[Federal Register Volume 60, Number 196 (Wednesday, October 11, 1995)]
[Notices]
[Pages 52945-52948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25164]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21388; No. 812-8884]
Alexander Hamilton Life Insurance Company of America, et al.
October 3, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: Alexander Hamilton Life Insurance Company of America
(``Alexander Hamilton''), Alexander Hamilton Variable Annuity Separate
Account (``Separate Account''), and FMG Distributors, Inc. (``FMG'').
RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) of the
1940 Act granting exemptions from Sections 26(a)(2) and 27(c)(2)
thereof.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction of mortality and expense risk charges from the assets of the
Separate Account in connection with the offering of a variable annuity
contract (``Contract''). Exemptions also are requested for any broker-
dealers who may, in the future, act as principal underwriters of the
Contract.
FILING DATE: The application was filed on March 10, 1994 and declared
inactive on May 1, 1995. The application was amended and reactivated on
May 8, 1995, and further amended on September 7, 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
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on October 30, 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, NW., Washington, DC 20549. Applicants, c/o Paul Shay, Esq.,
General Counsel, Alexander Hamilton Life Insurance Company of America,
33045 Hamilton Court, Farmington Hills, Michigan 48334-3358.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Patrice M. Pitts, Special Counsel, Office of Insurance
Products (Division of Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representation
1. Alexander Hamilton is a stock life insurance company licensed to
do business in Canada, the District of Columbia and all states except
New York. Alexander Hamilton is a wholly-owned subsidiary of Household
Group, Inc., which is an indirect wholly-owned subsidiary of Household
International, Inc., a diversified financial services holding company.
2. Alexander Hamilton established the Separate Account under the
laws of Michigan. A registration statement to register the Separate
Account under the 1940 Act as a unit investment trust has been filed
with the Commission (File No. 33-75714).\1\
\1\Applicants incorporate by reference the registration
statement for the Separate Account.
---------------------------------------------------------------------------
The Separate Account presently has nine sub-accounts (``Sub-
Accounts'') investing exclusively in shares of a corresponding
portfolio of: (a) Alexander Hamilton Variable Insurance Trust
(``Trust''); and (b) the Prime Money Fund (``Prime Fund''), part of
Federated Investors Insurance Management Series (``Federated''), which
is a management investment company. (The Trust and Prime Fund together
referred to as ``Funds.'') Other sub-accounts may be established in the
future to invest in other portfolios of the Funds or in portfolios of
other affiliated or unaffiliated investment companies or unit
investment trusts.
3. FMG will serve as distributor and principal underwriter of the
Contract. FMG is not otherwise affiliated with the other Applicants.
FMG is registered under the Securities Exchange Act of 1934 (``1934
Act'') as a broker-dealer and is a member of the National Association
of Securities Dealers, Inc. (``NASD''). Other broker-dealers that are
registered under the 1934 Act as broker-dealers and that are members of
the NASD also may serve as distributors and principal underwriters of
the Contract.
4. The Trust and Federated each are registered under the 1940 Act
as an open-end management investment company of the series type as
defined by Rule 18f-2 under the 1940 Act. Investment options offered
under the Contract include eight Trust portfolios and Federated's Prime
Fund. Alexander Hamilton Capital Management, Inc. and Federated
Advisers, each a registered investment adviser under the Investment
Advisers Act of 1940, are the investment advisers for the Trust and for
the Prime Fund, respectively. A separate class of shares of beneficial
interest, which have been registered as securities under the 1933 Act
on Form
[[Page 52946]]
N-1A, is issued in connection with each investment portfolio offered
under the Contract.
5. The Contract is a flexible premium deferred multi-funded
variable annuity which can be purchased on a non-tax qualified basis or
in connection with certain retirement plans that qualify for special
federal tax treatment under Sections 401, 403(b), 408 or 457 of the
Internal Revenue Code of 1986, as amended. The Contract provides for a
minimum initial premium payment and for optional subsequent premium
payments. Under the Contract, premium payments may be allocated to: (a)
The Sub-Accounts; (b) one or more ``Interest Rate Guarantee Periods''
of the Capital Developer Account;\2\ or (c) a combination of up to ten
of these options. The Contract value of the Contract will be: (a) The
sum of the value of all accumulation units in the Separate Account,
which will vary in accordance with the investment performance of the
Sub-Account(s) selected by the Contract owner; and (b) the amounts in
the Capital Developer Account, which will be guaranteed as to principal
and interest, although a Market Value Adjustment (``MVA'') may apply.
\2\Applicants represent that the Capital Developer Account
option under the Contract is not being registered under the 1933 Act
in reliance upon Section 3(a)(8) thereof.
