[Federal Register Volume 61, Number 147 (Tuesday, July 30, 1996)]
[Notices]
[Pages 39675-39677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19251]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22092; No. 812-10158]


Acacia National Life Insurance Company, et al.

July 23, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Acacia National Life Insurance Company (``Acacia''), Acacia 
National Variable Annuity Separate Account II (``Separate Account'') 
and The Advisors Group, Inc. (``TAG'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act granting exemptions from Sections 26(a)(2) and 27(c)(2) 
thereof.

SUMMARY OF APPLICATION: Applicants seek exemptions from the 1940 Act to 
the extent necessary to permit the deduction of mortality and expense 
risk charges from the assets of: (a) the Separate Account in connection 
with the offering of certain variable annuity contracts 
(``Contracts''); and (b) any other separate account (``Future 
Account'') established in the future by Acacia in connection with the 
offering of other variable annuity contracts (``Future Contracts'') 
which are similar in all material respects to the Contracts. Exemptions 
also are requested for any other broker-dealer (``Future Underwriter'') 
who may, in the future, act as principal underwriter of the Contracts 
or Future Contracts.

FILING DATE: The application was filed on May 16, 1996, and amended on 
June 27, 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 should be received by the 
Commission by 5:30 p.m. on August 19, 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 requestor'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 Ellen Jane 
Abromson, Acacia National Life Insurance Company, 51 Louisiana Avenue, 
N.W., Washington, D.C. 20001.

FOR FURTHER INFORMATION CONTACT:
Pamela K. Ellis, 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. Acacia is a stock life insurance company incorporated in 
Virginia and licensed to do business in 46 states and the District of 
Columbia. Acacia is a wholly owned subsidiary of Acacia Mutual Life 
Insurance Company (``Acacia Mutual'').
    2. Separate Account is a separate account established by Acacia in 
connection with offering the Contracts. Separate Account currently has 
fourteen sub-accounts (``Sub-Accounts''), each of which invests solely 
in shares of a corresponding portfolio (``Portfolio'') of one of 
several open-end, registered investment companies (``Funds''). Each of 
the Portfolios has a different investment objective.
    Separate Account is registered as a unit investment trust under the 
1940 Act, and interests in the Contracts are registered under the 
Securities Act of 1933 (``1933 Act''). The Future Accounts will be 
registered under the 1940 Act as unit investment trusts, and interests 
in the Future Contracts will be registered under the 1933 Act.
    3. TAG is the principal underwriter and distributor of the 
Contracts. TAG is registered with the Commission as a broker-dealer 
under the Securities Exchange Act of 1934, as amended (``1934 Act'') 
and is a member of the National Association of Securities Dealers, Inc. 
(``NASD''). TAG, an indirect wholly owned subsidiary of Acacia Mutual, 
is an affiliate of Acacia. Future Underwriters will be registered under 
the 1934 Act as broker-dealers and members of the NASD.
    4. The Contracts are variable annuity contracts issued by Acacia 
and are

[[Page 39676]]

offered for purchase on a non-qualified tax basis (``Non-Qualified 
Contracts'') or for use in connection with retirement plans qualifying 
for favorable federal income tax treatment (``Qualified Contracts''). 
Net premium payments may be allocated among the Sub-Accounts and 
Acacia's general account (``Fixed Account''), subject to certain 
restrictions. The value of the Contract (``Account Value'') is the 
total of the value held in both the Sub-Accounts and the Fixed Account. 
The Account Value allocated to the Sub-Accounts will vary with the 
investment performance of the Portfolios selected and may be 
transferred among one or more of the other Sub-Accounts or to the Fixed 
Account at any time without charge.
    5. The Contracts will pay a death benefit to a designated 
beneficiary if the Contract owner dies prior to the maturity date. The 
death benefit is guaranteed not to be less than the greater of the 
Account Value or the cumulative premium payments made less cumulative 
withdrawals, including any applicable surrender charges. For Contract 
owners under age 75, the death benefit is guaranteed not to be less 
than the ``Minimum Guaranteed Death Benefit,'' which initially is the 
greater of the Account Value or cumulative premium payments made, less 
cumulative withdrawals on the fifth Contract anniversary, and is re-
calculated and may be increased (but not decreased) every five years 
from the fifth Contract anniversary through age 75.
    6. A Contract may be surrendered prior to the maturity date for its 
Surrender Value (``Surrender Value''), which is equal to the Account 
Value less the Annual Policy Fee and any applicable Surrender Charges 
and premium or other taxes. All or a portion of the current Surrender 
Value may be withdrawn prior to the earlier of the date of death of the 
Contract owner or the maturity date. No Surrender Charge is imposed on 
earnings in all Sub-Accounts and the Fixes Account. In addition, up to 
10% of the Account Value (as of the last Contract anniversary), plus 
10% of (a) deposits since the last Contract anniversary less (b) 
withdrawals since the last Contract anniversary (``Free Withdrawal 
Amount''), also may be withdrawn free of Surrender Charges.
    7. The first annuity payment will be made as of the maturity date 
selected by the Contract Owner. Only fixed annuity payment options are 
available under the Contract.
    8. Contract Fees and Charges.
    a. Surrender Charge. No sales charge currently is deducted from 
premium payments. A Surrender Charge (``CDSC'') may be imposed as a 
percentage of premium payments being withdrawn if the Contract is 
surrendered or an excess partial withdrawal is taken within five years 
from the date Acacia receives each premium payment. The amount of the 
CDSC depends upon the number of complete years that have elapsed since 
the premium payment being withdrawn was made. In calculating the CDSC, 
Acacia treats premium payments as being withdrawn on a first-in first-
out basis, and as being withdrawn before earnings. The CDSC is 
determined by multiplying each premium payment included in the 
withdrawal by the CDSC Rate applicable to the year in which the premium 
payment was received, as follows:

