[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37504-37513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18173]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22066; No. 812-9944]


The Minnesota Mutual Life Insurance Company, et al.

July 11, 1996.
AGENCY: Securities and Exchange Commission (``Commission'').

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

-----------------------------------------------------------------------

APPLICANTS: The Minnesota Mutual Life Insurance Company (``Minnesota 
Mutual''), Minnesota Mutual Variable Life Separate Account 
(``Account'') and MIMLIC Sales Corporation (``MIMLIC Sales'').

RELEVANT ACT SECTIONS: Order requested pursuant to Sections 6(c) of the 
Act, granting exemptions from Sections 2(a)(35), 22(c), 22(d), 22(e), 
26(a), 27(a), 27(c), 27(d) and 27(f) of the Act and from Rules 6e-
2(b)(1), (b)(12)(i), (b)(13)(i), (b)(13)(ii), (b)(13)(iii), (b)(13)(v), 
(b)(13)(viii), (c)(1) and (c)(4), 22c-1 and 27f-1 thereunder. Order 
also requested pursuant to Section 11 approving an exchange offer.

SUMMARY OF APPLICATION: The relief requested would permit the offer and 
sale of certain scheduled premium variable life insurance policies 
(``Policies'') that provide for: (a) a cash option death benefit; (b) a 
scheduled decrease in the initial face amount and the subsequent 
adjustment of Policies to a face amount less than the initial face 
amount; (c) deduction of cost of insurance charges not to exceed the 
charges derived from the 1980 Commissioners Standard Ordinary Mortality 
Table for purposes of calculating ``sales load''; (d) deduction of a 
federal tax charge; (e) the anticipated joint life expectancy of the 
insureds to be determined on the basis of the 1980 Commissioners 
Standard Ordinary Mortality Table for purposes of calculating the 
period over which sales load may not exceed 9 percent; (f) assessment 
of a new first year sales load upon a policy adjustment involving an 
increase in base premium, which sales load may be in addition to a 
first year sales load being taken at the time the adjustment is made; 
(g) increase in the proportionate amount of sales load deducted from 
premiums following certain policy adjustments or the payment of 
nonrepeating premiums; (h) deduction from Account assets of the 
proposed charges for the cost of insurance and the face amount 
guarantee; (i) a right to convert to a fixed benefit adjustable life 
insurance policy with a death benefit equal to the Policy's then 
current face amount and with a plan of insurance which may be less than 
for the whole of life; and (j) personal delivery to Policy owners of 
free-look right notices which contain information comparable to that 
required by Form N-27I-2. The requested relief also would approve an 
exchange offer. The relief would extend to any variable

[[Page 37505]]

life insurance policies that may be offered in the future that are 
substantially similar in all material respects to the Policies 
(``Future Policies'') that are funded by the Account or any other 
separate accounts established in the future by Minnesota Mutual 
(``Future Accounts'') and that may be offered by MIMLIC Sales or any 
other members of the National Association of Securities Dealers, Inc. 
(``NASD'') that may in the future serve as principal underwriters of 
the Policies or Future Policies (``Future Underwriters'').

FILING DATE: The application was filed on January 16, 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 August 5, 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 J. Sumner Jones, 
Esq., Jones & Blouch L.L.P., Suite 405 West, 1025 Thomas Jefferson 
Street, N.W., Washington, D.C. 20007-0805.

FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, or Wendy Friedlander, Deputy Chief, 
Office of Insurance Products (Division of Investment Management), at 
(202) 942-0670.

SUPPLEMENTARY INFORMATION: The 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. Minnesota Mutual is a mutual life insurance company organized 
under the laws of Minnesota in 1880. It is authorized to do life 
insurance business in the District of Columbia, certain Canadian 
provinces, Puerto Rico and all states of the United States except New 
York.
    2. The Account is a separate account of Minnesota Mutual 
established by its Board of Trustees on October 21, 1985, to facilitate 
the issuance of scheduled premium variable life insurance policies. 
Under Minnesota law, assets of the Account equal to the reserves and 
other Account liabilities are not chargeable with liabilities arising 
out of any other business Minnesota Mutual may conduct, and the income, 
gains and losses, realized or unrealized, of the Account are credited 
to or charged against the Account without regard to other income, gains 
or losses of Minnesota Mutual.
    3. MIMLIC Sales, an indirect wholly-owned subsidiary of Minnesota 
Mutual, is the principal underwriter for the Account. The Policies will 
be sold by life insurance agents of Minnesota Mutual who are associated 
persons of either MIMLIC Sales or other broker-dealers who have entered 
into selling agreements with MIMLIC Sales. MIMLIC Sales is registered 
as a broker-dealer under the Securities Exchange Act of 1934 and is a 
member of the NASD.
    4. Assets of the Account are invested in shares of MIMLIC Series 
Fund, Inc. (``Fund''), a diversified, management investment company 
registered under the Act. The Fund is a series company consisting of a 
number of separate portfolios. Shares of each portfolio are sold 
without a sales charge to the Account and to other separate accounts of 
Minnesota Mutual established for the purpose of funding variable 
annuity contracts and other variable life insurance policies issued by 
Minnesota Mutual.
    5. The Policies are scheduled premium variable life insurance 
policies that pay a death benefit at the death of the second to die of 
two named insureds (``second death''). The Policies permit an owner to 
select a plan of insurance based on his or her insurance needs and the 
amount of premium the owner wishes to pay. Based on the owner's 
selection of any two of three components of a Policy--face amount, 
premium and plan of insurance--Minnesota Mutual will then calculate the 
third. The owner may change the face amount and premium level, and thus 
the plan of insurance, subject to certain limitations, so long as the 
Policy remains in force.
    6. The flexibility provided by the Policies results in a broad 
range of plans of insurance. ``Plan of insurance'' refers to the level 
of cash value accumulation assumed in the design of the Policy and, for 
whole life plans, the period of coverage over which premiums are 
required to be paid. There are two general categories of plans of 
insurance--whole life plans and protection plans. Whole life plans 
contemplate an eventual cash value accumulation, at or before the 
younger insured's age 100, equal to the net single premium require for 
the face amount of insurance. Premiums may be payable for a specified 
number of years or for the joint lives of the insured. Premiums payable 
for a specified number of years will cause a Policy to become paid-up 
prior to the younger insured's age 100. At issue, the maximum plan of 
insurance permitted under the Policies for a specific face amount is 
one in which the Policy will be paid up after the payment of ten annual 
premiums. A Policy is paid-up when is Policy value is such that no 
further premiums are required to provide the face amount of coverage 
until the second death of the two insureds.
    7. Protection plans of insurance assume an eventual exhaustion of 
cash value at the end of a specified period. Under conventional 
adjustable life, insurance coverage would terminate at the end of the 
specified period. However, since premiums under the Policies are 
payable for the joint lives of two insureds, the Policies provide for a 
scheduled reduction in face amount at the end of the initial period of 
coverage to an amount which the continued payment of the scheduled 
premium will provide a whole life plan. The minimum plan of insurance 
for a specific face amount is one which will provide for no scheduled 
reduction in face amount for at least ten years, except where the age 
of the younger insured is over age 70, in which case the minimum plan 
will be less than ten years.
    8. The scheduled reduction in face amount under a protection plan 
will occur at such time as the Policy's tabular cash value, i.e., the 
cash value which is assumed in designing the Policy and which would be 
guaranteed in a conventional fixed-benefit policy, is exhausted. If, at 
the time of a scheduled reduction in face amount, the actual cash value 
with the annual premium is sufficient to provide at least one year of 
protection at the then current face amount, the Policy will be adjusted 
to preserve the current face amount. The adjustment will result in a 
scheduled decrease in the current face amount at a later Policy 
anniversary, the elimination of the scheduled decrease in face amount, 
or the shortening of the premium payment period.
    9. The Policies offer a choice of two death benefits--the ``cash 
option'' and the protection option. If neither death benefit option has 
been elected, the cash option will be in effect. The scheduled premium 
for a Policy is the same no matter which option is chosen. Under the 
cash option, the death benefit is the current face amount at the time 
of the

