[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Notices]
[Pages 66807-66811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31220]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21605; File No. 812-9334]
New England Variable Life Insurance Company, et al.
December 18, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order of approval under the
Investment Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: New England Variable Life Insurance Company (``NEVLICO''),
New England Variable Annuity Separate Account (``NEVLICO Account''),
New England Mutual Life Insurance Company (``New England''), The New
[[Page 66808]]
England Variable Account (``TNE Account'') and New England Securities
Corporation (``New England Securities'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 11(c).
SUMMARY OF APPLICATION: Applicants seek an order approving offers to
owners of certain variable annuity contracts supported by the TNE
Account (the ``Old Contracts'') to exchange the Old Contracts for
certain variable annuity contracts supported by the NEVLICO Account
(the ``New Contracts'').
FILING DATE: The application was filed on November 18, 1994 and amended
on August 16, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
Applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 12,
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 who wish to be
notified of a hearing may request notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 501 Boylston Street, Boston Massachusetts 02117.
FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior
Counsel, or Wendy Finck Friedlander, Deputy Chief, at (202) 942-0670,
Office of Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Public Reference Branch of the SEC.
Applicant's Representations
1. NEVLICO, a stock life insurance company organized in 1980 under
Delaware law, is a wholly-owned subsidiary of New England, a mutual
life insurance company organized in Massachusetts in 1835.
2. The NEVLICO Account and the TNE Account (``Accounts''), separate
accounts within the meaning of Section 2(a)(37) of the 1940 Act, are
registered under the 1940 Act as unit investment trusts. The Accounts
are divided into subaccounts each of which invests in a designated
portfolio of the New England Zenith Fund or the Variable Insurance
Products Fund. Sub-accounts may be added to or deleted from the
Accounts from time to time.
3. New England Securities serves as the distributor and principal
underwriter for the Old Contracts and will serve as distributor and
principal underwriter for the New Contracts. New England Securities is
a wholly-owned subsidiary of New England.
4. According to the Applicants, the Old Contracts and the New
Contracts are similar. However, the New Contracts offer an enhanced
death benefit, a more flexible systematic withdrawal feature,
alternative annuity options and waivers of charges in certain
situations. Fewer investment options are offered under the New
Contracts.
5. Comparison of Contract Features:
a. Forms in Which Issued. Both the Old Contracts and the New
Contracts are issuable as flexible and single purchase payment deferred
variable annuity contracts.
b. Purchase Payments. The initial purchase payment for the Old
Contracts must be at least $25 for a flexible payment contract and
$5,000 for a single payment contract. Subsequent purchase payments must
be at least $25. In three states, premium taxes are deducted from
payments before investment under an Old Contract. The initial purchase
payment for a New Contract must be at least $2,000 for certain tax-
qualified contracts and $5,000 for all other contracts. Subsequent
purchase payments must be $250 and no purchase payments may be made
after a contract owner reaches age 86. No premium taxes are deducted
from purchase payments before investment under a New Contract, however,
such taxes will be deducted upon a full or partial surrender. Under
both the Old and New Contracts, New England and NEVLICO reserve the
right to limit purchase payments made in any year or in total under the
Contracts.
c. Allocations and Transfers. Both the Old and New Contracts permit
allocations to up to 10 accounts including one or more subaccounts and/
or the Fixed Account. 17 subaccounts are available under the Old
Contracts, whereas 12 are available under the New Contracts. Minimum
transfer amounts are $25 under the Old Contracts and $100 under the New
Contracts subject to a maximum of $5,000 under both contracts. Dollar
cost averaging is permitted under both contracts.
d. Annuity Payments. Under the Old Contracts, the owner could
select a maturity date at issue, subject to certain limits. The
maturity date under the New Contracts is the date that the owner or
annuitant reaches age 95 (or the maximum permitted under state law).
