[Federal Register Volume 60, Number 164 (Thursday, August 24, 1995)]
[Notices]
[Pages 44107-44110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20957]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21311; File No. 812-9460]
New England Variable Life Insurance Company, et al.
August 16, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'' or ``Act'').
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APPLICANTS: New England Variable Life Insurance Company (``NEVLICO''),
New England Variable Life Separate Account (``Variable Account'') and
New England Securities Corporation (``New England Securities'').
RELEVANT 1940 ACT SECTIONS: Exemption requested under Section 6(c) of
the Act from Sections 27(a)(3) and 27(e) of the Act and Rules 6e-
3(T)(b)(13)(ii), 6e-3(T)(b)(13)(vii), and 27e-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit the offer
and sale of certain flexible premium variable life insurance policies
(``Policies'') that permit Applicants to (i) waive or reimpose the
front-end sales charge imposed on premiums paid after the twentieth
Policy year, and (ii) waive notice of refund and withdrawal rights.
FILING DATE: The application was filed on January 27, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC 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 writer's interest, the
reason for the request and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 501 Boylston Street, Boston, Massachusetts 02117.
FOR FURTHER INFORMATION CONTACT:
Joyce Merrick Pickholz, Senior Counsel, or Wendy Finck 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
Public Reference Branch of the SEC.
Applicants' Representations
1. NEVLICO, a stock life insurance company organized in 1980 under
Delaware law, is a wholly-owned subsidiary of the New England Mutual
Life Insurance Company (``The New England''), a mutual life insurance
company organized in Massachusetts in 1835. The Variable Account was
established as a separate investment account on January 31, 1983, and
is registered under the 1940 Act as a unit investment trust. The
Variable Account is a separate account within the meaning of Section
2(a)(37) of the 1940 Act.
2. The Variable Account currently consists of twelve investment
sub-accounts each of which invests in a different portfolio of the New
England Zenith Fund, the Variable Insurance Products Fund or the
Variable Insurance Products Fund II (collectively, ``Eligible Funds'').
Sub-accounts may be added to or deleted from the Variable Account from
time to time.
3. Policies issued through the Variable Account, including the
Policies, will be sold through agents who are licensed by state
authorities to sell NEVLICO's variable insurance policies and who are
also registered representatives of New England Securities, the
principle underwriter of the Variable Account. New England Securities
is a wholly-owned subsidiary of The New England.
4. The Policy will be issued in reliance on Rule 6e-3(T) under the
1940 Act. The Policy provides for premium flexibility and a death
benefit and a surrender value that may increase or decrease daily
depending in part on the investment performance of the Eligible Funds.
Net premiums under the Policy may be allocated to the sub-accounts of
the Variable Account or to a ``Fixed Account''.
5. NEVLICO determines a three-year minimum premium amount based on
the Policy's face amount, the insured's age, sex (unless unisex rates
apply) and underwriting class, the current level of Policy charges, and
any rider benefit selected. Generally, during this three-year period,
as long as the minimum premium amount, which is set forth in the
Policy, has been timely paid, the Policy is guaranteed not to lapse
even if the Policy's net cash value is insufficient to pay the Monthly
Deduction (defined in paragraph 20 below) of certain charges under the
Policy in any month.
6. NEVLICO also determines a guaranteed minimum death benefit
premium (to maturity) (``Death Benefit A Premium''), which, if paid as
set forth in the Policy, guarantees that the Policy will mature for the
net cash value (equal to the Policy's cash value, less any Policy loan
balance, and less any surrender charge that would apply on surrender)
at age 100 of the insured. The Death Benefit A Premium, which is set
forth in the Policy, is based on the Policy's face amount, the
insured's age, sex (unless unisex rates apply) and underwriting class,
the death benefit option chosen, the guaranteed level of cost of
insurance charges, the current level of other Policy charges, and any
rider benefits selected. NEVLICO also determines a guaranteed minimum
death benefit premium (``Death Benefit B Premium''), which, if paid as
set forth in the Policy, guarantees that the Policy will stay in force
until the later of age 80 of the insured, or 20 years after the Policy
was issued, but no later than the maturity date of the Policy. The
Death Benefit B Premium, which is set forth in the Policy, is based on
factors similar to the Death Benefit A Premium, but is based on the
guaranteed level of both cost of insurance and other Policy charges,
and is actuarially determined to provide guaranteed coverage to the
earlier age. This premium will always be less than or equal to the
Death Benefit A Premium.
