, and the deduction of the 
mortality and expense risk and enhanced death benefit charges from, and 
other separate account established in the future by Western National, 
in connection with the issuance and sale of annuity contracts that will 
be offered on a basis that is substantially similar in all material 
respects to the Existing Contracts (``Future Contracts,'' together with 
Existing Contracts, the ``Contracts''), which may be sold in the future 
by the Separate Account or other separate accounts (``Future 
Accounts,'' together with the Separate Account, the ``Accounts'') 
established in the future by Western National in connection with the 
issuance of Contracts.

FILING DATE: The application was filed on December 21, 1994, and 
amended on June 14, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request [[Page 32388]] a hearing on the application by 
writing to the Secretary of the Commission and serving the Applicants 
with a copy of the request, personally or by mail. Hearing requests 
must be received by the Commission by 5:30 p.m. on July 10, 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 Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, DC 20549. Applicants, Dwight L. Cramer, 
Western National Life Insurance Company, 5555 San Felipe, Suite 900, 
Houston, Texas 77056. Copies to Judith A. Hasenauer, Blazzard, Grodd & 
Hasenauer, P.C. 943 Post Road East, P.O. Box 5108, Westport, 
Connecticut 06881.

FOR FURTHER INFORMATION CONTACT: Kevin Kirchoff, Senior Counsel, or 
Patrice M. Pitts, Special Counsel, 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 
Public Reference Branch of the Commission.

Applicants' Representations

    1. Western National is a stock life insurance company incorporated 
under the laws of the State of Texas. Western National is licensed to 
do business in 46 states and the District of Columbia. WNL, an 
affiliate of Western National, will serve as distributor of the 
Contracts. WNL is registered as a broker-dealer under the Securities 
Exchange Act of 1934, and is a member of the National Association of 
Securities Dealers.
    2. The Separate Account was established as a segregated asset 
account pursuant to a resolution of the Board of Directors of Western 
National on November 9, 1994, to act as a funding medium for certain 
annuity contracts. The Separate Account is registered with the 
Commission pursuant to the 1940 Act as a unit investment trust.
    3. The Separate Account presently consists of eight subaccounts, 
each of which will invest in the shares of one of the portfolios of WNL 
Series Trust (the ``Trust''). Additional subaccounts may be created to 
invest in any additional portfolios of the Trust which may be added in 
the future, or in other funding vehicles. The Trust is registered under 
the 1940 Act as an open-end management investment company.
    4. The assets of the Separate Account are the property of Western 
National. However, the assets of the Separate Account, equal to the 
reserves and other contract liabilities with respect to the Separate 
Account, are not chargeable with liabilities arising out of any other 
business Western National may conduct. Income, gains and losses, 
whether or not realized, are, in accordance with the Contracts, 
credited to or charged against the Separate Account without regard to 
other income gains or losses arising out of any other business Western 
National may conduct.
    5. The Existing Contracts are available for retirement plans which 
do not qualify for the special federal tax advantages pursuant to the 
Internal Revenue Code and for retirement plans which do qualify for the 
federal tax advantages available pursuant to the Internal Revenue Code.
    6. The minimum initial purchase payment for non-qualified Existing 
Contracts is $5,000 and for qualified Existing Contracts is $2,000. The 
minimum subsequent purchase payment for non-qualified Existing 
Contracts is $1,000 or, if the automatic premium check option is 
elected, $50. The minimum subsequent purchase payment for qualified 
Existing Contracts is $50. The maximum total purchase payments Western 
National will accept without its prior approval is $500,000 for 
contract owners up to 75 years in age. The maximum total purchase 
payments Western National will accept without its prior approval for 
contract owners age 75 and older is $250,000.
    7. Western National will, at the time of the initial purchase 
payment, add an additional amount, as a bonus (``Bonus''), equal to one 
percent (1%) of such purchase payment. Western National reserves the 
right to limit its payment of the Bonus to $5.000. If the contract 
owner makes a withdrawal prior to the seventh contract anniversary in 
excess of: (a) up to 10% of the contract value each contract year or 
(b) the amount permitted under the systematic withdrawal option (up to 