[[Page 37506]]

second death. The death benefit will not vary unless the Policy value 
exceeds the net single premium for the then current face amount. Under 
the protection option,the death benefit is the Policy value plus the 
greater of the then current face amount or the amount of insurance 
which could be purchased using the Policy values as a net single 
premium. The net single premium is the amount necessary to pay all 
future guaranteed cost of insurance charges for the lifetime of both 
insureds without the payment of additional premium. The protection 
option death benefit is available only until the Policy anniversary 
nearest the younger insured's age 70. At the Policy anniversary nearest 
the younger insured's age 70, the protection option is automatically 
converted to the cash option death benefit. At that time the Policy 
will be automatically adjusted so that the face amount will equal the 
death benefit in effect immediately prior to the adjustment.
    10. One of the principal benefits of an adjustable policy such as 
the Policy is that it may be adjusted on any monthly anniversary of the 
policy date to reflect the changing personal and insurance needs of the 
owner. Unlike most traditional life insurance policies, there is no 
need to exchange the Policy or to purchase an additional policy as such 
needs change. The Policies allow the owner to make four types of 
adjustment: (a) an increase or decrease in the premium; (b) an increase 
or decrease in the face amount; (c) a partial surrender; and (d) an 
adjustment to stop premium, which is an adjustment made on the 
assumption that no further base premiums will be paid. There are also 
two automatic adjustments, one at the point that the face amount is 
scheduled to decrease and the other upon the change from protection 
option death benefit to the cash option death benefit at the Policy 
anniversary nearest the younger insured's age 70.
    11. An adjustment usually will result in a change in the Policy's 
plan of insurance. Depending on the adjustment requested, for whole 
life plans the premium paying period may be lengthened or shortened or 
the plan may be changed from a whole life plan to protection plan by 
providing for a scheduled reduction in face amount at a future date. 
For Policies having a protection plan prior to an adjustment, and 
adjustment may change the Policy to a whole life plan by eliminating 
the scheduled decrease in face amount or it may change the duration of 
the plan by changing the time at which the decrease is scheduled to 
occur.
    12. If an owner requests an increase in scheduled premium, the 
adjustment will result in either an increase in face amount or an 
improvement in plan, whichever the owner selects. If the owner requests 
a decrease in scheduled premium or makes a partial withdrawal, the 
opposite results occur--a decrease in face amount or reduction in plan. 
An improvement in plan is, in the case of protection plans of 
insurance, a postponement of the time at which a reduction in face 
amount is scheduled to occur and, in the case of whole life plans, a 
reduction in the premium payment period. Elimination of a scheduled 
decrease in face amount and reduction in the premium payment period 
will occur if the improvement in plan is sufficient to convert a 
protection plan of insurance to a plan greater than whole life.
    13. Plan changes also will result from changes in face amount with 
or without changes in premium. Thus, an improvement in plan may be made 
by reducing the face amount while keeping the premium constant, and 
conversely, a reduction in plan may be made by increasing the face 
amount without a change in premium. If both face amount and premium are 
changed, the resulting plan will depend on the extent of the changes 
and whether the influence of the face amount or premium on the plan 
complements or contradicts the influence of the other. For example, if 
an owner requested a reduction in both face amount and premium, the 
effect of the reduction in face amount might more than offset the 
effect of a lower premium so as to result in an improved plan of 
insurance.
    14. The plan of insurance also will be affected by an adjustment to 
stop premium. This type of adjustment may be viewed as a decrease in 
base premium to a zero amount. In the absence of an accompanying 
request to change the face amount, and adjustment to stop premium is in 
effect a redetermination of the plan of insurance on the assumption 
that no further base premiums will be paid. In view of the contemplated 
termination of base premium payments, the resulting plan will usually 
be substantially reduced.
    15. When a Policy is adjusted, Minnesota Mutual will in effect 
reissue the Policy by computing a new plan of insurance, face amount 
and premium amount, if any. In addition, Minnesota Mutual will bring 
all Policy charges up to date, charge and credit loan interest and then 
calculate new tabular cash, actual cash and Policy values. In computing 
either a new face amount or new plan of insurance as a result of an 
adjustment, Minnesota Mutual will make the calculation on the basis of 
the higher of the Policy's Policy value or its tabular cash value at 
the time of the change. If the Policy value is higher than the tabular 
cash value, whether as the result of favorable investment performance, 
the payment of a nonrepeating premium or otherwise, a Policy adjustment 
will translate the excess value into enhanced insurance coverage in the 
form of either a higher face amount or an improved plan of insurance. 
If the Policy value is less than the tabular cash value, use of the 
tabular cash value insures that the Policy's guarantee of a minimum 
death benefit is not impaired by the adjustment.
    16. An adjustment also will result in the computation of a new 
tabular cash value. The tabular cash value after adjustment will be 
equal to the greater of the Policy value or the tabular cash value 
prior to the adjustment, plus the amount of any nonrepeating premium 
credited to the Policy and minus the amount of any partial surrender 
made at the time of the adjustment. Although the payment of a 
nonrepeating premium is not an adjustment, any such payment will be 
reflected in the tabular cash value of the Policy at issue or upon 
later adjustment. Minnesota Mutual reserves the right in its discretion 
to impose restrictions on or to refuse to permit nonrepeating premiums.
    17. The Policies provide various limitations and conditions on the 
right to make adjustments. These limitations and conditions may be 
changed in the future or additional restrictions may be imposed.
    18. Charges under the Policies are assessed against scheduled and 
nonrepeating premiums, the Policies' actual cash values and the assets 
of the Account. Premium charges vary depending on whether the premium 
is a scheduled premium or a nonrepeating premium. From scheduled 
premiums there is deducted any charge for sub-standard risks and any 
charge for additional benefits provided by rider to determine the base 
premium. From the base premium there is deducted a sales load, an 
underwriting charge, a premium tax charge and a federal tax charge.
    19. A basic sales load of 7 percent will be deducted from each 
scheduled premium and a first year sales load not to exceed 23 percent 
also may be deducted. A first year sales load will be applied only 
against base premiums scheduled to be paid in the twelve month periods 
following the Policy data, any policy adjustment involving an increase 
in base premium or any policy adjustment occurring during a