------------------------------------------------------------------------
                                                 Completed contract     
CDSC charge (as a % of the premium payment   anniversaries since receipt
             being withdrawn)                        of premium         
------------------------------------------------------------------------
8.........................................  0-2                         
6.........................................  3                           
4.........................................  4                           
0.........................................  5 or more.                  
------------------------------------------------------------------------

    If the Surrender Value is withdrawn or applied under an Annuity 
Payment Option, the CDSC will apply to all premium payments not 
previously assessed a CDSC. The CDSC may be waived under certain 
circumstances where the Contract owner receives qualified extended 
medical care; however, no additional premium payments will be accepted 
after this waiver has been exercised.
    b. Taxes. No charge currently is imposed for federal, state or 
local income taxes attributable to the Separate Account. Acacia may 
make such a charge in the future, subject to necessary regulatory 
approvals. A charge for any premium taxes will be deducted when such 
taxes are incurred, either when a premium payment is accepted, Account 
Value is withdrawn or surrendered, or Annuity Payments commence. 
Premium taxes may range up to 3.5% of purchase payments.
    c. Mortality and Expense Risk Charges. Acacia imposes charges as 
compensation for bearing certain mortality and expense risks under the 
Contracts. A monthly charge will be deducted at an effective annual 
rate of up to 1.25% of the average daily net assets of each Sub-
Account. Of the 1.25% mortality and expense risk charge, approximately 
1.0% is allocable to mortality risks and 0.25% to expense risks. The 
mortality and expense risk charge is guaranteed not to exceed 1.25% for 
the life of the Contracts and also is guaranteed to decrease by 0.5% on 
each Contract anniversary beginning in year 16 until it reaches an 
annual effective rate of .50% at the end of year 30. This charge will 
be deducted after the Maturity Date. This charge may be a source of 
profit for Acacia and the excess may be used for, among other things, 
the payment of distribution expenses.
    Applicants assert that the mortality and expense risk charge is a 
reasonable charge deducted to compensate Acacia for bearing certain 
mortality and expense risks under the Contracts, including: (i) The 
risk that annuitants under the Contracts will live longer than has been 
anticipated in setting the annuity rates guaranteed in the Contracts; 
(ii) the risk that the death benefit will be greater than the Account 
Value; and (iii) the risk that administrative expenses will exceed the 
charges guaranteed for the Contracts.
    d. Administrative Expense Charge. A monthly fee is deducted at an 
effective annual rate of 0.10% of the average daily net assets of each 
Sub-Account to partially compensate Acacia for certain expenses 
incurred in administering the Contract and the Separate Account 
(``Expense Charge''). The Expense Charge is guaranteed for the life of 
the Contract and may not be increased. The fee will be deducted after 
the Maturity Date. Applicants represent that the Expense Charge is 
deducted in reliance on Rule 26a-1 under the 1940 Act and is not 
greater than the average expected cost of the bookkeeping and other 
administrative services to be provided over the life of the Contract. 
Acacia does not expect or intend to earn a profit from this charge.
    e. Annual Contract Fee. An annual charge of $42 (``Annual Fee'') is 
deducted to partially compensate Acacia for certain expenses incurred 
in administering the Contract. The deduction will be made from the 
Account Value on each Contract anniversary prior to the Maturity Date 
in the same proportion that the values attributable to the Sub-Accounts 
bear to the total Account Value. The charge also will be assessed on 
the Maturity Date and upon full surrender. The Annual Fee is guaranteed 
not to increase during the life of the Contract and may be waived for 
Contracts with Account Value in excess of $50,000. Applicants represent 
that the Annual Fee is deducted in reliance on Rule 26a-1 under the 
1940 Act and is not greater than the average expected cost of the 
bookkeeping and other administrative services to be provided over the 
life of