7. The Policy provides for two alternate death benefit options. The
Option 1 (Face Amount) death benefit provides a death benefit equal to
the face amount of the Policy, subject to increases required by the
Internal Revenue Code of 1986, as amended (the ``Code''). The Option 2
(Face Amount Plus Cash Value) death benefit provides
[[Page 44108]]
a death benefit equal to the face amount of the Policy plus the amount,
if any, of the Policy's cash value, subject to increases required by
the Code. The Policy's death benefit is always at least equal to the
amount required to satisfy tax law requirements to qualify as life
insurance.
8. The Policy provides two minimum guaranteed death benefits. If
either minimum guaranteed death benefit is in effect, as determined on
the first day of each Policy month, the Policy will not lapse even if
the Policy's net cash value is insufficient to cover the Monthly
Deduction due for that month. If the death of the insured occurs while
either minimum guaranteed death benefit is in effect, then the death
benefit under the Policy will be based on the death benefit option in
effect on the date of death. The death benefit will be adjusted before
death benefit proceeds are paid. If premiums are paid in certain
amounts (Death Benefit A Premiums or Death Benefit B Premiums,
described above), then a minimum guaranteed death benefit may be in
effect unless certain Policy transactions are made. No minimum
guaranteed death benefit applies while a Policy loan is outstanding,
regardless of premium payments. A minimum guaranteed death benefit may
apply to the Policy once the loan is repaid.
9. A Policy owner may surrender the Policy for its net cash value
at any time while the insured is living. The net cash value equals the
cash value reduced by any Policy loan and accrued interest and by any
applicable Surrender Charge. The net cash value is increased by the
portion of any cost of insurance charge deducted that applies to the
period beyond the date of surrender. The net cash value is paid on the
Policy's maturity date if the insured is living and the Policy is in
force. After the Policy's ``free look'' period, a Policy owner may also
make a partial surrender of the Policy to receive a portion of its net
cash value, subject to certain limits. A Policy owner may borrow all or
part of a Policy's loan value at any time after the end of the ``free
look'' period.
10. After the first Policy year, the Policy owner may request an
increase in the face amount of the Policy. A new Surrender Charge
period will apply to each portion of the Policy resulting from a face
amount increase starting with the effective date of the increase. A
separate premium will apply to the face amount increase, (based on the
insured's age and underwriting class at the time of the increase), and
a Sales Charge will be deducted from the portion of each premium that
is attributable to the face amount increase for at least 20 years from
the date of the increase. The Monthly Deduction will also be adjusted
beginning with the effective date of the increase to reflect the new
face amount and amount at risk under the Policy. NEVLICO also permits
face amount reductions under the Policy, but not below NEVLICO's
minimum face amount requirements for issue (unless NEVLICO consents).
11. NEVLICO deducts 4% from each premium as a Sales Charge. NEVLICO
currently intends to waive this charge on premiums paid after the
twentieth Policy year, and on the portion of premiums attributable to a
face amount increase after twenty years from the date of the increase.
NEVLICO retains the right not to waive the charge or to reimpose it
prospectively on a nondiscriminatory basis. In addition, NEVLICO
deducts 1% from each premium to recover a portion of its federal income
tax liability that is determined solely by the amount of life insurance
premiums it receives.\1\ NEVLICO also deducts 2.5% from each premium to
cover state premium tax and administrative costs.
\1\ NEVLICO includes this 1% charge in the calculation of sales
load for purposes of the definition in Rule 6e-3(T)(c)(4). However,
NEVLICO does not intend to waive the 1% charge after the twentieth
Policy year.
