[Federal Register Volume 60, Number 180 (Monday, September 18, 1995)]
[Notices]
[Pages 48185-48192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23016]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21344; File No. 812-9472]


The Northwestern Mutual Life Insurance Company, et. al.

September 11, 1995.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the 
``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: The Northwestern Mutual Life Insurance Company 
(``Northwestern''), Northwestern Mutual Variable Life Account 
(``Account'') and Northwestern Mutual Investment Services, Inc. 
(``NMIS'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from: the provisions of, and the rules under, 
the 1940 Act--other than Sections 7 and 8(a)--specified in Rule 6e-2(b) 
thereunder; and the provisions of Sections 2(a)(32), 2(a)(35), 12(b), 
22(c), 26(a)(1), 26(a)(2), 27(a)(1), 27(c)(1), 27(c)(2) and 27(d) of 
the 1940 Act, subparagraphs (b)(1), (b)(12), (b)(13)(i), (b)(13)(ii), 
(b)(13)(iii), (b)(13)(iv), (b)(13)(v), (c)(1) and (c)(4) of Rule 6e-2, 
and Rules 12b-1(a)(1) and 22c-1 under the 1940 Act.

SUMMARY OF THE APPLICATION: Applicants seek an order permitting them to 
offer and sell certain scheduled premium variable life insurance 
policies (``Policies'') that provide for the following: a death benefit 
which may include a portion which is not guaranteed for the lifetime of 
the insured; premiums, the payment of which may be suspended in defined 
circumstances; optional unscheduled additional premiums; both a 
contingent deferred sales charge and a sales charge deducted from 
premiums, neither of which is subject to refunds; deduction of an 
administrative surrender charge on lapse or surrender; deduction from 
the Policy's account value of cost of insurance charges, charges for 
substandard risks and incidental insurance benefits, and minimum death 
benefit guarantee risk charges; values and charges based on the 
Commissioners 1980 Standard Ordinary Mortality Tables (the ``1980 CSO 
Tables''); the deduction from premium payments of an amount that is 
reasonably related to Northwestern's increased federal tax burden 
resulting from the application of Section 848 of the Internal Revenue 
Code of 1986, as amended; the holding of mutual fund shares funding the 
Account in an open account arrangement, without a trust indenture or 
use of a trustee; and the sale of mutual fund shares to the Account 
without the use of an underwriter for the mutual fund.

FILING DATE: The application was filed originally on February 8, 1995. 
An amended and restated application was filed on September 7, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the exemption 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the SEC 
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 
October 6, 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 
may request notification of a hearing by writing to the Secretary of 
the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o The Northwestern 
Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, WI 
53202, Attn: John M. Bremer, Senior Vice President, General Counsel and 
Secretary.

FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Special Counsel, or 
Wendy Finck Friedlander, Deputy Chief, Office of Insurance Products 
(Division of Investment Management), at (202) 942-0670.

SUPPLEMENTARY INFORMATION: 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. Northwestern, a mutual life insurance company organized under 
the laws of Wisconsin, is licensed to do business in all of the states 
and the District of Columbia.
    2. In 1983, Northwestern established the Account to fund the 
Policies. The Account is organized as a separate account under 
Wisconsin law, and is registered as a unit investment trust under the 
1940 Act.
    3. The Account has nine separate divisions (``Divisions''), each of 
which invests solely in a corresponding portfolio (``Portfolio'') of 
Northwestern Mutual Series Fund, Inc. (``Fund''), an open-end 
management company registered under the 1940 Act. Shares of each 
portfolio are purchased by Northwestern for the corresponding Account 
Division at net asset value.
    4. NMIS, a wholly owned subsidiary of Northwestern, serves as 
investment adviser to the Fund and underwriter for the Policies. NMIS 
is registered as a broker-dealer under the Securities Exchange Act of 
1934, and is registered as an investment advisor under the Investment 
Advisers Act of 1940.
    5. The Policy incorporates certain fundamental features 
characteristic of scheduled premium variable life insurance policies 
contemplated by Rule 6e-2, including a guarantee against lapse if 
specified required premiums are paid by their due dates. In addition, 
Policy owners will have the options of: (i) Making premium payments in 
excess of the required premiums, either to increase the Policy value 
which supports the guaranteed face amount or to purchase variable paid-
up additional insurance, or (ii) suspending premium payments when the 
Policy value already is sufficient to pay future premiums.
    6. The death benefit under a Policy will vary based upon investment 
performance of the Fund's Portfolios, subject to the minimum guarantee 
as provided by the Policy. The minimum guaranteed death benefit 
available under every Policy corresponds to the guaranteed minimum face 
amount of a traditional scheduled premium variable life insurance 
policy, and will neither increase nor decrease as long as premiums are 
paid when due and no Policy debt is outstanding. In addition to the 
minimum guaranteed feature, the death benefit may include one or more 
other parts: ``Additional Protection'' which is guaranteed for only a 
specified period, depending on the age and risk classification of the 
insured; ``Variable paid-up additional insurance'' which may be 
purchased by either paying additional premium or by applying any 
dividends to purchase paid-up additions; and ``Excess Amount''--the 
amount by which Policy value exceeds what is required to support the 
minimum guaranteed death benefit and 

[[Page 48186]]
Additional Protection--which reflects the payment of additional 
premiums or Policy dividends, or favorable investment performance. Each 
of these death benefit features may vary, to some degree, to reflect 
investment performance.
    7. Partial surrenders of the Policies will be permitted so long as 
the Policy that remains meets the regular minimum size requirements. A 
partial surrender will cause the Policy to be split into two; one 
Policy will be surrendered, the other will continue in force on the 
same terms as the original Policy except that the premiums will be 
based on the reduced amount of insurance. The owner will receive a new 
Policy document. The cash value and death benefit will be 
proportionately reduced.
    8. Premiums, dividends and most charges for the Policies follow an 
annualized structure, based on the Policy anniversary, with adjustment 
to reflect the dates on which events take place during a Policy year. 
The Policies permit payment of premiums as often as monthly, but 
Northwestern places the scheduled net annual premium in the Account on 
the anniversary date at the beginning of each Policy year regardless of 
the frequency on which premiums are being paid. Northwestern advances 
this amount on that date (unless the entire annual premium already has 
been paid), and Northwestern is reimbursed as premium payments are 
thereafter received from the Policy owner. Premiums paid on other than 
an annual basis are increased to: (i) reflect the time value of money, 
based on an 8% interest rate; and (ii) cover the administrative costs 
to process the additional premium payments.

