[Federal Register Volume 61, Number 80 (Wednesday, April 24, 1996)]
[Notices]
[Pages 18185-18188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10055]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21906; No. 812-10032]
Valley Forge Life Insurance Company, et al.
April 18, 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: Valley Forge Life Insurance Company (VFLIC), Valley Forge
Life Insurance Company Variable Annuity Separate Account (Separate
Account) and CNA Investor Services, Inc. (CNA/ISI).
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order exempting certain
transactions from the provisions of sections 26(a)(2)(C) and 27(c)(2)
of the Act in connection with the offering of certain flexible premium
deferred variable annuity contracts (Contracts) to be issued by VFLIC
through the Separate Account or any other separate account (Other
Accounts) established in the future by VFLIC, as well as other variable
annuity contracts (Future Contracts) issued in the future by VFLIC,
through the Separate Account or Other Accounts, which are materially
similar to the Contracts.
FILING DATE: The application was filed on March 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 Secretary of the SEC
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be
[[Page 18186]]
received by the SEC by 5:30 p.m. on May 13, 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, c/o Donald M. Lowry,
Esq., Senior Vice President and General Counsel, CNA Insurance
Companies, CNA Plaza 43 South, Chicago, Illinois 60685.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Special Counsel, or Peter R. Marcin, Law Clerk,
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. VFLIC is a stock life insurance company organized under the laws
of the State of Pennsylvania. VFLIC is authorized to transact business
in the District of Columbia, Guam, Puerto Rico and all states other
than New York.
2. The Separate Account was established by VFLIC as a separate
investment account under Pennsylvania insurance law as a funding medium
for variable annuity contracts. The Separate Account is registered with
the Commission as a unit investment trust under the 1940 Act, and the
Contracts are registered under the Securities Act of 1933.
3. The Separate Account currently has 18 subaccounts. The
subaccounts each invest exclusively in the shares of a designated
investment portfolio of Insurance Management Series, Variable Insurance
Products Fund II, The Alger American Fund, MFS Variable Insurance
Trust, SoGen Variable Funds, Inc., and Van Eck Worldwide Insurance
Trust (each, a portfolio, together, the portfolios). New subaccounts
may be added in the future that would invest in additional portfolios.
4. CNA/ISI is an affiliate of VFLIC and is the principal
underwriter of the Contracts. CNA/ISI is registered with the SEC as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. (NASD). CNA/ISI
may act as principal underwriter for any Future Contracts as well.
5. The Contracts are individual flexible premium deferred variable
annuity contracts. They may be purchased on a non-tax qualified basis
or they may be purchased and used in connection with retirement plans
that qualify for favorable federal income tax treatment. The minimum
initial purchase payment for a Contract is $2,000, and the minimum
additional purchase payment is $100.
6. The Contracts provide for a death benefit.
a. The Contracts provide that if the annuitant is age 75 or
younger, the death benefit is an amount equal to the greatest of:
(i) aggregate purchase payments made less any withdrawals
(including the applicable surrender charges, purchase payment tax
charge and market value adjustments) as of the date that VFLIC receives
due proof of death of the annuitant; or
(ii) the contract value as of the date that VFLIC receives due
proof of death of the annuitant; or
(iii) the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the
death benefit is paid.
b. If the annuitant is age 76 or older, the death benefit is an
amount equal to the greater of (i) or (ii) above.
c. The minimum death benefit is the death benefit floor amount as
of the date of the annuitant's death (i) adjusted for each withdrawal
made since the most recent reset of the death benefit floor amount by
multiplying that amount by the product of all ratios of the contract
value immediately after a withdrawal to the contract value immediately
before such withdrawal, (ii) plus any purchase payments made since the
most recent reset of the death benefit floor amount.
d. The death benefit floor amount is the largest contract value
attained on any prior death benefit floor computation anniversary.
Death benefit floor computation anniversaries are the 5th Contract
anniversary and each subsequent 5th Contract anniversary prior to the
annuitant's age 76.