[[Page 37507]]

period when a first year sales load is being assessed. It will also 
apply only to that portion of an annual base premium necessary for an 
original issue whole life plan of insurance. For base premiums greater 
than this whole life premium, the amount of the base premium in excess 
of the original issue whole life base premium will be subject only to 
the 7 percent basic sales load. In computing the first year sales load 
following a policy adjustment involving an increase in base premium, 
the charge will be applied only to the amount of the increase in base 
premium. However, if an adjustment occurs during a period when a first 
year sales load is being taken, the uncollected portion of such sales 
load--determined on the basis of the lesser of the base premium in 
effect prior to, or following, the adjustment--will also be assessed 
during the twelve month period following the adjustment. All of the 
sales load charges are designed to average not more than 9 percent of 
the base premiums over the lesser of: (a) the joint life expectancy of 
the insureds at policy issue or adjustment; (b) fifteen years from 
policy issue or adjustment; or (c) the premium paying period. 
Compliance with the 9 percent ceiling will be achieved by reducing the 
amount of the first year sales load, if necessary.
    20. An underwriting charge currently in an amount not in excess of 
$10 per $1,000 of face amount of insurance will be deducted ratably 
from the premiums scheduled to be made during the first Policy year and 
during the twelve month period following certain policy adjustments. In 
the event of a policy adjustment which results in a face amount 
increase and no base premium, the Policy owner must remit the 
underwriting charge to Minnesota Mutual prior to the effective date of 
the adjustment or it will be assessed against the Policy's actual cash 
value as a transaction charge. The specific amount of the charge may 
vary depending on the ages of the insureds and the premium level for a 
given amount of insurance. The underwriting charge is designed to 
compensate Minnesota Mutual for the administrative costs associated 
with issuing and adjusting Policies, including the cost of processing 
applications and adjustment requests, conducting medical examinations, 
classifying risks, determining insurability and risk class and 
establishing or modifying Policy records. Although the charge is not 
expected to be a source of profit to Minnesota Mutual, the amount of 
the charge is not guaranteed so that on adjustment the then current 
underwriting charge will apply to any increase in face amount which 
requires new evidence of insurability.
    21. A premium tax charge of 2.5 percent of each base premium will 
be deducted to cover the aggregate premium taxes payable by Minnesota 
Mutual to state and local governments for the Policies. The premium tax 
charge is not guaranteed and may be increased in the future, but only 
as necessary to cover premium tax expenses. Also, a federal tax charge 
of 1.25 percent of each base premium will be deducted to cover a 
federal tax related to premium payments. The federal tax charge is not 
guaranteed and may be increased in the future, but only as necessary to 
cover the federal tax related to premium payments.
    22. Nonrepeating premiums will be subject only to the basic sales 
load of 7 percent, the 2.5 percent premium tax charge and the 1.25 
percent federal tax charge. No underwriting charge will be assessed. 
Minnesota Mutual intends initially to waive the assessment of any sales 
charge against nonrepeating premiums, but reserves the right to impose 
the sales charge at a later date.
    23. In addition to deductions from premiums, Minnesota Mutual 
deducts certain charges from a Policy's actual cash value, namely, an 
administration charge, a face amount guarantee charge, a cost of 
insurance charge and certain charges for specific Policy transactions. 
The administration charge is guaranteed not to exceed $15 per month and 
is currently set at $10 per month. It is designed to cover certain 
administrative expenses, including those attributable to maintaining 
Policy records. The charge is not expected to be a source of profit to 
Minnesota Mutual. The face amount guarantee charge is guaranteed not to 
exceed 3 cents per thousand dollars of face amount per month and is 
currently set at 2 cents per thousand. The charge is designed to 
compensate Minnesota Mutual for its guarantee that the death benefit 
under the Policy will always be at least equal to the current face 
amount in effect at the time of the second death regardless of the 
investment performance of the sub-accounts in which net premiums have 
been invested. The cost of insurance charge compensates Minnesota 
Mutual for providing the death benefit under a Policy. The charge is 
calculated by multiplying the net amount at risk under a Policy by a 
rate which is based on the age, gender, risk class and the smoking 
habits of each insured. The rate also reflects the plan of insurance 
and any policy adjustments since issue. The rate cannot exceed the 
maximum charges for mortality derived from the 1980 Commissioners 
Standard Ordinary Mortality Table. The transaction charges consist of a 
$95 charge for each policy adjustment, except for adjustments involving 
only partial withdrawals when the charge will be the lesser of $95 or 2 
percent of the amount withdrawn, and a charge of up to $25 for each 
transfer of actual cash value among the guaranteed principal account 
and sub-accounts of the Account. Initially, the charge will be $10 for 
non-systematic transfers in excess of four per year. Establishing a 
systematic transfer program will be deemed to be a non-systematic 
transfer for purposes of determining the transfer charge. The above 
charges and restrictions will not apply to a transfer of all of the 
Policy value to the guaranteed principal account as a conversion 
privilege.
    24. The administration, face amount guarantee and cost of insurance 
charges are deducted from a Policy's actual cash value on the same day 
each month as the Policy issue date. Such charges are also deducted on 
the occurrence of the second death, a surrender, lapse or policy 
adjustment. Transaction charges are assessed against the actual cash 
value of a Policy at the time of a policy adjustment or when a transfer 
is made. In the case of a transfer, the charge is assessed against the 
amount transferred.
    25. The Policies also provide for charges against Account assets. 
Minnesota Mutual will deduct a mortality and expense risk charge on 
each valuation date at an annual rate of .50 percent of the Account's 
assets. In addition, Minnesota Mutual reserves the right to charge or 
make provision for any taxes payable by it with respect to the Account 
or the Policies by a charge or adjustment to Account assets.
    26. The Policies provide for a ``free look'' right, which is 
available not only following issuance of the Policy, but also following 
any policy adjustments involving an increase in base premium. The owner 
may return his or her Policy to Minnesota Mutual or its agent by the 
later of: (a) 45 days after execution of the application or request for 
adjustment; (b) 10 days after receipt of the Policy or adjusted Policy 
from Minnesota Mutual; or (c) 10 days after Minnesota Mutual's mailing 
or delivery of a notice describing the right of withdrawal. On return 
of the Policy after issue, all premiums paid will be refunded. On 
return of an adjusted Policy, the requested adjustment, including the 
$95 transaction charge assessed for the adjustment, will be canceled 
and any increase in premium paid will be refunded.
    27. The Policy contains no specific provision for conversion to a 
fixed

[[Page 37508]]

benefit policy as contemplated by paragraph (b)(13)(v)(B) of Rule 6e-2; 
however, fixed insurance coverage providing the benefits contemplated 
by that paragraph may be obtained by transferring all of the Policy 
value, and allocating all premiums, to the guaranteed principal 
account. So long as both insureds are alive, the owner of a Policy may 
ask to exchange the Policy for two individual policies insuring each of 
the insureds separately. Minnesota Mutual will require evidence of 
insurability to make the exchange. The two new policies will be issued 
on a variable or fixed benefit basis using a policy form in use on the 
date of the exchange; each new policy will have one-half of the death 
benefit, cash value and loan, if any, of the Policy being exchanged.

