[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Notices]
[Pages 11440-11443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6640]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21823; File No. 812-9754]


The Minnesota Mutual Life Insurance Company, et al.

March 13, 1996.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the 
``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: The Minnesota Mutual Life Insurance Company (``Minnesota 
Mutual''), Minnesota Mutual Variable Annuity Account (``Account'') and 
MIMLIC Sales Corporation (``MIMLIC'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for 
exemption from Sections 26(a)(2)(C) and 27(c)(2) of the Act.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
deduction from the assets of the Account of a mortality and expense 
risks charge and a deduction from each purchase payment of a guaranteed 
minimum annuity risk charge, under certain variable annuity contracts 
(``Contracts''). Applicants also request that the exemptions apply to 
(a) contracts that are substantially similar in all material respects 
to the Contracts (``Future Contracts''), (b) any separate account 
established by Minnesota Mutual in the future to fund the Contracts or 
Future Contracts (``Future Accounts'') and (c) any National Association 
of Securities Dealers (``NASD'') member that may in the future serve as 
principal underwriter of the Contracts or Future Contracts (``Future 
Underwriter'').

FILING DATE: The application was filed on September 8, 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 on the application, or ask to be notified 
if a hearing is ordered, by writing to the Commission's Secretary and 
serving the Applicants with a copy of the request, either personally or 
by mail. Hearing requests must be received by the SEC by 5:30 pm., on 
April 8, 1996 and should be accompanied by proof of service on the 
Applicants, either by affidavit, or, for lawyers, by 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 the date of the hearing by writing to the 
SEC's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Donald F. Gruber, 
Esq., Senior Counsel, The Minnesota Mutual Life Insurance Company, 400 
North Robert Street, St. Paul, MN 55101-2098.

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: 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. Minnesota Mutual is a mutual life insurance company organized 
under Minnesota law. The Account is registered with the Commission 
under the Act as a unit investment trust. The Account is divided into a 
number of sub-accounts, each corresponding to a mutual fund portfolio 
in which the sub-account's assets are invested. Currently, there is 
only one sub-account (``Sub-Account'') available under the Contracts.
    2. MIMLIC, a wholly owned subsidiary of MIMLIC Asset Management 
Company, which in turn is a wholly owned subsidiary of Minnesota 
Mutual, will be the principal underwriter of the Contracts. MIMLIC is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
and is an NASD member.
    3. The Contracts are individual, immediate variable annuity 
contracts

[[Page 11441]]