12. During the first eleven Policy years, if a Policy is totally
surrendered or lapses, the face amount is reduced, or a partial
surrender reduces the face amount, a Surrender Charge will be deducted
from the cash value. The Surrender Charge includes a Deferred Sales
Charge and a Deferred Administrative Charge. A new Surrender Charge
period and a separate premium will apply to each portion of the Policy
resulting from a face amount increase, starting with the date of the
increase.
13. The Deferred Sales Charge is based on a percentage of the
Policy's Target Premium. A Policy's Target Premium is less than or
equal to 75% of the annual premium necessary to maintain a fixed
benefit whole life insurance policy for the same face amount on the
life of the insured, using an assumed interest rate of 4%, guaranteed
cost of insurance charges, and the current level of other Policy
charges. Applicants represent that the Target Premium will never equal
or exceed the ``guideline annual premium'' as defined in Rule 6e-
3(T)(c)(8). A separate Target Premium amount applies to any face amount
increase, based on the insured's age and underwriting class at the time
of the increase.
14. For Policies that cover insureds whose issue age is 55 or less
at issue, the highest Deferred Sales Charge is paid if the Policy owner
lapses or surrenders the Policy, or reduces its face amount, in Policy
years three through five. The Deferred Sales Charge in these years
equals 45% of premiums paid up to one Target Premium, plus 13.5% of
additional premiums paid in excess of one Target Premium to a second
Target Premium, plus 13.5% of additional premiums paid in excess of two
Target Premiums up to a third Target Premium. The Deferred Sales Charge
during the first policy is equal to 25% of premiums paid up to one
Target Premium. The Deferred Sales Charge during the second Policy year
is equal to 25% of premiums paid up to one Target Premium plus 5% of
additional premiums paid up to a second Target Premium. In no event
will the Deferred Sales Charge exceed the limits set forth in
subparagraphs (i) and (v) of Rule 6e-3(T)(b)(13).
15. The table below shows the maximum Deferred Sales Charge that
may apply to Policies covering insureds whose issue age is 55 or less
at issue, expressed as a percentage of each Target Premium paid prior
to surrender, lapse, or face amount reduction, assuming that one Target
Premium per year has been paid under the Policy prior to such date. The
table shows the applicable charge if the lapse, surrender or face
amount reduction occurs at the end of each of the Policy years shown.
During Policy years six through eleven, the Deferred Sales Charge
declines on a monthly basis.
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The maximum
deferred sales
charge is the
following
percentage of
For policies, which are surrendered, lapsed or reduced each target
during premium paid
per year to
date of
surrender,
lapse, or
reduction
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Entire Policy Year:
3................................................... 24.00
4................................................... 18.00
5................................................... 14.40
Last Month of Policy Years:
6................................................... 10.00
7................................................... 6.86
8................................................... 4.50
9................................................... 2.67
10.................................................. 1.20
11.................................................. 0.00
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16. For insureds whose issue age is above 55 at issue, the Deferred
Sales Charge percentages are less than or equal to those described
above, with the maximum charge occurring in Policy years 3 through 5
for insureds with an
[[Page 44109]]
issue age up through 65, in Policy years 2 through 4 for insureds with
an issue age from 66 through 75, and in Policy year 2 for insureds with
an issue age above 75.
17. In the case of a partial surrender or reduction in face amount,
any Deferred Sales Charge that applies is deducted from the Policy's
cash value in an amount proportional to the amount of the Policy's face
amount surrendered.
18. The table below shows the Deferred Administrative Charge that
will be deducted from the Policy's available cash value in the event of
a total or partial surrender, lapse or face amount reduction. After the
end of the first Policy year the charge declines monthly.
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Administrative
For policies which are deferred, surrendered, lapsed or charge per
reduced during $1,000 of face
amount
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Entire Policy Year:
1................................................... $2.50
Last Month of Policy Years:
2................................................... 2.25
3................................................... 2.00
4................................................... 1.75
5................................................... 1.50
6................................................... 1.25
7................................................... 1.00
8................................................... 0.75
9................................................... 0.50
10.................................................. 0.25
11.................................................. 0.00
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19. For an insured whose issue age is above 65, the Deferred
Administrative Charge is less than or equal to that in the table above.