10% of the contract value each contract year) an amount equal to the 
Bonus will be deducted by Western National from the contract value. 
Western National will not recapture any investment earnings on the 
Bonus. The owner does not have a vested interest in the principal 
amount of the Bonus until seven contract years have elapsed from the 
date of the Bonus payment, and until that time the Bonus belongs to 
Western National.
    8. The Existing Contracts provide for certain guaranteed death 
benefits during the accumulation period. The standard death benefit 
provides that for a death occurring prior to the 80th birthday of the 
contract owner, or the oldest joint owner, the death benefit during the 
accumulation period will be the greater of: (1) the purchase payments, 
less any withdrawals including any previously deducted contingent 
deferred sales charge; or (2) the contract value determined as of the 
end of the valuation period during which Western National receives at 
its annuity service office both due proof of death and an election of 
the payment method; or (3) the highest step-up value prior to the date 
of death. The step-up value is equal to the contract value on each 
seventh contract anniversary plus any purchase payments made after such 
contract anniversary less any withdrawals and contingent deferred sales 
charge deducted after such contract anniversary. For a death occurring 
on or after the 80th birthday of the owner, or the oldest joint owner, 
the death benefit during the accumulation period will be the contract 
value determined as of the end of the valuation period during which 
Western National receives at its annuity service office both due proof 
of death and an election of the payment method.
    9. The Contracts also provide for an enhanced death benefit (via an 
endorsement) if selected by the contract owner (``Enhanced Death 
Benefit''). If the owner selects the Enhanced Death Benefit, for a 
death occurring prior to the 75th birthday of the owner, or the oldest 
joint owner, the death benefit will be the greater of 1, 2 or 3 above 
(in paragraph 8) or the total amount of purchase payments compounded up 
to the date of death at 3% interest, minus the total withdrawals and 
previously deducted contingent deferred sales charges compounded up to 
the date of death of 3% interest, not to exceed 200% of purchase 
payments, less withdrawals and previously deducted contingent deferred 
sales charges. For a death occurring on or after the 75th birthday and 
before the 80th birthday of the owner, or the oldest joint owner, the 
death benefit during the accumulation period will be the greater of 1, 
2 or 3 (in paragraph 8) above. For death occurring on or after the 80th 
birthday of the owner, or the oldest joint owner, the death benefit 
during the accumulation period will be the contract value determined as 
of the valuation period during which Western National receives at its 
annuity service office both due [[Page 32389]] proof of death and an 
election of the payment method.
    10. Subject to any limitations imposed by Western National on the 
number of transfers (currently unlimited), owners may transfer all or 
part of their interest in a subaccount or during the annuity period 
from a subaccount to the general account without the imposition of any 
fee or charge if there have been no more than the number of free 
transfers permitted. Currently, there are no restrictions on the number 
of transfers that can be made each contract year. However, if Western 
National does limit the number of transfers in the future, owners are 
guaranteed 12 free transfers during the accumulation period and 6 free 
transfers during the annuity period. Currently, Western National does 
not impose a transfer fee. Western National has reserved the right to 
charge a fee for transfers in the future which will not exceed the 
lesser of $25 or 2% of the amount transferred.
    11. Any premium taxes relating to the Existing Contracts may be 
deducted from the purchase payments or contact value when incurred. 
Western National currently defers the charge for premium taxes until 
full withdrawal or annuitization. However, Western National reserves 
the right to deduct the premium taxes when incurred. Premium taxes 
generally range from 0% to 4%.
    12. The Contracts do not provide for a front-end sales load to be 
deducted from purchase payments. However, if all or a portion of the 
Contract value is withdrawn, a contingent deferred sales charge (sales 
load) (``CDSC'') will be calculated at the time of each withdrawal and 
will be deducted from the contract value. This charge reimburses 
Western National for expenses incurred in connection with the 
promotion, sale and distribution of the Contracts. The CDSC is based 
upon the length of time from when each purchase payment was made as 
follows:

