[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Notices]
[Pages 62503-62506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29619]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21547; No. 812-9652]
Southland Life Insurance Company, et al.
November 29, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Southland Life Insurance Company (``Southland''), Southland
Separate Account A1 (the ``Account''), and ING America Equities, Inc.
(``ING Equities'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the 1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction of mortality and expense risk and enhanced death benefit
charges from the assets of: (a) The Account in connection with the
offer and sale of certain variable annuity contracts (``Existing
Contracts''); (b) the Account in connection with the issuance of
variable annuity contracts that are substantially similar in all
material respects to the Existing Contracts (``Future Contracts,''
together with Existing Contracts, the ``Contracts''); and (c) any other
separate account established in the future by Southland in connection
with the issuance of Contracts (``Future Account'').
FILING DATE: The application was filed on June 29, 1995. Applicants
have undertaken to amend the application during the notice period to
make the representations contained herein.
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 must be received by the
Commission by 5:30 p.m. on December 26, 1995, and must be
[[Page 62504]]
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 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 R. Scott Burton,
Assistant General Counsel, Southland Life Insurance Company, 5780
Powers Ferry Road, NW., Atlanta, Georgia 30327-4390.
FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior 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. Southland is a stock life insurance company organized pursuant
to the laws of the State of Texas and authorized to transact life
insurance and annuity business in the District of Columbia and all
states other than New York and Vermont. Southland is a wholly-owned
indirect subsidiary of Internationale Nederlanden Groep, N.V., a
diversified financial services company with headquarters in The Hague,
Netherlands.
2. ING Equities, an affiliate of Southland, will serve as the
principal underwriter of the Existing Contracts. ING Equities is
registered with the Commission as a broker-dealer pursuant to the
Securities Exchange Act of 1934 and is a member of the National
Securities Dealers, Inc.
3. The Account was established by Southland as a separate
investment account pursuant to Texas insurance law on February 24,
1994, as a funding medium for variable annuity contracts. The Account
is registered with the Commission as a unit investment trust under the
1940 Act. Pursuant to Texas law, the assets of the Account attributable
to the Contracts are owned by Southland but are held separately from
all other assets of Southland for the benefit of owners of, and persons
entitled to payments under, the Contracts.
4. The Account currently has twenty-one subaccounts
(``Subaccounts'') that each invest exclusively in the shares of a
designated investment portfolio of The Alger American Fund, Variable
Insurance Products Fund, Variable Insurance Products Fund II, or the
Janus Aspen Series.
5. The Existing Contracts are available for purchase in connection
with retirement plans that qualify for federal tax advantages available
pursuant to the Internal Revenue Code (``qualified contracts'') and
that do not qualify for the special federal tax advantages available
pursuant to the Internal Revenue Code (``non-qualified contracts'').
6. The minimum initial purchase payment is $5,000 for a non-
qualified Existing Contract and $1,000 for a qualified Existing
Contract. The minimum additional purchase payment is $500 for non-
qualified Existing Contract and $250 for a qualified Existing Contract
(or $90 for an individual retirement annuity on a monthly program of
purchase payments).
7. The Existing Contracts provide a death benefit that is the
greatest of the following, less taxes incurred by Southland but not
taken:
(1) the aggregate purchase payments made (less partial withdrawals
and any charges taken in connection with partial withdrawals),
accumulated at 4% per year (0% after attained age 75) up to a maximum
of two times the sum of all net purchase payments (less partial
withdrawals and any charges taken in connection with partial
withdrawals;
(2) the accumulation value at the time of death; and
(3) the step-up benefit\1\ plus net purchase payments made, less
partial withdrawals (and charges taken in connection with partial
withdrawals) since the last step-up anniversary.
\1\At each step-pup anniversary, the current accumulation value
is compared to the prior determination of the step-up benefit,
increased by purchase payments made and reduced by partial
withdrawals and any surrender and partial withdrawal transaction
charges taken since that anniversary. The greater of these becomes
the new step-up benefit. The step-up anniversaries are the contract
date and every sixth contract anniversary thereafter (i.e., sixth,
twelfth, eighteenth, etc., contract anniversaries).
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8. The portion of the death benefit equal to the accumulation
value, or to the sum of the purchase payments made less partial
withdrawals (and any charges taken in connection with partial
withdrawals), constitutes the basic death benefit. The death benefit in
excess of the foregoing basic death benefit, including purchase
payments accumulated at 4% interest, as described in (1) of paragraph 7
above, and the step-up benefit, as described in (3) of paragraph 7
above, constitutes the enhanced death benefit (``Enhanced Death
Benefit'').
