[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)]
[Notices]
[Pages 64089-64092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30356]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21586; File No. 812-9386]
Massachusetts Mutual Life Insurance Company, et al.
December 7, 1995.
AGENCY: U.S. Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Massachusetts Mutual Life Insurance Company
(``MassMutual''), Massachusetts Mutual Variable Life Separate Account I
(``Separate Account'') and MML Investors Services, Inc. (``MMLISI'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of
the 1940 Act for exemptions from Sections 27(a)(3) and 27(c)(2) of the
1940 Act and Rules 6e-3(T)(b)(13)(ii) and 6e-3(T)(c)(4)(v) thereunder.
SUMMARY OF THE APPLICATION: Applicants seek an order: (1) to permit
them to deduct from premium payments received in connection with
certain flexible premium variable life insurance policies
(``Policies'') issued by MassMutual and any other flexible premium
variable life insurance policies (``Other Policies'') issued by
MassMutual in the future and made available through the Separate
Account or any other separate account established in the future by
MassMutual to support flexible premium variable life insurance
contracts (``Future Accounts''), an amount less than or approximately
equal to the amount by which MassMutual's federal tax liabilities will
be increased as a result of its receipt of those premium payments; and
(2) to permit the deduction from premium payments in amounts less than
or equal to the minimum planned premium under the Policies of a sales
load that is greater than the sales load previously deducted from
premium payments in amounts exceeding the minimum planned premium.
FILING DATES: The application was filed on December 23, 1994, and
amended on June 28, 1995, and September 12, 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 Commission's Secretary
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 January 2, 1996, 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
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549. Applicants, Thomas F. English,
Esq., Massachusetts Mutual Life Insurance Company, 1295 State Street,
Springfield, Massachusetts 01111.
FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior
Counsel, or Wendy Finck 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 Commission's
Public Reference Branch.
Applicants' Representations
1. MassMutual is a mutual life insurance company organized under
Massachusetts law.
2. The Separate Account was established as a separate investment
account of MassMutual for the purpose of investing net premium payments
received under variable life insurance contracts. It is registered
under the 1940 Act as a unit investment trust.
3. MMLISI serves as the principal underwriter for the Policies.
MMLISI is registered with the Commission as a broker-dealer under the
Securities Exchange Act of 1934, and is a member of the National
Association of Securities Dealers, Inc. MMLISI may serve as principal
underwriter for Other Policies issued by MassMutual in the future.
4. The Policies are flexible premium variable life insurance
policies available on a ``Case'' or on an individual basis. Insureds
purchasing a Policy on a ``Case basis'' share a common employment or
other institutional relationship. All Policies in any Case are
aggregated for purposes of determining issue dates, policy dates,
underwriting requirements and sales load percentages. Individual
insureds with Case Policies may exercise all rights and privileges
under the Policy through their employer or other sponsoring entity
acting as Case administrator. After termination of the employment or
other relationship, an individual Policy owner may exercise such rights
and privileges directly. The minimum Case premium is $250,000 of first
year annualized premiums for all Policies in a Case.
5. The sales load component of the premium deduction is based on
the aggregate initial premiums paid for all Policies in a Case
(``Initial Case Premium''). For Policies issued in a Case with an
Initial Case Premium of at least $1,000,000, the sales load remains
level over the life of the Policies. For Policies issued in a Case with
an Initial Case Premium of less than $1,000,000, the sales load applied
to any premium payment not exceeding the minimum planned Policy premium
amount will be set at one level for the first five Policy years, and
then reset at a lower, level amount after the fifth Policy year. During
the first five Policy years, premiums are tracked on an annual
cumulative basis for each Policy, and the sales load will be assessed
at a higher level for premium payments made at or below the specified
minimum planned Policy premium.
6. No surrender charge is imposed under the Policies.
7. MassMutual deducts a state premium tax charge from each premium
payment made under the Policies. The level of such charge varies from
state to state. Currently, state premium tax rates range from 2% to
3.5%.
8. MassMutual proposes to deduct from premium payments a charge for
the federal tax burden imposed by deferred acquisition costs (``DAC
tax'') in the amount of 1% of premium payments. This amount is, at
most, approximately equal to or less than the increase in MassMutual's
federal income tax obligations based upon premiums received under the
Policies.
9. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA''),
Congress amended Section 848 of the Internal Revenue Code of 1986 (the
``Code''). In relevant part, Section 848 requires insurance companies
to capitalize and amortize over a period of ten years certain general
expenses for the current year. Under prior law, those expenses would
have been deductible in full from an insurance company's gross income
in the current tax year.