A. Deductions and Charges From Premiums

    1. Northwestern will deduct from premiums 8% of each premium paid. 
This deduction is for sales expenses (4.5%), state premium taxes 
(2.25%), and a federal deferred acquisition cost tax charge (1.25%).
    2. An annual Policy fee of up to $84.00 is deducted; Northwestern 
expects to reduce the deduction to $60.00 after the first ten years.
    3. For the minimum guaranteed death benefit there is an annual 
charge of $0.12 per $1,000 of insurance, for the guarantee that the 
amount of the death benefit will not be reduced if the net rate of 
return is less than the 4% rate assumed.
    4. An annual administrative expense charge of $0.12 per $1,000 of 
minimum guaranteed death benefit and Additional Protection will be 
deducted for the first ten years. Northwestern expects to waive the 
charge thereafter. This charge is for issuance expenses (other than 
sales expenses) which tend to vary with Policy amount.
    5. Any extra premium charged for insureds who do not qualify for 
one of the three best underwriting classifications, and any premium for 
additional benefits, also are deducted before determining the net 
premium to be placed in the Account.

B. Deductions and Charges From Policy Value

    1. While payment of premiums is suspended,\1\ a portion of the 
annual charges which ordinarily would be deducted from premiums will be 
deducted instead from Policy value. This deduction also will be made 
each year on the Policy anniversary.

    \1\ Payment of premiums may be suspended, at the Policyowner's 
option, when certain conditions are met.
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    2. Northwestern will deduct cost of insurance charges from the 
Policy value and from the value of any paid-up additional insurance. 
Generally, these charges are assessed on each Policy anniversary at 
rates that do not exceed those prescribed in the 1980 CSO Tables.
    3. The Policy value also will be reduced by any surrender charges, 
administrative charges, or decrease in Policy debt that may result from 
a withdrawal, a decrease in the face amount of insurance, or a change 
to variable benefit paid-up insurance.

C. Deductions and Charges From Assets of the Account and the Fund

    1. Northwestern will assess the daily mortality and expense risk 
charge at an effective rate of 0.6% per annum of the Account assets 
attributable to the Policy. This charge is for the (mortality) risk 
that insureds may live for shorter periods of time than estimated, and 
for the (expense) risk that costs of issuing and administering the 
Policies may be higher than estimated.
    2. Total Fund expenses for investment advisory and other services 
provided to the Fund will be assessed on a daily basis. These expenses 
will vary by portfolio, and currently fall in the approximate range of 
0.22% to 1.0% of assets, on an annual basis.

D. Transaction Charges

    1. Twenty-five dollars ($25.00) may be deducted from the Policy 
value upon each withdrawal of excess value or each transfer of invested 
amounts among the Account Divisions. These charges are designed to 
defray only the estimated costs of effecting the transactions. 
Currently, Northwestern is waiving these charges.
    2. Northwestern will assess a charge for the administrative costs 
incurred in processing a partial surrender. Current estimates place 
this charge at $250.

E. Surrender Charges

    1. Surrender charges are deducted from the Policy value and will 
reduce the Policy proceeds if a Policy is surrendered before the 
premium due at the beginning of the fifteenth Policy year has been 
paid. These charges include the administrative surrender charge for 
issue expenses, and the premium surrender charge for sales expenses. 
Both of these surrender charges are based on the minimum annual premium 
for the minimum guaranteed death benefit and the Additional Protection, 
excluding any amount for extra mortality benefits or for additional 
Policy benefits.
    2. An administrative surrender charge may be deducted if the Policy 
is surrendered or lapses in the first ten (10) Policy years. This 
charge provides partial compensation for estimated administrative 
expenses, such as the cost of collecting and processing premiums, 
processing applications, conducting medical examinations, establishing 
Policy records, determining insurability and assigning the insured to a 
risk classification, and issuing the Policy. These expenses exclude any 
costs properly attributable to sales or distribution activity. The 
maximum administrative surrender charge is $216, plus $1.08 per $1,000 
of the face amount of insurance. This charge decreases to zero after 
the first ten (10) Policy years.
    3. Northwestern will deduct a premium surrender charge, for sales 
expenses, upon surrender or lapse of a Policy during the first fifteen 
(15) Policy years. The premium surrender charge is a percentage of the 
annual premium for the Policy face amount (including a term insurance 
premium for the portion which is not guaranteed for the lifetime of the 
insured), reduced proportionately if total premiums actually paid are 
less than those annual premiums due during the first five (5) Policy 
years.
    4. A deduction from the Policy proceeds for a proportionate part of 
the surrender charges will be made if a partial surrender takes place 
before the premium due at the beginning of the fifteenth Policy year 
has been paid.