9. The Existing Contracts permit transfer of accumulation value
among Subaccounts, subject to certain conditions. Prior to the annuity
date, up to twelve transfers each contract year are permitted with no
charge. Each additional transfer is subject to a charge of $25. After
the annuity date, no more than four transfers each contract year are
permitted. No charge is assessed for a transfer after the annuity date.
Southland represents that it does not expect that the total revenues
from the excess transfer charge will be greater than the total cost of
administering excess transfer, on average, over the period that the
Existing Contracts are in force.
10. If the more than one partial withdrawal (other than a
withdrawal pursuant to a systematic withdrawal program or Individual
Retirement Account income program) is made during a contract year,
Southland will charge the lesser of $25 of 2% of the amount withdrawn
for each additional partial withdrawal. This charge will be deducted
from each Subaccount in the same proportion that the contract owner's
Subaccount accumulation value bears to the contract owner's
accumulation value. Southland represents that it does not expect that
the total revenues from this charge will be greater than the total
expected cost of administering partial withdrawals.
11. For the accounts of contract owners who reside in states that
require payment of premium taxes at the time purchase payments are
made, Southland currently advances the amount of the charge for
premiums taxes, without reducing the contract owner's accumulation
value. Southland then recovers the amount of the premium payments that
it advanced upon the surrender of a contract or on the annuity date.
Applicable premium taxes depend on the contract owner's place of
residence and general range from 0% to 3.5% of purchase payment or the
amount annuitized. Southland represents that the amount that it will
recover for premium taxes will not be greater than the amount of
premium taxes required to be paid.
12. The Existing Contracts do not provide for a front-end sales
load to be deducted from the purchase payments. However, within certain
time periods, if all or a portion of the contract value is withdrawn
prior to the annuity date, a contingent deferred sales charge
(``CDSC'') will be calculated at the time of each withdrawal and
deducted from the contract value. This charge reimburses Southland for
expenses
[[Page 62505]]
incurred in connection with the promotion, sale and distribution of the
Existing Contracts. The CDSC is equal to the percentage of each
purchase payment surrendered or withdrawn as shown in the table below.
The CDSC is separately calculated and applied to each purchase payment
at the time that the payment is surrendered or withdrawn. For purposes
of calculating the CDSC, earnings are considered withdrawn before
purchase payments and purchase payments are considered withdrawn or a
first-in-first-out basis.
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Surrender
charge as a
percentage of
Contract anniversaries since purchase payment was made purchase
payment
withdrawn
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0...................................................... 7
1...................................................... 6
2...................................................... 5
3...................................................... 4
4...................................................... 3
5...................................................... 2
6+..................................................... 0
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13. Proceeds from CDSC may not cover the expected costs of
distributing the Contracts. Any shortfall will be paid for from
Southland's general assets, which may include revenue from the
mortality and expense risk charge, described below.
14. Southland will assess the following charges (``Administrative
Charges''): (i) during the accumulation period only, an annual charge
of $30 per contract year from each Existing Contract, if total purchase
payments paid in the first contract year are less than $100,000; and
(ii) during both the accumulation and annuity periods, a charge which
is equal, on an annual effective basis, to 0.15% of the average daily
net asset value of each Existing Contract. Southland guarantees that it
will not raise Administrative Charges for the duration of the Existing
Contracts. Southland also 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 Existing Contracts on average,
excluding costs that are categorized properly as distribution expenses.
15. Southland assumes mortality risks under the Existing Contracts
because they: (i) impose a contractual obligation to pay a death
benefit if an annuitant dies prior to the annuity date; (ii) do not
impose any CDSC on the death benefit; (iii) impose a contractual
obligation to make annuity payments for the entire life of the
annuitant under annuity options involving life contingencies; and (iv)
contain annuity tables that Southland guarantees for the duration of
the contract. Southland also assumes the risk that annuitants as a
group will live longer than its annuity tables predict, which would
require Southland to pay more in annuity payments than it anticipated.
16. Southland also assumes expense risks under the Existing
Contracts because the administrative charges under outstanding Existing
Contracts, which cannot be raised, may be insufficient to cover the
actual administrative expenses attributable to the Existing Contracts.
Administrative expenses include principally the costs of the following:
processing purchase payments, annuity payments, surrenders and
transfers; furnishing confirmation notices and periodic reports;
calculating mortality and expense charges; preparing voting materials
and tax reports; updating registration statements; actuarial and other
expenses; initially devoting a data processing system to administer the
Existing Contracts; ongoing operating expenses of such a system in
connection with performing the foregoing functions; and fees paid to
outside administrators for additional data processing services.
