[Federal Register Volume 60, Number 160 (Friday, August 18, 1995)]
[Notices]
[Pages 43178-43180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20480]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21279; No. 812-9406]
Security Life of Denver Insurance Company, et al.
August 11, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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[[Page 43179]]
APPLICANTS: Security Life of Denver Insurance Company (``Security
Life''), Security Life Separate Account L1 (``Separate Account''), and
ING America Equities, Inc. (formerly known as SLD Equities, Inc.)
(``ING Equities'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Section 27(a)(3) of the 1940 Act and Rule 6e-
3(T)(b)(13)(ii) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit the issuance
of a variable life insurance contract (``Contract'') with a front-end
sales load structure in which the percentage of sales charge deducted
from any target premium payment could exceed that percentage deducted
from any premium payment made in a prior year in excess of the target
premium.
FILING DATE: The application was filed on December 30, 1994, and
amended on July 26, 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 by writing to the Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on September 1, 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
requestor's interest, the reason for the request, and the issues
contested.
Persons may request notification of a hearing by writing to the
Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street NW., Washington, D.C. 20549. Applicants, c/o Jerrianne Smith,
Security Life of Denver Insurance Company, Security Life Center, 1290
Broadway, Denver, Colorado 80203-5699.
FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, Assistant Special Counsel, or Brenda Sneed, Assistant
Director, at (202) 942-0670, Office of Insurance Products (Division of
Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. Security Life, a Colorado stock life insurance company,
principally is engaged in offering life insurance, annuities and
pension products. Security Life is licensed to do business in the
District of Columbia and all states except New York. Security Life is
an indirect wholly-owned subsidiary of Internationale Nederlanden
Groep, N.V. (``ING''). ING is headquartered in The Hague, Netherlands.
ING is subject to the oversight of Internationale Nederlanden America
Life Corporation, located in Georgia, which also is an indirect wholly-
owned subsidiary of ING.
2. The Separate Account was established by Security Life as a
separate account under the laws of Colorado. The Separate Account is
registered as a unit investment trust under the 1940 Act.\1\ A
registration statement also has been filed under the Securities Act of
1933 in connection with the offering of the Contract by the Separate
Account.\2\ The Separate Account presently has seventeen divisions
(``Divisions''), each of which invests in shares of a corresponding
portfolio of an open-end diversified management investment company.
\1\ Applicants incorporate this registration statement by
reference to the extent necessary to support and supplement the
descriptions and representations set out in this application.
\2\ Applicants incorporate this registration statement by
reference to the extent necessary to support and supplement the
descriptions and representations set out in this application.
Applicants state that the Separate Account currently funds other
variable life insurance contracts registered under the 1933 Act and,
in the future, may fund other forms of contracts.
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3. ING Equities (formerly, SLD Equities, Inc.),\3\ a wholly-owned
subsidiary of Security Life, is the principal underwriter for the
Contract. ING Equities 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.
\3\ Applicants represent that an amendment to the application
providing this information will be filed during the notice period.
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4. The Contract is a flexible premium variable universal life
insurance contract issued by Security Life in reliance on Rule 6e-3(T)
under the 1940 Act. The Contract provides insurance coverage with
flexibility in death benefits and premium payments and is designed
primarily for use on a multiple-life basis where the insureds share a
common employment or business relationship. The Contract provides for
allocation of net premium payments to one or more of the Divisions and
to a Guaranteed Interest Division which guarantees a minimum fixed rate
of interest, or both. The Contract also provides for certain guarantees
against lapse. If premium payments are discontinued, the Contract will
continue in effect until the cash value, less any Contract loans and
accrued loan interest, no longer can cover the monthly deductions for
the benefits selected, after which the Contract will lapse.\4\
\4\ During the first three Contract years, the Contract is
guaranteed not to lapse, regardless of Account Value, if certain
minimum annual premium requirements have been met. Further, if one
of the Contract's Guaranteed Minimum Death Benefit provisions has
been purchased, the Stated Death Benefit portion of the Contract
will remain in effect until the end of the Guarantee Period so long
as the conditions for the guarantee are met.
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5. Certain fees and charges are deducted under the Contract,
including: (a) a charge equal to 2.5% of each premium for state premium
taxes; (b) a charge currently equal to 1.5% of each premium for the
estimated costs for the Federal income tax treatment of Security Life's
deferred acquisition costs under Section 848 of the Internal Revenue
Code of 1986, as amended, (commonly referred to as the ``DAC Tax'');\5\
(c) a mortality and expense risk charge at an annual rate of 0.75%; (d)
an initial Contract charge of $10 per month from Account Value for the
first five Contract years for administrative expenses, cost of
insurance, Guaranteed Minimum Death Benefit coverage, if elected, and
any additional benefits provided by rider;\6\ and (e) administrative
charges in connection with certain Contract transactions, consisting of
(i) a service fee equal to the lesser of $25 or 2% of amount requested
for each partial withdrawal, (ii) a fee of $25 for each additional
transfer after the first 12 in a Contract year, (iii) a fee of $25 for
each premium allocation change after the first five in each Contract
year, and (iv) reservation of the right to charge a fee not to exceed
$25 for Contract illustrations in excess of one per Contract year.
\5\ By order dated July 14, 1994, the Commission granted
Applicants exemptive relief to deduct this charge. See Investment
Company Act Rel. No. 20407 (Jul. 14, 1994) (Order), and 20362 (June
17, 1994) (Notice).