F. Deduction of Charge for Section 848 Deferred Acquisition Costs

    1. Northwestern will deduct a charge equal to 1.25% of each premium 
payment to cover the estimated cost of 

[[Page 48187]]
its increased federal tax burden related to receipt of premiums in 
connection with the Policies. This increased federal tax burden results 
from Section 848 of the Internal Revenue Code of 1986 (as amended), 
which was enacted in 1990 to modify the federal income taxation of life 
insurance companies. Section 848 requires life insurance companies to 
capitalize and amortize, over a period of ten years, part of their 
general expenses for the current year. Under prior law, these expenses 
were deductible in full from the current year's gross income.
    2. The amount of deductions that would have to be amortized over 
ten years rather than deducted in the year incurred is a percentage of 
the current year's net premiums received in connection with certain 
types of insurance contracts. The percentage varies, depending on the 
type of insurance contract involved, according to a schedule set forth 
in Section 848(c)(1).
    3. In effect, Section 848 accelerates the realization of income 
from insurance contracts covered by that section and, accordingly, 
accelerates the payment of taxes on the income generated by those 
contracts. Consequently, taking into account the time value of money, 
the tax burden of the insurance company related to those contracts is 
increased. Because the amount of general deductions that must be 
capitalized and amortized is measured by premiums paid, an increased 
federal tax burden results from the receipt of those premiums. 
Applicants state that, in this respect, the impact of Section 848 can 
be compared to that of a state premium tax.
    4. The Policies fall under the category of ``specified contracts'' 
under Section 848, so that 7.7% of the net premiums received under the 
Policies must be capitalized and amortized. The increased tax burden on 
Northwestern resulting from this requirement can be quantified as 
follows. For every $10,000 of new premiums received by Northwestern 
under the Policies in a given year, the general deductions of 
Northwestern are reduced by $731.50, or (a) $770 (7.7% of $10,000) 
minus (b) $38.50 (one-half year's portion of the ten-year 
amortization). Using a 35% corporate tax rate, this results in an 
increase in tax for the current year of $256.03. This increase in tax 
will be partially offset by increased deductions which will be allowed 
during the next ten years as a result of amortizing the remainder of 
the $770 ($77 in each of the following nine years and $38.50 in the 
tenth).
    5. To the extent that capital must be used by Northwestern to 
satisfy its increased federal tax burden under Section 848 resulting 
from the receipt of premiums, such capital is not available for 
investment. Because the targeted rate of return for Northwestern (i.e., 
the return Northwestern seeks on invested capital) exceeds 11%,2 
Northwestern submits that a discount rate of 11% is appropriate when 
calculating the present value of its future tax deductions resulting 
from the amortization described above. To the extent that the 11% 
discount rate is lower than Northwestern's actual targeted rate of 
return, a measure of comfort is provided that the calculation of 
Northwestern's increased tax burden attributable to receipt of premiums 
will continue to be reasonable over time, even if the corporate tax 
rate applicable to Northwestern is reduced, or its targeted rate of 
return is lowered.

    \2\ In determining the targeted rate of return used in arriving 
at this discount rate, Northwestern first identified a reasonable 
risk-free rate of return that it could expect to earn over the long 
term. Northwestern then determined the premium it must earn over 
that risk-free rate of return given the inherently risky nature of 
the insurance products it sells. Applicants represent that such 
factors are appropriate to consider in determining the targeted rate 
of return.
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    6. Applying this 11% discount rate, and assuming a 35% corporate 
tax rate, the present value of the increased deductions amounts to a 
tax savings of $153.97. Thus, the present value of the increased tax 
burden resulting from the effect of Section 848 of each $10,000 of net 
premiums received under the policies is $102.06 ($256.03 minus 
$153.97).
    7. Because state premium taxes are deductible when computing an 
insurance company's federal income taxes, Northwestern does not incur 
incremental income tax when it passes on state premium taxes to its 
policy owners. In contrast, federal income taxes are not deductible in 
computing a company's federal income taxes. Therefore, to compensate 
Northwestern fully for the impact of Section 848, it would be necessary 
to allow Northwestern to impose an additional charge which would make 
it whole not only for the $102.06 additional tax burden attributable to 
Section 848, but also for the tax on the additional $102.06 itself. 
This additional charge can be determined by dividing $102.06 by the 
complement of the 35% federal corporate income tax rate (i.e., 65%) 
resulting in an additional charge of $157.01 for each $10,000 of net 
premiums, or 1.57%.
    8. Tax deductions are of value to a company only to the extent that 
a company has sufficient gross income to take the deductions fully. 
Based on prior experience, Northwestern believes that it is reasonable 
to expect that future federal income tax deductions will be taken 
fully.
    9. It is the judgment of Northwestern that a charge of 1.25% would 
reimburse it appropriately for the impact of Section 848 on its federal 
tax liabilities. Applicants represent that the proposed ``DAC tax'' 
charge is reasonably related to Northwestern's increased federal tax 
burden under Section 848, taking into account the benefit to 
Northwestern of the amortization permitted by Section 848 and the use 
of an 11% discount rate in computing the future deductions resulting 
from such amortization, such rate being no greater than Northwestern's 
targeted rate of return.

Applicants' Legal Analysis and Conclusions

    Applicants request exemptions pursuant to Section 6(c) of the 1940 
Act from: the provisions of, and those rules under, the 1940 Act--other 
than Sections 7 and 8(a)--specified in Rule 6e-2(b) thereunder; 
Sections 2(a)(32), 2(a)(35), 12(b), 22(c), 26(a)(1), 26(a)(2), 
27(a)(1), 27(c)(1), 27(c)(2) and 27(d) of the 1940 Act; and 
subparagraphs (b)(1), (b)(12), (b)(13)(i), (b)(12)(ii), (b)(13)(iii), 
(b)(13(iv), (b)(13)(v), (c)(1) and (c)(4) of Rule 6e-2, and Rules 12b-
1(a)(1) and 22c-1, under the 1940 Act. Applicants seek these exemptions 
to the extent necessary to permit them to offer and sell the Policies.

A. Request for Exemptions Relating to Definition of ``Variable Life 
Insurance Contract''

    1. Rule 6c-3 under the 1940 Act grants exemptions from numerous 
provisions of the 1940 Act to separate accounts of life insurance 
companies that support variable life insurance policies. The exemptions 
provided by Rule 6c-3 are available only to registered separate 
accounts whose assets are derived solely from the sale of ``variable 
life insurance contracts'' which meet the definitions set forth in Rule 
6e-2(c)(1) or ``flexible premium variable life insurance contracts'' 
which meet the definition set forth in Rule 6e-3(T)(c)(1) under the 
1940 Act, and from certain advances made by the insurer.
    2. A ``variable life insurance contract'' is defined in Rule 6e-
2(c)(1) to include only life insurance policies which provide both a 
death benefit and a cash surrender value which vary to reflect the 
investment experience of the separate account, and which guarantee that 
the death benefit will not be less than an amount stated in the policy. 
The required guaranteed minimum death benefit need be provided only so 
long as 

