[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24974-24976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12466]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21953; File No. 812-9796]


SAFECO Life Insurance Company, et al.

May 13, 1996.
agency: U.S. Securities and Exchange Commission (``SEC'').

action: Notice of application for approval under the Investment Company 
Act of 1940 (``1940 Act'').

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applicants: SAFECO Life Insurance Company (``SAFECO''), SAFECO Separate 
Account C (``Account C''), SAFECO Securities, Inc. (``SSI''), Princor 
Financial Services Corporation (``Princor''), and Principal Marketing 
Services, Inc. (``Principal Marketing'').

relevant 1940 act section: Section 11(a) of the 1940 Act.

summary of application: Applicants seek an order pursuant to Section 
11(a) of the 1940 Act approving the terms of an offer to exchange 
interests in certain variable annuity contracts issued by Principal 
Mutual Life Insurance Company (``Principal Mutual Contracts'') for 
variable annuity contracts issued by SAFECO (``SAFECO Contracts'').

filing date: The application was filed on October 3, 1995 and amended 
and restated on May 6, 1996.

hearing or notification of hearing: An order will be issued unless the 
SEC 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 
received by the SEC by 5:30 p.m. on June 7, 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 writer's interest, the reason for the 
request, and the issues contested. Persons who wish to be notified of a 
hearing may request notification by writing to the Secretary of the 
SEC.

addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549; Applicants: SAFECO, Account C and SSI, 15411 N.E. 51st Street, 
Redmond, Washington 98052; Princor and Principal Marketing, The 
Principal Financial Group, Des Moines, Iowa 50392-0200.

for further information contact: Edward P. Macdonald, Staff Attorney, 
or Wendy Friedlander, Deputy Chief (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. SAFECO is a stock life insurance company organized under the 
laws of the state of Washington. SAFECO is licensed to sell individual 
and group life, accident and health insurance and annuities in the 
District of Columbia and all states except New York. SAFECO is a 
wholly-owned subsidiary of SAFECO Corporation, a holding company whose 
subsidiaries are engaged primarily in insurance and financial service 
businesses.
    2. Account C is a separate account of SAFECO established pursuant 
to Washington State insurance law and registered with the SEC as a unit 
investment trust. Account C is divided into sub-accounts, each of which 
invests exclusively in one of the available portfolios of SAFECO 
Resource Series Trust or Scudder variable Life Investment Fund.
    3. SSI is a wholly-owned subsidiary of SAFECO that is registered 
with the SEC as a broker-dealer and is a member of the National 
Association of Securities Dealers, Inc. (``NASD''). SSI is the 
principal underwriter for the SAFECO Contracts.
    4. Princor, an indirect wholly-owned subsidiary of Principal Mutual 
Life Insurance Company, is registered with the SEC as a broker-dealer. 
Princor is a member of the NASD and is the principal underwriter of the 
Principal Mutual Contracts. In connection with the proposed exchange 
offer and pursuant to a selling agreement with SSI, Princor will act as 
a selling broker in the sale of the SAFECO Contracts.
    5. Principal Marketing, a wholly-owned subsidiary of Principal 
Mutual, is a licensed general insurance agent in approximately 34 
states. Principal Marketing is unaffiliated with SAFECO. Principal 
Marketing sells variable annuity and variable life insurance contracts 
of insurance companies unaffiliated with Principal Mutual, but is not 
registered as a broker-dealer with the SEC.\1\
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    \1\ Principal Marketing obtained a letter from the SEC's 
Division of Market Regulation agreeing not to seek enforcement 
action if Principal Marketing did not register as a broker-dealer 
based on certain representations including, e.g., that all such 
sales will be made by insurance agents and brokers of Principal 
Mutual who are also registered representatives of Princor and that 
Princor will be responsible for monitoring and controlling the 
activities of those registered representatives with respect to their 
sales of variable annuity and variable life insurance contracts. 
Principal Marketing Services, Inc. (pub. avail. June 2, 1988).
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The SAFECO Contracts

