[Federal Register Volume 61, Number 75 (Wednesday, April 17, 1996)]
[Notices]
[Pages 16813-16816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9402]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21887; No. 812-9818]


Companion Life Insurance Company, et al.

April 10, 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: Companion Life Insurance Company (``Companion Life''), 
Companion Life Separate Account C (``Separate Account''), and Mutual of 
Omaha Investors Services, Inc. (``Services'').

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), and 27(c)(2) of the Act and Rule 22c-1 
thereunder.

summary of application: Applicants seek an order to permit the 
deduction of a mortality and expense risk charge and an enhanced death 
benefit charge from the assets of the Separate Account or any other 
separate account (``Other Accounts'') established by Companion Life to 
support certain flexible premium individual deferred variable annuity 
contracts (``Contracts'') as well as other

[[Page 16814]]

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 Services, that may in the future serve as principal underwriter 
for the Contracts or Future Contracts, the same exemptions granted to 
Services (``Future Broker-Dealers''). Any such broker-dealer and will 
be registered under the Securities Exchange Act of 1934 (``1934 Act'') 
as a broker-dealer and will be a member of the National Association of 
Securities Dealers, Inc. (``NASD'').

filing date: The application was filed on October 16, 1995 and was 
amended on April 4, 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 May 6, 
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 NW., Washington, D.C. 20549. Applicants, Kenneth W. Reitz, Esq., 
Mutual of Omaha Companies, Mutual of Omaha Plaza, 3-Law, Omaha, 
Nebraska 68175-1008.

FOR FURTHER INFORMATION CONTACT:
Pamela K. Ellis, Senior Counsel, 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. Companion Life, a stock life insurance company, is incorporated 
in New York, and principally is engaged in the sale of life insurance 
and annuity policies in New York. Companion Life is a wholly owned 
subsidiary of United of Omaha Life Insurance Company. Both Companion 
and United of Omaha Life Insurance Company are Mutual of Omaha 
Companies.
    2. The Separate Account is a separate account established by 
Companion Life 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. Companion Life 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 series will have separate investment objectives 
and policies.
    4. Services will serve as the distributor and principal underwriter 
of the Contracts, and also may serve in these capacities for the Future 
Contracts. Services, an affiliate of Companion life, is registered 
under the 1934 Act as a broker-dealer and is a member of the NASD.
    5. In addition, broker-dealers other than Services also may serve 
as distributors and principal underwriters of certain of the Contracts 
as well as the Future Contracts. Future Broker-Dealers will be 
registered under the 1934 Act as broker-dealers and will be members of 
the NASD.
    6. The Contracts are individual flexible premium variable deferred 
annuity contracts. They may be purchased on a non-tax qualified basis 
(``Non-Qualified Contracts'') or they may be purchased and used in 
connection with retirement plans or individual retirement accounts that 
qualify for favorable federal income tax treatment (``Qualified 
Contracts''). Both the Non-Qualified Contracts and the Qualified 
Contracts may be purchased with an initial premium of $5,000, except 
under the electronic fund transfer program where the minimum initial 
purchase payment is $2,000.\1\ The minimum subsequent premium for both 
the Unqualified and Qualified Contracts if $500 (or $100 if made in 
connection with the electronic fund transfer program). Net purchase 
payments may be allocated to one or more of the Separate Account 
Subaccounts that have been established to support the Contracts. The 
Contracts also provide for the allocation of net purchase payments to 
the general account of Companion Life, where such purchase payments are 
credited with a predetermined fixed rate of interest.
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    \1\ Companion Life reserves the right to increase or decrease 
these amounts.
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    7. 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.
    8. The Contracts provide for a death benefit if the annuitant dies 
during the accumulation period. Any applicable premium taxes not 
previously deducted will be deducted from the death benefit payable. 
The standard death benefit is the greater of: (1) the accumulation 
value (without deduction of the contingent deferred sales charge, as 
defined below) on the later of the date on which due proof of death or 
an election of payout option is received by Companion Life's service 
office less any charge for applicable premium taxes; or (2) the sum of 
all net purchase payments, less any partial withdrawals. If the 
Contract owner elected the enhanced death benefit and dies before age 
81, Companion Life will provide an enhanced death benefit that will 
equal the greater of: (1) the accumulation value as of the end of the 
valuation period during which due proof of death and an election of a 
payout option are received by Companion Life's service center; (2) the 
greatest anniversary value,\2\ plus any subsequent net purchase 
payments and less any subsequent partial withdrawals; and (3) the sum 
of all net purchase payments less any partial withdrawals, accumulated 
at a 4.5% annual rate of interest, up to a maximum of two times each 
purchase payment. If the Contract owner elected the enhanced death 
benefit and dies after attaining age 81, the enhanced death benefit 
under the Contract will equal the greatest of:
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    \2\ The anniversary value equals the accumulation value on the 
Contract anniversary.
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    (1) the accumulation value as of the end of the valuation period 
during which due proof of death and an election of a payout option are 
received by Companion Life's service center; (2) the greatest 
anniversary value up to the last Contract anniversary before the 
Contract owner attains age 81, plus any subsequent purchase payments 
and less any subsequent partial withdrawals; and (3) the sum of all net 
purchase payments paid prior to the last Contract anniversary before 
the Contract owner attained age 81, less any partial withdrawals, 
accumulated at a 4.5% annual rate of interest, up to a maximum of two 
times each purchase payment.
    9. Certain charges and fees are assessed under the Contracts. There 
is no transfer fee charged for the first 12 transfers from Subaccounts 
of the Separate Account in each Contract year. Subsequent transfers 
within a Contract