[[Page 48188]]
premiums are duly paid in accordance with the terms of the policy.
    3. The death benefit will vary with investment performance when the 
value is sufficiently large that, in order to qualify the Policy as 
life insurance for federal income tax purposes, the death benefit must 
be increased. This could happen, for example, because of very favorable 
investment performance, the payment of additional premiums, or both. In 
addition, to some degree, each of the possible additional components of 
the death benefit--i.e., the Additional Protection, the Variable paid-
up additional insurance, and Excess Amount--also will vary to reflect 
investment performance.
    4. Applicants submit that the death benefit under the Policy varies 
to reflect investment experience within the meaning of Rule 6e-2(c)(1). 
Applicants concede, however, that the death benefit under the Policy is 
not precisely the type of variable death benefit contemplated when Rule 
6e-2 was adopted, and that the Policy contains other provisions that 
are not specifically addressed in Rule 6e-2. Accordingly, Applicants 
request exemptions from the definition of ``variable life insurance 
contract'' in Rule 6e-2(c)(1) and from all sections of and rules under 
the 1940 Act--other than Sections 7 and 8(a)--specified in Rule 6e-
2(b), under the same terms and conditions applicable to a separate 
account that satisfies the conditions set forth in Rule 6e-2(a), and to 
the extent necessary to permit the offer and sale of the Policy in 
reliance on Rule 6e-2, except as otherwise set forth in the 
application.
    5. Applicants submit that the definition of ``variable life 
insurance contract'' in Rule 6e-2(c)(1) was drafted at a time when less 
flexibility regarding premium payments and other policy features were 
offered than subsequently have been permitted. The Policy provides 
considerable latitude for the purchaser to select the desired 
combination of minimum guaranteed death benefit, Additional Protection, 
and Variable paid-up additional insurance. While such a choice may not 
have been contemplated when Rule 6e-2 was drafted, Applicants submit 
that purchasers are well served by the opportunity to choose a 
combination of features which they believe suits their own need with 
respect to the relationship of cash value, death benefit and investment 
performance.
    6. Applicants further submit that the considerations that led the 
Commission to adopt Rules 6c-3 and 6e-2 apply equally to the Account 
and the Policy, and that the exemptions provided by those rules should 
be granted to Applicants on the terms specified in those rules, except 
to the extent that further exemption from those terms is specifically 
requested.

B. Request for Exemptions Relating to Sales Charges

    1. Sections 26(a)(2) and 27(c)(2) may be construed to require that 
the proceeds of all payments under a Policy be deposited in the Account 
and that no payment be made from the Account to Northwestern or any 
affiliated person of Northwestern, except for bookkeeping and other 
administrative services. The premium surrender charge (for sales 
expenses) may be deemed inconsistent with the foregoing provisions, to 
the extent that the deduction from the Policy value would constitute 
payment for an expense not specifically permitted. Applicants request 
exemptions from Sections 26(a)(2) and 27(c)(2) to the extent necessary 
to permit the premium surrender charge to be deducted upon surrender or 
lapse of a Policy, as described in the application.
    2. Section 2(a)(35) and Rules 6e-2(b)(1) and 6e-2(c)(4) may be 
construed to contemplate that the sales charge for a variable life 
insurance policy will be deducted from premiums. The deduction of a 
premium surrender charge under the Policies may be deemed inconsistent 
with those provisions. Applicants request exemptions from Section 
2(a)(35) and Rules 6e-2(b)(1) and 6e-2(c)(4), to the extent necessary 
to permit part of the Policy's sales charge to be deducted from premium 
payments, and part as a surrender charge.
    3. Applicants submit that Rule 6e-2(c)(4) may be construed to 
comprehend a sales charge imposed on other than premiums. This is 
because the definition is an intellectual construct rather than a 
reflection of the actual methodology of administering variable life 
insurance policies, referring in paragraphs (i) and (ii), for example, 
to other amounts that are not  deducted from premiums.
    4. Section 27(a)(1) and Rule 6e-2(b)(13)(i) may be construed to 
contemplate that the sales charge under a policy will be deducted from 
premiums. Northwestern's deduction of part of its sales charge on a 
contingent deferred basis may be deemed inconsistent with the foregoing 
provisions, to the extent that the sales charge is deducted from other 
than premiums. Applicants request an exemption from those provisions to 
the extent necessary to permit part of the Policy's sales charge to be 
deducted from premium payments, and part to be deducted as a surrender 
charge.
    5. In pertinent part, Sections 2(a)(32), 27(c)(1), and 27(d) 
prohibit Applicants from selling the Policy unless it is a ``redeemable 
security.'' \3\ Subparagraphs (b)(12), (b)(13)(iv), and (b)(13)(v) of 
Rule 6e-2 afford exemptions from Section 27(c)(1), and subparagraphs 
(b)(13)(iv) and (b)(13)(v) of Rule 6e-2 afford exemptions from Section 
27(d), to the extent necessary for cash value to be regarded as 
satisfying the redemption and sales charge refund requirements of the 
1940 Act. However, the exemptions afforded by subparagraphs (b)(12), 
(b)(13)(iv), and (b)(13)(v) of Rule 6e-2 may not contemplate a 
contingent deferred sales charge. Moreover, Northwestern's deduction of 
the premium surrender charge may be viewed as reducing the proceeds 
that the Policy owner would receive on surrender below the Policy 
owner's proportionate share of the current net assets of the Account. 
Applicants request an exemption from the foregoing provisions to the 
extent necessary to permit part of the sales charge under a Policy to 
be deducted from premium payments, and part to be deducted as a 
surrender charge.

