[Federal Register Volume 60, Number 122 (Monday, June 26, 1995)]
[Notices]
[Pages 33015-33017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15502]
[[Page 33015]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21143; 812-9436]
Pacific Mutual Life Insurance Company, et al.; Notice of
Application
June 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: Pacific Mutual Life Insurance Company (``Pacific Mutual''),
Separate Account A (the ``Separate Account''), and Pacific Equities
Network (``PEN'').
RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the
Act granting an exemption from sections 26(a)(2)(C) and 27(c)(2) of the
Act.
SUMMARY OF APPLICATION: Applicants request an order permitting Pacific
Mutual to deduct a mortality and expense risk charge from the assets of
the Separate Account or any other separate account that Pacific Mutual
establishes to fund certain individual flexible premium combination
fixed/variable annuity contracts (the ``Contracts'').
FILING DATE: The application was filed on January 17, 1995, and was
amended on June 13, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested person may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on July 14, 1995,
and should be accompanied by proof of service on applicants in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Robin Yonis
Sandlaufer, Esq., Pacific Mutual Life Insurance Company, 700 Newport
Center Drive, Newport Beach, California 92660.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, at (202) 942-0654, or Robert A.
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application may be obtained for a fee from the SEC's
Public Reference Branch.
Applicants' Representations
1. Pacific Mutual, a mutual life insurance company, is organized in
California, and is authorized to do business in the District of
Columbia and all states except New York.
2. The Separate Account was established by Pacific Mutual as a
funding medium for the Contracts. The Separate Account is registered
with the SEC as a unit investment trust under the Act. Units of
interest in the Separate Account under the Contracts will be registered
under the Securities Act of 1933. Pacific Mutual is the depositor and
sponsor of the Separate Account. Applicants request that the relief
sought herein also apply to any other separate account (``Other
Account'') established by Pacific Mutual to fund the Contracts, as well
as other contracts that are substantially similar in all material
respects to the Contracts (``Future Contracts'').
3. The Separate Account currently is divided into eleven
subaccounts (``Subaccounts''), each of which will invest solely in
shares of a corresponding series of Pacific Select Fund (the ``Fund''),
an open-end management investment company. Other series of the Fund,
other investment companies or series of other investment companies, or
other investment vehicles may be available for investment in the future
through additional subaccounts and/or Other Accounts.
4. PEN, an indirect wholly-owned subsidiary of Pacific Mutual, will
serve as principal underwriter of the Contracts. PEN is registered as a
broker-dealer under the Securities Exchange Act of 1934, and is a
member of the National Association of Securities Dealers, Inc.
(``NASD''). Applicants request that the relief sought herein also apply
to any other entity that is registered with the SEC as a broker-dealer,
is a member of the NASD and that may, in the future, serve as the
principal underwriter of the Contracts or any Future Contracts.
5. The Contracts, which include the Pacific Portfolios Contract and
the Pacific One Contract, are individual flexible premium combination
fixed/variable annuity contracts. They may be purchased on a non-tax
qualified basis, or in connection with certain retirement plans that
qualify for special federal income tax treatment under the Internal
Revenue Code of 1986.
6. Each Contract requires certain minimum initial purchase payments
and requires a certain minimum for any additional payments. A Pacific
Portfolios Contract may be purchased with a minimum initial purchase
payment of $5,000 in the case of a non-tax qualified Contract, or
$2,000 in the case of a tax-qualified Contract. Minimum purchase
payment requirements are waived in certain cases. Additional payments
may be made at any time, but must be at least $250 ($25 in the case of
a tax-qualified Contract). A Pacific One Contract may be purchased with
a minimum initial purchase payment of $25,000. Additional payments must
be at least $1,000. Purchase payments or amounts already allocated to
the Subaccounts or the fixed option (these allocated amounts plus any
amount held in Pacific Mutual's loan account to secure contract debt
may be referred to as the ``Contract Value'') may be allocated to one
or more of the Subaccounts of the Separate Account which have been
established to support the Contracts or to the fixed option, which is
funded by Pacific Mutual's general account.
7. Several annuity payout options, including both fixed and
variable payment options, are available under the Contracts. Each
Contract also will provide for a death benefit if the annuitant dies
during the accumulation period. Generally, the death benefit will equal
the greater of (a) total purchase payments (less prior withdrawals), or
(b) the Contract Value. Death benefits may be higher under certain
circumstances.
8. Pacific Mutual incurs certain costs in connection with the
distribution of the Pacific Portfolios Contracts and the Pacific One
Contracts. No sales charges are deducted from purchase payments under
the Contracts prior to their allocation to the Contract Value.
