[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24970-24974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12387]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21951; No. 812-9978]


John Hancock Mutual Life Insurance Company, et al.

May 10, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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APPLICANTS: John Hancock Mutual Life Insurance Company (``John Hancock 
Mutual''), John Hancock Variable Life Insurance Company (``John Hancock 
Variable,'' together with John Hancock Mutual, the ``Companies''), John 
Hancock Variable Annuity Account JF (the ``Account''), and John Hancock 
Funds, Inc. (``JHFI'').

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

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction of mortality and expense risk and certain optional benefit 
rider charges from the assets of: (a) the Account in connection with 
the offer and sale of certain variable annuity contracts (``Existing 
Contracts''); (b) the Account in connection with the issuance of 
variable annuity contracts that are materially similar to the Existing 
Contracts (``Future Contracts,'' together with Existing Contracts, the 
``Contracts''); and (c) any other separate account established in the 
future by the Companies (``Future Account'') in connection with the 
issuance of Contracts, for which JHFI or certain other broker-dealers 
may act as distributor and principal underwriter. To the extent the 
Contracts are issued on a group basis, the term ``Contract,'' when used 
herein, includes any individual certificates or other participations 
thereunder.

FILING DATE: The application was filed on February 5, 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 
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 June 4, 1996, and must 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 Sandra M. DaDalt, 
Associate Counsel, John Hancock Mutual Life Insurance Company, John 
Hancock Place, Post Office Box 111, Boston, Massachusetts 02117.

FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, 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 Commission.

Applicants' Representations

    1. John Hancock Variable, a stock life insurance company 
incorporated under the laws of the Commonwealth of Massachusetts, is a 
wholly-owned subsidiary of John Hancock Mutual, a mutual life insurance 
company organized under the laws of the Commonwealth of Massachusetts.
    2. John Hancock Variable is the depositor of the Account, and will 
serve as depositor for Future Accounts.
    3. The Account was established as a separate investment account 
under the laws of the Commonwealth of Massachusetts on November 13, 
1995, pursuant to a resolution of the Board of Directors of John 
Hancock Variable. The Future Accounts will be separate accounts of 
either John Hancock Mutual or John Hancock Variable and will be 
registered with the Commission under the Act.
    4. JHFI, an indirect, wholly-owned subsidiary of John Hancock 
Mutual, is

[[Page 24971]]

