[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35984-35987]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17051]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21186; File No. 812-9596-01]


CIGNA Life Insurance Company, et al.

July 5, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

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

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APPLICANTS: CIGNA Life Insurance Company (``CIGNA Life''), CIGNA 
Variable Annuity Separate Account I (the ``Account''), certain separate 
accounts that may be established by CIGNA Life in the future to support 
certain variable annuity contracts issued by CIGNA Life (the ``Other 
Accounts'', collectively, with the Account, the ``Accounts'') and Cigna 
Financial Advisors, Inc. (``Cigna'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Sections 2(a)(32), 26 (a)(2)(C), 27(c)(1) 
and 27(c)(2) of the 1940 Act and Rule 22c-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek an order permitting CIGNA Life 
to deduct from the assets of the Accounts the mortality and expense 
risk charge imposed under certain variable annuity contracts issued by 
CIGNA Life (the ``Existing Contracts'') and under any other variable 
annuity contracts issued by CIGNA Life which are substantially 

[[Page 35985]]
similar in all material respects to the Existing Contracts and are 
offered through any of the Accounts (the ``Other Contracts'', together, 
with the Existing Contracts, the ``Contracts''). Additionally, where 
the Contract owner has selected an optional death benefit, the order 
would permit Applicants to deduct from the value of the Contract an age 
and gender based charge for the benefits selected. The charge would be 
deducted upon the occurrence of one of the following events: Upon the 
Contract anniversary; upon annuitization of the Contract; upon 
surrender of the Contract; or upon payment of the death benefit.

FILING DATE: The application was filed on May 10, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing on this application by writing to the 
Secretary of the SEC and serving 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 31, 1995 and should be accompanied by 
proof of service on Applicants in the form of an affidavit or, for 
lawyers, by certificate of service. Hearing requests should state the 
nature of the interest, the reason for the request and the issues 
contested. Persons may request notification of the date of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants: Robert A. Picarello, Esq., S-321, Connecticut 
General Life Insurance Company, 900 Cottage Grove Road, Hartford, 
Connecticut 06152.

FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, Senior Counsel, or 
Wendy Friedlander, Deputy Chief, both at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: Following is a summary of the application, 
the complete application is available for a fee from the Public 
Reference Branch of the SEC.

