[Federal Register Volume 61, Number 28 (Friday, February 9, 1996)]
[Notices]
[Pages 5046-5050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2873]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21729; No. 812-9790]


American Skandia Life Assurance Corporation, et al.

February 5, 1996.
Agency: Securities and Exchange Commission (``SEC or ``Commission'').

Action: Notice of Application for an Order under the Investment Company 
Act of 1940 (``1940 Act'').

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Applicants: American Skandia Life Assurance Corporation (``American 
Skandia''), American Skandia Assurance Corporation Variable Account B 
(``Separate Account'') and American Skandia Marketing, Inc. 
(``Marketing'').

Relevant 1940 Act Sections: Order requested under Section 6(c) of the 
1940 Act granting exemptions from the provisions of Sections 2(a)(32), 
22(c), 26(a)(2)(C), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and 
Rule 22c-1 thereunder.

Summary of Application: Applicants see an order to permit the deduction 
of a mortality and expense risk charge and the recapture of certain 
credits applied to purchase payments from the assets of the Separate 
Account or any other separate account (``Other Accounts'') established 
by American Skandia to support certain flexible premium individual tax 
deferred variable annuity contracts (``Contracts'') as well as other 
variable annuity contracts that are substantially similar in all 
material respects to the Contracts (``Future Contracts''). In addition, 
Applicants propose that the order extend to any broker-dealer other 
than Marketing, that may in the future serve as principle underwriter 
for the Contracts or Future Contracts, the same exemptions granted to 
Marketing (``Future Broker-Dealers''). Any such broker-dealer will be a 
member of the National Association of Securities Dealers, Inc. 
(``NASD''), and will be controlling, controlled by, or under common 
control with American Skandia.

Filing Date: The application was filed on September 25, 1995, and was 
amended on January 25, 1996.

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 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 March 1, 
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 requestor'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 
SEC.

Addresses: Secretary, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549. Applicants, M. Patricia Paez, 
Corporate Secretary, c/o Jeffrey M. Ulness, Esq., American Skandia Life 
Assurance Corporation, One Corporate Drive, Shelton, Connecticut 06484.

For Further Information Contact: Pamela K. Ellis, Senior 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 SEC's Public 
Reference Branch.

Applicants' Representations

    1. American Skandia, a stock life insurance company, is organized 
in Connecticut and licensed to do business in the District of Columbia 
and all of the 

[[Page 5047]]
United States. American Skandia is a wholly owned subsidiary of 
American Skandia Investment Holding Corporation (``ASIHC''), which in 
turn is wholly owned by Skandia Insurance Company Ltd., a Swedish 
corporation.
    2. The Separate Account is a separate account established by 
American Skandia to fund the Contracts. The Separate Account is 
registered with the Commission as a unit investment trust under the 
1940 Act, and the Contracts are registered as securities under the 
Securities Act of 1933.
    3. American Skandia will establish for each investment option 
offered under the Contract a Separate Account subaccount 
(``Subaccount''), which will invest solely in a specific corresponding 
portfolio of certain designated investment companies (``Funds''). The 
Funds will be registered under the 1940 Act as open-end management 
investment companies. Each Fund portfolio will have separate investment 
objectives and policies.
    4. Marketing will serve as the distributor and principal 
underwriter of the Contracts. Marketing, a wholly owned subsidiary of 
ASIHC, is registered under the 1934 Act as a broker-dealer and is a 
member of the NASD.
    5. In addition, broker-dealers other than Marketing also may serve 
as distributors and principal underwriters of certain of the Contracts 
as well as the Future Contracts.
    6. There are two different Contracts which are being registered 
(``Contract A and Contract B'', respectively).\1\ The Contracts are 
individual and group flexible premium variable tax deferred annuity 
contracts. The Contracts may be used in connection with retirement 
plans that qualify for favorable federal income tax treatment under 
Section 401, Section 403, or Section 408 of the Internal Revenue Code 
of 1986, as amended, or the Contracts may be purchased on a non-tax 
qualified basis.

