[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
[[Page 24972]]
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:
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Years from date of premium payment to date of withdrawal or CDSL
surrender (percent)
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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
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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