Applicants' Legal Analysis

Non-Variable Death Benefit

    1. Under the Policies the actual cash value will vary with the 
investment performance of the sub-accounts selected by the owner so 
long as the Policy has not been surrendered or lapsed. The death 
benefit also will vary with such investment performance if the owner 
has selected the protection option. All Policies permit the owner to 
select the protection option at the time of purchase or to subsequently 
change to the protection option provided there is satisfactory evidence 
of the insured's insurability. However, the protection option is 
available only until the Policy anniversary nearest the younger 
insured's age 70; at that anniversary the death benefit option will be 
changed to the cash option. Whenever the cash option death benefit is 
in effect under a Policy, that Policy will fail to satisfy the 
conditions of clause (i) of the definition of variable life insurance 
contract and clause (i) of Rule 6e-2(b)(12) unless and until the Policy 
value exceeds the net single premium for the then current face amount. 
Applicants request exemptions from Sections 22(c), 22(d), 22(e) and 
27(c)(1) of the Act, Rule 22c-1 and paragraphs (b)(12)(i) and (c)(1)(i) 
of Rule 6e-2 to the extent necessary to permit provision in the 
Policies for the cash option death benefit.
    2. Applicants submit that no purpose would be served in prohibiting 
the cash option death benefit under the Policies or the required change 
to the cash option death benefit at the younger insured's age 70. 
Except for the amount of the death benefit and the cost of insurance 
charges which reflect the amount at risk, a Policy with the cash option 
death benefit will operate in the same manner as one with the 
protection option in effect. The cash option death benefit may be 
viewed by some Policy owners as preferable, because the amounts at risk 
under the Policy will be smaller than under the protection option; as a 
result, the cost of insurance will be less, thereby permitting a more 
rapid increase in the actual cash value of the Policy. Applicants 
believe that a purchaser of a variable life insurance policy should not 
be compelled to have a death benefit which varies with the investment 
performance of the separate account. Further, prohibiting the change in 
death benefit to the cash option would preclude Minnesota Mutual's 
offering certain plans of insurance with the protection option, because 
the large amounts at risk in relation to the Policy values that may 
exist at older ages under the protection option are incompatible with 
the amount at risk to Policy value ratios contemplated, and inherent in 
the Policy's guarantees, for certain plans of insurance, including 
whole life plans.

Change in Face Amount

    3. Although all Policies provide for a guaranteed death benefit at 
least equal to the initial face amount, any Policy with a protection 
plan of insurance will provide for a scheduled reduction in face amount 
at the end of the initial term. Moreover, any Policy, including a 
Policy with a whole life plan of insurance, may be adjusted to a new 
face amount, which may be less than the initial face amount, and the 
death benefit guarantee will thereafter be applicable to the face 
amount as adjusted. Applicants request exemption from clause (ii) of 
Rule 6e-2(c)(1) to the extent necessary to permit the issuance of 
Policies with a scheduled decrease in the initial face amount, and the 
subsequent adjustment of Policies to a face amount less than the 
initial face amount.
    4. Applicants submit that there are no policy reasons for not 
permitting scheduled reductions in face amount. Policies with such 
reductions will require smaller premium payments than comparable whole 
life Policies, and therefore may be more affordable to many purchasers, 
particularly younger persons who may not have reached their maximum 
earnings potential at a time when their insurance needs may be 
greatest. The scheduled reduction in face amount will be fully 
disclosed so that a Policy owner may understand the nature of the 
insurance coverage provided by his or her Policy. Finally, the amount 
of reduced insurance is guaranteed regardless of the investment 
performance of the sub-accounts selected by the owner, so that the 
death benefit guarantee, although changed in amount, will continue 
until the second death.
    5. Exemptive relief from clause (ii) of Rule 6e-2(c)(1) is also 
required to permit owners to adjust their Policies subsequent to issue, 
which adjustments may decrease the face amount of insurance. Applicants 
submit that it is in the best interests of purchasers of the Policies 
that they have the flexibility to increase or decrease the face amount 
of coverage of their Policies in light of their current insurance needs 
and economic circumstances. Since, in computing a new face amount, 
premium or plan in connection with an adjustment, Minnesota Mutual will 
use the greater of the Policy's then Policy value or its tabular cash 
value, the adjustment will not impair the face amount guarantee 
previously in effect.

Cost of Insurance Based on 1980 Commissioners Standard Ordinary 
Mortality Table (``1980 Table'')

    6. In defining sales load, paragraph (c)(4) of Rule 6e-2 permits 
the exclusion of the cost of insurance based on the 1958 Commissioners 
Standard Ordinary Mortality Table (``1958 Table'') and the assumed 
investment rate specified in the contract. Under the Policies, the cost 
of insurance is guaranteed not to exceed the maximum charges for 
mortality derived from the 1980 Table. Applicants request exemption 
from Sections 2(a)(35) and 27(a)(1) of the Act and paragraphs (b)(1), 
(b)(13)(i) and (c)(4) of Rule 6e-2 to the extent necessary to permit 
the deduction of cost of insurance charges not to exceed the charges 
derived from the 1980 Table for purposes of calculating ``sales load.''
    7. The 1980 Table reflects more current mortality experience. 
Moreover, except for young male insureds at certain ages, the table 
provides for lower cost of insurance charges. If Minnesota Mutual were 
to compute sales load on the basis of cost of insurance charges derived 
from the 1958 Table, it would be able to increase the amount of the 
gross premiums under most of the Policies it issues and to treat the 
increase as attributable to cost of insurance when in fact such would 
not be the case.

