[Federal Register Volume 60, Number 181 (Tuesday, September 19, 1995)]
[Notices]
[Pages 48578-48580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23143]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21349; File No. 812-9388]


Integrity Life Insurance Company, et al.

September 12, 1995.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

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

-----------------------------------------------------------------------

APPLICANTS: Integrity Life Insurance Company (``Integrity''), Separate 
Account I of Integrity Life Insurance Company (``Account I''), Separate 
Account II of Integrity Life Insurance Company (``Account II,'' and 
collectively with Account I, the ``Separate Accounts'') and Integrity 
Financial Services, Inc. (``Services'').

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

SUMMARY OF THE APPLICATION: Applicants seek an order under Section 6(c) 
of the 1940 Act granting exemptions from Sections 26(a)(2)(C) and 
27(c)(2) to the extent necessary to permit the deduction of a mortality 
and expense risk charge from the assets of the Separate Accounts or 
other Separate Accounts (``Other Accounts'') established by Integrity 
to support certain flexible premium variable annuity policies 
(``Contracts'') as well as other variable annuity contracts that are 
substantially similar in all material respects to the Contracts 
(``Future Contracts''). In addition, Applicants propose that Services 
replace Integrity as principal underwriter for the Contracts, and that 
the order extend the same exemptions granted to Services, and to any 
other broker-dealer that may in the future serve a principal 
underwriter for the Contracts or Future Contracts, the same exemptions 
currently granted to Integrity.

FILING DATES: The application was filed on December 22, 1994, and was 
amended on August 2, 1995 and September 8, 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 SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m., on 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 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 
SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, Kevin L. Howard, 
Esq., Integrity Life Insurance Company, 239 S. Fifth Street, 12th 
Floor, Louisville, Kentucky, 40202.

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: Following is a summary of the application; 
the complete application is available for a fee from the SEC's Public 
Reference Branch.

Applicant's Representations

    1. Integrity, a stock life insurance company, is organized in Ohio 
and licensed to sell life insurance and annuities in forty-four states 
and the District of Columbia. In addition, Integrity is licensed to 
sell variable contracts in forty-three states and the District of 
Columbia. Integrity is an indirect wholly-owned subsidiary of ARM 
Financial Group, Inc. (``ARM Financial''). Integrity is currently the 
principal underwriter of the Contracts and is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member of the 
National Association of Securities Dealers, Inc. (``NASD'').
    2. Account I and Account II are separate accounts established by 
Integrity to fund the Contracts. Both Separate Accounts are registered 
under the 1940 as unit investment trusts. Interests in the Contracts 
are registered as securities under the 1933 Act.
    3. Account I has ten investment divisions (``Divisions''), each of 
which invests in one of the ten corresponding portfolios of the 
Variable Insurance Products Fund and the Variable Insurance Products 
Fund II, which are both part of the Fidelity Investments (R) group of 
companies (collectively, ``Trusts''). Account II has ten Divisions, 
each of which invests in a corresponding portfolio of The Legends Fund, 
Inc. (``Legends Fund,'' and collectively with the Trusts, ``Funds''). 
The Funds are diversified, open-end management investment companies 
registered under the 1940 Act.
    4. Services, a wholly-owned subsidiary of ARM Financial, is 
registered with the Commission under the Securities Exchange Act of 
1934 as a broker-dealer and is a member of the NASD. Applicants now 
seek to substitute Services for Integrity as the principal underwriter 
for the Contracts.\1\

    \1\The Commission has previously granted relief permitting 
Integrity to deduct mortality and expense risk charges from the 
assets of the Separate Accounts in connection with the sales of the 
Contracts. See, Integrity Life Insurance Company, Investment Company 
Act Release No. 19120 (Nov. 24, 1992) and The Equitable Life 
Assurance Society of the United States, Investment Company Act 
Release No. 15406 (Nov. 7, 1986) (``Existing Orders''). Applicants 
are not requesting that the order sought herein amend or supersede 
the Existing Orders.
---------------------------------------------------------------------------