    \3\ A ``redeemable security,'' as defined in Section 2(a)(32), 
entitles a Policy owner to receive his or her approximate 
proportionate share of the current net assets of the Account upon 
surrender.
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    6. Applicants represent that Rule 6e-2 was adopted at a time when 
less flexibility regarding premium payments and other policy features 
were offered than subsequently have been permitted. Because of these 
features, particularly premium flexibility, it is possible that the 
premiums actually received by the insurance company by the date of 
surrender or lapse of a Policy may be less than the full amount of 
scheduled minimum premiums paid on or before the relevant due dates. It 
is unclear how the technical sales load computation provisions in Rule 
6e-2 apply under such circumstances, particularly with respect to the 
premium surrender charge.
    7. Applicants submit that, although the definition of ``redeemable 
security'' found in Section 2(a)(32) does not expressly provide for the 
imposition of a sales charge at the time of redemption, such a charge 
is not necessarily inconsistent with the definition of ``redeemable 
security.'' Applicants further submit that the premium surrender charge 
is similar to the ``redemption'' charge authorized in Section 10(d)(4) 
of the 1940 Act, and that Congress obviously intended that such a 
``redemption charge''--which is expressly described as a ``discount 
from net asset value''--be deemed consistent 

[[Page 48189]]
with the concept of ``proportionate share'' under Section 2(a)(32).
    8. Applicants submit that there will be no restriction on, or 
impediment to, surrender that should cause the Policy to be considered 
other than a redeemable security within the meaning of the 1940 Act and 
the rules thereunder. The Policy provides for surrender and withdrawals 
of excess Policy value. The prospectus for the Policy will disclose the 
contingent deferred nature of part of the sales charge. Upon surrender 
or lapse, a Policy owner will receive his or her ``proportionate 
share'' of the Account--i.e., the amount of net premiums paid, reduced 
by the amount of all charges and increased by the amount of all return 
credited to the Policy.
    9. Rule 22c-1, adopted pursuant to Section 22(c), prohibits 
Applicants from redeeming a Policy except at a price based on the 
current net asset value of the Policy that is next computed after 
receipt of the request for full or partial surrender of the Policy. 
Rule 6e-2(b)(12) affords exemptions from Rule 22c-1. Rules 22c-1 and 
6e-2(b)(12), read together, impose requirements with respect to both 
the amount payable on surrender and the time as of which such amount is 
calculated. The proposed premium surrender charge may be deemed 
inconsistent with Section 22(c) and Rule 22c-1 to the extent that the 
sales charge can be viewed as causing a Policy to be redeemed at a 
price based on less than the current net asset value that is next 
computed after full or partial surrender of the Policy.
    10. Applicants submit that the premium surrender charge will not 
have the dilutive effect which Rule 22c-1 is designed to prohibit 
because a surrendering Policy owner would receive no more than an 
amount equal to the cash surrender value determined pursuant to the 
formula set out in his or her Policy and after receipt of his or her 
request. Furthermore, variable life insurance policies, by nature, do 
not lend themselves to the kind of speculative short-term trading that 
Rule 22c-1 was aimed against and, even if they could be so used, the 
surrender charge would discourage, rather than encourage, any such 
trading.
    11. Applicants submit that deduction of part of the sales charge as 
a deferred charge on surrender or lapse will be more favorable to 
Policy owners than deduction of the same amount of charge from 
premiums. First, the amount of the Policy owner's premium payment that 
will be allocated to the Account and be available to earn a return for 
the Policy owner will be greater than it would be if the sales charge 
were deducted from premiums. Second, the total dollar amount of sales 
load under a Policy is no higher than that permitted by Rule 6e-
2(b)(3)(13) for a conventional scheduled premium variable life 
insurance policy. For a Policy owner who does not lapse or surrender in 
the early Policy years, the dollar amount of sales load is lower than 
would be permitted if taken entirely as front-end deductions from 
premium payments made under a Policy. Third, the cost of insurance 
charge imposed will be less than it otherwise would be if the same 
amount of sales charge were deducted from premium payments, because the 
allocation of a greater amount of the Policy owner's premium to the 
Account reduces the amount at risk (i.e., the amount of death benefit 
less the Policy value) upon which the cost of insurance charge is 
based. Moreover, Applicants represent that the proposed sales load 
structure provides equitable treatment to both surrendering and 
persisting Policy owners. That is, if the insurer is not permitted to 
charge a sales load in the form of a contingent deferred charge, it 
would have to deduct the sales load entirely from premium payments, 
thereby charging persisting Policy owners more than may otherwise be 
necessary to recover the distribution costs attributable to such Policy 
owners.
    12. The premium surrender change, although imposed on other than 
the premium, will cover expenses associated with the offer and sale of 
the Policy, just as other forms of sales loads do. Applicants submit 
that the mere fact that the timing of the imposition of the surrender 
charge may not fall neatly within the literal pattern of all provisions 
discussed above, does not change its essential nature as a sales 
charge. Moreover, Applicants represent that proposed amendments to Rule 
6e-2 would permit assessment of a sales charge on a contingent deferred 
basis.
    13. Applicants represent that the percentages of sales load never 
will exceed the sum of 30% of the premium payments paid for the first 
Policy year plus 10% of premium payments paid for the second Policy 
year, and will not exceed 9% of premium payments expected to be paid 
over the lesser of 20 years or the expected lifetime of the insured. 
For this reason, Applicants submit that the Policy is consistent with 
the principles and policies underlying the sales load limitations in 
Section 27(a)(2) of the 1940 Act, and Rules 6e-2 (b)(13)(i) and 
(b)(13)(v).
    14. Applicants submit that premium and other flexibility options 
under the Policy are a potential benefit to Policy owners.

C. Request for Exemptions Relating to Collection of Administrative 
Surrender Charge

    1. Although the expenses that the administrative surrender charge 
is designed to recover are associated with the issuance of a Policy, 
Northwestern will deduct the administrative surrender charge from the 
Policy Value--not premiums--in the event of early surrender or lapse of 
a Policy, and such a deduction will reduce the proceeds otherwise 
payable. Such a deduction of the administrative surrender charge 
pursuant to the Policies may be deemed to violate Sections 2(a)(32), 
22(c), 27(c)(1), 27(d), and Rule 22c-1 for essentially the same reasons 
as the premium surrender charge might be deemed to violate those 1940 
Act sections and rules. Accordingly, Applicants request exemptions from 
the foregoing provisions of the 1940 Act to the extent necessary to 
permit the deduction of the administrative surrender charge upon early 
surrender or lapse of a Policy.
    2. Applicants submit that imposition of the administrative 
surrender charge is more favorable to Policy owners than a charge 
deducted entirely from premiums or from the Policy value over the life 
of the Policy. Because the reduction of the Policy owner's investment 
in the Account is less than it would be were the administrative 
surrender charge taken in full in the first Policy year, there is a 
larger Policy value initially earning a return for the Policy owner. In 
addition, for a Policy owner who does not lapse or surrender in the 
early Policy years, the total dollar amount of the charges for issuance 
and maintenance expenses is no more than Northwestern would be 
permitted to deduct from premium payments or by way of periodic 
deductions from Policy value. Also, the total dollar amount of the 
administrative surrender charge will be no higher than Northwestern 
would be permitted to deduct if this charge were in the form of a 
deduction from premium payments and/or from the Policy value prior to 
the lapse or surrender of a Policy.
    3. Applicants represent that the administrative surrender charge 
has not been increased to take account of the time value of money 
(i.e., the investment costs attributable to deferment of the charge) or 
the fact that not all Policy owners would incur the charge.
    4. Northwestern does not intend to make a profit on the 
administrative surrender charge.
    5. Administrative charges deducted in the form of a surrender 
charge are 

