[Federal Register Volume 61, Number 59 (Tuesday, March 26, 1996)]
[Notices]
[Pages 13223-13225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7237]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21834; File No. 812-9802]


Principal Mutual Life Insurance Company, et al.

March 20, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of Application for Amendment to Order Granting 
Exemptions Pursuant to the Investment Company Act of 1940 (the 
``Act'').

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APPLICANTS: Principal Mutual Life Insurance Company (``Principal 
Mutual''), Principal Mutual Life Insurance Company Separate Account B 
(the ``Account'') and Princor Financial Services Corporation 
(``Princor'').

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) of 
the Act to amend order granting exemptions from the provisions of 
Sections 2(a)(35), 26(a)(2)(C), 27(a)(2) and (3), and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants have previously received relief from 
the provisions of the Act set forth above to the extent necessary to 
permit the issuance and sale of certain variable annuity contracts 
(``Contracts'') with prescribed sales loads and mortality and expense 
risk charges (the ``Prior Order'').\1\ This application seeks 
additional relief so that: (a) The exemption from Sections 26(a)(2)(C) 
and 27(c)(2) will extend to the mortality and expense risk charges 
under the Contracts as revised by Principal Mutual; and (b) the 
exemptive relief regarding the mortality and expense risk charges and 
the relief granted by the Prior Order will extend to any variable 
annuity contracts that may be offered in the future that are 
substantially similar in all material respects to the Contracts 
(``Future Contracts'') that are funded by the Account or any other 
separate accounts established in the future by Principal Mutual 
(``Future Accounts'') and that may be offered by Princor or any other 
members of the National Association of Securities Dealers, Inc. 
(``NASD'') that may in the future serve as principal underwriters of 
the Contracts or Future Contracts (``Future Underwriters'').

    \1\ See Principal Mutual Life Insurance Company, et al., Inv. 
Co. Act Rel. No. 18798 (June 18, 1992)(1992 WL 150835 (SEC)) 
(notice) and Inv. Co. Act. Rel. No. 18853 (July 15, 1992)(1992 WL 
172828 (SEC)) (order); file no. 812-7882.
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FILING DATE: The application was filed on October 6, 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 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 15,1996, 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 Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Kristian 
Anderson, Counsel, The Principal Financial Group, Des Moines, Iowa 
50392-0300.

FOR FURTHER INFORMATION CONTACT: Kevin M. Kirchoff, Senior Counsel, or 
Wendy Friedlander, Deputy Chief, Office of Insurance Products (Division 
of Investment Management), at (202) 942-0670.

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 Commission.

Applicants' Representations and Legal Analysis

    1. Principal Mutual is a mutual life insurance company with its 
home office in Des Moines, Iowa. The Account was established on January 
12, 1970, as a separate account as defined in Section 2(a)(37) of the 
Act, and is registered pursuant to the Act as a unit investment trust 
(file no. 811-2091). Princor, a wholly-owned subsidiary of Principal 
Mutual, is the principal underwriter of the Contracts, and is a broker-
dealer registered under the Securities Exchange Act of 1934 and a 
member of the NASD.
    2. Principal Mutual assumes mortality and expense risks under the 
Contracts. The mortality risk is the risk that annuitants receiving 
annuity payments may live for a longer period of time than estimated. 
Principal Mutual assumes this mortality risk by virtue of annuity rates 
incorporated into the Contract which cannot be changed as to a current 
plan participant (except to make them more favorable to the 
participant). This assures each annuitant that his or her longevity 
will not have an adverse effect on the amount of annuity payments. The 
expense risk assumed by Principal Mutual is the risk that the allowance 
for administration expenses in the annuity