designed for use in connection with personal retirement plans, some of 
which may qualify for federal income tax advantages under the Internal 
Revenue Code of 1986, as amended. The Contracts provide for scheduled 
annuity payments, which must commence on a date within 12 months after 
the issue date of the Contract, except in certain states where a 
shorter period is required.
    4. Prior to the commencement of annuity payments, the owner of a 
Contract may surrender it for its total annuity value as of the date of 
surrender plus amounts deducted for sales charge, risk charges, and 
state premium taxes where applicable. After the commencement of annuity 
payments and during the cash value period, the owner may withdraw all 
or a portion of the cash value of the Contract, subject to certain 
dollar minimums. The cash value period commences on the date annuity 
payments commence and runs for a period approximately equal to the 
annuitant's life expectancy at the time the Contract is issued.
    5. The Contract provides for two annuity payment options: a life 
annuity and a joint and last survivor annuity. If the annuitant, or the 
last surviving annuitant, dies during the cash value period, the 
beneficiary will be paid a death benefit equal to the cash value of the 
Contract. The Contract permits the beneficiary to elect, a lieu of a 
single sum payment, payment of the death benefit in the form of annuity 
payments until the end of the cash value period and to withdraw some or 
all of the cash value.
    6. Although annuity payments will vary in relation to the 
investment performance of the Sub-Account, Minnesota Mutual guarantees 
a minimum annuity payment of at least 85% of the initial variable 
annuity payment amount. If an additional purchase payment is made, 
Minnesota Mutual guarantees that the variable annuity payments will 
always be at least 85% of the initial annuity payment amount 
attributable to that additional purchase payment plus the amount 
already guaranteed at the time of that purchase payment. Withdrawals of 
cash value will reduce the guaranteed minimum payment amount.
    7. Purchase payments under the Contracts will be credited in the 
form of annuity units and cash value units. Annuity units serve to 
measure the amount of each variable annuity payment under the 
Contracts, subject to the guaranteed minimum annuity payment amount. 
Cash value units serve to measure the cash value of the Contract 
available for withdrawal during the cash value period. The amount of 
cash value at any time is equal to the number of cash value units 
credited to the Contract times the current annuity unit value times a 
factor set forth in a table in the Contract.
    8. Additional purchase payments may be made during the cash value 
period while the annuitant is alive, subject to certain limitations and 
Minnesota Mutual's right to terminate at any time the owner's right to 
make additional payments. Each purchase payment will result in the 
credit of a number of cash value units equal to the number of annuity 
units credited. A withdrawal of cash value will result in the 
cancellation of cash value units as well as a number of annuity units. 
The reduction in cash value and annuity units as the result of a 
withdrawal will normally be at different rates, so that the number of 
cash value units after a withdrawal will no longer equal the number of 
annuity units. While annuity payments will be reduced as a result of 
cash value withdrawals, so long as the annuitant is alive, annuity 
payments will never be eliminated, even if all available cash value is 
completely withdrawn.
    9. Under the Contract, deductions are made from each purchase 
payment for a sales charge, a risk charge and state premium taxes, 
where applicable. A sales charge is deducted from the purchase payment 
using a percentage determined by the amount of total cumulative 
premiums paid to the date of the purchase payment, including the new 
purchase payment and any purchase payments made to a Contract 
previously issued to the same owner \1\ (``cumulative premiums''). The 
sales charge is 4.5% if cumulative premiums are less than $500,000, 
4.125% if cumulative premiums are $500,000 to $749,999.99 and 3.75% if 
cumulative premiums are $750,000 to $1,000,000.
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    \1\ The application will be amended during the notice period to 
include the portion of this representation relating to payments 
under previously issued Contracts.
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    10. Currently, a risk charge of 1.25% is deducted from each 
purchase payment for Minnesota Mutual's guarantee of the minimum 
annuity payment (``guaranteed minimum annuity risk charge''). This 
charge may be increased to a maximum of 2%. According to the 
Applicants, if the charge proves to be insufficient to cover the actual 
cost of the risk assumed by Minnesota Mutual in providing a guarantee 
of a minimum annuity payment amount, then Minnesota Mutual will absorb 
the resulting losses. Conversely, if the charge proves to be more than 
sufficient after the establishment of any contingency reserves deemed 
prudent or required by law, any excess will be profit to Minnesota 
Mutual.
    11. In addition to the above deductions from purchase payments, 
certain deductions will be made from the net asset value of the Sub-
Account. Minnesota Mutual will deduct a charge, computed daily, 
currently equal to an annual rate of .15% of the Sub-Account's net 
asset value for administrative services relative to the Contracts. 
Minnesota Mutual reserves the right to increase this charge to a 
maximum annual rate of .40% of the Sub-Account's net asset value. In 
making this charge, Applicants state that they are relying on Rule 26a-
1 under the Act, and amounts so deducted will satisfy the ``at-cost'' 
restrictions of that Rule.
    12. Minnesota Mutual also will deduct a charge, computed daily, 
currently equal to an annual rate of .80% of the Sub-Account's net 
asset value for mortality and expense risks assumed by Minnesota Mutual 
under the Contracts, of which .55% is for mortality risks and .25% is 
for expense risks. Minnesota Mutual reserves the right under the 
Contracts to increase the mortality risk charge to .80% and the expense 
risk charge to .60%. However, any increase of the total charge for 
mortality and expense risks above 1.25% on an annual basis would be 
subject to the approval of the Commission.
    13. The mortality risk assumed by Minnesota Mutual in connection 
with the Contracts arises from Minnesota Mutual's guarantee that it 
will make annuity payments in accordance with the annuity tables and 
other provisions in the Contract to each annuitant regardless of how 
long that annuitant lives or all annuitants as a group live. This 
assures that neither an annuitant's own longevity nor an improvement in 
life expectancy generally will have an adverse effect on the annuity 
payments received under the Contract. The expense risk assumed by 
Minnesota Mutual in connection with the Contracts arises from Minnesota 
Mutual's guarantee that the deductions provided for in the Contracts 
for sales and administrative expenses and the guaranteed minimum 
annuity payment amount will be adequate to cover actual expenses 
incurred. If the deductions made for mortality and expense risks prove 
to be insufficient to cover the actual cost of the mortality and 
expense risks assumed, Minnesota Mutual will absorb the resulting 
losses.

[[Page 11442]]

