[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
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8......................................... 0-2
6......................................... 3
4......................................... 4
0......................................... 5 or more.
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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