registered as a broker-dealer under the Securities Exchange Act of 1934 
(``1934 Act''), and is a member of the National Association of 
Securities Dealers, Inc. (``NASD''). JHFI will serve as the distributor 
and principal underwriter of the Existing Contracts and may also serve 
as the distributor and principal underwriter of Future Contracts.
    5. Broker-dealers other than JHFI may also serve as distributors or 
principal underwriters of Existing Contracts as well as Future 
Contracts to the extent that Existing Contracts or Future Contracts are 
sold through alternate distribution channels. Any such other broker-
dealer will be registered under the 1934 Act as a broker-dealer and 
will be a member of the NASD.
    6. The Accounts, which will have a number of subaccounts 
(``Subaccounts''), will invest premium payments received under the 
Contracts in shares of one or more of the corresponding funds of the 
John Hancock Declaration Trust and/or such other registered investment 
companies as the Companies may make available under the Contracts from 
time to time (each, a ``Series Trust''), or any combination thereof. 
Each Series Trust will be a diversified, open-end management investment 
company registered under the Act, and may have a number of classes or 
series.
    7. The Contracts are flexible premium deferred annuity contracts 
that may be issued in group or individual form. Premium payments are 
subject to certain limits that may be waived by the Companies. The 
owner of a Contract (``Owner'') can allocate premium payments, less any 
applicable premium taxes, to one or more of the Subaccounts of the 
Account, and to one or more of the guarantee periods (``Guarantee 
Periods'') of a market value adjustment fixed account (``MVA Fixed 
Account'').
    8. Prior to the date on which annuity payments commence (``Date of 
Maturity''), an Owner may surrender all or a portion of the Surrender 
Value (defined below), or transfer all or a portion of the accumulated 
value of the Contract (the total value of the Owner's interest in all 
Subaccounts and Guarantee Periods under a Contract, the ``Accumulated 
Value''), (a) from one Subaccount to another Subaccount or to a 
Guarantee Period, or (b) from one Guarantee Period to another Guarantee 
Period or to a Subaccount. After the Date of Maturity, only transfers 
among Subaccounts are permitted. ``Surrender Value'' is the Accumulated 
Value, adjusted by any applicable market value adjustment (``Market 
Value Adjustment''), less any applicable contingent deferred sales load 
(``CDSL''), any applicable Contract fee, any applicable deduction for 
income taxes withheld, and any applicable premium or similar taxes.
    9. The Contract provides for a series of annuity payments beginning 
on the Date of Maturity. The Owner may select from several annuity 
options which provide periodic annuity payments on a fixed or variable 
basis.
    10. In the event that the Annuitant dies prior to the Date of 
Maturity, a death benefit is payable under the Contract. The standard 
death benefit is equal to the greater of:
    (a) The Accumulated Value, adjusted by any Market Value Adjustment, 
next determined following receipt by the servicing agent of the 
Companies of due proof of death, together with any required 
instructions as to the method of settlement, and
    (b) the aggregate amount of the premium payments made under the 
Contract, less any partial withdrawals and CDSL.
    11. In addition, certain optional benefit riders are available at 
an additional charge under the Contracts. These optional benefit riders 
must be elected at the time the Contract is applied for, and none are 
available after a Contract has been issued.
    12. The Owner may elect a one year stepped-up death benefit rider 
