[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Notices]
[Pages 46322-46324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22067]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21325; No. 812-9506]


IDS Life Insurance Company, et al.

August 29, 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: IDS Life Insurance Company (``IDS'') and IDS Life Variable 
Life Separate Account (``Separate Account'').

relevant 1940 act sections: Order requested under Section 6(c) granting 
exemptions from Section 27(c)(2) of the 1940 Act and Rule 6e-3(T)(c)(4) 
thereunder.

summary of application: Applicants request an order that will permit 
the Separate Account, and any future separate accounts established by 
IDS (``Future Accounts''), to deduct from premium payments of certain 
flexible premium variable life insurance policies, an amount that is 
reasonably related to the IDS's increased Federal tax burden resulting 
from the receipt of those premium payments pursuant to the application 
of Section 848 of the Internal Revenue Code of 1986, as amended.

filing date: The application was filed on March 1, 1995, and was 
amended on July 24, 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 25, 1995, and should be 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, DC 20549. Applicants: Mary Ellyn Minenko, 
Counsel, IDS Life Insurance Company, IDS Tower 10, Minneapolis, 
Minnesota 55440.

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: 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. IDS is a stock life insurance company, organized in Minnesota, 
and is an indirect subsidiary of American Express Company.
    2. The Separate Account is a separate account established by IDS 
and registered under the 1940 Act as a unit investment trust. 
Currently, the Separate Account has 6 subaccounts each of which invests 
in a corresponding portfolio of IDS Life Series Fund, Inc., a 
registered open-end management investment company. The Separate Account 
is used to fund: (1) Certain individual flexible premium variable life 
insurance contracts (``Existing Policies''); (2) certain flexible 
survivorship variable life insurance policies (``Current Policies'') 
for which a registration statement has been filed recently with the 
Commission to register interests in the Current Policies under the 
Securities Act of 1933; and (3) certain flexible variable life 
insurance policies developed by IDS Life in the future (``Future 
Policies'') (Current Policies, together with Future Policies, 
``Policies'').
    3. IDS is the principal underwriter for the Policies. IDS is a 
registered broker-dealer under the Securities Exchange Act of 1934, and 
is a member of the National Association of Securities Dealers, Inc.
    4. Applicants propose to deduct a charge to reimburse IDS for the 
increase in its Federal income taxes resulting from the application of 
Section 848 of the Internal Revenue Code of 1986 (``Code''), as 
amended. The charge will be reasonably related to IDS's increased 
Federal tax burden, and will be deducted from premiums received.
    5. The Omnibus Budget Reconciliation Act of 1990 (``OBRA 1990''), 
amending Section 848 of the Code, requires life insurance companies to 
capitalize and amortize over ten years certain general expenses for the 
current year. Prior law allowed these expenses to be deducted in full 
from the current year's gross income. Section 848, as amended, 
effectively accelerates the realization of income from specified 
contracts and, consequently, the payment of taxes on that income. 
Taking into account the time value of money, Section 848 increases the 
insurance company's tax burden because the amount of general deductions 
that must be capitalized and amortized is measured by the premiums 
received under the Policies.
    6. The amount of deductions subject to Section 848 equals a 
percentage of the current year's net premiums received (i.e., gross 
premiums minus return premiums and reinsurance premiums) under life 
insurance or other contracts categorized under this Section. The 
Policies will be categorized under Section 848 as life insurance 
contracts requiring 7.7% of the net premiums received to be capitalized 
and amortized under the schedule set forth in Section 848(c)(1).
    7. The increased tax burden on every $10,000 of net premiums 
received under the Policies is quantified by Applicants as follows. For 
each $10,000 of net premiums received in a given year, IDS 

