[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Notices]
[Pages 54743-54746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26432]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21428; File No. 812-9626]


Annuity Investors Life Insurance Company, et al.

October 19, 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: Annuity Investors Life Insurance Company (the ``Company''), 
Annuity Investors Variable Account A (``Separate Account''), and AAG 
Securities, Inc. (``AAG Securities'').

RELVEANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Sections 22(d), 26(a)(2)(C) and 27(c)(2) 
thereof.

SUMMARY OF APPLICATION: Applicants seek an order to permit the Company: 
(1) To deduct a mortality and expense risk charge under certain 
variable annuity contracts (``Contracts''), and other variable annuity 
contracts issued by the Company in the future that are materially 
similar to the Contracts (``Future Contracts''), from the assets of the 
Separate Account or any separate account established in the future by 
the Company to support Future Contracts, and (2) to waive the 
contingent deferred sales charge when certain specified contingencies 
trigger the right to a complete or partial surrender.

FILING DATE: The application was filed on June 9, 1995, and amended and 
restated on October 10, 1995. Applicants represent that an amendment to 
the application will be filed during the notice period.

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 
November 13, 1995, and should be accompanied 

[[Page 54744]]
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 5423, Cincinnati, Ohio 45201-5423, Attn: Mark F. 
Muething, Esq.

FOR FURTHER INFORMATION CONTACT:
Joseph G. Mari, Senior Special Counsel, or Patrice M. Pitts, Special 
Counsel, 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. The Company is an Ohio stock life insurance company, and is a 
wholly-owned subsidiary of American Annuity Group, Inc. (``AAG'').
    2. On May 26, 1995, the Company established the Separate Account 
under Ohio law as an insurance company separate account. The Separate 
Account, registered under the 1940 Act as a unit investment trust, is 
divided into sub-accounts, each of which invests in shares of a 
different registered investment company or portfolio thereof.
    3. The Company may established one or more separate accounts in the 
future (``Other Accounts'') to support Future Contracts.
    4. AAG Securities, a wholly-owned subsidiary of AAG, is registered 
as a broker-dealer under the Securities Exchange Act of 1934. AAG 
Securities will be the principal underwriter of the Contracts, which 
will be sold by licensed insurance agents who are registered 
representatives of AAG Securities or of a registered broker-dealer that 
has entered into a selling agreement with AAG Securities.
    5. The Contracts are group flexible combination variable and fixed 
annuity contracts. The amount and timing of contributions (after the 
deduction of premium tax, if any) made to the Company in consideration 
for a person's (``Participant'') participation under a Contract 
(``Purchase Payments'') under a certificate of participation 
(``Certificate'') are determined by the applicable Participant.
    6. The Contracts provide for five options which may be elected by 
the Participant for the payment of annuity payments by the Company: (1) 
A life annuity with payments for at least a fixed period; (2) a life 
annuity; (3) a joint and one-half survivor annuity; (4) an income for a 
fixed period; and (5) such other form of annuity that is acceptable to 
the Company.
    7. The Company deducts annually from the value of a Participant's 
interest in all sub-accounts a charge of $25 as partial compensation 
for expenses relating to the issue and maintenance of the Certificate 
and the Separate Account (``Certificate Maintenance Fee''). The Company 
reserves the right to increase the Certificate Maintenance Fee and 
guarantees that the Certificate Maintenance Fee will not exceed $40. 
Any increase in the Certificate Maintenance Fee will apply only to 
deductions after the effective date of the change.
    8. The Company currently imposes no charge to reimburse itself for 
expenses incurred in the administration of the Contract, the 
Certificates and the Separate Account (``Administration Charge''), but 
reserves the right to impose an Administration Charge at the end of 
each valuation period. This charge would be deducted from the net asset 
value of each sub-account of the Separate Account at an effective 
annual rate guaranteed not to exceed .20%. Applicants represent that 
the Certificate Maintenance Fee and any future Administration Charge 
will be deducted in reliance on, and in compliance with, Rule 26a-1 
under the 1940 Act.
    9. No front-end sales charge is deducted from Purchase Payments. 
The Company may deduct a contingent deferred sales charge (``CDSC'') of 
up to 7% of Purchase Payments on certain surrenders or partial 
surrenders to help defray the costs incurred by the Company in 
connection with the sale of the Contracts. The CDSC will be imposed on 
surrenders of Purchase Payments only in cases where the purchase 
payment was made within seven years of the date of a written request 
for surrender. Surrenders and partial surrenders will be applied first 
to accumulated earnings (which may be surrendered without charge), and 
then to Purchase Payments on a first-in, first-out basis. The following 
table shows the schedule of the CDSC that will be applied to withdrawal 
of a purchase payment:

