[Federal Register Volume 60, Number 129 (Thursday, July 6, 1995)]
[Notices]
[Pages 35242-35244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16567]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21173; 812-9548]


The Travelers Life and Annuity Company, et al.;

June 29, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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APPLICANTS: The Travelers Life and Annuity Company (``TLAC''), The 
Travelers Fund BD II for Variable Annuities (``Fund BD II'') and any 
other separate account that TLAC may establish to support certain 
flexible premium deferred variable annuity contracts and certificates 
issued by TLAC (``Other Accounts'' or together with Fund BD II, the 
``Accounts''), and Tower Square Securities, Inc. (``TSSI'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
that would exempt applicants from sections 26(a)(2)(C) and 27(c)(2) of 
the Act.

SUMMARY OF APPLICATION: Applicants request an order to permit them to 
deduct a mortality and expense risk charge from the assets of the 
Accounts, in connection with certain flexible premium deferred variable 
annuity contracts.

FILING DATES: The application was filed on March 23, 1995, and amended 
on June 13, 1995 and June 27, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 24, 1995, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549. 
Applicants, One Tower Square, Hartford, Connecticut 06183.

FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, or C. David 
Messman, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. TLAC is a stock life insurance company organized in Connecticut 
and licensed to do business in all states except Alabama, Hawaii, 
Kansas, Maine, New Hampshire, New Jersey, North Carolina, Tennessee, 
Texas, Wyoming, and New York, and currently seeks to obtain licensure 
in the remaining states, except New York. TLAC is a wholly owned 
subsidiary of The Travelers Insurance Company, which is an indirect 
wholly owned subsidiary of Travelers Group Inc.
    2. Fund BD II is a separate investment account established by TLAC 
to fund certain individual and group flexible premium deferred variable 
annuity contracts and certificates to be issued by TLAC (``Current 
Contracts''). In the future, TLAC may issue other flexible premium 
deferred variable annuity contracts and certificates that are 
materially similar to the Current Contracts that are issued through 
Fund BD II or the Other Accounts (the ``Future Contracts'', together 
with the Current Contracts, the ``Contracts'').
    3. Fund BD II has filed a registration statement as a unit 
investment trust under the Act. Units of interest in Fund BD II under 
the Contracts will be registered under the Securities Act of 1933. Fund 
BD II is currently divided into twelve subaccounts. Each subaccount 
will invest in the shares of a portfolio of the Smith Barney/Travelers 
Series Fund, Inc., and one of the portfolios of the Smith Barney Series 
Fund, both open-end series-type management investment companies 
registered under the Act. In the future, TLAC may create or eliminate 
subaccounts.
    4. TSSI, an affiliate of TLAC and an indirect wholly owned 
subsidiary of 

