[Federal Register Volume 60, Number 164 (Thursday, August 24, 1995)]
[Notices]
[Pages 44104-44107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20956]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21313; No. 812-9518]
Minnesota Mutual Life Insurance Company, et al.
August 17, 1995.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of application for order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: The Minnesota Mutual Life Insurance Company (``Minnesota
Mutual''), Minnesota Mutual Variable Life Account (``Separate
Account''), and MIMLIC Sales Corporation (``MIMLIC'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the 1940 Act for exemptions from Sections 27(a)(1) and 27(a)(3) of the
1940 Act and paragraphs (b)(13)(i) and (b)(13)(ii) of Rule 6e-2
thereunder.
SUMMARY OF APPLICATION: Exemptions requested to the extent necessary to
permit the issuance and sale of a Policy Enhancement Agreement (``PE
Rider'') as a new rider to Minnesota Mutual's Variable Adjustable Life
Insurance Contracts (``VAL Contracts''). The PE Rider will provide VAL
Contract owners the option of scheduling automatic face amount
increases each Contract year in an amount selected by VAL Contract
owners at the time of initial purchase of the VAL Contracts.
FILING DATE: The application was filed on March 9, 1995.
HEARING OR NOTIFICATION OF HEARING: If no hearing is ordered, the
application will be granted. Any interested person may request a
hearing on this application, or ask to be notified if a hearing is
ordered. Any request must be received by the SEC by 5:30 p.m. on
September 11, 1995. Request a hearing in writing, giving the nature of
your interest, the reason for the request, and the issues you contest.
Serve the Applicants with the request either personally or by mail, and
also send it to the Secretary of the SEC, with proof of service by
affidavit, or, for lawyers, by certificate. Request notification of the
date of a hearing by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549.
[[Page 44105]]
Applicants, 400 North Robert Street, St. Paul, Minnesota 55101-2098.
FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, Special Counsel, or Wendy Friedlander, Deputy Chief,
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
SEC's Public Reference Branch.
Applicants' Representations
1. Minnesota Mutual is a mutual life insurance company that is
authorized to conduct a life insurance business in the District of
Columbia, Canada, Puerto Rico and all states of the United States
except New York, where it is an authorized reinsurer.
2. The Separate Account was established by Minnesota Mutual to fund
the VAL Contracts. The Separate Account is registered under the 1940
Act as a unit investment trust.
3. MIMLIC, the principal underwriter for the Separate Account, is
an indirect wholly-owned subsidiary of Minnesota Mutual. MIMLIC 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.
4. The VAL Contracts are scheduled premium variable life insurance
contracts that permit Contract owners to make non-scheduled premium
payments. Applicants represent that VAL Contracts are offered in
reliance upon exemptive relief previously granted by the Commission.\1\
\1\ Minnesota Mutual Life Insurance Company, Investment Co. Act
Rel. Nos. 15523 (Jan 7, 1987) (``1987 Order'') and 15466 (Dec. 8,
1986) (Notice); 16942 (Apr. 28, 1989) (Order), and 16902 (Apr. 4,
1989) (Notice); 17253 (Dec. 5, 1989) (Order) and 17203 (Nov. 6,
1989) (Notice).
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5. Most VAL Contracts are issued with a Cost of Living Agreement
Rider (``COL Rider''). The COL Rider permits a VAL Contract owner to
increase the face amount of the Contract every three Contract years
until age 56, without evidence of insurability.\2\ The COL Rider
increase, which allows for life insurance coverage that can keep pace
with inflation, with be in an amount equal to the percentage increase
in the consumer price index during those three years, provided that the
VAL Contract owner has not made a face amount adjustment during that
time. Absent Minnesota Mutual's consent, the amount of a such an
increase is limited to the lesser of $100,000 or 20% of the face amount
prior to the increase. A face amount increase effected under the COL
Rider increases the scheduled premium by the same percentage. Increases
in face amount pursuant to the COL Rider result in a: (a) New first-
year sales load deduction of 23% of the incremental scheduled premiums
paid in the year following the increase; (b) 7% sales load applicable
to all scheduled premiums payments, including the base and incremental
premiums in the first year after the increase; and (c) cost-based
policy adjustment charge of $25.
\2\ A VAL Contract owner must specifically accept the increase
of the amount of additional coverage offered under the COL Rider by
responding in writing to the notification of offer. If the insured
is over age 21 and the Contract owner fails to accept an increase,
no further COL Rider will be offered. Thereafter, the VAL Contract
owner could increase the face amount only with new evidence of
insurability.
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6. Minnesota Mutual now proposes to offer the PE Rider as an
alternative to the COL Rider. The PE Rider would be offered at the time
of initial purchase of the VAL Contract to prospective VAL Contract
owners who are age 52 or less. Contract owners electing the PE Rider
could commit in advance to annual face amount increases of 3% to 10%
with no new evidence of insurability and with the right to cancel that
commitment at any time. The maximum automatic increase would be limited
to the lesser of $35,000 or 10% of the face amount immediately prior to
the increase. Once a VAL Contract's face amount reaches $350,000, the
annual increase would be limited to $35,000. The base premium would
increase at the same percentage as the increase in face amount.
