[Federal Register Volume 60, Number 181 (Tuesday, September 19, 1995)]
[Notices]
[Pages 48582-48585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23142]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21348; File No. 812-9622]


SAFECO Life Insurance Company, et al.

September 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: SAFECO Life Insurance Company (``SAFECO''), First SAFECO 
National Life Insurance Company of New York (``First SAFECO''), SAFECO 
Separate Account C (``Account C''), SAFECO Resource Variable Account B 
(the ``Resource Account''), SAFECO Securities, Inc. (``SAFECO 
Securities''), and PNMR Securities, Inc. (``PNMR'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(C) for 
exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
deduction of a mortality and expense risk charge from the assets of 
Account C, the Resource Account, or any separate account established by 
SAFECO or First SAFECO in connection with certain variable annuity 
contracts (``Contracts''). The exemptions also would apply to any other 
registered broker-dealer, which is or will be controlling, controlled 
by, or under common control with SAFECO, and which may serve in the 
future as principal underwriter for variable annuity contracts that are 
similar in all material respects to the Contracts and that are offered 
in the future by SAFECO or First SAFECO (``Future Contracts'').

FILING DATE: The application was filed on May 31, 1995, and amended and 
restated on September 6, 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 Secretary of the SEC 
and serving Applicants with a copy of the request, personally or by 
mail. Hearing requests must be received by the SEC by 5:30 p.m. on 
October 10, 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 reasons for the request, and the issues contested. 
Persons may request notification of a hearing by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, P.O. Box 34690, Seattle, Washington 98124-1690, Attn: 
William E. Crawford, Esq.

FOR FURTHER INFORMATION CONTACT:
Joseph G. Mari, Senior Special Counsel, or Wendy 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 Commission.

Applicants' Representations

    1. SAFECO is a stock life insurance company organized under the 
laws of Washington and is the depositor of Account C and the Resource 
Account. First SAFECO, a wholly-owned subsidiary of SAFECO, is a stock 
life insurance company organized under the laws of New York.
    2. Account C and the Resource Account, organized by SAFECO under 
Washington law as insurance company separate accounts to fund certain 
variable annuity contracts, are registered under the 1940 Act as unit 
investment trusts. Account C currently funds certain individual 
variable annuity contracts (``Current C Contracts''), and will fund 
certain additional forms of variable annuity contracts currently being 
registered and to be offered by SAFECO through Account C (the ``Account 
C Contracts''). The Resource Account currently funds certain individual 
and group variable annuity contracts (``Current Resource Contracts'') 
and, in the future, may fund certain additional forms of variable 
annuity contracts offered by SAFECO. The Current C Contracts and the 
Current Resource Contracts collectively are referred to as the 
``Current Contracts''; the Current Contracts and Account C Contracts 
constitute the ``Contracts.''
    3. SAFECO or First SAFECO may establish one or more separate 
accounts in the future (``Other Accounts'') (Other Accounts, Account C, 
and Resource Account are referred to collectively as the ``Separate 
Accounts'') to support certain variable annuity contracts that are 
materially similar to the Contracts and are offered through any other 
broker-dealer that (i) may serve in the future as principal underwriter 
in respect of certain variable annuity contracts offered by SAFECO or 
First SAFECO, (ii) is registered under the Securities Exchange Act of 
1934 as a broker-dealer and which is or will be a member of the 
National Association of Securities Dealers, Inc. (the ``NASD''), and 
(iii) is controlling, controlled by, or under common control with 
SAFECO (``Other Principal Underwriters'').
    4. The Separate Accounts are comprised of sub-accounts each of 
which invests in the corresponding portfolio or series of a management 
investment company registered under the 1940 Act. SAFECO and First 
SAFECO may create new sub-account(s) of the Separate Accounts.
    5. SAFECO Securities, a registered broker-dealer and a member of 
the NASD, is the principal underwriter of the Current C Contracts and 
will be the principal underwriter of the Account C Contracts. SAFECO 
Securities also is the principal underwriter for the Current Resource 
Contracts, for which PNMR, a registered broker-dealer and a member of 
the NASD, previously had been the principal underwriter. SAFECO 
Securities or PNMR may act as principal underwriter for any Contracts 
issued in the future by SAFECO or First SAFECO.
    6. Applicants intend to offer the Account C Contracts to the public 
for individuals who qualify for federal income tax advantages available 
under Section 408 of the Internal Revenue Code of 1986, as amended 
(``qualified Account C Contracts''), and for individuals desiring such 
benefits who do not qualify for such tax advantages (``non-qualified 
Account C Contracts''). Account C Contracts will be offered on a 
flexible payment basis. Owners may allocate purchase payments to 
SAFECO's general account under the fixed account portion of the Account 
C Contracts, or to one of several sub-accounts of Account C.
    7. Applicants state that the minimum initial purchase payment for 
an Account C Contract is $2,000 for a qualified Account C Contract and 
$5,000 for a non-qualified Account C Contract. The minimum additional 
purchase payment is $250, except for additional purchase payments made 
through a systematic investing program, in which case the minimum 
payment is $100.
    8. Regarding the Current C Contracts and the Current Resource 
Contracts, Applicants only seek relief to assess mortality and expense 
risk charges from the assets of the Separate Accounts in connection 
with the offering of variable annuity contracts that are materially 
similar to those contracts. SAFECO, the 