10. The amount of deductions that would have to be capitalized and
amortized over ten years is based upon ``net premiums'' received in
connection with certain types of insurance contracts (``specified
contracts''). More specifically, an amount of expenses equal to a
percentage of the current year's net premiums (i.e., gross premiums
minus return premiums and
[[Page 64090]]
reinsurance premiums) must be capitalized and amortized for each
specified contract. The amount of general deductions that must be
capitalized varies, depending upon the type of contract to which the
premiums received relate, according to a schedule set forth in Section
848. The Policies fall into the category of individual life insurance
contracts under Section 848 for which 7.7% of net premiums received
must be capitalized and amortized.
11. The impact of the DAC tax on MassMutual may be quantified as
follows. For each $10,000 of premiums received by MassMutual under the
Policies in a given year, MassMutual must capitalize $770 (i.e., 7.7%
of $10,000); $38.50 (one-half year's portion of the ten-year
amortization) of this amount may be deducted in the current year. The
remaining $731.50 (i.e., $770 minus $38.50) is subject to taxation at
the corporate tax rate of 35 percent. As a result, MassMutual would owe
approximately $256.03 more in taxes for the current year than before
the OBRA tax changes. However, this current tax increase will be offset
partially by deductions allowed during the next ten years as a result
of amortizing the remainder of the $770-$77 in each of the following
nine years, and $38.50 in year ten. When estimating the economic impact
of the tax increase, the benefit to MassMutual of being able to deduct
$77.00 per year for each of the subsequent nine years and $38.50 for
the tenth year must be discounted, so that only the present value of
those deductions would be subtracted from the $256.03.
12. To the extent that capital must be used by MassMutual to
satisfy its increased federal tax burden under Section 848, such
capital used to satisfy this increased federal tax burden under Section
848 is, in essence, MassMutual's after tax rate of return--i.e., the
return MassMutual seeks on invested capital--of at least 8 percent.
Accordingly, in the business judgment of MassMutual, a discount rate of
at least 8% is appropriate for use in calculating the present value of
MassMutual's future tax deductions resulting from the amortization
described above. To the extent that the 8% discount rate is lower than
MassMutual's actual after tax rate of return, Applicants submit that a
measure of comfort is provided that the calculation of MassMutual's
increased tax burden attributable to the receipt of premiums will
continue to be reasonable over time, even if the corporate tax rate
applicable to MassMutual is reduced, or its after tax rate of return is
lowered.
13. MassMutual considered a number of factors in determining the
expected after tax rate of return used in arriving at this discount
rate. For example, MassMutual identified the level of investment return
that can be expected to be earned over the long term on various types
of fixed income securities, including the expected yield on 30-year
U.S. Treasury bonds and high-grade corporate bonds, and adjusted these
rates in an amount considered appropriate to compensated it for the
risks associated with allocating capital to a lien of business,
esp0ecially a newer line of business without a performance history.
MassMutual also considered whether this expected after tax rate of
return is within the normal range in the life insurance industry.
14. Assuming a corporate tax rate of 35 percent, and applying a
discount rate of 8 percent, the present value of the federal income tax
effect of the increased deductions allowable in the following ten years
is $174.60. Because this amount partially offsets the increased tax
burden, Section 848 imposes an increased tax burden on MassMutual with
a present value equal to $81.43 (i.e., $256.03 minus $174.60) for each
$10,000 of net premiums received.
15. Because state premium taxes are deductible in computing federal
income taxes, MassMutual does not incur incremental income tax when it
passes on state premium taxes to Policy owners. In contrast, federal
income taxes are not deductible in computing MassMutual's federal
income taxes. To offset fully the impact of Section 848, MassMutual
must impose an additional charge that would make it whole not only for
the $81.43 additional tax burden attributable to Section 848, but also
for the tax on the additional $81.43 itself. This additional charge may
be determined by dividing $81.43 by the complement of the 35% federal
corporate income tax rate (i.e., 65%), resulting in an additional
charge of $125.28 for (i.e., 1.25% of) each $10,000 of net premiums.
16. Based on prior experience, MassMutual believes that it is
reasonable to expect that virtually all future deductions will be fully
taken. MassMutual submits that a charge of 1% will reimburse it for the
impact of Section 848 on its federal tax liabilities. Applicants
represent that a 1% charge is reasonably related to MassMutual's
increased federal tax burden under Section 848, taking into account the
benefit to MassMutual of the amortization permitted by Section 848 and
the use by MassMutual of a discount rate of 8% in computing the future
deductions resulting from such amortization.