[[Page 13224]]
conversion rates will be insufficient to cover actual costs of 
administration during an annuity pay out period.
    3. For assuming these risks, Principal Mutual, in determining unit 
values for the Account and variable annuity payments, makes a charge as 
of the end of each valuation period against the assets of the Account 
held with respect to the Contract. If the charge is insufficient to 
cover the actual costs of the mortality and expense risk assumes, the 
financial loss will fall on Principal Mutual; conversely, if the charge 
proves more than sufficient, the excess will be a gain to Principal 
Mutual.
    4. The relevant portions of Sections 26(a)(2)(C) and 27(c)(2) of 
the Act prohibit a registered unit investment trust and any depositor 
thereof or underwriter therefor from selling periodic payment plan 
certificates unless the proceeds of all payments (other than the sales 
load) are deposited with a qualified bank as trustee or custodian and 
held under arrangements which prohibit any payment to the depositor or 
principal underwriter except a fee, not exceeding such reasonable 
amount as the Commission may prescribe, for performing bookkeeping and 
other administrative services of a character normally performed by the 
bank itself.
    5. In the Prior Order, Applicants received exemptive relief 
necessary to deduct a mortality and expense risk charge from the assets 
of the Account. For assuming mortality and expense risks, Principal 
Mutual currently deducts from each division of the Account a charge at 
a simple annual rate of 0.33 percent for certain Contracts and 0.55 
percent for other Contracts. In accordance with the right it has 
reserved to increase the charge up to 1.25 percent, subject to certain 
limitations, Principal Mutual intends to increase those charges to 0.42 
percent and 0.64 percent, respectively.
    6. Contracts issued prior to March 31, 1995, contained an 
additional limitation that permitted a change in the mortality and 
expense risk charge only after the Contract had been in effect for at 
least one year. That limitation has been eliminated for all Contracts 
issued subsequent to that date.
    7. In order to avoid questions regarding the scope of the Prior 
Order, Applicants seek an order pursuant to Section 6(c) of the Act 
amending the Prior Order to permit the issuance and sale of the 
Contracts providing for the mortality and expense risk charges 
described above, including the right to increase the charges up to a 
maximum of 1.25 percent.
    8. Applicants represent that the maximum charge of 1.25 percent is 
within the range of industry practice for comparable annuity products. 
This representation is based upon an analysis by Principal Mutual of 
publicly available information about selected similar industry 
products, taking into consideration such factors as the method used in 
charging sales loads, any contractual right to increase charges above 
current levels and the existence of charges against separate account 
assets for other than mortality and expense risks. Principal Mutual 
will maintain its principal 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 acknowledge that the sales load and the deferred 
sales charge under the Contracts will be insufficient to cover all 
costs relating to the distribution of the Contracts and if a profit is 
realized from the mortality and expense risk charge, all or a portion 
of such profit may be offset by distribution expenses not reimbursed by 
sales charges. In such circumstances a portion of the mortality and 
expense risk charge might be viewed as providing for a portion of the 
costs relating to distribution of the Contracts. Notwithstanding the 
foregoing, Principal Mutual has concluded that there is reasonable 
likelihood that the proposed distribution financing arrangements made 
with respect to the Contracts will benefit the Account, the 
Contractholders and plan participants. The basis for that conclusion is 
set forth in a memorandum which will be maintained by Principal Mutual 
at its principal office and will be available to the Commission upon 
request.
    10. Principal Mutual represents that the Account will invest only 
in underlying mutual funds which undertake, in the event such funds 
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.
    11. Applicants also request that the Prior Order be amended to 
provide that the exemptive relief from Sections 26(a)(2)(C) and 
27(c)(2) in connection with the mortality and expense risk charge 
extend to Future Contracts, funded by Future Accounts and sold through 
Future Underwriters. Applicants assert that extending the relied 
concerning the mortality and expense risk charge to Future Contracts, 
funded by Future Accounts and sold through Future Underwriters, is 
appropriate in the public interest. An order so providing should 
promote competitiveness in the variable annuity contract market by 
eliminating the need for filing redundant exemptive applications, 
thereby reducing Principal 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 Principal 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 
repeatedly to seek exemptive relief with respect to the same issues 
addressed in this application.
    12. Applicants represent that, before any Future Contracts are made 
available for sale to the public, Principal Mutual will have determined 
that the mortality and expense risk charge under the Future Contracts 
is within the range of industry practice for comparable annuity 
products based upon its analysis of then publicly available information 
about selected similar industry products. Principal Mutual will 
maintain at its principal 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.
    13. Applicants also represent that, if the sales charges under any 
Future Contracts are expected to be insufficient to cover the costs of 
distributing the Contracts, Principal Mutual, before such Future 
Contracts are made available for sale to the public, 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 Account or the Future Account, as 
applicable, the contractholders and plan participants. The basis for 
that conclusion will be set forth in a memorandum which will be 
maintained by Principal Mutual at its principal office and will be 
available to the Commission upon request.
    14. Principal 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

[[Page 13225]]
such fund within the meaning of Section 2(a)(19) of the Act.
    15. In the Prior Order, Applicants also received exemptive relief 
from the provisions of Sections 2(a)(35), 27(a)(2) and 27(a)(3) to 
permit the use of the sales load pattern and payment arrangements 
described in the application that resulted in the Prior Order. 
Applicants now request that this relief extend to Future contracts that 
are funded by the Account or any Future Accounts and that may be 
offered by Princor or any Future Underwriters. Applicants assert that 
extending the relief previously granted in this manner is appropriate 
in the public interest for the same reasons as those discussed in 
paragraph 11, above.
    16. The reasons advanced in support of the exemptive application 
resulting in the Prior Order apply with equal force, Applicants assert, 
to Future Contracts, Future Accounts and Future Underwriters. The abuse 
intended to be curbed by Section 27(a)(3) (excessive front-end loading 
of periodic payment plans) is not, and will not be presented by the 
sales load structure of the Contracts or Future Contracts.

Conclusion

    For the reasons summarized 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 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7237 Filed 3-25-96; 8:45 am]
BILLING CODE 8010-01-M