[[Page 16815]]

year, however, will be assessed a fee of $10 per transfer.
    10. Companion Life will deduct an administration charge from each 
Subaccount of the Separate Account. The charge is equal, on an annual 
basis, to .20% of the net asset value of each Subaccount.
    11. An annual policy fee of $30 will be charged against each 
Contract. This charge will be deducted pro rata from each Subaccount in 
which the Contract owner is invested at the end of each Contract year 
prior to the annuity starting date (and upon a complete surrender) to 
compensate Companion Life for the administrative services provided to 
Contract owners. Currently, this fee is waived if the accumulation 
value exceeds $50,000.
    12. Applicants represent that the transfer fee, administration 
charge, and the annual policy fee will not increase regardless of the 
actual cost incurred. In addition, Applicants represent that these 
charges are at cost with no anticipation of profit.
    13. A contingent deferred sales charge (``CDSC'') may be imposed on 
certain withdrawals. The amount of the CDSC decreases annually from 7% 
to 0% over 8 Contract years. For the purposes of determining the CDSC, 
withdrawals will be allocated first to premiums on a first-in, first-
out basis so that all withdrawals are allocated to premiums to which 
the lowest (if any) CDSC applies, then to earnings. In addition, there 
is a free withdrawal amount equal to up to 15% of accumulation value 
each Contract year. A CDSC also will not be applied on the annuity 
starting date if the accumulation value is applied after the second 
Contract anniversary to provide lifetime annuity payments. No CDSC will 
be imposed as a result of any death benefit payment, or, under 
Qualified Plans, any refund of contributions paid in excess of the 
Contract owner's deductible amounts. Applicants state that the CDSC 
will not increase.
    14. Companion Life proposes to direct a daily mortality and expense 
risk charge. Companion Life represents that this charge is equal to an 
effective annual rate of 1.00% of the net asset value of the Separate 
Account, and that it will not increase. Of this amount, approximately 
.75% is for mortality risk and .25% is for expense risks.
    15. Companion Life 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 Companion Life to pay 
out more in annuity income than it had planned. Additional mortality 
risks assumed by Companion Life are that it will waive the CDSC in the 
event of the death of the owner and Companion Life's contractual 
obligation to provide a standard and an enhanced death benefit prior to 
the annuity date. Thus, Companion Life 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 
Companion Life is that the contract administration charge will be 
insufficient to cover the cost of administering the Contracts.
    16. In the event the mortality and expense risk charges are more 
than sufficient to cover Companion Life's costs and expenses, any 
excess will be a profit to Companion Life. The cost of distributing the 
Contracts will be met from funds derived from the CDSC and from 
Companion Life's general account, which may include amounts derived 
from the mortality and expense risk charge.
    17. There will be a charge made each year for expenses related to 
the enhanced death benefit. Companion Life deducts this charge through 
the cancellation of accumulation units at each Contract anniversary and 
at surrender to compensate it for the increased risks associated with 
providing the enhanced death benefit. The charge at full surrender will 
be a pro-rata portion of the annual charge. Companion Life guarantees 
that this charge will never exceed an annual rate of .35% of the 
average death benefit amount.\3\
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    \3\ The average death benefit amount is the mean of the death 
benefit amount on the most recent Contract anniversary and the death 
benefit amount on the immediately preceding Contract anniversary.
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    18. If premium taxes are assessed, Companion Life may deduct a 
charge for aggregate premium taxes paid with respect to a particular 
Contract from purchase payments of from accumulation value (upon 
complete surrender, death of any Contract owner, or at the annuity 
starting date).
    In addition, no charges are currently made for any other federal, 
state, or local taxes. Companion Life, however, may deduct charges for 
such taxes (or the economic burden thereof) from the Separate Account 
in the future. In such case, Companion Life will either seek exemptive 
relief to the extent necessary to permit the deduction of such taxes or 
treat those deductions as deductions of sales load.\4\
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    \4\ Applicants represent that they will file an amendment to 
their application during the notice period to reflect this 
representation.
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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, 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 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 Contracts and Future Contracts of the 
1.00% charge for the assumption of mortality and expense risks, and 
.35% of the average death benefit amount for the enhanced death benefit 
charge, and that the foregoing exemptions extend to Future Broker-
Dealers.
    4. Applicants assert that the terms of the relief requests 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 new 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.
    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

