[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Notices]
[Pages 36847-36849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17521]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21202; File No. 812-9482]


Ameritas Life Insurance Corp., et al.

July 11, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Ameritas Life Insurance Corp. (``Ameritas''), Ameritas Life 
Insurance Corp. Separate Account LLVL (``Separate Account''), and 
Ameritas Investment Corp. (``Investment Corp.'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for 
exemptions from Section 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder.

SUMMARY OF APPLICATION: The Applicants seek an order to permit them to 
deduct from premium payments received under certain flexible premium 
variable life insurance contracts (the ``Policies'') issued through the 
Separate Account an amount that is reasonable in relation to Ameritas's 
increased federal tax burden resulting from the application of Section 
848 of the Internal Revenue Code of 1986, as amended (the ``Code''). 
The deduction would not be treated as sales load.

FILING DATE: The application was filed on February 15, 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 Secretary of the SEC 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 August 7, 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 who wish to be 
notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549; 
Applicants, c/o Norman M. Krivosha, Esq., Ameritas Life Insurance 
Corp., 5900 ``O'' Street, Lincoln, Nebraska 68510.

FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney, 
or Patrice M. Pitts, Special Counsel, Division of Investment Management 
(Office of Insurance Products), at (202) 942-0670.

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. Ameritas, a mutual life insurance company domiciled in Nebraska 
since 1887, is licensed to sell insurance in 49 states, and has assets 
of over $2 billion.
    2. In 1994, the Board of Directors of Ameritas established the 
Separate Account under Nebraska law. The Separate Account is registered 
as a unit investment trust under the 1940 Act.
    3. Currently, there are eleven subaccounts within the Separate 
Account available to policyowners for investment. Each subaccount will 
invest only in the shares of a corresponding portfolio of the Vanguard 
Variable Insurance Fund or Neuberger & Berman Advisers Management Trust 
(collectively the ``Funds''). Each Fund is 

[[Page 36848]]
registered with the SEC as an open-end diversified management 
investment company. The assets of the Separate Account are segregated 
from all other Ameritas assets, and are not chargeable with liabilities 
arising out of any other business which Ameritas may conduct.
    4. Investment Corp. is a wholly-owned subsidiary of Ameritas and is 
the principal underwriter of the Policies. Investment Corp. 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.
    5. The Policies are issued through the Separate Account pursuant to 
Rule 6e-3(T) under the 1940 Act. The Policies will provide for (i) 
lifetime insurance coverage on the named insured up to age 100, (ii) 
cash value accumulation, (iii) surrender rights, and (iv) loan 
privileges. The Policies contain two death benefit options. Death 
benefit proceeds are payable to the beneficiary of Policies upon 
receipt by Ameritas of satisfactory proof of death. The amount of the 
death benefit proceeds is equal to: (i) the death benefit, plus (ii) 
additional life insurance proceeds provided by any riders, minus (iii) 
outstanding policy loans, minus (iv) any overdue monthly deduction, 
including the deduction for the month of death. The Policies 
incorporate a guaranteed death premium feature under which Policies are 
guaranteed not to lapse during the first three policy years, provided 
the specified amount of premiums is paid in advance on a monthly or 
yearly basis.
    6. In the Omnibus Budget Reconciliation Act of 1990, Congress 
amended the Code by, among other things, enacting Section 848 thereof 
which requires that life insurance companies capitalize and amortize 
over a period of ten years part of their general expenses for the 
current year. Under prior law, these expenses were deductible in full 
from the current year's gross income. Section 848, in effect, 
accelerates the realization of income from specified insurance 
contracts for federal income tax purposes and, therefore, the payment 
of taxes on the income generated by those contracts. Taking into 
account the time value of money, Section 848 increases the tax burden 
borne by the insurance company because the amount of general deductions 
that must be capitalized and amortized is measured by premium payments 
received under specified contracts, such as the Policies. In this 
respect, the impact of Section 848 can be compared with that of a state 
premium tax.
    7. The Policies to which the tax burden charge (the ``DAC tax 
charge'') will apply fall into the category of life insurance contracts 
identified under Section 848 as those for which the percentage of net 
premiums that determines the amount of otherwise currently deductible 
general expenses to be capitalized and amortized is 7.7 percent.
    8. The increased tax burden resulting from the applicability of 
Section 848 to every $10,000 of net premiums received may be quantified 
as follows. In the year when the premiums are received, Ameritas's 
general deductions are reduced by $731.50--i.e., an amount equal to (a) 
7.7 percent of $10,000 ($770) minus (b) one-half year's portion of the 
ten-year amortization ($38.50). Using a 35 percent corporate tax rate, 
this computes to an increase in tax for the current year of $256.03 
(i.e., $731.50 multiplied by .35). This increase in tax will be 
partially offset by increased deductions that will be allowed during 
the next ten years as a result of amortizing the remainder of the 
$770--$77 in each of the following nine years, and $38.50 in the tenth 
year.
    9. Capital which must be used by Ameritas to satisfy its increased 
federal tax burden under Section 848 (resulting from the receipt of 
premiums) is not available to Ameritas for investment. Because it seeks 
an after tax rate of return of 10 percent on its invested capital,\1\ 
Ameritas submits that a discount rate of at least 10 percent is 
appropriate for use in calculating the present value.