---------------------------------------------------------------------------
6. The Contract also provides for: (a) A death benefit, which is
selected by the Contract owner or beneficiary from among several
payment options; and (b) a periodic fixed and/or variable or other
annuity payment option plan of payment offered by Alexander Hamilton
before the maturity date of a Contract. The death benefit for a
Contract owner who dies at age 75 or less is equal to the greatest of:
(a) all premium payments, less ``adjusted partial withdrawals,''\3\
with interest compounded at 4% per year; (b) Contract value as of the
most recent Contract anniversary before age 75 that is a multiple of
five Contract years, plus premium payments and less any adjusted
partial withdrawals made since that Contract anniversary;\4\ and (c)
Contract value as of the date Alexander Hamilton receives satisfactory
proof of death and election of an annuity payment option. The death
benefit for a Contract owner who dies at an age greater than 75 is
equal to the Contract value on the date Alexander Hamilton receives
satisfactory proof of death, election of a payment option and return of
a Contract.
\3\The ``adjusted partial withdrawal'' for each partial
withdrawal is the product of (a) times (b) where: (a) is the ratio
of the amount of the partial withdrawal to the Contract value on the
date of, but prior to, the partial withdrawal; and (b) is the death
benefit on the date of, but prior to, the partial withdrawal.
\4\For purposes of (a) and (b), above, the Death Benefit will be
calculated as of the date of the owner's death and never will be
greater than 200% of all premium payments, less withdrawals.
---------------------------------------------------------------------------
7. The following fees and charges are deducted under a Contract.
a. Annual Administrative Charge
An annual charge of the lesser of $30 or 2% of Separate Account
value is deducted from Separate Account value on the first day of each
Contract year and upon full surrender of a Contract, but not after the
maturity date, to compensate Alexander Hamilton for the administrative
services provided to Contract owners. Alexander Hamilton does not
anticipate any profit from this charge, which is guaranteed not to
increase for the duration of the Contract. Applicants intend to rely on
Rule 26a-1 under the 1940 Act to deduct this charge.
b. Contingent Deferred Sales Charge (``CDSC'')
No sales charge currently is deducted from premium payments. A
declining CDSC of up to 7% will be imposed as a percentage of Contract
value withdrawn or surrendered during the first eight Contract years,
or annuitized during the first Contract year, to pay Contract
distribution expenses. The CDSC as a percentage of each premium payment
is determined as follows:
------------------------------------------------------------------------
Surrender charge (as a % of the premium Complete years since receipt
payment being withdrawn) of premium
------------------------------------------------------------------------
7........................................ 0-1
7........................................ 2
6........................................ 3
5........................................ 4
4........................................ 5
3........................................ 6
2........................................ 7
1........................................ 8
0........................................ 9 and above
------------------------------------------------------------------------
In no event will the CDSC exceed 8.5% of total premium payments.
Additionally, during the first eight Contract years, up to 10% Contract
value surrendered or withdrawn or annuitized during that Contract year
will be exempt from any CDSC (but not from any MVA).
c. Market Value Adjustment
An MVA may be imposed on the partial withdrawal, full surrender or
transfer to the Separate Account of any amount from the Capital
Developer Account during an Interest Rate Guarantee Period.\5\ The MVA
will never reduce Capital Development Account Value to an amount less
than amounts allocated to that Account accumulated at an annual
interest rate of 3%. No MVA will be applied during the last 30 days of
an Interest Rate Guarantee Period.
\5\The MVA will reflect the relationship between: (a) the
Treasury Rate for the Interest Rate Guarantee Period; and (b) the
guaranteed interest rate applicable to the Interest Rate Guarantee
Period from which the partial withdrawal, surrender or transfer is
made at the time of the transaction.
---------------------------------------------------------------------------
d. Mortality and Expense Risk Charge
A daily mortality and expense risk charge will be deducted at an
annual rate of 1.25% (of which 0.50% is allocable to mortality risks
and 0.75% to expense risks) of the value of the net assets in the
Separate Account. The mortality and expense risk charge may be a source
of profit for Alexander Hamilton and the excess may be used for, among
other things, the payment of distribution expenses.
This charge is imposed to compensate Alexander Hamilton for bearing
certain mortality and expense risks under the Contract. Alexander
Hamilton will assume two mortality risks under the Contract: (a) That
the annuity rates under the Contract cannot be changed to the detriment
of Contract owners even if annuitants live longer than projected; and
(b) that Alexander Hamilton may be obligated to pay a death benefit
claim in excess of a Contract's value at the time of payment. The
expense risk assumed by Alexander Hamilton is the risk that its actual
administration costs will exceed the amount recovered through the
administrative charges.
e. Administrative Expense Charge
A daily administrative charge is deducted from the assets of the
Separate Account at an annual rate of 0.15% to compensate Alexander
Hamilton for certain expenses it incurs in administration of the
Contract and the Separate Account. Applicants represent that the charge
will reimburse Alexander Hamilton only for administrative costs
expected to be incurred over the life of the Contract. Alexander
Hamilton does not anticipate any profit from this charge, which is
guaranteed not to increase for the duration of the Contract. Applicants
represent that this charge will be deducted in reliance on Rule 26a-1
under the 1940 Act.
f. Transfer Charge
Currently, Alexander Hamilton has no plans to impose a transfer
charge. However, Alexander Hamilton reserves
[[Page 52947]]
the right to impose a $10 charge for each transfer in excess of fifteen
during any Contract year.\6\
\6\The registration statement, which Applicants have
incorporated by reference, provides information about the transfer
charge.