[[Page 48583]]
Resource Account and SAFECO Securities were granted exemptive relief 
under Section 6(c) of the 1940 Act from the provisions of Sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act permitting the assessment of a 
mortality and expense risk charge (the ``Resource Application'') to the 
extent set forth therein.\1\ Applicants represent that no material 
facts contained in the Resource Application have changed since the 
issuance of the Resource Order and incorporate that application herein 
by reference. SAFECO, Account C and PNMR were granted exemptive relief 
under Section 6(c) oft he 1940 Act from the provisions of Sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act permitting the deduction of a 
mortality and expense risk charge (the ``Account C Application'') to 
the extent set forth therein.\2\ Applicants represent that no material 
facts contained in the Account C Application have changed since the 
issuance of the Account C Order and incorporate that application herein 
by reference.

    \1\Safeco Life Insurance Company, Investment Company Act Release 
Nos. 15396 (Nov. 5, 1986) (notice) and 15459 (Dec. 5, 1986) 
(``Resource Order'').
    \2\Safeco Life Insurance Company, Investment Company Act Release 
Nos. 20043 (Jan. 28, 1994) (notice) and 20097 (Feb. 25, 1994) (the 
``Account C Order'').
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    9. Certain charges and fees are assessed under the Contracts. A 
Contract owner will be able to make up to twelve transfers each 
Contract year at no charge. Each additional transfer will be subject to 
a charge of $10, which, according to Applicants, will not exceed the 
average costs associated with administering the Contracts.
    10. Contract owners will be permitted to make one withdrawal of 
Contract Value (the amount that the Contract provides for investment at 
any time), subject to the other limitations and charges under the 
Contracts, without the assessment of an excess withdrawal charge. A 
maximum charge of $25 is assessed for each withdrawal in excess of one 
withdrawal per Contract year.
    11. For non-qualified Account C Contracts, SAFECO intends to 
deduct, as a charge against Contract Value, an amount equal to and for 
premium taxes. For qualified Account C Contracts, SAFECO intends to pay 
premium taxes, although SAFECO reserves the right to deduct, as a 
charge against Contract Value, an amount equal to and for premium 
taxes. For non-qualified Current Contracts, SAFECO deducts, as a charge 
against Contract Value, an amount equal to and for premium taxes. For 
qualified Current Contracts, SAFECO has reserved the right to deduct, 
as a charge against Contract Value, an amount equal to and for premium 
taxes. Premium taxes generally range up to 3.5%.
    12. No front-end sales charge is imposed when purchase payments are 
applied under the Account C Contracts. However, a contingent deferred 
sales charge (``CDSC'') is assessed if the Account C Contract is 
surrendered or partial withdrawals exceeding certain amounts are taken 
during the six-year period from the issue date of the Account C 
Contract. Each Contract year, an Account C Contract owner generally may 
withdraw a total of 10% of the Contract Value as of the date of the 
withdrawal, without payment of the CDSC. The percentage imposed at the 
time of surrender or partial withdrawal depends on when the Account C 
Contract is surrendered or partial withdrawals are taken. The maximum 
CDSC is 7% of the amount withdrawn during the first Contract year. The 
percentage scales downward by one percent each year. In no event will 
the CDSC under the Account C Contracts be greater than 9% of purchase 
payments.
    13. Applicants submit that proceeds from the CDSC may not cover the 
expected cost of distributing the Contracts and that any shortfall will 
be recovered from SAFECO's or First SAFECO's general assets, which may 
include revenue from the mortality and expense risk charge deducted 
from the Separate Accounts.
    14. The administrative charges to be assessed with respect to the 
Account C Contracts will be (i) an annual administration maintenance 
charge, currently $30 per Contract year, and (ii) an asset-related 
administration charge at an annual rate of approximately .15%, which 
rate may not be increased for the duration of the Account C Contracts. 
The annual administration maintenance charge is imposed only on Account 
C Contracts with a Contract Value less than $100,000. SAFECO states 
that it may change the annual administration maintenance charge over 
the period that the Account C Contracts are in force, but in no event 
will the annual administration maintenance charge exceed $40 per 
Contract year.
    15. SAFECO represents that it does not expect that the total 
revenues from the administrative charges will be greater than the total 
expected cost of administering the Contracts, on average, excluding 
costs that are properly categorized as distribution expenses, over the 
period that the Contracts are in force. Applicants represent that they 
rely on and are in compliance with the requirements of Rule 26a-1 in 
connection with charges under the Contracts.
    16. Applicants propose to deduct a daily charge for mortality and 
expense risks from the assets of the Separate Accounts. With respect to 
the Account C Contracts, SAFECO will assess the Separate Accounts with 
a daily charge for mortality and expense risks at an aggregate annual 
rate of 1.25%. Approximately .90% of the annual charge is allocated to 
the mortality risks and .35% is allocated to the expense risks.
    17. SAFECO will assume a mortality risk by its contractual 
obligation to pay a death benefit to the beneficiary if the owner, as 
defined in the Account C Contract (``Account C Contract Owner''), dies 
prior to the Annuity Date. Applicants assert that the Account C 
Contracts provide a guaranteed death benefit that is the greater of: 
(a) the Contract Value at the time of notification of death and 
election of a settlement option, but not later than six months 
following the date of death; or (b) the previous minimum guaranteed 
death benefit. Applicants represent that the minimum guaranteed death 
benefit is reset at the end of each sixth Contract Year (the ``Six Year 
Contract Anniversary''), as described below. At each Six Year Contract 
Anniversary the last minimum guaranteed death benefit value on record 
is compared to the then current Contract Value. The greater of the two 
values becomes the new minimum guaranteed death benefit value. At the 
first Six year Contract Anniversary the last minimum guaranteed death 
benefit value of record is the sum of all payments less any withdrawals 
during the first six Contract Years; that value will be compared to 
Contract Value. The minimum guaranteed death benefit value is fixed as 
of the last Six Year Contract Anniversary preceding the Account C 
Contract Owner's 76th birthday. If an Account C Contract Owner makes 
withdrawals during the period between Six Year Contract Anniversaries, 
the minimum guaranteed death benefit value is reset to equal the sum 
of: (a) The previous minimum guaranteed death benefit value; multiplied 
by (b) the Contract Value after the withdrawal; divided by (c) the 
Contract Value before the withdrawal. Similarly, if an Account C 
Contract Owner makes purchase payments during the period between Six 
Year Contract Anniversaries, the previous minimum guaranteed death 
benefit is adjusted to reflect the amount of the purchase payments.
    18. Applicants also represent that SAFECO assumes a similar 
mortality risk under the Current Contracts. The 