9. Purchase payments on Pacific Portfolios Contracts are subject to
a contingent deferred sales charge (``CDSC'') on withdrawals prior to
annuitization. The CDSC is calculated as a percentage of the total
withdrawal subject to the CDSC and, in the case of partial withdrawals.
is deducted from the Contract Value remaining after the Contract owner
is paid the amount requested. The amount of the CDSC imposed on
withdrawal will depend on the ``age'' of the amount withdrawn that is
subject to the CDSC, as follows:
------------------------------------------------------------------------
Deferred sales charge
Age of payment (percent)
------------------------------------------------------------------------
1.............................................. 7
2.............................................. 7
3.............................................. 6
4.............................................. 5
5.............................................. 3
[[Page 33016]]
6.............................................. 1
7 or more...................................... 0
------------------------------------------------------------------------
A purchase payment is considered to have an ``age'' of 1 from the
day it is effective until the next succeeding Contract anniversary. No
CDSC is imposed on annuitized Contract Value or in connection with
payment of death benefits. Nor will a CDSC be assessed (a) on earnings
under a Contract, or (b) on withdrawals in any Contract year
aggregating up to 10% of the Contract owner's purchase payments
otherwise subject to a CDSC, measured at the time of withdrawal. In
calculating any CDSC, or in calculating the 10% available for free
withdrawal, Pacific Mutual will assume that a Contract owner's earnings
are withdrawn first, followed by the Contract owner's purchase payments
in the order in which they are paid. Pacific Mutual does not expect
that the CDSC will be sufficient to cover the sales expenses of Pacific
Portfolios Contracts. Pacific Mutual will pay any additional sales
expenses relating to Pacific Portfolios Contracts.
10. Pacific One Contracts are not subject to sales charges. Pacific
Mutual will pay sales expenses relating to Pacific One Contracts from
its general account, which may include amounts derived from the
mortality and expense risk charge.
11. Pacific Mutual may deduct a charge for premium taxes. The tax
rates currently range from 1% to 4%. A premium tax may be imposed upon
purchase payments at the time they are made, on Contract Value upon
fully or partial withdrawals, upon annuitization, or when converted
into another benefit payment.
12. Pacific Mutual does not currently impose a transaction charge
on the Contracts for the administrative costs of transfers among the
Subaccounts and to the fixed option, and withdrawals, but reserves the
right to do so. These charges may be up to $15 on each transfer in
excess of 15 transfers in any Contract year, and $15 on each partial
withdrawal in excess of 15 partial withdrawals in any Contract year.
13. Pacific Mutual will charge an annual fee of $40 against each
Contract to compensate it for administering the Contract, maintaining
records, and preparing and distributing annual reports and statements.
The annual fee will be assessed each anniversary of the Contract and at
the time of a full withdrawal of any Contract Value not annuitized only
if, in either case, the Contract Value is less than a specified amount
on that date. The annual fee is guaranteed not to increase for the life
of the Contract.
14. Pacific Mutual will impose a charge against the assets in the
Separate Account to compensate it for issuance and administration of
the Contracts and operation of the Separate Account. This charge will
accrue daily against the value of the net assets of each Subaccount
attributable to the Pacific Portfolios and Pacific One Contracts, at an
annual rate guaranteed for the life of the Contract not to exceed .15%.
15. Applicants represent that the charges for administration of the
Contracts and operation of the Separate Account, including any annual
fee, the administrative fee, and any future transfer or withdrawal
transaction fees, will be deducted from the Subaccounts or from the
Contract Value allocated to the Subaccounts in reliance on rule 26a-1
under the Act, and will not be greater than the cost of the
administrative services to be provided over the life of the Contract.
Pacific Mutual does not expect or intend to make a profit from the
annual fee, administrative fee, or any future transfer or withdrawal
transaction fees.
16. Pacific Mutual proposes to assess a charge against the Contract
Value allocated to the Subaccounts to compensate it for bearing certain
mortality and expense risks under the Contracts. The aggregate
mortality and expense risk charge will be equal, on an annual basis, to
1.25% of the value of the net assets in each Subaccount. Of this
amount, approximately .80% will be charged to cover mortality risk and
approximately .45% will be charged to cover expense risk. This rate of
1.25% will be guaranteed not to increase for the duration of a
Contract.
17. The mortality risk arises from Pacific Mutual's contractual
obligation, where a Contract owner selects an annuity option with a
life contingency, to make periodic annuity payments regardless of how
long all annuitants or any individual annuitant lives. Contract owners
are thus assured that neither an annuitant's greater-than-expected
longevity nor a greater-than-expected improvement in life expectancy
generally will adversely affect the number or amount of annuity
payments the annuitant will receive under the Contracts. Where a
Contract has been purchased and a life contingency annuity option
selected, this eliminates the annuitant's risk of outliving the
accumulated funds. Pacific Mutual assumes a mortality risk in
connection with payment of the death benefit under each Contract
because the death benefit could exceed the Contract Value. Pacific
Mutual also incurs a mortality risk in connection with the ``step-up''
of the guaranteed minimum amount of death benefits under each Contract
under certain circumstances. There is no extra charge for this
guarantee. The expense risk assumed by Pacific Mutual is that its
actual expenses in issuing and administering the Contracts and
operating the Separate Account will exceed the amount anticipated or
recovered through the annual administrative charges.