    6. The SAFECO Contracts are individual, flexible purchase payment, 
deferred variable annuity contracts that provide for accumulation of 
contract values and payment of monthly annuity amounts on a fixed and 
variable basis. They are designed to be used in retirement plans 
qualifying under Section 403(b) of the Internal Revenue Code of 1986, 
as amended, (``Code'') and individual retirement programs, such as 
individual retirement accounts pursuant to Section 408 of the code.
    7. Under the SAFECO Contracts a contract holder may withdraw up to 
10% of contract value per year without penalty. The SAFECO Contracts 
have a contingent deferred sales load (``CDSL'') that declines over an 
eight year period from 8% to 0% of the amount withdrawn, in excess of 
the 10% free withdrawal amount. The CDSL deducted will never exceed 
8.5% of the purchase payments made under that particular SAFECO 
Contract. A withdrawal charge of the lesser of $25 or 2% of the amount 
withdrawn will apply to each partial withdrawal after the first in any 
contract year.
    8. The SAFECO Contracts have a mortality and expense risk charge of 
1.25% of the average daily net asset value of Account C, an asset-based 
administration charge of 0.15% of the average daily net asset value of 
Account

[[Page 24975]]

C, and an annual administration fee, currently $30, which is deducted 
only if contract value is less than $50,000. The SAFECO Contracts 
reserve the right to increase the $30 administration fee to $35.
    9. A transfer charge of the lesser of $10 or 2% of the amount 
transferred applies to each transfer exceeding 12 in any contract year 
(not counting automatic transfers that take place over a period of six 
months or more).
    10. Portfolio expenses for the portfolios available under the 
SAFECO Contracts range from approximately 0.65% to approximately 1.08% 
on an annual basis. State premium taxes are deducted at annuitization 
of from purchase payments, as required by state law.

The Principal Mutual Contract

    11. The Principal Mutual Contracts are group variable annuity 
contracts issued by Separate Account B of Principal Mutual, a mutual 
life insurance company unaffiliated with SAFECO. Although the Principal 
Mutual Contracts have no fixed account investment option, they permit a 
participant to exchange the participation certificate for an associated 
fixed-dollar annuity contract issued by Principal Mutual
    12. The Principal Mutual Contracts have a CDSL that declines over a 
ten year period from 7% to 0% of the amount withdrawn. The CDSL will 
never exceed 9% of purchase payments relating to the amounts withdrawn.
    13. The Principal Mutual contracts have an administration charge of 
$25 per year for each participant plus an asset-based administrative 
charge which is 0.50% of the first $50,000 of contract value of any 
participant, divided by the total contract value of the participant. If 
purchase payments for a participant under a Principal Mutual Contract 
are made as part of a retirement plan sponsored by, or program of, a 
participant's employer and Principal Mutual receives all of that 
portion of the purchase payments under such a plan or program directed 
to annuity contracts for all employees participating in the plan or 
program, then the percentage of the asset-based administration charge 
will be computed by dividing 0.50% of the first $50,000 of contract 
value of a participant by the total contract value of all that 
employer's participants. In some cases, employers pay all or a portion 
of the administration charges for their participants.
    14. A mortality and expense risk charge of up to 2% of the assets 
of Account B may be deducted under the Principal Mutual Contracts. 
Currently the charge is 1.4965% (1.0001% for rollover individual 
retirement annuities).
    15. Although there is no transfer charge under the Principal Mutual 
Contracts, transfers are limited to two per twelve-month period, absent 
Principal Mutual's consent. State premium taxes are deducted at 
annuitization or from purchase payments, in accordance with applicable 
state law. The respective total expenses of the three investment 
companies in which Separate Account B assets are invested are .51%, 
.55%, and .60% on an annual basis.