[[Page 46323]]
must capitalize $770 (i.e., 7.7% of $10,000), and $38.50 of this amount 
may be deducted in the current year. The remaining $731.50 ($770 less 
$38.50) is subject to taxation at the corporate tax rate of 35% and 
results in $256.02 (.35%  x  $731.50) more in taxes for the current 
year than IDS otherwise would have owed prior to OBRA 1990. However, 
the current tax increase will be offset partially by deductions allowed 
during the next ten years, which result from amortizing the remainder 
of the $770 ($77 in each of the following nine years and $38.50 in year 
ten).
    8. It is IDS's business judgment that it is appropriate to use a 
discount rate of at least 10% in evaluating the present value of its 
future tax deductions for the following reasons. Capital that IDS must 
use to pay its increased federal tax burden under Section 848 will be 
unavailable for investment. The cost of capital used to satisfy this 
increased tax burden essentially will be IDS's after-tax rate of return 
(i.e., the return sought on invested capital), which is in excess of 
10%. Accordingly, Applicants submit that the targeted rate of return is 
appropriate for use in this present value calculation.
    9. In determining the rate of return used in arriving at the 
discount rate, IDS considered a number of factors. These factors 
include current market rates, inflation, and expected future interest 
rate trends.
    10. Using a federal corporate tax rate of 35%, and assuming a 
discount rate of 10%, the present value of the increased tax burden 
resulting from Section 848 on each $10,000 of net premium is $95.62.
    11. IDS does not incur incremental federal income tax when it 
passes on state premium taxes to Policy owners because state premium 
taxes are deductible in computing federal income taxes. Conversely, 
federal income taxes are not deductible in computing IDS's federal 
income taxes. To compensate IDS fully for the impact of Section 848, 
IDS must impose an additional charge to make it whole for the $95.62 
additional tax burden attributable to Section 848, as well as the tax 
on the additional $95.62 itself, which can be determined by dividing 
$95.62 by the complement of 35% federal corporate income tax rate 
(i.e., 65%), resulting in an additional charge of $147.11 for each 
$10,000 of net premiums, or 1.47%.
    12. Based on its prior experience, IDS reasonably expects to fully 
take almost all future deductions. It is IDS's judgment that a 1.25% 
charge would reimburse it for the increased federal income tax 
liabilities under Section 848. Applicants represent that the 1.25% 
charge will be reasonably related to IDS's increased federal income tax 
burden under Section 848. This representation takes into account the 
benefit to IDS of the amortization permitted by Section 848 and the use 
of a 10% discount rate (which is equivalent to IDS's targeted rate of 
return) in computing the future deductions resulting from such 
amortization. IDS also may add this 1.25% charge to the Existing 
Policies, but only with respect to sales of new policies, not on 
additional premiums paid to currently-held policies. (SEC File Nos. 
811-4298/33-11165).\1\

    \1\ Applicants represent that, during the Notice Period, the 
application will be amended to reflect this representation.
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Applicants' Legal Analysis

    1. Applicants request an order under Section 6(c) of the 1940 Act 
granting exemptions from Sections 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) to allow the deduction of a charge from premiums to 
compensate IDS for its increased federal tax burden based on receipt of 
these premiums under the Policies, and under the Existing Policies. The 
charge will be in an amount that is reasonably related to IDS's 
increased federal tax burden. Applicants assert that it is appropriate 
to deduct a charge for an insurer's increased tax burden attributable 
to premiums received, and to exclude the deduction of this charge from 
sales load, because it is a legitimate expense of the company and not 
for sales and distribution expenses.
    2. Section 6(c) authorizes the Commission, by order and upon 
application, to exempt any person, security, or transaction, or class 
of persons, securities, or transactions, from any provisions of the 
1940 Act. The Commission grants relief under Section 6(c) to the extent 
an 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. The Separate Account is, and the Future Accounts will be, 
regulated under the 1940 Act as issuers of periodic payment plan 
certificates. Accordingly, the Separate Account, the Future Accounts, 
and IDS (as depositor and principal underwriter) are deemed to be 
subject to Section 27 of the 1940 Act.
    4. Section 27(c)(2) prohibits the sale of periodic payment plan 
certificates unless the following conditions are met. The proceeds of 
all payments (except amounts deducted for ``sales load'') must be held 
by a trustee or custodian having the qualifications established under 
Section 26(a)(1) for the trustees of unit investment trusts. These 
proceeds also must be held under an indenture or agreement that 
conforms with the provisions of Section 26(a)(2) and Section 26(a)(3) 
of the 1940 Act.
    5. ``Sales load'' is defined under Section 2(a)(35), in relevant 
part, as:

    The difference between the price of a security to the public and 
that portion of the proceeds from its sale which is received and 
invested or held for investment by the issuer (or in the case of a 
unit investment trust, by the depositor or trustee), less any 
portion of such difference deducted for trustee's or custodian's 
fees, insurance premiums, issue taxes, or administrative expenses or 
fees which are not properly chargeable to sales or promotional 
activities.