Applicants' Representations

    1. CIGNA Life, a stock life insurance company domiciled in 
Connecticut, is a wholly owned subsidiary of Connecticut General Life 
Insurance Company, which is, in turn, wholly owned by CIGNA Holdings 
Inc. CIGNA Holdings Inc. is wholly owned by CIGNA Corporation. The 
Account, established July 6, 1994 under Connecticut law, is registered 
with the Commission as a unit investment trust. The Account will fund 
the Existing Contracts issued by CIGNA Life. Applicants represent that 
the Other Accounts will be organized as unit investment trusts and will 
file registration statements under the 1940 Act and the Securities Act 
of 1933.
    2. Cigna will serve as the distributor of and the principal 
underwriter for the Existing Contracts. The application states that 
Cigna is also expected to serve as the distributor of and the principal 
underwriter for the Other Contracts. Cigna is a wholly owned subsidiary 
of Connecticut General Corporation which, in turn, is a wholly owned 
subsidiary of CIGNA Corporation. Cigna is a broker dealer registered 
under the Securities Exchange Act of 1934, an investment advisor 
registered under the Investment Advisers Act of 1940, and a member of 
the National Association of Securities Dealers, Inc.
    3. The Accounts are comprised of subaccounts (the ``Subaccounts''). 
The assets of each Subaccount of an Account will be invested in a 
corresponding portfolio of one of five investment companies (the 
``Funds''). Currently, the Funds have seventeen portfolios available 
for investment. Applicants state that each of the Funds is a 
diversified, open-end management investment company. Applicants also 
state that the number and identity of available Funds and investment 
portfolios may change.
    4. The Existing Contracts are combination fixed and variable 
annuity contracts issued on an individual basis. The Existing Contracts 
may be purchased on a nonqualified basis or with the proceeds from 
certain plans qualifying for favorable tax treatment under the Internal 
Revenue Code of 1986, as amended (the ``Code''). The minimum initial 
premium is $2,500 and the minimum for subsequent premiums is $100. A 
minimum initial premium of $2,000 will be permitted for an Individual 
Retirement Annuity under Section 408 of the Code.
    5. The Existing Contracts provide for certain guaranteed death 
benefits at no charge if an optional death benefit is not selected. The 
guaranteed death benefit is the value of the Account plus the value of 
the fixed account as of the date CIGNA Life receives due proof of death 
and a payment election. If the owner of a Contract dies prior to the 
annuity date, the death benefit will be paid to the beneficiary.
    6. CIGNA Life imposes an annual administrative fee of $35 on 
Contracts having a Contract value of less than $100,000. Until the 
earlier of the annuity date or a surrender of the Contract, the fee 
will be deducted pro rata from all of the Subaccounts of the Account in 
which the owner of the Contract invests. Where a variable payout has 
been selected after the annuity date, the fee will be deducted 
proportionately and in installments from the annuity payments. 
Applicants state that the annual administrative fee partially 
compensates CIGNA Life for administrative services associated with the 
Contracts and the Account.
    7. CIGNA Life also deducts a daily administrative expense charge 
equal annually to .10% of the average daily net asset value of the 
Account. Applicants represent that CIGNA Life does not anticipate a 
profit from either the annual administrative charge or from the daily 
administrative charge. Applicants also state that the charges are 
guaranteed not to increase for a Contract once that Contract has been 
issued. Finally, Applicants state that CIGNA Life will rely upon and 
comply with Rule 26a-1 under the 1940 Act in deducting both 
administrative charges.
    8. A contingent deferred sales charge (the ``Sales Charge'') of up 
to 7% may be assessed by CIGNA Life upon withdrawal of a portion of the 
Account's value or upon surrender of the Contract within the first 
seven years of the Contract. The Sales Charge is a percentage of the 
amount withdrawn and is assessed against the balance remaining in the 
Account after withdrawal. The percentage declines depending upon how 
many years have passed since the withdrawn premium was originally made 
by the Contract owner. Applicants state that CIGNA Life guarantees that 
aggregate withdrawal charges under a Contract will not exceed 8.5% of 
total premiums paid.
    9. CIGNA Life will impose a daily charge equal to an annual 
effective rate of 1.20% of the value of the net assets of the Account 
to compensate CIGNA Life for assuming certain mortality and expense 
risks in connection with the Contracts. Applicants state that 
approximately .70% of the 1.20% charge is attributable to mortality 
risk while approximately .50% is attributable to expense risk. The 
mortality and expense risk charge is guaranteed not to increase for a 
Contract once that Contract has been issued. If the mortality and 
expense risk charge is insufficient to cover actual costs of the risks 
assumed, CIGNA Life will bear the loss. Conversely, if the charge 
exceeds costs, this excess will be profit to CIGNA Life and will be 
available for any corporate purpose, including payment of expenses 
relating to the distribution of the Contracts. Applicants state that 
CIGNA Life expects a profit from the mortality and expense risk charge.

[[Page 35986]]