Three annuity options are the same under both contracts. However, the
Old Contracts offer three options not available under the New
Contracts: life income, installment refund; investment; and specified
amount of income and the New Contracts offer one annuity option not
available under the Old Contracts, namely, income until the payee
teaches 100. All options are available under the Old Contracts in fixed
form, and all except investment and specified amount of income options
are available in variable form. All options under the New Contracts are
available in fixed and variable form. Under the New Contracts, the
payee under the variable form of a life contingency payment option with
a period certain may withdraw the commuted value of the remaining
payments payable during the period certain.
e. Death Proceeds. Under the Old Contracts, the death benefit is
the greater of the Contract value next determined after receipt of
proof of death or election of payment form and the sum of all purchase
payments less surrenders. Under the New Contracts, the death benefit is
the Contract value next determined after receipt of proof of death or
election of payment form and the guaranteed minimum death benefit. On
the date of issue, the guaranteed minimum benefit is the initial
purchase payment. On the seventh contract anniversary and every seven
years thereafter until the owner's (or, if applicable, annuitant's)
76th birthday (if joint owners, the 71st birthday of the eldest owner),
the guaranteed minimum is recalculated and becomes the greater of the
Contract value on the date of the recalculation or the guaranteed
minimum applicable just before the recalculation. Between
recalculations, adjustments are made for interim purchase payments and
surrenders.
f. Surrenders. After a partial surrender, the remaining Contract
value must be at least $500 under an Old Contract and $1,000 under a
New Contract. Otherwise, except for a deduction for premium taxes under
a New Contract, the surrender rights and privileges are the same under
he Old and New Contracts.
g. Systematic Withdrawals. Prior to annuitization, the owner of an
Old Contract may withdraw a specified portion of Contract value
periodically. The New Contracts permit withdrawal of either a fixed
dollar amount or the investment gain under the contract, provided the
withdrawal is at least $100.
6. Comparison of Contract Charges:
[[Page 66809]]
a. Administration Contract Charges. This fee is $30 under the Old
Contracts; under the New Contracts, the fee is the lesser of $30 or 2%
of the Contract value. Under the New Contracts, the fee is waived if
Contract value is at least $50,000 at year end or if Contract value was
$25,000 at the end of the prior year and purchase payments of at least
$1,000 (net of surrenders) were made during the year.
b. Asset-Based Charges. The aggregate asset-based charges under
both contracts is 1.35% which is composed of (1) an administrative
services charge of .40% under the Old Contracts and .10% under the New
Contracts and (2) a mortality and expense risk charge under the Old
Contracts of .95% and 1.25% under the New Contracts.
c. Transfer Charge. A $10 charge is imposed under both Contracts on
transfers in excess of 12 per year. The charge may be increased under
the New Contracts and the number of free transfers may be reduced under
both Contracts (to 4 under the Old Contracts and 0 under New
Contracts).
d. Contingent Deferred Sales Charge. No sales charges are deducted
from purchase payments under either the Old or New Contracts, but a
contingent deffered sales charge (``CDSC'') may apply to the following
events (a) full or partial surrenders of Contract value, (b) the
application of Contract exceeds to certain annuity options prior to the
maturity date and, for new Contracts (c) the withdrawal of the commuted
value of proceeds applied to an annuity option if no CDSC was deducted
at annuitization and (d) in states where the maximum maturity age is
less than 95, the maturity date, if a purchase payment was made less
than seven years before the withdrawal.
Under the Old Contracts, a declining CDSC applies during the first
ten Contract years, to withdrawals in excess of 10% of Contract value
on the date of the first withdrawal in the Contract year. Under the New
Contracts, a declining CDSC applies to the withdrawal of purchase
payments invested less than seven years. There is a few withdrawal
amount under the New Contracts equal to the greater of 10% of the
Contract value at the beginning of the year, or the excess of Contract
value over premiums subject to a CDSC on the withdrawal date. The CDSC
under both the New and Old Contracts may not exceed 8% of the first
$50,000 of purchase payments and 6.5% of payments exceeding $50,000.