The Proposed Exchange Offer

    16. Applicants state that Principal Mutual supports this 
application because it no longer intends to offer the Principal Mutual 
contracts. SAFECO Contracts will be offered to holders of participation 
certificates issued under Principal Mutual Contracts in connection with 
a 403(b) Plan. Any exchange pursuant to the offer will be at relative 
net asset values, i.e., immediately after the exchange, the cash value 
of a SAFECO Contract acquired will be identical to the participant's 
cash value under the Principal Mutual Contract immediately prior to the 
exchange. No administrative fee, sales charge or any other charge will 
be imposed at the time of the exchange.
    17. Surrenders of, or partial withdrawals from, a SAFECO Contract 
acquired in exchange for a Principal Mutual Contract will be subject to 
the SAFECO Contract's CDSL. In calculating the amount of the CDSL 
actually imposed in such a situation, each purchase payment made under 
the Principal Mutual Contract exchanged will be treated as if it had 
been made under the SAFECO Contract at the same time and in the same 
amount as actually made under the Principal Mutual Contract. Aggregate 
CDSL deductions upon surrender of or partial withdrawals from a SAFECO 
Contract acquired by exchange will not exceed 8.5% of the sum of the 
purchase payments made for the Principal Mutual Contract exchanged and 
the SAFECO Contract acquired.
    18. The proposed exchange offer will be conveyed to offerees by 
written materials and by telephone contact by registered 
representatives of Princor. Each offeree who expresses interest in the 
exchange offer will be mailed a prospectus for the SAFECO Contracts. 
Accompanying that prospectus will be a cover letter and sales 
literature that has been filed with the NASD. The sales literature and 
cover letter will highlight the differences between the Principal 
Mutual Contracts and the SAFECO Contracts and the terms of the exchange 
offer. Interested offerees will then be contacted again by telephone by 
registered representatives of Princor. Administrative details of 
effecting exchanges will be handled by Princor.
    19. Pursuant to the terms of a selling agreement authorizing 
Principal Marketing to solicit sales of SAFECO Contracts in connection 
with the proposed exchanges, SSI will pay Principal Marketing 3% of 
amounts exchanged (the SSI Commissions). Principal Marketing will then 
pay 1% of the amounts exchanged to the registered representatives of 
Princor responsible for the exchanges.\2\
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    \2\ In connection with other sales of SAFECO Contracts not 
included in the proposed exchange offer, Applicants state that SSI 
may pay its registered representatives or other distributors up to 
5.8% of purchase payments, excluding bonuses and overrides, in 
commissions.
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    20. Applicants represent that the exchanges will not have adverse 
tax consequences for offerees who accept the exchange offer.

Applicants' Legal Analysis

    1. Section 11(a) of the 1940 Act makes it unlawful for any 
registered open-end company, or principal underwriter for such a 
company, to make or cause to be made an offer to the holder of a 
security of such company, to exchange his security for a security in 
the same or another such company on any basis other than the relative 
net asset values of the respective securities, unless the terms of the 
offer have first been submitted to and approved by the SEC or are in 
accordance with SEC rules adopted under Section 11 of the 1940 Act.
    2. Section 11(c) of the 1940 Act requires that any offer of 
exchange of the securities of a registered unit investment trust for 
the securities of any other investment company must be approved by the 
Commission or satisfy applicable rules adopted under Section 11 of the 
1940 Act, regardless of the basis of the exchange.
    3. Applicants state that because the legislative history of Section 
11 indicates a concern with ``switching,'' \3\ applications for orders 
under Section 11(a) have focused on sales loads or sales load 
differentials and administrative fees to be imposed as a result of a 
proposed exchange.
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    \3\ ``Switching'' is the practice of inducing security holders 
of one investment company to exchange their securities for those of 
a different investment company ``solely for the purpose of exacting 
additional selling charges.'' H. Rep. 2639, 76th Cong., 3d Sess., 8 
(1940).
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    4. Rule 11a-2 permits certain types of exchange offers of one 
variable annuity