The Deferred Administrative Charge partially covers the administrative
costs of processing surrenders, lapses, and reductions in face amount,
as well as legal, actuarial, systems, mailing and other overhead costs
connected with NEVLICO's variable life insurance operations. Applicants
represent that this charge has been designed to cover actual costs and
is not intended to produce a profit.
20. On the first day of each Policy Month, starting with the Policy
Date, NEVLICO will make a deduction from a Policy's cash value (the
``Monthly Deduction''). If either minimum guaranteed death benefit is
in effect, or if the Policy is protected against lapse by payment of
the minimum premium during the first three Policy years, the Monthly
Deduction will be made, whether or not premiums are paid, until the
cash value equals zero. Otherwise, the Monthly Deduction will be made,
whether or not premiums are paid, as long as the net cash value is
sufficient to cover the entire Monthly Deduction. The Monthly Deduction
will reduce the cash value in each sub-account of the Variable Account
and in the Fixed Account in proportion to the cash value in each. The
Monthly Deduction includes the following charges:
(i) Policy Fee. The Policy Fee is currently equal to $4.50 per
month (guaranteed not to exceed $7.00 per month).
(ii) Administrative Charge. The Administrative Charge is currently
equal to $0.06 per $1,000 of Policy face amount in the first Policy
year, and $0.02 per $1,000 of Policy face amount thereafter (guaranteed
not to exceed $0.08 per $1,000 of face amount in the first Policy year
and $0.04 per $1,000 of Policy face amount thereafter).
The Policy Fee and the Administrative Charge together partially
cover the cost of administering the Policies (such as the cost of
processing Policy transactions, issuing Policy Owner statements and
reports, and record keeping), as well as legal, actuarial, systems,
mailing and other overhead costs connected with NEVLICO's variable life
insurance operations. These charges have been designed to cover actual
costs and are not intended to produce a profit.
(iii) Minimum Death Benefit Guarantee Charge. The Minimum Death
Benefit Guarantee Charge is $0.01 per $1,000 of Policy face amount.
(iv) Monthly Charges for the Cost of Insurance. This charge covers
the cost of providing insurance protection under a Policy.
(v) Charges for Additional Benefits. Charges will be imposed for
the cost of any additional rider benefits as described in the rider
form.
21. At the time of a face amount increase, a Face Amount Increase
Administrative Charge of $2.50 per $1,000 of face amount increase will
be deducted from the Policy's cash value in the sub-accounts and the
Fixed Account in proportion to the amount of the Policy's cash value in
each. The Face Amount Increase Administrative Charge covers the cost of
processing the face amount increase and, like the Deferred
Administrative Charge, Policy Fee and Administrative Charge, has been
designed to cover actual costs and is not intended to produce a profit.
NEVLICO currently limits this charge to a maximum of $200.00.
22. NEVLICO charges the subaccounts of the Variable Account for the
mortality and expense risks that NEVLICO assumes. Currently, the charge
is made daily at an annual rate of 0.75% of the sub-accounts' assets.
This charge is guaranteed not to exceed an annual rate of 0.90% of the
value of each sub-account's assets attributable to the Policies. The
mortality risk NEVLICO assumes is that insureds may live for shorter
periods of time than NEVLICO estimated. The expense risk NEVLICO
assumes is that NEVLICO's costs of issuing and administering Policies
may be more than NEVLICO estimated. Charges for investment advisory
fees and other expenses incurred by the Eligible Funds are deducted
from the assets of the relevant fund and are indirectly borne by owners
of Policies.
Applicants' Legal Analysis
1. Section 6(c) of the Act 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 of the Act, if and 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 policy and provisions of the Act.
2. Section 27(a)(3) of the Act generally provides that the amount
of sales load deducted from any one of the first twelve monthly
payments under a periodic payment plan certificate, or their
equivalent, cannot exceed proportionately the amount deducted from any
other such payment, and that the amount deducted from any subsequent
payment cannot 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), provided that the proportionate amount of sales load deducted
from any payment during the contract period does not exceed the
proportionate amount deducted from any prior payment, unless the
increase is caused by the grading of cash values into reserves or
reductions in the annual cost of insurance.
