[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