CDSC Under the Old Contracts
------------------------------------------------------------------------
Percent
of
contract
value
Contract year withdrawn
(after)
10% free
amount
(percent)
------------------------------------------------------------------------
1............................................................ 6.5
2............................................................ 6.0
3............................................................ 5.5
4............................................................ 5.0
5............................................................ 4.5
6............................................................ 4.0
7............................................................ 3.5
8............................................................ 3.0
9............................................................ 2.0
10........................................................... 1.0
11 and after................................................. 0
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CDSC Under the New Contracts
------------------------------------------------------------------------
Charge as
percentage
of
Years purchase payment has been invested purchase
payment
(percent)
------------------------------------------------------------------------
1........................................................... 7
2........................................................... 6
3........................................................... 5
4........................................................... 4
5........................................................... 3
6........................................................... 2
7........................................................... 1
Thereafter.................................................. 0
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7. The Exchange Offer:
a. Applicants propose to offer owners of Old Contracts the
opportunity to exchange their contracts for New Contracts (the
``Exchange Offer'') by means of disclosure included in the prospectus
for the New Contracts. The disclosure would note relevant differences
between the Old and New Contracts and explain how the death benefit and
CDSC would be calculated in New Contracts issued in exchange for Old
Contracts. In particular, the disclosure will explain how an owner of
an Old Contract contemplating an Exchange could minimize the applicable
contingent deferred sales charge depending on whether the payment is
made on or before the Exchange or after the Exchange is affected.
b. No purchase payment would be required in connection with an
Exchange (except if necessary to meet the minimum initial premium
requirement for the New Contracts). A pro rata portion of the annual
administration contract charge would be deducted on the date the
Exchange is effected (the ``Exchange Date'') because Contract years
will thereafter be based on the Exchange Date rather than the issue
date of the Old Contract. However, no sales charge would be deducted in
connection with an Exchange nor would commissions be paid to New
England Securities or any of its registered representatives. Applicants
state that they believe that an Exchange would not result in adverse
tax consequences to owners of Old Contracts.
c. According to the Application, the Contract value (``Exchange
Value'') of the Old Contracts (together with any additional payments
submitted with an application for the New Contract) on the Exchange
Date would be applied to the New Contract as the Contract value as of
the Exchange Date. If a charge was deducted under the Old Contract for
premium taxes, Applicants represent that a credit will be applied to
the New Contract on the Exchange Date in an amount calculated to offset
the premium tax charge, if any, that would apply to the Exchanged Value
upon annuitization, surrender or payment of the Death Proceeds under
the New Contract.
d. If the Exchange Value is allocated among Eligible Funds not
available under the New Contracts, the owner would be required to
reallocate the Exchanged Value to available eligible funds. Applicants
represent that any such reallocation would not be counted toward the 12
free transfers permitted in the first New Contract year.
e. The Exchange Date would be the issue date of the new Contract
for purposes of determining contract years and anniversaries after the
Exchange Date and the maturity date would be set at age 95 of the older
of the contract owner or annuitant or the maximum age allowable by law.
A new minimum death benefit would be calculated for the New Contract
equal to the greater of purchase payments made on the Old Contract
(adjusted for withdrawals) or the Exchange Value. The guaranteed
minimum death benefit would be recalculated on each seven-year
anniversary of the Exchange Date.
f. Withdrawals after the Exchange Date would be governed by the
terms of the New Contract for purposes of calculating any CDSC.
