[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