    5. Integrity, the Separate Accounts, and Services will enter into 
an agreement under which Services will become principal underwriter for 
the Contracts. Integrity and Services propose to enter into selling 
agreements with broker-dealers for the distribution of the Contracts.
    6. The Contracts are flexible premiums variable annuity contracts. 
Contract owners (``Participants'') may allocate premium payments to one 
or more of the Separate Accounts' Divisions, or to one or more of 
Integrity's guaranteed periods, or both. Amounts allocated to guarantee 
periods accumulate on a fixed basis, except as adjusted for any 
applicable value adjustment.
    7. A death benefit is available under the Contracts if a 
Participant dies prior to his or her retirement date. The amount of the 
death benefit is equal to the greatest of (1) the Participant's annuity 
value, (2) the minimum death benefit, which equals total contributions 
less the sum of the market value 

[[Page 48579]]
adjusted withdrawals, and (3) the Participant's highest annuity value 
at the beginning of any participation year, plus subsequent 
contributions and minus subsequent withdrawals (``Enhanced Death 
Benefit'').
    8. Retirement benefits under the Contracts may take the form of a 
lump sum payment or an annuity. The retirement benefits are calculated 
as of the retirement date selected by the Participant. If no annuity 
payment option is elected by the retirement date, Integrity will deem 
the retirement date to have been extended.
    9. Certain charges and fees are assessed under the Contracts. Until 
annuity payments begin, Participants may transfer their Contract values 
among Divisions of the relevant Separate Account and the relevant 
guarantee periods, except that transfers to any guarantee period must 
be to a newly elected guarantee period at the current guaranteed 
interest rate. No fee currently is imposed for a Participant's first 
twelve transfers per participation year. Integrity reserves the right 
to impose a fee of up to $25 for each transfer in excess of twelve per 
participation year. The transfer fee will be paid to Integrity to 
compensate it for the anticipated actual administrative expenses 
relating to transfers and is guaranteed not to increase during the life 
of the Contracts. In addition, Applicants reserve the right to impose a 
transfer fee in connection with Future Contracts of up to $25 on 
transfers beginning with the first transfer of Contract values in any 
participation year. No charges will be assessed for transfers made 
under Integrity's dollar cost averaging program.
    10. A contingent deferred sales charge (``CDSC'') may be imposed on 
certain withdrawals. The amount of the CDSC decreases annually from 7% 
to 0% over 7 participation years. No CDSC will be applied to partial 
withdrawals made during any participation year that do not exceed the 
specified amount. In addition, Integrity may waive the CDSC in certain 
circumstances.
    11. If a Participant's Contract value is less than $50,000 on the 
last day of any participation year prior to the Participant's 
retirement date, Integrity charges an annual administrative charge of 
$30. In addition, all Contracts are subject to a daily charge equal, on 
an annual basis, to .15% of the net asset value of the relevant 
Separate Account to cover policy administration expenses. These daily 
and annual fees are guaranteed for the life of the Contracts and will 
not exceed the cost of services to be provided over the life of the 
Contract.
    12. Integrity imposes charges as compensation for bearing certain 
mortality and expense risks under the Contracts. The amount of the 
mortality and expense risk charges under the Contracts is equal, on an 
annual basis, to 1.20% (of which .35% is attributable to mortality 
risks and .85% to expense risks) of the daily net asset value of the 
relevant Separate Account. For the Future Contracts, the annual 
mortality and expense risk charge will not exceed an effective annual 
rate of 1.20% of the net asset value of any Separate Account, or of 
Other Accounts, attributable to such contracts.
    13. Integrity assumes the mortality risk that the life expectancy 
of the annuitant will be greater than that assumed in the guaranteed 
annuity purchase rates, thus requiring Integrity to pay out more in 
annuity income than it had planned. Integrity assumes an additional 
mortality risks because of its contractual obligation to provide a 
minimum death benefit and an Enhanced Death Benefit prior to the 
annuity date. Thus, Integrity assumes the risk that it may not be able 
to cover its distribution expenses and that the owner may die at a time 
when the amount of the death benefit payable exceeds the then net 
surrender value of the Contracts. The expense risk assumed by Integrity 
is that the administration charge will be sufficient to cover the 
actual cost of administering the Contracts.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the 1940 to the 
extent that the exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940, in relevant part, 
prohibit a registered unit investment trust, its depositor or principal 
underwriter, from selling periodic payment plan certificates unless the 
proceeds of all payments, other than sales loads, are deposited with a 
qualified bank and held under arrangements which prohibit any payment 
to the depositor or principal underwriter except a reasonable fee, as 
the Commission may prescribe, for performing bookkeeping and other 
administrative duties normally performed by the bank itself.
    3. Applicants request an order under Section 6(c) exempting them 
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent 
necessary to permit the deduction of the mortality and expense risk 
charge from the assets of the Separate Accounts or Other Accounts that 
issue the Contracts or Future Contracts. Applicants also propose that 
Services replace Integrity as principal underwriter for the Contracts, 
and that the order extend the same exemptions granted to Services, and 
to any other broker-dealer that may in the future serve a principal 
underwriter for the Contracts or Future Contracts, the same exemptions 
currently granted to Integrity. Any such principal underwriter will be 
wholly-owned, directly or indirectly, by ARM Financial.
    4. Applicants submit that their request for an order is appropriate 
in the public interest. Such an order would promote competitiveness in 
the variable annuity contract market by eliminating the need for 
Integrity to file redundant exemptive applications, thereby reducing 
Integrity's administrative expenses and maximizing the efficient use of 
Integrity's resources. The delay and expense involved in having 
repeatedly to seek exemptive relief would impair Integrity's ability 
effectively to take advantage of business opportunities as these 
opportunities arise. Applicants further submit that the requested 
relief is consistent with the purposes of the 1940 Act and the 
protection of investors for the same reasons. If Integrity were 
required repeatedly to seek exemptive relief with respect to the same 
issues addressed in this Application, investors would not receive any 
benefit or additional protection thereby. Thus, Applicants believe that 
the requested exemptions 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.
    5. Applicants represent that they have reviewed publicly-available 
information regarding the aggregate level of the mortality and expense 
risk charges under variable annuity contracts comparable to the 
Contracts currently being offered in the insurance industry taking into 
consideration such factors as current charge levels, the manner in 
which charges are imposed, the presence of charge-level or annuity-rate 
guarantees and the markets in which the Contracts will be offered. 
Based upon the foregoing, Applicants further represent that the 
mortality and expense risk charges under the Contracts are within the 
range of industry practice for comparable contracts. Applicants will 
maintain and make available to the Commission, upon request, a 