Increases under the PE Rider continue until: (1) Cancelled at any time,
in writing, by the Contract owner; (2) cancelled by a Contract owner
exercising the free look rights in connection with the incremental
coverage; (3) the Contract is surrendered, terminated or continued in
force as extended term insurance; or (4) the insured reaches age 59 or
dies.
7. The PE Rider would result in the payment of a premium, currently
expected to be $25 per year, and a new first-year sales load on
incremental scheduled premium payments for the first year after an
increase. An increase pursuant to the PE Rider would occur only if: (1)
There had been no adjustment (increase or decrease) to the face amount
of the VAL Contract during the six-month period preceding the Contract
anniversary; (2) an annual base premium of at least $300 had been paid
during the immediately preceding Contract year; and (3) the resulting
plan of insurance would provide a level face amount of insurance for
the minimum time period specified in the VAL Contract.
8. Applicants assert that the ability to increase insurance
coverage automatically each year (rather than every three years) in an
amount expected to exceed inflation rates without new evidence of
insurability could be an important feature to prospective VAL Contract
purchasers whose earnings are expected to increase over time.
Applicants submit that prospective purchasers currently must either
commit to more insurance than they initially can afford or must risk
that the insured will continue to remain insurable in the future.
9. Applicants note that, unlike the COL Rider face amount
increases, no positive action would be required to effect an increase
under the PE Rider. Applicants submit that, when an increase results
from taking no action (a ``negative option''), more increases can be
expected than if positive action is required. Applicants assert that in
either situation an insured who is in bad health would be among those
increasing the Contract's face amount. Thus, Applicants submit, the
broader base of additional increases from negative options should be
expected to come from other, healthier insureds and should reduce
somewhat the related mortality risks that ultimately might have to be
reflected in increased cost of insurance charges under the VAL
Contracts. Accordingly, Applicants assert that the adverse-selection
risks to Minnesota Mutual of PE Rider increases would be reduced
somewhat by the negative option aspect of their implementation.
10. Applicants note further that PE Rider increases can be expected
to involve larger absolute and percentage amounts than COL Rider
increases. COL Rider increases can occur only every three years and,
thus, there is less compounding of the percentage limits and inflation
rates are unlikely to be so high that they will approach the 10% per
year increase permitted under the PE Rider. Because larger increases
would be possible under the PE Rider than under the COL Rider,
Applicants assert that it is important that adverse-selection mortality
risks be reduced in the PE Rider by use of a negative option. Absent
the negative option, Applicants submit that it is likely that the PE
Rider either could not be offered, could only be offered if cost of
insurance charges were increased on the incremental coverage added by
PE Rider increases, or could only be offered in significantly reduced
amounts.
11. Applicants note that PE Rider increases would involve
additional sales efforts in connection with the initial sale of the VAL
Contract. COL Rider
[[Page 44106]]
increases, in comparison, involve no additional sales effort at the
initial sale but would require such effort to convince VAL Contract
owners to exercise their increase rights under the COL Rider. In either
situation, Applicants state that sales representatives would deserve
additional commissions at the time the additional premiums began to be
paid to Minnesota Mutual, when the increase occurs.
Applicants' Legal Analysis
1. Applicants request exemptive relief under Section 6(c) of the
1940 Act from Sections 27(a)(1) and 27(a)(3) of the 1940 Act and from
subparagraphs (b)(13)(i) and (b)(13)(ii) of Rule 6e-2 to the extent
necessary to permit the deduction of first-year sales loads under the
VAL Contract in connection with the PE Rider face amount increases.
2. Section 6(c) of the 1940 Act, in relevant part, authorizes the
Commission, by order and upon application, to conditionally or
unconditionally exempt any person, security or transaction or class of
such, from any provision of the 1940 Act or rule thereunder, if and 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.
3. Variable life insurance contracts, including the VAL Contract,
are regulated under the 1940 Act as periodic payment plan certificates.
The Separate Account is regulated under the 1940 Act as if it were an
issuer of periodic payment plan certificates. Accordingly, the Separate
Account, Minnesota Mutual as the Separate Account's depositor, and
MIMLIC Sales as principal underwriter of the VAL Contracts, are deemed
to be subject to the provisions of section 27 of the 1940 Act.
Section 27(a)(1) and Rule 6e-2(b)(13)(i)
4. Section 27(a)(1) of the 1940 Act prohibits a registered
investment company issuing periodic payment plan certificates, or its
depositor or underwriter, from selling such certificates if the sales
load exceeds 9% of the total payments to be made on the certificates.