17. As compensation for assuming the basic mortality and expense
risks, Southland will assess, during the accumulation period and the
annuity period, a daily charge for mortality and expense risks at an
annual effective rate of 1.25% of the net asset value of the Account
(``Mortality and Expense Risk Charge''). Of this amount, approximately
0.90% is attributable to mortality risks, and approximately 0.35% to
expense risks.
18. As compensation for providing the Enhanced Death Benefit,
during the accumulation period but not during the annuity period,
Southland will assess a daily charge at an annual effective rate of
0.12% of the net asset value of the Account (``Enhanced Death Benefit
Charge'').
19. Southland guarantees that it will not increase the amount of
mortality and Expense Risk Charge or the Enhanced Death Benefit Charge
for any Contract once that Contract is issued. If the Mortality and
Expense Risk Charge and Enhanced Death Benefit Charge are insufficient
to cover the expenses and costs, the loss will be borne by Southland
Conversely, if the amounts deducted prove more than sufficient, the
excess will be profit to Southland. Southland expects to earn a profit
from the Mortality and Expense Risk Charge and the Enhanced Death
Benefit Charge. To the extent that the CDSC is insufficient to cover
the actual costs of distribution, the expenses will be paid from
Southland's general account assets, which will include profit, if any,
derived from the mortality and expense risk charge.
Applicants' Legal Analysis and Conditions
1. Pursuant to Section 6(c) of the 1940 Act, the Commission may
exempt any person, security, or transaction, or any class or classes of
persons, securities or transactions, from any provision or provisions
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.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act prohibit a
registered unit investment trust and any depositor thereof or
underwriter therefor from selling periodic payment plan certificates
unless the proceeds of all payments (other than sales load) are
deposited with a qualified bank as 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 normally performed by the bank itself.
3. Applicants request an order pursuant to Section 6(c) of the 1940
Act 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 and the Enhanced Death Benefit Charge from the
assets of the Account and any Future Accounts in connection with the
Contracts.
4. Applicants assert that the Mortality and Expense Risk Charge of
1.25% is reasonable in relation to the risks assumed by Southland under
the Existing Contracts and reasonable in amount as determined by
industry practice with respect to comparable annuity products.
Applicants state that these determinations are based upon an analysis
of publicly available information about similar industry products, and
by taking into consideration such factors as current charge levels and
benefits provided, the existence of charge guarantees and guaranteed
annuity rates. Southland undertakes to maintain at its home office a
memorandum, available to the Commission and its staff upon request,
setting forth in detail the methodology used in making the foregoing
determinations.
[[Page 62506]]
5. Applicants assert that the charge of 0.15% for the Enhanced
Death Benefit is reasonable in relation to the risks assumed by
Southland under the Existing Contracts for providing the Enhanced Death
Benefit. Southland undertakes to maintain at its home office a
memorandum, available to the Commission and its staff upon request,
setting forth in detail the methodology used in determining that the
risk charge of 0.15% for the Enhanced Death Benefit is reasonable in
relation to the risks assumed by Southland under the Existing
Contracts.
6. Southland has concluded that there is a reasonable likelihood
that the Account's distribution financing arrangement will benefit the
Account and its investors. Southland represents that it will maintain
and make available to the Commission and its staff upon request a
memorandum setting forth the basis of such conclusion.
7. Applicants represent that, before relying on the exemptive
relief requested in this application in connection with Future
Contracts, Applicants will make the same determinations on the same
basis as to the Mortality and Expense Risk Charge, the Enhanced Death
Benefit Charge, and the distribution financing arrangement under such
Future Contracts and maintain at their home office memoranda, available
to the Commission and its staff upon request, setting forth in detail
the methodology used in making such determinations.
8. Southland represents that the assets of the Account and any
Future Accounts will be invested only in an underlying portfolio which
undertakes, in the event it should adopt a plan for financing
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, to
have such plan formulated and approved by a board of directors (or
trustees), the majority of whom are not ``interested persons'' of such
portfolio within the meaning of Section 2(a)(19) of the 1940 Act.
9. Applicants submit that their request for exemptive relief would
promote competitiveness in the variable annuity contract market by
eliminating the need for redundant exemptive applications, thereby
reducing Applicants' administrative expenses and maximizing the
efficient use of their resources. Applicants further submit that the
delay and expense involved in having repeatedly to seek exemptive
relief would impair their ability effectively to take advantage of
business opportunities as they arise. Further, if Applicants 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.
Conclusion
For the reasons summarized above, Applicants represent that the
exemptions requested are necessary and 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 H. McFarland,
Deputy Secretary.
[FR Doc. 95-29619 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-M