[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46871-46874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22579]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22185; File No. 812-10060]


Connecticut General Life Insurance Company, et al.

August 28, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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applicants: Connecticut General Life Insurance Company (``CG Life''), 
CG Corporate Insurance Variable Life Separate Account 02 (``Account 
02''), and CIGNA Financial Advisors, Inc. (``CFA'').

relevant 1940 act sections: Order requested under Section 6(c) of the 
1940 Act granting exemptions from Section 27(c)(2) of the 1940 Act and 
Rule 6e-3(T)(c)(4)(v) thereunder.

summary of application: Applicants request an order permitting Account 
02 and any other separate account established in the future by CG Life 
(the ``Future Accounts,'' collectively, with Account 02, the 
``Accounts'') to support certain flexible premium variable life 
insurance contracts (``Current Contracts'') or contracts which are 
substantially similar in all material respects to the Current Contracts 
(``Future Contracts'') issued by CG Life to deduct a charge (``federal 
tax burden charge'') that is reasonable in relation to CG Life's 
increased federal income tax burden resulting from the application of 
Section 848 of the Internal Revenue Code of 1986, as amended.

filing date: The application was filed on March 26, 1996 and amended 
and restated on August 26, 1996.

hearing or notification of hearing: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on September 23, 
1996, and should be accompanied by proof of service on Applicants in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549; 
Applicants, Robert A. Picarello, Esq.,

[[Page 46872]]

Connecticut General Life Insurance Company, 900 Cottage Grove Road, 
Hartford, CT 06152, copy to George N. Gingold, Esq., 197 King Philip 
Drive, West Hartford, CT 06117-1409.

FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, Staff Attorney, or Patrice M. Pitts, Special 
Counsel, Office of Insurance Products, Division of Investment 
Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the SEC.