[[Page 48190]]
specifically permitted by Rule 6e-3(T)(b)(13)(iv)(C) for variable life 
insurance policies offered and sold in reliance on the rule. Applicants 
submit that the relief requested herein with respect to the 
administrative surrender charge under the Policies is equally 
appropriate.

D. Request for Exemptions Relating to Deduction of Insurance Charges 
From Policy Value

    1. Sections 26(a)(2) and 27(c)(2) may be construed to prohibit 
Northwestern from deducting certain insurance charges from the Policy 
value. Applicants request exemptions from the foregoing sections and 
Rule 6e-2(b)(13)(iii) \4\ to the extent necessary to permit the 
deduction of certain insurance charges from Policy value, as described 
in the application.

    \4\ In pertinent part, Rule 6e-2(b)(13)(iii) provides an 
exemption from Sections 26(a)(2) and 27(c)(2), subject to certain 
conditions which Applicants submit that they satisfy.
---------------------------------------------------------------------------

    2. Applicants submit that the deduction of cost of insurance 
charges from the Policy value is fair and reasonable, and in accordance 
with the practice under most other variable life insurance policies.
    3. Applicants further submit that deduction from the Policy value 
of charges for substandard risks and incidental insurance benefits also 
is reasonable and appropriate. If all such charges were required to be 
deducted solely from premiums, it would be necessary for Northwestern 
to: (a) reduce the premium flexibility under the Policy; and/or (b) 
limit further the classes of insureds for whom the Policy will be 
available, and limit or eliminate the kinds of rider benefits that 
Northwestern intends to make available.
    4. Applicants submit that Rule 6e-3(T) authorizes deductions from 
account value for all of these insurance charges in connection with 
policies eligible to rely on that rule, and that proposed amendments to 
Rule 6e-2 would authorize deductions from account value of the risk 
charges for guaranteed benefits.
    5. Applicants submit that their method of deducting cost of 
insurance charges is fair and reasonable, and consistent with general 
industry practice.
    6. Applicants submit that charges for substandard risks and 
incidental insurance benefits must be deducted from Policy value, as a 
practical matter.
    7. The Policy provides for an annual charge, based on the face 
amount of insurance, for the death benefit guarantee. Generally, this 
charge is deducted from annual premiums, but if payment of premiums is 
suspended, the charge will be deducted from Policy value. In addition, 
an annual cost of insurance charge based on the amount at risk and the 
attained age and risk classification of the insured is deducted from 
Policy value; this charge also applies to the values which support any 
variable paid-up additional insurance.
    8. Applicants represent that the proposed method of deducting 
insurance charges is not designed to yield more revenues than if these 
charges were assessed solely against premiums.
    9. Northwestern represents that these risk charges are reasonable 
in relation to the risks assumed under the Policy. The methodology used 
to support this representation is based on an analysis of the pricing 
structure of the Policies--including other charges, and an analysis of 
the various risks--including special risks arising out of provisions 
that allow additional and unscheduled premium payments and, in certain 
circumstances, suspension of premium payments. Northwestern undertakes 
to keep and make available to the Commission the documentation used to 
support this representation.
    10. Northwestern further represents that there is a reasonable 
likelihood that the distribution financing arrangement of the Account 
will benefit the Account and Policy owners. Northwestern will keep and 
make available to the Commission on request a memorandum setting forth 
the basis for this representation.
    11. Applicants agree that if the requested order is granted, such 
order will be expressly conditioned on Applicants' compliance with the 
following: the Account will invest only in management investment 
companies which have undertaken, in the event they should adopt any 
plan under Rule 12b-1 under the 1940 Act to finance distribution 
expenses, to have a board of directors, a majority of whom are not 
interested persons of the company, formulate and approve such plan.

E. Request for Exemptions Relating to Use of 1980 Standard Ordinary 
Mortality Tables

    1. Section 27(a)(1) prohibits an issuer of periodic payment plan 
certificates from imposing a sales load exceeding 9% of the payments to 
be made on such certificates. Rule 6e-2(b)(13)(i) provides an exemption 
from Section 27(a)(1) to the extent that the sales load, as defined in 
Rule 6e-2(c)(4), does not exceed 9% of the payments to be made on the 
variable life insurance policy during the period equal to the lesser of 
20 years or the anticipated life expectancy of the insured, based on 
the Commissioners 1958 Standard Ordinary Mortality Table (the ``1958 
CSO Table'').
    2. Rule 6e-2(c)(4), in defining ``sales load,'' contemplates the 
deduction of an amount for the cost of insurance based on the 1958 CSO 
Table and the assumed investment return specified in the Policy. 
Following the adoption of Rule 6e-2, the National Association of 
Insurance Commissioners adopted the 1980 CSO Tables, which reflect more 
recent information and data about mortality. The guaranteed cost of 
insurance rates under the Policy are based on the 1980 CSO Tables. 
Applicants request exemptions from Section 27(a)(i) and Rules 6e-
2(c)(1), 6e-2(b)(13)(i), and 6e-2(4) to the extent necessary to permit 
cost of insurance to be calculated based on the 1980 CSO Tables, for 
purposes of testing compliance with those rules and that statutory 
provision.
    3. Applicants represent that proposed amendments to Rule 6e-2 would 
require use of the 1980 CSO Tables for purposes of Rules 6e-2(b)(13)(i) 
and 6e-2(c)(4), where the 1980 CSO Tables relate to the insurance rates 
guaranteed under an insurance policy.
    4. Applicants further represent that because cost of insurance 
charges based on the 1980 CSO Tables generally are lower than those 
based on the 1958 CSO Table, lower charges and higher Policy values 
generally result if charges are based on the 1980, rather than the 
1958, CSO Tables.