---------------------------------------------------------------------------
g. Premium Taxes
A premium tax charge ranging from 0% to 3.5% of premiums or
Contract value will be deducted under the Contract if Alexander
Hamilton is required to pay premium taxes to various states and local
jurisdictions. The deduction will be made when Alexander Hamilton is
required to pay the premium tax and may be made from premium payments,
upon surrender or at annuitization.
h. Deductions for Other Taxes
No charge currently is imposed for federal, state or local income
taxes attributable to the Separate Account, other than premium taxes.
Alexander Hamilton may make such deductions for such taxes or the
economic burden thereof in the future, subject to necessary regulatory
approvals.
i. Expenses of the Trust and Fund
Net assets of the Separate Account will reflect the investment
advisory fee and other expenses incurred by the Trust and Funds,
respectively.
Applicants' Legal Analysis
1. Applicants request an order under Section 6(c) of the 1940 Act
granting exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof to
permit the assessment of charges for mortality and expense risks under
the Contract. Applicants also seek exemptive relief for broker-dealers
who, in the future, may act as principal underwriters of the Contract.
2. Section 6(c) of the 1940 Act authorizes the Commission to exempt
any person, security or transaction, or any class or classes of
persons, securities or transactions, from the provisions of the 1940
Act and the rules thereunder, if and to the extent that such exemption
is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
3. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, 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 arrangement 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.
4. Applicants submit that their request for an order is appropriate
in the public interest and consistent with the protection of investors
and purposes fairly intended by the policy and provisions of the 1940
Act. Applicants further submit that the terms of the relief requested
with respect to future underwriters issuing the Contract are consistent
with the standards of Section 6(c) of the 1940 Act. Applicants assert
that, without the requested relief, Alexander Hamilton would have to
request and obtain exemptive relief for each new principal underwriter
that distributes the Contract. Applicants represent that such
additional requests for exemptive relief would present no issues under
the 1940 Act that have not already been addressed in this application.
5. Applicants further state that the requested relief is
appropriate in the public interest because it would promote
competitiveness in the variable annuity market by eliminating the need
for Alexander Hamilton to file redundant exemptive applications,
thereby reducing its administrative expenses and maximizing the
efficient use of its resources. Investors would not receive any benefit
or additional protection by requiring Alexander Hamilton to seek
exemptive relief repeatedly with respect to the same issues addressed
in this Application. Applicants assert that the delay and expense
involved would impair Alexander Hamilton's ability to take effective
advantage of business opportunities as they arise and would
disadvantage investors as a result of Alexander Hamilton's increased
overhead expenses.
6. Applicants submit that the mortality and expense risk charges
are reasonable and proper insurance charges. Alexander Hamilton
guarantees certain risks in return for these charges. The mortality and
expense risk charge is a reasonable charge to compensate Alexander
Hamilton for: the risk that annuitants under the Contract will live
longer than has been anticipated in setting the annuity rates
guaranteed in the Contract; the risk that the death benefit will be
greater than the Contract value; the risk created by the
inapplicability of a CDSC to amounts paid as a death benefit; and the
risk that administrative expenses will be greater than amounts derived
from both the Administrative Expense Charge and the Annual
Administrative Fee.
7. Applicants represent that the charge of 1.25% for mortality and
expense risks is within the range of industry practice for comparable
variable annuity contracts. The representation is based upon Alexander
Hamilton's analysis of publicly available information about similar
industry products, taking into consideration such factors as current
charge levels, the existence of charge level guarantees and guaranteed
annuity rates. Alexander Hamilton will maintain at its administrative
offices, and make available to the Commission upon request, a
memorandum setting forth in detail the products analyzed in the course
of, and the methodology and result of, its comparative survey.
8. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge under the Contract, all or a portion
of such profit may be available to pay distribution expenses not
reimbursed by the CDSC. Alexander Hamilton has concluded that there is
a reasonable likelihood that the proposed distribution financing
arrangement will benefit the Separate Account and Contract owners.
Alexander Hamilton will keep at its administrative offices and make
available to the Commission, upon request, a memorandum setting forth
the basis for this representation.
9. Applicants represent that the Separate Account will invest only
in management investment companies which undertake, in the event any
such company adopts a plan under Rule 12b-1 to finance distribution
expenses, to have a board of directors, a majority of whom are not
interested persons of any such investment company, as defined in the
1940 Act, formulate and approve any plan under Rule 12b-1 under the
1940 Act to finance distribution expenses.
Conclusion
Applicants assert that for the reasons and based 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 a mortality and expense risk charge
under the Contract offered by the Separate Account are necessary and
appropriate in the public interest and consistent with the protection
of investors and the policies and provisions of the 1940 Act.
[[Page 52948]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-25164 Filed 10-10-95; 8:45 am]
BILLING CODE 8010-01-M