Deduction of Proposed Federal Tax Charge

    8. Applicants requests an exemption from the provisions of Sections 
2(a)(35), 27(a)(1) and 27(c)(2) of the Act an paragraphs (b)(1), 
(b)(13)(i) and (c)(4) of Rule 6e-2 to the extent necessary to permit 
deductions to be made from premium payments received under the Policies 
in an amount that is reasonable in relation to Minnesota Mutual's

[[Page 37509]]

increased federal income tax burden related to the receipt of such 
premiums and to treat such deductions as other than ``sales load'' for 
the purposes of the Act and Rule 6e-2.
    9. The Policies provide for a deduction of a federal tax charge 
from each premium payment, including nonrepeating premiums. The current 
charge proposed to be deducted is 1.25 percent of the premium. 
Minnesota Mutual may increase the federal tax charge, but only to the 
extent necessary to cover the federal tax related to premium payments. 
Applicants submit that the proposed deduction to cover such charges is 
akin to a state premium tax charge in that it is an appropriate charge 
related to Minnesota Mutual's tax burden attributable to premiums 
received and therefore that the proposed deduction be treated as other 
than sales load, as is a state premium tax charge, for purposes of the 
Act.
    10. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA 
1990''), Congress amended the Internal Revenue Code of 1986 (``Code'') 
by, among other things, enacting Section 848 thereof, Section 848 
requires an insurance company to capitalize and amortize over a period 
of ten years part of the company's general expenses for the current 
year. Under prior law, these general expenses were deductible in full 
from the current year's gross income. The effect of Section 848 is to 
accelerate the realization of income from insurance contracts covered 
by that section and, accordingly, the payment of taxes on the income 
generated by those contracts. The amount of general deductions that 
must be capitalized and amortized over ten years, rather than deducted 
in the year incurred, is based solely upon ``net premiums'' received in 
connection with certain types of insurance contracts. The Policies fall 
into the category of life insurance contracts, and under Section 848, 
7.7 percent of the year's net premiums received must be capitalized and 
amortized.
    11. The increased tax burden on Minnesota Mutual resulting from 
Section 848 may be quantified as follows. For each $10,000 of net 
scheduled premiums received by Minnesota Mutual under the Policies in a 
given year, Section 848 requires Minnesota Mutual to capitalize $770 
(7.7 percent of $10,000) and $38.50 of this $770 may be deducted in the 
current year. This leaves $731.50 ($770 minus $38.50) subject to 
taxation at the corporate tax rate of 35 percent, which results in 
Minnesota Mutual owing $256.03 (.35 x $731.50) more in taxes for the 
current year than would have been owed by Minnesota Mutual prior to 
OBRA 1990. This current increase in federal income tax will be 
partially offset by deductions that will be allowed during the next ten 
years as a result of amortizing the remainder of the $731.50 ($77 in 
each of the following nine years and $38.50 in year ten).
    12. In the business judgment of Minnesota Mutual, a discount rate 
of at least 10 percent is appropriate for use in calculating the 
present value of Minnesota Mutual's future tax deductions resulting 
from the amortization described above. Minnesota Mutual seeks an after 
tax rate of return on the investment of its surplus of 10 percent. To 
the extent that surplus must be used by Minnesota Mutual to meet its 
increased federal tax burden under Section 848 resulting from the 
receipt of premiums, such surplus is not available to Minnesota Mutual 
for investment. Thus, the cost of ``capital'' used to satisfy Minnesota 
Mutual's increased federal income tax burden under Section 848 is, in 
essence, Minnesota Mutual's after-tax rate of return on surplus.
    13. In determining the after-tax rate of return used in arriving at 
the 10 percent discount rate, Minnesota Mutual considered a number of 
factors, including market interest rates, Minnesota Mutual's 
anticipated long-term growth rate, the risk level for this type of 
business that is acceptable to Minnesota Mutual, inflation, and 
available information about the rates of return obtained by other 
mutual life insurance companies. Minnesota Mutual represents that these 
factors are appropriate factors to consider in determining its cost of 
capital. Minnesota Mutual first projects its future growth rate based 
on sales projections, current interest rates, the inflation rate, and 
the amount of surplus that it can provide to support such growth. It 
then uses the anticipated growth rate and the other factors cited above 
to set a rate of return on surplus that equals or exceeds this rate of 
growth. Of these other factors, market interest rates, the acceptable 
risk level and the inflation rate receive significantly more weight 
than information about the rates of return obtained by other companies.
    14. Minnesota Mutual seeks to maintain a ratio of surplus to assets 
that it establishes based on its judgment of the risks represented by 
various components of its assets and liabilities. Consequently, 
Minnesota Mutual's surplus must grow at least at the same rate as its 
assets. On the basis of the foregoing, Applicants submit that Minnesota 
Mutual's after-tax rate of return on surplus is appropriate for use in 
the present value calculation of future tax benefits. Minnesota Mutual 
undertakes to monitor the tax burden imposed on it and to reduce the 
federal tax charge to the extent of any significant decrease in the tax 
burden.
    15. If a corporate federal income tax rate of 35 percent and a 
discount rate of 10 percent are used, the present value of the federal 
income tax effect of the increased deductions allowable in the 
following ten years, which partially offsets the increased federal 
income tax burden is $160.40. The effect of Section 848 on Minnesota 
Mutual in connection with the Policies is, therefore, an increased 
federal income tax burden with a present value of $95.63 for each 
$10,000 of net premiums, i.e., $256.03 minus $160.40. Federal income 
taxes are not deductible in computing Minnesota Mutual's federal income 
taxes. To compensate Minnesota Mutual fully for the impact of Section 
848, therefore, it would be necessary to allow Minnesota Mutual to 
impose an additional charge that would compensate it not only for the 
$95.43 additional federal income tax burden attributable to Section 848 
but also for the federal income tax on the additional $95.43 itself. 
This federal income tax can be determined by dividing $95.43 by the 
complement of the 35 percent federal corporate income tax rate, i.e., 
65 percent, resulting in an additional charge of $147.12 for each 
$10,000 of net premiums, or 1.47 percent.
    16. Based on prior experience, Minnesota Mutual expects that all of 
its current and future deductions will be fully taken. It is Minnesota 
Mutual's judgment that a charge of 1.25 percent would reimburse 
Minnesota Mutual in part for the impact of Section 848 on Minnesota 
Mutual's federal income tax liabilities. The charge to be deducted by 
Minnesota Mutual is reasonably related to Minnesota Mutual's increased 
federal income tax burden under Section 848, taking into account the 
benefit to Minnesota Mutual of the amortization permitted by Section 
848 and the use by Minnesota Mutual of a discount rate of 10 percent in 
computing the future deductions resulting from such amortization.
    17. While Minnesota Mutual believes that a charge of 1.25 percent 
of premiums would reimburse it in part for the impact of Section 848 as 
currently written on Minnesota Mutual's federal income tax liabilities, 
Minnesota Mutual also believes that it may have to increase this charge 
either to recover in full the impact of Section 848 as presently 
written or to recover any increased federal income tax burden resulting 
from a future change in

[[Page 37510]]

