[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Notices]
[Pages 43634-43637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20772]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21283; No. 812-9376]


First Variable Life Insurance Company, et al.

August 15, 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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applicants: First Variable Life Insurance Company (``First Variable''), 
First Variable Annuity Fund E (``Separate Account''), and First 
Variable Capital Services, Inc. (``Capital Services'').

relevant 1940 act sections: Order requested under Section 6(c) of the 
1940 Act granting exemptions from the provisions of Sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act.

summary of application: Applicants seek an order to permit the 
deduction of a mortality and expense risk charge from the assets of the 
Separate Account or any other separate account (``Other Accounts'') 
established by First Variable to support certain variable annuity 
contracts (``Contracts'') as well as other variable annuity contracts 
that are substantially similar in all material respects to the 
Contracts (``Future Contracts''). This order will supersede prior 
orders issued by the Commission permitting Applicants to issue variable 
annuity contracts that provide for the deduction of mortality and 
expense risk charges from the Separate Account.

filing date: Applicants filed their application on December 19, 1994, 
and filed amended applications on May 22, 1995, July 21, 1995, and 
August 15, 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 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 
September 11, 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 SEC.

addresses: Secretary, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549. Applicants, Arnold Bergman, First 
Variable Life Insurance Company, 600 Atlantic Avenue, 28th Floor, 
Boston, Massachusetts 02210.

for further information contact: Pamela K. Ellis, Senior Counsel, or 
Wendy Finck Friedlander, Deputy Chief 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 SEC's Public 
Reference Branch. 

[[Page 43635]]


Applicants' Representations

    1. First Variable, a stock life insurance company, is organized in 
Arkansas, and licensed to do business in the District of Columbia, the 
United States Virgin Islands, and all states except New York.
    2. The Separate Account is a separate account established by First 
Variable to fund the Contracts. The Separate Account is registered with 
the Commission as a unit investment trust under the 1940 Act, and 
interests in the Contracts are registered as securities under the 
Securities Act of 1933.
    3. Capital Services will serve as the distributor and the principal 
underwriter for the Contracts. Capital Services, a wholly owned 
subsidiary of First Variable, 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.
    4. First Variable Advisory Services Corp., a wholly owned 
subsidiary of First Variable, is the investment advisor for the Trust.
    5. By orders of the Commission,\1\ Applicants were granted 
exemptions under Section 6(c) of the 1940 Act from the provisions of 
Section 26(a)(2) and 27(c)(2) to the extent necessary to permit the 
deduction of mortality and expense risk charges from the assets of the 
Separate Account in connection with the issuance of certain variable 
annuity contracts. Applicants now request that such orders be 
superseded by the order requested in this application.

    \1\ First Variable Life Ins. Co., Inv. Co. Act Rel. Nos. 18741 
(Jun. 1, 1992) (Order), and 18695 (May 6, 1992) (Notice); Monarch 
Life Ins. Co., Act Rel. Nos. 18165 (May 23, 1991) (Order), and 18117 
(Apr. 26, 1991) (Notice); and First Variable Life Ins. Co., Inv. Co. 
Act Rel. Nos. 15701 (Apr. 24, 1987) and 15644 (Mar. 26, 1987) 
(collectively, ``Existing Orders'').
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    6. The Contracts are three variable annuity contracts: VISTA 
Contracts, Direct Annuity Contracts, and Direct Annuity Plus Contracts. 
First Variable will make the Contracts available for use by individuals 
in retirement plans which may or may not qualify for federal tax 
advantages under the Internal Revenue Code. Each of the Contracts 
requires certain minimum initial purchase payments. Subsequent purchase 
payments will be at least $100 for the VISTA Contracts and the Direct 
Annuity Contracts. For the Direct Annuity Plus Contracts, the minimum 
subsequent purchase payments will be $500 for non-qualified Contracts 
and $100 for qualified Contracts.
    7. The purchase payments under the Contacts will be allocated to 
the Separate Account and/or to the general account. The Separate 
Account is divided into subaccounts (``Subaccounts''), which will 
invest in the shares of one of the portfolios of Variable Investors 
Series Trust (``Trust''). The Trust is an open-end, management 
investment company and currently has seven portfolios. First Variable 
may establish additional Subaccounts and may substitute or add 
additional portfolios of the Trust or, where appropriate, of other 
registered, open-end investment companies.
    8. The Contracts provide for a death benefit if the annuitant dies 
during the accumulation period. For the VISTA Contracts, the death 
benefit is the greater of: (1) The aggregate value; or (2) the sum of 
purchase payments less any withdrawals; or (3) the aggregate value as 
of the first day of the current five year Contract period \2\ plus any 
purchase payments made since that day and less any amounts withdrawn 
since that day. Where permitted by state law, First Variable will 
provide a death benefit for its Direct Annuity Contracts that will be 
the greater of: (1) The purchase payments, less any withdrawals 
including any applicable Withdrawal Charge, as defined below; \3\ (2) 
the Contract value; or (3) the Contract value as of the first day of 
the current five year Contract period plus any purchase payments made 
since that day and less any amounts withdrawn since that day. 
Otherwise, the death benefit will be the greater of: (1) The purchase 
payments, less any withdrawals including any applicable Withdrawal 
Charges; or (2) the Contract value. The death benefit for the Direct 
Annuity Plus Contracts will be the greater of the purchase payments, 
less any withdrawals, or the Contract value.