    \1\ In determining its cost of capital, Ameritas considered a 
number of factors. Ameritas first determined a reasonable risk-free 
rate of return that could be expected to be earned over the long 
term, based on current market rates, inflation, and expected future 
interest rate trends. Ameritas then determined the premium it needed 
to earn over this risk-free rate in order to compensate for the risk 
profile of the insurance business. Ameritas also took into 
consideration any information available about the rates of return 
earned by other mutual life insurance companies. Ameritas represents 
that these factors are appropriate considerations in determining it 
cost of capital.
    Ameritas also took into account the ratio of surplus to assets 
that it seeks to maintain. Ameritas represents that maintaining the 
ratio of surplus to assets is critical to maintaining both 
competitive ratings from various rating agencies and to offering 
competitive pricing on new and in force business. Consequently, 
Ameritas asserts that its surplus must grow at least at the same 
rate as its assets.
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    10. Using a corporate tax rate of 35 percent, and assuming a 
discount rate of 10 percent, the present value of the tax effect of the 
increased deductions allowable in the following ten years comes to 
$160.41. Because this amount partially offsets the increased tax 
burden, applying Section 848 to the specified contracts imposes an 
increased tax burden on Ameritas equal to a present value of $95.62 
(i.e., $256.03 minus $160.41) for each $10,000 of net premiums.
    11. Ameritas does not incur incremental income tax when it passes 
on state premium taxes to contract owners, because state premium taxes 
are deductible when computing federal income taxes. In contrast, 
federal income taxes are not tax-deductible when computing Ameritas's 
federal income taxes. Therefore, to offset fully the impact of Section 
848, Ameritas must impose an additional charge that would make it whole 
not only for the $95.62 additional tax burden attributable to Section 
848, but also for the tax on the additional $95.62 itself. This 
additional charge can be computed by dividing $95.62 by the complement 
of the 35 percent federal corporate income tax rate (i.e., 65 percent), 
resulting in an additional charge of $147.11 for each $10,000 of net 
premiums, or 1.47 percent.
    12. Tax deductions are of value to Ameritas only to the extent that 
it has sufficient gross income to fully utilize the deductions. Based 
upon its prior experience, Ameritas submits that it is reasonable to 
expect that virtually all future deductions will be fully taken.
    13. Ameritas submits that a DAC tax charge of 1.00 percent of 
premium payments would reimburse it for the impact of Section 848 on 
its federal tax liabilities. Ameritas represents that a 1.00 percent 
charge is reasonably related to its increased tax burden under Section 
848, taking into account the benefit to Ameritas of the amortization 
permitted by Section 848, and the use by Ameritas of a 10 percent 
discount rate in computing the future deduction resulting from such 
amortization, such rate being the equivalent of Ameritas's cost of 
capital.

Applicants' Legal Analysis

    1. Pursuant to Section 6(c) of the 1940 Act, the SEC may, by order 
upon application, conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities or transactions, from any provision(s) of the 1940 Act or 
from any rule or regulation 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 
intended by the policy and provisions of the 1940 Act.
    2. Applicants request an order of the Commission pursuant to 
Section 6(c) of the 1940 Act, exempting them from the provisions of 
Section 27(c)(2) of the 1940 Act and 6e-3(T)(c)(4)(v) thereunder to the 
extent necessary to permit 