Section 848, or the interpretation thereof, or any successor or related 
provisions. Such an increase could result from, among other things, a 
change in the corporate federal income tax rate, a change in the 7.7 
percent figure, or a change in the amortization period. Accordingly, 
Minnesota Mutual has reserved the right to increase the federal tax 
charge to the extent necessary to cover the federal tax related to 
premium payments.
    18. The requested exemptions are necessary in connection with 
Applicants' reliance on certain provision of Rule 6e-2(b)(13), 
particularly paragraph (b)(13)(i), which provides as here pertinent an 
exemption from Section 27(a)(1). Issuers and their affiliates may rely 
on Rule 6e-2(b)(13)(i) only if they meet the Rule's limitations on 
``sales load'' as defined in Rule 6e-2(c)(4). Depending upon the load 
structure of a particular Policy, these limitations may not be met if 
the deduction for the increase in Minnesota Mutual's federal tax burden 
is included in sales load. Although a deduction for an insurance 
company's increased federal tax burden does not fall squarely within 
any of the specified charges or other amounts which are excluded from 
the definition of sales load in Rule 6e-2(c)(4), applicants have found 
no public policy reasons for including them in ``sales load.''
    19. The public policy that underlies Rule 6e-2(b)(13)(i), like that 
which underlies Section 27(a)(1) of the Act, is to prevent excessive 
sales loads from being charged in connection with the sale of periodic 
payment plan certificates. Applicants submit that the treatment of a 
federal income tax charge attributable to premium payments as sales 
load would not in any way further this legislative purpose because such 
a deduction has no relation to the payment of sales commissions or 
other distribution expenses. Applicants assert that the Commission 
appears to have concurred with this rationale by excluding deductions 
for state premium taxes from the definition of sales load in Rule 6e-
2(c)(4). The source for the definition of sales load found in the Rule 
supports this analysis. The Commission's intent in adopting paragraph 
(c)(4) of rule 6e-2 was to tailor the general terms of Section 2(a)(35) 
of the Act to variable life insurance contracts. Section 2(a)(35) 
excludes deductions from premiums for ``issue taxes'' from the 
definition of sales load in the Act. This suggests, Applicants argue, 
that it is consistent with the policies of the Act to exclude from the 
definition of sales load in Rule 6e-2(c)(4) deductions made to pay an 
insurance company's costs attributable to its tax obligations. Section 
2(a)(35) also excludes administrative expenses or fees that are ``not 
properly chargeable to sales or promotional activities.'' This suggests 
that the only deductions intended to fall within the definition of 
sales load are those that are properly chargeable to such activities. 
Because the proposed deductions will be used to compensate Minnesota 
Mutual for its increased federal income tax burden attributable to the 
receipt of premiums, and are not properly chargeable to sales or 
promotional activities, the deductions should not be treated as sales 
load for purposes of the Act and Rule 6e-2.
    20. Applicants agree that if the requested order is granted, such 
order may be expressly conditioned on Applicants' compliance with the 
following undertakings:
    (a) Minnesota Mutual will monitor the federal tax burden 
attributable to its receipt of premiums under the Policies and will 
reduce the federal tax charge to the extent of any significant decrease 
in the tax burden;
    (b) the registration statement for the Policies will: (1) disclose 
the federal tax charge; (2) explain the purpose of the charge; and (3) 
state that the charge is reasonable in relation to Minnesota Mutual's 
increased federal income tax burden under Section 848 of the Code 
resulting from the receipt of premiums; and
    (c) the registration statement for the Policies will contain as an 
exhibit an actuarial opinion as to: (1) the reasonableness of the 
charge in relation to Minnesota Mutual's increased federal income tax 
burden under Section 848 resulting from the receipt of premiums; (2) 
the reasonableness of the after-tax rate of return that is used in 
calculating such charge and the relationship that such charge has to 
Minnesota Mutual's cost of capital; and (3) the appropriateness of the 
factors taken into account by Minnesota Mutual in determining the 
after-tax rate of return.

Anticipated Life Expectancy Based on 1980 Table

    21. Under the Policies, there is a basic sales load of seven 
percent and a first year sales load of up to 23 percent. The first year 
sales load is adjusted so that all sales load charges will average not 
more than nine percent of the base premiums scheduled to be paid over 
the lesser of: (a) 15 years from the date of Policy issue or 
adjustment; or (b) the anticipated joint life expectancy of the 
insureds at Policy issue or adjustment based on the 1980 Table. Since 
longevity is generally greater under the 1980 Table, the period for 
compliance with the nine percent sales load limitation contained in the 
Policies could be longer than the period contemplated by paragraph 
(b)(13)(i). Applicants request exemption from Section 27(a)(1) of the 
Act and paragraph (b)(13)(i) of Rule 6e-2 to the extent necessary to 
permit the anticipated joint life expectancy of the insureds to be 
determined on the basis of the 1980 Table for purposes of calculating 
the period over which sales loads may not exceed 9 percent.
    22. The Policies have been designed on the basis of the 1980 Table 
for all purposes. Presumably, the purpose of the life expectancy 
provision in paragraph (b)(13)(i) of the Rule is to provide a realistic 
limitation on the number of payments that can reasonably be anticipated 
under a scheduled premium contract issued for an older insured. 
Applicants submit that the more current 1980 Table is appropriate for 
this purpose.

First Year Sales Load on Policy Adjustments

    23. Applicants propose to assess a new first year sales load upon 
any adjustment of a Policy involving an increase in the base premium 
and to continue to assess a first year sales load if an adjustment is 
made during a period when a first year sales load is currently being 
taken. A policy adjustment is essentially the issuance of a new Policy 
in exchange for an old Policy with the higher of the tabular cash value 
or the Policy value of the old Policy being transferred to the new 
Policy at no load except for a charge of $95 (the lesser of $95 or 2 
percent in the case of a partial withdrawal) to cover administrative 
expenses associated with the reissue.
    24. If a policy adjustment is reviewed as an exchange, the exchange 
would be permitted under the terms of Rule 11a-2 under the Act, and a 
new first year sales load could be assessed without need for exemptive 
relief. However, since an adjustment is made in accordance with the 
terms of the Policies, the adjusted Policy could be viewed as a 
continuation of the old Policy, and a new first year sales load 
assessed as a result of an adjustment involving an increase in base 
premium might result in the aggregate sales loads exceeding nine 
percent if the 20 year period in which to comply with the nine percent 
ceiling were measured from the date of issue as opposed to the date of 
adjustment. In order to resolve the uncertainty of whether, for sales 
load purposes, an adjustment can be viewed as an exchange, Applicants 
request exemption from Section 27(a)(1)

[[Page 37511]]