    \1\ Applicants have received a similar exemptive order in 
relation to other annuities. American Skandia Life Assurance Corp., 
Investment Company Act Rel. No. 20980 (Mar. 31, 1995) (notice) and 
Investment Company Act Rel. No. 21034 (Apr. 27, 1995) (order) 
(``April Order''). The April Order permitted Applicants to deduct a 
mortality and expense risk charge from the assets of certain 
flexible premium deferred variable annuity contracts and any 
contracts offered in the future that were substantially similar in 
all material respects to the contracts that were the subject of the 
April Order. Applicants state that while they believe that the 
Contracts which are the subject of this application may be 
substantially similar to the contracts that were the subject of the 
prior relief, Applicants are submitting this request to avoid any 
possibility that may be raised as to whether the Contracts that are 
subject of this application are substantially similar ``in all 
material respects'' to the contracts which were the subject of the 
prior exemption relief.
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    7. Contract A may be purchased with an initial payment of $1,000 
and Contract B may be purchased with an initial payment of $25,000; the 
minimum subsequent purchase payment for both Contract A and Contract B 
is $100. Alternatively, in both cases, the Contract owner may authorize 
and American Skandia may accept the use of a program of periodic 
purchase payments provided that such payments received in the first 
year total American Skandia's then current minimum payments under such 
a program. Net purchase payments may be allocated to one or more of the 
Subaccounts that have been established to support the Contracts or, in 
most jurisdictions, to a fixed account.
    8. Under Contract A, American Skandia will add bonus credits 
(``Credits'') to the account value in conjunction with each purchase 
payment. The funds for such credits are drawn from American Skandia's 
general account. Generally, when total purchase payments are less than 
$10,000, the Credits equal 1.5% of purchase payments. When the total 
purchase payments are at least $10,000 but less than $1 million, the 
Credits equal 3$ of purchase payments. When total Purchase payments are 
at least $1 million but less than $5 million, the Credits equal 4% of 
purchase payments. Credits equal 5% of purchase payments if the total 
is at least $5 million. The Credits are vested when applied, except 
under the following circumstances: (1) An amount equal to any Credit 
will be returned to American Skandia if the Contract owner cancels the 
Contract during the free-look period; (2) an amount equal to ``Excess 
Credit will be returned to American Skandia should a purchaser not 
fulfill its letter of intent obligation within a 13 month period; \2\ 
(3) an amount equal to any Credit will be returned to American Skandia 
by reducing the amount available pursuant to the medically available 
surrender by an amount equal to any Credit allocated within 12 months 
of the first occurrence of the applicable contingency upon which such 
medically related surrender is based (or applied after an application 
is received for such medically related surrender); and (4) an amount 
equal to any Credits applied within 12 months prior to the date of 
death causing the payment of a death benefit will be returned to 
American Skandia should the death benefit be greater than the minimum 
death benefit. No such program applies under Contract B.

    \2\ ``Excess Credit'' is the amount of the Credit in excess of 
what would have been payable without the letter of intent.
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    9. The Contracts provide for a series of annuity payments beginning 
on the ``Annuity Date.'' The Contract owner may select from several 
payout options which provide periodic annuity payments on a fixed 
basis.
    10. Prior to the Annuity Date, a medically related surrender may be 
available under Contract A. If the specified eligibility requirements 
are met, the amount available for surrender is the account value less 
an amount equal to any Credit allocated to the ``account value'' \3\ 
within twelve months after the first occurrence of the contingency upon 
which the medically related surrender is permitted.\4\ No similar 
program applies under Contract B.

    \3\ The ``account value'' is the value of each allocation to a 
Subaccount or a ``fixed allocation'' prior to the annuity date, plus 
any earnings, and/or losses, distributions, and charges thereon, 
before assessment of any applicable contingent deferred sales charge 
and/or maintenance fee.
    \4\ In the case of a medically related surrender, Credits 
applied in conjunction with purchase payments received after 
application for a medically related surrender will also be returned 
to American Skandia.
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    11. During the accumulation period, the Contracts provide for 
payment of a death benefit upon the death of: the first Contract owner, 
should the annuity be held by one or more natural persons; or the 
annuitant, should the annuity be held by an entity and there is no 
contingent annuitant. The minimum death benefit under both Contracts is 
the sum of all purchase payments less the sum of any withdrawals. If a 
decent was not named a Contract owner or annuitant as of the Contract 
issue date, and did not become such as a result of a prior Contract 
owner's or annuitant's death, the minimum death benefit is suspended as 
to that person for a two-year period from the date he or she first 
became a Contract owner or annuitant. Following the suspension period, 
the death benefit is the same as if such person had been a Contract 
owner or annuitant on the Contract issue data.
    12. After the first ten Contract years, the death benefit under 
Contract A is the account value less an amount equal to any Credit 
allocated within 12 months prior to the date of death. During the first 
ten Contract years, the death benefit is the greater of (1) or (2), 
where: (1) Is the account value of the Subaccounts and the ``interim 
value'' of any ``fixed allocations'' less any Credits applied with in 
the twelve months prior 

[[Page 5048]]
to the date of death; \5\ and (2) is the minimum death benefit.