------------------------------------------------------------------------
                                                              Applicable
    Number of full contract years since purchase payment        charge  
                                                              (percent) 
------------------------------------------------------------------------
0..........................................................            7
1..........................................................            6
2..........................................................            5
3..........................................................            4
4..........................................................            3
5..........................................................            2
6..........................................................            1
7..........................................................            0
------------------------------------------------------------------------

    10. The Company may reduce or eliminate the CDSC on the Contracts 
and Certificates when certain sales result in savings or reduced sales 
expenses. The entitlement to such a reduction in the CDSC generally 
will be based on: (i) The size and type of the group to which sales are 
to be made; (ii) the anticipated total amount of Purchase payments to 
be received; and/or (iii) any prior or existing relationship with the 
Company. Applicants represent that the reduction or elimination of the 
CDSC will not be unfairly discriminatory to any purchaser.
    11. The Contracts provide that the following types of surrenders or 
partial surrenders may be made without incurring a CDSC:
    a. Seven Year Old Purchase Payments. Surrenders of all or part of 
any Purchase Payments that have been held by the Company for at least 
seven years.
    b. 10% Free Withdrawals. During any period of twelve months 
commencing on the effective date of the Certificate and on each 
Certificate Anniversary (the annual anniversary of the effective date 
of the Certificate) thereafter (``Certificate Year''), after the first 
Certificate Year, for Certificates qualified under Section 403(b) of 
the Internal Revenue Code of 1986, as amended (``Code''), the CDSC will 
not be imposed on the surrender of up to 10% of the Account Value 
(i.e., the aggregate value of a Participant's interest in the Variable 
Account plus the Fixed Account) as of the last day of the previous 
Certificate Year.
    c. Purchase of an Income Annuity. If all or part of the Account 
Value is applied to the purchase of an annuity from the Company for 
life or for a non-commutable period of five years or more.
    d. Disability. The surrender of a Certificate if the Participant is 
``disabled'' as that term is defined in the Social Security Act of 
1935, as amended.
    e. Plans Qualified Under Section 403(b) of the Code. For 
Participants in plans qualified under Section 403(b) of the Code if: 
(i) The plan is subject to the Employee Retirement Income Security Act 
of 1974, as amended (``ERISA'') and the Participant incurs a separation 
from service; or (ii) the plan is not subject to ERISA and either (A) 
the Participant 

[[Page 54745]]
incurs a separation from service, has attained age 55 and has held the 
Certificate for at least seven years, provided that the Account Value 
is not transferred on a tax-free basis to another insurance carrier, or 
(B) the Participant has held the Certificate for fifteen years or more.
    f. Plans Qualified Under Section 401 of the Code. For Participants 
in plans qualified under Section 401 of the Code if the Participant 
incurs a separation from service.
    g. Long-term Care Rider. If the Participant is confined in a 
``licensed hospital'' or ``long-term care facility'' (as those terms 
are defined in the Long-Term Rider to the Contract) for at least 90 
days beginning on or after the first Certificate Anniversary.
    12. The Company will deduct a mortality and expense risk charge 
under certain Contracts that is equal, on an annual basis, to 1.25% of 
the daily net asset value of each sub-account in the Separate Account. 
Approximately 0.75% of this charge is attributable to mortality risks 
and 0.50% is attributable to expense risks. The Company guarantees that 
this charge of 1.25% will never increase for such Contracts.
    13. The Company proposes to offer an Enhanced Contract with a 
reduced mortality and expense risk charge to employers and/or their 
employee benefit trusts where the Company is the preferred variable 
annuity provider to that organization. In this situation, the Company 
expects significant administrative expense savings for Enhanced 
Contracts from the consolidation of enrollment, premium transmission 
and Participant servicing functions. The Company also anticipates that 
the additional administrative support typically provided by employers/
trustees in this situation will reduce renewal expenses and improve 
Contract and Certificate persistency, thereby resulting in 
administrative expense savings to the Company.
    14. The Company proposes to deduct from the Enhanced Contract a 
mortality and expense risk charge that is equal, on an annual basis, to 
0.95%. Approximately 0.20% of this charge is attributable to expense 
risk and 0.75% is attributable to mortality risk. The Company 
guarantees that this charge of 0.95% will never be increased for 
Enhanced Contracts.
    15. The mortality risks assumed by the Company arise in part from 
the Company's guarantee that it is obligated to make annuity payments 
at least equal to payments calculated based on annuity tables provided 
in the Contracts and Certificates, regardless of how long a Participant 
or annuitant lives, and regardless of any general improvement in life 
expectancy.
    16. The Company also assumes a mortality risk in connection with 
the provision of a death benefit. If the Participant dies before 
attaining age 75, and before the annuity commencement date, the death 
benefit will be an amount equal to the greatest of: (i) The Account 
Value on the Death Benefit Valuation Date (i.e., the valuation period 
during which the Company receives both proof of death of the 
Participant and a written request regarding payment of the death 
benefit), less any applicable premium tax not previously deducted, and 
less any outstanding loans; (ii) the total Purchase Payments, less any 
applicable premium tax not previously deducted, less any partial 
surrenders, and less any outstanding loans; or (iii) the largest death 
benefit amount on any Certificate Anniversary prior to death that is an 
exact multiple of five and occurs prior to the Death Benefit Valuation 
Date, less any applicable premium tax not previously deducted, less any 
partial surrenders after the death benefit was determined and less any 
outstanding loans.
    If the Participant dies after attaining age 75 and before the 
annuity commencement date, the death benefit is an amount equal to the 
greatest of: (i) The Account Value on the Death Benefit Valuation Date, 
less any applicable premium tax not previously deducted, and less any 
outstanding loans; (ii) the total Purchase Payments, less any 
applicable premium tax not previously deducted, less any partial 
surrenders, and less any outstanding loans; or (iii) the largest death 
benefit amount on any Certificate Anniversary prior to death that is 
both an exact multiple of five and occurs prior to the date on which 
the participant attained age 75, less any applicable premium tax not 
previously deducted, less any partial surrenders after the death 
benefit was determined and less any outstanding loans.
    17. The expense risk assumed by the Company is the risk that the 
Company's administrative charges will be insufficient to cover actual 
administrative expenses over the life of the Contracts.