F. Request for Exemptions Relating to the DAC Tax

    1. Section 2(a)(35), in pertinent part, defines ``sales load'' as 
the difference between the price of a security to the public and that 
portion of the proceeds from its sale that is received and invested or 
held for investment by the depositor, less any portion of such 
difference deducted for trustee's or custodian's fees or other fees 
that are not properly chargeable to sales or promotional activities.
    2. Section 27(c)(2) prohibits a registered investment company or a 
depositor or underwriter for such company from making any deduction 
from payments made under periodic plan certificates other than a 
deduction for sales load. Sections 27(a)(1) and 27(h)(1) of the 1940 
Act, as modified by Rule 6e-2(b)(13)(i), limit the amount of sales load 
that can be deducted in connection with variable life insurance 
policies issued in reliance on Rule 6e-2.
    3. Applicants state that Rules 6e-2(b)(13)(iii) and 6e-
3(T)(b)(13)(iii) each 

[[Page 48191]]
provide exemptive relief from Section 27(c)(2) to permit an insurer to 
deduct certain charges other than sales load, including deductions to 
pay the insurer's tax liabilities--imposed by any State or other 
governmental entity--arising as a result of its receipt of premium 
payments. Applicants seek relief from Section 27(c)(2) only to the 
extent necessary to permit deductions from premium payments received in 
connection with the Policies in an amount that is reasonable in 
relation to Northwestern's increased federal tax burden related to the 
receipt of such premiums. Applicants also request exemptions from Rule 
6e-2(c)(4)(v) so that the proposed ``DAC tax'' charge is treated as 
other than sales load for purposes of Section 27 and the provisions of 
Section 27 referred to in Rule 6e2.
    4. The exemption requested by Applicants is necessary in order for 
them to rely on certain provisions of Rule 6e-2(b)(13)(i), which 
provides exemptions from Sections 27(a)(1)and 27(h)(1). Issuers and 
their affiliates may rely on subparagraph (b)(13)(i) of Rule 6e-2 only 
if they meet the limitations on ``sales load,'' as defined in paragraph 
(c)(4) of that rule. Applicants state that these limitations may not be 
met if the deduction for an increase in Northwestern's federal tax 
burden is included in sales load.
    5. Rule 6e-2(c)(4) defines ``sales load'' as the excess of premium 
payments over certain itemized charges and adjustments. Applicants 
submit that a deduction for an insurer's increased federal tax burden 
as described above does not fall squarely into any of those itemized 
charges or adjustments. Arguably, then, such a deduction may be treated 
as ``sales load'' under a literal reading of Rule 6e-2(c)(4).
    6. Applicants submit that there is no public policy reason for 
including deductions made to pay federal taxes in sales load, nor is 
there any language in the releases in which the Commission adopted Rule 
6e-2 or adopted and amended Rule 6e-3(T) suggesting that the exclusion 
from the definition of sales load of deductions for tax liabilities 
attributable to premiums was based on the type of governmental entity 
imposing the taxes.
    7. Applicants submit that the public policy underlying Rule 6e-
2(b)(13)(i), like that underlying Sections 27(a)(1) and 27(h)(1), is to 
prevent excessive sales loads from being charged in connection with the 
sale of periodic payment plan certificates. Applicants submit that the 
treatment of a tax burden charge attributable to premium payments as 
sales load would not further this objective because such a deduction 
bears no relation to the payment of sales commissions or other 
distribution expenses. Applicants state that the Commission has 
concurred with this conclusion by excluding deductions for state 
premium taxes from the definition of ``sales load'' in Rule 6e-2(c)(4).
    8. Applicants assert that the source for the definition of sales 
load found in Rule 6e-2(c)(4) supports this analysis. Applicants submit 
that the Commission's intent in adopting subparagraph (c)(4) of Rule 
6e-2 was to tailor the general terms of Section 2(a)(35) to variable 
life insurance contracts. Just as the percentage limits of Sections 
27(a)(1) and 27(h)(1) depend on the definition of sales load in Section 
2(a)(35) for their efficacy, the percentage limits in subparagraph 
(b)(13)(i) of Rule 6e-2 depend on subparagraph (c)(4). Applicants 
submit, therefore, that Rule 6e-2(c)(4) does not depart, in principle, 
from Section 2(a)(35).
    9. Applicants assert that Section 2(a)(35) excludes from the 
definition of ``sales load'' deductions from premiums for ``issue 
taxes.'' Applicants submit that this suggests that excluding deductions 
made to pay an insurer's costs attributable to its tax obligations from 
the definition of ``sales load'' in Rule 6e-2 is consistent with the 
policies of the 1940 Act.
    10. Applicants further submit that the reference in Section 
2(a)(35) to administrative expenses or fees that are ``not properly 
chargeable to sales or promotional activities'' suggests that the only 
deductions intended to fall within the definition of ``sales load'' are 
those properly chargeable to such activities. Because the proposed 
deductions will be used to compensate Northwestern for its increased 
federal tax burden attributable to the receipt of premiums, and are not 
properly chargeable to sales or promotional activities, Applicants 
assert that the language in Section 2(a)(35) also indicates that not 
treating such deductions as sales load is consistent with the policies 
of the 1940 Act.
    11. Applicants represent that Northwestern will monitor the 
reasonableness of the ``DAC tax'' charge to be deducted. Applicants 
represent, further, that the registration statement for the Policies 
will: (a) Disclose the charge; (b) explain the purpose of the charge; 
and (c) state that the charge is reasonable in relation to 
Northwestern's increased federal tax burden under Section 848 resulting 
from the receipt of premiums. Applicants also represent that the 
registration statement for the Policies will contain as an exhibit an 
actuarial opinion as to: (a) The reasonableness of the charge in 
relation to Northwestern's increased federal tax burden under Section 
848 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 in 
determining such targeted rate of return.
    12. Applicants assert that it is proper for an insurer to deduct a 
charge for the tax burden attributable to premiums received from 
variable life insurance policies, and to exclude such a deduction from 
sales load, because the deduction for the insurer's increased federal 
tax burden is a legitimate expense of the company, and is not for sales 
and distribution expenses. Applicants note that the Commission has 
previously considered similar deductions for premium taxes in 
connection with its adoption of Rule 6e-2 and Rule 6e-3(T). In each 
case, the Commission permitted deductions for such taxes to be made and 
to be treated as other than sales load. Applicants assert that the 
proprietary of a charge for an insurers tax burden attributable to 
premiums received is the same whether such burden arises under state or 
federal law.