\6\ The monthly charge is comprised of a per Contract charge of
$5 per month plus a charge of $0.0125 per $1,000 of Stated Death
Benefit (or Target Death Benefit, if greater), and is limited to a
maximum of $20 per month. The cost of insurance charges and the cost
of any additional benefits added by rider are deducted monthly in
amounts not to exceed the guaranteed maximum rates stated in the
Contract. The charge for the Guaranteed Minimum Death Benefit, if
purchased, is currently $0.005 per $1,000 (and guaranteed not to
exceed $0.01 per $1,000) of Stated Death Benefit each month during
the Guarantee Period.
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Applicants state that the administrative charges imposed in
connection with the Contracts are not designed to yield a profit to
Security Life. All administrative and other
[[Page 43180]]
charges in connection with the Contracts will comply with all
applicable requirements of Rule 6e-3(T), subject only to the relief
requested herein.
6. A front-end sales charge also is deducted under the Contract. As
illustrated below, for each of the first five Contract years, the
front-end sales charge is equal to 8% of premiums paid up to the
Contract's ``target premium,'' \7\ and 3% of premiums paid in excess of
the target premium. In the sixth Contract year and thereafter, the
sales charge is equal to 3% of all premium amounts.\8\
\7\ Target premiums are actuarially determined based on the age,
sex and premium class of the insured.
\8\ For a Contract with multiple coverage segments of stated
death benefit, premiums paid are allocated to the segments in the
same proportion that the guideline annual premium (as defined by
Federal income tax law) for each segment bears to the total
guideline annual premium for the Contract.
Front-End Sales Loads
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Deducted from
premium payments
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Contract years Up to Excess of
target target
premium premium
(percent) (percent)
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1 to 5............................................ 8.0 3.0
6................................................. 3.0 3.0
After 6........................................... 3.0 3.0
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Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act, in pertinent part, provides that
the Commission, by order upon application, may conditionally or
unconditionally exempt any person, security or transaction, or any
class or classes of persons, securities or transactions, from any
provision or provisions of the 1940 Act, 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 contract and provisions of the 1940 Act.
2. Section 27(a)(3) of the 1940 Act generally provides, with
respect to periodic payment plan certificates, that the amount of sales
charge deducted from any of the first twelve monthly payments, of their
equivalent, can not exceed proportionately the amount deducted from any
other such payment. Further, the amount deducted from any subsequent
payment can not exceed proportionately the amount deducted from any
other subsequent payment.
3. Rule 6e-3(T)(b)(13)(ii) grants an exemption from Section
27(a)(3) of the 1940 Act, provided that the proportionate amount of
sales charge deducted from any premium payment does not exceed the
proportionate amount deducted from any prior premium payment, unless an
increase is caused by the grading of cash value into reserves or
reductions in sales of the annual cost of insurance. Rule 6e-
3(T)(b)(13)(ii) thus permits a decrease in sales load for any
subsequent premium payment, but not an increase.
4. Applicants submit that the requested relief is necessary
because, in any one of the first five Contract years, the 8% front-end
sales charge deducted from premium payments not in excess of the target
premium could exceed the 3% front-end sales charge deducted from any
premium payments made in a prior year in excess of the target premium.
Applicants request exemptive relief because the Contract's sales load
structure appears to violate the ``stair-step'' provisions in Section
27(a)(3) and Rule 6e-3(T)(13)(ii).
5. Applicants state that the stair-step requirements of Section
27(a)(3) are designed to address the abuse of periodic payment plan
certificates that imposed unduly complicated sales load structures,
which purchasers could have difficulty understanding. Applicants submit
that the stair-step features of the sales charge design of the Contract
are not unduly complicated and will clearly be of benefit to Contract
owners. Further, full disclosure of the sales charge features of the
Contract will be contained in the Contract prospectus.
6. Applicants submit that the sales charges are not designed to
generate more revenues from later premium payments than from earlier
payments. Applicants note that, to the extent that sales charges
decline after the early Contract years, greater amounts, in general,
tend to be paid with respect to payments made in early Contract years
than with respect to payments made in later years. This varies somewhat
with respect to individual Contracts, to the extent that the precise
amount of sales charges imposed depends, among other things, on the
degree to which a Contract owner exercises the premium and other
flexibility features of the Contract. The exercise of these features,
however, is solely within the control of the Contract owner.
7. Applicants submit that the Contract could be designed to avoid
the stair-step violation and qualify for the exemptive relief from
Section 27(a)(3) afforded by Rule 6e-3(T)(b)(13)(ii) if a full 8%
front-end sales load were to be assessed against all premiums paid
during the first five Contract years (including those in excess of the
target premium) and a 3% sales charge were to be assessed against
premiums paid in the sixth Contract year and thereafter. Applicants
believe, however, that the Contract's existing sales charge design is
more favorable to Contract owners because premiums in excess of the
target premium will be paid without imposition of an additional 5%
front-end sales load. Applicants state that the 5% additional sales
charge is not imposed, despite the fact that Rule 6e-3(T) would permit
the deduction of the additional amounts.
8. Moreover, Applicants represent that the sales charge structure
is based on Security Life's operating expenses for the sale of the
Contract. Thus, this structure reflects in part the lower overall
distribution costs associated with excess premiums paid over the life
of a Contract. Applicants submit that it would not be in the best
interest of a Contract Owner to require the imposition of a sales load
structure that is higher than Applicants deem necessary to adequately
defray their expenses.
Conclusion
For the reasons discussed above, Applicants submit that the
requested exemptions from Section 27(a)(3) of the 1940 Act and Rule 6e-
3(T)(b)(13)(ii) thereunder, are necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the contract and provisions of the 1940
Act. Therefore, the standards set forth in Section 6(c) of the 1940 Act
are satisfied.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20480 Filed 8-17-95; 8:45 am]
BILLING CODE 8010-01-M