------------------------------------------------------------------------
                                                            Withdrawal  
 Length of time from purchase payment (number of years)  charge(percent)
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1......................................................                5
2......................................................                5
3......................................................                5
4......................................................                4
5......................................................                3
6......................................................                2
7......................................................                1
8 or more..............................................                0
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After the first contract anniversary, a withdrawal of up to 10% of the 
contract value, determined as of the immediately preceding contract 
anniversary, may be withdrawn once each contract year on a non-
cumulative basis without the imposition of the CDSC.
    13. Applicants acknowledge that the CDSC, if applicable, may be 
insufficient to cover all costs relating to the distribution of the 
Contracts, and that if a profit is realized from the Mortality and 
Expense Risk Charge, all or a portion of such profit may be offset by 
distribution expenses not reimbursed by the CDSC.
    14. On each contract anniversary, Western National will deduct a 
charge to reimburse it for expenses relating to maintenance of the 
Contracts (``Contract Maintenance Charge''). The Contract Maintenance 
Charge is currently $30 each contract year. However, during the 
accumulation period, if the contract value on the contract anniversary 
is at least $40,000, then no Contract Maintenance Charge is deducted. 
If a total withdrawal is made on other than a contract anniversary and 
the contract value for the valuation period during which the total 
withdrawal is made is less than $40,000, the full Contract Maintenance 
Charge will be deducted at the time of the total withdrawal. During the 
annuity period, the Contract Maintenance Charge will be deducted pro-
rata from annuity payments regardless of contract size and will result 
in a reduction of each annuity payment. The Contract Maintenance Charge 
will be deducted from the general account and the subaccounts in the 
Separate Account in the same proportion that the amount of the contract 
value in the general account and each subaccount bears to the total 
contract value.
    15. Each valuation period Western National will deduct a charge 
equal on an annual basis to .15% of the average daily net asset value 
of the Separate Account (``Administrative Charge''). Western National 
represents that the Administrative Charge will not exceed expenses and 
will not be increased should it prove to be insufficient. Western 
National does not intend to profit from the Administrative Charge, 
which will be reduced to the extent that the amount of the charge is in 
excess of that necessary to reimburse Western National for its 
administrative expenses.
    16. Western National will assume certain mortality and expense 
risks under the Contracts. To compensate it for assuming these risks, 
Western National will deduct each valuation period a charge which is 
equal, on an annual basis, to 1.25% of the average daily net asset 
value of the Separate Account (``Mortality and Expense Risk Charge''). 
Of this amount, approximately .80% is attributable to mortality risks, 
and approximately .45% is attributable to expense risks. The Mortality 
and Expense Risk Charge is guaranteed by Western National and cannot be 
increased. Western National anticipates that it will derive a profit 
from this charge.
    17. The mortality risks assumed by Western National arise from its 
contractual obligation to make annuity payments after the annuity date 
(determined in accordance with the annuity option chosen by the owner) 
regardless of how long all annuitants live. This assures that neither 
an annuitant's own longevity, nor an improvement in life expectancy 
greater than that anticipated in the mortality tables, will have any 
adverse effect on the annuity payments the annuitant will receive under 
the Contract. Further, Western National bears a mortality risk because 
it guarantees the annuity purchase rates for the annuity options under 
the Contracts whether for a fixed annuity or a variable annuity. Also, 
there is a mortality risk borne by Western National with respect to the 
standard death benefit and the waiver of the CDSC if purchase payments 
have been held in the contract less than seven contract years.
    18. The expense risk assumed by Western National is that all actual 
expenses involved in administering the Contracts, including maintenance 
costs, administrative costs, mailing costs, data processing costs, 
legal fees, accounting fees, filing fees and the costs of other 
services may exceed the amount recovered from the Contract Maintenance 
Charge and the Administrative Charge.
    19. If the Owner selects the Enhanced Death Benefit, each valuation 
period prior to the 75th birthday of the contract owner, or oldest 
joint owner, Western National will deduct a charge from the Separate 
Account which is equal, on an annual basis, to .15% of the average 
daily net asset value of the Separate Account (``Enhanced Death Benefit 
Charge''). This charge compensates Western National for assuming the 
mortality risks for the Enhanced Death Benefit. Western National 
expects to profit from this charge.