Applicants' Legal Analysis and Conditions

    Pursuant to Section 6(c) of the 1940 Act, the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of persons, 
securities or transactions, from any provision of the 1940 Act or from 
any rule or regulation 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.

A. Exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act

    1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and any depositor or underwriter 
thereof from selling periodic payment plan certificates unless the 
proceeds of all payments are deposited with a qualified trustee or 
custodian and held under arrangements which prohibit any payment to the 
depositor or principal underwriter except a fee, not exceeding such 
reasonable amount as the Commission may prescribe, for performing 
bookkeeping and other administrative services.
    2. 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 Account or any Other Account 
under the Contracts and the Future Contracts.
    3. Applicants submit that their request for an order that applies 
to the Separate Account and to Other Accounts issuing Future Contracts 
is appropriate in the public interest. Such an order would reduce 
administrative costs and increase the Company's ability to respond 
promptly to new opportunities that may be presented. Applicants assert 
that without the requested relief, the Company would have to request 
and obtain exemptive relief for each new Other Account it establishes 
to fund Future Contracts. Investors would not receive any additional 
benefit or additional protection by the Company being required 
repeatedly to seek exemptive relief with respect to the issues 
addressed in this application. Applicants represent that the requested 
relief is consistent with the purposes of the 1940 Act and the 
protection of investors for the same reasons. Applicants assert that 
the grant of this exemptive relief would not diminish the protections 
provided to investors by the 1940 Act.
    4. Applicants represent that the mortality and expense risk charges 
under the Contracts (1.25% or .95%, as applicable) are reasonable in 
relation to the risks undertaken by the Company and are within the 
range of industry 