of the Act and Rule 6e-2(b)(13)(i) to the extent necessary to permit 
the assessment of a new first year sales load upon an adjustment of a 
Policy involving an increase in base premium, which sales load may be 
in addition to a first year sales load being taken at the time the 
adjustment is made.
    25. Applicants submit that collection of a new first year sales 
load upon an adjustment involving an increase in base premium is 
appropriate in view of the fact that such an adjustment is not expected 
to occur in typical cases without substantial sales effort for which 
first year sales compensation from Minnesota Mutual will be required. 
Applicants assert that, in adopting Rule 6e-3(T) under the Act, the 
commission appears to have recognized that a first year sales load 
should be allowed for an increase in face amount provided the free look 
and conversion rights applicable upon issuance of a contract are 
available for the incremental insurance coverage. Applicants submit 
that under the Policies an improvement in plan is comparable to an 
increase in face amount and that a new first year sales load is 
appropriate regardless of the form in which the enhanced insurance 
coverage resulting from the increase in premium is taken. The terms of 
the Policies permit an owner to obtain at any time the equivalent of a 
fixed dollar adjustable life insurance policy, and Minnesota Mutual 
will provide a free look right with respect to any adjustment involving 
an increase in base premium.
    26. Applicants further submit that the continued assessment of an 
existing first year sales load in addition to a new first year sales 
load is appropriate in the circumstances where it arises. If an 
adjustment is made when a first year sales load is being taken--during 
the twelve month period following issuance of the Policy or a prior 
policy adjustment--the uncollected portion of such sales load will be 
assessed during the twelve month period following the adjustment. The 
continued assessment of such first year sales load is warranted in this 
circumstance as it permits Minnesota Mutual to recover as a sales load 
no more than what it would have received had the adjustment not 
occurred. Where the adjustment made is one resulting in an increase in 
base premium, the only change in the first year sales load applicable 
to the base premium previously in effect is that its assessment is made 
over a new twelve month period. Assessing the uncollected portion of 
the first year sales load applicable to the premium previously in 
effect over a new twelve month period is to the advantage of the Policy 
owner because it results in a greater portion of the base premium being 
available for investment and an earlier increase in Policy value.
    27. Where an adjustment results in the assessment of a new first 
year sales load or the continued assessment of an existing first year 
sales load, the aggregate sales loads thereafter will not exceed nine 
percent of the base premiums scheduled to be made over the lesser of 15 
years, the premium paying period or the anticipated joint life 
expectancy of the insureds. Moreover, the aggregate sales loads 
assessed under the Policies will not exceed the sum of the sales loads 
that would have been assessed if the increase in face amount or 
improvement in plan of insurance resulting from the increase in premium 
were provided under a separate Policy. Applicants submit that the 
proposed sales load pattern is consistent with the purposes of Section 
27(a)(1) of the Act and Rule 6e-(b)(13)(i).

Increase in Proportionate Amount of Sales Load After Policy Adjustments 
or Payment of Nonrepeating Premiums

    28. As noted above, Applicants propose to impose a new first year 
sales load whenever the owner of a Policy requests an adjustment 
involving an increase in base premium. The collection of a new first 
year sales load against the increase in the base premium will result in 
an increase in the percentage sales load deducted from the total base 
premium in violation of the Act and Rule, except in the unusual 
circumstance where a sales load in the same proportionate amount was 
deducted from the immediately preceding payment. An increase in the 
percentage sales load deducted from the total base premium also may 
occur as a result of the payment of a nonrepeating premium or a policy 
adjustment involving a decrease in premium. For example, if the 7 
percent basic sales load were to be deducted from the nonrepeating 
premium, the payment of such a premium during the first year following 
issuance of the Policy or a policy adjustment would result in an 
increase in percentage sales load, since the nonrepeating premium would 
be subject only to the basic sales load of 7 percent while the next 
scheduled premium would be subject to a new first year sales load. If, 
at the time of payment of the nonrepeating premium, the waiver of the 
basic sales charge, presently contemplated, were in effect, the payment 
of such premium at any time would result in an increase in the 
percentage sales load, since the next scheduled payment would be 
subject to a sales load. Finally, an adjustment during the first Policy 
year which reduces the amount of the premium from a greater than whole 
life premium will result in an increase in percentage sales load, since 
the portion of any premium in excess of the whole life premium is 
subject to the basic sales load only. Applicants request exemption from 
Section 27(a)(3) of the Act and paragraph (b)(13)(ii) of Rule 6e-2 to 
the extent necessary to permit increases in the proportionate amount of 
sales load deducted from premiums following certain policy adjustments 
or the payment of nonrepeating premiums.
    29. The reasons for allowing a new first year sales load following 
policy adjustments involving an increase in base premium apply also to 
this requested ``stair-step'' relief. Applicants assert that exemptive 
relief to permit an increase in percentage sales load after the payment 
of a nonrepeating premium is appropriate in order to encourage the 
payment of such premiums and to avoid assessing a sales load in excess 
of the charge Minnesota Mutual considers necessary to provide for its 
anticipated sales expenses. Similarly, exemptive relief to permit a 
percentage increase in sales load upon a reduction in premium under 
plans which are greater than whole life is justified by the advantage 
to Policy owners in having a sales load schedule in which the first 
year sales load is confined to the whole life premium. Applicants 
submit that it is not in the interest of investors to require the 
imposition of sales loads in excess of those deemed necessary by 
investment companies and their sponsors.

Deduction of Charges From Account Assets

    30. Applicants propose to deduct certain charges from assets of the 
Account other than for administrative services, such as charges for the 
cost of insurance and charges for the face amount guarantee. Applicants 
request exemption from Sections 26(a) (1) and (2) and 27(c)(2) of the 
Act and paragraph (b)(13)(iii) of Rule 6e-2 to the extent necessary to 
permit the deduction from Account assets of the charges it proposes to 
make under the Policies for the cost of insurance and the face amount 
guarantee.
    31. Applicants argue that the Commission appears to have recognized 
the appropriateness of deducting cost of insurance charges and charges 
for guaranteed death benefit risks from separate account assets. 
Paragraphs (b)(13)(iii) (E) and (F) of Rule 6e-3(T) provide exemptive 
relief to permit the

[[Page 37512]]

deduction of cost of insurance charges and charges for guaranteed death 
benefit risks, respectively, for flexible premium variable life 
policies, and the Commission's proposed amendments to Rule 6e-2 would 
also expressly provide such relief. Here, Minnesota Mutual's charge for 
the cost of insurance is in an amount not in excess of the cost of 
insurance derived from the 1980 Table, and its charge for the face 
amount guarantee at a maximum rate of 3 cents per thousand dollars of 
face amount per month, a charge for the risks associated with the 
guaranteed death benefit, is reasonable in light of the risks assumed. 
Minnesota Mutual has prepared a memorandum setting forth the basis for 
its conclusion as to the face amount guarantee charge, including the 
methodology it used to support that conclusion, which is based on an 
analysis of the pricing structure of the Policies and an analysis of 
the various risks associated with the Policies, including the special 
risks arising from the ability to adjust a Policy using the higher of 
its tabular cash value and the Policy value. Minnesota Mutual will keep 
and make available to the Commission upon request a copy of such 
memorandum. Minnesota Mutual also represents that the sales charges 
under the Policies are excepted to cover the costs of distributing the 
Policies.