G. Request for Exemptions Relating to Custodianship Arrangements

    1. In pertinent part, Sections 26(a)(1) and 26(a)(2) prohibit 
Applicants from selling the Policy unless it is issued pursuant to a 
trust indenture or other such instrument that designates one or more 
trustees or custodians, qualified as specified, to have possession of 
all securities in which the Account invests.
    2. In pertinent part, Section 27(c)(2) may be read to prohibit 
Applicants from selling the Policy unless the proceeds of all purchase 
payments are deposited with a trustee or custodian as specified.
    3. Rule 6e-2(b)(13)(iii) affords an exemption from Sections 
26(a)(1), 26(a)(2), and 27(c)(2), provided that the life insurer 
complies, to the extent applicable, with all other provisions of 
Section 26 as if it were a trustee or custodian for the Account, and 
assuming that it meets the other requirements set forth in the rule.
    4. Applicants represent that the holding of Fund shares by the 
Account or its depositor under an open account arrangement--without 
having possession of share certificates and without a trust indenture 
or other such instrument--may be deemed inconsistent with the foregoing 
provisions. Accordingly, Applicants request exemptions from Sections 

[[Page 48192]]
26(a)(1), 26(a)(2) and 27(c)(2), to the extent necessary.
    5. Applicants represent that current industry practice calls for 
unit investment trust separate accounts, such as the Account, to hold 
shares of management investment companies in uncertificated form. 
Applicants further represent that holding shares of underlying 
management investment companies in uncertificated form contributes to 
efficiency in the operation and sale of such shares by separate 
accounts, and generally saves costs.
    6. Applicants note that, in contrast to the Policies (which are 
covered by Rule 6e-2), policies covered by Rule 6e-3(T) may rely on 
Rules 6e-3(T)(b)(13)(iii) (B) and (C) which, in effect, afford the 
exemptions requested here by the Applicants. The Commission has 
proposed amendments to Rule 6e-2(b)(13)(iii) to permit life insurers to 
hold the assets of a separate account without a trust indenture or 
other such instrument, and to permit a separate account organized as a 
unit investment trust to hold the securities of any registered 
investment company that offers its shares to the separate account in 
uncertificated form. Applicants also note that the Commission has 
adopted 1940 Act Rule 26a-2 which affords exemptions in connection with 
variable annuity separate accounts that are essentially similar to 
those requested here. Accordingly, Applicants presume that the 
Commission adopted or proposed the foregoing exemptive rules based on a 
determination that, where state insurance law protects separate account 
assets and open account arrangements foster administrative efficiency 
and cost savings, safekeeping of separate account assets does not 
necessarily depend on the presence of a trustee, custodian or trust 
indenture, or the issuance of share certificates.
    7. Northwestern represents that: it will comply with all other 
applicable provisions of Section 26 of the 1940 Act as if it were a 
trustee or custodian for its Account (subject to the other exemptive 
relief requested in the application); it will file with the insurance 
regulatory authority of Wisconsin an annual statement of its financial 
condition in the form prescribed by the National Association of 
Insurance Commissioners--the most recent such statement indicated that 
Northwestern has a combined capital and surplus of at least $1 million; 
it is examined from time to time by the insurance regulatory authority 
of Wisconsin as to its financial condition and other affairs; and it is 
subject to supervision and inspection with respect to its separate 
account operations.
H. Request for Exemptions Relating to Sale of Fund Shares Without an 
Underwriter

    1. Section 12(b) of the 1940 Act provides, in pertinent part, that 
it shall be unlawful for any registered open-end company to act as a 
distributor of securities of which it is the issuer, except through an 
underwriter, in contravention of such rules and regulations as the 
Commission may prescribe. Rule 12b-1(a)(1) provides, in pertinent part, 
that, except in compliance with the provisions of that rule, it shall 
be unlawful for a registered open-end management investment company to 
act as a distributor of securities of which it is the issuer, except 
through an underwriter.
    2. Applicants request exemption from Section 12(b) and Rule 12b-
1(a)(1) to the extent necessary to permit the Fund to sell the shares 
of its portfolios to the Account without the use of an underwriter, on 
the condition that Applicants not use the Fund's assets for 
distribution expenses unless the Fund complies with 1940 Act Rule 12b-
1(b).
    3. Applicants state that shares of the Fund Portfolios have been 
and will be sold only to the Account and to other separate accounts of 
Northwestern, except for the seed money shares purchased by 
Northwestern itself. The shares will be sold at net asset value without 
any sales charge or underwriting spread. Applicants represent that the 
Fund bears no expenses for distribution of its shares.
    4. Applicants submit that, in view of the foregoing facts, no 
useful purpose would be served by requiring the Fund to use an 
underwriter for the sale of the shares of its portfolios to the 
Account. Direct sales of these shares to the Account would not expose 
the Fund to any underwriting risks, since such shares are issued only 
when requests for their purchase are received from the Account. Nor 
would the direct sales to the Account create any expenses for the Fund.

Conclusion

    Applicants assert that, for the reasons set forth above, the 
requested exemptions meet the standards of Section 6(c) of the 1940 
Act. The requested exemptions are 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23016 Filed 9-15-95; 8:45 am]
BILLING CODE 8010-01-M