7. Certain charge and fees are assessed under the Contracts. VFLIC
will impose a transfer processing fee of $25 on the thirteenth and each
subsequent transfer request made by a Contract owner during a single
Contract year prior to the annuity date.
8. VFLIC will deduct an administration charge from the assets of
the Separate Account that is equal, on an annual basis, to 0.15%.
9. An annual policy fee of $30 will be charged against each
Contract, unless the Contract value is less than $50,000 at the time of
the deduction.
10. 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.
11. VFLIC will deduct a surrender charge upon certain surrenders or
withdrawals prior to the annuity date. The charge is a percentage of
each purchase payment surrendered or withdrawn (or applied to an
annuity payment option during the first five Contract years) as shown
in the following table:
------------------------------------------------------------------------
Surrender
charge as a
percentage of
Number of full years elapsed between date of receipt of purchase
purchase payment and date of surrender or withdrawal payment
withdrawn or
surrendered
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0...................................................... 7
1...................................................... 7
2...................................................... 6
3...................................................... 5
4...................................................... 4
5...................................................... 0
------------------------------------------------------------------------
12. The surrender charge is separately calculated and applied to
each purchase payment at any time that the purchase payment is
surrendered or withdrawn (or applied to an annuity payment option
during the first five Contract years). No surrender charge applies to
withdrawals of Contract value in excess of aggregate purchase payments
(less prior withdrawals of purchase payments). The surrender charge is
calculated using the assumption that all purchase payments are
surrendered or withdrawn before any Contract value in excess of
aggregate purchase payments (less prior withdrawals of purchase
payments), and that purchase payments are surrendered or withdrawn on a
first-in, first-out basis. Notwithstanding the foregoing, in each
Contract year, a Contract owner may withdraw an amount equal to 15% of
aggregate purchase payments (less prior withdrawals of purchase
payments) as of the first valuation day of that Contract year without
incurring a surrender charge.
13. After the first five Contract years, no surrender charge is
assessed on the adjusted Contract value applied to an annuity payment
option on the annuity date. If on the annuity date, however, the payee
elects to receive a lump sum, this sum will equal the Contract's
surrender value on such date.
[[Page 18187]]
14. The amounts obtained from the surrender charge will be used to
help defray expenses incurred in the sale of the Contracts (or Future
Contracts), including commissions and other promotional or distribution
expenses associated with the printing and distribution of prospectuses
and sales literature. If proceeds from the surrender charge do not
cover the expected costs of distributing the Contracts (or Future
Contracts), any shortfall will be recovered from VFLIC's general
assets, which may include revenue from the mortality and expense risk
charge deducted from the Separate Account.
15. VFLIC proposes to deduct a daily mortality and expense risk
charge. VFLIC represents that this charge is equal to an effective
annual rate of 1.25%. Approximately 0.70% of this annual charge is
allocated to the mortality risks that VFLIC will assume, and 0.55% is
allocated to the expense risks that VFLIC will assume. VFLIC will
assess the charge for mortality and expense risks during the
accumulation period and the annuity period and guarantees that it will
not raise the charge for any Contract (or Future Contract) once that
Contract (or Future Contract) is issued.
16. VFLIC will assume several mortality risks under the Contracts
(or Future Contracts). First, VFLIC will assume a mortality risk by its
contractual obligation to pay a death benefit to the beneficiary if the
annuitant dies prior to the annuity date. Second, VFLIC will assume a
mortality risk arising from the fact that the Contract (and Future
Contracts) does/do not impose any surrender charge on the death
benefit. Third, VFLIC will assume an additional mortality risk by its
contractual obligation to continue to make annuity payments for the
entire life of the annuitant under annuity options involving life
contingencies. With regard to the third risk, VFLIC will assume the
risk that annuitants as a group will live a longer time than VFLIC's
annuity tables predict, which would require VFLIC to pay out more in
annuity payments than it anticipated. The expense risk assumed by VFLIC
is that the Contract administrative charges will be insufficient to
cover the cost of administering the Contracts.