Conversion to Fixed Benefit Adjustable Life Policy

    32. A principal feature of the Policies is that the initial face 
amount of insurance may change either automatically or at the 
initiative of the Policy owner. As has been noted, Policies may be 
issued with a scheduled reduction in face amount. They may also be 
issued with a scheduled increase in face amount if they are projected 
to become paid-up on a date other than a Policy anniversary. In 
addition, when a Policy becomes paid-up, Minnesota Mutual will 
determine a new face amount, which will be at least equal to the face 
amount previously in effect. Finally, an owner may increase or decrease 
the face amount of a Policy, subject to certain limitations, as part of 
a Policy adjustment, and a change in face amount will occur in 
connection with the automatic conversion from the protection option 
death benefit to the cash option death benefit at the Policy 
anniversary nearest the younger insured's age 70.
    33. Applicants assert that the conversion right required by the 
Rule is satisfied by the owner's right under the Policy to transfer all 
of the Policy value to the guaranteed principal account without charge, 
and to thereafter allocate all new premiums to the guaranteed principal 
account. Since a Policy, the benefits of which are based exclusively on 
the guaranteed principal account, may have a plan of insurance other 
than for the whole life, and have a face amount at the time the owner 
exercises this ``conversion'' right either greater or less than the 
initial face amount of the Policy, the conversion right provided by the 
Policies may not satisfy the requirements of paragraph (b)(13)(v)(B). 
Applicants request exemption from Section 27(d) of the Act and 
paragraph (b)(13)(v)(B) of Rule 6e-2 to the extent necessary to permit 
the conversion right provided by the Policies to have a death benefit 
equal to the Policy's then current face amount and a plan of insurance 
which may be less than for the whole of life.
    34. The conversion right to the Policies in essence provides a 
Policy owner with the right to obtain fixed benefit coverage that most 
closely corresponds to the owner's then current variable life insurance 
coverage. This right is not confined to the two year period 
contemplated by the Rule, but is available so long as a Policy is in 
force and all scheduled premiums have been paid. In view of the 
adjustable features of the Policies, the current face amount and plan 
of insurance presumably reflect the owner's judgment as to the type and 
amount of insurance coverage most appropriate in view of his or her 
current circumstances. In Applicants' opinion, the same type and amount 
of fixed benefit coverage should be available upon conversion. 
Moreover, to require the owner of a Policy having a term plan of 
insurance to take a whole life policy upon exercise of the conversion 
right could well discourage exercise of the right, as it would force 
the owner to accept a policy design differing substantially from the 
one he or she has.
    35. The proposed amendments to Rule 6e-2 would revise paragraph 
(b)(13)(v)(B) so as to permit conversion to a fixed benefit policy 
other than for the whole of life. The amendment would permit the life 
insurer ``to convert to any type of life insurance policy other than a 
flexible or scheduled contract, rather than to covert only to a whole 
life insurance policy * * *.'' Similar flexibility is presently 
available for flexible premium contracts under the comparable 
provisions of paragraph (b)(13)(v)(B) of Rule 6e-3(T). In addition, 
Rule 6e-3(T) allows conversion to a policy with either the same death 
benefit or net amount at risk as the flexible premium contract at the 
time of conversion as opposed to the date of issue. The absence of a 
similar provision in Rule 6e-2 may reflect, not only the fact that Rule 
6e-2, unlike Rule 6e-3(T) does not contemplate increases in insurance 
benefits at the request of the contract holder, but also a 
determination that the conversion right should not be impaired by poor 
investment performance. As the changes in face amount under the 
Policies will never be as a result of poor investment performance, 
there is no valid reason for restricting the conversion right to the 
death benefit selected at issue.

Modified Free Look Right Procedures

    36. Applicants request relief from Section 27(f) of the Act and 
Rules 27f-1 and 6e-2(b)(13)(viii)(C) thereunder to the extent necessary 
to permit personal delivery to policy owners of free look right notices 
which contain information comparable to that required by Form N-27I-2, 
but which are not in the format required by that Form. Rule 6e-
3(T)(b)(13)(viii) provides an exemption from Section 27(f) and Rule 
27f-1 with respect to flexible premium variable life insurance 
contracts conditioned on the provision of free look rights 
substantially identical to those prescribed in rule 6e-2. Rule 6e-
3(T)(13)(viii)(C), however, permits those involved with issuing and 
selling flexible premium variable life insurance policies: (a) to 
modify the free look notice format provided in Form N-27I-2, provided 
that the information presented in the modified notice is comparable to 
that required by Form N27I-2; and (b) send the free look notice either 
by personal delivery or first class mail.
    37. Applicants submit that whether a life insurance policy has a 
scheduled premium structure or a flexible premium structure is 
irrelevant to the design or method of delivery appropriate for free 
look right notices associated with the policy. In either case, the free 
look right and the notices thereof are occasioned by a sales load 
structure that imposes on some payments a sales load of greater than 9 
percent of the payment. So long as an adequate free look right and 
reliable means of providing policy owners specific notice of that right 
are present, the particular design of the notice or the mode of 
delivery selected should be of no consequence. Applicants assert that 
the Commission appears to have recognized this by proposing to amend 
paragraph (b)(13)(viii)(C) of Rule 6e-2 to afford persons involved with 
issuing and selling scheduled premium policies the same degree of free 
look notice format and delivery flexibility as presently afforded in 
connection with flexible premium policies.

[[Page 37513]]

Offer of Exchange

    38. The owners of a Policy may ask, so long as both insureds are 
alive, to exchange the Policy for two individual policies insuring each 
of the insureds separately. Since the individual policies may be 
variable life policies issued by a separate account of Minnesota 
Mutual, including the Account, which is registered under the Act as a 
unit investment trust, the exchange provision may be viewed as an offer 
of exchange within the prohibition of Sections 11 (a) and (c). 
Applicants request an order pursuant to Section 11 of the Act 
permitting the exchange of a Policy for two individual variable 
insurance policies in accordance with the provision described above.
    39. An exchange pursuant to the Policy provision is subject to 
satisfactory evidence of insurability of both insureds. If the exchange 
is permitted by Minnesota Mutual, each of the new individual policies 
issued will have one-half of the death benefit, Policy value and Policy 
loan of the Policy surrendered, and the scheduled premiums to be paid 
to the new policies will be based on the age, gender and risk class of 
each insured on the date of exchange. The purpose of Section 11 is to 
prevent ``switching.'' ``Switching'' is a term of art that refers to 
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. Because 
the new policies together will have a policy value equal to the policy 
value of the surrendered security, the exchange will be made on the 
basis of the relative net asset values of the policies involved. 
Furthermore, no charge, administrative or otherwise, will be made in 
connection with the exchange, and no sales charge will be imposed under 
the new policies on policy values transferred to the new policies in 
connection with the exchange. Applicants conclude that the terms of the 
proposed offer of exchange do not involve any of the switching abuses 
that led to the adoption of Section 11 of the Act.

Class Relief

    40. Extending the relief herein requested to Future Contracts, 
Future Accounts and Future Underwriters is appropriate in the public 
interest. An order so providing should promote competitiveness in the 
variable life insurance market by eliminating the need for filing 
redundant exemptive applications, thereby reducing Minnesota Mutual's 
costs. The delay and expense of repeatedly seeking exemptive relief for 
substantially similar contracts, new separate accounts or new principal 
underwriters could impair Minnesota Mutual's ability to take effective 
advantage of business opportunities that might arise. There is no 
benefit or additional protection afforded to investors by requiring 
Applicants to repeatedly seek exemptive relief with respect to the same 
issues addressed in this application.

Conclusion

    For the reasons summarized above, Applicant 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. 96-18173 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M