[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Notices]
[Pages 12115-12117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7155]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21830; File No. 812-9858]


National Integrity Life Insurance Company, et al.

March 18, 1996.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

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

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APPLICANTS: National Integrity Life Insurance Company (``National 
Integrity''), Separate Account I of National Integrity Life Insurance 
Company (``Separate Account I''), Separate Account II of National 
Integrity Life Insurance Company (``Separate Account II,'' and together 
with Separate Account I, the ``Separate Accounts'') and SBM Financial 
Services, Inc. (``SBM'').

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

SUMMARY OF THE APPLICATION: Applicants seek an order under Section 6(c) 
of the 1940 Act granting exemptions from Sections 26(a)(2)(C) and 
27(c)(2) to the extent necessary to permit the deduction of a mortality 
and expense risk charge from the assets of the Separate Accounts or 
other separate accounts established by National Integrity (``Other 
Separate Accounts'') to support certain flexible premium 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 request 
that such exemptive relief extend to any broker-dealer other than SBM 
which may serve in the future as principal underwriter in respect of 
the Contracts or of Future Contracts offered by National Integrity and 
made available through the Separate Accounts or the Other Separate 
Accounts.

FILING DATES: The application was filed on November 21, 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 Secretary of the SEC 
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 
April 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 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 Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, Kevin L. Howard, Esq., 
National Integrity Life Insurance Company, 239 S. Fifth Street, 12th 
Floor, Louisville, Kentucky 40202.

FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Attorney, 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 Public 
Reference Branch of the SEC.

Applicants' Representations

    1. National Integrity, a stock life insurance company, is organized 
in New York and is licensed to sell life insurance and annuities in 
eight states and the District of Columbia and variable contracts in six 
states and the District of Columbia. National Integrity is an indirect 
wholly-owned subsidiary of ARM Financial Group, Inc. (``ARM 
Financial'').
    2. Separate Account I, formerly known as Separate Account NIA, and 
Separate Account II, formerly known as Separate Account SFN, were 
established on May 19, 1986, and May 21, 1992, respectively, as 
separate accounts under New York insurance law to fund the Contracts. 
The Separate Accounts are registered under the 1940 Act as unit 
investment trusts. Interests in the Contracts are registered as 
securities under the Securities Act of 1933. Each Separate Account is 
divided into ten investment divisions (``Divisions''), each of which 
invests solely in shares of a registered open-end management investment 
company.
    3. Integrity Financial Services, Inc. (``IFS''), currently the 
principal underwriter of the Contracts, is registered with the 
Commission under the Securities Exchange Act of 1934 (the ``1934 Act'') 
as a broker-dealer and is a member of the NASD.\1\ Applicants now seek 
to substitute SBM for IFS as the principal underwriter for the 
Contracts. Upon issuance of the requested order, National Integrity, 
the Separate Accounts, and SBM will enter into an agreement under which 
SBM will become principal underwriter for the Contracts. SBM, a wholly-
owned subsidiary of ARM Financial, is registered with the Commission 
under the 1934 Act as a broker-dealer and is a member of the NASD.

    \1\ Applicants state that the Commission has previously granted 
relief to National Integrity, Separate Account NIA and IFS 
permitting the deduction of mortality and expense risk charges from 
the assets of Separate Account NIA in connection with the Contracts. 
See, Investment Company Act Release Nos. 15355 (Oct. 10, 1986) 
(notice) and 15406 (Nov. 7, 1986) (order). In addition, Applicants 
state that the Commission has previously granted similar relief to 
National Integrity, Separate Account SFN and IFS. See, Investment 
Company Act Release Nos. 19052 (Oct. 26, 1992) (notice) and 19121 
(Nov. 24, 1992) (order). Applicants are not requesting that the 
order sought herein amend or supercede the orders referenced above.
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    4. The Contracts are flexible premium variable annuity contracts. 
Contract owners (``Participants'') may allocate premium payments to one 
or more of the Separate Accounts' Divisions, or to

