[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  
------------------------------------------------------------------------
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