Applicants' Representations

    1. CG Life, a stock life insurance company domiciled in 
Connecticut, is a wholly owned subsidiary of CIGNA Holdings, Inc., 
which is, in turn, wholly owned by CIGNA Corporation.
    2. Account 02, established by CG Life on February 23, 1996, 
pursuant to Connecticut law, is registered with the Commission as a 
unit investment trust. The assets of Account 02 are divided among 
subaccounts, each of which invests in shares of a portfolio of a 
registered open-end management investment company. Each of the Future 
Accounts will be organized as unit investment trusts and will file 
registration statements under the 1940 Act and the Securities Act of 
1933.
    3. CFA will serve as the distributor and the principal underwriter 
of the Current Contracts. Applicants expect CFA also to serve as the 
distributor and principal underwriter of the Future Contracts. CFA is a 
wholly owned subsidiary of Connecticut General Corporation, which, in 
turn, is a wholly owned subsidiary of CIGNA Corporation. CFA is a 
member of the National Association of Securities Dealers, Inc., and is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 and as an investment adviser the Investment 
Advisers Act of 1940.
    4. The Current Contracts are flexible premium variable individual 
life insurance policies. The Future Contracts will be substantially 
similar in all material respects to the Current Contracts 
(collectively, Future Contracts and Current Contracts, the 
``Contracts''). The Contracts will be issued in reliance on Rule 6e-
3(T)(b)(13)(i)(A).
    5. CG Life will deduct 1.25% of each premium payment made under the 
Current Contracts to cover CG Life's estimated cost for the federal 
income tax treatment of deferred acquisition costs.
    6. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA 
1990''), Congress amended the Internal Revenue Code of 1986 (the 
``Code'') by, among other things, enacting Section 848 thereof. Section 
848 changed how a life insurance company must compute its itemized 
deductions from gross income for federal income tax purposes. Section 
848 requires a life 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 gross income of the current year.
    7. The amount of expenses that must be capitalized and amortized 
over ten years rather than deducted in the year incurred is based upon 
``net premiums'' received in connection with certain types of insurance 
contracts. Section 848 of the Code defines ``net premium'' for a type 
of contract as gross premiums received by the insurance company on the 
contracts minus return premiums and premiums paid by the insurance 
company for reinsurance of its obligations under such contracts. 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.
    8. The amount of general expenses that must be capitalized depends 
upon the type of contract to which the premiums received relate, and 
varies according to a schedule set forth in Section 848. The Contracts 
are ``specified insurance contracts'' that fall into the category of 
life insurance contracts, under Section 848, for which 7.7% of the 
year's net premiums received must be capitalized and amortized.
    9. The increased tax burden on CG Life resulting from the 
application of Section 848 may be quantified as follows. For each 
$10,000 of net premiums received by CG Life under the Contracts in a 
given year, Section 848 requires CG Life to capitalize $770 (7.7% of 
$10,000). $38.50 of this $770 may be deducted in the current year, 
leaving $731.50 ($770 minus $38.50) subject to taxation at the 
corporate tax rate of 35 percent. This results in an increase in tax 
for the current year of $256.03 (.35  x  $731.50). 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 $770 ($77 in each of the following nine 
years and $38.50 in year ten).
    10. In the business judgment of CG Life, a discount rate of 10% is 
appropriate for use in calculating the present value of CG Life's 
future tax deductions resulting from the amortization described above. 
CG Life seeks an after tax rate of return on the investment of its 
capital in excess of 10%.\1\ To the extent that capital must be used by 
CG Life to meet its increased federal tax burden under Section 848 
resulting from the receipt of premiums, such capital is not available 
to CG Life for investment. Thus, the cost of capital used to satisfy CG 
Life's increased federal income tax burden under Section 848 is, in 
essence, CG Life's after tax rate of return on capital, and, 
accordingly, the rate of return on capital, is appropriate for use in 
this present value calculation. To the extent that the 10% discount 
rate is lower than CG Life's actual targeted rate of return, a margin 
of comfort is provided that the calculation of CG Life's increased tax 
burden attributable to the receipt of premiums will continue to be 
reasonable over time, even if the corporate tax rate or targeted rate 
of return is lowered. CG Life undertakes to monitor the tax burden 
imposed on it and to reduce the charge to the extent of any significant 
decrease in the tax burden.
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    \1\ In determining the after-tax rate of return used in arriving 
at this discount rate, CG Life considered a number of factors, 
including: actual historical costs CG Life has incurred for capital; 
market interest rates; CG Life's anticipated long term growth rate; 
the risk level for this type of business; and inflation. CG Life 
represents that such factors are appropriate factors to consider in 
determining CG Life's cost of capital. CG Life first projects its 
future growth rate based on its sales projections, the current 
interest rates, the inflation rate, and the amount of capital that 
CG Life can provide to support such growth. CG Life then uses the 
anticipated growth rate and other factors enumerated above to set a 
rate of return on capital that equals or exceeds this rate of 
growth. CG Life seeks to maintain a ratio of capital to assets that 
is established based on its judgment of the risks represented by 
various components of its assets and liabilities. Maintaining the 
ratio of capital to assets is critical to offering competitively 
priced products and, as to CG Life, to maintaining a competitive 
rating from various rating agencies. Consequently, CG Life's capital 
should grow at least at the same rate as do its assets.
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    11. Assuming a 35% corporate federal income tax rate, and applying 
the 10% discount rate, the present value of the federal income tax 
effect of the increased deductions allowable in the following 10 years 
is $160.40. Because this amount partially offsets the increased federal 
income tax burden, Section 848 imposes an increased federal income tax 
burden on CG Life with present value of $95.63 (i.e., $256.03 minus 
$160.40, or 0.96%) for each $10,000 of net premiums.
    12. State premium taxes are deductible when computing federal 
income taxes. Thus, CG Life does not incur incremental federal income 
tax when it passes on state premium taxes

[[Page 46873]]

to owners of the Contracts. Federal income taxes, however, are not 
deductible when computing CG Life's federal income taxes. To compensate 
CG Life fully for the impact of Section 848, therefore, it would be 
necessary to allow CG Life to impose an additional charge that would 
make it whole not only for the $95.63 additional federal income tax 
burden attributable to Section 848, but also for the federal income tax 
on the additional $95.63 itself. This federal income tax can be 
determined by dividing $95.63 by the complement of the 35% federal 
corporate income tax rate, i.e., 65%, resulting in an additional charge 
of $147.12 for each $10,000 of net premiums, or 1.47% of net premiums.
    13. Based on prior experience, CG Life expects that all of its 
current and future deductions will be fully taken. A charge of 1.25% of 
net premium payments would reimburse CG Life for the impact of Section 
848 on its federal income tax liabilities, taking into account the 
benefit of CG Life of the amortization permitted by Section 848 and the 
use by CG Life of a discount rate of 10% (the equivalent of CG Life's 
cost of capital) in computing the future deductions resulting from such 
amortization.
    14. Although a charge of 1.25% of net premium payments would 
reimburse CG Life for the impact of Section 848 (as currently written) 
on its federal income tax liabilities, CG Life will have to increase 
this charge if any future change in, or interpretation of Section 848, 
or any successor provision, results in an increased federal income tax 
burden as a consequence of the receipt of premiums. Such an increase 
could result from a change in the corporate federal income tax rate, a 
change in the 7.7% figure, or a change in the amortization period.