[[Page 48580]]
memorandum outlining the methodology underlying this representation. 
Similarly, prior to making available any Future Contracts through the 
Separate Accounts or Other Accounts, Applicants will represent that the 
mortality and expense risk charges under any such contracts will be 
within the range of industry practice for comparable contracts. 
Applicants will maintain and make available to the Commission, upon 
request, a memorandum outlining the methodology underlying such 
representation.
    6. Applicants do not believe that the contingent withdrawal charges 
under the Contracts will necessarily cover the expected costs of 
distributing the Contracts. Any ``shortfall'' will be made up from 
Integrity's general account assets which will include amounts derived 
from mortality and expense risk charges. Integrity has concluded that 
there is a reasonable likelihood that the distribution financing 
arrangement being used in connection with the Contracts will benefit 
the Separate Accounts and the Contract owners. Integrity will keep and 
make available to the Commission, upon request, a memorandum setting 
forth the basis for this representation. Similarly, Integrity will 
maintain and make available to the Commission, upon request, a 
memorandum setting forth the basis for the same representation with 
respect to Future Contracts offered by the Separate Accounts or by 
Other Accounts established by Integrity.
    7. Applicants represent that the Separate Accounts and Other 
Accounts will invest only in a management investment company which has 
undertaken, in the event such company adopts a plan under Rule 12b-1 
under the 1940 Act to finance distribution expenses, to have a board of 
directors (or trustees), a majority of whom are not ``interested 
persons'' of the management investment company within the meaning of 
Section 2(a)(19) of the 1940 Act, formulate and approve any plan under 
Rule 12b-1 to finance distribution expenses.

Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested exemptions from sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to deduct the mortality and expense risk 
charge from the assets of the Separate Accounts or Other Accounts that 
issue the Contracts and/or the Future Contracts, and in connection with 
Contracts or Future Contracts for which broker-dealers other than 
Services will serve as principal underwriter, meet the applicable 
statutory standards in Section 6(c) of the 1940 Act. Applicants assert 
that the exemptions requested are necessary and appropriate in the 
public interest and consistent with the protection of investors and the 
policies 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. 95-23143 Filed 9-18-95; 8:45 am]
BILLING CODE 8010-01-M