17. Applicants also represent that the charge to be deducted under
Other Policies by MassMutual pursuant to the relief requested will be
reasonably related to MassMutual's increased federal tax burden under
Section 848, taking into account the benefit to MassMutual of the
amortization permitted by Section 848, and the use by MassMutual of an
appropriate discount rate (i.e., a rate not less than MassMutual's
expected after tax rate of return) in computing the cost of the
increased tax burden ad the present value of the future deductions
resulting from such amortization.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act, in relevant part, authorizes the
Commission, by order upon application to exempt any person or
transaction or class of persons or transactions from the provisions of
the 1940 Act or rules thereunder, if and 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. Applicants request an order of the Commission pursuant to
Section 6(c) of the 1940 Act exempting them from the provisions of
Section 27(c)2) of the 1940 Act and Rule 6e-3(T)(c)(4)(v) thereunder to
permit deductions from premium payments received in connection with the
Policies and Other Policies an amount that is reasonable in relation to
MassMutual's federal income tax burden related to the receipt of such
premiums. Applicants further request an exemption from Rule 6e-
3(T)(c)(4)(v) of the 1940 Act to permit the proposed deductions to be
treated as other than sales load.
3. Applicants also request that the Commission grant an order
exempting them from the ``stair step'' provisions of Section 27(a)(3)
of the 1940 Act and Rule 6e-3(T)(b)(13)(ii) thereunder in connection
with the sale of units of interest in the Separate Account under the
Policies.
Section 27(c)(2) and Rule 6e-3(T)(c)(4)--DAC Tax Exemption
1. The Separate Account is, and the Future Accounts will be,
regulated under the 1940 Act as if they were the issuers of periodic
payment plan certificates. Accordingly, the Separate Account, the
Future Accounts, MassMutual (as the depositor for the Separate Account)
and MMLISI (as principal underwriter of the Policies)
[[Page 64091]]
are deemed to be subject to Section 27 of the 1940 Act.
2. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic
payment plan certificates unless the proceeds of all payments (except
such amounts as are deducted for sales load) are held under an
indenture or agreement containing in substance the provisions required
by Section 26(a) (2) and (3) of the 1940 Act. Sections 27(a)(1) and
27(h)(1) of the 1940 Act limit sales loads on periodic payment plan
certificates to 9% of total payments to be made.
3. Rule 6e(3)(T) provides a broad range of exemptive relief for the
offering of flexible premium variable life insurance policies such as
the Policies and the Other Policies. Paragraph (b)(13)(iii) of Rule 6e-
3(T) provides relief from 27(c)(2) of the 1940 Act to the extent
necessary to permit ``[t]he deduction of premium or other taxes imposed
by any state or other governmental entity.'' Applicants submit that the
exemptive relief needed to permit the deduction of a DAC tax charge is
provided without regard to whether the taxes are imposed by states or
other governmental entities. However, Applicants acknowledge the
argument that, although it increases an insurance company's tax
liability because of the type of premium payments received, Section 848
of the Code does not purport to impose a tax on life insurance
companies. Accordingly, Applicants request an exemption from Section
27(c)(2) to address any concern that the proposed DAC tax charge might
not be deemed to be entitled to the exemptive relief from that Section
provided by Rule 6e-3(T)(b)(13)(iii).
4. Rule 6e-3(T)(c)(4) defines ``sales load'' as the excess of
premium payments over certain itemized charges and deductions. A
deduction for an insurer's DAC tax expense as described above does not
fall squarely into any of those itemized charges or deductions.
Arguably, then, such a deduction may be treated as ``sales load'' under
a literal reading of Rule 6e-3(T)(c)(4). Applicants request an
exemption from Rule 6e-3(T)(c)(4)(v) to permit the proposed DAC tax
charge to be assessed without treating the charge as a deduction to
cover sales and distribution expenses.
5. Applicants submit that there is no public policy reason for
treating as deductions made to pay costs attributable to federal taxes
(e.g., the proposed DAC tax charge) as sales load. Applicants also
assert that language in the releases in which the Commission adopted
and amended Rule 6e-3(T) does not suggest that such a result was
intended, despite the literal wording of paragraph (c)(4) of the Rule.
6. Applicants assert that the public policy that underlies Section
27(a)(1) of the 1940 Act is to prevent excessive sales loads from being
charged in connection with the sale of periodic payment plan
certificates. Applicants submit that the treatment of a DAC tax charge
as sales load would not further this legislative purpose. Applicants
state that the Commission has concurred with this conclusion by
excluding deductions for state premium taxes from the definition of
``sales load'' in paragraph (c)(4) of Rule 6e-3(T).