4. The amount of the Sales Charge deducted from premium payments
under the Policy is 4%. NEVLICO intends to waive this charge on
premiums paid after the twentieth Policy year and on the portion of
premiums attributable to a face amount increase after twenty years from
the date of the increase. The continuation of this waiver, however, is
not contractually guaranteed, and NEVLICO may withdraw or modify the
waiver at any time. Thus, it is possible that the waiver could apply at
some times with respect to a given Policy and not at a subsequent time
with respect to the same Policy. Arguably Section 27(a)(3) and Rule 6e-
3(T)(b)(13)(ii) could prohibit this sales load structure. Applicants
request an exemption from
[[Page 44110]]
those provisions to the extent necessary to permit the waiver,
modification and reinstatement of the sales load as described in this
paragraph.
5. Applicants assert that the purpose of the proposed waiver of
Sales Charge after the twentieth Policy year is to more closely reflect
NEVLICO's expenses in connection with Policy sales. To the extent that
NEVLICO determines that the full 4% Sales Charge on premiums made after
the twentieth Policy year could generate more revenue than NEVLICO
believes necessary, it may waive the charge. Applicants submit that it
would not be in the interest of owners to require the imposition of a
Sales Charge on premiums paid after the twentieth Policy year that is
higher than Applicants deem necessary. Applicants assert that the
policies and purposes of Section 27(a)(3) and Rule 6e-3(T)(b)(13)(ii)
do not require such a result.
6. Section 27(e) of the Act and Rules 27e-1 and 6e-
3(T)(b)(13)(vii), in effect, require a notice of right of withdrawal
and refund, on Form N-27l-1, to be provided to Policy owners entitled
to a refund of sales load in excess of the limits permitted by Rule 6e-
3(T)(b)(13)(v).
7. Applicants request exemptions from Section 27(e) of the Act and
Rules 27e-1 and 6e-3(T)(b)(13)(vii) thereunder to the extent necessary
to waive the requirements to provide notice to policy owners entitled
to a refund of sales load in excess of the limits permitted by Rule 6e-
3(T)(b)(13)(v).
8. The Policy limits the amount of the Deferred Sales Charge that
may be deducted upon surrender, face amount reduction or lapse, by the
excess sales load limits set forth in Rule 6e-3(T)(b)(13)(v). Thus, no
excess sales load is ever paid by a Policy owner surrendering,
effecting a face amount reduction, or lapsing in the first two Policy
years.
9. Rule 27e-1 specifies in paragraph (e) that no notice need be
mailed when there is otherwise no entitlement to receive any refund of
sales load. Moreover, Rule 27e-1 and Rule 6e-2 were adopted in the
context of front-end loaded products only and in the broader context of
the companion requirements in Section 27 for the depositor or
underwriter to maintain segregated funds as security to assure the
refund of any excess sales load. In the context of the Policy's
Deferred Sales Charge structure, where no excess sales load is ever
paid or refunded, Form N-27l-1 could at best confuse Policy owners, and
could at worst encourage a Policy owner to surrender the Policy during
the first two Policy years when it may not be in the owner's best
interest to do so. An owner of a Policy with a declining contingent
deferred sales charge, unlike a front-end loaded policy, does not
foreclose his or her opportunity, at the end of the first two Policy
years, to receive a refund of monies spent. Not only has such an owner
not paid any excess load, but also, because the deferred charge
declines over the life of the Policy, he or she may never have to pay
it. Encouraging a surrender during the first two Policy years could
cost such an owner more in total sales load (relative to total premium)
than he or she would otherwise pay if the Policy, which is designed as
a long-term investment vehicle, were held for the period originally
intended.
Applicants' Conclusion
For the reasons stated above, Applicants submit that the requested
exemptions, in accordance with the standards of Section 6(c) of the
Act, are consistent with the protection of investors and the purposes
intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20957 Filed 8-23-95; 8:45 am]
BILLING CODE 8010-01-M