    \2\ The first five year Contract period begins on the issue 
date, the second five year Contract period begins on the fifth 
Contract anniversary, and so forth.
    \3\ See infra at Paragraph 9.
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    9. Certain charges and fees are assessed under the Contracts. In 
the case of the VISTA and Direct Annuity Contracts, prior to the 
annuity date, amounts allocated to the Separate Account may be 
transferred among Subaccounts without the imposition of any fee or 
charge if there have been no more than 12 transfers for the VISTA 
Contracts, or more than six transfers for the Direct Annuity Contracts, 
made in the Contract year. Subsequent transfers within a Contract year, 
however, will be assessed a $25 per transfer, or, if less, 2% of the 
amount transferred. First Variable will not impose a transfer fee on 
any transfers made by the owners of the Direct Annuity Plus Contracts. 
Applicants represent that the transfer fee is at cost with no 
anticipation of profit.
    10. A withdrawal charge (``Withdrawal Charge'') may be imposed on 
certain withdrawals. The owner may withdraw the owner's interest in a 
Contract in whole or in part prior to the date annuity payments 
commence.\4\ For the VISTA Contracts, an owner may make such 
withdrawals without charge in an amount not to exceed the withdrawal 
privilege amount (``Privilege Amount''). The Privilege Amount is equal 
to the sum of 10% of the new purchase payments not previously 
withdrawn, plus 100% of the excess of the value of a Contract over new 
purchase payments not previously withdrawn. New purchase payments are 
purchase payments made in the current and four previous Contract years. 
It is assumed that purchase payments are withdrawn in the order in 
which they were made. In the event that a withdrawal exceeds the 
Privilege Amount for the VISTA Contracts, the Withdrawal Charge is 
determined by multiplying the excess of the amount withdrawn over the 
Privilege Amount by a percentage that decreases annually from 5% to 0% 
over six Contract years.

    \4\ Although the VISTA Contracts provide that an owner may not 
make more than four partial withdrawals in any Contract year, First 
Variable does not and will not enforce this limitation.
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    No Withdrawal Charge will be assessed on withdrawals from the 
Direct Annuity Contracts unless the withdrawals exceed the free 
withdrawal amount (``Free Amount''). The Free Amount is determined as 
the sum of 10% of premiums that remain subject to the Withdrawal 
Charge, plus the excess of the Contract value over purchase payments 
not previously withdrawn, plus any purchase payments no longer subject 
to the Withdrawal Charge. Should the withdrawal exceed the Free Amount, 
the Withdrawal Charge for the Direct Annuity Contracts will be 
determined by multiplying the excess of the amount over the Free Amount 
by a percentage that decreases annually from 7% to 0% over six years 
from the Contract anniversary since the purchase payment. Purchase 
payments are deemed to be withdrawn in the order in which they are 
made. An owner may make a withdrawal each Contract year of the Free 
Amount provided that the minimum partial withdrawal amount is $1,000 or 
the owner's entire interest in the Subaccount, if less.
    There will be no Withdrawal Change imposed on withdrawals made 
under the Direct Annuity Plus Contracts.
    11. First Variable deducts on each valuation date an administration 
charge. 

[[Page 43636]]
For the VISTA and Direct Annuity Contracts, the administrative charge 
is equal, on an annual basis, to .15% of the net asset value of the 
Separate Account. For the Direct Annuity Plus Contracts, the 
administrative charge is equal, on an annual basis, to .25% of the 
average daily net asset value of the Separate Account. First Variable 
submits that it incurs additional administrative expenses for the 
Direct Annuity Plus Contracts because it permits an owner to make 
unlimited transfers without the imposition of any fee or charge.
    12. An annual contract maintenance charge of $30 will be charged 
against each Contract (for the VISTA Contracts, it is only deducted 
during the accumulation period). For the VISTA Contracts, in the case 
of a total withdrawal occurring 31 or more days after the beginning of 
the Contract year, the full charge of $30 will be deducted. For the 
Direct Annuity Contracts, if the annuity date is not the Contract 
anniversary, a pro rata portion of the annual contract maintenance 
charge will be deducted on the annuity date. For the Direct Annuity 
Plus Contracts, if the Contract value on a Contract anniversary is at 
least $50,000, then no annual contract maintenance charge will be 
deducted (if a total withdrawal is made on other than a Contract 
anniversary and the Contract value for the valuation period during 
which the total withdrawal is made is less than $50,000, the full 
annual contract maintenance charge will be assessed at the time of the 
withdrawal).
    13. The administration charge and the annual contract maintenance 
charge are designed to compensate First Variable for assuming 
administrative expenses related to the Separate Account and the 
issuance and maintenance of the Contracts. These charges will not be 
increased by First Variable. First Variable represents that it does not 
intend to profit from the administration charge and the annual contract 
maintenance charge.
    14. First Variable deducts a mortality and expense risk charge from 
each Separate Account. First Variable represents that the aggregate 
morality and expenses risk charge is equal, on an annual basis, to 
1.25% of the net asset value of each Subaccount of the Separate 
Account. Of this amount, approximately .80% is for mortality risks and 
.45% is for expense risks.\5\