Applicants' Legal Analysis and Conditions

    1. Pursuant to Section 6(c) of the 1940 Act the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of persons, 
securities or transactions, from any provision or provisions of the 
1940 Act or from any rule or regulation thereunder, if and to the 
extent that such exemption is [[Page 32390]] necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
1940 Act.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in pertinent 
part, prohibit a registered unit investment trust and any depositor 
thereof or underwriter therefor from selling periodic payment plan 
certificates unless the proceeds of all payments (other than sales 
load) are deposited with a qualified bank as trustee or custodian and 
held under arrangements which prohibit any payment to the depositor or 
principal underwriter except a fee, not exceeding such reasonable 
amount as the Commission may prescribe, for performing bookkeeping and 
other administrative services of a character normally performed by the 
bank itself.
    3. Applicants request an order pursuant to Section 6(c) of the 1940 
Act exempting them from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to the extent necessary to permit the deduction of mortality and 
expense risk and enhanced death benefit charges from the assets of the 
Separate Account and any Future Accounts in connection with the 
Existing Contracts and Future Contracts.
    4. Applicants assert that the mortality and expense risk charge of 
1.25% is reasonable in relation to the risks assumed by Western 
National under the Existing Contracts and reasonable in amount as 
determined by industry practice with respect to comparable annuity 
products. Applicants state that these determinations are based upon an 
analysis of the mortality risks (taking into consideration such factors 
as the guaranteed annuity purchase rates), the expense risks (taking 
into account the existence of charges against the Separate Account 
assets for other than mortality and expense risks), the estimated costs 
for certain product features and industry practice with respect to 
comparable variable annuity products. Western National undertakes to 
maintain at its principal office a memorandum, available to the 
Commission, setting forth in detail the products analyzed and the 
methodology and results of this analysis.
    5. Applicants assert that the charge of 0.15% for the Enhanced 
Death Benefit is reasonable in relation to the risks assumed by Western 
National under the Existing Contracts for providing the Enhanced Death 
Benefit. Western National undertakes to maintain at its home office a 
memorandum, available to the Commission upon request, setting forth in 
detail the methodology used in determining that the risk charge of 
0.15% for the enhanced death benefit is reasonable in relation to the 
risks assumed by Western National under the Existing Contracts.
    6. Applicants represent that, before relying on exemptive relief 
requested in this application in connection with Future Contracts, 
Applicants will determine that any enhanced death benefit risk charges 
under such contracts are reasonable in relation to the related risks 
assumed by Western National under such Future Contracts. Applicants 
represent that Western National will maintain and make available to the 
Commission upon request a memorandum setting forth in detail the 
methology used in making that determination with respect to Future 
Accounts.
    7. Applicants represent that, before relying on exemptive relief 
requested in this application in connection with Future Contracts, 
Applicants will determine that any mortality and expense risk charges 
under such contracts are reasonable in amount as determined by industry 
practice with respect to comparable annuity products and/or reasonable 
in relation to the risks assumed by Western National. Applicants 
represent that Western National will maintain and make available to the 
Commission upon request a memorandum setting forth the basis of such 
conclusion with respect to the Future Accounts.
    8. Western National has concluded that there is a reasonable 
likelihood that the Separate Account's distribution financing 
arrangement will benefit the Separate Account and its investors. 
Western National represents that it will maintain and make available to 
the Commission upon request a memorandum setting forth the basis of 
such conclusion.
    9. Applicants represent that, before relying on exemptive relief 
requested in this application in connection with Future Contracts or 
Future Accounts, Applicants will determine that there is a reasonable 
likelihood that the distribution financing arrangement will benefit the 
Separate Account and its investors or Future Accounts and their 
investors. Western National represents that it will maintain and make 
available to the Commission upon request a memorandum setting forth the 
basis of such conclusion.
    10. Western National represents that the assets of the Separate 
Account and any Future Accounts will be invested only in underlying 
mutual funds which undertake, in the event they should adopt a plan for 
financing distribution expenses pursuant to Rule 12b-1 under the 1940 
Act, to have such plan formulated and approved by their board of 
directors, the majority of whom are not ``interested persons'' of such 
funds within the meaning of Section 2(a)(19) of the 1940 Act.
    11. Applicants request an order pursuant to Section 6(c) of the 
1940 Act exempting them from Sections 2(a)(32), 22(c), 26(a)(2)(C), 
27(c)(1), 27(c)(2) and 27(d) of the 1940 Act, and from Rule 22c-1 
promulgated thereunder, to the extent necessary to permit Western 
National to issue Contracts providing for the Bonus and its recapture 
if the owner makes a withdrawal prior to the seventh contract 
anniversary in excess of 10% of the contract value each contract year.
    12. Applicants represent that contract owners do not have a vested 
interest in the principal amount of the Bonus until seven contract 
years have elapsed from the date of payment of the Bonus by Western 
National and that, until such time, the Bonus is the property of 
Western National.
    13. Applicants represent that it is not administratively feasible 
for them to track the Bonus amounts in the Separate Account. 
Accordingly, the Mortality and Expense Risk Charge, the Administrative 
Charge and, when applicable, the Enhanced Death Benefit Charge 
(collectively, the ``Asset-Based Charges''), will be assessed against 
the entire value of each Contract holder's account, including the Bonus 
amount, even during the period when the Owner's interest in the Bonus 
has not vested (the first seven Contract years). As a result, during 
the first seven years of each Contract that includes a Bonus, the 
aggregate Asset-Based Charges assessed will be higher than those that 
would be charged if the Contract did not include the Bonus.
    14. Applicants represent that the Bonus and its recapture will 
involve none of the abuses to which Sections 2(a)(32), 22(c), 
26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and Rule 
22c-1 thereunder were intended to prevent. Applicants also state that 
the Bonus will be attractive to and in the interest of investors 
because it will permit owners to put 101% of their purchase payments to 
work for them in the selected investment options. Applicants further 
explain that the earnings attributable to the Bonus always will be 
retained by the owner, and the principal amount of the Bonus also will 
be retained if the initial purchase payment is not withdrawn for seven 
contract years.
    15. Applicants submit that their request for exemptive relief would 
promote competitiveness in the variable annuity contract market by 
eliminating the need for redundant exemptive 
[[Page 32391]] applications, thereby reducing Applicants' 
administrative expenses and maximizing the efficient use of their 
resources. Applicants further submit that the delay and expense 
involved in having repeatedly to seek exemptive relief would impair 
their ability effectively to take advantage of business opportunities 
as they arise. Further, if Applicants were required repeatedly to seek 
exemptive relief with respect to the same issues addressed in this 
application, investors would not receive any benefit or additional 
protection.

Conclusion

    For the reasons summarized above, Applicants represent that the 
exemptions requested 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15118 Filed 6-20-95; 8:45 am]
BILLING CODE 8010-01-M