[[Page 35243]]
The Travelers Inc., will serve as the distributor and principal 
underwriter of the Contracts. TSSI is registered under the Securities 
Exchange Act of 1934 as a broker-dealer and is a member of the National 
Association of Securities Dealers, Inc.
    5. The Contracts would provide retirement payments and other 
benefits to persons qualified for Federal income tax advantages and to 
those who do not qualify for such tax advantages. Annuity payments 
would be made on a fixed or variable basis, and the Contracts have 
several annuity and income options. The Contracts require an initial 
purchase payment of $5,000. The minimum additional payment is $500. 
Contract owners may allocate purchase payments to one or more 
subaccounts and to the fixed account.
    6. The Contracts provide for two death benefit options, the 
standard death benefit and the enhanced death benefit. The standard 
death benefit varies, depending on the age of the annuitant or Contract 
owner and the maturity date. If the annuitant or Contract owner dies 
before age 75 and before the maturity date, the standard death benefit 
is equal to the greater of the following, less any applicable premium 
tax or surrenders not previously deducted: (a) The Contract value, (b) 
the total purchase payments under the Contract, and (c) the Contract 
value on the fifth Contract year anniversary immediately preceding 
TLAC's receipt of proof of death. If the annuitant or Contract owner 
dies on or after age 75, but before age 85 and before the maturity 
date, TLAC will pay as a standard death benefit the greater of the 
following, less any applicable premium tax or surrenders not previously 
deducted: (a) The Contract value, (b) the total purchase payments under 
the Contract, and (c) the Contract value on the latest fifth Contract 
year anniversary occurring on or before the deceased's 75th birthday. 
If the annuitant or Contract owner dies on or after age 85 and before 
the maturity date, TLAC will pay as a standard death benefit the 
Contract value, less any applicable premium tax and surrenders not 
previously deducted.
    7. Under the enhanced death benefit, if the annuitant or Contract 
owner dies before age 75 and before the maturity date, TLAC will pay 
the greater of (a) the guaranteed death benefit, or (b) the Contract 
value less any applicable premium tax and surrenders not previously 
deducted. The guaranteed death benefit equals the purchase payments 
made to the Contract (minus surrenders and applicable premium taxes) 
increased by 5% on every Contract date anniversary up to the Contract 
date anniversary following the deceased's 75th birthday, with a maximum 
guaranteed death benefit of 200% of purchase payments minus surrenders 
and applicable premium taxes. If the annuitant or Contract owner dies 
on or after age 75 but before age 85 and before the maturity date, TLAC 
will pay as an enhanced death benefit the greater of (a) the guaranteed 
death benefit as of the deceased's 75th birthday, plus additional 
purchase payments, minus surrenders and minus applicable premium tax or 
(b) the Contract value less any applicable premium tax or surrenders 
not previously deducted. If the annuitant or Contract owner dies on or 
after age 85 but before the maturity date, TLAC will pay as an enhanced 
death benefit the Contract value, less any applicable premium tax and 
surrenders not previously deducted.
    8. Prior to the maturity date, the Contract owner may transfer all 
or part of the Contract value between subaccounts. TLAC currently does 
not charge or restrict the amount or frequency of transfers, but it 
reserves the right to limit the number of transfers to no more than one 
in any six month period.
    9. TLAC will deduct an annual Contract administration charge of $30 
from the Contract value once each year. No Contract administration 
charge is payable after an annuity payout has begun, at the death of 
the annuitant or Contract owner, nor if the Contract value is greater 
than or equal to $40,000 at the date of assessment of the charge. TLAC 
also will deduct a daily asset-based administration charge at an annual 
rate of .15%.
    10. Applicants represent that the annual administration fee and the 
asset-based administration charge will not increase during the life of 
the Contracts. In addition, applicants represent that the charges 
represent reimbursement for the actual administration costs expected to 
be incurred over the life of the Contracts. Applicants will rely on 
rule 26a-1 to deduct this charge and certain other charges under the 
Contract.\1\

    \1\ Rule 26a-1 allows for payment of a fee for bookkeeping and 
other administrative expenses provided that the fee is no greater 
than the cost of the services provided, without profit.
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    11. Applicants will charge a contingent deferred sales charge 
(``surrender charge'') upon certain withdrawals. The surrender charge 
is 6% of a purchase payment in the first, second, and third years 
following the payment, 3% in the fourth year, 2% in the fifth year, and 
1% in the sixth year following the payment. After the first Contract 
year, Contract owners may surrender up to 15% of their Contract value 
as of the first valuation date of a Contract year without incurring a 
surrender charge (the ``free withdrawal amount''). The free withdrawal 
allowance applies to partial and full surrenders except full surrenders 
where the Contract owner transfers the Contract value to annuity 
contracts issued by other financial institutions.
    12. There is no surrender charge on Contract earnings, which equal 
the Contract value, minus the sum of all purchase payments received 
that have not been previously surrendered, minus the amount of the 15% 
free withdrawal, if applicable. In determining the amount of any 
surrender charge, surrenders will be deemed to be taken first from any 
free withdrawal amount, next from purchase payments on a first-in, 
first-out basis, and then from Contract earnings in excess of any 15% 
free withdrawal amount.
    13. TLAC proposes to deduct a daily mortality and expense risk 
charge of 1.02% for Contracts providing the standard death benefit. Of 
this amount, approximately .765% is for mortality risk and .255% is for 
expense risk. For Contracts providing the enhanced death benefit, TLAC 
proposes to deduct a daily mortality and expense risk charge of 1.30%. 
Of that amount, approximately 1.04% is for mortality risk and .26% is 
for expense risk.
    14. TLAC assumes the mortality risk that annuitants may live for a 
longer period than estimated when the guarantees in the Contract were 
established, thus requiring TLAC to pay out more in annuity income than 
it had planned. TLAC also assumes a mortality risk in that it may be 
obligated to pay a death benefit in excess of the Contract value. 
Because the enhanced death benefit provides a higher level of benefits 
than the standard death benefit, the mortality risks for the enhanced 
death benefit exceed those for the standard death benefit. The expense 
risk assumed by TLAC is that the other fees may be insufficient to 
cover the actual cost of administering the Contracts.
    15. If the mortality and expense risk charge is insufficient to 
cover the actual cost of the risks, TLAC will bear the shortfall. 
Conversely, if the charge is more than sufficient, the excess will be 
profit to TLAC and will be available for any proper corporate purpose, 
including payment of distribution expenses.
    16. If premium taxes are applicable to a Contract, they will be 
deducted when the Contract is purchased, upon surrender of the 
Contract, when 

