[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