Applicants' Legal Analysis

    1. Applicants request an order of the Commission pursuant to 
Section 6(c) exempting them from the provisions of Section 27(c)(2) of 
the 1940 Act and Rule 6e-3(T)(c)(4)(v) thereunder, to the extent 
necessary to permit deductions to be made from premium payments 
received in connection with the Contracts. The deductions would be in 
an amount that is reasonable in relation to CG Life's increased federal 
income tax burden related to the receipt of such premiums. Applicants 
further request an exemption from Rule 6e-3(T)(c)(4)(v) under the 1940 
Act to permit the proposed deductions to be treated as other than 
``sales load'' for the purposes of Section 27 of the 1940 Act and the 
exemptions from various provisions of that Section found in Rule 6e-
3(T)(b)(13).
    2. Section 6(c) of the 1940 Act provides, in pertinent part, that 
the Commission may, by order upon application, conditionally or 
unconditionally exempt any person, security or transaction from any 
provision of the 1940 Act 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 the provisions of the 1940 Act.
    3. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic 
payment plan certificates unless the proceeds of all payments (except 
such amounts as are deducted for sales load) are held under an 
indenture or agreement containing in substance the provisions required 
by Sections 26(a)(2) and 26(a)(3) of the 1940 Act. Applicants note that 
certain provisions of Rule 6e-3(T) provide a range of exemptive relief 
for the offering of flexible premium variable life insurance policies 
such as the Contracts. For example, subject to certain conditions, Rule 
6e-3(T)(b)(13)(iii) provides exemptions from Section 27(c)(2) that 
include permitting the payment of certain administrative fees and 
expenses, the deduction of a charge for certain mortality and expense 
risks, and the ``deduction of premium taxes imposed by any state or 
governmental entity.''
    4. Rule 6e-3(T)(c)(4)(v) defines ``sales load'' charged during a 
contract period as the excess of any payments made during the period 
over the sum of certain specified charges and adjustments, including 
``a deduction for and approximately equal to state premium taxes.''
    5. Applicants submit that the proposed federal tax burden charge to 
be deducted in connection with the Contracts is akin to a state premium 
tax charge in that it is an appropriate charge related to CG Life's tax 
burden attributable to premiums received. Thus, Applicants submit that 
the proposed federal tax burden charge should be treated as other than 
``sales load,'' as is a state premium tax charge, for purposes of the 
1940 Act.
    6. Applicants maintain that the requested exemptions from Rule 6e-
3(T)(c)(4)(v) are necessary in connection with Applicants' reliance on 
certain provisions of Rule 6e-3(T)(b)(13), and particularly on 
subparagraph (b)(13)(i) which provides exemptions from Sections 
27(a)(1) and 27(h)(1) of the 1940 Act. Issuers and their affiliates may 
rely on Rule 6e-3(T)(b)(13)(i) only if they meet the Rule's alternative 
limitations on sales load, as defined in Rule 6e-3(T)(c)(4). Applicants 
state that, depending upon the load structure of a particular contract, 
these alternative limitations may not be met if the deduction for the 
increase in an issuer's federal tax burden is included in sales load. 
Applicants acknowledge that a deduction for an insurance company's 
increased federal tax burden related to deferred acquisition costs does 
not fall squarely within any of the specified charges or adjustments 
which are excluded from the definition of ``sales load'' in Rule 6e-
3(T)(c)(4). Nevertheless, Applicants submit that there is no public 
policy reason for treating such federal tax burden charge as ``sales 
load.''
    7. Applicants assert that the public policy underlying Rule 6e-
3(T)(b)(13)(i), like that underlying Sections 27(a)(1) and 27(h)(1) of 
the 1940 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 in no way 
further this legislative purpose because such a deduction has no 
relation to the payment of sales commissions or other distribution 
expenses. Applicants state that the Commission has concurred in this 
conclusion by excluding deductions for state premium taxes from the 
definition of ``sales load'' in Rule 6e-3(T)(c)(4).
    8. Applicants assert that the source for the definition of ``sales 
load'' found in Rule 6e-3(T) supports this analysis. Applicants state 
that the Commission's intent in adopting Rule 6e-3(T)(c)(4) was to 
tailor the general terms of Section 2(a)(35) of the 1940 Act to 
variable life insurance contracts. In this regard, Applicants note that 
just as the percentage limits of Sections 27(a)(1) and 27(h)(1) depend 
on the definition of ``sales load'' in Section 2(a)(35) for their 
efficacy, the percentage limits in Rule 6e-(T)(b)(13)(i) depend on Rule 
6e-3(T)(c)(4), which does not depart, in principle, from Section 
2(a)(35).
    9. Applicants assert that Section 2(a)(35) also excludes from 
``sales load'' administrative expenses or fees that are ``not properly 
chargeable to sales or promotional activities''. Applicants submit that 
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 federal tax burden charge will be 
used to compensate CG Life for its increased federal income tax burden 
attributable to the receipt of premiums, and such cost is not properly 
chargeable to sales