17. If the mortality and expense risk charges are insufficient to
cover the expenses and costs assumed, the loss will be borne by VFLIC.
Conversely, if the amount deducted proves more than sufficient, the
excess will be profit to VFLIC. VFLIC expects to earn a profit from the
mortality and expense risk charge. To the extent that the surrender
charge, described above, is insufficient to cover the actual costs of
distribution, the expenses will be paid from VFLIC's general account
assets, which will include profit, if any, derived from the mortality
and expense risk charge.
18. Taxes on purchase payments generally are incurred by VFLIC as
of the annuity date based on the Contract value on that date, and VFLIC
deducts a charge for taxes on purchase payments from the Contract value
as of the annuity date. Some jurisdictions impose a tax on purchase
payments at the time such payments are made. In those jurisdictions,
VFLIC's current practice is to pay the tax and then deduct the charge
for these taxes from the Contract value upon surrender, payment of the
death benefit, or upon the annuity date. VFLIC reserves the right to
deduct any state and local taxes on purchase payments from the Contract
value at the time such tax is due. VFLIC represents that the amount
that it will recover from the charge for taxes on purchase payments
will not exceed the amount of such taxes that it pays.
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. Sections 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 exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
assessment of the mortality and expense risk charge from the Separate
Account or any Other Accounts with respect to the Contracts and any
Future Contracts. For the reasons set forth below, Applicants believe
that the exemptions requested are necessary or appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policies and provisions of the 1940
Act.
4. Applicants assert that the terms of the relief requested with
respect to any Future Contracts funded by the Separate Account or Other
Accounts 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. Applicants submit that any
such additional request for exemption would present no issues under the
1940 Act that have not been addressed in this application, and that
investors would not receive any benefit or additional protections
thereby. Indeed, they might be disadvantaged as a result of VFLIC's
increased overhead expenses.
5. 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 opportunity as they arise.
6. 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.
7. Applicants represent that VFLIC assumes a mortality risk by
virtue of the death benefit and annuity tables guaranteed in the
Contracts or Future Contracts. The annuity rates cannot be changed
after issuance of a Contract or Future Contract. If the mortality or
expense risk charges are insufficient to cover the actual costs, VFLIC
will bear the loss. To the extent that the charges are in excess of
actual costs, VFLIC, at its discretion, may use the excess to offset
losses when the charges are not sufficient to cover expenses.
8. 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 and benefits provided, the existence of expense
charge guarantees, guaranteed death benefits, and guaranteed annuity
[[Page 18188]]
rates. VFLIC will maintain at its principal offices, and make available
to the Commission and its staff, a memorandum setting forth in detail
the products analyzed in the course of, and the methodology and results
of, Applicants' comparative review.
9.VFLIC represents that, before issuing any Future Contracts, it
will: make the same determinations on the same basis as to the
mortality and expense risk charge under such Future Contracts; and
maintain at its executive office, and make available to the Commission
and its staff upon request, a memorandum setting forth in detail the
methodology used in making such determinations.
10. VFLIC 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 the Other Accounts,
and their respective Contract owners. VFLIC represents that it will
maintain, and make available to the Commission and its staff upon
request, a memorandum setting forth the basis of such conclusion.
11. VFLIC represents that, before issuing any Future Contracts, it
will conclude that there is a reasonable likelihood that the
distribution financing arrangements proposed for the Future Contracts
will benefit the Separate Account, any Other Accounts and their
respective Future Contract owners. VFLIC represents that it will
maintain, and make available to the Commission and its staff upon
request, a memorandum setting forth the basis for such a conclusion.
12. The Separate Account and Other Accounts will be invested only
in an underlying fund (or portfolio) which undertakes, in the event
VFLIC 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 fund's board of directors, the majority of whom are not
``interested persons'' of the fund (or portfolio) within the meaning of
Section 2(a)(19) 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. 96-10055 Filed 4-23-96; 8:45 am]
BILLING CODE 8010-01-M