[[Page 24976]]

contract for another. Exchanges are permitted by Rule 11a-2 provided 
the only variance from relative net asset value is an administrative 
fee disclosed in the offering account's registration statement, and a 
sales load or sales load differential calculated according to methods 
prescribed in the rule.
    5. Applicants assert that the terms of the proposed exchange offer 
would satisfy all of the requirements of Rule 11a-2, except that SAFECO 
and Principal Mutual are not affiliated and Rule 11a-2 is limited by 
paragraph (b) to affiliated offerors. The proposed exchange would be 
made on the basis of relative net asset values, i.e., immediately after 
the exchange the cash value of a SAFECO Contract acquired will be 
identical to the participant's cash value under the Principal Mutual 
Contract immediately prior to the exchange. No administrative fees or 
sales load would be deducted at the time of the exchange; and any CDSL 
subsequently deducted upon surrender of, or partial withdrawal from, a 
SAFECO Contract acquired in an exchange would be calculated as if: (i) 
the contract holder of that SAFECO Contract had been a contract holder 
from the date on which he became a participant under the Principal 
Mutual Contract exchanged; and (ii) each purchase payment for the 
Principal Mutual Contract exchanged had been made under the Principal 
Mutual Contract. The total CDSL deducted under a SAFECO Contract 
acquired by exchange would not exceed 8.5% of the sum of the purchase 
payments made for the Principal Mutual Contract exchanged and the 
SAFECO Contract acquired.
    6. Applicants assert that the proposed exchange offer would be 
permitted under Rule 11a-2 if SAFECO and Principal Mutual were 
affiliated with one another. Applicants also assert that the staff of 
the SEC in a no-action letter granted to Alexander Hamilton Funds (pub. 
avail. July 20, 1994) has, in interpreting Section 11(a), stated that 
the lack of affiliation between two investment companies and their 
depositors creates fewer Section 11 concerns than the presence of 
affiliation between two investment companies and their depositors. 
Therefore, Applicants argue that the lack of affiliation between SAFECO 
and Principal Mutual does not create any additional concerns under 
Section 11 and the exchange offer would be permitted under Rule 11a-2 
were it not for their lack of affiliation.
    7. Applicants argue that while the CDSL for the SAFECO Contracts is 
nominally higher than that of the Principal Mutual Contracts for the 
first four contract years, the SAFECO Contracts permit up to 10% of 
contract value to be withdrawn without the imposition of a CDSL. 
Accordingly, the CDSL actually imposed upon a full surrender would be 
slightly greater for the SAFECO Contracts only during the first 
contract year, and even then it might be less for the SAFECO Contracts 
if investment performance were sufficient to affect the guaranteed 
maximum CDSLs of the two contracts. Moreover, the CDSL for the SAFECO 
Contracts endures for only eight years as opposed to ten years for the 
CDSL of the Principal Mutual Contracts.
    8. Applicants also argue that the expenses of the underlying 
investment company portfolios to which Principal Mutual Contract assets 
may be allocated are somewhat lower than those to which SAFECO 
Contracts assets may be allocated, but the SAFECO Contracts offer seven 
investment alternatives as compared to only three for the Principal 
Mutual Contracts. Accordingly, individuals may differ in whether they 
prefer the lower expenses of the funds available under the Principal 
Mutual Contracts or the broader range of investment options of the 
funds available under the SAFECO Contracts.
    9. Applicants state that permitting investors to evaluate the 
relative merits of the two contracts and to select the one that best 
suits their circumstances and preferences is consistent with the public 
interest and the protection of investors. Therefore, Applicants assert 
that the terms of the proposed offer of exchange do not offer any of 
the ``switching'' abuses that led to the adoption of Section 11 of the 
1940 Act and that approving the exchange offer would be consistent with 
the precedent established by the SEC's adoption of Rule 11a-2 
thereunder.

Conclusion

    For the reasons set forth above, Applicants represent that approval 
of the exchange offer 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12466 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M