[[Page 48584]]
Current Contracts provide a guaranteed death benefit that is the 
greater of: (1) Net purchase payments plus any deposits less any 
withdrawals (including any applicable charges) at the time of death; or 
(2) the Contract Value determined as of the ``Valuation Period'' (as 
defined in the Current Contract), next following the date both proof of 
death and an election of a single sum payment or of a form of annuity 
payment is received by SAFECO.
    19. SAFECO also represents that it assumes a mortality risk by its 
contractual obligation to continue to make annuity payments for the 
life of the annuitant under annuity options involving life 
contingencies. This assures each annuitant that neither the annuitant's 
own longevity nor an improvement in life expectancy generally will have 
an adverse effect on the annuity payments received under an Account C 
Contract. This relieves the annuitant from the risk of outliving the 
amounts accumulated for retirement. At the same time, SAFECO represents 
that it assumes the risk that annuitants as a group will live a longer 
time than SAFECO's annuity tables predict, which would require SAFECO 
to pay out more in annuity income than planned. SAFECO assumes an 
additional mortality risk because the Account C Contract does not 
impose CDSC or similar charge on the death benefit or upon 
annuitization.
    20. In addition to mortality risks, SAFECO asserts that it assumes 
an expense risk under the Contracts because the administrative charges 
under the Contracts may be insufficient to cover actual administrative 
expenses.
    21. Applicants represent that if the administrative charges and 
mortality and expense risk charges assessed against Separate Account 
assets are insufficient to cover the expenses and costs assumed, the 
loss will be borne by SAFECO or First SAFECO. If the amount deducted 
for mortality and expense risk charges proves more than sufficient, the 
excess will be profit to SAFECO or First SAFECO. SAFECO anticipates 
earning a profit from the mortality and expense risk charge.