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one or more of National Integrity's guarantee periods, or both. Amounts 
allocated to guarantee periods accumulate on a fixed basis, except as 
adjusted for any applicable market value adjustment.
    5. A death benefit is available under the Contracts if a 
Participant dies prior to his or her retirement date. The amount of the 
death benefit is equal to the greatest of: (1) the Participant's 
annuity value; (2) the minimum death benefit, which equals total 
contributions less the sum of the market value adjusted withdrawals; 
and (3) the Participant's highest annuity value at the beginning of any 
participation year, plus subsequent contributions and minus subsequent 
withdrawals (``Enhanced Death Benefit'').
    6. Retirement benefits under the Contracts may take the form of a 
lump sum payment or an annuity. The retirement benefits are calculated 
as of the retirement date selected by the Participant. If no annuity 
payment option is elected by the retirement date, National Integrity 
will deem the retirement date to have been extended, and the values 
under the Participant's Contract in the Divisions or in the guarantee 
periods will remain invested in those Divisions or guarantee periods 
until National Integrity receives the Participant's written 
instructions at its administrative office.
    7. Certain charges and fees are assessed under the Contracts. Until 
annuity payments begin, Participants may transfer their Contract values 
among Divisions of the relevant Separate Account and the relevant 
guarantee periods, except that transfers to any guarantee period must 
be to a newly elected guarantee period at the current guaranteed 
interest rate. No fee currently is imposed for a Participant's first 
twelve transfers per participation year. National Integrity reserves 
the right to impose a fee of up to $25 for each transfer in excess of 
twelve per participation year. The transfer fee will be paid to 
National Integrity to compensate it for the anticipated actual 
administrative expenses relating to transfers and is guaranteed not to 
increase during the life of the Contracts. In addition, Applicants 
reserve the right to impose a transfer fee in connection with Future 
Contracts of up to $25 on transfers beginning with the first transfer 
of Contract values in any participation year. No charges will be 
assessed for transfers made under National Integrity's dollar cost 
averaging program.
    8. A contingent deferred sales charge (``CDSC'') may be imposed on 
certain withdrawals. Applicants state that contributions withdrawn will 
be subject to a CDSC of up to 7% of the total amount of the withdrawal 
requested, as adjusted for any applicable market value adjustment made 
in respect of withdrawals from the general account, plus the CDSC 
itself. Withdrawals made in the current participation year are subject 
to a CDSC of 7% of the amounts withdrawn or surrendered. Thereafter, 
the applicable CDSC decreases by 1% per year until reaching 0% after 
the fifth prior participation year. No CDSC will be applied to partial 
withdrawals made during any participation year that do not exceed the 
free corridor amount. National Integrity may waive the CDSC in certain 
circumstances.
    9. If a Participant's Contract value is less than $50,000 on the 
last day of any participation year prior to the Participant's 
retirement date, National Integrity charges an annual administrative 
charge of $30. All Contracts are subject to a daily charge equal, on an 
annual basis, to 0.15% of the net asset value of the relevant Separate 
Account to cover Contract administration expenses. These daily and 
annual fees are guaranteed for the life of the Contracts and will not 
exceed the cost of services to be provided over the life of the 
Contract, defined in accordance with the standards in Rule 26a-1 under 
the 1940 Act.
    10. National Integrity imposes charges as compensation fro bearing 
certain mortality and expense risks under the Contracts. The amount of 
the mortality and expense risk charges under the Contracts is equal, on 
an annual basis, to 1.20% (of which 0.35% is attributable to mortality 
risks and 0.85% to expense risks) of the daily net asset value of the 
relevant Separate Account. For the Future Contracts, the annual 
mortality and expense risk charge will not exceed an effective annual 
rate of 1.20% of the daily net asset value of a Separate Account, or of 
Other Separate Accounts, attributable to such Future Contracts.
    11. The mortality risk assumed by National Integrity under the 
Contracts arises from its obligation to make annuity payments 
(determined in accordance with the annuity tables and other provisions 
contained in the relevant Contract) where a life annuity is selected, 
regardless of how long an annuitant may live. The mortality risk under 
the Contracts is the risk that, upon selection of an annuity option 
that has life contingencies, annuitants will live longer than National 
Integrity's actuarial projections, resulting in higher than expected 
income payments. National Integrity is also assuming a mortality risk 
as a result of its promise to pay a minimum death benefit and the 
Enhanced Death Benefit. The expense risk assumed by National Integrity 
is that the administrative charges will be insufficient to cover the 
actual cost of administering the Contracts.