    10. Applicants state that the mortality risk borne by CIGNA Life 
arises from: (a) The contractual obligation of CIGNA Life to make 
annuity payments regardless of how long all annuitants or any 
individual annuitant may live; and (b) the guarantee of a death 
benefit. Applicants state that the expense risk assumed by CIGNA Life 
under the Contracts is the risk that the administrative charges 
assessed under the Contracts may be insufficient to cover actual 
administrative expenses incurred by CIGNA Life.
    11. When an application for a Contract is made, one or more 
optional death benefits may be selected by the Contract owner. The 
mortality and expense risks charge does not compensate for the 
anticipated costs of providing the optional death benefits. There is, 
therefore, an additional charge for these benefits. Applicants describe 
four optional death benefits. Once election is completed, the optional 
death benefits chosen remain in effect for the life of the Contract 
absent a written request by the owner of the Contract for termination. 
Only one request for termination may be given. Optional death benefits 
must be selected at the time of application, and can not be added at a 
later date. The optional death benefits provide for the payment of a 
certain amount as the death benefit if the value of the Contract is 
less than that amount when the death benefit is paid.
    12. On each anniversary of a Contract, a charge will be made for 
any optional death benefit in effect for the Contract year just ended. 
If the charge is applicable, it will be computed in accordance with 
mortality tables which are made a part of the Contract and reflect the 
age and the gender of the owner of the Contract. The charge is based 
upon the ``amount at risk.'' The amount at risk is the excess of the 
death benefit which would be payable at the end of a Contract month 
over the Account value. There is no deduction made from the Account 
value until the Contract anniversary. At the Contract anniversary, the 
sum of any charges accrued at the end of each Contract month during the 
previous year is deducted. If the owner or the annuitant, as 
applicable, were to die on other than a Contract anniversary, all 
charges accrued will be deducted from the death benefit payable, the 
surrender proceeds or from the amount applied to provide annuity 
benefits.
    13. Applicants state that CIGNA Life expects to derive a profit 
from the optional death benefit charge. Applicants also represent that 
the table of charges in the application, which sets forth the charges 
for the optional death benefits, is guaranteed not to change for any 
Contract once that Contract is issued.
    14. CIGNA Life may incur premium taxes relating to the Contracts 
and CIGNA Life will deduct these taxes upon withdrawal, annuitization 
or payment of the death benefit. CIGNA Life reserves the right to 
deduct charges made for federal, state or local taxes incurred by CIGNA 
Life in the future.

Applicants' Legal Analysis and Conditions

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act in connection with Applicants' assessment of 
the daily charge for the mortality and expense risks under the 
Contracts and for Applicants' assessment, where applicable, of the 
optional death benefit charge. Applicants state that the requested 
extension of relief to the Other Accounts and the Other Contracts is 
appropriate in the public interest. Applicants assert that the relief 
would promote competitiveness in the variable annuity market by 
eliminating the need to file redundant exemptive applications and 
would, therefore, reduce administrative expenses and maximize efficient 
use of resources. Applicants argue that the delay and expense involved 
in having to repeatedly seek exemptive relief would impair the ability 
of CIGNA Life to take advantage effectively of business opportunities 
as those opportunities arise. Applicants assert that the requested 
relief is consistent with the purposes of the 1940 Act and the 
protection of investors for the same reasons. Finally, Applicants state 
that were CIGNA Life required to seek repeated exemptive relief with 
respect to the issues addressed in the application, no additional 
benefit or protection would be provided to investors through the 
redundant filings.
    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 assert that the charge for mortality and expense 
risks and the charge for the optional death benefit are reasonable in 
relation to the risks assumed by CIGNA Life under the Contracts.
    4. Applicants represent that the mortality and expense risk charge 
is within the range of industry practice with respect to comparable 
annuity products. Applicants state that this representation is based 
upon Applicants' analysis of a survey of comparable contracts issued by 
a large number of insurance companies taking into consideration such 
factors as: Current charge levels; benefits provided; charge level 
guarantees; and guaranteed annuity rates. Applicants represent that 
CIGNA Life will maintain at its home office, available to the 
Commission, a memorandum setting forth in detail the methodology and 
the results of the comparative survey analyzed by Applicants.
    5. Applicants represent that the charge for the optional death 
benefit is determined by multiplying, at the end of each Contract 
month, the actual amounts at risk under the benefit or benefits 
selected by the cost per $1,000 of the amount at risk. Applicants also 
represent that the amounts at risk used will be actual figures, and 
that the determination of the figures on a monthly basis is reasonable. 
Applicants state that the cost per $1,000 of amount at risk, i.e., the 
cost of insurance charge, was determined by using assumptions regarding 
the expected mortality of the Contract owners. Applicants state that 
these assumptions reflect that the Contracts are both insurance and 
investment vehicles and could appeal to a different group than would a 
traditional annuity. CIGNA Life represents that there could be less 
self selection of this product by healthy individuals than a 
traditional annuity. Applicants further state that, because of the 
optional death benefits provided under the Contracts without health 
underwriting, there could be self selection by unhealthy individuals 
who would not ordinarily qualify for traditional life insurance. CIGNA 
Life asserts that the foregoing mortality assumptions are reasonable. 
Applicants state that CIGNA Life undertakes to maintain, at its home 
office and available to the Commission, a memorandum detailing the 
methodology used in determining that the optional death benefit charge 
is reasonable in relation to the risks assumed by CIGNA Life under the 
Contracts.