    \5\ Under the Existing Orders, First Variable deducts on each 
valuation date a mortality and expense risk charge which is equal, 
on an annual basis, to 1.25% (consisting of approximately .75% for 
mortality risks and .50% for expense risks).
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    15. First Variable assumes the mortality risk that the life 
expectancy of the annuitant will be greater than that assumed in the 
guaranteed annuity purchase rates, thus requiring First Variable to pay 
out more in annuity income than it had planned. Furthermore, First 
Variable assumes the mortality risk that it will waive the Withdrawal 
Charge in the event of the death of the owner under certain Contracts. 
Thus, First Variable assumes the risk that it may not be able to cover 
its distribution expenses and that the owner may die at a time when the 
amount of the death benefit payable exceeds the then net surrender 
value of the Contracts. The expense risk assumed by First Variable is 
that the Contract administration charge and the annual contract 
maintenance charge will be insufficient to cover the cost of 
administering the Contracts.
    16. In the event the mortality and expense risk charges are more 
than sufficient to cover First Variable's costs and expenses, any 
excess will be a profit to First Variable. Any profit realized by these 
charges may be used by First Variable to, among other things, offset 
losses experienced when the Withdrawal Charges are insufficient. The 
mortality and expense risk charges may not be increased under the 
Contracts.
    17. Various jurisdictions levy premium taxes on annuity premiums 
received by life insurance companies. First Variable may charge 
Contracts the amount of any tax levied as a result of the issuance, 
maintenance, surrender, or annuitization of a Contract at the time the 
purchase payment is received, or, if not previously deducted, such tax 
may be deducted: (1) At the annuity commencement date; (2) in the event 
of the annuitant's or owner's death prior to the annuity commencement 
date; (3) in the event of partial or total withdrawal; and (4) when 
payable by First Variable. For the Direct Annuity Contracts, First 
Variable intends to advance any premium taxes when due at the time 
purchase payments are made and then deduct premium taxes from an 
owner's Contract value at the time annuity payments begin or upon 
surrender if First Variable is unable to obtain a refund. For the 
Direct Annuity Plus Contracts, First Variable intends to deduct premium 
taxes when incurred. First Variable represents that state premium taxes 
may range up to 4% of purchase payments.
Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule, or regulation of the 1940 to the 
extent that the 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, 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.
    3. Applicants request exemptions from Sections 26(a)(2) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the assets of the Separate Account and the Other 
Accounts in connection with the Contracts and Future Contracts of the 
1.25% charge for the assumption of mortality and expense risks. 
Applicants believe that the terms of the relief requested with respect 
to any Future Contracts funded by Other Accounts are consistent with 
the standards enumerated in Section 6(c) of the 1940 Act. Without the 
requested relief, Applicants would have to request and obtain exemptive 
relief for each new Other Account it establishes to fund any Future 
Contract. Applicants submit that any such additional request for 
exemption would present no issues under the 1940 Act that have not 
already been addressed in this application.
    Applicants submit 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 their 
resources. The delay and expense involved in having repeatedly to seek 
exemptive relief would reduce Applicants' ability effectively to take 
advantage of business opportunities as they arise.
    Applicants further submit that the requested relief is consistent 
with the purposes of the 1940 Act and the protection of investors for 
the same reasons. If Applicants were required repeatedly to seek 
exemptive relief with respect to the same issues addressed in this 
application, investors would not receive any benefit or additional 

[[Page 43637]]
protection thereby. Investors might be disadvantaged as a result of 
Applicants' increased overhead expenses.
    Applicants thus believe that the requested exemption is 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.
    4. Applicants represent that the 1.25% per annum mortality and 
expense risk charge is within the range of industry practice for 
comparable annuity contracts. This representation is based upon an 
analysis of publicly available information about similar industry 
products, taking into consideration such factors as, among others, the 
current charge levels, guaranteed annuity rates, and other contact 
charges and options. First Variable will maintain at its principal 
offices, available to the Commission, a memorandum setting forth in 
detail the products analyzed in the course of, and the methodology and 
results of, Applicants' comparative review.
    5. First Variable has conducted that there is a reasonable 
likelihood that the Separate Account's and Other Accounts' proposed 
distribution financing arrangements will benefit the Separate Account 
and the Other Accounts and their investors. First Variable represents 
that it will maintain and make available to the Commission upon request 
a memorandum setting forth the basis of such conclusion.
    6. The Separate Account and Other Accounts will be invested only in 
management investment companies that undertake, in the event they 
should adopt a plan for financing distribution expenses pursuant to 
Rule 12b-1 under the 1940 Act, to have such plan formulated and 
approved by their board members, the majority of whom are not 
``interested persons'' of the management investment company within the 
meaning of Section 2(a)(19) of the 1940 Act.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested 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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20772 Filed 8-21-95; 8:45 am]
BILLING CODE 8010-01-M