[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                         
------------------------------------------------------------------------
                                                        Deducted from   
                                                      premium payments  
                                                   ---------------------
                  Contract years                      Up to    Excess of
                                                      target     target 
                                                     premium    premium 
                                                    (percent)  (percent)
------------------------------------------------------------------------
1 to 5............................................        8.0        3.0
6.................................................        3.0        3.0
After 6...........................................        3.0        3.0
------------------------------------------------------------------------

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