Sales loads on periodic payment plan certificates are limited by 
Sections 27(a)(1) and 27(h)(1) to a maximum of 9% of total payments.
    6. Certain provisions of Rule 6e-3(T) provide a range of exemptive 
relief. Rule 6e-3(T) provides exemptive relief if the separate account 
issues flexible premium variable life insurance contracts, as defined 
in subparagraph (c)(1) of that Rule.
    7. Applicants state that paragraph (b)(13)(iii)(E) of Rule 6e-3(T) 
provides exemptive relief from Section 27(c)(2) to permit an insurer to 
make certain deductions, other than sales load, including the insurer's 
tax liabilities from receipt of premium payments imposed by states or 
by other governmental entities. Applicants assert that the proposed 
deduction with respect to Section 848 of the Code arguably is covered 
by subparagraph (b)(13)(iii) of Rule 6e-3(T). Applicants note, however, 
that the language of paragraph (c)(4) of the Rule appears to require 
that deductions for federal tax obligations from receipt of premium 
payments be treated as ``sales load.''
    8. Applicants state that paragraph (b)(1), together with paragraph 
(c)(4), of Rule 6e-3(T) provides an exemption from the Section 2(a)(35) 
definition of ``sales load'' by substituting a new definition to be 
used for the purposes of the Rule. Rule 6e-3(T)(c)(4) defines ``sales 
load'' during a period as the excess of any payments made during that 
period over certain specified charges and adjustments, including a 
deduction for state premium taxes. Under a literal reading of paragraph 
(c)(4) of the Rule, a deduction for an insurer's increased federal tax 
burden does not fall squarely into those itemized charges or 
deductions, 

[[Page 46324]]
arguably causing the deduction to be treated as part of ``sales load.''
    9. Applicants state that the public policy that underlies paragraph 
(b)(13) of Rule 6e-3(T), and particularly subparagraph (b)(13)(i), like 
that which underlies paragraphs (a)(1) and (h)(1) of Section 27, is to 
prevent excessive sales loads from being charged for the sale of 
periodic payment plan certificates. Applicants submit that this 
legislative purpose is not furthered by treating a federal income tax 
charge based on premium payments as a sales load because the deduction 
is not related to the payment of sales commissions or other 
distribution expenses.
    10. Applicants assert that the standards of Section 6(c) are 
satisfied because the requested relief is appropriate in the public 
interest and consistent with the purposes of the 1940 Act and the 
protection of investors. The exemptive relief would eliminate the need 
for IDS to file additional exemptive applications for each Policy or 
Future Policy to be issued through a Future Account with respect to the 
same issues under the 1940 Act that have been addressed in this 
application, and thus would promote competitiveness in the variable 
life insurance market by avoiding delay, reducing administrative 
expenses, and maximizing efficient use of resources. Applicants further 
assert that the exemptive relief would enhance IDS's ability to 
effectively take advantage of business opportunities as they arise. If 
IDS were required to repeatedly seek exemptive relief with respect to 
the same issues addressed in the application, investors would not 
receive any benefit or additional protection thereby and might be 
disadvantaged as a result of increased overhead expenses.

Conditions for Relief

    1. IDS will monitor the reasonableness of the 1.25% charge.
    2. The registration statement for each Policy under which the 1.25% 
charge is deducted will: (a) disclose the charge; (b) explain the 
purpose of the charge; and (c) state that the charge is reasonable in 
relation to IDS's increased federal tax burden under Section 848 of the 
Code.
    3. The registration statement for each Policy providing for the 
1.25% deduction will contain as an exhibit an actuarial opinion as to: 
(a) The reasonableness of the charge in relation to IDS's increased 
federal tax burden under Section 848 of the Code resulting from the 
receipt of premiums; (b) the reasonableness of the targeted rate of 
return that is used in calculating such charge; and (c) the 
appropriateness of the factors taken into account by IDS in determining 
such targeted rate of return.

Conclusion

    For the reasons and upon the facts set forth above, Applicants 
submit that the requested exemptions to permit IDS to deduct 1.25% of 
premium payments under the Policies are 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. 95-22067 Filed 9-5-95; 8:45 am]
BILLING CODE 8010-01-M