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