[[Page 46874]]

or promotional activities, Applicants submit that this language of 
Section 2(a)(35) is another indication that not treating such federal 
tax burden charge as ``sales load'' is consistent with the policies of 
the 1940 Act.
    10. Applicants further assert that Section 2(a)(35) excludes from 
the definition of ``sales load'' under the 1940 Act deductions from 
premiums for ``issue taxes.'' Applicants submit that the exclusion from 
``sales load'' of charges attributable to federal tax obligations is 
consistent with the policies of the 1940 Act.
    11. Applicants assert that the terms of the relief requested with 
respect to Contracts to be issued through the Accounts are consistent 
with the standards enumerated in Section 6(c) of the 1940 Act. Without 
the requested relief, CG Life would have to request and obtain 
exemptive relief for each Contract to be issued through one of the 
Accounts. Applicants state that such additional requests for exemptive 
relief would present no issues under the 1940 Act not already addressed 
in this request for exemptive relief.
    12. Applicants assert that the requested relief is appropriate in 
the public interest because it would promote competitiveness in the 
variable life insurance market by eliminating the need for CG Life or 
Future Accounts to file redundant exemptive applications, thereby 
reducing administrative expenses and maximizing efficient use of 
resources. The delay and expense involved in having to seek exemptive 
relief repeatedly would impair the ability of CG Life and the Future 
Accounts to take advantage fully of business opportunities as those 
opportunities arise.
    13. Applicants state that the requested relief is consistent with 
the purposes of the 1940 Act and the protection of investors for the 
same reasons. If CG Life and the Future Accounts were required to seek 
exemptive relief repeatedly with respect to the same issues addressed 
in this application, investors would not receive any benefit or 
additional protection thereby and might be disadvantaged as a result of 
increased overhead expenses for CG Life and the Future Accounts.

Conditions for Relief

    1. Applicants agree to comply with the following conditions for 
relief.
    a. CG Life will monitor the reasonableness of the federal tax 
burden charge to be duducted pursuant to the requested exemptive 
relief.
    b. The registration statement for each Contract under which the 
federal tax burden charge is deducted will: (i) disclose the charge; 
(ii) explain the purpose of the charge; and (iii) state that the 
charge is reasonable in relation to CG Life's increased federal 
income tax burden under Section 848 of the Code resulting from the 
receipt of premiums.
    c. The registration statement for each Contract under which the 
federal tax burden charge is deducted will contain as an exhibit an 
actuarial opinion as to: (i) the reasonableness of the charge in 
relation to CG Life's increased federal income tax burden under 
Section 848 resulting from the receipt of premiums; (ii) the 
reasonableness of the after tax rate of return that is used in 
calculating the federal tax burden charge and the relationship that 
such charge has to CG Life's cost of capital; and (iii) the 
appropriateness of the factors taken into account by CG Life in 
determining the after tax rate of return.

    2. Applicants undertake to rely on the exemptive relief requested 
herein with respect to Future Contracts only if such contracts are 
substantially similar in all material respects to the Contracts 
described in the Application.

Conclusion

    For the reasons summarized above, Applicants represent that the 
requested relief from Sections 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder is necessary or appropriate in the public 
interest and otherwise meets the standards of Section 6(c) of the 1940 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22579 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M