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 Act 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.Section 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositor 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 an order under Section 6(c) exempting them 
from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent 
necessary to permit the deduction of the mortality and expense risk 
charge from the assets of the Separate Accounts or Other Separate 
Accounts that issue the Contracts or Future Contracts. Applicants also 
propose that SBM replace IFS as principal underwriter for the 
Contracts, and that the relief requested in this application extend to 
any broker-dealer other than SBM which may serve in the future as 
principal underwriter in respect of the Contracts or of Future 
Contracts offered by National Integrity and made available through the 
Separate Accounts or the Other Separate Accounts. Any such principal 
underwriter will be wholly-owned, directly or indirectly, by ARM 
Financial.
    4. Applicants submit that their request for an order is appropriate 
in the public interest. Such an order would promote competitiveness in 
the variable annuity contract market by eliminating the need for 
National Integrity to file redundant exemptive applications, thereby 
reducing National Integrity's administrative expenses and maximizing 
the efficient use of its resources. The delay and expense involved in 
repeatedly having to seek exemptive relief would impair National

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Integrity's ability effectively to take advantage of business 
opportunities as these opportunities arise. 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. If National 
Integrity were required repeatedly to seek exemptive relief with 
respect to the same issues addressed in this application, investors 
would not receive any benefit or additional protection thereby.
    5. Applicants represent that they have reviewed publicly-available 
information regarding the aggregate level of the mortality and expense 
risk charges under variable annuity contracts comparable to the 
Contracts currently being offered in the insurance industry, taking 
into consideration such factors as current charge levels, the manner in 
which charges are imposed, the presence of charge level or annuity rate 
guarantees and the markets in which the Contracts will be offered. 
Based upon the foregoing, Applicants represent that the mortality and 
expense risk charges under the Contracts are within the range of 
industry practice for comparable contracts. Applicants will maintain at 
the headquarters of Arm Financial and make available to the Commission, 
upon request, a memorandum outlining the methodology underlying this 
representation. Similarly, prior to making available any Future 
Contracts through the Separate Accounts or Other Separate Accounts, 
Applicants will represent that the mortality and expense risk charges 
under any such contracts will be within the range of industry practice 
for comparable contracts. Applicants will maintain at the headquarters 
of Arm Financial and make available to the Commission, upon request, a 
memorandum outlining the methodology under lying such representation.
    6. Applicants do not believe that the CDSC under the Contracts will 
necessarily cover the expected costs of distribution the Contracts. Any 
shortfall will be made up from National Integrity's general account 
assets which will include amounts derived from mortality and expense 
risk charges. National Integrity has concluded that there is a 
reasonable likelihood that the distribution financing arrangement being 
used in connection with the Contracts will benefit the Separate 
Accounts and the Participants. National integrity will maintain at the 
headquarters of Arm Financial and make available to the Commission, 
upon request, a memorandum setting forth the basis for this 
representation. Similarly, National Integrity will maintain at the 
headquarters of Arm Financial and make available to the Commission, 
upon request, a memorandum setting forth the basis for the same 
representation with respect to Future Contracts offered by the Separate 
Accounts or by Other Separate Accounts.
    7. Applicants represent that the Separate Accounts and Other 
Separate Accounts will invest only in a management investment company 
which has undertaken, in the event such company adopts a plan under 
Rule 12b-1 under the 1940 Act to finance distribution expenses, to have 
a board of directors or trustees, a majority of whom are not 
``interested persons'' of the company within the meaning of Section 
2(a)(19) of the 1940 Act, formulate and approve any plan under Rule 
12b-1 to finance distribution expenses.

Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to deduct the mortality and expense risk 
charge under the Contracts are necessary and appropriate in the public 
interest and consistent with the protection of investors and 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. 96-7155 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-M