[[Page 36849]]
Applicants to deduct from premium payments received in connection with 
the Policies an amount that is reasonable in relation to Ameritas's 
increased federal tax burden created by its receipt of such premium 
payments. The deduction would not be treated as sales load.
    3. Section 2(a)(35) of the 1940 Act defines ``sales load'' as the 
difference between the price of a security offered to the public and 
that portion of the proceeds from its sale which is received and 
invested or held by the issuer (or in the case of a unit investment 
trust, by the depositor or trustee), less any portion of such 
difference deducted for trustee's or custodian's fees, insurance 
premiums, issue taxes, or administrative expenses or fees which are not 
properly chargeable to sales or promotional activities.
    4. Section 27(c)(2) of the 1940 Act prohibits a registered 
investment company or a depositor or underwriter for such company from 
making any deduction from purchase payments made under periodic payment 
plan certificates other than a deduction for sales load.
    5. Rule 6e-3(T)(b)(13)(iii), among other things, provides relief 
from Section 27(c)(2) of the 1940 Act to the extent necessary to permit 
the deduction of certain charges other than sales load, including 
``[t]he deduction of premium or other taxes imposed by any state or 
other governmental entity.'' Applicants represent that the requested 
exemption is necessary if they are to rely on certain provisions of 
Rule 6e-3(T)(b)(13).
    6. Rule 6e-3(T)(c)(4) defines ``sales load'' during a contract 
period as the excess of any payments made during that period over 
certain specified charges and adjustments, including ``[a] deduction 
for and approximately equal to state premium taxes.'' Applicants submit 
that the proposed DAC tax charge is akin to a state premium tax charge 
and, therefore, should be treated as other than sales load for purposes 
of the 1940 Act and the rules thereunder.
    7. Applicants acknowledge that the proposed DAC tax charge does not 
fall squarely into any of the itemized categories of charges or 
adjustments set forth in Rule 6e-3(T)(c)(4); a literal reading of that 
rule arguably does not exclude such a ``tax burden charge'' from sales 
load. Applicants maintain, however, that there is no public policy 
reason why a tax burden charge designed to cover the expense of federal 
taxes should be treated as sales load. Applicants also assert that 
nothing in the administrative history of Rule 6e-3(T) suggests that the 
SEC intended to treat tax charges as sales load.
    8. Applicants assert that the public policy that underlies Rule 6e-
3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and 
27(h)(1), is to prevent excessive sales loads from being charged in 
connection with the sale of periodic payment plan certificates. 
Applicants submit that the treatment of a tax burden charge 
attributable to the receipt of purchase payments as sales load would in 
no way further this legislative purpose because such a charge has no 
relation to the payment of sales commissions or other distribution 
expenses. Applicants further submit that the Commission has concurred 
with this conclusion by excluding deductions for state premium taxes 
from the definition of sales load in Rule 6e-3(T)(c)(4).
    9. Applicants assert that the genesis of Rule 6e-3(T)(c)(4) 
supports this analysis. In this regard, Applicants note that Section 
2(a)(35) of the 1940 Act provides a scale against which the percent 
limits of Sections 27(a)(1) and 27(h)(1) thereof may be measured. 
Applicants submit that the intent of the SEC in adopting Rule 6e-
3(T)(c)(4) was to tailor the general terms of Section 2(a)(35) top 
flexible premium variable life insurance contracts in order, among 
other things, to facilitate verification by the SEC of compliance with 
the sales load limits set forth in Rule 6e-3(T)(b)(13)(i). Applicants 
submit that Rule 6e-3(T)(c)(4) does not depart, in principal, from 
Section 2(a)(35).
    10. Applicants further assert that Section 2(a)(35) excludes from 
the definition of sales load under the 1940 Act deductions from 
premiums for ``issue taxes.'' Applicants submit that, by extension, the 
exclusion from ``sales load'' (as defined in Rule 6e-3(T)) of charges 
to cover an insurer's expenses attributable to its federal tax 
obligations is consistent with the protection of investors and the 
purposes intended by the policies and provisions of the 1940 Act.
    11. Applicants also submit that the reference in Section 2(a)(35) 
to administrative expenses or fees that are ``not properly chargeable 
to sales or promotional activities'' suggests that the only deductions 
intended to fall within the definition of sales load are those that are 
properly chargeable to such activities. Because the proposed DAC tax 
charge will be used to compensate Ameritas for its increased federal 
tax burden attributable to the receipt of premiums, and such deductions 
are not properly chargeable to sales or promotional activities, 
Applicants assert that the language of Section 2(a)(35) is another 
indication that not treating such deductions as sales load is 
consistent with the purposes intended by the policies of the 1940 Act.

Condition for Relief

    1. Applicants agree to comply with the following conditions for 
relief.
    a. Ameritas will monitor the reasonableness of the 1.00 percent 
proposed DAC tax charge.
    b. The registration statement for the Policies under which the 1.00 
percent charge is deducted will: (i) disclose the charge; (ii) explain 
the purpose of the charge; and (iii) state that the charge is 
reasonable in relation to Ameritas's increased federal tax burden 
resulting from the application of Section 848 of the Code.
    c. The registration statement for the Policies under which the 1.00 
percent charge is deducted will contain as an exhibit an actuarial 
opinion as to: (i) the reasonableness of the charge in relation to 
Ameritas's increased federal tax burden resulting from the application 
of Section 848 of the Code; (iii) the reasonableness of the targeted 
rate of return that is used in calculating such charge; and (iii) the 
appropriateness of the factors taken into account by Ameritas in 
determining such targeted rate of return.

Conclusion

    For the reasons summarized above, Applicants represent that the 
requested relief from Section 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder is necessary or appropriate in the public 
interest and otherwise meets the standards of Section 6(c) of the 1940 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17521 Filed 7-17-95; 8:45 am]
BILLING CODE 8010-01-M