Applicants' Legal Analysis

    1. Applicants request exemptive relief, pursuant to Section 6(c) of 
the Act, from the provisions of Sections 26(a)(2)(C) and 27(c)(2) of 
the Act to permit (a) the deduction of a guaranteed minimum annuity 
risk charge of up to 2% of a purchase payment from each purchase 
payment made under a Contract or Future Contract and, (b) the deduction 
of a mortality and expense risks charge of up to 1.25% from the assets 
of the Account or Future Accounts with respect to the Contracts and 
Future Contracts. Applicants also request that the exemptive relief 
extend to any other NASD member that may serve in the future as 
principal underwriter for the Contracts or Future Contracts.
    2. Section 26(a)(2)(C) provides that no payment to the depositor 
of, or principal underwriter for a registered unit investment trust 
shall be allowed the trustee or custodian as an expense except 
compensation, not exceeding such reasonable amount as the Commission 
may prescribe, for performing bookkeeping and other administrative 
duties normally performed by the trustee or custodian. Section 27(c)(2) 
prohibits a registered investment company or a depositor or underwriter 
for such company from selling periodic payment plan certificates unless 
the proceeds of all payments, other than sales loads, on such 
certificates are deposited with a trustee or custodian having the 
qualifications prescribed in Section 26(a)(1), and are held by such 
trustee or custodian under an agreement containing substantially the 
provisions required by Sections 26(a)(2)(C) and 26(a)(3) of the Act.
    3. Applicants submit that Minnesota Mutual is entitled to 
reasonable compensation for its assumption of risks associated with the 
guaranteed minimum annuity payment amount and its assumption of 
mortality and expense risks. Applicants represent that the guaranteed 
minimum annuity risk charge of up to 2% is reasonable in relation to 
the risks assumed. This representation is based upon a determination by 
Minnesota Mutual actuaries of the amount of a one-time charge reburied 
to cover the Company's risks for the guarantee with respect to each 
purchase payment. Minnesota Mutual will maintain at its home office, 
available to the Commission upon request, a memorandum summarizing the 
analysis made and the basis for Minnesota Mutual's conclusion in this 
regard.
    4. Applicants represent that the mortality and expense risks charge 
is within the range of industry practice for comparable annuity 
products. This representation is based upon an analysis made by 
Minnesota Mutual of publicly available information about selected 
variable annuity products, taking into consideration such factors as 
any contractual rights to increase charges above current levels, the 
existence of other charges and a front end sales load deduction. 
Minnesota Mutual will also maintain at its home office, available to 
the Commission upon request, a memorandum providing the basis for its 
conclusion in this regard, setting forth in detail the products 
analyzed in the course of, and the methodology and results of, the 
comparative survey made.
    5. Applicants acknowledge that it is possible that Minnesota 
Mutual's revenues from the sales charge could be less than its costs of 
distributing the Contracts. In that case, the excess distribution costs 
would be paid out of Minnesota Mutual's general assets, including the 
profits, if any, from the guaranteed minimum annuity risk charge or the 
mortality and expense risks charge. In those circumstances, a portion 
of the guaranteed minimum annuity risk charge or the mortality and 
expense risks charge might be viewed as providing for some of the costs 
relating to the distribution of the Contracts.
    6. Notwithstanding the foregoing, Minnesota Mutual has concluded 
that there is a reasonable likelihood that the proposed distribution 
financing arrangements made with respect to the Contracts will benefit 
the Separate Account and Contract owners. The basis for that conclusion 
is set forth in a memorandum which will be maintained by Minnesota 
Mutual at its home office and will be available to the Commission upon 
request. Moreover, Minnesota Mutual represents that the Separate 
Account will invest only in an underlying mutual fund which undertakes, 
in the event it should adopt any plan under Rule 12b-1 to finance 
distribution expenses, to have that plan formulated and approved by a 
board of directors, a majority of the members of which are not 
``interested persons'' of that fund within the meaning of Section 
2(a)(19) of the Act.
    7. Applicants submit that extending the relief to Future Contracts, 
Future Accounts and Future Underwriters is appropriate in the public 
interest. According to the Applicants, the requested exemptions should 
promote competitiveness in the variable annuity contract market by 
eliminating the need for filing redundant exemptive applications, 
thereby reducing Minnesota Mutual's costs. The delay and expense of 
repeatedly seeking exemptive relief for substantially similar 
contracts, new separate accounts or new principal underwriters could 
impair Minnesota Mutual's ability to take effective advantage of 
business opportunities that might arise. There is no benefit or 
additional protection afforded to investors by requiring Applicants to 
repeatedly seek exemptive relief with respect to the same issues 
addressed in the application.
    8. Applicants represent that before any Future Contracts are made 
available for sale to the public, Minnesota Mutual will have determined 
that the mortality and expense risk charges under such contracts are 
within the range of industry practice for comparable annuity products 
based upon its analysis of then publicly available information about 
selected variable annuity products. Minnesota Mutual will maintain at 
its home office, available to the Commission upon request, a memorandum 
setting forth in detail the products analyzed in the course of, and the 
methodology and results of, the comparative survey made.
    9. Applicants also represents that, if the sales charges under any 
Future Contracts are expected to be insufficient to cover the costs of 
distributing such contracts, before the Future Contracts are made 
available for sale to the public, Minnesota Mutual will have concluded 
that there is a reasonable likelihood that the proposed distribution 
financing arrangements made with respect to the Future Contracts will 
benefit the Separate Account or Future Account, as applicable, and the 
owners of the Future Contracts. The basis for that conclusion will be 
set forth in a memorandum that will be maintained by Minnesota Mutual 
at its home office and will be available to the Commission upon 
request. Moreover, Minnesota Mutual represents that if the Future 
Contract is funded by a Future Account, the Future Account will invest 
only in an underlying mutual fund which undertakes, in the event such 
fund should adopt any plan under Rule 
12b-1 to finance distribution expenses, to have such plan formulated 
and approved by a board of directors, a majority of the members of 
which are not ``interested persons'' of such fund within the meaning of 
Section 2(a)(19) of the Act.

Conclusion

    Applicants submit that the exemptive relief requested is 
appropriate in the public interest and consistent with the protection 
of investors and the purposes

[[Page 11443]]

fairly intended by the policy and provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6640 Filed 3-19-96; 8:45 am]
BILLING CODE 8010-01-M