[[Page 54746]]
practice for comparable annuity products. Applicants base this 
representation on an analysis made by the Company of publicly available 
information about selected similar industry products, taking into 
consideration such factors as any contractual right to increase charges 
above current levels, the existence and amount of other charges, the 
nature of the death benefit provided, the guaranteed annuity purchase 
amounts, the number of transfers permitted without charge and 
surrenders not subject to a CDSC. The Company represents that it will 
maintain at its administrative office a memorandum available to the 
Commission, setting forth in detail the products analyzed in the course 
of, and the methodology and results of, the comparative survey made by 
Contracts and Enhanced Contracts.
    5. Similarly, Applicants represent that the mortality and expense 
risk charges under any Future Contracts issued by the Separate Account 
or Other Separate Accounts, will be reasonable in relation to the risks 
assumed by the Company and within the range of industry practice for 
comparable annuity products. The Company undertakes to maintain at its 
administrative office a separate memorandum, available to the 
Commission upon request, setting forth in detail the products analyzed, 
and the methodology and the results of the analysis relied upon in 
making these determinations.
    6. Applicants acknowledge that the Company's revenues from the CDSC 
could be less than the Company's costs of distributing the Contracts. 
In that case, the excess distribution costs would have to be paid out 
of the Company's general account, including the profits, if any, from 
the mortality and expense risk charges. In those circumstances, a 
portion of the mortality and expense risk charge might be viewed as 
providing for a portion of the costs relating to the distribution of 
the Contracts. The Company represents that there is a reasonable 
likelihood that the proposed distribution financing arrangements mad 
with respect to the Contracts and Future Contracts will benefit the 
Separate Account and Other Accounts and the Participants. The basis for 
that conclusion is, and with respect to Future Contracts will be, set 
forth in a memorandum which will be maintained by the Company at its 
administrative office and will be available to the Commission.
    7. The Company represents that the Separate Account and Other 
Accounts will invest only in an underlying mutual fund which 
undertakes, if it adopts a plan to finance distribution expenses under 
Rule 12b-1 under the 1940 Act, to have a board of directors, a majority 
of whom are not ``interested persons'' of that fund within the meaning 
of Section 2(a)(19) of the 1940 Act, formulate and approve any such 
plan.

B. Exemption From Section 22(d) of the 1940 Act

    1. Pursuant to Section 6(c) of the 1940 Act, Applicants also 
request that the Commission issue an order to provide exemptive relief 
from Section 22(d) to the extent necessary to permit the Applicants to 
waive the CDSC under the Contracts and Future Contracts in the event of 
the enumerated contingencies triggering the right the make the free 
withdrawals as described above.
    2. Section 22(d) of the 1940 Act prohibits a registered investment 
company, its principal underwriter, or a dealer in its securities, from 
selling any redeemable security issued by such registered investment 
company to any person except at a public offering price described in 
the prospectus. Rule 6c-8 under the 1940 Act permits registered 
separate accounts to impose a deferred sales charge. Although Rule 6c-
8, unlike Rule 6c-10 under the 1940 Act, does not impose any conditions 
on the ability of the investment company involved to provide for 
variations in the deferred sales charges, Rule 6c-8 (again unlike Rule 
6c-10) does not provide an exemption from Section 22(d). Applicants 
recognize that the proposed waiver of the CDSC described in this 
application could be viewed as causing the Contracts to be sold at 
other than a uniform offering price.
    3. Rule 22d-1 permits the sale of redeemable securities at prices 
that reflect scheduled variations in, or elimination of, sales loads. 
That Rule has been interpreted as granting relief only for scheduled 
variations in front-end sales loads, not deferred sales loads and, 
therefore, is not directly applicable to Applicants' proposed waiver of 
the CDSC.
    4. Rule 22d-2 exempts registered separate accounts through which 
variable annuity contracts are offered, their principal underwriters, 
dealers and sponsoring insurance companies from Section 22(d) to the 
extent necessary to permit variations in the sales load, administrative 
charges, or other deductions from the Purchase Payments assessed under 
such contract, provided that those variations reflect differences in 
costs or services, are not unfairly discriminatory, and are described 
adequately in the prospectus. Applicants represent that the elimination 
or reduction of the CDSC when sales of the Contracts and Certificates 
result in savings or reduction of sales expenses would be made in 
reliance on Rule 22d-2. Applicants also represent, however, that the 
seven proposed contingencies for waiver of the CDSC do not reflect 
differences in sales costs or services. For that reason, Applicants do 
not rely on Rule 22d-2 for the requested relief.
    5. Applicants submit that the proposed waiver of the CDSC is 
consistent with the policies of Section 22(d) and the rules thereunder. 
One such purpose is to prevent an investment company from 
discriminating among investors by charging different prices to 
different investors. Applicants represent that, to the extent permitted 
by state law, the seven proposed contingencies relating to the waiver 
of the CDSC will be included in all Contracts and Certificates; 
eligibility for the waiver will be predicated upon the qualification of 
a Participant under one of the seven contingencies. Therefore, the 
benefit will not unfairly discriminate among Participants. Applicants 
submit that the waiver is advantageous to Participants because it 
provides circumstances in which they may make partial surrenders or a 
full surrender under their Contracts without imposition of the CDSC. 
Applicants represent that waiving the CDSC under such circumstances 
will not result in the occurrence of any of the abuses that Section 
22(d) is designed to prevent.

Conclusion

    Applicants assert that for the reasons and upon the facts set forth 
above, the requested exemptions from Sections 22(d), 26(a)(2)(C) and 
27(c)(2) of the 1940 Act are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26432 Filed 10-24-95; 8:45 am]
BILLING CODE 8010-01-M