[[Page 39677]]

the Contract. Acacia does not expect or intend to earn a profit from 
this charge.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions, from the provisions of the 1940 
Act and the rules thereunder, if and to the extent that such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.
    2. Applicants submit that their request for an order that applies 
to Future Contracts and Future Accounts is appropriate in the public 
interest and consistent with the protection of investors and purposes 
fairly intended by the policy and provisions of the 1940 Act. 
Applicants further submit that the terms of the relief requested are 
consistent with the standards enumerated in Section 6(c) of the 1940 
Act and with existing precedent. Without the requested relief, Acacia 
would have to request and obtain separately exemptive relief for each 
new Future Account established and each new class of Future Contract 
issued. Applicants represent that such additional requests for 
exemptive relief would present no issues under the 1940 Act that have 
not already been addressed in this application.
    3. Applicants also submit that the terms of the relief requested 
with respect to the offering of the Contracts and Future Contracts 
through TAG or any Future Underwriter are consistent with the standards 
of Section 6(c) of the 1940 Act. Applicants assert that, without the 
requested relief, they would have to request and obtain exemptive 
relief in connection with any new Future Underwriter that distributes 
the Contracts or Future Contracts. Applicants represent that such 
additional requests for exemptive relief would present no issues under 
the 1940 Act that have not already been addressed in this application.
    4. Applicants further state that the requested relief is 
appropriate in the public interest because it would promote 
competitiveness in the variable annuity contract market by eliminating 
the need for Acacia to file redundant exemptive applications, thereby 
reducing its administrative expenses and maximizing the efficient use 
of its resources. Investors would not receive any benefit or additional 
protection by requiring Acacia to seek exemptive relief repeatedly with 
respect to the issues addressed in this application. Applicants assert 
that the delay and expense involved would impair Acacia's ability to 
take advantage effectively of business opportunities as they arise and 
would disadvantage investors as a result of Acacia's increased overhead 
expenses.
    5. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositor or 
principal underwriter, from selling periodic payment plan certificates 
unless the proceeds of all payments, other than sales loads, are 
deposited with a qualified bank and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties normally performed by the 
bank itself.
    6. Applicants submit that the mortality and expenses risk charges 
are reasonable and proper insurance charges that are deducted to 
compensate Acacia for bearing certain mortality and expenses risks 
under the Contracts and Future Contracts. In return for these charges, 
Acacia bears the risk that: (i) Annuitants under the Contracts as a 
class will live longer than has been anticipated in setting the annuity 
rates guaranteed in the Contracts and Future Contracts; (ii) the death 
benefit will be greater than the Contract value; and (iii) 
administrative expenses will exceed the charges guaranteed for such 
Contracts.
    7. Applicants represent that the mortality and expense risk charge 
is within the range of industry practice for comparable variable 
annuity contracts. This representation is based on Acacia's analysis of 
publicly available information about similar industry contracts, taking 
into consideration such factors as current charge levels, charge level 
or annuity rate guarantees, the manner in which the charges are imposed 
and the markets in which the contracts have been offered. Applicants 
state that, as long as there are Contracts outstanding, Acacia will 
maintain at its administrative offices and make available to the 
Commission, upon request, a memorandum setting forth in detail the 
products analyzed in the course of, and the methodology and results of, 
its comparative survey.
    8. The mortality and expense risk charge may be a source of profit 
for Acacia. Applicants acknowledge that if a profit is realized from 
this charge, all or a portion of such profit may be available to pay, 
among other things, distribution expenses not reimbursed by the CDSC. 
Acacia has concluded that there is a reasonable likelihood that the 
proposed distribution financing arrangements will benefit the Separate 
Account and the Contract owners. Acacia will keep at its administrative 
offices and make available to the Commission, upon request, a 
memorandum setting forth the basis for this representation.
    9. Applicants represent that Separate Account and Future Accounts 
will invest only in management investment companies which undertake, in 
the event any such company adopts a plan Rule 12b-1 to finance 
distribution expenses, to have a board of directors, a majority of whom 
are not interested persons of any such investment company, as defined 
in the 1940 Act, formulate and approve the plan.

Conclusion

    Applicants assert that for the reasons and based upon the facts set 
forth above, the requested exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to deduct a mortality and expense risk charge 
under the Contracts and Future Contracts are necessary and appropriate 
in the public interest and consistent with the protection of investors 
and the policies 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. 96-19251 Filed 7-29-96; 8:45 am]
BILLING CODE 8010-01-M