    \5\ ``Fixed allocation'' is defined as an allocation of account 
value that is to be credited a fixed rate of interest for a 
specified guarantee period during the accumulation phase, and is to 
be supported by the assets of the Separate Account.
    As of any particular date, the ``interim value'' is the initial 
value of a fixed allocation, plus all interest credited thereon, 
less the sum of all previous transfers and withdrawals of any type 
from such fixed allocation of such interim value and interest 
thereon from the date of each withdrawal or transfer.
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    13. Under Contract B, the death benefit after the earlier of ten 
Contract years or age 90 of the decedent is the account value. Prior to 
that, the death benefit is the greater of (1) or (2), where: (1) Is the 
account value of the Subaccounts and the interim value of fixed 
allocations; and (2) is a minimum death benefit.
    14. Certain charges and fees are assessed under the Contracts. 
There is no transfer fee charged for transfers or ``renewals'' \6\ from 
a fixed allocation at the end of its guarantee period, or for the first 
12 transactions from Subaccounts of the Separate Account in each 
Contract year. Subsequent transfers within a Contract year, however, 
will be assessed a fee of $10 per transfer.

    \6\ A ``renewal'' is a transaction that occurs automatically as 
of the last day of a fixed allocation's guarantee period unless 
American Skandia receives alternative instructions.
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    15. Before the Annuity Date, American Skandia will deduct an 
administration charge at the rate of .15% per annum of the average 
daily total asset value of each Account.
    16. Before the Annuity Date and upon surrender, American Skandia 
will deduct a maintenance fee equalling the lesser of 2% of the account 
value or $30 per Contract year. This fee is waived under certain 
circumstances that generally include situations when the maintenance 
expenses likely are to be reduced (i.e., when a large number of 
annuities are purchased by an owner).
    17. The total maintenance fee and administrative charges assessed 
against the Separate Account will not be greater than the total 
anticipated costs of services to be provided over the life of the 
Contracts, in accordance with the applicable standards of Rule 26a-1 
under the 1940 Act.
    18. Under Contract A, a contingent deferred sales charge (``CDSC'') 
may be imposed on certain withdrawals. The amount of the CDSC decreases 
annually from 8.5% to 0% over 9 Contract years. In addition, there is a 
free withdrawal amount during a Contract year that is the greater of 
(1) or (2), where (1) is the annuity's ``growth'' \7\ and (2) is 10% of 
``new'' purchase payments. When determining the CDSC, withdrawals other 
than the free withdrawals amount will be allocated first to any amount 
available as a free withdrawal, then from new purchase payments on a 
first-in first-out basis. There is no CDSC upon withdrawal under 
Contract B.