7. Applicants asset that, in evaluating whether it is consistent
with the purposes and policies of the 1940 Act for deductions made to
pay federal taxes to be excluded from sales load, it is helpful to
examine the definition of ``sales load'' in Section 2(a)(35) of the
1940 Act. Section 2(a)(35) of the 1940 Act defines ``sales load'' as
the difference between the price of a security offered to the public
and that portion of the proceeds from its sale which is received and
invested or held for investment by the issuer (or in the case of a unit
investment trust, by the depositor or trustee), less any portion of
such difference deducted for trustee's or custodian's fees, insurance
premiums, issue taxes, or administrative expenses or fees which are not
properly chargeable to sales or promotional activities. Applicants note
that both Section 2(a)(35) and Rule 6e-3(T)(c)(4) define ``sales load''
derivatively.
8. Applicants further assert that Section 2(a)(35) excludes from
the definition of ``sales load'' under the 1940 Act deductions from
payments for ``issue taxes.'' Applicants submit that issue taxes
incurred as a result of selling an investment company security would be
similar to premium taxes incurred as a result of the sale of a variable
life insurance policy. This suggests that it is consistent with the
1940 Act's policies to exclude from the definition of ``sales load'' in
Rule 6e-3(T) deductions made to pay federal tax obligations incurred as
a result of receipt of premiums.
9. Applicants submit that the reference in Section 2(a)(35) to
administrative expenses or fees that are ``not properly chargeable to
sales or promotional activities'' suggests that the only deductions
intended to fall within the definition of ``sales load'' are those that
are properly chargeable to such activities. Because the proposed
deductions will be used to compensate MassMutual for its increased
federal tax burdens attributable to the receipt of premiums, and are
not properly chargeable to sales or promotional activities, Applicants
assert that the language in Section 2(a)(35) indicates that treating
the proposed DAC tax charge as other than sales load is consistent with
the policies of the 1940 Act.
10. Finally, Applicants state that the limitation to state premium
taxes of the premium tax exclusion from the definition of ``sales
load'' in Rule 6e-3(T)(c)(4)(v) probably is an historical accident.
When Rule 6e-3(T) was adopted and later amended, the federal government
did not impose taxes based upon receipt of premiums. Applicants note
that nothing in the Commission releases dealing with Rule 6e-3(T)
suggests that the exclusion of premium tax deductions from the
definition of sales load was based on the type of governmental entity
imposing such taxes.
11. Applicants assert that the requested relief with respect to the
Policies or Other Policies issued through the Separate Account or
Future Accounts is appropriate in the public interest because it would
promote competitiveness in the variable life insurance market by
eliminating the need for MassMutual to file redundant exemptive
applications, thereby reducing administrative expenses and maximizing
the efficient use of its resources. The delay and expense involved in
having to seek exemptive relief repeatedly would impair MassMutual's
ability to take advantage effectively of business opportunities as they
arise. In addition, Applicants state that the requested relief is
consistent with the purposes of the 1940 Act and the protection of
investors for the same reasons. If Mass Mutual was required to seek
exemptive relief repeatedly with respect to the same issues addressed
in this request for relief, investors would not receive any benefit or
additional protection thereby and might be disadvantaged as a result of
MassMutual's increased overhead expenses.
Conditions for Relief
1. Applicants represent that MassMutual will monitor the
reasonableness of the 1% charge.
2. Applicants represent that the registration statement for each
Policy or Other Policy under which the 1% charge is deducted will: (i)
disclose the charge; (ii) explain the purpose of the charge; and (iii)
state that the charge is reasonable in relation to MassMutual's
increased federal tax burden as a result of applying Section 848 of the
Code.
3. Applicants represent that the registration statement for each
Policy or Other Policy under which the 1%
[[Page 64092]]
charge is deducted will contain as an exhibit an actuarial opinion as
to: (i) the reasonableness of the charge in relation to MassMutual's
increased federal tax burden resulting from the application of Section
848 of the Code; (ii) the reasonableness of the expected after tax rate
of return that is used in calculating the charge; and (iii) the
appropriateness of the factors used to determine MassMutual's expected
after tax rate of return.
Section 27(a)(3) and Rule 6e-3(T)(b)(13)(ii)--``Stair Step'' Exemption
1. Section 27(a)(3) of the 1940 Act provides that the amount of
sales load which may be deducted from any of the first twelve monthly
payments on a periodic payment plan certificate may not exceed
proportionately the amount deducted from any other such payment, and
that the sales load deducted from any subsequent payment may not exceed
proportionately the amount deducted from any other subsequent payment.