Rule 6e-2(b)(13)(i) provides exemptive relief from Section 27(a)(1) of
the 1940 Act by requiring compliance with the 9% limit of Section
27(a)(1) over a period of the lesser of twenty years or the anticipated
life expectancy of the insured. Therefore, Section 27(a)(1) of the 1940
Act and Rule 6e-2(b)(13)(i) together limit the sales loads to be
assessed under the VAL Contracts to 9% of the premiums to be paid over
the lesser of 20 years or the anticipated life expectancy of the
insured.
5. Applicants assert that the sales load requirements of Section
27(a)(1) are satisfied at the time of issuance of the VAL Contracts.
Applicants note, however, that a new first year sales load is assessed
upon any Contract adjustment involving an increase in the base premium,
which sales load may be in addition to a first year sales load being
taken at the time the adjustment is made. Applicants submit that, in
that event, it is possible that the 9% sales load limitation could be
viewed as being exceeded if the relevant time period for measurement
were from the time the VAL Contract was initially issued rather than
from the time of the relevant adjustment. Accordingly, Applicants
request exemptive relief from Section 27(a)(1) and Rule 6e-2(b)(13)(i)
to deduct first-year loads in connection with PE Rider face amount
increases.
Section 27(a)(3) and Rule 6e-2(b)(13)(ii)
6. Section 27(a)(3) of the 1940 Act makes it unlawful for any
registered investment company issuing periodic payment plan
certificates, or for its depositor or underwriter, to sell such
certificates if the amount of sales load deducted from any of the first
twelve monthly payments exceeds proportionately that amount deducted
from any other such payment. Sale of such certificates similarly is
prohibited if the amount of sales load deducted from any subsequent
payment exceeds proportionately that amount deducted from any other
subsequent payment. Rule 6e-2(b)(13)(ii) provides relief from the
``stair-step'' provisions of Section 27(a)(3) in connection with
offerings of scheduled premium variable life insurance contracts,
provided that the sales load deducted from any payment is not
proportionately greater than that deducted from any prior payment under
the contract.
7. Applicants state that the relief from Section 27(a)(3) provided
by Rule 6e-2(b)(13)(ii) is not available to the VAL Contracts because
the new 23% first-year sales load imposed upon a contract adjustment
that involves an increase in base premium normally would be higher than
that deducted from earlier payments. Accordingly, Applicants submit
that an exemptive order therefore would be required. Accordingly,
Applicants request exemptive relief from Section 27(a)(3) and Rule 6e-
2(b)(13)(ii) to deduct first year sales loads in connection with the PE
Rider face amount increases.
8. Applicants represent that sales efforts are exerted in
connection with the proposed PE Rider at the time the VAL Contract is
issued and the PE Rider is selected, although no additional sales
effort would be required for PE Rider increases at the time of the
increase. Applicants note that the PE Rider is an optional feature that
is sold by separate rider for an additional premium charge, and that
the PE Rider must specifically be selected or rejected by an eligible
VAL Contract owner. Thus, sale of the VAL Contract would not
necessarily involve sale of the PE Rider.\3\ Further, the sales
representative would have to exert special effort to make sure that the
VAL Contract owner understands the benefits offered by the PE Rider.
Moreover, the PE Rider would likely result in sales of more insurance
than the COL Rider. Applicants, therefore, assert that these sales
efforts would not be minimal but would involve transactions, when made,
that increase base premiums.
\3\ In contrast, sale of the VAL Contract would necessarily
involve sale of the COL Rider, whose increases involve a positive
option that requires additional sales efforts at the time of
exercise.
9. Applicants submit that collection of a new first year sales load
upon an automatic adjustment involving an increase in base premium is
appropriate and justified in view of the fact that such an adjustment
is not expected to occur in typical cases without substantial sales
effort for which first-year sales compensation will be required.
Moreover, Applicants believe that it would be anomalous for sales
representatives to earn less for special efforts required at the time
of initial sale of the VAL Contract in connection with the PE Rider
than for comparable sales efforts made in connection with effecting a
smaller COL Rider increase. Both COL Rider and PE Rider increases can
be rejected; once rejected, neither will be re-offered (except that
eligibility for COL Rider increases will continue for insureds under
age 21 at the time of rejecting an increase). Absent the ability to
earn a subsequent first-year commission, Applicants believe that a
sales representative would be unlikely to exert any effort to sell the
PE Rider.
10. Applicants assert that potential VAL Contract owners will be
protected from unwanted increases in insurance through use of the
automatic PE Rider increases because the Contract owner must expressly
elect the PE Rider at the time of initial purchase of the VAL Contract.
Applicants submit that this protection from unwanted sales of insurance
is in addition to the VAL Contract owner's ability to cancel the PE
[[Page 44107]]
Rider at any time or to exercise the free look right to reject a PE
Rider increase and all subsequent increases.
Conclusion
For the reasons discussed above, Applicants submit that the
requested exemptions from Sections 27(a)(1) and 27(a)(3) of the 1940
Act and paragraphs (b)(13)(i) and (b)(13)(ii) of Rule 6e-2 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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20956 Filed 8-23-95; 8:45 am]
BILLING CODE 8010-01-M