Accordingly, the Exchange Value would be treated as the oldest purchase
payment and would be withdrawn first, after the free withdrawal amount
was calculated. However, withdrawals of Exchange Value will be subject
to the CDSC percentage applicable under the Old Contracts taking into
account the number of years the Old Contract had
[[Page 66810]]
been in effect, rather than the CDSC under the New Contracts.
g. In most years the CDSC percentage under the Old Contracts will
be slightly higher than for the New Contracts. Applicants submit that
the sales charge schedule under the Old Contracts was designed to cover
the costs associated with the original sale of those Contracts and, it
is believed that, if the original sales schedule is not preserved for
the Exchange Value, some owners might exchange contracts with the
intent to then surrender the New Contract and incur a lower CDSC.
h. Because a CDSC is assessable under an Old Contract for the first
ten contract years, the applicant of the Old Contract's CDSC schedule
to the Exchange Value from an Old Contract outstanding less than three
years would subject the Exchange Value to a CDSC for a longer period
after the Exchange Date than a purchase payment made immediately after
the Exchange Date. However, Applicants will waive any CDSC on Exchange
Value that would otherwise be imposed more than seven years after the
Exchange Date.\1\
\1\ With respect to the CDSC waiver, Applicants state that they
intend to rely on Rule 22d-1 under the 1940 Act and undertake to
disclose the terms of the sales load variation in the prospectus for
the New Contracts.
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i. Applicants submit that the application of the original CDSC
schedule of the Old Contract to any purchase payments submitted with
the application for the New Contract is to the advantage of owners of
Old Contracts outstanding more than three full contract years before
the Exchange Date because the CDSC rate under the Old Contracts is in
most cases less, and never more than, the CDSC rate applicable to
purchase payments made immediately after the Exchange Date. Whether
there is a benefit from the application of the original CDSC to the
Exchange Value of Old Contracts held less than three years, depends on
whether there is a surrender during the first seven years. During the
first few years of the seven year period the applicable CDSC rate under
the Old Contracts is slightly lower than under the New Contracts, but
the reverse is true during the later years of the seven year period.
Applicants believe that the treatment of additional purchase payments
submitted with an exchange application as part of Exchange Value
results in the fairest treatment for the broadest class of owners of
Old Contracts and that the waiver of any applicable CDSC more than
seven years after the Exchange Date will minimize any inequity to
owners of contracts outstanding less than three years of the Exchange
Date. Also, Applicants undertake to include in the prospectus for the
New Contracts, disclosure identifying the circumstances in which it
would be advantageous or disadvantageous to submit a purchase payment
with the application or immediately after the issuance of the New
Contract.
Applicants' Legal Analysis
1. Section 11(a) of the 1940 Act provides in relevant part that it
shall be unlawful for any registered open-end management investment
company (``fund'') or its principal underwriter to make an offer to a
shareholder of that fund or of another fund to exchange his security
for a security in the same or another fund on any basis other than the
relative net asset values of the securities to be exchanged, unless the
terms of the offer have first been submitted to and approved by the
Commission or the offer complies with the Commission's rules. Section
11(c) provides that the provisions of subsection (a) apply,
irrespective of the basis of exchange, to any offer of exchange of a
security of a fund for the securities of a unit investment trust and to
any type of offer of exchange of the securities of a registered unit
investment trust for the securities of any other investment company.
Therefore, prior Commission approval is required for exchange offers
subject to Section 11(c) even if made on the basis of relative net
asset values.
2. Rule 11a-2 under the 1940 Act, permits exchange offer without
prior Commission approval by registered insurance company separate
accounts and their principal underwriters to holders of variable
contracts supported by separate accounts having the same or an
affiliated insurance company depositor or sponsor provided, in essence,
that the exchange is made on the basis of the relative net asset values
of the securities to be exchanged (less administrative fees disclosed
in the offering account's registration statement), and any sales loads
imposed is calculated and deducted in accordance with the terms and
conditions of Rule 11a-2. Paragraph (d)(1) of Rule 11a-2 provides that,
where both the exchanged and acquired securities are subject to
deferred sales loads, any deferred sales load imposed on the acquired
security shall be calculated as if the holder of the acquired security
had been the holder of that security from the date on which he became
the holder of the exchanged security, and purchase payments made for
the exchanged security had been made for the acquired security on the
date on which they were made for the exchanged security. Applicants
state that Rule 11a-2(d)(1), on its face, appears to require that any
CDSC deducted on a surrender made after the exchange be deducted in
accordance with the CDSC schedule of the acquired contract.