Applicants' Legal Analysis

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and 
27(c)(2) thereof to the extent necessary to permit the deduction of a 
mortality and expense risk charge from the assets of the Separate 
Accounts under the Contracts and Future Contracts as described herein.
    2. Section 6(c) of the 1940 Act, in relevant part, provides that 
the Commission may issue an order exempting any person, security or 
transaction, or any class or classes of persons, securities or 
transactions, from any provision or provisions of the 1940 Act as may 
be 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and any depositor thereof or principal 
underwriter therefor, from selling periodic payment plan certificates 
unless the proceeds of all payments (other than sales load) are 
deposited with a qualified trustee or custodian and held under an 
agreement that provides that no payment to the depositor or principal 
underwriter shall be allowed except as a fee, not exceeding such 
reasonable amount as the Commission may prescribe, for bookkeeping and 
other administrative services.
    4. Applicants assert that the requested exemptions meet the 
standards of Section 6(c) of the 1940 Act, and that the terms of the 
relief requested with respect to the Contracts or Future Contracts 
funded by a Separate Account and distributed by SAFECO Securities, PNMR 
or any Other Principal Underwriters are consistent with the standards 
set forth in Section 6(c) of the 1940 Act. Applicants state that 
without the requested future relief, they would have to request and 
obtain exemptive relief in connection with Contracts or Future 
Contracts to the extent required. Applicants submit that any such 
additional request for exemption would present no issues under the 1940 
Act that have not already been addressed in this application, the 
Account C Application, and the Resource Application.
    5. Applicants submit that the requested exemptive relief is 
appropriate in the public interest because it would promote 
competitiveness in the variable annuity contract market by eliminating 
the need for SAFECO, First SAFECO and their appropriate affiliates to 
file redundant exemptive applications, thereby reducing administrative 
expenses and maximizing the efficient use of resources. The delay and 
expense involved in having to seek exemptive relief repeatedly would 
impair SAFECO's, First SAFECO's, Other Accounts', and Other Principal 
Underwriters' ability effectively to take advantage of business 
opportunities as they arise. If SAFECO and First SAFECO were required 
to seek exemptive relief repeatedly with respect to the issues 
addressed in this Application, the Resource Application and the Account 
C Application, investors would not receive any benefit or additional 
protection thereby. Indeed, they might be disadvantaged as a result of 
SAFECO's and First SAFECO's increased overhead expenses. Applicants 
further submit that, for the same reasons, the requested relief is 
consistent with the purposes of the 1940 Act and the protection of 
investors.
    6. Applicants represent that the mortality and expense risk charge 
of 1.25% is within the range of industry practice for comparable 
annuity products. Applicants state that this determination is based on 
their analysis of publicly available information about similar industry 
practices, taking into consideration such factors as current charge 
levels and benefits provided, the existence of expense charge 
guarantees, and guaranteed annuity rates. SAFECO and First SAFECO 
undertake to maintain at their home offices, and make available to the 
Commission upon request, a memorandum setting forth in appropriate 
detail the products analyzed, the methodology, and the results of the 
analysis relied upon, in making the foregoing determination.
    7. Similarly, Applicants represent, regarding the Future Contracts, 
that the mortality and expense risk charges under any Future Contracts 
will be within the range of industry practice for comparable annuity 
products. Applicants state that this determination will be based on 
their analysis of publicly available information about similar industry 
practices, taking into consideration such factors as current charge 
levels and benefits provided, the existence of expense charge 
guarantees, and guaranteed annuity rates. SAFECO and First SAFECO 
undertake to maintain at their home offices, and make available to the 
Commission upon request, a memorandum setting forth in appropriate 
detail the products analyzed, the methodology, and the results of the 
analysis relied upon, in making the foregoing determination.
    8. The CDSC may be insufficient to cover all costs relating to the 
distribution of the Contracts. In that event, if a profit is realized 
from the mortality and expense risk charge, all or a portion of such 
profit may be offset by distribution expenses not reimbursed by the 
CDSC. Notwithstanding the foregoing, SAFECO has concluded that there is 
a reasonable likelihood that the proposed distribution financing 
arrangements will benefit the Separate Accounts and Contract owners. 

[[Page 48585]]
SAFECO undertakes to maintain at its home office, and make available 
upon request to the Commission and its staff, a memorandum setting out 
the basis for such conclusion.
    9. SAFECO and First SAFECO also represent that the Separate 
Accounts will invest only in an underlying mutual fund which 
undertakes, in the event it should adopt any plan pursuant to Rule 12b-
1 of the 1940 Act to finance distribution expenses, to have such plan 
formulated and approved by a board of directors, a majority of the 
members of which are not ``interested persons'' of such fund within the 
meaning of Section 2(a)(19) of the 1940 Act.

Conclusion

    Applicants submit, for the reasons stated herein, that the 
requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to permit the assessment of a mortality and expense risk charge 
meet the standards set out in Section 6(c) of the 1940 Act. 
Accordingly, Applicants assert that 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, 
pursuant to delegated authority.
Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 95-23142 Filed 9-18-95; 8:45 am]
BILLING CODE 8010-01-M