2. Rule 6e-3(T)(b)(13)(ii) provides an exemption from Section
27(a)(3), provided that the proportionate amount of sales load deducted
from any payment does not exceed the proportionate amount deducted from
any prior payment, unless an increase is caused by reductions in the
annual cost of insurance or in sales load for amounts transferred to a
variable life insurance policy from another plan of insurance.
3. Under MassMutual's proposed sales load structure for Policies
issued in a Case with an Initial Case Premium of less than $1,000,000,
during the first five Policy years, MassMutual assesses a front-end
sales load of 15% of premium payments made which are less than or equal
to the minimum planned Policy premium, and 6% of premium payments made
which exceed the minimum planned Policy premium. After the fifth Policy
Year, the sales load percentages for these Policies will decrease to 6%
on all premium payments. Thus, if during the first four years of a
Policy for which the Initial Case Premium paid was less than
$1,000,000, a Policy owner makes a premium payment which exceeds the
minimum planned Policy premium, the percentage of sales load deducted
(in the next Policy Year) from that portion of any premium payment
which is less than or equal to the minimum planned Policy premium would
exceed that deducted from the prior premium payment. Applicants request
an exemption from the requirements of Section 27(a)(3) of the 1940 Act
and Rule 6e-3(T)(b0(13)(ii) thereunder because the sales load structure
under the Policies appears to violate the ``stair-step'' provisions
articulated in Section 27(a)(3) of the 1940 Act. Moreover, Applicants
note, the exemption from Section 27(a)(3) provided by Rule 6e-
3(T)(b)(13)(ii) does not appear to cover the case at hand.
4. Applicants represent that MassMutual has designed the Policies
so that they comply with Rule 6e-3(T)'s sales load limitations and are
``refund proof'': i.e., sales load deductions from premium payments
will not exceed the sales load limitations specified in Rule 6e-
3(T)(b)(13)(i)(A) and will never require the repayment of any sales
charges pursuant to Rule 6e-3(T)(b)(13)(v)(A).
5. Applicants further represent that MassMutual has designed the
sales load structure under the Policies to give Policy owners
significant flexibility with respect to the timing and amount of
premium payments, while permitting MassMutual to deduct only those
charges deemed necessary to defray distribution expenses and support
the benefits under the Policies.
6. Applicants represent that the proposed sales load design
provides a significant benefit to Policy owners by passing through to
them a portion of MassMutual's savings resulting from the lower
distribution costs associated with Policies having an Initial Case
Premium of $1,000,000 or less and for which premium payments are made
during the first five Policy Years which exceed the minimum planned
Policy premium set for that Policy year. Applicants submit that it
would not be in the interest of Policy owners to require the imposition
of a sales charge on premium payments in excess of the minimum planned
Policy premium, or subsequent premium payments that are higher than
Applicants deem necessary.
7. Applicants assert that Section 27(a)(3) was designed to address
abuses involving periodic payment plans under which large amounts of
front-end sales load are deducted so early in life of the plan that an
investor redeeming in the early periods would recoup little of his or
her investment. MassMutual anticipates that: (i) a substantial number
of the Policies will be sold in connection with rollover transactions
effectuated pursuant to Section 1035 of the Code; and (ii) under such a
scenario, there will be a higher occurrence of premium payments made in
the first Policy year which exceed the minimum planned premium payment
by Policy owners purchasing Policies having an Initial Case Premium of
less than $1,000,000. For these reasons, Applicants submit that the
proposed sales load structure would not present the type of abuse that
Section 27(a)(3) was designed to prevent.
8. Moreover, Applicants assert that, to the extent that owners of
Policies with an Initial Case Premium of less than $1,000,000 make
premium payments during the first Policy year which exceed the minimum
planned Policy premium, MassMutual's proposed sales load structure will
cause a greater proportion of the Policies' sales charges to be
deducted later than they otherwise might have been deducted. In this
regard, Applicants note that MassMutual could have decided to assess a
sales load of 30% on premium payments less than or equal to the minimum
planned Policy premium made during the first Policy year, and 7.89% on
premium payments made thereafter. Applicants submit that, by spreading
sales charges more evenly over the life of a Policy, MassMutual's sales
load structure furthers the purposes of Section 27(a)(3) of the 1940
Act.
Conclusion
Applicants submit that, for the reasons and upon the facts set
forth above, the requested exemptions would be appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by 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. 95-30356 Filed 12-12-95; 8:45 am]
BILLING CODE 8010-01-M