[[Page 35987]]

    6. Applicants acknowledge that the Sales Charge will likely be 
insufficient to cover all costs relating to the distribution of the 
Contracts. To the extent distribution costs are not covered by the 
Sales Charge, CIGNA Life will recover its distribution costs from the 
assets of the general account. These assets may include that portion of 
the mortality and expense risk charge which is profit to CIGNA Life, 
and that portion of the optional death benefit charge that is profit. 
Applicants represent that CIGNA Life has concluded that there is a 
reasonable likelihood that the proposed distribution financing 
arrangement will benefit the Account, the Other Accounts and the owners 
of the Contracts. The basis for this conclusion is set forth in a 
memorandum which will be maintained by CIGNA Life at its home office 
and will be made available to the Commission.
    7. CIGNA Life also represents that the Accounts will invest only in 
open-end management investment companies which undertake, in the event 
such company adopts a plan under Rule 12b-1 of the 1940 Act to finance 
distribution expenses, to have such plan formulated and approved by 
either the company's board of directors or the board of trustees, as 
applicable, a majority of whom are not interested persons of such 
company within the meaning of the 1940 Act.
    8. Applicants also request an order under Section 6(c) granting 
exemptions from Sections 2(a)(32) and 27(c)(1) of the 1940 Act and Rule 
22c-1 thereunder to the extent necessary to permit the deduction from 
Account values of the optional death benefit charges at the following 
times: upon surrender; upon annuitization; or upon payment of a death 
benefit.
    9. Section 27(c)(1) requires that periodic payment plan 
certificates, such as the Contracts, be redeemable securities. Section 
2(a)(32) defines a ``redeemable security'' as one which, upon 
presentation to the issuer, entitles the holder to receive 
``approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.'' Rule 22c-1 under the 1940 Act 
prohibits redemptions ``except at a price based on the current net 
asset value of such security which is next computed * * *.'' Applicants 
concede that where the optional death benefit charge is imposed upon 
annuitization, surrender or payment of the death benefit, the net 
dollar amount paid upon surrender or in the form of a death benefit, or 
applied to the purchase of annuity units under the Contract, will be 
less than the full accumulation unit value of the variable portion of 
the Contract. Applicants state, however, that the gross proceeds will 
equal the full net asset value of the variable portion of the Contract. 
Applicants represent that the difference between the gross proceeds and 
the net dollar amount paid or applied will be equal to the unpaid 
aggregate charges for the optional death benefit that have accrued 
since the most recent Contract anniversary. Applicants state that if 
the cost for the optional death benefit were deducted from the value of 
the Contract upon accrual, there would be no difference between the 
gross proceeds and the net amount paid or applied. Applicants argue 
that payment of the accrued but unpaid charges out of the gross 
proceeds of redemption, annuitization or a death benefit should be 
viewed as a delayed deduction of otherwise permitted charges. 
Applicants assert that the prohibitions of Sections 2(a)(32) and 
27(c)(1) and Rule 22c-1 are designed to prevent diminution or dilution 
of investment company assets and should not, therefore, be applied to a 
transaction that, but for its timing, would be otherwise permissible.

Conclusion

    Applicants assert that for the reasons and upon the facts set forth 
above, the requested exemptions from Sections 2(a)(32), 26(a)(2)(C), 
27(c)(1) and 27(c)(2) of the 1940 Act and Rule 22c-1 thereunder 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-17051 Filed 7-11-95; 8:45 am]
BILLING CODE 8010-01-M