(the ``Enhanced Death Benefit rider''), designed to enhance the 
standard death benefit payable to the beneficiary. Under this rider, 
upon the death of the Annuitant prior to the Date of Maturity, the 
death benefit payable will be the greater of: (a) The standard death 
benefit, and (b) the highest Accumulated Value, as adjusted by any 
Market Value Adjustment, as of any Contract anniversary preceding the 
date of receipt of due proof of death, together with any required 
settlement instructions, and preceding the Contract anniversary nearest 
the Annuitant's 81st birthday, plus any premium payments, less any 
prior partial withdrawals and related CDSL, since such Contract 
anniversary. The minimum described in clause (b) of the preceding 
sentence is initially established on the first Contract anniversary and 
may increase on any future Contract anniversary as a result of 
additional premium payments or favorable investment performance, but it 
will never decrease unless partial withdrawals are made. This benefit 
cannot be purchased by applicants 80 years of age or older
    13. An Accidental Death Benefit rider (the ``ADB rider'') may be 
elected. Under this rider, upon the accidental death (as defined in the 
rider) of the Annuitant prior to the Date of Maturity, the beneficiary 
will receive, in addition to any other death benefit, an amount equal 
to the Accumulated Value, as of the date of the accident that results 
in Annuitant's death, up to a maximum of $200,000. This benefit cannot 
be purchased by applicants 80 years of age or older and ceases, along 
with applicable charges, at age 80.
    14. The Owner may elect a Nursing Home Waiver of CDSL rider (the 
``Nursing Home rider''), under which the CDSL, if otherwise applicable, 
will be waived on any withdrawals if, beginning at least 90 days after 
the date of issue, the Owner becomes confined to a nursing home 
facility for at least 90 consecutive days, subject to certain 
conditions. This benefit cannot be purchased by applicants 75 years of 
age or older, or applicants who were confined to a nursing home within 
the prior two years.
    15. The Contracts and optional benefit riders provide for certain 
charges described below. Except for the Companies' reservation of right 
to increase the annual Contract Fee (described below), none of such 
charges may be increased during the life of a Contract. The Companies 
may waive or reduce any of the charges under the Contracts, in 
accordance with their rules, as permitted by the Act, rules thereunder, 
and applicable Commission orders or staff positions.
    16. The Companies deduct an annual fee of $30 per Contract year 
(``Contract Fee'') on all Contracts having an Accumulated Value of less 
than $10,000. The Contract Fee will be deducted at the beginning of 
each Contract year after the first and at a full surrender during a 
Contract year (``Contract Year''). The Companies reserve the right to 
increase the Contract Fee up to a maximum of $50.
    17. The Companies also deduct a daily administrative charge from 
the assets of the Accounts. This charge is equal to an annual rate of 
0.35 percent of the net assets of Contracts with an initial premium 
payment of less than $250,000, and 0.10 percent of the net assets of 
Contracts with an initial premium payment of $250,000 or more. The 
difference between these rates reflects the cost of administering 
larger Contracts, which is lower in proportion to their Accumulated 
Value than that of relatively smaller Contracts. The Companies do not 
anticipate deriving any profit from these administrative charges, and 
will deduct them in reliance upon, and in compliance with, Rule 26a-1 
under the Act.
    18. Several states and local governments impose a premium or 
similar tax on annuities. Currently, such