[[Page 16816]]

reducing their administrative expenses and maximizing the efficient use 
of their resources. The delay and expense involved in having repeatedly 
to seek exemptive relief would reduce Applicant's ability effectively 
to take advantage of business opportunities as they 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. Applicants thus believe that the requested exemption 
is 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.
    5. Applicants represent that the 1.00% 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 and benefits provided, the existence of expense 
charge guarantees, guaranteed death benefits, and guaranteed annuity 
rates. Companion Life will maintain at its principal offices, 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.
    6. Applicants also assert that the charge equal to an annual rate 
of .35% of the average death benefit amount for Contracts and Future 
Contracts issued with the enhanced death benefit is reasonable in 
relation to the risks assumed by Companion Life. In arriving at this 
determination, Companion Life projected its expected cost in providing 
this benefit by using the price of put options which could be used to 
hedge the risk inherent in providing the enhanced death benefit. 
Companion Life undertakes to maintain at its home office a memorandum, 
available to the Commission, setting forth in detail the methodology 
used in determining that the risk charge equal to an annual rate of 
.35% of the average death benefit amount under certain Contracts and 
Future Contracts for the enhanced death benefit is reasonable in 
relation to risks assumed by Companion Life under the Contracts and 
Future Contracts.
    7. Companion Life has concluded that there is a reasonable 
likelihood that the Separate Accounts and Other Accounts' proposed 
distribution financing arrangements will benefit the Separate Accounts 
and their investors. Companion Life represents that it will maintain 
and make available to the Commission upon request a memorandum setting 
forth the basis of such conclusion.
    8. 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.
    9. Section 2(a)(32) of the 1940 Act defines a redeemable security 
as any security under the terms of which the holder, upon its 
presentation to the issuer, is entitled to receive approximately his 
proportionate share of the issuer's current net assets, or the cash 
equivalent thereof. Sections 22(c) and 27(c)(1) of the 1940 Act and 
Rule 22c-1 thereunder, in pertinent part, prohibit a registered 
investment company, its depositor, or principal underwriter, from 
selling periodic payment plan certificates unless such certificates are 
redeemable securities.
    10. Applicants request exemptions from Sections 2(a)(32), 22(c), 
and 27(c)(1) of the 1940 Act, and Rule 22c-1 thereunder, to permit the 
deduction upon surrender of the prorated enhanced death benefit charge 
equal to .35% of the average death benefit.
    11. Applicants assert that the enhanced death benefit charge is 
assessed to compensate Companion Life for the increased risk it bears 
if the Contract owner elects the enhanced death benefit. The death 
benefit represents an optional insurance benefit that Companion Life 
may provide through the life of the Contract or Future Contract for 
which it is entitled to receive compensation. Normally, the enhanced 
death benefit charge accrues each Contract year and is deducted 
retroactively on each Contract anniversary, for that prior Contract 
year. By deducting a prorated enhanced death benefit charge upon a 
Contract owner's surrender, Companion Life is compensated by the 
Contract owner for the additional risk the company bears during the 
period between the last Contract anniversary and the date of surrender.
    12. Applicants further assert that the assessment of the prorated 
enhanced death benefit charge upon surrender does not alter a Contract 
owner's current net asset value. As previously discussed, Companion 
Life deducts the enhanced death benefit charge through the cancellation 
of a Contract owner's accumulation units. Accordingly, the assessment 
of the prorated enhanced death benefit charge upon surrender, or at any 
other time during the life of a Contract or Future Contract, will not 
alter the Contract or Future Contract's current net asset value.
    13. In addition, Applicants assert that the assessment of a 
prorated enhanced death benefit charge upon a Contract owner's 
surrender, which is fully disclosed in the prospectus for the Contract, 
should not be construed as a restriction on redemption. Applicants 
maintain that the Contracts and Future Contracts are and will be 
redeemable securities and that the imposition of the prorated enhanced 
death benefit charge upon surrender represents nothing more than the 
proportionate deduction of an insurance charge that could otherwise be 
deducted daily through the life of the Contract or Future Contract. 
Moreover, as stated previously, Applicants only assess the charge if 
the Contract owner has elected the enhanced death benefit.

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. 96-9402 Filed 4-16-96; 8:45 am]
BILLING CODE 8010-01-M