3. No CDSC would be imposed at the time of the exchange of an Old
Contract for a New Contract. However, on surrender of the New Contract,
the Exchanged Value would be subject to the CDSC provided for by the
Old Contract rather than the CDSC provided for in the New Contract.
Taking into account the rate at which the CDSC declines under each
Contract, the CDSC rate applied to Exchange Value withdrawn more than
two years after the Old Contract was issued, would be higher under the
Old Contract's CDSC schedule than under the New Contract's CDSC
schedule for the same number of years of investment. Therefore,
Applicants submit that the Exchange Offer does not appear to comply
with the terms of Rule 11a-2 and prior approval of the Exchange Offer
by the Commission, pursuant to Section 11(c) of the 1940 Act, is
required.
4. According to Applicants, the public policy underlying Section 11
may be inferred from Section 1(b)(1) of the 1940 Act, which states that
the national public interest and the interests of investors are
adversely affected when, among other things, investors exchange
securities issued by investment companies without adequate, accurate
and explicit information, fairly presented, concerning the character of
such securities and the circumstances, policies and financial
responsibility of such companies and their management. Also, according
to the legislative history of the 1940 Act, the purpose of Section
11(a) is to provide Commission review of the terms of certain exchange
offers, to assure that an offer is not being proposed solely for the
purpose of exacting additional selling charges and profits from
investors by switching them from one security to another.
5. Applicants submit that the owners of the Old Contracts will
receive adequate, accurate and explicit information, fairly presented,
concerning the Exchange Offer in the prospectus for the New Contracts
which will be given to any owner of an Old Contract considering the
Exchange Offer.
6. Applicants assert that the Exchange Offer does not impose
additional sales load but preserves the old sales charge schedule for
Exchange Value. No sales charge would be deducted on the Exchange Date,
and, for purposes of any CDSC applicable after the exchange,
[[Page 66811]]
credit would be given for the time that the Old Contract was in effect.
7. Applicants submit that the history for Rule 11a-2 does not
reflect any policy basis for the apparent requirement that the sales
load schedule for the acquired security be applied to Contract values
carried over from the exchanged security. Provisions of Rule 11a-2
relevant to exchanges of variable annuity contracts with front-end
sales load structures effectively permit the deduction of an aggregate
sales load based on the highest sales load rate applicable to either
the exchanged security or acquired security. Applicants submit that
there is no policy reason for permitting the highest sales load rate to
apply in the context of contracts with a front-end sales load
structure, but not contracts with a deferred sales load structure.
Further, Applicants note that Rule 11a-3, which applies to exchange
offers involving mutual fund shares, prohibits the deduction of a
deferred sales load on an exchanged security at the time of exchange,
but permits the deduction of that sales load when the acquired security
is redeemed, provided that, among other things, credit is given for the
time the acquired security was held. Thus, Applicants state that Rule
11a-3 would permit the CDSC deductions as contemplated in the Exchange
Offer and cite examples 4 and 5 in the appendix to the Commission
release adopting Rule 11a-3 (Inv. Co. Act Rel. No. 17097) in support of
their view. Applicants submit that there is no policy reason for
applying different rules to mutual fund exchange offers than are
applied to separate account exchange offers.
Applicants' Conclusion
For the reasons set forth above, Applicants submit that the
Exchange Offer complies with the general principals of Section 11(a)
and Rules 11a-2 and 11a-3 and does not present any of the abuses that
Section 11 was intended to prevent. Accordingly, Applicants request
approval pursuant to Section 11(c) of the 1940 Act to the extent
necessary to permit the Exchange Offer to be made to owners of the Old
Contracts as described above.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31220 Filed 12-22-95; 8:45 am]
BILLING CODE 8010-01-M