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taxes range up to 5 percent of the Accumulated Value applied to an 
annuity option. Ordinarily, any state-imposed premium or similar tax 
will be deducted from the Accumulated Value only at the time of 
annuitization. The Companies will deduct a charge for these taxes from 
the Accumulated Value at the time of annuitization, death, surrender, 
or withdrawal. For Contracts issued in South Dakota, the Companies pay 
a tax on each premium payment and deduct the charge therefor at the 
time the payment is made.
    19. No sales charge is deducted from any premium payment. However, 
a CDSL may be assessed on premium payments whenever any amount is 
withdrawn from a Contract prior to the Date of Maturity. This charge is 
used to cover expenses relating to the offer and sale of the Contracts, 
including commissions and other distribution costs and sales-related 
expenses. The CDSL percentage charge depends upon the number of years 
that have elapsed from the date of the premium payment to the date of 
its withdrawal, as follows:

------------------------------------------------------------------------
 Years from date of premium payment to date of withdrawal or      CDSL  
                          surrender                            (percent)
------------------------------------------------------------------------
7 or more....................................................          0
6 but less than 7............................................          2
5 but less than 6............................................          3
4 but less than 5............................................          4
3 but less than 4............................................          5
2 but less than 3............................................          5
Less than 2..................................................          6
------------------------------------------------------------------------

    20. Whenever a CDSL is imposed, it is deducted from each Subaccount 
of the Accounts and each Guarantee Period of the MVA Fixed Account in 
the proportion that the amount subject to the CDSL in each bears to the 
total amount subject to the CDSL. In calculating the CDSL, all amounts 
withdrawn plus all Contract Fees and CDSL are assumed to be deducted 
first from the earliest purchase payment, and then from the next 
earliest purchase payment, and so forth until all payments have been 
exhausted, satisfying the first-in/first-out method of accounting.
    21. No CDSL is assessed on amounts applied to provide an annuity or 
to pay a death benefit. Amounts withdrawn to satisfy the minimum 
distribution requirements for tax qualified plans also are not subject 
to a CDSL. In addition, no CDSL will apply to certain withdrawals if an 
Owner has elected the Nursing Home rider.
    22. In any Contract Year, an Owner may withdraw up to 10 percent of 
the Accumulated Value as of the beginning of the Contract Year without 
the assessment of any CSDL. If, in any Contract Year, the Owner 
withdraws an aggregate amount in excess of 10 percent of the 
Accumulated Value as of the beginning of the Contract Year, the excess 
amount withdrawn is subject to a CDSL, to the extent it is attributable 
to premium payments made within seven years of the date of withdrawal 
or surrender.
    23. The Companies do not anticipate that the CDSL will generate 
sufficient revenues to pay the cost of distributing the Contracts. If 
the CDSL is insufficient to cover such costs, the deficiency will be 
met from the general account assets of John Hancock Mutual or John 
Hancock Variable, as the case may be, which may include profits, if 
any, derived from the charge for mortality and expense risks.
    24. The Companies bear a mortality risk that arises from their 
contractual obligation to make annuity payments (determined in 
accordance with the guaranteed annuity tables and other provisions 
contained in the Contract) regardless of how long all Annuitants or any 
individual Annuitant may live. This undertaking assures that neither an 
Annuitant's own longevity, nor an improvement in general life 
expectancy, will adversely affect the periodic guaranteed annuity 
payments that the Annuitant will receive under the Contract. The 
Companies also incur a mortality risk inherent in the standard death 
benefit, because the benefit payable could be more than the Accumulated 
Value. The Companies assume an additional mortality risk, since no CDSL 
is imposed on the payment of the standard death benefit.
    25. The expense risk assumed by the Companies is the risk that 
their actual administrative costs will exceed the amount recovered 
through the administrative charges. The administrative services to be 
provided by the Companies, directly or through their affiliates, 
include: processing applications and issuing the Contracts, processing 
premium payments, transfers and surrenders, processing purchases and 
redemptions of fund shares, furnishing confirmations and reports, 
maintaining records, administering annuity payments, providing account 
and valuation services, and providing actuarial, financial accounting, 
regulatory and reporting services.
    26. The Companies impose a daily charge to compensate them for 
bearing mortality and expense risks in connection with the Contracts. 
This charge is equal to an effective annual rate of 0.90 percent of the 
value of the net assets in the Account, and is guaranteed not to 
increase. Of that amount, approximately 0.45 percent is attributable to 
expense risks and approximately 0.45 percent is attributable to 
mortality risks. The Companies reserve the right to revise the 
allocation of the charge between mortality and expense risks.
    27. If the administrative charges and the mortality and expense 
risk charge are insufficient to cover actual expenses and costs 
assumed, the loss will be borne by the Companies. Conversely, if the 
charges are more than sufficient, the excess will be profit to the 
Companies. The Companies currently anticipate that they will derive a 
profit from the mortality and expense risk charge.
    28. Separate monthly charges are made for the Enhanced Death 
Benefit rider, the ADB rider, and the Nursing Home rider. In each case, 
the charge for the rider is made through a pro-rata reduction in 
Accumulation Units of the Subaccounts and dollar amounts in the 
Guarantee Periods, based on relative values. The charge, made at the 
beginning of each month, is equal to the Accumulated Value at that time 
multiplied by 1/12th of the following applicable annual percentage 
rates: Enhanced Death Benefit rider, 0.15 percent; ADB rider, 0.10 
percent; Nursing Home rider, 0.05 percent. Applicants represent that 
the charges for these optional benefit riders will never exceed these 
annual rates.
    29. Just as the Companies assume a mortality risk through their 
obligation to make annuity payments and provide the standard death 
benefit, they also assume certain insurance risks associated with the 
three optional benefit riders.
    30. Under the Enhanced Death Benefit rider, the Companies assume an 
increased mortality risk because the benefit is potentially greater 
than that provided by the standard death benefits. A mortality risk 
also is assumed by the Companies under the Enhanced Death Benefit rider 
since, as under the standard death benefit, no CDSL is imposed upon the 
payment of the benefit.
    31. The Companies assume a traditional life insurance mortality 
risk under the ADB rider, and the entire amount of the benefit is 
payable from the general account assets of John Hancock Mutual or John 
Hancock Variable, as the case may be.
    32. By waiving the CDSL when an Owner becomes confined to a nursing 
home facility (as provided in the Nursing Home rider), the Companies 
assume an insurance risk to the extent that any reduced CDSL revenues 
will not be available to defray marketing expenses incurred in the 
offer and sale of the Contracts. To compensate the