[[Page 35244]]
retirement payments begin, or upon payment of a death benefit.

Applicants' Legal Analysis

    1. Applicants request an exemption pursuant to section 6(c) from 
sections 26(a)(2)(C) and 27(c)(2) to the extent necessary to permit the 
deduction from Fund BD II and Other Accounts of the Mortality and 
Expense Risk Charge. Sections 26(a)(2)(C) and 27(c)(2) of the Act, in 
relevant part, prohibit a registered unit investment trust, its 
depositor or principal underwriter, from selling periodic payment plan 
certificates unless the proceeds of all payments, other than sales 
loads, are deposited with a qualified bank and held under arrangements 
which prohibit any payment to the depositor or principal underwriter 
except a reasonable fee, as the Commission may prescribe, for 
performing bookkeeping and other administrative duties normally 
performed by the bank itself.
    2. Section 6(c) of the Act authorizes the Commission to exempt any 
person from any provision of the Act or any rule or regulation 
thereunder, if and to the extend that such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    3. Applicants also request relief with respect to Future Contracts 
that may be funded by Fund BD II and Other Accounts. Applicants 
represent that the terms of the relief requested with respect to any 
Future Contracts are consistent with the standards of section 6(c) of 
the Act. Without the requested relief, applicants represent that they 
would have to request and obtain exemptive relief for Future Contracts 
and any Other Account. Applicants represent that these additional 
requests for exemptive relief would present no issues under the Act not 
already addressed in this application, and that investors would not 
receive any benefits or additional protections thereby.
    4. Applicants represent that the requested relief is appropriate in 
the public interest, because it would promote competitiveness in the 
variable annuity contract market by eliminating the need for applicants 
to file redundant exemptive applications, thereby reducing their 
administrative expenses and maximizing the efficient use of resources. 
The delay and expense involved in repeatedly seeking exemptive relief 
would reduce applicants' ability to effectively take advantage of 
business opportunities as they arise.
    5. Applicants represent that the 1.02% mortality and expense risk 
charge for Contracts providing the standard death benefit is reasonable 
in relation to the risks assumed by TLAC under the Contracts and is 
within the range of industry practice for comparable annuity contracts. 
This representation is based on an analysis of publicly available 
information regarding similar contracts of other companies, taking into 
consideration such features as the charge levels, the benefits 
provided, and investment options under the contracts. TLAC will 
maintain at its home office, and make available to the SEC upon 
request, a memorandum setting forth in detail the products analyzed and 
the methodology and results of applicants' comparative review.
    6. Applicants represent that the mortality and expense risk charge 
of 1.30% for Contracts providing the enhanced death benefit is 
reasonable in relation to the risks assumed by TLAC under the 
Contracts. Based on its analysis, TLAC determined that an additional 
mortality risk charge of .28% was a reasonable charge for the enhanced 
death benefit. TLAC will maintain at its home office, and make 
available to the SEC upon request, a memorandum setting forth in detail 
the methodology used in applicants review.
    7. Applicants acknowledge that distribution expenses may in part be 
financed by profits derived from the mortality and expense risk 
charges. TLAC has concluded that there is a reasonable likelihood that 
the proposed distribution financing arrangement will benefit Fund BD II 
and investors in the Contracts. TLAC will maintain and make available 
to the Commission upon request a memorandum at its home office setting 
forth the basis of such conclusion.
    8. The Accounts will invest in a management investment company that 
has adopted a plan pursuant to rule 12b-1 under the Act only if that 
company has undertaken to have such plan formulated and approved by its 
board of directors, a majority of whom are not ``interested persons'' 
of the company within the meaning of section 2(a) (19) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-16567 Filed 7-5-95; 8:45 am]
BILLING CODE 8010-01-M