    \7\ ``Growth'' is defined as the then current account value, 
less all ``unliquidated'' purchase payments (i.e., purchase payments 
not previously surrendered or withdrawn), and less the value at the 
time credited of any Credits or additional amounts.
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    19. American Skandia proposes to deduct a daily mortality and 
expense risk charge. This charge will be equal to an effective annual 
rate of 1.25% of the daily net asset value of the Separate Account. Of 
this amount, approximately .90% is for mortality risks and .35% is for 
expense risks.
    20. American Skandia assumes the mortality risk that the life 
expectancy of the annuitant will be greater than that assumed in the 
guaranteed annuity purchase rates, thus requiring American Skandia to 
pay out more in annuity income than it had planned. Additional 
mortality risks assumed by American Skandia are that it will waive the 
CDSC in the event of the death of the owner, and its contractual 
obligation to provide a standard and an enhanced death benefit prior to 
the annuity date. Thus, American Skandia assumes the risk that it may 
not be able to cover its distribution expenses and that the owner may 
die at a time when the amount of the death benefit payable exceeds the 
then net surrender value of the Contracts. The expense risk assumed by 
American Skandia is that the contract administration charge and 
maintenance fee will be insufficient to cover the cost of administering 
the Contracts.
    21. In the event the mortality and expense risk charges are more 
than sufficient to cover American Skandia's costs and expenses, any 
excess will be a profit to American Skandia.
    22. Should the owner live in a jurisdiction that levies a premium 
tax, American Skandia will pay the taxes when due. American Skandia 
represents that state premium taxes may range up to 3.5% of purchase 
payments and are subject to change. Although no local taxes currently 
are assessed against any American Skandia annuity, local taxes also may 
be assessed.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule, or regulation of the 1940 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. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositors or 
principal underwriter, from selling periodic payment plan certificates 
unless the proceeds of all payments, other than sales loads, are 
deposited with a qualified bank and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties normally performed by the 
bank itself.
    3. Applicants request exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the net assets of the Separate Account and the Other 
Accounts in connection with the Contract and Future Contracts of the 
1.25% charge for the assumption of mortality and expense risks, and an 
extension of the exemptive relief requested herein to Future Broker-
Dealer.
    4. Applicants represent that the 1.25% per annum mortality and 
expense risk charge is within the range of industry practice for 
comparable annuity contracts. This representation is based upon an 
analysis of publicly available information about similar industry 
products, taking into consideration such factors as, among others, the 
current charge levels, the existence of charge level guarantees, and 
guaranteed annuity rates. American Skandia will maintain at its 
principal offices, and make available to the Commission, a memorandum 
setting forth in detail the products analyzed in the course of, and the 
methodology and results of, Applicants' comparative review. In 
addition, Applicants will keep, and make available to the Commission, a 
memorandum setting forth the basis for the same representations, and 
that the mortality and expense risk charges are reasonable, with 
respect to the Future Contracts offered by the Separate Account or 
Other Accounts.
    5. American Skandia has concluded that there is a reasonable 
likelihood that the proposed distribution financing arrangements will 
benefit the Separate Accounts and Other Accounts and their respective 
investors. American Skandia represents that it will maintain and make 
available to the Commission upon request a memorandum setting forth the 
basis of such conclusion. In addition, Applicants will keep, and make 