[[Page 24973]]

Companies for the risk associated with this potential revenue loss, a 
charge is made in connection with the benefit provided.
    33. The charges for the Enhanced Death Benefit, ADB, and Nursing 
Home riders are designed to cover the anticipated cost of the benefits 
provided and the risks assumed, and do not include an element of 
profit.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions, from the provisions of the Act and the 
rules promulgated thereunder if, and to the extent that, such 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 Act.
    2. Section 26(a)(2)(C) provides that no payment to the depositor 
of, or principal underwriter for, a registered unit investment trust 
shall be allowed the trustee or custodian as an expense compensation, 
exceeding such reasonable amount as the Commission may prescribe, for 
performing bookkeeping and other administrative duties normally 
performed by the trustee or custodian. Section 27(c)(2) prohibits a 
registered investment company or a depositor or underwriter for such 
company from selling periodic payment plan certificates unless the 
proceeds of all payments on such certificates, other than sales loads, 
are deposited with a trustee or custodian having the qualifications 
prescribed in Section 26(a)(1), and are held by such trustee or 
custodian under an agreement containing substantially the provisions 
required by Sections 26(a)(2) and 26(a)(3) of the Act.
    3. Applicants request an order pursuant to Section 6(c) of the 1940 
Act exempting them from Sections 26(a)(2)(C) and 27(c)(2) thereof to 
the extent necessary to permit the deduction of the mortality and 
expense risk and optional benefit rider charges from the assets of the 
Account and any Future Accounts in connection with the Contracts, for 
which JHFI or certain other broker-dealer may act as distributor and 
principal underwriter.
    4. The Companies represent that the 0.90 percent mortality and 
expense charge assessed under the Contracts is/will be within the range 
of industry practice of comparable annuity products. This 
representation is/will be based upon their analysis of publicly 
available information about similar industry products, taking into 
consideration such factors as current charge levels, existence of 
charge level guarantees, guaranteed death benefits and guaranteed 
annuity rates. The Companies will maintain at their home office and 
make available to the Commission memoranda setting forth in detail the 
products analyzed in the course of, and the methology and result of, 
their comparative surveys.
    5. Applicants submit that the charges equal to an annual rate of 
0.15 percent, 0.10 percent, and 0.05 percent of the Accumulated Value, 
taken at the beginning of the Contract month, for Contracts issued with 
the Enhanced Death Benefit rider, the ADB rider, and/or the Nursing 
Home rider, respectively, are reasonable in relation to the risks 
assumed by the Companies under each of the optional benefit riders. In 
arriving at this determination, the Companies projected their expected 
costs in providing these benefits at different issue ages to determine 
the expected cost of the optional benefit riders.
    6. For the Enhanced Death Benefit rider, the Companies conducted a 
large number of trials, and hypothetical asset returns were projected 
using generally-accepted actuarial simulation methods. For each asset 
return pattern generated, hypothetical accumulated values were 
calculated by applying the projected asset returns to the initial value 
in a hypothetical account. Each accumulated value so calculated was 
compared to the amount of the Enhanced Death Benefit payable in the 
event of the hypothetical annuitant's death during the year in 
question. By analyzing the results of a statistically valid number of 
such simulations, the Companies were able, actuarially, to reasonably 
estimate the level costs of providing the benefits.
    7. For the ADB rider, a set of mortality rates was developed for 
accidental death at each attained age, based on the 1994 Statistical 
Abstract of the United States and using accepted actuarial techniques. 
A single weighted average mortality rate was then developed by applying 
the expected sales distribution by age and premium amount to the 
accidental death benefit rates derived above. This single rate was then 
converted into a reasonable charge, again using accepted actuarial 
techniques.
    8. For the Nursing Home rider, a set of probabilities of entering a 
nursing home based on the 1985 National Nursing Home Survey was 
developed for quinquenal issue ages. These probabilities were then 
applied to the amounts of insurance expected to be in force during the 
CDSL period to calculate the expected loss of CDSL for those issue 
ages. An appropriate weighted average charge for all issue ages was 
derived by applying an expected sales distribution percentage varying 
by age to the present value of the lost CDSLs using accepted actuarial 
techniques. The weighted average charge was divided by the average 
premium and the result amortized to derive a Nursing Home rider charge.
    9. Applicants note that the .30 percent aggregate amount of charges 
for the optional benefits, when added to the 0.90 percent mortality and 
expense risk charge, results in a total charge of 1.20 percent, which 
Applicants represent is within the industry range for mortality and 
expense risk charges. Applicants also state that the unbundling of 
these optional benefits provide the Owner with greater flexibility. The 
Companies will maintain at their home office and make available to the 
Commission memoranda setting forth in detail the methodology used in 
determining that each of the three above-described optional benefit 
riders is reasonable in relation to risks assumed by the Companies 
under the Contracts.
    10. Applicants acknowledge that, to the extent the mortality 
experience and unreimbursed expenses of the Companies are less than 
anticipated, the charge for mortality and expense risks may be a source 
of profit, which would increase the respective general assets of the 
Companies available to pay the distribution expenses that the Companies 
must bear. Under such circumstances, the charge for mortality and 
expense risks might be viewed as being used to pay cost related to 
distribution of the Contracts. The Companies have concluded that there 
is a reasonable likelihood that the proposed distribution financing 
arrangements will benefit the Accounts, the Future Accounts, and Owners 
of the Contracts. The basis for this conclusion will be set forth in 
memoranda maintained by the Companies at their home office and made 
available to the Commission.
    11. The Companies represent that the Account and Future Accounts 
will invest only in management investment companies which undertake, in 
the event any such company adopts a plan under Rule 12b-1 of the Act to 
finance distribution expenses, to have a board of directors, a majority 
of whom are not ``interested persons'' of the investment company (as 
defined under Section 2(a)(19) of the Act), formulate and approve any 
such plan.
    12. Applicants submit that their request for exemptive relief would 
promote competitiveness in the variable annuity contract market by 
eliminating the need for redundant exemptive

[[Page 24974]]

applications, thereby reducing the administrative expenses of 
Applicants and maximizing the efficient use of their resources. 
Applicants further submit that the delay and expense involved in having 
repeatedly to seek exemptive relief would impair their ability 
effectively to take advantage of business opportunities as they arise. 
Further, if Applicants 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.

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. 96-12387 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M