18. If the mortality and expense risk charge is insufficient to
cover the assumed risk, Pacific Mutual will bear the loss. Conversely,
if the mortality and expense risk charge exceeds the amount necessary
to cover the assumed risk, the excess may be used for, among other
things, the payment of distribution, sales, and other expenses. Pacific
Mutual currently anticipates a profit from the mortality and expense
risk charge.
Applicants' Legal Analysis
1. Applicants request an exemption under section 6(c) of the Act
from sections 26(a)(2)(C) and 27(c)(2) of the Act to permit the
deduction of a mortality and expense risk charge from the assets of the
Separate Account or any Other Account under the Contracts or Future
Contracts.
2. Sections 26(a)(2)(C) and 27(c)(2), in relevant part, prohibit a
principal underwriter for, or depositor of, a registered unit
investment trust from selling periodic payment plan certificates unless
the proceeds of all payments, other than sales loads, on such
certificates are deposited with a qualified trustee or custodian,
within the meaning of section 26(a)(1), and are held under arrangements
that prohibit any payment to the depositor or principal underwriter
except a reasonable fee, as the SEC may prescribe, for performing
bookkeeping and other administrative duties normally performed by the
trustee or custodian. Pacific Mutual's deduction of a mortality and
expense risk charge from the assets of the Separate Account may be
deemed to be a payment prohibited by sections 26(a)(2)(C) and 27(c)(2).
3. Section 6(c) authorizes the SEC, by order upon application, to
conditionally or unconditionally grant an exemption from any provision
of the Act, or any rule or regulation promulgated thereunder, if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly [[Page 33017]] intended by the policy and provisions of
the Act.
4. Applicants believe that the requested order meets the standards
of section 6(c). With respect to the exemption requested in connection
with any Other Account and/or Future Contracts, applicants believe that
the requested order would promote efficiency and competitiveness in the
market for variable annuities by reducing the administrative costs and
delay incurred by Pacific Mutual in seeking, what is essentially,
redundant relief. Applicants believe that no incremental benefit or
protection would inure to investors if Pacific Mutual were required to
seek such further exemptive relief.
5. Applicants believe that Pacific Mutual is entitled to reasonable
compensation for its assumption of mortality and expense risks.
Applicants represent that the proposed mortality and expense risk
charge is consistent with the protection of investors because it is a
reasonable and proper insurance charge. The charge is a reasonable one
to compensate Pacific Mutual for the risks that: (a) Annuitants under
the Contracts will live longer individually or as a group than has been
anticipated in setting the annuity rates guaranteed in the Contracts;
(b) the Contract Value will be less than the death benefit; and (c)
administrative expenses will be greater than amounts derived from the
administrative charges.
6. Pacific Mutual represents that the 1.25% mortality and expense
risk charge under the Contracts is within the range of industry
practice for comparable annuity products. This representation is based
upon Pacific Mutual's analysis of publicly available information about
similar industry products, taking into consideration such factors as
the current charge levels, existence of charge level guarantees, any
death benefit guarantees, guaranteed annuity rates, and other policy
options. Pacific Mutual will maintain at its administrative offices,
and make available to the SEC upon request, a memorandum setting forth
in detail the products analyzed in the course of, and the methodology
and results of, its comparative survey.
7. Pacific Mutual also represents that the mortality and expense
risk charge under any Future Contract will be within the range of
industry practice for comparable annuity products at the time such
Future Contract is first offered. Pacific Mutual will maintain at its
administrative offices, and make available to the SEC upon request, a
memorandum setting forth in detail the products analyzed in the course
of, and the methodology and results of, its comparative survey
undertaken in connection with such Future Contract.
8. Applicants acknowledge that, if a profit is realized from a
mortality and expense risk charge, all or a portion of such profit may
be available to pay Pacific Mutual's distribution expenses. Pacific
Mutual has concluded that there is a reasonable likelihood that the
proposed distribution financing arrangements for the Contract will
benefit the Separate Account or Other Accounts and the Contract owners.
The basis for that conclusion is set forth in a memorandum that will be
maintained by Pacific Mutual at its administrative offices and will be
made available to the SEC upon request. Pacific Mutual will not offer
any Future Contract subject to a mortality and expense risk charge
unless and until it has concluded that there is a reasonable likelihood
that the distribution financing arrangements proposed for such Future
Contract will benefit the Separate Account or the applicable Other
Account and the owners of such Future Contract. Pacific Mutual will
maintain at its administrative offices, and will make available to the
SEC upon request, a memorandum setting forth the basis for that
conclusion.
9. Pacific Mutual represents that the Separate Account and any
other Account will invest only in those management investment companies
that undertake, in the event such company should adopt a plan under
rule 12b-1 under the Act to finance distribution expenses, to have a
board of directors (or trustees), a majority of whom are not
``interested persons'' of such company, formulate and approve any such
plan.
Conclusion
For the reasons set forth above, applicants believe that the
requested exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15502 Filed 6-23-95; 8:45 am]
BILLING CODE 8010-01-M