[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