[[Page 5049]]
available to the Commission, a memorandum setting forth the basis for 
the same representations with respect to the Future Contracts offered 
by the Separate Account or Other Accounts.
    6. The Separate Account and Other Accounts will be invested only in 
management investment companies that undertake, in the event the 
company 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 the company's board members, the majority of whom are 
not ``interested persons'' of the management investment company within 
the meaning of Section 2(a)(19) of the 1940 Act.
    7. Applicants request exemptions from Section 2(a)(32), 22(c), 
26(a)(2)(c), 27(c)(1), 27(c)(2), and 27(d) of the 1940 Act and Rule 
22c-1 thereunder to the extent necessary to permit American Skandia to 
issue certain Contracts which provide a ``bonus'' Credit to a Contract 
with each purchase payment received and to recapture such Credit if: 
(1) The Contract is cancelled during the ``free-look'' period; (2) the 
purchaser fails to satisfy his or her obligations to make certain 
purchase payments within a 13 month period pursuant to a letter of 
intent; (3) there is a medically related surrender; and (4) the death 
benefit payable is greater than the minimum death benefit.
    8. Applicants represent that it is not administratively feasible to 
track the Credit amount in the Separate Account. Accordingly, any asset 
based charges under the Contracts will be assessed against the entire 
amount in the Separate Account, including the Credit amount, even 
during the period when the Contract owner's interest in the Credit is 
not completely vested. As a result, for a period of up to 13 months 
from the Contract issue date, the aggregate asset based charges 
assessed will be higher than those which would be charged if the 
Contract owner's account value did not include the Credit.
    9. Applicants submit that the recapture of the Credit amount would 
not deprive an owner of his or her proportionate share of the issuer's 
current net assets. Until the right to recapture has expired, American 
Skandia retains the right to, and interest in, the Credit amount, 
although not in the earnings attributable to that amount. Applicants 
state that the Contract owner's interest in the Credit amount should 
not be viewed as completely vested until the applicable recapture 
period has ended. Thus, Applicants assert that when American Skandia 
recaptures the applicable Credit, it merely retrieves its own assets, 
and because the Contract owner's interest in that amount has not been 
completely vested, he or she has not been deprived of a proportionate 
share of the Separate Account's assets. Applicants submit that the 
Contract's provisions for recapture of any applicable Credit does not 
violate Section 27(c)(1) and 2(a)(32) of the 1940 Act.
    10. Applicants assert that because the recapture of any Credit 
amount merely returns to American Skandia its own assets, such 
recapture is not a payment of the sort addressed by Section 
26(a)(2)(C). Moreover, Applicants submit that the Credit amount should 
at most be viewed as a deduction from the amount redeemed rather than 
from the account, and thus Section 26(a)(2)(C) would not apply.
    11. Although Section 27(d) speaks in terms of the certificate 
holder receiving the value of his or her account, Applicants assert 
that the recapture of any credits is consistent with that section. 
Applicants state that the Contract owner's interest in any Credit does 
not vest completely until the right of recapture has expired. Until 
such time, American Skandia retains the rights to and interest in any 
such Credit. Thus, Applicants assert the reference to Section 27(d) to 
the value of the account should not be understood to encompass the 
principal amount of any Credit.
    12. Applicants state that American Skandia's addition of the Credit 
arguably could be viewed as resulting in the owner purchasing 
redeemable securities for a price below the current net asset value. 
Applicants contend, however, that the Credit is not violative of 
Section 22(c) and Rule 22c-1. Applicants assert that the Credit does 
not threaten the evils that Rule 22c-1 was intended to eliminate or 
reduce--namely, the dilution of the value of outstanding redeemable 
securities of registered investment companies through their sale at a 
price below net asset value or their redemption or repurchase at a 
price above it, or other unfair results, including speculative trading 
practices. These evils were the result of the practice of basing the 
price of a mutual fund share on the net asset value per share 
determined as of the close of the market on the previous day--i.e., 
``backward pricing.'' Where this practice allowed purchasers to take 
advantage of increases in the net asset value that were not yet 
reflected in increased price, the value of outstanding mutual fund 
shares were diluted. The proposed Credit poses no such threat of 
dilution. Interests in the Contract owner's account will be sold at a 
price determined on the basis of net asset value. The Credit does not 
reflect a reduction of that price. Instead, American Skandia will 
purchase with its own money on behalf of the Contract owner an interest 
equal to the Credit amount based on the size of the initial purchase 
payment. Because any Credit will be paid from American Skandia's 
general account assets and will not be drawn from the assets of the 
Separate Account, no dilution will occur.
    13. Applicants also submit that a second harm that Rule 22c-1 was 
designed to address--namely, speculative trading practices--will not 
occur as a result of the proposed Credit. Because neither of the harms 
that Rule 22c-1 was meant to address would result from American 
Skandia's proposed method of adding Credits to a Contract owner's 
account value, Rule 22c-1 and Section 22(c) should have no application 
to American Skandia's proposal to add Credits.
    14. Applicants assert that the terms of the relief requested with 
respect to any Future Contracts funded by the Separate Account or Other 
Accounts, as well as for Future Broker-Dealers, are consistent with the 
standards enumerated in Section 6(c) of the 1940 Act. Without the 
requested relief, Applicants would have to request and obtain exemptive 
relief for each Other Account it establishes to fund any Future 
Contract, as well as for each Future Broker-Dealer that distributes the 
Contracts or the Future Contracts. Applicants submit that any such 
additional request for exemption would present no issues under the 1940 
Act that have not already been addressed in this application, and that 
investors would not receive any benefit or additional protections 
thereby.
    15. Applicants submit that the requested relief is appropriate in 
the public interest, because it would promote competitiveness in the 
variable annuity contract market by eliminating the need for Applicants 
to file redundant exemptive applications, thereby reducing their 
administrative expenses and maximizing the efficient use of their 
resources. The delay and expense involved in having to seek exemptive 
relief repeatedly would reduce Applicants' ability effectively to take 
advantage of business opportunities as they arise.
    16. Applicants further submit that the requested relief is 
consistent with the purposes of the 1940 Act and the protection of 
investors for the same reasons. Applicants thus believe that the 
requested exemption is appropriate in the public interest and 
consistent with the protection of investors and the 

[[Page 5050]]
purposes fairly intended by the policy and provisions of the 1940 Act.

Conclusion

    For the reasons set forth 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. 96-2873 Filed 2-8-96; 8:45 am]
BILLING CODE 8010-01-M